sec document
As filed with the Securities and Exchange Commission on December 29, 2005
Registration No. 333-________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------------
CEPTOR CORPORATION
(Name of Small Business Issuer in Its Charter)
Delaware 2834 11-2897392
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
200 International Circle
Suite 5100
Hunt Valley, Maryland 21030
(410) 527-9998
(Address and Telephone Number of Registrant's Principal Executive Offices)
----------------------------
William H. Pursley
Chairman and Chief Executive Officer
CepTor Corporation
200 International Circle
Suite 5100
Hunt Valley, Maryland 21030
(410) 527-9998
(Name, Address and Telephone Number of Agent for Service)
Copy to:
Harvey J. Kesner, Esq.
Olshan Grundman Frome Rosenzweig & Wolosky LLP
65 East 55Th Street
New York, New York 10022
(212) 451-2300
----------------------------
As soon as practicable after the effective date of this registration statement
(Approximate Date of Proposed Sale to the Public)
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 ("Securities Act"), check the following box.|X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
CALCULATION OF REGISTRATION FEE
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Proposed
Maximum
Title of Each Class of Offering Proposed Maximum Amount of
Securities To Be Amount To Be Price Per Aggregate Offering Registration
Registered Registered(1) Share Price Fee
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Common Stock, par value 268,817 $0.77(2) $ 206,989.09 $ 22.15
$0.0001 per share
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Common Stock
underlying warrant at
$1.023 per share 1,000,000 $0.77(3) $ 770,000.00 $ 82.39
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Common Stock
underlying warrants at
$0.9765 per share 500,000 $0.77(3) $ 385,000.00 $ 41.20
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Common Stock
underlying convertible
debentures at $0.9765
per share 12,734,825 $0.77(3) $ 9,805,815.25 $ 1,049.22
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Common Stock
underlying convertible
promissory note at
$0.375 per share(4) 673,287 $0.77(3) $ 518,430.99 $ 55.47
--------------------------------------------------------------------------------------------------------------
Common Stock
underlying convertible
promissory note at
$1.00 per share(5) 265,000 $0.77(3) $ 204,050.00 $ 21.83
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(1) Pursuant to Rule 416 of the Securities Act, the shares of Common Stock
offered hereby also include an indeterminate number of additional shares of
Common Stock as may from time to time become issuable by reason of stock splits,
stock dividends, recapitalizations or other similar transactions.
(2) Estimated at $0.77 per share, the last sale price of Common Stock as
reported on the OTC Bulletin Board regulated quotation service on December 27,
2005, for the purpose of calculating the registration fee in accordance with
Rule 457(c) under the Securities Act.
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(3) Estimated at $0.77 per share, the last sale price of Common Stock as
reported on the OTC Bulletin Board regulated quotation service on December 27,
2005, for the purpose of calculating the registration fee in accordance with
Rule 457(g)(3) under the Securities Act.
(4) Shares issuable upon conversion of principal and accrued interest through
July 3, 2006, the maturity date, in the aggregate amount of $516,980.
(5) Shares issuable upon conversion of principal and accrued interest through
December 9, 2006, the maturity date, in the aggregate amount of $265,000.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
Subject to completion, dated December 29, 2005
PROSPECTUS
CEPTOR CORPORATION
15,441,929 Shares of Common Stock
This prospectus relates to the sale by certain selling stockholders identified
in this prospectus (the "Selling Stockholders") of up to an aggregate of
15,441,929 shares of common stock, par value $0.0001 per share ("Common Stock")
which includes (i) 12,734,825 shares issuable upon the conversion of a
convertible debenture (ii) 1,500,000 shares issuable upon the exercise of
warrants and (iii) 938,287 shares issuable upon the conversion of convertible
promissory notes. All of such shares of Common Stock are being offered for
resale by the Selling Stockholders.
The prices at which the Selling Stockholders may sell shares will be determined
by the prevailing market price for the shares or in negotiated transactions. We
will not receive any of the proceeds from the sale of these shares by the
Selling Stockholders. However, we will receive proceeds from the exercise of
warrants if exercised by the Selling Stockholder and will retain proceeds from
the issuance of certain convertible indebtedness upon conversion of debt.
We will bear all costs relating to the registration of the Common Stock, other
than any Selling Stockholder's legal or accounting costs or commissions.
Our Common Stock is quoted on the regulated quotation service of the OTC
Bulletin Board under the symbol "CEPO.OB" The last sales price of our Common
Stock on December 27, 2005 as reported by the OTC Bulletin Board was $0.77 per
share.
The information in this prospectus is not complete and may be changed. These
securities may not be sold (except pursuant to a transaction exempt from the
registration requirements of the Securities Act of 1993, as amended (the
"Securities Act")) until the Registration Statement filed with the Securities
and Exchange Commission ("SEC") is declared effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD READ
THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS"
BEGINNING ON PAGE 5 WHICH DESCRIBES CERTAIN MATERIAL RISK FACTORS YOU SHOULD
CONSIDER BEFORE INVESTING.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is December 29, 2005
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY.............................................................1
RISK FACTORS...................................................................5
FORWARD-LOOKING STATEMENTS....................................................24
USE OF PROCEEDS...............................................................25
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS...................25
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.....................26
BUSINESS......................................................................38
MANAGEMENT....................................................................48
PRINCIPAL STOCKHOLDERS........................................................54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................55
DESCRIPTION OF THE TRANSACTIONS...............................................57
SELLING STOCKHOLDERS..........................................................58
DESCRIPTION OF SECURITIES.....................................................59
PLAN OF DISTRIBUTION..........................................................62
WHERE YOU CAN FIND MORE INFORMATION...........................................64
LEGAL MATTERS.................................................................64
EXPERTS.......................................................................64
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES...............................................................64
CHANGES IN ACCOUNTANT.........................................................65
INDEX TO FINANCIAL STATEMENTS................................................F-1
You should rely only on the information contained in this prospectus and in any
prospectus supplement we may file after the date of this prospectus. We have not
authorized anyone to provide you with different information. If anyone provides
you with different or inconsistent information, you should not rely on it. The
Selling Stockholders will not make an offer to sell these securities in any
jurisdiction where an offer or sale is not permitted. You should assume that the
information appearing in this prospectus or any supplement is accurate as of the
date on the front cover of this prospectus or any supplement only, regardless of
the time of delivery of this prospectus or any supplement or of any sale of
Common Stock. Our business, financial condition, results of operations and
prospects may have changed since that date.
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PROSPECTUS SUMMARY
The following summary highlights aspects of the offering. This prospectus does
not contain all of the information that may be important to you. You should read
this entire prospectus carefully, including the "Risk Factors" section and the
financial statements, related notes and the other more detailed information
appearing elsewhere in this prospectus before making an investment decision.
Unless otherwise indicated, all references to "we", "us", "our" and similar
terms, as well as references to the "Registrant" in this prospectus, refer to
CepTor Corporation and not to the Selling Stockholders.
Corporate History
We were incorporated in Delaware in 1986 under the name Aloe Scientific
Corporation. In 1988 our name was changed to CepTor Corporation (the "Company").
Until December 2003 our stock was held by ten persons and our operations were
privately funded by loans from our owners, through research grants, and by
testing and development agreements with third parties. In January 2004 we were
acquired by Xechem International, Inc. ("Xechem") in a stock-for-stock
transaction. Thereafter, Xechem determined that it would be in their best
interest and our best interest to spin-off our company to permit us to seek
separate financing in order to pursue further development of our products. As a
result, on December 8, 2004, we completed a merger (the "Merger") with Medallion
Crest Management, Inc., a Florida corporation ("Medallion"). Medallion acquired
all of our outstanding capital stock in exchange for 5,278,068 shares of
Medallion Common Stock and the assumption of certain obligations.
On December 8, 2004 we also filed an amendment to our Articles of Incorporation
in order to adopt the name CepTor Corporation and to authorize our Series A
Convertible Preferred Stock, par value $0.0001 per share, ("Series A Preferred
Stock"). As a result of these transactions, we succeeded to the type of business
of CepTor Corporation as had been conducted since 1986 as our sole line of
business under the direction of a management team appointed by Xechem in 2004,
and relocated our principal executive offices to Hunt Valley, Maryland.
On January 31, 2005, we merged with our wholly-owned subsidiary to change our
domicile to Delaware from Florida and to collapse the parent-subsidiary
relationship resulting from the December 8, 2004 transactions.
Private Placement
In connection with the Merger, we also completed the closing of a private
offering of our securities ("Private Placement") in which, through February 11,
2005 we sold an aggregate of 511.65 Units to accredited investors in the Private
Placement, pursuant to the terms of a Confidential Private Placement Memorandum
dated October 22, 2004, as supplemented. Each Unit consists of one share of
Series A Preferred Stock and a three-year warrant to purchase our common stock,
par value $0.0001 per share ("Common Stock") at $2.50 per share. Each share of
Series A Preferred Stock is convertible into 10,000 shares of Common Stock and
each unit warrant entitles the holder to purchase 5,000 shares of Common Stock
for $2.50 per share. The Units were offered by the Placement Agent pursuant to a
placement agent agreement, as amended ("Placement Agent Agreement"), under which
the Placement Agent is entitled, in addition to a percentage of gross proceeds
of the Private Placement, to receive 300,000 shares of Common Stock and a
warrant to purchase up to an aggregate of 10% of the shares of Common Stock into
which the Series A Preferred Stock may be converted that is sold in the Private
Placement. We realized gross proceeds from the Private Placement of $12,791,250,
before payment of commissions and expenses.
The information in this prospectus is presented as if the company existing since
1986 had been the registrant for all periods presented. The section
"Management's Discussion and Analysis or Plan of Operation" and the financial
statements presented in this prospectus are exclusive of any assets or results
of operations or business attributable to Medallion.
Description of Business
We are a development-stage biopharmaceutical company focusing on the development
of proprietary, cell-targeted therapeutic products for neuromuscular and
neurodegenerative diseases. Our goal is to increase the quality and quantity of
life of people suffering with these diseases. Primary efforts are currently
being focused on moving our lead product, "Myodur", into phase I/II clinical
trials for Duchenne's muscular dystrophy. Our broad platform technology also
includes the development of products for multiple sclerosis, retinal
degeneration and epilepsy.
We currently have no revenues from operations and are funding the development of
our products through the sale of our securities and will continue to fund our
activities through sales of securities or partnering arrangements for the
foreseeable future. Our current emphasis is on filing an investigational new
drug ("IND") application for Myodur, manufacturing supplies required for
pre-clinical studies and initial clinical trials of our proposed product,
conducting toxicological and other pre-clinical studies, pursuing clinical
studies and United States Food and Drug Administration ("FDA") approvals.
Currently our available capital resources are not sufficient to sustain planned
operations, which raises substantial doubt about our ability to continue as a
going concern. In the absence of the availability of financing from additional
sales of our securities on a timely basis, we could be forced to materially
curtail, limit, or cease our operations.
Technology
Through an existing proprietary platform technology, we intend to pursue drug
candidates that exploit the understanding that activation of the cysteine
protease calpain initiates the cellular degradation that accompanies many
neuromuscular and neurodegenerative diseases. Early studies undertaken by us
found that the calpain inhibitor leupeptin substantially ameliorated the
degenerative effects of these diseases. Our technology includes utilizing the
carrier molecules carnitine and taurine, which are used to target various
passenger molecules, including our analogue of leupeptin, to skeletal muscle
cells and nerve cells, respectively. This provides for potential applications of
this technology in muscular dystrophy, multiple sclerosis (MS), epilepsy,
amyotrophic lateral sclerosis (ALS), chronic inflammatory demyelinating
polyneuropathy (CIDP), cancer cachexia, AIDS wasting, traumatic nerve injury,
retinal degeneration, ototoxicity, Alzheimer's disease, Huntington's disease and
cardiomyopathies.
We have been issued compound patents on both carrier molecules (carnitine and
taurine) in combination with any passenger molecule and have applied for orphan
drug status for Myodur. Additional provisional and other patent applications
have been filed or are in process.
Much of our technology is based on muscle and nerve cell targeting for calpain
inhibition. Calpain exists in every cell of the body and is a protease that
degrades cells naturally, in a normal metabolic process, in concert with new
cells that are constantly being developed. If calpain is up regulated
abnormally, the cellular degradation process breaks down cells and tissues
faster than they can be restored, resulting in several serious neuromuscular and
neurodegenerative diseases. Whether by genetic defect, trauma or insult, if cell
membrane integrity is compromised, it can lead to up regulation of calpain
causing deleterious muscle or nerve cell and tissue degradation. Although the
subject of our continued research, we believe this to be because the cell
membrane defect allows the entry of extracellular calcium ions into the cell,
which, consequently, up regulates calpain. Our technology is designed to target
calpain inhibitors to muscle and nerve cells preventing degradation of those
tissues.
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Strategy
We are focusing on a two-pronged business strategy to minimize product
development risk and time to market and maximize market protection through a
combination of internal development and licensing and the orphan drug model. We
seek to take advantage of the legislative, regulatory, and commercial
opportunities common to these rare orphan diseases. We currently intend to focus
on developing and commercializing orphan drug candidates internally, while
working to partner product development opportunities for non-orphan drug
candidates with third parties. This strategy may be further refined to take into
account foreign partnering opportunities, including for our orphan drug
candidates.
We have developed a unique technology that we believe has broad application and
which may be used to target drugs orally to many human organ and tissue systems.
The basis of this technology is a concept that integrates the special chemical
properties of active, currently available, and naturally occurring
bio-pharmaceuticals and the specific biological characteristics of targeting
drugs to cells. Our technology provides a means for targeting drugs to the site
for which the drug has therapeutic effect. This targeting capability has the
potential effect of reducing, potentially markedly, the amount of drug that is
circulated to other places in the body. Therefore, effective targeting makes it
possible to use much less drug in the patient's body, thereby decreasing the
probability of harmful side effects and delivering it much more efficiently, in
terms of efficacy, directly to the affected site.
Our current focus includes three proprietary products, Myodur, Neurodur and
C-301. In pre-clinical studies Myodur has demonstrated efficacy in muscular
dystrophy, Neurodur has demonstrated efficacy in MS, and C-301 has demonstrated
efficacy in animal models for epilepsy. We presently expect to submit an IND
application for Myodur in January 2006.
In September 2004, we granted an exclusive license to JCR Pharmaceuticals Co.,
Ltd. ("JCR") to develop, manufacture, use, sell and sublicense Myodur for
muscular dystrophy in Japan, South Korea, China, Taiwan and Singapore. The
license agreement provides, among other things, for an initial equity investment
in and future milestone payments to us, plus future royalties.
Our principal executive offices are located at 200 International Circle, Suite
5100, Hunt Valley, Maryland, 21030 and our telephone number is (410) 527-9998.
The Offering
On December 9, 2005, we entered into a securities purchase agreement (the
"Securities Purchase Agreement") with Cornell Capital Partners, LP ("Cornell
Capital") pursuant to which Cornell Capital has agreed to purchase from us, in a
private placement, secured convertible debentures in the aggregate principal
amount of $2,000,000 (the "Debentures"), which Debentures bear interest at the
rate of 8% per year. Pursuant to the Securities Purchase Agreement, we issued a
Debenture in the principal amount of $1,000,000 on each of December 9, 2005 and
December 28, 2005. Each Debenture has a three-year maturity from the date of
issuance and is subject to earlier conversion or redemption pursuant to its
terms.
Cornell Capital has the right to convert a portion or all of the outstanding
principal and interest under the Debentures into shares of Common Stock at a
conversion price per share equal to the lesser of $0.9765 (105% of the closing
bid price of the Common Stock on December 8, 2005) (the "Fixed Price") or (ii)
95% of the lowest closing bid price of the Common Stock for the twenty trading
days immediately preceding the conversion date (the "Floating Price" and
together with the Fixed Price, the "Conversion Price"), subject to adjustment as
provided in the Debentures; provided, that any such conversion based on the
Floating Price will generally be limited to $150,000 of principal outstanding
under the Debentures in any thirty day period; and further provided, that
Cornell Capital may not convert the Debentures into shares of Common Stock if
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such conversion would result in Cornell Capital, together with its affiliates,
beneficially owning in excess of 4.9% of the then issued and outstanding shares
of Common Stock. The Conversion Price and number of shares of Common Stock
issuable upon conversion of the Debentures is subject to certain exceptions and
adjustment for stock splits and combinations and other dilutive events.
Subject to the terms and condition of the Debentures, we have the right at any
time upon three business days notice to redeem the Debentures, in whole or in
part. If the closing bid price of the Common Stock, is less than the Fixed Price
at the time of the redemption, we are obligated to pay, in addition to the
principal and accrued interest being redeemed, a redemption premium of 8% of the
principal amount being redeemed (the "Redemption Amount"). If the closing bid
price is greater than the Fixed Price, we may redeem up to 50% of the principal
amount at the Redemption Amount and the remaining 50% at the greater of the (x)
Redemption Amount or (y) the market value of the Common Stock. In addition,
Cornell Capital will receive a three-year warrant to purchase 25,000 shares of
Common Stock for every $100,000 redeemed by us, on a pro rata basis, at an
exercise price per share of $0.9765 (the "Redemption Warrant").
If an Event of Default (as such term is defined in the Debentures) occurs, any
principal and accrued interest outstanding will become immediately due and
payable, in cash or Common Stock, at Cornell Capital's election.
Pursuant to the Securities Purchase Agreement, on December 9, 2005, we issued to
Cornell Capital the Warrant at an exercise price per share of $1.023 (110% of
the closing bid price of the Common Stock on December 8, 2005) and (ii) 268,817
shares of Common Stock, and on each of December 9, 2005 and December 28, 2005,
we made a cash payment to an affiliate of Cornell Capital of $80,000 for
expenses incurred in connection with the transaction.
In connection with the Securities Purchase Agreement, we also entered into an
investor registration rights agreement with Cornell Capital pursuant to which we
are obligated to register 500% of the amount of shares issuable upon conversion
of the Debenture at maturity based upon the Fixed Price and to file a
registration statement of which this prospectus is a part with the SEC within 30
days of December 9, 2005 (the "Registration Statement"). If the Registration
Statement is not deemed effective by the SEC within 90 days after December 9,
2005 due to our failure to use best efforts, we are obligated to pay Cornell, as
liquidated damages, an amount equal to 1% of the value of the Debentures
outstanding, in cash or in shares of Common Stock, at Cornell Capital's option,
for each 30-day period thereafter.
We have granted a security interest in all of our assets to Cornell Capital to
secure our obligations under the Debentures.
Convertible Promissory Notes
On December 9, 2005, we issued a convertible promissory note (the "Note") in the
principal amount of $250,000 to Harbor Trust which bears interest at the rate of
6% percent per year. All unpaid principal and interest under the Note will be
due and payable on December 9, 2006. The Note is convertible, in whole or in
part, at any time, into Common Stock at a conversion price of $1.00 per share,
subject to certain limitations on conversion as set forth in the Note, including
where the resulting number of shares converted on a cumulative basis, would
exceed 19.99% of the total number of shares of Common Stock outstanding and,
subject to a conversion price adjustment in the event we offer or sell an option
to acquire Common Stock at a price per share less than the conversion price.
On December 9, 2005, we issued an amended convertible promissory note (the
"Amended Note") to Harbor Trust which amends a convertible promissory note,
dated December 9, 2004 with Harbor Trust in the principal amount of $452,991.10
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reducing the conversion price to $0.375 from $0.75 per share. The Amended Note
bears interest at the rate of 10% per year through December 9, 2005 and 12% per
year thereafter. All unpaid principal and interest under the Amended Note will
be due and payable on July 3, 2006. The Amended Note is convertible, in whole or
in part, at any time, into Common Stock at the conversion price of $0.375 per
share subject to certain limitations on conversion as set forth in the Amended
Note, including where the resulting number of shares converted, on a cumulative
basis, would exceed 19.99% of the total number of shares of Common Stock
outstanding.
Use of Proceeds
We will not receive any proceeds from the sale of shares in this offering by the
Selling Stockholders. We will, however, receive proceeds from the exercise of
the Warrants if exercised by the Selling Stockholder and will retain proceeds
from the issuance of certain convertible indebtedness upon conversion of debt.
We intend to use any proceeds for working capital and general corporate
purposes.
Common Stock Outstanding
As of December 27, 2005 we had 29,398,732 shares of Common Stock issued and
outstanding, which includes shares offered by this prospectus and assumes
conversion of the Series A Preferred Stock outstanding which is entitled to
vote, on an as-converted basis, with Common Stock, but which excludes shares
that, as of the date of this prospectus, are issuable upon the exercise and/or
conversion of options, notes and/or warrants. If all of the shares offered by
this prospectus were issued and outstanding as of the date hereof, the number of
shares offered by this prospectus would represent 52.5% of the total Common
Stock.
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information contained in this prospectus you should carefully consider the
risks described below before purchasing our common stock. Our most significant
risks and uncertainties are described below; however, they are not the only
risks we face. If any of the following risks actually occur, our business,
financial condition, or results or operations could be materially adversely
affected, the trading of our common stock could decline, and you may lose all or
part of your investment therein. You should acquire shares of our common stock
only if you can afford to lose your entire investment.
Risks Related to Our Business and Industry
IF WE CANNOT OBTAIN ADDITIONAL FUNDS WHEN NEEDED, OR ACHIEVE PROFITABILITY WE
MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.
Absent additional funding from private or public equity or debt financings,
collaborative or other partnering arrangements, or other sources, we will be
unable to conduct our product development efforts as planned, and we may need to
curtail our development plans, cease operations or sell assets.
WE HAVE A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT LOSSES TO
CONTINUE FOR THE FORESEEABLE FUTURE.
We have yet to establish any history of profitable operations. At September 30,
2005, we had an accumulated deficit of $34,042,557. Our revenues have not been
sufficient to sustain our operations. We expect that our revenues will not be
sufficient to sustain our operations for the foreseeable future. Our
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profitability will require the successful commercialization of our proposed
products. No assurances can be given when this will occur or that we will ever
be profitable.
Our ability to obtain additional funding will determine our ability to continue
as a going concern. Our financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
EVEN WITH THE SALE OF COMMON STOCK TO FUSION CAPITAL FUND II, LLC ("FUSION
CAPITAL"), WHICH HAS NOT YET COMMENCED, WE WILL REQUIRE ADDITIONAL FINANCING TO
SUSTAIN OUR OPERATIONS AND WITHOUT IT WE WILL NOT BE ABLE TO CONTINUE
OPERATIONS.
We only have the right to receive $25,000 per trading day under the stock
purchase agreement with Fusion Capital ("Stock Purchase Agreement") unless our
stock price equals or exceeds $1.60, in which case the daily amount may be
increased under certain conditions as the price of the Common Stock increases.
Fusion Capital shall not have the right nor the obligation to purchase any
shares of Common Stock on any trading days that the market price of the Common
Stock is less than $0.50. Since we initially registered 5,000,000 shares for
sale by Fusion Capital, the selling price of the Common Stock to Fusion Capital
will have to average at least $4.00 per share for us to receive the maximum
proceeds of $20 million without registering additional shares of Common Stock.
Assuming a purchase price of $0.77 per share, the closing sale price of the
Common Stock as reported on the OTC Bulletin Board on December 27, 2005 and the
purchase by Fusion Capital of the full 5,000,000 shares under Common Stock
Purchase Agreement, proceeds to us would only be $3,850,000 unless we choose to
register more than 5,000,000 shares, which we have the right, but not the
obligation, to do. In the event we elect to issue more than 5,000,000 shares, we
will be required to file a new registration statement and have it declared
effective by the SEC.
The extent we rely on Fusion Capital as a source of funding will depend on a
number of factors including, the prevailing market price of the Common Stock and
the extent to which we are able to secure working capital from other sources.
Specifically, Fusion Capital shall not have the right nor the obligation to
purchase any shares of Common Stock on any trading days that the market price of
our common stock is less than $0.50 per share. If obtaining sufficient financing
from Fusion Capital were to prove unavailable or prohibitively dilutive and if
we are unable to commercialize and sell our proposed products, we will need to
secure other sources of funding in order to satisfy our working capital needs.
Even if we are able to access the full $20 million under the Stock Purchase
Agreement with Fusion Capital, we may still need additional capital to fully
implement our business, operating and development plans. Should the financing we
require to sustain our working capital needs be unavailable or prohibitively
expensive when we require it, the consequences would be a material adverse
effect on our business, operating results, financial condition and prospects.
EVEN WITH THE PROCEEDS FROM THE CORNELL CAPITAL DEBENTURES AND THE SALE OF
COMMON STOCK TO FUSION CAPITAL, WE WILL REQUIRE ADDITIONAL FUNDING WHICH WILL BE
SIGNIFICANT AND WE MAY HAVE DIFFICULTY RAISING NEEDED CAPITAL IN THE FUTURE
BECAUSE OF OUR LIMITED OPERATING HISTORY AND BUSINESS RISKS ASSOCIATED WITH OUR
COMPANY.
We currently do not generate any revenue from our proposed products and revenue
from grants and collaborative agreements may not be sufficient to meet our
future capital requirements. We do not know when, or if, this will change. We
have expended substantial funds in research and development and will continue to
expend substantial funds in contract manufacturing, research, development and
pre-clinical testing and clinical trials of our drug delivery technology and
compounds. We will require substantial additional funds to conduct research and
development, establish and conduct clinical and pre-clinical trials, obtain
required regulatory approvals and clearances, establish clinical and, if our
products are subsequently considered candidates for FDA approval, commercial
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scale manufacturing arrangements, and provide for the marketing and distribution
of our products. Additional funds may not be available on acceptable terms, if
at all. If adequate funds are unavailable or are not available on terms deemed
acceptable by management, we may have to delay, reduce the scope of or eliminate
one or more of our research or development programs or product or marketing
efforts which may materially harm our business, financial condition, and results
of operations. Our long term capital requirements are expected to depend on many
factors, including:
o the number of potential products and technologies in development;
o continued progress and cost of our research and development programs;
o progress with pre-clinical studies and clinical trials;
o the time and costs involved in obtaining regulatory clearance;
o costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims;
o costs of developing sales, marketing and distribution channels and our
ability to sell our drugs;
o costs involved in establishing manufacturing capabilities for clinical
trial and commercial quantities of our drugs;
o competing technological and market developments;
o market acceptance of our products;
o costs for recruiting and retaining management, employees, and
consultants; and
o costs for training physicians.
We may consume available resources more rapidly than currently anticipated,
resulting in the need for additional funding. We may seek to raise any necessary
additional funds through the exercise of warrants, equity, or debt financings,
collaborative arrangements with corporate partners, or other sources. Any such
equity financing may be dilutive to existing stockholders and debt financing, if
available, may involve restrictive covenants that would limit how we conduct our
business or finance our operations, or otherwise have a material effect on our
current or future business prospects. In addition, in the event that additional
funds are obtained through arrangements with collaborative partners or other
sources, we may have to relinquish economic and/or proprietary rights to some of
our technologies or products under development that we would otherwise seek to
develop or commercialize by ourselves. If adequate funds are not available, we
may be required to significantly reduce, refocus, or delay our development
efforts with regard to our drug delivery technology, compounds, and drugs.
OUR FINANCIAL CONDITION AND THE RESTRICTIVE COVENANTS CONTAINED IN OUR
OUTSTANDING DEBT MAY LIMIT OUR ABILITY TO BORROW ADDITIONAL FUNDS OR TO RAISE
ADDITIONAL EQUITY AS MAY BE REQUIRED TO FUND OUR FUTURE OPERATIONS.
The terms of our outstanding secured convertible debentures with Cornel Capital
may limit our ability, without Cornell Capital's consent, to, among other
things:
o enter into certain transactions;
7
o create additional liens on our assets;
o issue preferred stock or Common Stock at certain discounts below market
prices; or
o merge or consolidate with other entities.
and could adversely affect our liquidity and our ability to attract additional
funding as required.
WE MAY NOT BE ABLE TO PAY OUR DEBT AND OTHER OBLIGATIONS AND OUR ASSETS MAY BE
SEIZED AS A RESULT.
We do not have sufficient funds to repay out outstanding debt at maturity and we
may not generate the cash flow required to pay our liabilities as they become
due. Our outstanding debt includes approximately $2,000,000 and accrued interest
of our secured convertible debentures with Cornell Capital due in December 2006
and an aggregate of $1,151,728 and accrued interest of convertible notes, of
which $901,728 and accrued interest is due on July 3, 2006 and $250,000 and
accrued interest is due on December 9, 2006. Cornell Capital may require us to
repay all of the principal and interest outstanding under the Debentures under
certain circumstances. We may not have sufficient cash reserves to repay the
Debentures at such time, which would cause an event of default under the
Debentures and may force us to declare bankruptcy. If we raise additional funds
to repay the convertible notes and debentures by selling equity securities, the
relative equity ownership of our existing investors could be diluted and new
investors could obtain terms more favorable than previous investors.
OUR OBLIGATIONS UNDER THE DEBENTURES ARE SECURED BY ALL OF OUR ASSETS.
Our obligations under the Debentures are secured by all of our assets. As a
result, if we default under the terms of the Debentures or related agreements,
including our failure to issue shares of Common Stock upon conversion by Cornell
Capital, our failure to timely file a registration statement or have such
registration statement declared effective, our breach of any covenant,
representation or warranty in the Securities Purchase Agreement or Debentures or
the commencement of a bankruptcy, insolvency, reorganization or liquidation
proceeding against us could require the early repayment of the Debentures, if
the default is not cured within the specified grace period. In addition, Cornell
Capital could foreclose its security interest and liquidate some or all of our
assets and we could cease to operate. Any such issuance of shares could cause a
significant drop in the price of our stock and significant dilution to our
stockholders.
THE FAILURE TO COMPLETE DEVELOPMENT OF OUR TECHNOLOGY, OBTAIN GOVERNMENT
APPROVALS, INCLUDING REQUIRED FDA APPROVALS, OR TO COMPLY WITH ONGOING
GOVERNMENTAL REGULATIONS COULD DELAY OR LIMIT INTRODUCTION OF PROPOSED PRODUCTS
AND RESULT IN FAILURE TO ACHIEVE REVENUES OR MAINTAIN OUR ONGOING BUSINESS.
Our research and development activities and the manufacture and marketing of our
intended products are subject to extensive regulation for safety, efficacy, and
quality by numerous government authorities in the United States and abroad.
Before receiving FDA clearance to market our proposed products, we will have to
demonstrate that our products are safe and effective on the patient population
and for the diseases that are to be treated. Clinical trials, manufacturing and
marketing of drugs are subject to the rigorous testing and approval process of
the FDA and equivalent foreign regulatory authorities. The Federal Food, Drug
and Cosmetic Act ("FDC Act") and other federal, state, and foreign statutes and
regulations govern and influence the testing, manufacture, labeling,
advertising, distribution, and promotion of drugs and medical devices. As a
result, clinical trials and regulatory approval can take a number of years or
longer to accomplish and require the expenditure of substantial financial,
managerial, and other resources.
8
In order to be commercially viable, we must successfully research, develop,
obtain regulatory approval for, manufacture, introduce, market, and distribute
our technologies. For each drug utilized with our drug delivery technology, and
for Myodur and Neurodur, we must successfully meet a number of critical
developmental milestones, including:
o demonstrate benefit from delivery of each specific drug through our
drug delivery technology;
o demonstrate through pre-clinical and clinical trials that our drug
delivery technology and patient specific therapy is safe and effective;
o establish a viable Good Manufacturing Process capable of potential
scale-up.
The time frame necessary to achieve these developmental milestones may be long
and uncertain, and we may not successfully complete these milestones for any of
our intended products in development.
In addition to the risks previously discussed, our technology is subject to
additional developmental risks which include the following:
o the uncertainties arising from the rapidly growing scientific aspects
of drug delivery, therapies, and potential treatments;
o uncertainties arising as a result of the broad array of potential
treatments related to nerve and muscle injury and disease; and
o anticipated expense and time believed to be associated with the
development and regulatory approval of treatments for nerve and muscle
injury and disease.
In order to conduct clinical trials that are necessary to obtain approval by the
FDA to market a product it is necessary to receive clearance from the FDA to
conduct such clinical trials. The FDA can halt clinical trials at any time for
safety reasons or because our clinical investigators do not follow the FDA's
requirements for conducting clinical trials. If we are unable to receive
clearance to conduct clinical trials or the trials are halted by the FDA, we
would not be able to achieve any revenue from such product, as it is illegal to
sell any drug or medical device in the United States for human consumption
without FDA approval, and many foreign countries are influenced in granting
their own required approvals by the FDA.
DATA OBTAINED FROM CLINICAL TRIALS IS SUSCEPTIBLE TO VARYING INTERPRETATIONS,
WHICH COULD DELAY, LIMIT OR PREVENT REGULATORY CLEARANCES.
Data already obtained, or in the future obtained, from pre-clinical studies and
clinical trials (as of the date of this prospectus no clinical trials of our
technology have been undertaken) do not necessarily predict the results that
will be obtained from later pre-clinical studies and clinical trials. Moreover,
pre-clinical and clinical data is susceptible to varying interpretations, which
could delay, limit or prevent regulatory approval. A number of companies in the
pharmaceutical industry have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials. The failure to
adequately demonstrate the safety and effectiveness of an intended product under
development could delay or prevent regulatory clearance of a potential drug,
resulting in delays to commercialization, and could materially harm our
business. Our clinical trials may not demonstrate sufficient levels of safety
and efficacy necessary to obtain the requisite regulatory approvals for our
drugs, and thus our proposed drugs may not be approved for marketing. Even after
approval, further studies could result in withdrawal of FDA and other regulatory
approvals and voluntary or involuntary withdrawal of products from the market.
9
We may encounter delays or rejections based upon additional government
regulation from future legislation or administrative action or changes in FDA
policy during the period of development, clinical trials and FDA regulatory
review. We may encounter similar delays in foreign countries. Sales of our
products outside the U.S. would be subject to foreign regulatory approvals that
vary from country to country. The time required to obtain approvals from foreign
countries may be shorter or longer than that required for FDA approval, and
requirements for foreign licensing may differ from FDA requirements. We may be
unable to obtain requisite approvals from the FDA and foreign regulatory
authorities, and even if obtained, such approvals may not be on a timely basis,
or they may not cover the uses that we request.
In the future, we may select drugs for "molecular binding" using our drug
delivery technology which may contain controlled substances which are subject to
state, federal and foreign laws and regulations regarding their manufacture,
use, sale, importation and distribution. For such drugs containing controlled
substances, we and any suppliers, manufacturers, contractors, customers and
distributors may be required to obtain and maintain applicable registrations
from state, federal and foreign law enforcement and regulatory agencies and
comply with state, federal and foreign laws and regulations regarding the
manufacture, use, sale, importation and distribution of controlled substances.
These regulations are extensive and include regulations governing manufacturing,
labeling, packaging, testing, dispensing, prescription, and procurement quotas,
record keeping, reporting, handling, shipment, and disposal. Failure to obtain
and maintain required registrations or comply with any applicable regulations
could delay or preclude us from developing and commercializing our drugs
containing controlled substances and subject us to enforcement action. In
addition, because of their restrictive nature, these regulations could limit our
commercialization of drugs containing controlled substances.
OUR DRUGS OR TECHNOLOGY MAY NOT GAIN FDA APPROVAL IN CLINICAL TRIALS OR BE
EFFECTIVE AS A THERAPEUTIC AGENT WHICH COULD AFFECT OUR FUTURE PROFITABILITY AND
PROSPECTS.
In order to obtain regulatory approvals, we must demonstrate that the procedure
is safe and effective for use in humans and functions as a therapeutic against
the effects of injury or disease. To date, we have not conducted any human pilot
study pursuant to Institutional Review Board oversight in anticipation of our
initial FDA submission for patient-specific or other therapy. Further, we have
conducted only sporadic and limited animal studies to observe the effects of our
drugs and have not subjected our drugs or technologies to rigorous testing
standards that would be acceptable for publication in scientific peer review
journals.
We may not be able to demonstrate that any potential drug or technology,
including Myodur or Neurodur, although appearing promising in pre-clinical and
animal observations, is safe or effective in advanced clinical trials that
involve human patients. We are also not able to assure that the results of the
tests already conducted and which we intend to repeat will be consistent with
our prior observations or support our applications for regulatory approval. As a
result, our drug and technology research program may be curtailed, redirected or
eliminated at any time.
The diseases and illnesses to which our drugs and technologies are directed are
very complex and may be prone to genetic mutations. These mutations may prove
resistant to currently approved therapeutics or our drugs or technologies. Even
if we gain regulatory approval there may develop resistance to our treatment.
This could have a material adverse effect on our business, financial condition,
and results of operations.
10
WE HAVE ACCUMULATED DEFICITS IN THE RESEARCH AND DEVELOPMENT OF OUR TECHNOLOGY
AND THERE IS NO GUARANTEE THAT WE WILL EVER GENERATE REVENUE OR BECOME
PROFITABLE EVEN IF ONE OR MORE OF OUR DRUGS ARE APPROVED FOR COMMERCIALIZATION.
Since our inception in 1986, we have incurred operating losses. As of September
30, 2005, our accumulated deficit amounted to approximately $34,042,557. In
addition, we expect to continue incurring operating losses for the foreseeable
future as we continue to develop our products which will cause us to incur
substantial research and development and clinical trials costs. Our ability to
generate revenue and achieve profitability depends upon our ability, alone or
with others, to complete the development of our proposed products, obtain the
required regulatory approvals and manufacture, market, and sell our proposed
products. Development, including the cost of contract manufacturing of our
proposed products for pre-clinical testing and human clinical trials is
extremely costly and requires significant investment. In the absence of
additional financing we may not be able to continue our development activities.
In addition, we may choose to license the rights to particular drugs or other
technology. License fees may increase our costs.
We have not generated any revenue from the commercial sale of our proposed
products or any drugs and do not expect to receive such revenue in the near
future. Our primary activity to date has been research and development of our
technology. All revenues to date are from grants, both public and private, and
collaborative agreements. A substantial portion of the research results and
observations on which we rely were performed by third-parties at those parties'
sole or shared cost and expense. We cannot be certain as to when or whether to
anticipate commercializing and marketing our proposed products in development,
and do not expect to generate sufficient revenues from proposed product sales to
cover our expenses or achieve profitability in the foreseeable future.
WE HAVE RELIED SOLELY ON THIRD-PARTY RESEARCH INSTITUTIONS INCLUDING THE STATE
UNIVERSITY OF NEW YORK, HEALTH SCIENCE CENTER AT DOWNSTATE MEDICAL CENTER AND
STONY BROOK UNIVERSITY FOR ALL OF OUR RESEARCH AND DEVELOPMENT, WHICH COULD BE
MATERIALLY DELAYED SHOULD WE LOSE ACCESS TO THOSE FACILITIES.
Although we are in discussions to lease laboratory facilities for our on-going
research and development programs, we currently have no research and development
facilities of our own. We are entirely dependent on third parties to use their
facilities to conduct research and development. To date, we have primarily
relied on third-party research institutions for this purpose including the
Health Science Center at Downstate Medical Center and Stony Brook University.
Our inability to have continued access to these facilities to conduct research
and development may delay or impair our ability to gain FDA approval and
commercialization of our drug delivery technology and products.
We currently maintain a good working relationship with our third-party research
institutions. Although we are evaluating various facilities in which to
establish our laboratories, should we be required to relocate on short notice,
we do not currently have an alternate facility where we could relocate our
research activities. The cost and time to establish or locate an alternative
research and development facility to develop our technology will be substantial
and may delay gaining FDA approval and commercializing our products.
WE ARE DEPENDENT ON OUR COLLABORATIVE AGREEMENTS FOR THE DEVELOPMENT OF OUR
TECHNOLOGIES AND BUSINESS DEVELOPMENT WHICH EXPOSES US TO THE RISK OF RELIANCE
ON THE VIABILITY OF THIRD PARTIES.
In conducting our research and development activities, we rely and expect in the
future to rely upon numerous collaborative agreements with universities,
governmental agencies, charitable foundations, manufacturers, contract research
organizations, and corporate partners. The loss of or failure to perform under
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any of these arrangements, by any of these entities, may substantially disrupt
or delay our research and development activities including our anticipated
clinical trials.
WE ARE EXPOSED TO PRODUCT LIABILITY, CLINICAL AND PRE-CLINICAL LIABILITY RISKS
WHICH COULD PLACE A SUBSTANTIAL FINANCIAL BURDEN UPON US SHOULD WE BE SUED,
BECAUSE WE DO NOT CURRENTLY HAVE PRODUCT LIABILITY INSURANCE ABOVE AND BEYOND
OUR GENERAL INSURANCE COVERAGE.
Our business exposes us to potential product liability and other liability risks
that are inherent in the testing, manufacturing, marketing and sale of
pharmaceutical products. We cannot assure that such potential claims will not be
asserted against us. In addition, the use in our clinical trials of
pharmaceutical products that we may develop and the subsequent sale of these
products by us or our potential collaborators may cause us to bear a portion of
or all product liability risks. A successful liability claim or series of claims
brought against us could have a material adverse effect on our business,
financial condition, and results of operations.
All of our pre-clinical trials have been and all of our proposed clinical and
pre-clinical trials are anticipated to be conducted by collaborators and third
party contractors. We do not currently have any product liability insurance or
other liability insurance relating to clinical trials or any products or
compounds. We intend to seek insurance against such risks before we initiate
clinical trials or before our product sales are commenced. We cannot assure that
we will be able to obtain or maintain adequate product liability insurance on
acceptable terms, if at all, or that such insurance will provide adequate
coverage against our potential liabilities. An inability to obtain sufficient
insurance coverage at an acceptable cost or otherwise to protect against
potential product liability claims could prevent or inhibit the
commercialization of our drug delivery technology. A product liability claim
could also significantly harm our reputation and delay market acceptance of our
intended products. Furthermore, our current and potential partners with whom we
have collaborative agreements or our future licensees may not be willing to
indemnify us against these types of liabilities and may not themselves be
sufficiently insured or have a net worth sufficient to satisfy any product
liability claims. Product liability claims or other claims related to our
intended products, regardless of their outcome, could require us to spend
significant time and money in litigation or to pay significant settlement
amounts or judgments. Any successful product liability or other claim may
prevent us from obtaining adequate liability insurance in the future on
commercially desirable or reasonable terms. Claims or losses in excess of any
product liability insurance coverage that may be obtained by us could have a
material adverse effect on our business, financial condition, and results of
operations.
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS MORE DIFFICULT, AND
THEREFORE, INVESTORS HAVE LIMITED INFORMATION UPON WHICH TO RELY.
An investor can only evaluate our business based on a limited operating history.
While we were organized in 1986, our current level of activity and operations
only recently began following our acquisition by Xechem and subsequent closing
on our financing during December 2004 and January and February 2005. Our
operations will continue to change and our costs will increase dramatically as
we evolve from primarily a technology holding company to a capitalized company
with employees and internal operations. Since inception, we have engaged
primarily in research and development, relied to a great extent on third-party
efforts, sought avenues for licensing technology, sought grants, raised capital,
and recruited scientific and management personnel external to us. We have not
generated any meaningful revenue to date, other than research grants, and have
no royalty revenue or products ready for use and in the marketplace. This
limited history may not be adequate to enable an investor to fully assess our
ability to develop our technologies and proposed products, obtain FDA approval,
and achieve market acceptance of our proposed products, and respond to
competition, or conduct such affairs as are presently contemplated.
12
THE SALE OF THE COMMON STOCK TO FUSION CAPITAL MAY CAUSE DILUTION AND THE SALE
OF THE SHARES OF COMMON STOCK ACQUIRED BY FUSION CAPITAL COULD CAUSE THE PRICE
OF THE COMMON STOCK TO DECLINE.
The purchase price for the Common Stock to be sold to Fusion Capital pursuant to
the Stock Purchase Agreement entered into in October 2005 will fluctuate based
on the price of the Common Stock. Fusion Capital may sell none, some or all of
the shares of Common Stock purchased from us at any time. We expect that the
shares purchased by Fusion Capital will be sold over a period of up to 40 months
from the date of the Stock Purchase Agreement with Fusion Capital. Depending
upon market liquidity at the time, a sale of shares at any given time could
cause the trading price of the Common Stock to decline. The sale of a
substantial number of shares of the Common Stock, or anticipation of such sales,
could make it more difficult for us to sell equity or equity-related securities
in the future at a time and at a price that we might otherwise wish to effect
sales.
FUTURE SALES BY CORNELL CAPITAL MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR
ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.
The sale of shares pursuant to the Securities Purchase Agreement with Cornell
Capital will have a dilutive impact on our stockholders. If the aggregate
principal amount of the $2,000,000 Debentures and accrued interest are converted
at maturity into shares of our Common Stock at the Fixed Price of $0.9765, up to
2,546,965 shares of Common Stock will be issued to Cornell Capital. If the
Debentures are converted, in whole or in part, at the Floating Price, the number
of shares issuable to Cornell Capital upon conversion may be substantially
greater. Cornell Capital may sell such shares in the market immediately, which
could cause our stock price to decline. In addition, the interest on the
Debentures may be payable, at the option of Cornell Capital, in shares of our
Common Stock in lieu of cash, which could have a further dilutive impact on our
stockholders and could cause our stock price to decline.
ACCEPTANCE OF OUR PRODUCTS IN THE MARKETPLACE IS UNCERTAIN AND FAILURE TO
ACHIEVE MARKET ACCEPTANCE WILL PREVENT OR DELAY OUR ABILITY TO GENERATE
REVENUES.
Our future financial performance will depend, in part, upon the introduction and
customer acceptance of our proposed products. Even if approved for marketing by
the necessary regulatory authorities, our products may not achieve market
acceptance. The degree of market acceptance will depend upon a number of
factors, including:
o the receipt of regulatory clearance of marketing claims for the uses
that we are developing;
o the establishment and demonstration of the advantages, safety and
efficacy of our technologies;
o pricing and reimbursement policies of government and third party payors
such as insurance companies, health maintenance organizations and other
health plan administrators;
o our ability to attract corporate partners, including pharmaceutical
companies, to assist in commercializing our intended products; and
o our ability to market our products.
Physicians, patients, payors or the medical community in general may be
unwilling to accept, utilize, or recommend any of our products. If we are unable
to obtain regulatory approval, commercialize, and market our proposed products
when planned, we may not achieve any market acceptance or generate revenue.
13
WE MAY FACE LITIGATION FROM THIRD PARTIES THAT CLAIM OUR PRODUCTS INFRINGE ON
THEIR INTELLECTUAL PROPERTY RIGHTS, PARTICULARLY BECAUSE THERE IS SUBSTANTIAL
UNCERTAINTY ABOUT THE VALIDITY AND BREADTH OF MEDICAL PATENTS.
We may be exposed to future litigation by third parties based on claims that our
technologies, products, or activities infringe the intellectual property rights
of others or that we have the trade secrets of others. This risk is exacerbated
by the fact that the validity and breadth of claims covered in medical
technology patents and the breadth and scope of trade secret protection involve
complex legal and factual questions for which important legal principles are
unresolved. Any litigation or claims against us, whether or not valid, could
result in substantial costs, could place a significant strain on our financial
and managerial resources, and could harm our reputation. Most of our license
agreements would likely require that we pay the costs associated with defending
this type of litigation. In addition, intellectual property litigation or claims
could force us to do one or more of the following:
o cease selling, incorporating or using any of our technologies and/or
products that incorporate the challenged intellectual property, which
would adversely affect our future revenue;
o obtain a license from the holder of the infringed intellectual property
right, which license may be costly or may not be available on
reasonable terms, if at all; or
o redesign our products, which would be costly and time consuming.
We have not engaged in discussions, received any communications, nor do we have
any reason to believe that any third party is challenging or has the proper
legal authority to challenge our intellectual property rights or those of the
actual patent holders, other than a letter received during August 2004 from
counsel to a company named Ceptyr Corporation alleging infringement of
trademarks issued to Ceptyr with respect to our name CepTor. In light of our
formation and use of the name CepTor in commerce many years prior to the
formation of Ceptyr and issuance of their trademark, we believe the demand to
cease and desist from future infringement to be substantially without merit. No
further communication has been received since mid-2004.
CERTAIN UNIVERSITY RELATIONSHIPS ARE IMPORTANT TO OUR BUSINESS AND OUR
SCIENTIFIC ADVISORY BOARD'S UNIVERSITY RELATIONSHIPS MAY POTENTIALLY RESULT IN
CONFLICTS OF INTERESTS.
Dr. Alfred Stracher and Dr. Leo Kesner are the original chief scientific
investigators of our technology and have had longstanding associations with the
Health Science Center at Downstate Medical Center and Stony Brook University for
more than the last five years. Dr. Stracher is also Chairman of the Department
of Biochemistry of the Health Science Center at Downstate Medical Center. Dr.
Stracher's and Dr. Kesner's association with those universities may currently or
in the future involve conflicting interests.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OR ENFORCE OUR RIGHTS TO INTELLECTUAL
PROPERTY OR SECURE RIGHTS TO THIRD PARTY PATENTS, WE MAY LOSE VALUABLE RIGHTS,
EXPERIENCE REDUCED MARKET SHARE, ASSUMING ANY, OR INCUR COSTLY LITIGATION TO
PROTECT SUCH RIGHTS.
Our ability to obtain licenses to third-party patents, maintain trade secret
protection, and operate without infringing the proprietary rights of others will
be important to our commercialization of any products under development.
Therefore, any disruption in access to the technology could substantially delay
the development of our technology.
14
The patent positions of biotechnology and pharmaceutical companies, including
ours, which also involve licensing agreements, are frequently uncertain and
involve complex legal and factual questions. In addition, the coverage claimed
in a patent application can be significantly reduced before the patent is
issued. Consequently, our patent applications and any issued and licensed
patents may not provide protection against competitive technologies or may be
held invalid if challenged or circumvented. Our competitors may also
independently develop drug delivery technologies or products similar to ours or
design around or otherwise circumvent patents issued or licensed to us. In
addition, the laws of some foreign countries may not protect our proprietary
rights to the same extent as U.S. law.
We also rely upon trade secrets, technical know how, and continuing
technological innovation to develop and maintain our competitive position. We
generally require our employees, consultants, advisors and collaborators to
execute appropriate confidentiality and assignment of inventions agreements.
These agreements typically provide that all materials and confidential
information developed or made known to the individual during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances, and that all inventions
arising out of the individual's relationship with us shall be our exclusive
property. These agreements may be breached and we may not have an appropriate
remedy available for breach of the agreements. Furthermore, our competitors may
independently develop substantially equivalent proprietary information and
techniques, reverse engineer our information and techniques, or otherwise gain
access to our proprietary technology. We may be unable to meaningfully protect
our rights in trade secrets, technical know how, and other non patented
technology.
Although our trade secrets and technical know how are important, our continued
access to the patents is a significant factor in the development and
commercialization of our drug delivery technology. Aside from the general body
of scientific knowledge from other drug delivery processes and technology, we
believe these patents, based upon our current scientific data, are the only
intellectual property necessary to develop our short-term plans for our current
drug delivery system using our proposed Myodur, Neurodur and other drugs. We do
not believe that we are or will be violating any other patents in developing our
technology although we anticipate seeking a license from Sigma-Tau in order to
employ a manufacturing method useful for large scale manufacturing of Myodur.
We may have to resort to litigation to protect its rights for certain
intellectual property, or to determine their scope, validity, or enforceability.
Enforcing or defending our rights is expensive, could cause diversion of our
resources, and may not prove successful. Any failure to enforce or protect our
rights could cause us to lose the ability to exclude others from using our
technology to develop or sell competing products.
We currently depend and will continue to depend heavily on third parties for
support in research and development and clinical and pre-clinical testing. We
expect to conduct activities with Downstate Medical Center and other State
University of New York facilities at Stony Brook and Buffalo. We currently have
no significant formal agreement with either of these institutions other than
research and testing agreements entered through the Research Foundation of the
State University of New York. Under certain circumstances, the State University
of New York and others may acquire certain rights in newly developed
intellectual property developed in conjunction with us.
Research and development and clinical trials involve a complex process, and
these universities' facilities may not be sufficient. Inadequate facilities
could delay clinical trials of our drugs and result in delays in regulatory
approval and commercialization of our drugs, either of which would materially
harm our business. We may, if adequate funding is obtained, decide to establish
an independent facility to replace or supplement university facilities. To date,
we have not identified the location, negotiated leases or equipment purchases,
15
and, accordingly, we are subject to various uncertainties and risks that may be
associated with the potential establishment of a new facility.
We may rely on third party contract research organizations, service providers,
and suppliers to support development and clinical testing of our products.
Failure of any of these contractors to provide the required services in a timely
manner or on reasonable commercial terms could materially delay the development
and approval of our products, increase our expenses, and materially harm our
business, financial condition, and results of operations.
KEY COMPONENTS OF OUR TECHNOLOGIES MAY BE PROVIDED BY SOLE OR LIMITED NUMBERS OF
SUPPLIERS, AND SUPPLY SHORTAGES OR LOSS OF THESE SUPPLIERS COULD RESULT IN
INTERRUPTIONS IN SUPPLY OR INCREASED COSTS.
Certain components used in our research and development activities such as
leupeptin, carnitine and taurine compounds, are currently purchased or
manufactured for us from a single or a limited number of outside sources. The
reliance on a sole or limited number of suppliers could result in:
o potential delays associated with research and development and clinical
and pre-clinical trials due to an inability to timely obtain a single
or limited source component;
o potential inability to timely obtain an adequate supply of required
components; and
o potential of reduced control over pricing, quality, and timely
delivery.
We do not have long-term agreements with any of our suppliers, and therefore the
supply of a particular component could be terminated without penalty to the
supplier. Any interruption in the supply of components could cause us to seek
alternative sources of supply or manufacture these components internally. If the
supply of any components is interrupted, components from alternative suppliers
may not be available in sufficient volumes within required timeframes, if at
all, to meet our needs. This could delay our ability to complete clinical
trials, obtain approval for commercialization or commence marketing, or cause us
to lose sales, incur additional costs, delay new product introductions, or harm
our reputation. Further, components from a new supplier may not be identical to
those provided by the original supplier. Such differences if they exist could
affect product formulations or the safety and effect of our products that are
being developed and delay regulatory approvals.
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND ONCE OUR PRODUCTS ARE APPROVED, IF
AT ALL, WE MAY NOT BE ABLE TO MANUFACTURE SUFFICIENT QUANTITIES AT AN ACCEPTABLE
COST.
Our products remain in the research and development and pre-clinical trial phase
of commercialization. Once our products are approved for commercial sale, if at
all, we will need to establish the capability to commercially manufacture our
products in accordance with FDA and other regulatory requirements. We have
limited experience in establishing, supervising, and conducting commercial
manufacturing. If we fail to adequately establish, supervise, and conduct all
aspects of the manufacturing processes, we may not be able to commercialize our
products. We do not presently own manufacturing facilities necessary to provide
clinical or commercial quantities of our intended products.
We presently plan to rely on third party contractors to manufacture part or all
of our products. This may expose us to the risk of not being able to directly
oversee the production and quality of the manufacturing process. Furthermore,
these contractors, whether foreign or domestic, may experience regulatory
compliance difficulty, mechanic shut downs, employee strikes, or any other
unforeseeable acts that may delay production.
16
DUE TO OUR LIMITED MARKETING, SALES, AND DISTRIBUTION EXPERIENCE, WE MAY BE
UNSUCCESSFUL IN OUR EFFORTS TO SELL OUR PRODUCTS, ENTER INTO RELATIONSHIPS WITH
THIRD PARTIES, OR DEVELOP A DIRECT SALES ORGANIZATION.
We have yet had to establish any marketing, sales, or distribution capabilities
for our proposed products. Until such time as our products are further along in
the regulatory process, we will not devote any meaningful time or resources to
this effort. At the appropriate time, we intend to enter into agreements with
third parties to sell our products or we may develop our own sales and marketing
force. We may be unable to establish or maintain third party relationships on a
commercially reasonable basis, if at all. In addition, these third parties may
have similar or more established relationships with our competitors who may
exist after our introduction of products, if any.
If we do not enter into relationships with third parties for the sales and
marketing of our products, we will need to develop our own sales and marketing
capabilities. We have limited experience in developing, training, or managing a
sales force. If we choose to establish a direct sales force, we may incur
substantial additional expenses in developing, training, and managing such an
organization. We may be unable to build a sales force on a cost effective basis
or at all. Any such direct marketing and sales efforts may prove to be
unsuccessful. In addition, we will compete with many other companies that
currently have extensive marketing and sales operations. Our marketing and sales
efforts may be unable to compete against these other companies. We may be unable
to establish a sufficient sales and marketing organization on a timely basis, if
at all, and may be unable to engage qualified distributors. Even if engaged,
these distributors may:
o fail to satisfy financial or contractual obligations to us;
o fail to adequately market our products;
o cease operations with little or no notice; or
o offer, design, manufacture, or promote competing products.
If we fail to develop sales, marketing, and distribution channels, we would
experience delays in product sales and incur increased costs, which would harm
our financial results.
IF WE ARE UNABLE TO CONVINCE PHYSICIANS AS TO THE BENEFITS OF OUR INTENDED
PRODUCTS, WE MAY INCUR DELAYS OR ADDITIONAL EXPENSE IN OUR ATTEMPT TO ESTABLISH
MARKET ACCEPTANCE.
Broad use of our drug delivery technology may require physicians to be informed
regarding our intended products and the intended benefits. The time and cost of
such an educational process may be substantial. Inability to successfully carry
out this physician education process may adversely affect market acceptance of
our products. We may be unable to timely educate physicians regarding our
intended products in sufficient numbers to achieve our marketing plans or to
achieve product acceptance. Any delay in physician education may materially
delay or reduce demand for our products. In addition, we may expend significant
funds towards physician education before any acceptance or demand for our
products is created, if at all.
THE MARKET FOR OUR PRODUCTS IS RAPIDLY CHANGING AND COMPETITIVE, AND NEW
MECHANISMS, TECHNOLOGIES, NEW THERAPEUTICS, NEW DRUGS, AND NEW TREATMENTS WHICH
MAY BE DEVELOPED BY OTHERS COULD IMPAIR OUR ABILITY TO MAINTAIN AND GROW OUR
BUSINESS AND REMAIN COMPETITIVE.
The pharmaceutical and biotechnology industries are subject to rapid and
substantial technological change. Developments by others may render our
technologies and intended products noncompetitive or obsolete, or we may be
17
unable to keep pace with technological developments or other market factors.
Technological competition from pharmaceutical and biotechnology companies,
universities, governmental entities and others diversifying into the field is
intense and is expected to increase. Many of these entities have significantly
greater research and development capabilities and budgets than we do, as well as
substantially more marketing, manufacturing, financial and managerial resources.
These entities represent significant competition for us. Acquisitions of, or
investments in, competing pharmaceutical or biotechnology companies by large
corporations could increase such competitors' financial, marketing,
manufacturing, and other resources.
We are a start-up development stage enterprise that heretofore has operated in
all material respects only as a virtual company with no day-to-day business
management, operating as a vehicle to hold certain technology for possible
future exploration, and have been and will continue to be engaged in the
development of novel untested drug delivery and therapeutic technologies. As a
result, our resources are limited and we may experience management, operational,
or technical challenges inherent in such activities and novel technologies.
Other companies, which may become competitors, have developed or are in the
process of developing technologies that could now be, or in the future become,
the basis for competition. Some of these technologies may have an entirely
different approach or means of accomplishing similar therapeutic effects
compared to our technology. Our competitors may develop drug delivery
technologies and drugs that are safer, more effective, or less costly than our
intended products and, therefore, present a serious competitive threat to us.
The potential widespread acceptance of therapies that are alternatives to ours
may limit market acceptance of our products even if commercialized. Many of our
targeted diseases and conditions can also be treated by other medication or drug
delivery technologies. These treatments may be widely accepted in medical
communities and have a longer history of use. The established use of these
competitive drugs may limit the potential for our technologies and products to
receive widespread acceptance if commercialized.
WE MAY NOT BE SUCCESSFUL IN OBTAINING ORPHAN DRUG STATUS FOR CERTAIN OF OUR
PRODUCTS OR, IF THAT STATUS IS OBTAINED, FULLY ENJOYING THE BENEFITS OF ORPHAN
DRUG STATUS.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs
intended to treat a rare disease or condition generally affecting fewer than
200,000 people in the United States. We may not be successful in receiving
orphan drug status for certain of our products. Orphan drug designation must be
requested before submitting a NDA. After the FDA grants orphan drug designation,
the generic identity of the therapeutic agent and its potential orphan use are
publicized by the FDA. Under current law, orphan drug status is conferred upon
the first company to receive FDA approval to market the designated drug for the
designated indication. Orphan drug status also grants marketing exclusivity in
the United States for a period of seven years following approval of the NDA,
subject to limitations. Orphan drug designation does not provide any advantage
in, or shorten the duration of, the FDA regulatory approval process. Although
obtaining FDA approval to market a product with orphan drug status can be
advantageous, the scope of protection or the level of marketing exclusivity that
is currently afforded by orphan drug status and marketing approval may not
remain in effect in the future.
Our business strategy involves obtaining orphan drug designation for certain of
the products we have under development. Although we have applied for certain
orphan drug designation with the FDA, we do not know whether any of our products
will receive an orphan drug designation. Orphan drug designation does not
prevent other manufacturers from attempting to develop similar drugs for the
designated indication or from obtaining the approval of an NDA for their drug
prior to the approval of our NDA application. If another sponsor's NDA for a
competing drug in the same indication is approved first, that sponsor is
entitled to exclusive marketing rights if that sponsor has received orphan drug
designation for its drug. In that case, the FDA would refrain from approving an
application by us to market our competing product for seven years, subject to
limitations. Competing products may receive orphan drug designations and FDA
18
marketing approval before the products under development by us may receive
orphan drug designation.
NDA approval for a drug with an orphan drug designation does not prevent the FDA
from approving the same drug for a different indication, or a molecular
variation of the same drug for the same indication. Because doctors are not
restricted by the FDA from prescribing an approved drug for uses not approved by
the FDA, it is also possible that another company's drug could be prescribed for
indications for which products developed by us have received orphan drug
designation and NDA approval. The prescribing of approved drugs for alternative
uses, commonly referred to as "off label" sales, could adversely affect the
marketing potential of products that have received an orphan drug designation
and NDA approval. In addition, NDA approval of a drug with an orphan drug
designation does not provide any marketing exclusivity in foreign markets.
The possible amendment of the Orphan Drug Act by the U.S. Congress has been the
subject of frequent discussion. Although no significant changes to the Orphan
Drug Act have been made for a number of years, members of Congress have from
time to time proposed legislation that would limit the application of the Orphan
Drug Act. The precise scope of protection that may be afforded by orphan drug
designation and marketing approval may be subject to change in the future.
IF USERS OF OUR PRODUCTS ARE UNABLE TO OBTAIN ADEQUATE REIMBURSEMENT FROM THIRD
PARTY PAYORS, OR IF NEW RESTRICTIVE LEGISLATION IS ADOPTED, MARKET ACCEPTANCE OF
OUR PRODUCTS MAY BE LIMITED AND WE MAY NOT ACHIEVE ANTICIPATED REVENUES.
The continuing efforts of government and insurance companies, health maintenance
organizations, and other payors of healthcare costs to contain or reduce costs
of health care may affect our future revenues and profitability, and the future
revenues and profitability of our potential customers, suppliers and
collaborative partners, and the availability of capital. For example, in certain
foreign markets, pricing or profitability of prescription pharmaceuticals is
subject to government control. In the United States, given recent federal and
state government initiatives directed at lowering the total cost of health care,
the U.S. Congress and state legislatures will likely continue to focus on health
care reform, the cost of prescription pharmaceuticals, and on the reform of the
Medicare and Medicaid systems. While we cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could materially harm our business, financial
condition, and results of operations.
Our ability to commercialize our products will depend in part on the extent to
which appropriate reimbursement levels for the cost of our products and related
treatment are obtained by governmental authorities, private health insurers and
other organizations, such as HMOs. Third party payors are increasingly
challenging the prices charged for medical drugs and services. Also, the trend
toward managed health care in the United States and the concurrent growth of
organizations such as HMOs, which could control or significantly influence the
purchase of health care services and drugs, as well as legislative proposals to
reform health care or reduce government insurance programs, may all result in
lower prices for or rejection of our drugs. The cost containment measures that
health care payors and providers are instituting and the effect of any health
care reform could materially harm our ability to operate profitably.
OUR BUSINESS INVOLVES ENVIRONMENTAL RISKS RELATED TO HANDLING REGULATED
SUBSTANCES THAT COULD SEVERELY AFFECT OUR ABILITY TO CONDUCT RESEARCH AND
DEVELOPMENT OF OUR DRUG DELIVERY TECHNOLOGY.
In connection with our research and development activities and manufacture of
materials and drugs, we are subject to federal, states and local laws, rules,
regulations, and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling, and disposal of certain materials,
19
biological specimens, and wastes. Although we believe that we have complied with
the applicable laws, regulations, and policies in all material respects and have
not been required to correct any material noncompliance, we may be required to
incur significant costs to comply with environmental and health and safety
regulations in the future. Our research and development may in the future
involve the controlled use of hazardous materials, including but not limited to
certain hazardous chemicals and narcotics. Although we believe that our safety
procedures for storing, handling, and disposing of such materials will comply
with the standards prescribed by state and federal regulations, we cannot
completely eliminate the risk of accidental contamination or injury from these
materials. In the event of such an occurrence, we could be held liable for any
damages that result and any such liability could exceed our resources.
WE DEPEND UPON KEY PERSONNEL WHO MAY TERMINATE THEIR EMPLOYMENT WITH US AT ANY
TIME, AND WE WILL NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL WHICH MAY BE
UNAVAILABLE DUE TO THE NECESSITY OF UNIQUE SKILLS AND RESOURCES.
Our success will depend to a significant degree upon the continued services of
key management, including William H. Pursley (age 52) and Norman W. Barton (age
58). We maintain directors and officers insurance for our directors and
executive officers and "key man" life insurance for Dr. Barton in the amount of
$1,000,000. This insurance may not adequately compensate for the loss of Dr.
Barton's services. Our success will depend on the ability to attract and retain
highly skilled personnel. Competition for qualified personnel is intense, and
the process of hiring and integrating such qualified personnel is often lengthy.
We may be unable to recruit such personnel on a timely basis, if at all.
Management and other employees may voluntarily terminate their employment at any
time. The loss of the services of key personnel, or the inability to attract and
retain additional qualified personnel, could result in delays to development or
approval, loss of sales and diversion of management resources. Additionally,
failure to attract and retain highly qualified management personnel would damage
our business prospects.
Risks Related to Our Common Stock
WE HAVE RAISED SUBSTANTIAL AMOUNTS OF CAPITAL IN PRIVATE PLACEMENTS FROM TIME TO
TIME.
The securities offered in such private placements were not registered under the
Securities Act or any state "blue sky" law in reliance upon exemptions from such
registration requirements. Such exemptions are highly technical in nature and if
we inadvertently failed to comply with the requirements of any of such exemptive
provisions, investors would have the right to rescind their purchase of our
securities or sue for damages. If one or more investors were to successfully
seek such rescission or prevail in any such suit, we could face severe financial
demands that could materially and adversely affect our financial position.
Financings that may be available to us under current market conditions
frequently involve sales at prices below the prices at which our Common Stock
currently is reported on the OTC Bulletin Board or exchange on which our Common
Stock may in the future, be listed, as well as the issuance of warrants or
convertible securities at a discount to market price.
INVESTORS IN OUR SECURITIES MAY SUFFER DILUTION.
The issuance of shares of our Common Stock, or shares of our Common Stock
underlying warrants, options or preferred stock or convertible debentures or
notes will dilute the equity interest of existing stockholders who do not have
anti-dilution rights and could have a significant adverse effect on the market
price of our Common Stock. The sale of our Common Stock acquired at a discount
could have a negative impact on the market price of our Common Stock and could
increase the volatility in the market price of our Common Stock. In addition, we
may seek additional financing which may result in the issuance of additional
20
shares of our Common Stock and/or rights to acquire additional shares of our
Common Stock. The issuance of our Common Stock in connection with such financing
may result in substantial dilution to the existing holders of our Common Stock
who do not have anti-dilution rights. Those additional issuances of our Common
Stock would result in a reduction of an existing holder's percentage interest in
our company.
OUR COMMON STOCK IS THINLY TRADED, SO YOU MAY BE UNABLE TO SELL AT OR NEAR ASK
PRICES OR AT ALL IF YOU NEED TO SELL YOUR SHARES TO RAISE MONEY OR OTHERWISE
DESIRE TO LIQUIDATE YOUR SHARES.
Our Common Stock historically been sporadically or "thinly-traded" on the OTC
Bulletin Board, meaning that the number of persons interested in purchasing our
Common Stock at or near ask prices at any given time may be relatively small or
non-existent. As of December 27, 2005, our average trading volume per day for
the past three months was approximately 51,700 shares a day with a high of
340,200 shares traded and a low of no shares traded. This situation is
attributable to a number of factors, including the fact that we are a small
company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they may tend to be risk-averse and may be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price. There can be no assurance that a
broader or more active public trading market for our Common Stock will develop
or be sustained, or that current trading levels will be sustained.
Fusion Capital's purchase and sale into the market of $25,000 of our Common
Stock each trading day could cause our Common Stock price to decline due to the
additional shares available in the market, particularly in light of the
relatively thin trading volume of our Common Stock. For example, using the
closing price per share on December 27, 2005, of $0.77, Fusion Capital would be
issued 32,468 shares each trading day if we elected to have them purchase the
daily purchase amount, whereas our average trading volume for the prior three
months was approximately 51,700 shares per day. The market price of our Common
Stock could decline given our minimal average trading volume compared to the
number of shares potentially issuable to Fusion Capital and the voting power and
value of your investment would be subject to continual dilution if Fusion
Capital purchases the shares and resells those shares into the market, although
there is no obligation for Fusion Capital to sell such shares. Any adverse
affect on the market price of our Common Stock would increase the number of
shares issuable to Fusion Capital each trading day which would increase the
dilution of your investment. Although we have the right to reduce or suspend
Fusion Capital purchases at any time, our financial condition at the time may
require that we not exercise our right to suspend such purchases even if there
is a decline in the market price.
Contractual 9.9% beneficial ownership limitations prohibit Fusion Capital,
together with its affiliates, from beneficially owning more than 9.9% of our
outstanding Common Stock. This 9.9% limitation does not prevent Fusion Capital
from purchasing shares of our Common Stock and then reselling those shares in
stages over time where Fusion Capital and its affiliates do not, at any given
time, beneficially own shares in excess of the 9.9% limitation. Consequently,
these limitations will not necessarily prevent substantial dilution of the
voting power and value of your investment.
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HISTORICALLY, OUR COMMON STOCK HAS EXPERIENCED SIGNIFICANT PRICE FLUCTUATIONS.
There can be no assurance that the market price for our Common Stock will remain
at its current level and a decrease in the market price could result in
substantial losses for investors. The market price of our Common Stock may be
significantly affected by one or more of the following factors:
o announcements or press releases relating to the bio-pharmaceutical
sector or to our own business or prospects;
o regulatory, legislative, or other developments affecting us or the
healthcare industry generally;
o conversion of our preferred stock and convertible debt into Common
Stock at conversion rates based on then current market prices or
discounts to market prices of our Common Stock, and exercise of options
and warrants at below current market prices;
o sales by those financing our company through convertible securities the
underlying Common Stock of which have been registered with the SEC and
may be sold into the public market immediately upon conversion; and
o market conditions specific to bio-pharmaceutical companies, the
healthcare industry and general market conditions.
IN ADDITION, IN RECENT YEARS THE STOCK MARKET HAS EXPERIENCED SIGNIFICANT PRICE
AND VOLUME FLUCTUATIONS.
These fluctuations, which are often unrelated to the operating performance of
specific companies, have had a substantial effect on the market price for many
healthcare and life science related technology companies. Factors such as those
cited above, as well as other factors that may be unrelated to our operating
performance, may adversely affect the price of our Common Stock.
WE HAVE NOT HAD EARNINGS, BUT IF EARNINGS WERE AVAILABLE, IT IS OUR GENERAL
POLICY TO RETAIN ANY EARNINGS FOR USE IN OUR OPERATIONS.
We do not anticipate paying any cash dividends on our Common Stock or Series A
Preferred Stock in the foreseeable future despite the recent reduction of the
federal income tax rate on dividends. Any payment of cash dividends on our
Common Stock or Series A Preferred Stock in the future will be dependent upon
our financial condition, results of operations, current and anticipated cash
requirements, preferred rights of holders of preferred stock, restrictive
covenants in debt or other instruments or agreements, plans for expansion, as
well as other factors that our board of directors deems relevant. We anticipate
that any future financing agreements may restrict or prohibit the payment of
dividends without prior consent.
WE ARE SIGNIFICANTLY INFLUENCED BY OUR DIRECTORS AND EXECUTIVE OFFICERS.
As of December 27, 2005, our directors, officers and employees beneficially own
an aggregate of approximately 19.3% (or 16.0% giving effect to the rights of
currently outstanding Series A Preferred Stock holders) of our outstanding
Common Stock. These stockholders, acting together, would be able to exert
significant influence on substantially all matters requiring approval by our
stockholders, including the election of directors and approval of mergers and
other significant corporate transactions.
22
CERTAIN PROVISIONS OF DELAWARE CORPORATE LAWS AND OTHER PROVISIONS THAT MAY HAVE
CERTAIN ANTI-TAKEOVER EFFECTS.
The anti-takeover provisions of the Delaware General Corporation Law ("DGCL")
may have the effect of discouraging a future takeover attempt which individual
or Series A Preferred stockholders may deem to be in their best interests or in
which stockholders may receive a substantial premium for their shares over
then-current market prices. We are subject to such anti-takeover provisions
which could prohibit or delay a merger or other takeover or change of control
and may discourage attempts by other companies to acquire us. Stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so.
Following the reincorporation merger, which became effective on January 31,
2005, our certificate of incorporation and by-laws were amended and provide
additional provisions applicable to a Delaware corporation, including Section
203 of the DGCL "Business Combinations With Interested Stockholders" which, in
general, restricts a corporation organized under the laws of Delaware from
certain business combinations for a period of three years with an "interested"
stockholder (generally, 15% ownership) without approval of the board of
directors. In addition, our by-laws contain provisions providing for advance
notice of certain stockholder actions, such as the nomination of directors and
stockholder proposals.
OUR BOARD OF DIRECTORS HAS TAKEN UNDER CONSIDERATION AND SOUGHT ADVICE ON THE
ADVISABILITY OF ADOPTION OF A STOCKHOLDER RIGHTS PLAN.
A stockholder rights plan may prevent a change in control or sale of our company
in a manner or on terms not previously approved by our board of directors.
A stockholder rights plan, in general, is a right granted as a dividend to
existing stockholders as of a record date as a defensive mechanism to prevent
unwanted takeovers and are triggered upon the announcement that a party has
acquired a specified percentage or more of the outstanding voting stock of a
company without approval by the company's board of directors.
THERE MAY BE A LIMITED PUBLIC MARKET FOR OUR SECURITIES; WE MAY FAIL TO QUALIFY
FOR LISTING.
Although we intend to apply for listing of our Common Stock on either the AMEX,
NASDAQ or other registered stock exchange, there can be no assurance if and when
initial listing criteria could be met or if such application would be granted,
or that the trading of our Common Stock will be sustained. In the event that our
Common Stock fails to qualify for initial or continued listing on a registered
stock exchange or for initial or continued inclusion in the NASDAQ system,
trading, if any, in our Common Stock, would then continue to be conducted on the
NASD's "Electronic Bulletin Board" in the over-the-counter market and in what
are commonly referred to as "pink sheets." As a result, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of our Common Stock, and our Common Stock would become substantially less
attractive for margin loans, for investment by financial institutions, as
consideration in future capital raising transactions or other purposes. We do
not presently satisfy the listing criteria for the NASDAQ or AMEX markets.
Trading of our Common Stock may be subject to penny stock rules under the
Exchange Act. Unless exempt, for any transaction involving a penny stock, the
regulations require broker-dealers making a market in our Common Stock to
provide risk disclosure to their customers including regarding the risks
associated with our Common Stock, the suitability for the customer of an
investment in our Common Stock, the duties of the broker-dealer to the customer,
information regarding prices for our Common Stock and any compensation the
broker-dealer would receive. The application of these rules may result in fewer
23
market makers in our Common Stock. Our Common Stock is presently subject to the
rules on penny stocks, and the liquidity of the Common Stock could be materially
adversely affected so long as we remain subject to such rule.
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC
DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
Keeping abreast of, and in compliance with, changing laws, regulations and
standards relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, new SEC regulations and, in the event we are
approved for listing on either NASDAQ or a registered exchange, NASDAQ and stock
exchange rules, will require an increased amount of management attention and
external resources. We intend to continue to invest all reasonably necessary
resources to comply with evolving standards, which may result in increased
general and administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance activities.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements (as defined in Section 27A
of the Securities Act and Section 21E of the Securities Exchange Act of 1934
(the "Exchange Act"). To the extent that any statements made in this prospectus
contain information that is not historical, these statements are essentially
forward-looking. Forward-looking statements can be identified by the use of
words such as "expects," "plans" "will," "may," "anticipates," believes,"
"should," "intends," "estimates," and other words of similar meaning. These
statements are subject to risks and uncertainties that cannot be predicted or
quantified and consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties include, without limitation, our ability to raise capital to
finance the development of our products, the effectiveness, profitability and
the marketability of those products, our ability to protect our proprietary
information, general economic and business conditions, the impact of
technological developments and competition, including entry of newly-developed
alternative drug technologies, our expectations and estimates concerning future
financial performance and financing plans, adverse results of any legal
proceedings, the impact of current, pending or future legislation and regulation
on the healthcare industry, our ability to satisfy government and commercial
customers using our technology, our ability to develop manufacturing
capabilities or the inability to enter into acceptable relationships with one or
more contract manufacturers for our products and key components and the ability
of such contract manufacturers to manufacture products or components of an
acceptable quality on a cost-effective basis, the volatility of our operating
results and financial condition, our ability to attract or retain qualified
senior management personnel, including sales and marketing and scientific
personnel and other risks detailed from time to time in our filings with the
SEC.
Information regarding market and industry statistics contained in this
prospectus is included based on information available to us that we believe is
accurate. It is generally based on academic and other publications that are not
produced for purposes of securities offerings or economic analysis. We have not
reviewed or included data from all sources, and cannot assure investors of the
accuracy or completeness of the data included in this prospectus. Forecasts and
other forward-looking information obtained from these sources are subject to the
same qualifications and the additional uncertainties accompanying any estimates
of future market size, revenue and market acceptance of products and services.
We do not undertake any obligation to publicly update any forward-looking
statements. As a result, you should not place undue reliance on these
forward-looking statements.
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USE OF PROCEEDS
The Selling Stockholders will receive all of the proceeds from the sale of the
shares offered for sale by them under this prospectus. We will not receive any
proceeds from the resale of shares by the Selling Stockholders covered by this
prospectus. We will, however, receive proceeds from the exercise of warrants if
exercised by the Selling Stockholder and will retain proceeds from the issuance
of certain convertible indebtedness upon conversion of debt. Any such proceeds
will be used for working capital and general corporate purposes.
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Common Stock has been quoted on the OTC Bulletin Board since December 13,
2004 under the symbol CEPO.OB. Prior to that date, there was no active market
for our Common Stock. Based upon information furnished by our transfer agent, as
of December 27, 2005, we had approximately 288 holders of record of our Common
Stock.
The following table sets forth the high and low sales prices for our Common
Stock for the periods indicated as reported by the OTC Bulletin Board:
Fiscal Year 2003 High Low
---------------- ---- ---
First Quarter $ N/A $ N/A
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter N/A N/A
Fiscal Year 2004
----------------
First Quarter $ N/A $ N/A
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter 5.00 2.75
Fiscal Year 2005
----------------
First Quarter $ 6.70 $ 3.85
Second Quarter 4.09 2.25
Third Quarter 3.00 0.88
Fourth Quarter (through December 27, 2005) 1.84 0.74
We have not declared or paid any cash dividends on our Common Stock and do not
anticipate declaring or paying any cash dividends in the foreseeable future. We
currently expect to retain future earnings, if any, for the development of our
business. Dividends may be paid on our Common Stock only if and when declared by
our board of directors and paid on an as-converted basis to the holders of our
Series A Preferred Stock.
Equity Compensation Plan Information
We maintain a Founders' Plan and a 2004 Incentive Stock Plan. As of December 27,
2005 (i) we have issued 3,031,943 shares of Common Stock under the Founders'
Plan, and (ii) 908,381 shares of Common Stock under our 2004 Incentive Plan, and
have outstanding non-qualified stock options to purchase a total of 646,695
shares of our Common Stock, with exercise prices at the fair market value or in
excess of the fair market value on the date of grant, under the 2004 Incentive
Stock Plan. (See "Management - Stock Plans" for a detailed description of our
equity compensation plans.)
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The following table provides information as of December 31, 2004 with respect to the shares of our
Common Stock that may be issued under our existing equity compensation plans:
Number of securities to Weighted-average
be issued upon exercise exercise price of Number of securities
of outstanding options, outstanding options, available for future
Plan Category warrants and rights warrants and rights issuance
----------------------- ------------------------- --------------------- -----------------------
Equity compensation
plans approved by
security holders(1) 662,340 $2.64 1,310,790
-------------------
(1) Represents the 2004 Stock Incentive Plan and Founders' Plan.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of our plan of operation should be read in conjunction
with our financial statements and notes thereto appearing elsewhere in this
document.
Overview
We are a development-stage biopharmaceutical company engaged in the discovery,
development, and commercialization of proprietary, cell-targeted therapeutic
products for the treatment of neuromuscular and neurodegenerative diseases with
a focus on orphan diseases. An orphan disease is defined in the United States as
a serious or life-threatening disease that affects less than 200,000 people and
for which no definitive therapy currently exists. We are seeking to create an
efficient orphan drug platform by taking advantage of the legislative,
regulatory and commercial opportunities common to these rare diseases. Our plan
of operation is to focus on developing and commercializing domestic orphan drug
candidates internally, while working to partner product development
opportunities for non-orphan drug candidates and foreign opportunities with
third parties. Presently our activities primarily include three proprietary
products, Myodur, Neurodur and C-301. In pre-clinical studies Myodur has
demonstrated efficacy in muscular dystrophy, Neurodur has demonstrated efficacy
in multiple sclerosis, and C-301 has demonstrated efficacy in epilepsy.
Capital Resources and Cash Requirements
After giving effect to our repurchase of shares of Common Stock from Xechem and
the additional commitments associated with our planned activities, our current
capital resources are not sufficient to allow us to execute our development
plans without raising substantial additional funds. These matters raise
substantial doubt about our ability to continue as a going concern.
In February 2005, we completed the Private Placement of an aggregate of $12.8
million of securities (approximately $9.2 million after expenses of
approximately $2.3 million and the repurchase of Common Stock for approximately
$1.3 million from our former parent as required by our spinoff agreement)
through the sale of 511.65 units at $25,000 per Unit, with each Unit consisting
of one share of Series A Convertible Preferred Stock and a detachable
transferable, three-year warrant to purchase shares of our Common Stock. Each
share of Series A Preferred Stock is convertible initially into 10,000 shares of
common stock at any time. The Unit warrants entitle the holder to purchase 5,000
shares of Common Stock for a three-year period after the date of issuance, at an
exercise price of $2.50 per share.
26
In addition to 511,650 shares of Common Stock repurchased from Xechem pursuant
to our spinoff agreement for approximately $1.3 million, on June 17, 2005 we
elected to repurchase an additional 2,886,563 shares from Xechem for
approximately $2.3 million which reduced the number of shares issued and
outstanding at a per share price below the then applicable market price.
In April 2005 we entered into a manufacture and supply agreement to provide
materials for both our pre-clinical and toxicology studies and to initiate our
human clinical trials for our proposed product, Myodur, to treat muscular
dystrophy. We do not have sufficient capital to purchase all the materials
necessary to complete our long-term toxicology studies or to complete all of our
human clinical trials in order to file for approval to market our proposed
product, Myodur. In addition, our planned activities for the foreseeable future
will require us to engage additional consultants and contract research
organizations to support our clinical development programs, and additional
personnel, including management, with expertise in areas such as preclinical
testing, clinical trial design and management, regulatory affairs, manufacturing
and marketing. We will need to raise substantial additional capital for these
purposes and to continue funding the development of Myodur and our other
products. In the absence of the availability of financing from additional sales
of our securities on a timely basis, we could be forced to materially curtail,
limit, or cease our operations.
We continue to seek additional capital through equity and debt offerings,
collaborative partnerships, joint ventures and strategic alliances both within
the United States and abroad in an effort to accelerate the development of our
proposed products. Subsequent to September 30, 2005, we initiated several
programs to address our liquidity situation, and entered into agreements with
Fusion Capital and Cornell Capital.
Fusion Capital
On October 7, 2005, we entered into the Stock Purchase Agreement with Fusion
Capital pursuant to which Fusion Capital has agreed, under certain conditions as
outlined below, to purchase on each trading day $25,000 of Common Stock up to an
aggregate, under certain conditions, of $20 million over a 40-month period from
October 7, 2005, subject to earlier termination at our discretion. If the market
price of our Common Stock increases to certain levels, then in our discretion,
we may elect to sell more Common Stock to Fusion Capital than the minimum daily
amount. The purchase price of the shares of Common Stock will be calculated
based upon the future market price of the Common Stock without any fixed
discount to the market price. Fusion Capital does not have the right or the
obligation to purchase shares of Common Stock in the event that the price of our
Common Stock is less than $0.50 per share.
In connection with entering into the Stock Purchase Agreement, we authorized the
sale and issuance to Fusion Capital of up to 5,000,000 shares of Common Stock
for maximum proceeds of $20 million. The selling price of the Common Stock will
have to average at least $4.00 per share for us to receive the maximum proceeds
of $20 million. Assuming Fusion Capital purchases all $20 million of Common
Stock, we estimate that the maximum number of shares of Common Stock we will
sell to Fusion Capital under the Stock Purchase Agreement will be 5,000,000
shares (exclusive of 377,359 shares (the "Initial Commitment Shares") issued to
Fusion Capital and a warrant to purchase 377,359 shares at $0.01 per share which
expires December 31, 2010 (the "Fusion Warrant") as an initial commitment fee,
25,000 shares issued to Fusion Capital as an expense reimbursement and an
additional 754,717 shares that will be issued to Fusion Capital as an additional
commitment fee). Assuming a purchase price of $0.77 per share, the closing sale
price of the Common Stock as reported on the OTC Bulletin Board on December 27,
2005 and the purchase by Fusion Capital of the full 5,000,000 shares under
Common Stock Purchase Agreement, proceeds to us would only be $3,850,000 unless
we choose to register more than 5,000,000 shares, in which case, we would be
required to file a new registration statement and have it declared effective by
the SEC. Unless an event of default occurs, Fusion Capital may not transfer or
sell the Initial Commitment Shares, the shares issuable pursuant to the Fusion
Warrant or the additional 754,717 shares representing an additional commitment
27
fee until the earlier of 40 months from the date of the Stock Purchase Agreement
or the date the Stock Purchase Agreement is terminated. In the event we elect to
sell more than the 5,000,000 shares of Common Stock, we will be required to file
a new registration statement and have it declared effective by the SEC. The
number of shares ultimately offered for sale by Fusion Capital is dependent upon
the number of shares purchased by Fusion Capital under the Stock Purchase
Agreement.
Purchase of Shares under the Stock Purchase Agreement
Under the Stock Purchase Agreement, on each trading day, Fusion Capital is
obligated to purchase a specified dollar amount of Common Stock. Subject to our
right to suspend such purchases at any time, and our right to terminate the
Stock Purchase Agreement at any time for any reason effective upon one trading
day's notice Fusion Capital will purchase on each trading day during the term of
the Agreement $25,000 of Common Stock. This daily purchase amount may be
decreased by us at any time for any reason effective upon one trading days
notice. We also have the right to increase the daily purchase amount at any
time, provided however, we may not increase the daily purchase amount above
$25,000 unless the price of the Common Stock is above $1.60 per share for five
consecutive trading days. The purchase price per share is equal to the lesser
of:
o the lowest sale price of the Common Stock on the purchase date; or
o the average of the three lowest closing sale prices of the Common Stock
during the twelve consecutive trading days prior to the date of a
purchase by Fusion Capital.
The purchase price will be adjusted for any reorganization, recapitalization,
non-cash dividend, stock split, or other similar transaction occurring during
the trading days in which the closing bid price is used to compute the purchase
price. Fusion Capital may not purchase shares of Common Stock under the Stock
Purchase Agreement if Fusion Capital, together with its affiliates, would
beneficially own more than 9.9% of the Common Stock outstanding at the time of
the purchase by Fusion Capital. Fusion Capital has the right at any time to sell
any shares purchased under the Stock Purchase Agreement which would allow it to
avoid the 9.9% limitation. Therefore, we do not believe that Fusion Capital will
ever reach the 9.9% limitation.
The following table sets forth the amount of proceeds we would receive from
Fusion Capital from the sale of 5,000,000 shares of Common Stock offered at
various assumed average purchase prices:
Proceeds from
the Sale of Total Shares
Shares to Fusion Number of Issued to Percentage of
Capital Under Assumed Shares to Fusion Capital Outstanding Effective
the Stock Average be Issued Under the After Price
Purchase Purchase if Full Stock Purchase Issuance to Per
Agreement Price Purchase Agreement (1) Fusion Capital (2) Share (3)
------------------------- ------------------- ---------------- ------------------ --------------------- --------------
$ 2,500,000 $ 0.50 5,000,000 5,779,718 30.7% $ 0.43
$ 4,550,000 $ 0.91 (4) 5,000,000 5,779,718 30.7% $ 0.79
$ 5,000,000 $ 1.00 5,000,000 5,779,718 30.7% $ 0.87
$ 10,000,000 $ 2.00 5,000,000 5,779,718 30.7% $ 1.73
$ 20,000,000 $ 4.00 5,000,000 6,534,436 33.3% $ 3.06
$ 20,000,000 $ 5.00 4,000,000 5,534,436 29.7% $ 3.61
28
--------------------
(1) Includes the number of shares issuable at the corresponding assumed
purchase price as set forth, 25,000 shares of Common Stock issued to
Fusion Capital as an expense reimbursement, 377,359 shares of Common
Stock issued to Fusion Capital and 377,359 shares of Common Stock
issuable upon exercise of the Fusion Warrant as an initial commitment
fee, and 754,718 shares of Common Stock issuable as an additional
commitment fee, as applicable.
(2) Based on 13,471,803 shares of Common Stock outstanding (giving effect to
the rights of currently outstanding Series A Preferred Stock holders) as
of December 5, 2005, 377,359 shares of Common Stock issuable upon
exercise of the Fusion Warrant, 754,718 shares of Common Stock issuable
as an additional commitment fee, as applicable, and the number of shares
issuable at the corresponding assumed purchase price set forth in the
adjacent column.
(3) Calculated by dividing the proceeds from the sale of shares to Fusion
Capital by the total shares issued to Fusion Capital under the Stock
Purchase Agreement, including dilution resulting from the issuance of
shares described in footnote (1) above.
(4) Closing sale price of the Common Stock as reported on the OTC Bulletin
Board on December 5, 2005.
The following tables set forth the number of shares which would be issued to
Fusion Capital which would result in $20,000,000, $10,000,000, $5,000,000 and
$1,000,000 of proceeds to us from the sale of Common Stock at various assumed
average purchase prices:
Proceeds from
the Sale of Total Shares
Shares to Fusion Number of Issued to Percentage of
Capital Under Assumed Shares to Fusion Capital Outstanding Effective
the Stock Average be Issued Under the After Price
Purchase Purchase if Full Stock Purchase Issuance to Per
Agreement Price Purchase Agreement (1) Fusion Capital (2) Share (3)
------------------------- ------------------- ---------------- ------------------ --------------------- --------------
$ 20,000,000 $ 0.50 40,000,000 41,534,436 76.1% $ 0.48
$ 20,000,000 $ 0.91(4) 21,978,022 23,512,458 64.3% $ 0.85
$ 20,000,000 $ 1.00 20,000,000 21,534,436 62.2% $ 0.93
$ 20,000,000 $ 2.00 10,000,000 11,534,436 46.9% $ 1.73
$ 20,000,000 $ 4.00 5,000,000 6,534,436 33.3% $ 3.06
$ 20,000,000 $ 5.00 4,000,000 5,534,436 29.7% $ 3.61
--------------------
(1) Includes the number of shares issuable at the corresponding assumed
purchase price as set forth, 25,000 shares of Common Stock issued to
Fusion Capital as an expense reimbursement, 377,359 shares of Common
Stock issued to Fusion Capital and 377,359 shares of Common Stock
issuable upon exercise of the Fusion Warrant as an initial commitment
fee, and 754,718 shares of Common Stock issuable as an additional
commitment fee.
(2) Based on 13,471,803 shares of Common Stock outstanding (giving effect to
the rights of currently outstanding Series A Preferred Stock holders) as
of December 5, 2005, 377,359 shares of Common Stock issuable upon
exercise of the Fusion Warrant, 754,718 shares of Common Stock issuable
as an additional commitment fee, as applicable, and the number of shares
issuable at the corresponding assumed purchase price set forth in the
adjacent column.
29
(3) Calculated by dividing the proceeds from the sale of shares to Fusion
Capital by the total shares issued to Fusion Capital under the Stock
Purchase Agreement, including dilution resulting from the issuance of
shares described in footnote (1) above.
(4) Closing sale price of the Common Stock as reported on the OTC Bulletin
Board on December 5, 2005.
Proceeds from
the Sale of Total Shares
Shares to Fusion Number of Issued to Percentage of
Capital Under Assumed Shares to Fusion Capital Outstanding Effective
the Stock Average be Issued Under the After Price
Purchase Purchase if Full Stock Purchase Issuance to Per
Agreement Price Purchase Agreement (1) Fusion Capital (2) Share (3)
------------------------- ------------------- ---------------- ------------------ --------------------- --------------
$ 10,000,000 $ 0.50 20,000,000 20,779,718 61.4% $ 0.48
$ 10,000,000 $ 0.91(4) 10,989,011 11,768,729 49.3% $ 0.85
$ 10,000,000 $ 1.00 10,000,000 10,779,718 45.2% $ 0.93
$ 10,000,000 $ 2.00 5,000,000 5,779,718 30.7% $ 1.73
$ 10,000,000 $ 4.00 2,500,000 3,279,718 20.1% $ 3.05
$ 10,000,000 $ 5.00 2,000,000 2,779,718 17.5% $ 3.60
--------------------
(1) Includes the number of shares issuable at the corresponding assumed
purchase price as set forth, 25,000 shares of Common Stock issued to
Fusion Capital as an expense reimbursement, 377,359 shares of Common
Stock issued to Fusion Capital and 377,359 shares of Common Stock
issuable upon exercise of the Fusion Warrant as an initial commitment
fee.
(2) Based on 13,471,803 shares of Common Stock outstanding (giving effect to
the rights of currently outstanding Series A Preferred Stock holders) as
of December 5, 2005, 377,359 shares of Common Stock issuable upon
exercise of the Fusion Warrant, and the number of shares issuable at the
corresponding assumed purchase price set forth in the adjacent column.
(3) Calculated by dividing the proceeds from the sale of shares to Fusion
Capital by the total shares issued to Fusion Capital under the Stock
Purchase Agreement, including dilution resulting from the issuance of
shares described in footnote (1) above.
(4) Closing sale price of the Common Stock as reported on the OTC Bulletin
Board on December 5, 2005.
Proceeds from
the Sale of Total Shares
Shares to Fusion Number of Issued to Percentage of
Capital Under Assumed Shares to Fusion Capital Outstanding Effective
the Stock Average be Issued Under the After Price
Purchase Purchase if Full Stock Purchase Issuance to Per
Agreement Price Purchase Agreement (1) Fusion Capital (2) Share (3)
------------------------- ------------------- ---------------- ------------------ --------------------- --------------
$ 5,000,000 $ 0.50 10,000,000 10,779,718 45.2% $ 0.46
$ 5,000,000 $ 0.91(4) 5,494,505 6,274,223 32.4% $ 0.80
$ 5,000,000 $ 1.00 5,000,000 5,779,718 30.7% $ 0.87
$ 5,000,000 $ 2.00 2,500,000 3,279,718 20.1% $ 1.52
30
$ 5,000,000 $ 4.00 1,250,000 2,029,718 13.4% $ 2.46
$ 5,000,000 $ 5.00 1,000,000 1,779,718 12.0% $ 2.81
--------------------
(1) Includes the number of shares issuable at the corresponding assumed
purchase price as set forth, 25,000 shares of Common Stock issued to
Fusion Capital as an expense reimbursement, 377,359 shares of Common
Stock issued to Fusion Capital as and 377,359 shares of Common Stock
issuable upon exercise of the Fusion Warrant an initial commitment fee.
(2) Based on 13,471,803 shares of Common Stock outstanding (giving effect to
the rights of currently outstanding Series A Preferred Stock holders) as
of December 5, 2005, 377,359 shares of Common Stock issuable upon
exercise of the Fusion Warrant, and the number of shares issuable at the
corresponding assumed purchase price set forth in the adjacent column.
(3) Calculated by dividing the proceeds from the sale of shares to Fusion
Capital by the total shares issued to Fusion Capital under the Stock
Purchase Agreement, including dilution resulting from the issuance of
shares described in footnote (1) above.
(4) Closing sale price of the Common Stock as reported on the OTC Bulletin
Board on December 5, 2005.
Proceeds from
the Sale of Total Shares
Shares to Fusion Number of Issued to Percentage of
Capital Under Assumed Shares to Fusion Capital Outstanding Effective
the Stock Average be Issued Under the After Price
Purchase Purchase if Full Stock Purchase Issuance to Per
Agreement Price Purchase Agreement (1) Fusion Capital (2) Share (3)
------------------------- ------------------- ---------------- ------------------ --------------------- --------------
$ 1,000,000 $ 0.50 2,000,000 2,779,718 17.5% $ 0.36
$ 1,000,000 $ 0.91(4) 1,098,901 1,878,619 12.6% $ 0.53
$ 1,000,000 $ 1.00 1,000,000 1,779,718 12.0% $ 0.56
$ 1,000,000 $ 2.00 500,000 1,279,718 8.9% $ 0.78
$ 1,000,000 $ 4.00 250,000 1,029,718 7.3% $ 0.97
$ 1,000,000 $ 5.00 200,000 979,718 7.0% $ 1.02
--------------------
(1) Includes the number of shares issuable at the corresponding assumed
purchase price as set forth, 25,000 shares of Common Stock issued to
Fusion Capital as an expense reimbursement, 377,359 shares of Common
Stock issued to Fusion Capital and 377,359 shares of Common Stock
issuable upon exercise of the Fusion Warrant as an initial commitment
fee.
(2) Based on 13,471,803 shares of Common Stock outstanding (giving effect to
the rights of currently outstanding Series A Preferred Stock holders) as
of December 5, 2005, 377,359 shares of Common Stock issuable upon
exercise of the Fusion Warrant, and the number of shares issuable at the
corresponding assumed purchase price set forth in the adjacent column.
(3) Calculated by dividing the proceeds from the sale of shares to Fusion
Capital by the total shares issued to Fusion Capital under the Stock
Purchase Agreement, including dilution resulting from the issuance of
shares described in footnote (1) above.
(4) Closing sale price of the Common Stock as reported on the OTC Bulletin
Board on December 5, 2005.
31
In connection with entering into the Stock Purchase Agreement, we authorized the
sale to Fusion Capital of up to 5,000,000 shares of Common Stock. We estimate
that we will sell no more than 5,000,000 shares to Fusion Capital under the
Stock Purchase Agreement (exclusive of the Initial Commitment Shares issued to
Fusion Capital, 377,359 shares issuable to Fusion Capital upon exercise of the
Fusion Warrant as an initial commitment fee, 25,000 shares issued to Fusion
Capital as an expense reimbursement and an additional 754,717 shares issuable to
Fusion Capital as an additional commitment fee), all of which are included in
this offering. We have the right to terminate the Stock Purchase Agreement
without any payment or liability to Fusion Capital at any time, including in the
event that all 5,000,000 shares are sold to Fusion Capital under the Stock
Purchase Agreement. In the event we elect to sell more than the 5,000,000
shares, we will be required to file a new registration statement and have it
declared effective by the SEC.
Minimum Purchase Price
Under the Stock Purchase Agreement, we have set a minimum purchase price ("floor
price") of $0.50 per share. Fusion Capital shall not have the right nor the
obligation to purchase any shares of Common Stock in the event that the purchase
price would be less the floor price. Specifically, Fusion Capital shall not have
the right or the obligation to purchase shares of Common Stock on any trading
day that the market price of the Common Stock is below $0.50 per share.
Our Right To Suspend Purchases
We have the unconditional right to suspend purchases at any time for any reason
effective upon one trading day's notice. Any suspension would remain in effect
until our revocation of the suspension. To the extent we need to use the cash
proceeds of the sales of Common Stock under the Stock Purchase Agreement for
working capital or other business purposes, we do not intend to restrict
purchases under the Stock Purchase Agreement.
Our Right To Increase and Decrease the Amount to be Purchased
Under the Stock Purchase Agreement Fusion Capital has agreed to purchase on each
trading day during the 40-month term of the Stock Purchase Agreement, $25,000 of
Common Stock up to an aggregate of $20 million. We have the unconditional right
to decrease the daily amount to be purchased by Fusion Capital at any time for
any reason effective upon one trading day's notice.
In our discretion, we may elect to sell more Common Stock to Fusion Capital than
the minimum daily amount. We have the right to increase the daily purchase
amount as the market price of the Common Stock increases. Specifically, for
every $0.10 increase in Threshold Price above $1.50, we have the right to
increase the daily purchase amount by up to an additional $2,500. For example,
if the Threshold Price is $1.70 we would have the right to increase the daily
purchase amount to up to an aggregate of $30,000. The "Threshold Price" is the
lowest sale price of the Common Stock during the five trading days immediately
preceding our notice to Fusion Capital to increase the daily purchase amount. If
at any time during any trading day the sale price of the Common Stock is below
the Threshold Price, the applicable increase in the daily purchase amount will
be void.
In addition to the daily purchase amount, we may elect to require Fusion Capital
to purchase on any single trading day, Common Stock in an amount up to $250,000,
provided that the price is above $2.00 during the ten prior trading days. The
price at which such shares would be purchased will be the lowest purchase price
during the previous fifteen trading days prior to the date that such purchase
notice was received by Fusion Capital. We may increase this amount to $500,000
if our share price is above $4.00 during the five trading days prior to our
delivery of the purchase notice to Fusion Capital. This amount may also be
32
increased to up to $1,000,000 if the price of the Common Stock is above $6.00
during the five trading days prior to our delivery of the purchase notice to
Fusion Capital. We may deliver multiple purchase notices; however at least ten
trading days must have passed since the most recent non-daily purchase was
completed.
Events of Default
Generally, Fusion Capital may terminate the Stock Purchase Agreement without any
liability or payment to the Company upon the occurrence of any of the following
events of default:
o the effectiveness of the registration statement of which this
prospectus is a part of lapses for any reason (including, without
limitation, the issuance of a stop order) or is unavailable to Fusion
Capital for sale of Common Stock and such lapse or unavailability
continues for a period of ten consecutive trading days or for more than
an aggregate of thirty trading days in any 365-day period;
o suspension by a principal market of the Common Stock from trading for a
period of three consecutive trading days;
o the de-listing of the Common Stock from a principal market provided the
Common Stock is not immediately thereafter trading on the Nasdaq
National Market, the Nasdaq National SmallCap Market, the New York
Stock Exchange or the American Stock Exchange;
o the transfer agent's failure for five trading days to issue to Fusion
Capital shares of Common Stock which Fusion Capital is entitled to
under the Stock Purchase Agreement;
o any material breach of the representations or warranties or covenants
contained in the Stock Purchase Agreement or any related agreements
which has or which could have a material adverse affect on us subject
to a cure period of ten trading days;
o any participation or threatened participation in insolvency or
bankruptcy proceedings by or against us; or
o a material adverse change in our business.
Our Termination Rights
We have the unconditional right at any time for any reason to give notice to
Fusion Capital terminating the Stock Purchase Agreement. Such notice shall be
effective one trading day after Fusion Capital receives such notice.
Effect of Performance of the Stock Purchase Agreement on our Stockholders
It is anticipated that shares issued to Fusion Capital will be sold over a
period of up to 40 months from the date of the Stock Purchase Agreement. The
sale of a significant amount of shares at any given time could cause the trading
price of the Common Stock to decline and to be highly volatile. Fusion Capital
may ultimately purchase all of the shares of Common Stock issuable under the
Stock Purchase Agreement, and it may sell some, none or all of the shares of
Common Stock it acquires upon purchase. Therefore, the purchases under the Stock
Purchase Agreement may result in substantial dilution to the interests of our
other stockholders. However, we have the right at any time for any reason to:
(1) reduce the daily purchase amount, (2) suspend purchases of Common Stock by
Fusion Capital and (3) terminate the Stock Purchase Agreement.
33
No Short-Selling or Hedging by Fusion Capital
Fusion Capital has agreed that neither it nor any of its affiliates will engage
in any direct or indirect short-selling or hedging of Common Stock during any
time prior to the termination of the Stock Purchase Agreement.
Commitment Shares Issued to Fusion Capital
Under the terms of the Stock Purchase Agreement Fusion Capital has received
377,359 shares of Common Stock and the Fusion Warrant to purchase up to 377,359
shares of Common Stock at a purchase price of $0.01 per share as an initial
commitment fee. In addition, in connection with each purchase of Common Stock
after Fusion Capital has purchased $10 million of Common Stock, we will issue up
to 754,717 additional shares of Common Stock to Fusion Capital as an additional
commitment fee. These additional commitment fee shares will be issued pro rata
based on the proportion that a dollar amount purchased by Fusion Capital after
Fusion Capital has purchased the first $10 million bears to the remaining $10
million amount under the Stock Purchase Agreement. Unless an event of default
occurs, these shares may not be transferred or sold by Fusion Capital until 40
months from the date of the Stock Purchase Agreement or the date the Stock
Purchase Agreement is terminated.
All commitment fee shares (initial commitment fee and additional commitment fee)
are issued without consideration and shall be accounted for by multiplying the
number of commitment fee shares issued by the par value thereof ($0.0001 per
share) and result in an increase in "Common Stock" on our balance sheet by such
amount. In connection with such increase in "Common Stock", a corresponding
charge reducing the amount of "Additional Paid-in Capital" on our balance sheet
will also be recorded. In the case of commitment fee shares that may become
issuable pro-rata on the second $10 million of Fusion Capital's funding
commitment, the above description will apply to only such commitment fee shares
that are actually issued. For example, when Fusion Capital purchases the next
$250,000 of Common Stock after it has purchased the first $10,000,000, we will
issue 18,868 shares of Common Stock to Fusion Capital ($250,000 / $10,000,000 x
754,717) charging "Additional Paid-in Capital" in the amount of $1.89 (18,868 x
$0.0001) and crediting "Common Stock" for $1.89. The costs associated with the
issuance of shares to Fusion Capital, including the costs of issuing additional
commitment fee shares, will be netted against the proceeds received.
Any net proceeds received from the sale of shares of our Common Stock to Fusion
Capital will be recorded as an increase to "Common Stock" and "Additional
Paid-in Capital" and will be included in stockholders' equity on our balance
sheet. Any costs we incurred in connection with this transaction whether settled
in cash or equity securities (including the costs and expenses of issuing
commitment fee shares), will be charged against the net proceeds.
No Variable Priced Financings
Until the termination of the Stock Purchase Agreement, we have agreed not to
issue, or enter into any agreement with respect to the issuance of, any variable
priced equity or variable priced equity-like securities unless we have obtained
Fusion Capital's prior written consent.
Participations Rights
For a period of 40 months from October 7, 2005, the date of the Stock Purchase
Agreement, we have granted to Fusion Capital the right to participate in the
purchase of any New Securities (as defined below) that we may, from time to
time, propose to issue and sell in connection with any financing transaction to
a third party. In particular, Fusion Capital can purchase up to 25% of such New
Securities at the same price and on the same terms as such other investor,
34
provided that in any single transaction, Fusion Capital may not purchase in
excess of $5,000,000. "New Securities" means any shares of Common Stock, our
preferred stock or any other of our equity securities or our securities
convertible or exchangeable for our equity securities. New Securities shall not
include, (i) shares of Common Stock issuable upon conversion or exercise of any
securities outstanding as of the date of the Stock Purchase Agreement , (ii)
shares, options or warrants for Common Stock granted to our officers, directors
or employees pursuant to stock option plans approved by our board of directors,
(iii) shares of Common Stock or securities convertible or exchangeable for
Common Stock issued pursuant to the acquisition of another company by
consolidation, merger, or purchase of all or substantially all of the assets of
such company or (iv) shares of Common Stock or securities convertible or
exchangeable into shares of Common Stock issued in connection with a strategic
transaction involving us and issued to an entity or an affiliate of such entity
that is engaged in the same or substantially related business as we are. Fusion
Capital's rights shall not prohibit or limit us from selling any securities so
long as we make the same offer to Fusion Capital.
As of the date of this prospectus, we have not sold and Fusion has not purchased
any Common Stock from us.
Convertible Debentures
On December 9, 2005, we entered into the Securities Purchase Agreement with
Cornell Capital pursuant to which Cornell Capital has agreed to purchase from
us, in a private placement, the Debentures, which Debentures bear interest at
the rate of 8% per year. Pursuant to the Securities Purchase Agreement, we
issued a Debenture in the principal amount of $1,000,000 on each of December 9,
2005 and December 28, 2005. Each Debenture has a three-year maturity from the
date of issuance and is subject to earlier conversion or redemption pursuant to
its terms.
Cornell Capital has the right to convert a portion or all of the outstanding
principal and interest under the Debentures into shares of Common Stock at a
conversion price per share equal to the lesser of (i) the Fixed Price or (ii)
the Floating Price subject to adjustment as provided in the Debentures;
provided, that any such conversion based on the Floating Price will generally be
limited to $150,000 of principal outstanding under the Debentures in any thirty
day period; and further provided, that Cornell Capital may not convert the
Debentures into shares of Common Stock if such conversion would result in
Cornell Capital beneficially owning in excess of 4.9% of the then issued and
outstanding shares of Common Stock. The Conversion Price and number of shares of
Common Stock issuable upon conversion of the Debentures is subject to certain
exceptions and adjustment for stock splits and combinations and other dilutive
events.
Subject to the terms and condition of the Debentures, we have the right at any
time upon three business days notice to redeem the Debentures, in whole or in
part. If the closing bid price of the Common Stock, is less than the Fixed Price
at the time of the redemption, we are obligated to pay, in addition to the
principal and accrued interest being redeemed, the Redemption Amount. If the
closing bid price is greater than the Fixed Price, we may redeem up to 50% at
the Redemption Amount and 50% at the greater of the (x) Redemption Amount and
(y) the market value of the Common Stock. In addition, Cornell Capital will
receive a three-year warrant to purchase 25,000 shares of Common Stock for every
$100,000 redeemed by us, on a pro rata basis, at an exercise price per share of
$0.9765 (the "Redemption Warrant").
If an Event of Default (as such term is defined in the Debentures) occurs, any
principal and accrued interest outstanding will become immediately due and
payable, in cash or Common Stock, at Cornell Capital's election.
35
Pursuant to the Securities Purchase Agreement, on December 9, 2005, we issued to
Cornell Capital (i) a Warrant at an exercise price per share of $1.023 (110% of
the closing bid price of the Common Stock on December 8, 2005) and (ii) 268,817
shares of Common Stock, and on each of December 9, 2005 and December 28, 2005,
we made a cash payment to an affiliate of Cornell Capital of $80,000 for
expenses incurred in connection with the transaction.
The Securities Purchase Agreement contains standard representations and
warranties on our part and also limits us in certain activities while the
Debentures are outstanding. Among other things, without Cornell Capital's prior
consent, we are restricted from entering into certain transactions and issuing
additional securities at prices in excess of 25% below the then current market
price.
In connection with the Securities Purchase Agreement, we also entered into an
investor registration rights agreement with Cornell Capital pursuant to which we
are obligated to file a registration statement of which this prospectus is a
part with the SEC within 30 days of December 9, 2005 (the "Registration
Statement"). If the Registration Statement is not deemed effective by, the SEC
within 90 days after December 9, 2005 due to our failure to use best efforts, we
are obligated to pay Cornell, as liquidated damages, an amount equal to 1% of
the value of the Debentures outstanding, in cash or in shares of Common Stock,
at Cornell Capital's option, for each 30-day period thereafter.
We have granted a security interest in all of our assets to Cornell Capital to
secure our obligations under the Debentures.
Convertible Promissory Notes
On December 9, 2005, we issued a convertible promissory note (the "Note") in the
principal amount of $250,000 to Harbor Trust which bears interest at the rate of
6% percent per year. All unpaid principal and interest under the Note will be
due and payable on December 9, 2006. The Note is convertible, in whole or in
part, at any time, into Common Stock at a conversion price of $1.00 per share,
subject to certain limitations on conversion as set forth in the Note, including
where the resulting number of shares converted on a cumulative basis, would
exceed 19.99% of the total number of shares of Common Stock outstanding and,
subject to a conversion price adjustment in the event we offer or sell an option
to acquire Common Stock at a price per share less than the conversion price.
On December 9, 2005, we issued an amended convertible promissory note (the
"Amended Note") to Harbor Trust which amends a convertible promissory note dated
December 9, 2004 with Harbor Trust in the principal amount of $452,991.10
reducing the conversion price to $0.375 from $0.75 per share. The Amended Note
bears interest at the rate of 10% per year through December 9, 2005 and 12% per
year thereafter. All unpaid principal and interest under the Amended Note will
be due and payable on July 3, 2006. The Amended Note is convertible, in whole or
in part, at any time, into Common Stock at the conversion price of $0.375 per
share subject to certain limitations on conversion as set forth in the Note,
including where the resulting number of shares converted, on a cumulative basis,
would exceed 19.99% of the total number of shares of Common Stock outstanding.
Common Stock Sale
To address our short term liquidity shortage, we entered into a stock purchase
agreement for the sale of approximately 265,600 shares of our common stock
available under our Founders' Plan and received $167,250 during October 2005.
There can be no assurance that our plans to obtain additional financing to fund
operations will be successful or that the successful implementation of the
business plan will actually improve our operating results. If these financing
36
programs are not successful in raising the capital we require to execute our
development plans, it may be necessary to curtail, or cease entirely our plan
operations.
Research, Development and Manufacturing
Currently, our primary efforts are moving our lead product, Myodur, into phase
I/II clinical trials for Duchenne's muscular dystrophy. We plan to use our
available cash to continue the pre-clinical development of our technologies,
which primarily includes the manufacture of Myodur, conducting pre-clinical
tests and toxicology studies, compiling, drafting and submitting an IND
application for Myodur, and preparing for initiation of Phase I/II human
clinical trials in 2006, if approved by the FDA. As resources permit, we may
also fund other working capital needs. We presently expect to submit an IND
application for Myodur in January 2006 and initiate human clinical trials early
in the second quarter of 2006.
We do not have, and do not intend to establish, our own manufacturing facilities
to produce our product candidates in the near or mid-term. We outsource the
manufacturing of our proposed product, Myodur, to contract manufacturers. On
April 18, 2005, we entered into an exclusive manufacture and supply agreement
with Bachem AG, whereby Bachem is, in addition to cash payments, entitled to
receive royalty payments in the amount of the lesser of 5% of "net sales" (as
defined in the agreement) or $10 million, $15 million or $25 million in the
first, second and third (and thereafter) years of the agreement, respectively.
During the nine-month period ended September 30, 2005, we incurred approximately
$3.0 million for costs of the proposed product and related materials. As of
September 30, 2005, we have sufficient materials for our pre-clinical and
toxicology programs in support of our IND and our initial human clinical trials.
We may incur significant expenditures for the next twelve months for the cost to
manufacture our proposed product in order to execute additional and other
toxicology testing.
Employees
As of December 27, 2005, we had ten employees, all of whom are full-time
employees, one of whom focuses on and coordinates our research program, five
that focus on and coordinate clinical and regulatory strategy and operations,
one in business and corporate development, and three in management, finance, and
administration. Three of our employees have doctorate and/or M.D. degrees. As
our current business strategy is primarily to coordinate research, clinical
development, and manufacturing activities by third parties, we do not anticipate
hiring a significant number of additional employees over the next twelve months.
Properties
We currently lease our executive offices in Hunt Valley, Maryland consisting of
approximately 5,200 square feet for approximately $6,500 per month, subject to a
3% annual rent escalation clause. This lease expires on December 31, 2006 and we
believe it should provide sufficient space for our clinical, regulatory and
other administrative functions during the remaining term of the lease.
We plan to expand and secure laboratory facilities for our own internal research
activities. Suitable laboratory facilities have been identified and efforts are
underway to negotiate the lease and purchase of research equipment necessary to
continue our internal research activities. We are currently conducting research
in various third party commercial and academic settings. Our plans include
continuing this practice in addition to expanding the use of third-party
research organizations and facilities to meet specific needs.
37
BUSINESS
We are a development-stage biopharmaceutical company focusing on the development
of proprietary, cell-targeted therapeutic products for neuromuscular and
neurodegenerative diseases. Our goal is to increase the quality and quantity of
life of people suffering with these diseases. Primary efforts are currently
being focused on moving our lead product, Myodur, into phase I/II clinical
trials for Duchenne's muscular dystrophy. Our broad platform technology also
includes the development of products for multiple sclerosis, retinal
degeneration and epilepsy.
We currently have no revenues from operations and are funding the development of
our products through the sale of our securities and will continue to fund our
activities through sales of securities or partnering arrangements for the
foreseeable future. In the absence of the availability of financing from
additional sales of our securities on a timely basis, we could be forced to
materially curtail, limit, or cease our operations. Currently, our available
capital resources are not sufficient to sustain our planned operations, which
raises substantial doubt about our ability to continue as a going concern. Our
current emphasis is on filing an IND application for Myodur, manufacturing
supplies required for pre-clinical studies and initial clinical trials of our
proposed product, conducting toxicological and other pre-clinical studies,
pursuing clinical studies and required FDA approvals.
Technology
Through an existing proprietary platform technology, we intend to pursue drug
candidates that exploit the understanding that activation of the cysteine
protease calpain initiates the cellular degradation that accompanies many
neuromuscular and neurodegenerative diseases. Early studies undertaken by us
found that the calpain inhibitor leupeptin substantially ameliorated the
degenerative effects of these diseases. Our technology includes utilizing the
carrier molecules carnitine and taurine, which are used to target various
passenger molecules, including our analogue of leupeptin, to skeletal muscle
cells and nerve cells, respectively. This provides for potential applications of
this technology in muscular dystrophy, MS, epilepsy, ALS, CIDP, cancer cachexia,
AIDS wasting, traumatic nerve injury, retinal degeneration, ototoxicity,
Alzheimer's disease, Huntington's disease and cardiomyopathies.
We have been issued compound patents on both carrier molecules (carnitine and
taurine) in combination with any passenger molecule and have applied for orphan
drug status for Myodur. Additional provisional and other patent applications
have been filed or are in process.
Much of our technology is based on muscle and nerve cell targeting for calpain
inhibition. Calpain exists in every cell of the body and is a protease that
degrades cells naturally, in a normal metabolic process, in concert with new
cells that are constantly being developed. If calpain is up regulated
abnormally, the cellular degradation process breaks down cells and tissues
faster than they can be restored, resulting in several serious neuromuscular and
neurodegenerative diseases. Whether by genetic defect, trauma or insult, if cell
membrane integrity is compromised, it can lead to up regulation of calpain
causing deleterious muscle or nerve cell and tissue degradation. Although the
subject of our continued research, we believe this to be because the cell
membrane defect allows the entry of extracellular calcium ions into the cell,
which, consequently, up regulates calpain. Our technology is designed to target
calpain inhibitors to muscle and nerve cells preventing degradation of those
tissues.
Strategy
We are focusing on a two-pronged business strategy to minimize product
development risk and time to market and maximize market protection through a
combination of internal development and licensing and the orphan drug model. We
seek to take advantage of the legislative, regulatory, and commercial
38
opportunities common to rare orphan diseases. We currently intend to focus on
developing and commercializing orphan drug candidates internally, while working
to partner product development opportunities for non-orphan drug candidates with
third parties. This strategy may be further refined to take into account foreign
partnering opportunities, including for our orphan drug candidates.
We estimate the current total market potential of Myodur in Duchenne's muscular
dystrophy at approximately $2.9 billion worldwide. FDA approval of Myodur would
require an effective compound. With a possible expected orphan drug fast track,
and efforts to maintain a relatively low cost development process plan, we
currently expect to internally develop and commercialize Myodur world-wide, with
the exception of the Pacific Rim where we have granted an exclusive license for
Myodur. We also plan to apply for orphan drug status and develop internally
drugs for ALS and CIDP.
Preliminary worldwide partnering discussions are currently underway for multiple
sclerosis and retinal degeneration. We believe epilepsy drug development is an
out-licensing candidate to partner with larger pharmaceutical firms. We believe
our largest potential indication for long-term drug development to be for
cardiomyopathies (cardiac skeletal muscle deterioration) which would also be a
candidate for out-licensing and development with large pharmaceutical firms.
LOW-RISK DEVELOPMENT. We believe our technology affords the opportunity to
minimize development risk because of the following:
o MINIMAL DOSING FOR MAXIMUM EFFECTIVENESS. Due to the targeting effects
of the carrier molecules, only minimal dosing of the therapeutic
passenger molecules is anticipated to be required, suggesting a direct,
positive safety effect and a more efficient delivery in terms of
efficacy.
o NATURALLY OCCURRING CARRIERS. Carnitine and taurine are benign,
naturally occurring, endogenous molecules that reside in all humans.
Carnitine and taurine perform the same transport function with our
compounds as occurs naturally.
o CURRENTLY APPROVED PRODUCTS. Carnitine, and valproic acid, are already
approved compounds for carnitine deficiency in dialysis patients and
epilepsy, respectively. These drugs are currently administered at
higher doses than we anticipate we will use in our activities.
o LEUPEPTIN TESTED IN CHILDREN. The active ingredient in Myodur,
leupeptin, has already been studied in a limited DMD pediatric
population at doses higher than we envision using.
o MOLECULES FAMILIAR TO FDA. Carnitine and taurine, as well as the
current passenger molecules, leupeptin and valproic acid, are well
known and established molecules to the FDA and no denaturing of the
individual molecules in combination has been demonstrated.
ORPHAN DRUG MODEL. According to the National Institutes of Health (NIH), there
are over 6,000 orphan diseases (diseases affecting less than 200,000 people) in
the US directly affecting approximately 24,000,000 patients. The US gene pool is
also representative of Western Europe, Canada and Australia. Accordingly,
management also believes orphan disease statistics to be similar in those
regions.
We believe there are a significant number of efficiencies that can be
capitalized on to create a realistic, focused orphan disease platform for
numerous potential orphan diseases including:
o UNMET MEDICAL NEED. By definition, an orphan drug is one that addresses
a disease that affects less than 200,000 patients in the US, is for a
serious or life threatening condition and has no definitive therapy
available.
39
o MITIGATED RISKS. Since the Orphan Drug Act in 1983, 1456 drugs have
been designated as orphans and 269 (and more to come) have been
approved representing a significantly higher success rate than
non-orphan development.
o MARKET EXCLUSIVITY. Government legislation protects and rewards
companies for the development of drugs for orphan diseases by providing
for seven years of market exclusivity in the U.S. and ten years in the
European Union, creating a competition free environment with that
technology and providing for an absence of patent issues for those same
periods of time.
o REGULATORY. As a result of the orphan drug legislation, regulatory
challenges for product approval can be less daunting than for
non-orphan drugs. Fewer total patient exposures, fewer clinical trials,
and acceptance of surrogate markers along with clinical outcomes are
possible for orphan drug candidates. The FDA is mandated to review an
orphan drug approval application (NDA or BLA) in six months (fast
track), instead of from one to two years. Understanding the orphan
legislation and designing clinical trials for orphan drugs provides
efficiencies across many different diseases. Overall clinical trial
costs and time lines may also be greatly reduced compared to non-orphan
drug development.
o COMMERCIALIZATION AND HIGH VALUE. Orphan drugs demand a high premium
because of their potential to increase the quality and quantity of life
in areas where there is very little or no other hope. Examples include
Genzyme's Cerezyme(TM) for Gaucher disease costing up to $300,000 per
year per patient; TKT's Replagal(TM) at $160,000 per year for Fabry
disease; factor XIII costs hemophiliacs $70,000 per year; and even for
non-life threatening disorders like growth hormone deficiency, hGH
costs $20,000 per year. Servicing niche markets may permit low fixed
costs, and efficient target marketing. A small sales force can focus on
a specialty audience in a very connected community with similar tactics
for many diseases.
o DISTRIBUTION. Due to the costs, administration, shipping and handling
requirements for orphan drugs, a very specialized distribution system
is required. Similarities may allow using the same "internal"
distribution system and infrastructure. Today, most orphan drugs are
contracted out separately to specialty distribution companies at a
significant cost, usually between 6-7% of top line revenues.
o REIMBURSEMENT. The cost of orphan drugs is often not borne by the
individual patient and insurance complications cannot be tolerated for
the prescribing physicians requiring expert reimbursement service to
assure uninterrupted therapy without undue complication. Orphan drugs
continue to be reimbursed at a rate greater than 95% in the U.S.
o COST OF GOODS SOLD. The gross amount of material required to supply an
orphan market is low relative to non-orphan drugs so that a favorable
relationship is possible between quantity and relative sales price,
allowing for potential high gross margins.
Technology Overview
DRUG TARGETING/DELIVERY TECHNOLOGY. When a pharmaceutical agent is administered
to a patient, either orally or by injection, the drug distributes itself in most
of the whole body water and tissues while only a small portion administered goes
to the diseased area where it is expected to have its clinical effect. In some
cases, larger doses must be administered which can produce severe undesirable
side effects in organs for which it was not intended. Thus, the means by which a
drug reaches its target site or its delivery at the right moment and frequency,
takes on increasing significance.
40
Recent developments have fueled an increased intensity in research aimed at
creating new drug delivery systems. Much of this interest has stemmed from the
advances in biotechnology immunology, which has resulted in the creation of a
new class of peptide and protein drugs. Concurrent attempts to overcome barriers
which limit the availability of these macromolecules has led to an exploration
of non-parenteral routes for their systemic delivery as well as means to
overcome the enzymatic and absorption barriers for the purpose of increasing
bioavailability.
Although for conventional drugs the oral route is convenient and popular, most
peptide and protein drugs have low uptake due to proteolytic degradation in the
gastrointestinal tract and poor permeability of the intestinal mucosa to high
molecular weight substances. Several approaches to overcome these obstacles have
been under intense investigation: (i) inhibiting proteolytic degradation, (ii)
increasing the permeability across the relevant membrane, (iii) structural
modification to improve their resistance to breakdown or to enhance
permeability, and (iv) by specific pharmaceutical formulation to prolong their
retention time at the site of administration using controlled delivery systems.
CONTROLLED-RELEASE SYSTEMS. A number of combination and variations on these
themes have been investigated. For example, linkage of drugs to monoclonal
antibodies, encapsulation of drugs in liposomes, modification of the liposome
surface to alter the pharmacokinetics, coating of proteins and/or liposomes with
polymers or polysaccharides, fusion of toxins to antibodies via recombinant
technology and many others. All of these modifications are designed to
accelerate and control the transport of pharmacologically-active agents from
sites of administration to organs. These systems do not address overcoming
physical barriers common to macromolecules.
SITE-SPECIFIC DELIVERY (TARGETING). These alterations in drug structure are not
limited entirely to enhancing the stability of drugs, but are also designed to
improve the targeting of the drug to a specific organ or tissue. By taking
advantage of a feature on a cell membrane that becomes a focal point for
incorporating a specific carrier into the design of the drug to carry it to its
designated goal, targeting or site-specific delivery can be improved. The
carriers generally utilized have been monoclonal antibodies that target specific
cell membrane epitopes or receptors; however, a greater understanding of
membrane-specific features might enable one to design small molecular carriers
attached to drugs for enhanced uptake. Thus, new drugs in the form of peptides,
proteins, oligonucleotides, and genes are now on the horizon. The limitations at
this juncture relate to how we deliver them, intact, to preferred sites in order
to achieve maximal physiologic effectiveness and reduced side effects.
Our Technology
We have developed a unique technology that we believe has broad application and
can be used to target oral drugs, to many organ and tissue systems in the human
body. The basis of this new technology is a concept that integrates the special
chemical properties of active, currently available and naturally occurring
carrier molecules and the specific biological characteristics of targeting drugs
to cells. Our technology provides a means for targeting drugs to the site for
which the drug has therapeutic effect. This targeting capability has the
potential effect of reducing, potentially markedly, the amount of drug that is
circulated to other places in the body. Therefore, targeting makes it possible
to use much less drug in the patient's body, thereby drastically decreasing the
probability of harmful side effects. Both carnitine and taurine, naturally
occurring substances, have been initially utilized in our technology as specific
carriers of drugs, particularly to muscle and nerve. Any drug, new or old, can
potentially be linked to these carriers if a functional group is available to
carry out the linkage.
There are many medical conditions like muscular dystrophy in which loss of
muscle tissue is a prominent part of the disease process. There are also several
diseases such as MS, ALS and spinal cord injury, where nerve cell degradation is
secondary to the primary defect.
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CALPAIN INHIBITION. It has been published that a protease, calpain, is involved
in initiating the degenerative process in each of muscular dystrophy, MS, ALS,
and spinal cord injury. Calpains are a family of Ca++ activated intracellular
proteases, whose activity is accelerated when abnormal amounts of Ca++ enter the
cell by virtue of increased membrane permeability as a result of some traumatic
or ischemic event and/or a genetic defect, such as the absence of dystrophin in
Duchenne muscular dystrophy. Our research program has identified an inhibitor of
calpain, and has demonstrated usefulness in halting the loss of muscle tissue in
certain circumstances. The inhibitor, (an analogue) leupeptin, is a tripeptide
produced by streptomyces strains.
Calpain is one of a relatively small family of cysteine proteases which also
include the caspases which are active in promoting programmatic cell death, or
apoptosis. It has been implicated in the initiation of both necrotic and
apoptotic cell death. The trigger which activates calpain is Ca++ ions leaking
into cells, where the levels are generally very low. The dystrophin gene
responsible for muscular dystrophy, for instance, is involved in maintaining
muscle cell membrane integrity and when it is mutated the membrane is leaky for
calcium. Overstimulation of neural receptors by GABA and other excitatory
molecules following abnormal GABA release accompanying injury, can lead to
excitatory neurotoxicity by allowing entrance of too much Ca++. Calpain has been
implicated in the neurotoxicity that follows spinal cord injury. Tissues
weakened by ischemia/reperfusion injury such as occurs following stroke or
myocardial infarct, admit Ca++. Over the past ten years it has emerged that
calpain enzymatic activity plays a key role in a very large number of cellular
degenerative conditions. Leupeptin, the tripeptide aldehyde has been shown to be
a potent inhibitor of thiol proteases of the calpain class of enzymes.
One of the problems in using leupeptin, either by oral or injection
administration, is that it distributes itself indiscriminately to all parts of
the body, when only skeletal muscle or nerve tissue should be targeted. One
approach involving larger doses than are necessary to get the desired result
often causes side effects in other parts of the body and in the case of
leupeptin, would be very expensive. We have investigated a way to more
specifically target the calpain inhibitor to muscle by linking the active part
of the inhibitor to a natural occurring substance in the body which is attracted
to skeletal muscle by an active transport mechanism. This substance is called
carnitine which is normally used to transport fatty acids into muscle cell
mitochondria. We have successfully linked leupeptin to carnitine to create a
more efficient calpain inhibitor we call Myodur. Our studies suggest that the
chemical entity carnityl-leu-argininal (Myodur) is at least 100 times more
effective in inhibiting calpain intracellularly in skeletal muscle than is
leupeptin alone. This has resulted in adoption of Myodur as a new potential
candidate for therapy for the treatment of muscle wasting diseases, be they
primary or secondary.
Leupeptin is not patent-protected, having been first isolated and characterized
in 1969. We have been granted orphan drug status for the use of leupeptin in
nerve repair and filed for Orphan Drug status in muscular dystrophy for Myodur,
which includes the active part of leupeptin.
Another naturally occurring substance, taurine, is attracted to nervous tissue
and to the retina. When leupeptin is linked to taurine, calpain appears to be
inhibited in a number of nerve-related disease states in our studies which are
preliminary. This result is subject to continued review and assessment and may
not be indicative of future successful drug development or commercialization.
The diseases affected could include deafness as a result of antibiotic damage to
hair cells in the ear, diabetic and age-related retinopathy, seizures, and
possibly Alzheimer's disease. We believe this drug, named Neurodur, could be a
particularly effective drug for the treatment of hearing loss due to nerve
damage, as well as diabetic retinopathy, multiple sclerosis, and spinal cord
injury.
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In summary, our technology provides us with the ability and potential to seek
to:
o Explore potential therapeutic, including oral, agents in a variety of
neuromuscular and neurodegenerative disorders;
o Improve the safety profile of new, as well as existing, pharmaceuticals
currently on the market;
o Investigate new and abandoned pharmaceutical research projects where
untargeted therapeutics possess toxic characteristics that have not
been able to be successfully managed when delivered untargeted;
o Extend the patent life of existing major drugs by using them in a
targeted compound and provide a means of product differentiation in the
generic pharmaceutical industry; and
o Investigate the potential for developing cardioactive drugs.
Manufacturing
We do not have, and do not intend to establish, manufacturing facilities to
produce our product candidates in the near- or mid-term. We plan to utilize
contract manufacturers for all of our production requirements. We believe that
there are a number of high quality Good Laboratory Practice (GLP) and Good
Manufacturing Practice (GMP) contract manufacturers available for these
purposes.
Contract Manufacturing Agreement with Bachem
We have agreed to purchase our clinical materials from Bachem AG through the end
of 2005 pursuant to a manufacturing agreement entered into during 2004 and have
entered into an exclusive manufacturer and supply agreement with Bachem in April
2005 under which we would purchase our requirement of product from Bachem for
cash and royalty payments in the amount of the lesser of 5% of "net sales" (as
defined in the agreement) or $10 million, $15 million or $25 million, in the
first, second and third (and thereafter) years of the agreement, respectively.
We currently purchase certain patented components required for our products from
Sigma-Tau Industrie Farmaceutiche Riunite S.p.A. ("Sigma Tau"). We expect the
cost of the required product for pre-clinical studies and initial clinical
trials to be significant.
FDA Oversight of Manufacturing
The manufacturer of our product candidates or any future product, whether done
by third-party contractors or internally, will be subject to rigorous
regulations, including the need to comply with the FDA's current GMP standards.
As part of obtaining FDA approval for each product, each of the manufacturing
facilities must be inspected, approved by and registered with the FDA. In
addition to obtaining FDA approval of the prospective manufacturer's quality
control and manufacturing procedures, domestic and foreign manufacturing
facilities are subject to periodic inspection by the FDA and/or foreign
regulatory authorities which have the authority to suspend or withdraw
approvals.
Intellectual Property
Our intellectual property portfolio includes:
o Patent 4,742,081--Carnitine, which preferentially accumulates in
cardiac and skeletal muscle, is coupled to a protease inhibitor or any
other pharmaceutically active compound, for the purpose of
43
site-specific drug delivery to these tissues. These products may be
useful in a variety of muscle wasting diseases as well as cardiac
conditions including cardiac ischemia;
o Patents 4,866,040, 5,008,288 and 5,876,747--These patents cover the
compounds carnitine, aminocarnitine and cysteic acid (taurine) as
carriers linked to protease inhibitors, propranolol, procainamide and
quinidine and, as well, phosphatidyl carnitine incorporated into
liposomes for the treatment of muscle disorders as well as cardiac
arrhythmias;
o PCT international patent application no. PCT/US05/16132, which was
filed on May 6, 2005, covers compound C-301 and related compounds to
treat a number of neurologic, otologic, and ophthalmologic disorders
such as epilepsy and bipolar disorder. The international application
claims priority upon a U.S. provisional application no. 60/568,720,
which was filed on May 6, 2004.
o PCT international patent application (no. to be assigned), which was
filed on June 13, 2005 and covers Myodur and related compounds as well
as their use to treat muscle disorders. The application claims new
compositions of matter (i.e., oral prodrugs and pharmaceutical
formulations thereof), kits, and use of these materials to treat a
variety of diseases such as muscular dystrophy. The international
application claims priority upon U.S. provisional application nos.
60/578,914 and 60/633,274, which were filed on June 12, 2004 and
December 3, 2004, respectively. A U.S. utility application will be
filed shortly with the U.S. Patent and Trademark office
o PCT international patent application (no. to be assigned), which was
filed on September 29, 2005, covers Neurodur and related compounds to
treat a number of neurologic, otologic, and ophthalmologic disorders.
The application claims new compositions of matter and use of these
compositions as oral pro-drugs to treat a variety of diseases such as
multiple sclerosis. The international application claims priority upon
U.S. provisional application, which was filed on September 29, 2004. A
U.S. utility application will be filed shortly with the U.S. Patent and
Trademark office.
We have made, or plan to make, the following orphan drug designation filings:
o Orphan Drug Designation has been granted for leupeptin in denervation
injury;
o Orphan Designation for Myodur in muscular dystrophy was applied for on
January 29, 2004;
o Orphan Designation for C-202 in ALS will be applied for in 2005; and
o Orphan Designation for C-208 in chronic inflammatory demyelinating
polyneuropathy will be applied for in 2005.
We also rely on protection afforded by confidentiality and invention
acknowledgement agreements with key personnel in order to secure and protect our
intellectual property rights that are not subject to patent or other statutory
protection.
Licenses
On September 15, 2004 we granted an exclusive fifteen-year license to JCR to
develop, manufacture, use, sell, and sublicense Myodur for the treatment of
muscular dystrophy in Japan, South Korea, China, Taiwan and Singapore. The
licensing agreement provides, among other things for, royalty payments in the
amount of 25% of "net sales" (as such term is defined in the agreement) provided
that the sum of the cost of goods sold, plus royalty payments does not exceed
35% of net sales. Pursuant to the license agreement, JCR acquired 554,413 shares
44
of Common Stock for $1,000,000 ($929,231 after expenses), and upon FDA approval
of an IND application for Myodur for muscular dystrophy in the United States, is
obligated to purchase $1,000,000 of additional shares of our Common Stock. The
purchase price at the time of the second $1,000,000 investment required under
the license agreement will be the then market price of Common Stock which may be
higher, or lower, on a price per share basis, than the purchase price applicable
to the initial investment. In addition, JCR is obligated to make a milestone
payment of $500,000 to us upon FDA approval of an IND application to initiate
Phase I/II clinical studies for Myodur for muscular dystrophy in the United
States.
Competitive Business Conditions and Competitive Position in the Industry;
Methods of Competition
We currently have no products or drugs in commercial production and are
exclusively engaged in research and development, pre-clinical and pre-regulatory
review and preparation. Accordingly, we do not compete with any product or in
any market or industry. While there is no assurance that any of our products
will be capable of commercialization, we believe that competition in our planned
area of concentration, should any of our products obtain regulatory clearances
required for commercialization, will primarily involve effectiveness of our
products for the approved indications, dosage, delivery, and, to a lesser
degree, price and insurance availability.
Distribution Methods
We currently have no distribution methods since all of our products are
presently in development and we have neither applied for nor received any
regulatory approvals.
Sources and Availability of Raw Materials
We presently maintain relationships with two companies, Bachem AG and Sigma Tau,
for raw materials for our research and testing needs. The raw materials required
by us are available from a limited number of suppliers capable of production
which meets our requirements and FDA standards. We presently expect to purchase
certain components of our product which are manufactured under patent
protection.
Customers
We currently have no customers.
Government Regulation
The manufacturing and marketing of all of our drug and drug delivery technology,
including Myodur and Neurodur, and our related research and development
activities are subject to regulation for safety, efficacy and quality by
numerous governmental authorities in the United States and other countries. We
anticipate that these regulations will apply separately to each drug and
compound in our drug delivery technology. Compliance with these regulations will
involve a considerable level of time, expense and uncertainty.
In the United States, drugs are subject to rigorous federal regulation and, to a
lesser extent, state regulation. The United States Food, Drug and Cosmetic Act,
the regulations promulgated thereunder, and other federal and state statutes and
regulations govern, among other things, the testing, manufacture, safety,
efficacy, labeling, storage, record keeping, approval, advertising and promotion
of our drugs. Drug development and approval within this regulatory framework is
difficult to predict and will take a number of years and involve material
expenditures that cannot be accurately projected at this early stage of
development of our products but which will exceed our current resources and will
require sources of funds, which are presently uncertain.
45
The steps required before a pharmaceutical agent may be marketed in the United
States include:
o Pre-clinical laboratory tests, in vivo pre clinical studies and
formulation studies;
o The submission to the FDA of an IND application for human clinical
testing which must become effective before human clinical trials can
commence;
o Adequate and well controlled human clinical trials to establish the
safety and efficacy of the product;
o The submission of a NDA or Biologic Drug License Application to the
FDA; and
o FDA approval of the NDA or Biologic Drug License Application prior to
any commercial sale or shipment of the product.
In addition to obtaining FDA approval for each product, each domestic product
manufacturing facility must be registered with, and approved by, the FDA.
Domestic manufacturing facilities are subject to biennial inspections by the FDA
and must comply with the FDA's Good Manufacturing Practices for products, drugs
and devices.
PRE-CLINICAL TRIALS. Pre-clinical testing includes laboratory evaluation of
chemistry and formulation, as well as tissue culture and animal studies to
assess the potential safety and efficacy of the product. Pre-clinical safety
tests must be conducted by laboratories that comply with FDA regulations
regarding Good Laboratory Practices. No assurance can be given as to the
ultimate outcome of such pre-clinical testing. The results of pre clinical
testing are submitted to the FDA as part of an IND application and are reviewed
by the FDA prior to the commencement of human clinical trials.
We intend to largely rely upon contractors to perform pre-clinical trials. To
date, we have established limited relationships with regards to pre-clinical
testing of our intended products.
CLINICAL TRIALS. Clinical trials involve the administration of the new product
to healthy volunteers or to patients under the supervision of a qualified
principal investigator. Clinical trials must be conducted in accordance with
Good Clinical Practices under protocols that detail the objectives of the study,
the parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND
application . Further, each clinical study must be conducted under the auspices
of an independent institutional review board at the institution where the study
will be conducted. The institutional review board will consider, among other
things, ethical factors, the safety of human subjects and the possible liability
of the institution. Compounds must be formulated according to Good Manufacturing
Practices.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the product into
healthy human subjects, the drug is tested for safety (adverse side effects),
absorption, dosage tolerance, metabolism, bio distribution, excretion and
pharmacodynamics (clinical pharmacology). Phase II is the proof of principal
stage and involves studies in a limited patient population in order to:
o Determine the efficacy of the product for specific, targeted
indications;
o Determine dosage tolerance and optimal dosage; and
o Identify possible adverse side effects and safety risks.
46
If there is evidence that the product is found to be effective and has an
acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to further evaluate clinical efficacy and to test for safety within
an expanded patient population at geographically dispersed multi center clinical
study sites. Phase III frequently involves randomized controlled trials and,
whenever possible, does double blind studies. We, or the FDA, may suspend
clinical trials at any time if it is believed that the individuals participating
in such trials are being exposed to unacceptable health risks.
We intend to rely upon contractors to perform its clinical trials. We have not
established any relationships regarding anticipated clinical trials for any
intended product.
NDA AND FDA APPROVAL PROCESS. The results of the pharmaceutical development, pre
clinical studies and clinical studies are submitted to the FDA in the form of a
NDA for approval of the marketing and commercial shipment of the product. The
testing and approval process is likely to require substantial cost, time and
effort. In addition to the results of preclinical and clinical testing, the NDA
applicant must submit detailed information about chemistry, manufacturing and
controls that will determine how the product will be made. The approval process
is affected by a number of factors, including the severity of the disease, the
availability of alternative treatments and the risks and benefits demonstrated
in clinical trials. Consequently, there can be no assurance that any approval
will be granted on a timely basis, if at all. The FDA may deny a NDA if
applicable regulatory criteria are not satisfied, require additional testing or
information or require post marketing testing and surveillance to monitor the
safety of a company's products if it does not believe the NDA contains adequate
evidence of the safety and efficacy of the drug. Notwithstanding the submission
of such data, the FDA may ultimately decide that a NDA does notes not satisfy
its regulatory criteria for approval. Moreover, if regulatory approval of a drug
is granted, such approval may entail limitations on the indicated uses for which
it may be marketed. Finally, product approvals may be withdrawn if compliance
with regulatory standards is not maintained or if problems occur following
initial marketing. Post approval studies may be conducted as Phase IV to explore
further intervention, new indications or new product uses.
Among the conditions for NDA approval is the requirement that any prospective
manufacturer's quality control and manufacturing procedures conform to Good
Manufacturing Practices and the requirement specifications of the FDA. In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, money and effort in the area of drug application and
quality control to ensure full technical compliance. Manufacturing
establishments, both foreign and domestic, also are subject to inspections by or
under the authority of the FDA and by other federal, state or local agencies.
INTERNATIONAL APPROVAL. Whether or not FDA approval has been obtained, approval
of a product by regulatory authorities in foreign countries must be obtained
prior to the commencement of commercial sales of the drug in such countries. The
requirements governing the conduct of clinical trials and drug approvals vary
widely from country to country, and the time required for approval may be longer
or shorter than that required for FDA approval. Although there are some
procedures for unified filings for certain European countries, in general, each
country at this time has its own procedures and requirements.
OTHER REGULATION. In addition to regulations enforced by the FDA, we are also
subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state or local regulations. Our research and development may involve the
controlled use of hazardous materials, chemicals, and various radioactive
compounds. Although we believe that our safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of any accident, we
could be held liable for any damages that result and any such liability could
exceed our resources.
47
In pre-clinical studies Myodur has demonstrated efficacy in muscular dystrophy,
Neurodur has demonstrated efficacy in MS, and C-301 has demonstrated efficacy in
animal models for epilepsy. We presently expect to file an IND application for
Myodur in the fourth quarter of 2005. However, such filing may be subject to
further delay as a result of many factors either within or outside our control.
Employees
As of December 27, 2005, we had ten employees, all of whom are full-time
employees. Three of our employees have doctorate and/or M.D. degrees.
Properties
We lease our executive offices in Hunt Valley, Maryland consisting of
approximately 5,200 square feet for approximately $6,500 per month, subject to a
3% annual rent escalation clause. This lease expires on December 31, 2006 and we
believe should provide sufficient space for our clinical, regulatory and other
administrative functions during the remaining term of the lease.
MANAGEMENT
Directors and Executive Officers
Our current directors and executive officers are as follows:
Name Age Position
---- --- --------
William H. Pursley 52 Chief Executive Officer, Chairman of the
Board and Director
Norman W. Barton, M.D., Ph.D. 58 Executive Vice President and Chief
Medical Officer
Donald W. Fallon 51 Senior Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Leonard A. Mudry 68 Director
John W. Griffin, M.D. 63 Director
Each director holds office until the next annual meeting of stockholders or
until their successors have been duly elected and qualified. Executive officers
are elected annually and serve at the discretion of our Board. Pursuant to the
Placement Agent Agreement with Brookshire Securities Corporation ("Placement
Agent"), the Placement Agent has the right to designate one director, who shall
also serve on our Compensation and Audit Committees until December 2005. As of
the date of this prospectus, no such designation has been made.
No compensation has been paid to our directors for services rendered as a
director during fiscal 2004. In February 2005, we adopted a cash and equity
compensation plan for our non-executive directors. (See "2004 Incentive Plan.")
48
The principal occupations for the past five years (and, in some instances, for
prior years) of each of our directors and executive officers are as follows:
WILLIAM H. PURSLEY, has served as our Chief Executive Officer and Chairman of
our Board since March 2004. From September 2003 to March 2004, Mr. Pursley was
President and Vice Chairman of Xechem, where he developed a new focus for that
company, significantly increasing its value and spearheading the acquisition of
the Company. From August 2002 until September 2003, Mr. Pursley was Chief
Executive Officer of Osiris where he led a turnaround that revamped management
and operations through corporate partnerships with Boston Scientific Corporation
(BSX-NYSE), among others. Prior thereto, from April 1999 until August 2002, Mr.
Pursley was Senior Vice President, Commercial Operations for Transkaryotic
Therapies, Inc. (TKTC-NASDAQ) where he developed its European business unit to
launch Replagal(TM), an orphan drug for Fabry disease. Previously, Mr. Pursley
has served in executive positions at Genentech, Inc. (DNA-NYSE), Genzyme, Inc.
(GENZ-NASDAQ), and Bio-Technology General Corporation (BTGC-NASDAQ) where he
played key roles in the commercialization of over $2 billion in orphan drugs.
The long-time industry executive started his career twenty-five years ago at
Merck & Co., Inc. Mr. Pursley holds a BA degree in Biology from the University
of Louisville.
NORMAN W. BARTON, M.D., PH.D., has served as our Executive Vice President and
Chief Medical Officer since April 2004, and previously was Senior Vice President
and Chief Medical Officer with Osiris Therapeutics, Inc., a privately held
biotechnology company ("Osiris"), from September 2002 to April 2004. Dr. Barton
has had a distinguished career over two decades in investigative medicine and
development of novel therapeutic agents in both the academic and commercial
sectors. Dr. Barton is formally trained in biological chemistry and internal
medicine and is certified as a specialist in neurology. From 1996 until
September 2002, Dr. Barton was at Bio-Technology General Corporation
(BTGC-NASDAQ) where he was Senior Vice President and Chief Medical Officer. In
this capacity, Dr. Barton had overall responsibility for the worldwide
development and registration programs for four proprietary recombinant protein
products. Successful advancement of these programs required frequent interaction
with US and European regulatory authorities and development of core competencies
in clinical research, data management and biostatistics. In addition to product
development responsibilities, Dr. Barton also created and supervised a medical
affairs group that provided critical support for commercialized products in both
US and international markets. From 1981 to 1996, Dr. Barton served as a
physician scientist and Chief of the Clinical Investigations Section (1985-96)
with the Neurological Institute at the National Institutes of Health (NIH).
While at the NIH, Dr. Barton was responsible for the development of enzyme
replacement therapy for a severely debilitating lipid storage disorder known as
Gaucher disease. For this precedent setting achievement, Dr. Barton was awarded
both the Outstanding and Meritorious Service Medals of the United States Public
Health Service. Dr. Barton received his MD and Ph.D. from Pennsylvania State
University, and he completed his residency in Internal Medicine at Albany
Medical College Hospital and his residency in Neurology at Cornell University
New York Hospital.
DONALD W. FALLON, has served as our Senior Vice President, Finance and
Administration, Chief Financial Officer and Secretary since March 2004. Mr.
Fallon has over 20 years of broad financial management experience gained at both
public and private companies. Prior to joining our company, from May 2002 until
December 2003, he was Vice President of Finance and Chief Financial Officer for
Osiris and was involved in strategic partnering, fund raising and strategic
planning activities. From January 2000 to May 2002, Mr. Fallon was Senior
Director of Finance and Accounting with Guilford Pharmaceuticals Inc., where he
was responsible for financial and strategic planning systems in addition to
accounting operations and internal and external financial reporting. From June
1998 through January 2000, Mr. Fallon was Vice President of Finance and Chief
Financial Officer with Small Molecule Therapeutics, Inc., a venture-backed drug
discovery company. In addition, Mr. Fallon has held various positions with other
start-up and established life sciences companies. Mr. Fallon is a Certified
49
Public Accountant, received a BS degree in Accounting from the University of
Baltimore and holds an MBA degree in Finance from Loyola College.
LEONARD A. MUDRY, has been a member of our Board since December 2, 2004. Mr.
Mudry provides consulting and financial services to a number of businesses
which, from June 2000 to January 2004, included Xechem. From January 2004 to
October 2004, Mr. Mudry was, a director of Xechem. Mr. Mudry was from November
1998 to June 2000, a business consultant with Strategic Business Group in
Cranford, NJ, from May 1994 to October 1998, Senior Vice President, Finance and
Operations of Xechem and from February 1991 to April 1994, Vice President,
Operations of Medigene, Inc., a pre-natal testing company. Prior to joining
Medigene, Mr. Mudry was Vice President, Operations/Finance for Princeton
Diagnostic Labs, from March 1990 to January 1991 and Senior Vice President and
Chief Financial Officer of American Medical Laboratories, from January 1987 to
March 1990. Prior thereto, Mr. Mudry held various positions with Hoffmann-La
Roche, Inc. a major pharmaceutical company, and its subsidiaries, from 1969 to
1987.
JOHN W. GRIFFIN, M.D., is Professor and Director of the Department of Neurology
at Johns Hopkins University School of Medicine and Professor of Neuroscience and
Pathology and Neurologist-in-Chief at Johns Hopkins Hospital. Dr. Griffin has
been on the faculty at Johns Hopkins since 1976, and Professor of Neurology and
Neuroscience since 1986. Dr. Griffin is President of the American Neurological
Association and was Past President of the Peripheral Nerve Society and the
Society for Experimental Neuropathology, and in 2005 was elected to the
Institute of Medicine of the National Academy of Science. Dr. Griffin trained
and was a medical intern and resident at Stanford University School of Medicine
and did his neurology residency at Johns Hopkins, before going to the NIH as a
Clinical Associate. Dr. Griffin's clinical and research career has been devoted
to the neurobiology and neuropathology of the peripheral nervous system, and to
studies of peripheral neuropathies. Dr. Griffin's honors include Jacob Javits
Award from the NIH, and multiple teaching awards, including the Professor's
Award of the Johns Hopkins University School of Medicine. Dr. Griffin has given
many named lectures, including the Robert Wartenberg Lecture of the American
Academy of Neurology and the Soriano Lecture of the American Neurological
Association. Dr. Griffin is a former member of the National Advisory Council to
the National Institute of Neurologic Disease and Stroke and is currently Chair
of the Burroughs Wellcome Fund Program in Translational Research. Dr. Griffin is
the Editor-in-Chief of the journal, NATURE NEUROLOGY.
There are no family relationships between any of our directors or executive
officers.
Executive Compensation
The following sets forth information for the three most recently completed
fiscal years concerning the compensation of (i) the Chief Executive Officer and
(ii) all other executive officers who earned in excess of $100,000 in salary and
bonus in the fiscal year ended December 31, 2004.
50
SUMMARY COMPENSATION TABLE
Long Term Compensation
---------------------------------------------------
Annual
Compensation Restricted Securities
------------------------ Stock Underlying All Other
Name and Principal Salary Award(s) Options Compensation
Position Year ($) ($)(1) (#) ($)
--------------------------------- ------------- -------------- --------------- ---------------- ----------------
William H. Pursley 2004 $351,967(2) 5,089,506(3) - 1,630(4)
Chairman and Chief 2003 - - -
Executive Officer 2002 - - - -
Norman W. Barton, M.D., Ph.D. 2004 187,152(2) 1,855,551(3) - 1,364(4)
Executive Vice President and 2003 - - - -
Chief Medical Officer 2002 - - - -
Donald W. Fallon 2004 179,667(2) 848,252(3) - 500(4)
Senior Vice President, 2003 - - - -
Finance and Administrative, 2002 - - - -
Chief Financial Officer and
Secretary
Sean Miller 2004 - - - -
Chief Executive Officer(5) 2003 - - - -
2002 - - - -
-------------------
(1) Vesting restrictions on such shares lapse as to (i) 10% on the sixth
month anniversary of the date of award (ii) an additional 10% on the
twelve month anniversary of the date of award and (iii) the balance upon
initiation of phase III clinical trials for Myodur in muscular dystrophy.
(2) Includes $5,467, $5,467 and $4,667 of 401(k) contributions for Mr.
Pursley, Dr. Barton, and Mr. Fallon, respectively. Includes payments of
$71,500, $0 and $29,167 paid by Xechem to Mr. Pursley, Dr. Barton, and
Mr. Fallon, respectively, during 2004.
(3) 1,247,428 shares, 454,792 shares, and 207,905 shares of restricted stock
for Mr. Pursley, Dr. Barton and Mr. Fallon, respectively, have been
valued at $4.08, the closing price per share of our Common Stock as
reported by the OTC Bulletin Board on December 31, 2004.
(4) Represents reimbursement of premiums paid by such executive officer under
certain term life insurance policies.
(5) Mr. Miller resigned from our company as of December 8, 2004. Information
on Mr. Miller is not available.
51
Employment Agreements
Each of Messrs. Pursley and Fallon and Dr. Barton are parties to employment
agreements with us. Under such agreements each such employee is generally
obligated to commit substantially all of his time and attention to our affairs.
William H. Pursley, our Chairman of the Board and Chief Executive Officer, has
an employment agreement ending March 31, 2006. The agreement may be renewed for
additional one-year terms unless either party notifies the other at least sixty
days prior to the end of the then current term of its desire to terminate the
agreement. The agreement provides that Mr. Pursley will be compensated at an
annual base salary of $330,000 with annual increases and a discretionary annual
bonus in an amount (in cash, stock or other property) to be determined by the
Board. The agreement may be terminated by us for "cause", by Mr. Pursley for
"good reason" (as such terms are defined in the agreement), by Mr. Pursley for
any reason, upon thirty days notice, and by us without cause, upon sixty days
notice. If Mr. Pursley is terminated by us without cause, or by Mr. Pursley for
good reason he will be entitled to his base salary and a continuation of
benefits under our benefit plans for senior executives for a twelve month period
after the date of termination.
Norman W. Barton, our Executive Vice President and Chief Medical Officer, has an
employment agreement ending April 26, 2006. The agreement may be renewed for
additional one-year terms unless either party notifies the other at least sixty
days prior to the end of the then current term of its desire to terminate the
agreement. The agreement provides that Dr. Barton will be compensated at an
annual base salary of $265,000 with annual increases and an annual bonus in an
amount (in cash, stock or other property) to be determined by the discretion of
the Board. The agreement may be terminated by us for "cause", by Dr. Barton for
"good reason" (as such terms are defined in the agreement), by Dr. Barton for
any reason, upon thirty days notice, and by us without cause, upon sixty days
notice. If Dr. Barton is terminated by us without cause or by Dr. Barton for
good reason, he will be entitled to his base salary and continuation of benefits
under our benefit plans for senior executives for a twelve month period after
the date of termination.
Donald W. Fallon, our Senior Vice President, Finance and Administration and
Chief Financial Officer and Secretary, has an employment agreement ending March
31, 2006. The agreement may be renewed for additional one-year terms unless
either party notifies the other at least sixty days prior to the end of the then
current term of its desire to terminate the agreement. The agreement provides
that Mr. Fallon will be compensated at an annual base salary of $175,000 with
annual increases and an annual bonus in an amount (in cash, stock or other
property) to be determined by the discretion of the Board. As of March 1, 2005,
Mr. Fallon's annual base salary was increased to $240,000. The agreement may be
terminated by us for "cause", by Mr. Fallon for "good reason" (as such terms are
defined in the agreement), by Mr. Fallon for any reason, upon thirty days
notice, and by us without cause, upon sixty days notice. If Mr. Fallon is
terminated by us without cause or by Mr. Fallon for good reason, he will be
entitled to his base salary and continuation of benefits under our benefit plans
for senior executives for a twelve month period after the date of termination.
OPTION/SAR GRANTS AND FISCAL YEAR END OPTION EXERCISES AND VALUES
Stock Plans
Prior to our adoption of the Company's Founders' Stock Plan and 2004 Incentive
Plan, we did not have a stock option, long-term incentive or other similar plan
for officers, directors and employees.
52
FOUNDERS' PLAN. Our Founders' Plan was adopted by the board of directors and
stockholders on December 9, 2004. An aggregate of 3,031,943 shares of Common
Stock have been issued under the Founders' Plan. The Founders' Plan is
administered by the Board or the Compensation Committee, which Compensation
Committee presently consists of Leonard Mudry. Upon the happening of certain
events described in the Founders' Plan, such as the cessation of employment by a
participant following an award, shares issued or issuable to Founders' Plan
participants may revert to William Pursley, our Chief Executive Officer, and may
be cancelled, forfeited, re-designated or re-issued by us in Mr. Pursley's sole
discretion subject to Board and Compensation Committee approvals. Unless vesting
is accelerated by the Board or Compensation Committee, Founders' Stock Plan
shares will vest 10% upon the six month anniversary of the date of issuance, 10%
upon the one-year anniversary of the date of issuance and the remainder upon
initiation of a Phase III clinical trial for "Myodur" in muscular dystrophy,
provided such date is not less than six months following the date of award. In
the discretion of the Board or the Compensation Committee, vesting may be
accelerated upon the achievement of significant scientific, regulatory, or other
development milestones subject to approval of the Placement Agent.
2004 INCENTIVE PLAN. Our 2004 Incentive Plan was adopted by the board of
directors and stockholders on December 9, 2004. An aggregate of 2,773,820
shares of Common Stock have been reserved for issuance under the 2004 Incentive
Plan. The purpose of the 2004 Incentive Plan is to provide an incentive to
retain in the employ of and as directors, officers, consultants, advisors and
employees of our company, persons of training, experience and ability, to
attract new directors, officers, consultants, advisors and employees whose
services are considered valuable, to encourage the sense of proprietorship and
to stimulate the active interest of such persons into our development and
financial success. Under the 2004 Incentive Plan, we are authorized to issue
incentive stock options intended to qualify under Section 422 of the Code,
non-qualified stock options and restricted stock. The 2004 Incentive Plan is
administered by the Board or the Compensation Committee, which Compensation
Committee presently consists of Leonard Mudry. As of December 27, 2005, 908,381
shares of Common Stock have been issued under the 2004 Incentive Plan, options
to purchase 646,695 shares of Common Stock were outstanding and 1,131,435 shares
remain available for issuance.
Compensation of Directors
On February 11, 2005, our Board adopted a Deferred Stock Plan for Non-Employee
Directors (the "Directors Plan") as an amendment to our 2004 Incentive Stock
Plan. An aggregate of 200,000 shares of Common Stock have been reserved under
the Directors Plan. The purpose of the Directors Plan is to provide an incentive
for non-employee directors to promote the financial success and progress of our
company. The Directors Plan is administered by the Board or the Compensation
Committee. Under the Directors Plan we are authorized to issue non-qualified
stock options to a director who is not, at the time of grant, an employee. The
Directors Plan provides for (i) the automatic initial grant of options to
purchase 10,000 shares of Common Stock to each non-employee director who joins
our Board at an exercise price equal to the fair market value at the date of
such election or appointment to the Board, and (ii) the grant of options to
purchase 2,000 shares of Common Stock on the date of each Board meeting
thereafter attended by such non-employee director at an exercise price equal to
the fair market value at the date of such Board meeting, subject to vesting as
follows: one-fourth of the shares of issuable pursuant to the option shall be
exercisable on the date which is six months from the date of grant, an
additional one-fourth of the shares shall be exercisable on the one-year
anniversary of the date of grant, an additional one-fourth of the shares shall
be exercisable on the two-year anniversary of date of grant, and the remaining
one-fourth of the shares shall be exercisable on the three-year anniversary of
the date of grant, and further subject to such person serving as a director at
the time of vesting. The Directors Plan provides for a maximum lifetime award of
30,000 shares to any director. The term of each option under the Directors Plan
is ten years. On February 11, 2005, our Board approved the payment of $1,000 to
each non-employee director for each Board meeting attended, in person or by
53
telephone, plus reimbursement of ordinary and necessary reasonable expenses of
participation by such director in such meeting.
PRINCIPAL STOCKHOLDERS
Security Ownership of Certain Beneficial Owners and Management
Based soley upon information available to the Company, the following table sets
forth certain information regarding beneficial ownership of our Common Stock as
of December 27, 2005 by (i) each person known by us to own beneficially more
than 5% of our outstanding Common Stock, (ii) each of our directors and
executive officers, and (iii) all directors and executive officers as a group.
Except as otherwise indicated, each of the stockholders named below has sole
voting and investment power with respect to such shares of Common Stock:
Name and Address of Number of Shares Percentage
Beneficial Owner(1) Beneficially Owned Beneficially Owned(2)
---------------------------------------- ---------------------------- -----------------------------
William H. Pursley 1,245,897(3) 8.8%
Norman W. Barton, M.D., Ph.D. 452,992(4) 3.2%
Donald W. Fallon 207,905(5) 1.5%
Leonard A. Mudry 11,000(6) *
John W. Griffin, M.D. 2,500(7) *
Sean Miller(8) 0 0%
Fusion Capital Fund II, LLC(9) 779,718(10) 5.3%
222 Merchandise Mart Plaza
Suite 9-112
Chicago, Illinois 60654
Cornell Capital Partners LP(11) 3,815,782(12) 21.5%
101 Hudson Street
Suite 3700
Jersey City, New Jersey 07302
Harbor Trust, Marge Chassman
Trustee(13)
445 West 23rd Street
New York, New York 10011 1,443,958(14) 9.4%
All directors and executive officers 1,920,294 13.5%
as a group (5 persons)
-------------------
* Represents less than 1%.
54
(1) The address of each person or entity, except as otherwise indicated is
c/o CepTor Corporation, 200 International Circle, Suite 5100, Hunt
Valley, Maryland 21030.
(2) Includes shares of Common Stock issuable upon the conversion of currently
outstanding shares of Series A Preferred Stock.
(3) Includes 500 shares held by Mr. Pursley's wife and children.
(4) Includes 300 shares held by Dr. Barton's wife and children.
(5) Includes 200 shares held by Mr. Fallon's wife and child.
(6) Includes 6,000 shares subject to an option which are exercisable within
60 days.
(7) Represents shares subject to an option which are exercisable within 60
days.
(8) Mr. Miller resigned effective as of December 8, 2004.
(9) Steven G. Martin and Joshua B. Scheinfeld, the principals of Fusion
Capital, are deemed to be beneficial owners of all of the shares of
Common Stock owned by Fusion Capital. Messrs. Martin and Scheifeld share
voting and dispositive power over the shares being sold under this
prospectus.
(10) Includes 377,359 shares issuable upon exercise of a warrant.
(11) Mark Angelo, the managing member of Yorkville Advisors, LLC, the general
partner of Cornell Capital, sole voting and dispositive power over the
shares being sold under this prospectus.
(12) Includes 1,000,000 shares issuable upon exercise of a Warrant and
2,546,965 shares issuable upon conversion of the Debentures, based upon
the Fixed Price at maturity; provided, however, the terms of the
Debentures and the Warrants provide that Cornell Capital may not convert
the Debentures into or exercise the Warrants for shares of Common Stock
if, giving effect to such conversion and/or exercise, Cornell Capital,
together with its affiliates, would beneficially own more than 4.9% of
Common Stock outstanding following such conversion and/or exercise.
(13) Marge Chassman, trustee of the Harbor Trust, has sole voting and
dispositive power over the shares being sold under this prospectus.
(14) Includes 37,500 shares held directly by Ms. Chassman and 1,158,613 shares
issuable upon conversion of convertible promissory notes at maturity.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 23, 2003, Xechem entered into a financing plan with its then
wholly-owned subsidiary ("Spinoff Agreement") providing for, among other things,
establishing a capital structure suitable for attracting third-party financing,
separation of the management and refocusing each of the companies on their
respective core competencies and technologies. As part of the Spinoff Agreement,
Xechem agreed that management would receive from Xechem the right to acquire
shares of Common Stock at par value.
Under the Spinoff Agreement, we also agreed to buy from Xechem and redeem up to
$2,000,000 of shares of Common Stock owned by Xechem (the "Redemption
Obligation") from proceeds of future offerings. The Redemption Obligation
originally provided for payment at a rate of 25% of the gross proceeds (up to
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$2,000,000) raised, before fees and commissions, pursuant to the sale of our
stock. In addition, we agreed to pay a royalty equal to 2% of the gross revenues
from the sale of any products incorporating any of the technology then owned on
the date of the Spinoff Agreement or the licensing of any technology or sale of
the licensing rights. On December 9, 2004, the Spinoff Agreement was amended
which reduced the Redemption Obligation to 10% of the gross proceeds (up to
$2,000,000), and conforming the lock-up applicable to our Common Stock to be
held by Xechem following the Merger such that 50% may be sold six months
following the effective date of the registration of the Common Stock underlying
the securities purchased in the Private Placement, and 50% twelve months
following the effective date of such registration. The amendment permits Xechem
to transfer its shares in any privately negotiated transaction, provided the
purchaser agrees to the terms and restrictions applicable to Xechem, and our
consent is obtained.
During April and May 2004, as contemplated by the Spinoff Agreement, we entered
into certain interim financing agreements ("Bridge Loans") in anticipation of
the spinoff. The terms of the Bridge Loans provided the Company with $1,100,000
pursuant to 8% promissory notes maturing on October 22, 2004. In addition, we
agreed to issue 515,430 shares of Common Stock to the Bridge Loan holders and
others. Since we were unable to repay the Bridge Loans on their maturity date,
the Bridge Loan holders had a right to convert their promissory notes into
shares of common stock of Xechem. No Bridge Loan holder exercised their
conversion rights and pursuant to an exempt exchange offer dated October 22,
2004, as amended November 15, 2004, ("Exchange Offer"), all of the Bridge Loans
have either been repaid with the proceeds of the initial closing of the Private
Placement or have been converted into new 10% convertible promissory notes
("Replacement Notes") with a December 8, 2005 maturity date, convertible into
shares of our Common Stock at $1.25 per share in an amount equal to the
outstanding principal and interest. An aggregate of 238,000 shares of Common
Stock originally issued in connection with the Bridge Loans was converted into a
total of 487,597 shares of Common Stock upon the effectiveness of the Merger. In
April 2005, the Replacement Notes were amended to extend the maturity date to
July 3, 2006 from December 8, 2005, to increase the interest rate to 12%,
effective December 9, 2005 and to change the conversion price to $0.75 from
$1.25 per share.
On June 17, 2005, we entered into a Securities Purchase Agreement with Xechem
pursuant to which we repurchased 2,886,563 shares of Common Stock from Xechem
for a purchase price of $2,309,250. As additional consideration, William
Pursley, our Chairman and Chief Executive Officer, surrendered options to
purchase 43,000,000 shares of common stock of Xechem. Xechem retained 500,000
shares of Common Stock, but agreed that it would only sell such shares subject
to the volume restrictions of Rule 144, regardless of whether or not such volume
limitations are applicable at the time of such sale. Additionally, the
Securities Purchase Agreement terminated the Spinoff Agreement.
We are a party to an employment agreement with William Pursley, a director and
our Chief Executive Officer and Chairman of the Board, which employment
agreement expires on March 31, 2006 (with automatic one-year renewal terms) for
an annual base salary of $330,000 and annual increases and bonuses at the
discretion of our Board.
We are a party to an employment agreement with Norman Barton, M.D., Ph.D., our
Executive Vice President and Chief Medical Officer, which employment agreement
expires on April 26, 2006 (with automatic one-year renewal terms) for an annual
base salary of $265,000 and annual increases and bonuses at the discretion of
the Board.
We are a party to an employment agreement with Donald Fallon, our Senior Vice
President, Finance and Administration, Chief Financial Officer and Secretary,
which employment agreement expires March 31, 2006 (with automatic one-year
renewal terms) for an annual base salary of $175,000 and annual increases and
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bonuses at the discretion of the Board. As of March 1, 2005, Mr. Fallon's annual
base salary was increased to $240,000.
In December 2004, Mr. Pursley, Mr. Fallon and Dr. Barton were issued 1,247,428,
207,905 and 454,792 shares, respectively, of Common Stock under our Founders'
Plan.
On February 11, 2005, we granted a non-qualified option to Leonard Mudry, a
director, to purchase an aggregate of 12,000 shares of Common Stock at $6.25 per
share, the closing price per share of our Common Stock on the OTC Bulletin Board
on the date of grant. The options become exercisable as to 3,000 shares on each
of August 11, 2005, February 11, 2006, February 11, 2007 and February 11, 2008.
On February 11, 2005, we awarded 5,000 restricted shares of Common Stock to
Leonard Mudry, which restrictions lapse as to all of the shares awarded on
August 11, 2005.
On July 20, 2005, we granted a non-qualified option to purchase 10,000 shares of
Common Stock at $2.70 per share, the closing price per share of the Common Stock
on the OTC Bulletin Board on the date of grant, to Dr. Griffin, a non-employee
director, in accordance with the terms of the Directors Plan.
On September 13, 2005, we granted an option to purchase 2,000 shares of Common
Stock at $1.02 per share, the closing price per share of the Common Stock on the
OTC Bulletin Board on the date of grant, to each of Dr. Griffin and Mr. Mudry,
our non-employee directors, for participation in our Board meetings in
accordance with the terms of the Directors Plan.
DESCRIPTION OF THE TRANSACTIONS
On December 9, 2005, we entered into the Securities Purchase Agreement with
Cornell Capital pursuant to which Cornell Capital has agreed to purchase from
us, in a private placement, the Debentures, which Debentures bear interest at
the rate of 8% per year. Pursuant to the Securities Purchase Agreement, we
issued a Debenture in the principal amount of $1,000,000 on each of December 9,
2005 and December 28, 2005. Each Debenture has a three-year maturity from the
date of issuance and is subject to earlier conversion or redemption pursuant to
its terms.
Cornell Capital has the right to convert a portion or all of the outstanding
principal and interest under the Debentures into shares of Common Stock at a
conversion price per share equal to the lesser of (i) the Fixed Price or (ii)
the Floating Price, subject to adjustment as provided in the Debentures;
provided, that any such conversion based on the Floating Price will generally be
limited to $150,000 of principal outstanding under the Debentures in any thirty
day period; and further provided, that Cornell Capital may not convert the
Debentures into shares of Common Stock if such conversion would result in
Cornell Capital beneficially owning in excess of 4.9% of the then issued and
outstanding shares of Common Stock. The Conversion Price and number of shares of
Common Stock issuable upon conversion of the Debentures is subject to certain
exceptions and adjustment for stock splits and combinations and other dilutive
events.
Subject to the terms and condition of the Debentures, we have the right at any
time upon three business days notice to redeem the Debentures, in whole or in
part. If the closing bid price of the Common Stock, is less than the Fixed Price
at the time of the redemption, we are obligated to pay, in addition to the
principal amount being redeemed, the Redemption Amount. If the closing bid price
is greater than the Fixed Price, we may redeem up to 50% of the principal amount
at the Redemption Amount and the remaining 50% at the greater of the (x)
Redemption Amount and (y) the market value of the Common Stock. In addition,
Cornell Capital will receive a Redemption Warrant.
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If an Event of Default (as such term is defined in the Debentures) occurs, any
principal and accrued interest outstanding will become immediately due and
payable, in cash or Common Stock, at Cornell Capital's election.
Pursuant to the Securities Purchase Agreement, on December 9, 2005, we issued to
Cornell Capital (i) a Warrant at an exercise price per share of $1.023 (110% of
the closing bid price of the Common Stock on December 8, 2005) and (ii) 268,817
shares of Common Stock and, on each of December 9, 2005 and December 28, 2005,
we made a cash payment to an affiliate of Cornell Capital of $80,000 for
expenses incurred in connection with the transaction.
In connection with the Securities Purchase Agreement, we also entered into an
investor registration rights agreement with Cornell Capital pursuant to which we
are obligated to file the Registration Statement of which this prospectus is a
part with the SEC within 30 days of December 9, 2005. If the Registration
Statement is not deemed effective by the SEC within 90 days after December 9,
2005, we are obligated to pay Cornell, as liquidated damages, an amount equal to
1% of the value of the Debentures outstanding, in cash or in shares of Common
Stock, at Cornell Capital's option, for each 30-day period thereafter.
We have granted a security interest in all of our assets to Cornell Capital to
secure our obligations under the Debentures.
On December 9, 2005, we issued the Note in the principal amount of $250,000 to
Harbor Trust which bears interest at the rate of 6% percent per year. All unpaid
principal and interest under the Note will be due and payable on December 9,
2006. The Note is convertible, in whole or in part, at any time, into Common
Stock at a conversion price of $1.00 per share, subject to certain limitations
on conversion as set forth in the Note, including where the resulting number of
shares converted on a cumulative basis, would exceed 19.99% of the total number
of shares of Common Stock outstanding and, subject to a conversion price
adjustment in the event we offer or sell an option to acquire Common Stock at a
price per share less than the conversion price.
On December 9, 2005, we issued the Amended Note to Harbor Trust which amends a
convertible promissory note dated December 9, 2004 with Harbor Trust in the
principal amount of $452,991.10 reducing the conversion price to $0.375 from
$0.75 per share. The Amended Note bears interest at the rate of 10% per year
through December 9, 2005 and 12% per year thereafter. All unpaid principal and
interest under the Amended Note will be due and payable on July 3, 2006. The
Amended Note is convertible, in whole or in part, at any time, into Common Stock
at the conversion price of $0.375 per share subject to certain limitations on
conversion as set forth in the Note, including where the resulting number of
shares converted, on a cumulative basis, would exceed 19.99% of the total number
of shares of Common Stock outstanding.
SELLING STOCKHOLDERS
The following table sets forth the shares beneficially owned, as of the date of
this prospectus, by the Selling Stockholders prior to the offering contemplated
by this prospectus, the number of shares each Selling Stockholder is offering by
this prospectus and the number of shares which each Selling Stockholder would
own beneficially if all such offered shares are sold. The Selling Stockholders
acquired their beneficial interests in the shares being offered hereby in
transactions described under the heading "Description of the Transactions." None
of the Selling Stockholders is known to us to be a registered broker-dealer or
an affiliate of a registered broker-dealer. Each of the Selling Stockholders has
acquired its shares solely for investment and not with a view to or for resale
or distribution of such securities. Beneficial ownership is determined in
accordance with SEC rules and includes voting or investment power with respect
to the securities.
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Shares of Shares of Percentage of
Common Shares of Common Common
Stock Common Stock Stock
Owned Prior Stock Owned after Owned After
Name to Offering to be Sold the Offering the Offering
---- ----------- ---------- ------------ ------------
Cornell Capital Partners, LP(1) 3,815,782(2) 3,815,782 0 0%
Harbor Trust (3) 1,443,958(4) 938,287 505,671 3.3%
-------------------
(1) Mark Angelo, the managing member of Yorkville Advisors, LLC, the general
partner of Cornell Capital, has sole voting and dispositive power over
the shares being sold under this prospectus.
(2) Includes 268,817 shares of Common Stock which have been issued to Cornell
Capital under the Stock Purchase Agreement, 1,000,000 shares issuable
upon exercise of the Warrant and 2,546,965 shares issuable upon
conversion of the Debentures, based upon the Fixed Price, at maturity;
provided, however, the terms of the Debentures and the Warrants provide
that Cornell Capital may not convert the Debentures into or exercise the
Warrants for shares of Common Stock if, giving effect to such conversion
and/or exercise, Cornell Capital, together with its affiliates, would
beneficially own more than 4.9% of Common Stock outstanding following
such conversion and/or exercise.
(3) Marge Chassman, trustee of the Harbor Trust, has sole voting and
dispositive power over the shares being sold under this prospectus.
(4) Includes 37,500 shares held directly by Ms. Chassman and 1,158,613 shares
issuable upon conversion of convertible promissory notes at maturity.
No Selling Stockholder is an affiliate or is controlled by our affiliates. None
of the Selling Stockholders has or had a material relationship with us or any of
our predecessors or affiliates for the past three years except as described
elsewhere in this prospectus and in our SEC filings and reports.
DESCRIPTION OF SECURITIES
We are authorized to issue 100,000,000 shares of Common Stock and 20,000,000
shares of Preferred Stock, par value $0.0001 per share, 1,000 shares of which
have been designated Series A Preferred Stock. As of December 27, 2005, there
were 11,744,120 shares of Common Stock, and 248.15 shares of Series A Preferred
Stock issued and outstanding.
Common Stock
The holders of Common Stock are entitled to one vote per share. Our Certificate
of Incorporation does not provide for cumulative voting. The holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board out of legally available funds. However, the current policy of the
Board is to retain earnings, if any, for operations and growth. Upon
liquidation, dissolution or winding-up, the holders of Common Stock are entitled
to share ratably in all assets which are legally available for distribution,
after payment of or provision for all liabilities and the liquidation preference
of any outstanding preferred stock such as the Series A Preferred Stock. The
holders of Common Stock have no preemptive, subscription, redemption or
conversion rights.
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Preferred Stock
The following description of the Series A Preferred Stock is qualified in its
entirety by reference to the Certificate of Incorporation filed with the
Secretary of State of the State of Delaware on February 1, 2005 fixing the
rights, powers and privileges of the Series A Preferred Stock.
Holders of Series A Preferred Stock will be entitled at any time to convert
their shares of Series A Preferred Stock into Common Stock, without any further
payment therefor. Each share of Series A Preferred Stock is initially
convertible into 10,000 shares of Common Stock. The number of shares of Common
Stock issuable upon conversion of the Series A Preferred Stock is subject to
adjustment upon the occurrence of certain events, including, among others, a
stock split, reverse stock split or combination of our Common Stock, an issuance
of Common Stock or other securities as a dividend or distribution on the Common
Stock, a reclassification, exchange or substitution of the Common Stock, or our
capital reorganization. Upon our merger or consolidation with or into another
company, or any transfer, sale or lease by us of substantially all of our Common
Stock or assets, the Series A Preferred Stock will be treated as Common Stock
for all purposes, including the determination of any assets, property or stock
to which holders of the Series A Preferred Stock are entitled to receive, or
into which the Series A Preferred Stock is converted, by reason of the
consummation of such merger, consolidation, sale or lease.
Except as otherwise required by law, the holders of Series A Preferred Stock are
entitled to vote their shares on an as-if-converted to Common Stock basis, and
shall vote together with the holders of the Common Stock, and not as a separate
class.
In the event of our voluntary or involuntary liquidation, dissolution or
winding-up, holders of Series A Preferred Stock will be entitled to receive out
of our assets available for distribution to our stockholders, before any
distribution is made to holders of our Common Stock, liquidating distributions
in an amount equal to $25,000 per share. After payment of the full amount of the
liquidating distributions to which the holders of the Series A Preferred Stock
are entitled, holders of the Series A Preferred Stock will receive liquidating
distributions pro rata with holders of Common Stock, based on the number of
shares of Common Stock into which the Series A Preferred Stock is convertible at
the conversion rate then in effect.
The Series A Preferred Stock may not be redeemed.
Holders of Series A Preferred Stock will not be entitled to receive dividends.
Warrants
We have issued unit warrants to purchase up to an aggregate of 2,558,250 shares
of Common Stock in connection with the Private Placement. Each unit warrant
entitles the holder to purchase 5,000 shares of Common Stock at the exercise
price of $2.50 per share and will expire three years after effectiveness of a
registration statement covering shares of Common Stock underlying the warrants.
We have issued warrants to purchase up to an aggregate of 1,681,650 shares of
Common Stock to the Placement Agent and certain other parties in connection with
the Private Placement. Each warrant entitles the holder to purchase the stated
number of shares of Common Stock at an exercise price of $1.25 per share and
will expire five years (with respect to warrants to purchase 1,481,650 shares)
and three years (with respect to warrants to purchase 200,000 shares) after its
issue date.
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We have issued three-year warrants to purchase an aggregate of 160,000 shares of
Common Stock at $1.70 per share to two firms for investor relation services. The
warrants contain cashless exercise provisions.
We have issued a warrant to Fusion Capital to purchase 377,359 shares of Common
Stock at an exercise price of $0.01 per share which will expire on December 31,
2010.
We have issued a warrant to Cornell Capital to purchase 1,000,000 shares of
Common Stock at an exercise price of $1.023 per share which will expire on
December 9, 2006.
As of December 27, 2005, we have issued warrants to purchase 5,777,259 shares of
Common Stock.
The warrants may not be redeemed by us at any time.
The warrants contain provisions that protect the holders against dilution by
adjustment of the purchase price in certain events, such as stock dividends,
stock splits, and other similar events.
Prior to exercise, the warrants do not confer upon holders any voting or any
other rights as a stockholder.
Convertible Notes
We have issued convertible promissory notes in an aggregate principal amount
outstanding as of December 27, 2005 of $901,728. These notes mature on July 3,
2006 and earn interest at a rate of 10% per year through December 8, 2005 and
12% thereafter until maturity. The outstanding principal amount of these notes
and accrued unpaid interest may, at the holder's option, be converted into
shares of Common Stock at a conversion price of $0.375 per share.
We have issued a convertible promissory note in the aggregate principal amount
outstanding as of December 27, 2005 of $250,000. This note matures on December
9, 2006 and earns interest at a rate of 6% per year. The outstanding principal
amount of this note and accrued unpaid interest may, at the holder's option, be
converted into shares of Common Stock at a conversion price of $1.00 per share,
subject to a conversion price adjustment in the event we offer or sell an option
to acquire Common Stock at a price per share less than the conversion price.
These Notes are convertible, in whole or in part, at any time, into Common Stock
at their respective conversion prices subject to certain limitations on
conversion as set forth in the notes, including where the resulting number of
shares converted on a cumulative basis, would exceed 19.99% of the total number
of shares of Common Stock outstanding.
Convertible Debenture
We have issued to Cornell Capital Debentures in the aggregate principal amount
of $2,000,000, which Debentures bear interest at the rate of 8% per year. We
issued a Debenture in the principal amount of $1,000,000 on each of December 9,
2005 and December 28, 2005. Each Debenture has a three-year maturity from the
date of issuance and is subject to earlier conversion or redemption pursuant to
its terms. Cornell Capital has the right to convert a portion or all of the
outstanding principal and interest under the Debentures into shares of Common
Stock at a conversion price per share equal to the lesser of the Fixed Price or
(ii) the Floating Price, subject to adjustment as provided in the Debentures;
provided, that any such conversion based on the Floating Price will generally be
limited to $150,000 of principal outstanding under the Debentures in any thirty
day period; and further provided, that Cornell Capital may not convert the
Debentures into shares of Common Stock if such conversion would result in
Cornell Capital beneficially owning in excess of 4.9% of the then issued and
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outstanding shares of Common Stock. The Conversion Price and number of shares of
Common Stock issuable upon conversion of the Debentures is subject to certain
exceptions and adjustment for stock splits and combinations and other dilutive
events.
Subject to the terms and condition of the Debentures, we have the right at any
time upon three business days notice to redeem the Debentures, in whole or in
part. If the closing bid price of the Common Stock, is less than the Fixed Price
at the time of the redemption, we are obligated to pay, in addition to the
principal and accrued interest being redeemed, the Redemption Amount. If the
closing bid price is greater than the Fixed Price, we may redeem up to 50% at
the Redemption Amount and 50% at the greater of the (x) Redemption Amount and
(y) the market value of the Common Stock. If an Event of Default (as such term
is defined in the Debentures) occurs, any principal and accrued interest
outstanding will become immediately due and payable, in cash or Common Stock, at
Cornell Capital's election.
Lock-up Agreements
Our shares of Common Stock are subject to various lock-up agreements that
provide restrictions on the future sale of Common Stock by certain holders.
Xechem, the parent of our company prior to the Merger and present owner of
500,000 shares of Common Stock, has agreed that it would only sell any such
shares subject to the volume of restrictions of Rule 144, regardless of whether
or not such volume limitations under Rule 144 are applicable at the time of such
sale. Additionally, participants in the Founders' Plan may sell 10% of their
shares on the six month anniversary following issuance, an additional 10% on the
twelve month anniversary of the issuance, and the balance upon initiation of a
Phase III clinical trial for our "Myodur" technology for muscular dystrophy,
unless accelerated by our Compensation Committee. All lock-up agreements expire
24 months after the closing of the Private Placement.
Anti-Takeover Effect of Delaware Law, Certain By-Law Provisions
Certain provisions of our by-laws are intended to strengthen our Board's
position in the event of a hostile takeover attempt. These by-law provisions
have the following effects:
o they provide that only business brought before an annual meeting by our
Board or by a stockholder who complies with the procedures set forth in
the by-laws may be transacted at an annual meeting of stockholders; and
o they provide for advance notice or certain stockholder actions, such as
the nomination of directors and stockholder proposals.
We are subject to the provisions of Section 203 of the DGCL, an anti-takeover
law. In general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three years
prior, did own, 15% or more of the voting stock.
PLAN OF DISTRIBUTION
We are registering an aggregate of 15,441,929 shares of Common Stock covered by
this prospectus on behalf of the Selling Stockholders. The Common Stock may be
sold or distributed from time to time by the Selling Stockholders directly to
one or more purchasers or through brokers, dealers, or underwriters who may act
62
solely as agents at market prices prevailing at the time of sale, at prices
related to the prevailing market prices, at negotiated prices, or at fixed
prices, which may be changed. The sale of the Common Stock offered by this
prospectus may be effected in one or more of the following methods:
o ordinary brokers' transactions;
o transactions involving cross or block trades;
o through brokers, dealers, or underwriters who may act solely as agents
o "at the market" into an existing market for the Common Stock;
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected through
agents;
o in privately negotiated transactions; or
o any combination of the foregoing.
In order to comply with the securities laws of certain states, if applicable,
the Common Stock may be sold only through registered or licensed brokers or
dealers. In addition, in certain states, the Common Stock may not be sold unless
they have been registered or qualified for sale in the state or an exemption
from the registration or qualification requirement is available and complied
with.
Brokers, dealers, underwriters, or agents participating in the distribution of
the shares as agents may receive compensation in the form of commissions,
discounts, or concessions from the Selling Stockholders and/or purchasers of the
Common Stock for whom the broker-dealers may act as agent. The compensation paid
to a particular broker-dealer may be less than or in excess of customary
commissions.
Neither we nor the Selling Stockholders can presently estimate the amount of
compensation that any agent will receive. We know of no existing arrangements
between the Selling Stockholders, any other stockholder, broker, dealer,
underwriter, or agent relating to the sale or distribution of the shares offered
by this prospectus. At the time a particular offer of shares is made, a
prospectus supplement, if required, will be distributed that will set forth the
names of any agents, underwriters, or dealers and any compensation from the
Selling Stockholders, and any other required information.
We will pay all of the expenses incident to the registration, offering, and sale
of the shares to the public other than commissions or discounts of underwriters,
broker-dealers, or agents. We have also agreed to indemnify Cornell Capital and
related persons against specified liabilities, including liabilities under the
Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers, and controlling persons, we have been
advised that in the opinion of the SEC this indemnification is against public
policy as expressed in the Securities Act and is therefore, unenforceable.
We have advised the Selling Stockholders that while they are engaged in a
distribution of the shares included in this prospectus they are required to
comply with Regulation M promulgated under the Securities Exchange Act of 1934,
as amended. With certain exceptions, Regulation M precludes the Selling
Stockholders, any affiliated purchasers, and any broker-dealer or other person
who participates in the distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.
Regulation M also prohibits any bids or purchases made in order to stabilize the
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price of a security in connection with the distribution of that security. All of
the foregoing may affect the marketability of the shares offered hereby this
prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, and other information with the
SEC. Our filings are available to the public at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Further
information on the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.
We have filed a registration statement on Form SB-2 with the SEC under the
Securities Act for the Common Stock offered by this prospectus. This prospectus
does not contain all of the information set forth in the registration statement,
certain parts of which have been omitted in accordance with the rules and
regulations of the SEC. For further information, reference is made to the
registration statement and its exhibits. Whenever we make references in this
prospectus to any of our contracts, agreements or other documents, the
references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for the copies of the actual contract,
agreement or other document.
LEGAL MATTERS
The validity of the securities being offered by this prospectus have been passed
upon for us by Olshan Grundman Frome Rosenzweig & Wolosky LLP, New York, New
York.
EXPERTS
The financial statements as of December 31, 2004 and for the year then ended,
included in this prospectus have been so included in reliance on the report of
Marcum & Kliegman LLP, independent registered public accounting firm, given upon
the authority of such firm as experts in accounting and auditing.
The financial statements as of December 31, 2003 and for the year ended December
31, 2003 and for the period from August 11, 1986 (inception) through December
31, 2003 included in this prospectus and the registration statement have been
audited by WithumSmith+Brown, P.C., independent registered public accountants as
stated in their report dated July 26, 2004, except for Note 14 (g) to the
December 31, 2003 financial statements which is dated December 8, 2004 which
includes an explanatory paragraph relating to our ability to continue as a going
concern. Such financial statements have been so included in reliance upon the
authority of such firm as experts in auditing and accounting.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers or persons controlling us, we have been
advised that it is the SEC's opinion that such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
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CHANGES IN ACCOUNTANT
On October 22, 2004, we replaced WithumSmith+Brown, P.C. as our independent
registered public accounting firm and approved the appointment of Marcum &
Kliegman LLP as its independent registered public accounting firm for the fiscal
year ended December 31, 2004.
As of December 8, 2004, upon effectiveness of the Merger, we replaced Daszkal
Bolton LLP as our independent auditors and approved the appointment of Marcum &
Kliegman LLP as our independent registered public accounting firm to audit our
financial statements. The reason for the replacement of Daszkal Bolton LLP was
primarily that, following the Merger, we continued the business of the Company
as our sole line of business. We believe that it was in our best interests to
retain Marcum & Kliegman LLP, the independent registered public accounting firm
at the time of the Merger, to continue to audit such business after the Merger.
Marcum & Kliegman LLP is located at 655 Third Avenue, 16th Floor, New York, New
York 10017.
The reports of Daszkal Bolton LLP on our financial statements for the fiscal
years ended April 30, 2004 and 2003 did not contain an adverse opinion or
disclaimer of opinion nor were they qualified or modified as to uncertainty,
audit scope or accounting principles, except that the reports for both years
were qualified as to uncertainty regarding our ability to continue as a going
concern.
During our two most recent fiscal years, and the subsequent interim periods,
prior to December 8, 2004, there were no disagreements with Daszkal Bolton LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to the
satisfaction of Daszkal Bolton LLP, would have caused it to make reference to
the matter in connection with its reports. There were no "reportable events" as
that term is described in Item 304(a)(1)(v) of Regulation S-B.
Appointment of Marcum & Kliegman LLP was recommended and approved by our Audit
Committee. During our two most recent fiscal years, and the subsequent interim
periods, prior to December 8, 2004, we did not consult Marcum & Kliegman LLP
regarding either: (i) the application of accounting principles to a specified
transaction, completed or proposed, or the type of audit opinion that might be
rendered on our financial statements, or (ii) any matter that was either the
subject of a disagreement as defined in Item 304(a)(1)(iv) of Regulation S-B or
a reportable event as described in Item 304(a)(1)(v) of Regulation S-B.
65
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS....................F-2
AUDITED FINANCIAL STATEMENTS:
BALANCE SHEETS AS OF DECEMBER 31, 2004 AND 2003..............................F-4
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
AND FOR THE PERIOD FROM INCEPTION (AUGUST 11, 1986) TO DECEMBER 31, 2004.....F-5
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY FOR THE PERIOD FROM
INCEPTION (AUGUST 11, 1986) TO DECEMBER 31, 2004.............................F-6
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
AND FOR THE PERIOD FROM INCEPTION (AUGUST 11, 1986) TO
DECEMBER 31, 2004............................................................F-7
NOTES TO FINANCIAL STATEMENTS........................................F-9 to F-26
UNAUDITED FINANCIAL STATEMENTS:
BALANCE SHEET AS OF SEPTEMBER 30, 2005......................................F-27
STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
AND 2004 AND FOR THE PERIOD FROM INCEPTION (AUGUST 11, 1986) TO
SEPTEMBER 30, 2005..........................................................F-28
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2005....................................................F-29
STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
AND 2004 AND FOR THE PERIOD FROM INCEPTION (AUGUST 11, 1986) TO
SEPTEMBER 30, 2005..........................................................F-31
NOTES TO FINANCIAL STATEMENTS.......................................F-33 to F-47
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
CepTor Corporation (A Development Stage Company):
We have audited the accompanying balance sheet of CepTor Corporation (A
Development Stage Company) as of December 31, 2004 and the related statements of
operations, changes in stockholders' deficiency, and cash flows for the year
then ended and for the period from August 11, 1986 (date of inception) to
December 31, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
The financial statements of the Company as of and for the year ended December
31, 2003 and for the period from August 11, 1986 (date of inception) to December
31, 2003 were audited by another independent registered public accounting firm
whose report dated July 26, 2004 expressed an unqualified opinion on those
statements and included an explanatory paragraph regarding the Company's ability
to continue as a going concern. The financial statements for the period from
August 11, 1986 (date of inception) to December 31, 2003 reflect a net loss of
$911,586 of the total inception to date net loss of $16,395,591. The other
auditors' report has been furnished to us, and our opinion, insofar as it
related to the amounts included for such prior periods are based solely on the
report of such other auditors.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CepTor Corporation (A
Development Stage Company) as of December 31, 2004, and the results of its
operations and its cash flows for the year then ended and for the period from
August 11, 1986 (date of inception) to December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Marcum & Kliegman LLP
Marcum & Kliegman LLP
New York, New York
March 4, 2005, except for the 6th paragraph of Note 18 as to which the date is
April 13, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors,
CepTor Corporation (A Development Stage Company):
We have audited the accompanying balance sheet of CepTor Corporation (A
Development Stage Company) as of December 31, 2003, and the related statements
of operations, stockholders' deficiency and cash flows for the year then ended
and for the period from August 11, 1986 (date of inception) to December 31,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CepTor Corporation (A
Development Stage Company) as of December 31, 2003, and the results of its
operations and cash flows for the year then ended and for the period from August
11, 1986 (date of inception) to December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2 to
the December 31, 2003 financial statements, the Company has sustained
reoccurring operating losses and has an accumulated deficit of $915,846 as of
December 31, 2003. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans regarding those
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ WithumSmith+Brown, P.C.
WithumSmith+Brown, P.C.
New Brunswick, New Jersey
July 26, 2004, except for Note 14(g) to the December 31, 2003 financial
statements, which is dated December 8, 2004
F-3
CEPTOR CORPORATION
(A Development Stage Company)
BALANCE SHEETS
DECEMBER 31,
2004 2003
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,331,513 $ 68,374
Prepaid expenses 107,729 17,697
------------- -------------
Total current assets 1,439,242 86,071
Property and equipment, net 60,615 137
Security deposit 18,511 -
------------- -------------
TOTAL ASSETS $ 1,518,368 $ 86,208
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $ 58,266 $ 35,517
Accrued expenses 315,237 -
Common stock subject to repurchase under put right 1,637,325 -
------------- -------------
Total current liabilities 2,010,828 35,517
Convertible notes 56,821 -
Long-term debt - 275,000
Due to Xechem International, Inc. - 50,000
------------- -------------
TOTAL LIABILITIES 2,067,649 360,517
------------- -------------
Commitments and contingencies
Stockholders' Deficiency:
Preferred stock, $0.0001 par value; authorized
20,000,000 shares, issued and outstanding - 145.07
shares of Series A Convertible Preferred Stock;
liquidation preference - $3,626,750 3,626,750 -
Common stock, $0.0001; authorized 100,000,000 shares,
issued and outstanding 10,539,161, net of 401,305
shares subject to put right and 3,898,213
shares at December 31, 2004 and 2003, respectively 1,054 390
Subscriptions receivable on common stock (303) -
Deferred compensation (624,750) -
Additional paid-in capital 12,294,648 641,147
Treasury stock, 145,070 shares, at cost (362,675) -
Deficit accumulated during the development stage (15,484,005) (915,846)
------------- -------------
Total stockholders' deficiency (549,281) (274,309)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 1,518,368 $ 86,208
============= =============
F-4
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
CUMULATIVE
AUGUST 11, 1986
FOR THE YEARS ENDED (DATE OF
DECEMBER 31, INCEPTION) TO
----------------------------- DECEMBER 31,
2004 2003 2004
------------ ------------ ---------------
REVENUES:
Other income $ - $ - $ 75,349
OPERATING EXPENSES:
Research and development 1,988,269 (58,785) 2,576,006
In-process research and development 5,034,309 - 5,034,309
General and administrative 1,209,486 (67,507) 1,376,408
Stock-based compensation pursuant to spinoff agreement 2,082,500 - 2,082,500
Stock-based compensation to nonemployees 2,689,575 41,637 2,907,235
Stock-based litigation settlement expenses 422,000 - 422,000
Non-cash interest expense 1,100,915 - 1,100,915
Interest expense, net of interest income 20,835 12,157 35,451
------------ ---------- ------------
Total operating expenses 14,547,889 (72,498) 15,534,824
------------ ---------- ------------
NET (LOSS) INCOME (14,547,889) 72,498 (15,459,475)
Preferred dividends (936,116) - (936,116)
------------ ---------- ------------
NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS $(15,484,005) $ 72,498 $(16,395,591)
============ ========== ============
Basic and diluted (loss) income per common share $ (3.25) $ 0.02
Weighted-average common shares outstanding 4,757,477 3,898,213
F-5
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
PREFERRED STOCK COMMON STOCK
----------------------- ------------------------ SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT RECEIVABLE
---------------------------------------------------------------
BALANCE, AUGUST 11, 1986
AND DECEMBER 31, 1986 - $ - - $ - $ -
Issuance of common stock
for cash, $0.0012 840,818 84
-------- -------- --------- ------- ----------
BALANCE, DECEMBER 31, 1987 - - 840,818 84 -
-------- -------- --------- ------- ----------
BALANCE, DECEMBER 31, 1988 - - 840,818 84 -
-------- -------- --------- ------- ----------
BALANCE, DECEMBER 31, 1989 - - 840,818 84 -
-------- -------- --------- ------- ----------
BALANCE, DECEMBER 31, 1990 - - 840,818 84 -
-------- -------- --------- ------- ----------
BALANCE, DECEMBER 31, 1991 - - 840,818 84 -
Net loss
-------- -------- --------- ------- ----------
BALANCE, DECEMBER 31, 1992 - - 840,818 84 -
Net loss
Convertible notes 176,572 18
Issuance of common stock in
exchange for services
rendered. $ 0.0142 176,572 18
-------- -------- --------- ------- ----------
BALANCE, DECEMBER 31, 1993 - - 1,193,962 120 -
Net income
Distribution to stockholders
-------- -------- --------- ------- ----------
BALANCE, DECEMBER 31, 1994 - - 1,193,962 120 -
Net loss
-------- -------- --------- ------- ----------
BALANCE, DECEMBER 31, 1995 - - 1,193,962 120 -
Net loss
-------- -------- --------- ------- ----------
BALANCE, DECEMBER 31, 1996 - - 1,193,962 120 -
Net loss
Issued pursuant to
acquisition, $3.3501 59,700 6
Issuance of common stock
for cash, $3.3501 29,850 3
Capital contribution
by stockholder
Expense pursuant to grant
of stock option
-------- -------- --------- ------- ----------
BALANCE, DECEMBER 31, 1997 - - 1,283,512 129 -
Net loss
-------- -------- --------- ------- ----------
BALANCE, DECEMBER 31, 1998 - - 1,283,512 129 -
Net loss
-------- -------- --------- ------- ----------
BALANCE, DECEMBER 31, 1999 - - 1,283,512 129 -
Net loss
Issuance of common stock
for cash, $3.1409 15,919 2
-------- -------- --------- ------- ----------
BALANCE, DECEMBER 31, 2000 - - 1,299,431 131 -
Net loss
Issued pursuant to funding
agreement, $0.0838 1,083,729 108
-------- -------- --------- ------- ----------
BALANCE, DECEMBER 31, 2001 - $ - 2,383,160 $ 239 $ -
F-6
DEFICIT
ACCUMULATED
DEFERRED ADDITIONAL TREASURY STOCK DURING THE TOTAL
COMPEN- PAID-IN ----------------- DEVELOPMENT STOCKHOLDERS
SATION CAPITAL SHARES AMOUNT STAGE DEFICIENCY
----------------------------------------------------------------------
BALANCE, AUGUST 11, 1986
AND DECEMBER 31, 1986 $ - $ - - $ - $ - $ -
Issuance of common stock
for cash, $0.0012 916 1,000
-------- -------- ------ -------- --------- ---------
BALANCE, DECEMBER 31, 1987 - 916 - - - 1,000
-------- -------- ------ -------- --------- ---------
BALANCE, DECEMBER 31, 1988 - 916 - - - 1,000
-------- -------- ------ -------- --------- ---------
BALANCE, DECEMBER 31, 1989 - 916 - - - 1,000
-------- -------- ------ -------- --------- ---------
BALANCE, DECEMBER 31, 1990 - 916 - - - 1,000
-------- -------- ------ -------- --------- ---------
BALANCE, DECEMBER 31, 1991 - 916 - - - 1,000
Net loss (8,006) (8,006)
-------- -------- ------ -------- --------- ---------
BALANCE, DECEMBER 31, 1992 - 916 - - (8,006) (7,006)
Net loss (1,169) (1,169)
Convertible notes 3 21
Issuance of common stock in
exchange for services
rendered. $ 0.0142 2,482 2,500
-------- -------- ------ -------- --------- ---------
BALANCE, DECEMBER 31, 1993 - 3,401 - - (9,175) (5,654)
Net income 10,222 10,222
Distribution to stockholders (4,260) (4,260)
-------- -------- ------ -------- --------- ---------
BALANCE, DECEMBER 31, 1994 - 3,401 - - (3,213) 308
Net loss (1,342) (1,342)
-------- -------- ------ -------- --------- ---------
BALANCE, DECEMBER 31, 1995 - 3,401 - - (4,555) (1,034)
Net loss (8,727) (8,727)
-------- -------- ------ -------- --------- ---------
BALANCE, DECEMBER 31, 1996 - 3,401 - - (13,282) (9,761)
Net loss (3,975) (3,975)
Issued pursuant to
acquisition, $3.3501 199,994 200,000
Issuance of common stock
for cash, $3.3501 99,997 100,000
Capital contribution
by stockholder 50,000 50,000
Expense pursuant to grant
of stock option 20,356 20,356
-------- -------- ------ -------- --------- ---------
BALANCE, DECEMBER 31, 1997 - 373,748 - - (17,257) 356,620
Net loss (21,102) (21,102)
-------- -------- ------ -------- --------- ---------
BALANCE, DECEMBER 31, 1998 - 373,748 - - (38,359) 335,518
Net loss (25,172) (25,172)
-------- -------- ------ -------- --------- ---------
BALANCE, DECEMBER 31, 1999 - 373,748 - - (63,531) 310,346
Net loss (36,256) (36,256)
Issuance of common stock
for cash, $3.1409 49,998 50,000
-------- -------- ------ -------- --------- ---------
BALANCE, DECEMBER 31, 2000 - 423,746 - - (99,787) 324,090
Net loss (233,958) (233,958)
Issued pursuant to funding
agreement, $0.0838 90,659 90,767
-------- -------- ------ -------- --------- ---------
BALANCE, DECEMBER 31, 2001 $ - $514,405 - $ - $(333,745) $ 180,899
F-6
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY (CONTINUED)
PREFERRED STOCK COMMON STOCK DEFERRED
----------------------- ----------------------- SUBSCRIPTION COMPEN-
SHARES AMOUNT SHARES AMOUNT RECEIVABLE SATION
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 - $ - 2,383,160 $ 239 $ - $ -
Net loss
Issued pursuant to funding agreement, $0.0838 1,515,053 151
------- --------- ---------- ----- ---- ---------
BALANCE, DECEMBER 31, 2002 - - 3,898,213 390 - -
Net income
------- --------- ---------- ----- ---- ---------
BALANCE, DECEMBER 31, 2003 - - 3,898,213 390 - -
Acquisition by Xechem International, Inc. and
application of push-down accounting - -
Option granted pursuant to spinoff agreement - -
Common stock subject to repurchase under put right (401,305) (40)
Common stock issued May 2004, in connection
with bridge loans ($1.31) 451,597 45
Common stock issued May 2004, to placement
agent for bridge loans ($2.50) 36,000 4
Common stock issued September 2004, net of
offering expenses of $70,760 ($1.68) 554,413 55
Common stock issued December 2004 to advisors
for past services ($2.50) 675,690 68
Reclassification in December 2004 of advances
from Xechem as contribution to capital
Minority shareholders pursuant to recapitalization 1,850,000 185
Common stock issued December 2004 pursuant to
exercise of options granted pursuant to
spinoff agreement ($0.00001) 3,031,943 303 (303)
Intrinsic value of beneficial conversion
feature of replacement notes
Common stock issued December 2004 in conversion
of convertible note ($1.25) 167,610 17
Common stock issued December 2004 in connection
with litigation settlement ($2.50) 125,000 12
Warrants issued in connection with
litigation settlement
Common stock issued December 2004 pursuant to
placement agent agreement ($2.50) 150,000 15
Warrants issued to nonemployees for services
Preferred stock and warrants issued pursuant to
units sold December 2004 in a private placement
($25,000/Unit) 145.07 $3,626,750
Acquisition December 2004 of treasury stock
under put right ($2.50)
Deemed dividend of beneficial conversion
feature of units sold in private placement
Stock option-based compensation for investor
relation services rendered (1,198,500)
Stock option-based compensation for research
consulting services rendered (30,600)
Amortization of deferred compensation 604,350
Net loss
------ ---------- ---------- ------ ----- ---------
BALANCE, DECEMBER 31, 2004 145.07 $3,626,750 10,539,161 $1,054 $(303) $(624,750)
====== ========== ========== ====== ===== =========
F-6
DEFICIT
ACCUMULATED
ADDITIONAL TREASURY STOCK DURING THE TOTAL
PAID-IN ----------------- DEVELOPMENT STOCKHOLDERS
CAPITAL SHARES AMOUNT STAGE DEFICIENCY
-------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $ 514,405 - $ - $(333,745) $ 180,899
Net loss (654,599) (654,599)
Issued pursuant to funding agreement, $0.0838 126,742 126,893
----------- ------- --------- ------------ -----------
BALANCE, DECEMBER 31, 2002 641,147 - - (988,344) (346,807)
Net income 72,498 72,498
----------- ------- --------- ------------ -----------
BALANCE, DECEMBER 31, 2003 641,147 - - (915,846) (274,309)
Acquisition by Xechem International, Inc. and
application of push-down accounting 4,118,463 915,846 5,034,309
Option granted pursuant to spinoff agreement 2,082,500 2,082,500
Common stock subject to repurchase under put right (1,637,285) (1,637,325)
Common stock issued May 2004, in connection
with bridge loans ($1.22) 549,955 550,000
Common stock issued May 2004, to placement
agent for bridge loans ($2.50) 89,996 90,000
Common stock issued September 2004, net of
offering expenses of $70,760 ($1.68) 929,176 929,231
Common stock issued December 2004 to advisors
for past services ($2.50) 1,689,157 1,689,225
Reclassification in December 2004 of advances
from Xechem as contribution to capital 350,310 350,310
Minority shareholders pursuant to recapitalization (185) -
Common stock issued December 2004 pursuant to
exercise of options granted pursuant to
spinoff agreement ($0.00001) -
Intrinsic value of beneficial conversion
feature of replacement notes 1,111,240 1,111,240
Common stock issued December 2004 in conversion
of convertible note ($1.25) 209,495 209,512
Common stock issued December 2004 in connection
with litigation settlement ($2.50) 312,488 312,500
Warrants issued in connection with
litigation settlement 109,500 109,500
Common stock issued December 2004 pursuant to
placement agent agreement ($2.50) (15) -
Warrants issued to nonemployees for services 396,000 396,000
Preferred stock and warrants issued pursuant to
units sold December 2004 in a private placement
($25,000/Unit) (822,510) 2,804,240
Acquisition December 2004 of treasury stock
under put right ($2.50) 145,070 (362,675) (362,675)
Deemed dividend of beneficial conversion
feature of units sold in private placement 936,116 (936,116) -
Stock option-based compensation for investor
relation services rendered 1,198,500 -
Stock option-based compensation for research
consulting services rendered 30,600 -
Amortization of deferred compensation 604,350
Net loss (14,547,889) (14,547,889)
----------- ------- --------- ------------ -----------
BALANCE, DECEMBER 31, 2004 $12,294,648 145,070 $(362,675) $(15,484,005) $ (549,281)
=========== ======= ========= ============ ===========
F-6
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
CUMULATIVE
AUGUST 11, 1986
FOR THE YEARS ENDED (DATE OF
DECEMBER 31, INCEPTION) TO
------------------------------------- DECEMBER 31,
2004 2003 2004
----------------- ------------------ ------------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net (loss) income $ (14,547,889) $ 72,498 $ (15,459,475)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 11,046 273 13,283
Write-off of in-process research and development 5,034,309 - 5,034,309
Charge for stock option issued pursuant to
spinoff agreement 2,082,500 - 2,082,500
Stock-based compensation to nonemployees 2,689,575 - 2,912,431
Stock-based component of litigation settlement 422,000 - 422,000
Non-cash interest expense 1,100,915 41,637 1,318,575
Changes in assets and liabilities:
Prepaid expenses (90,032) (6,476) (107,729)
Other assets (18,511) - (18,511)
Accounts payable and accrued expenses 361,644 (220,998) 397,161
----------------- ------------------ ------------------
Net cash used in operating activities (2,954,443) (113,066) (3,405,456)
----------------- ------------------ ------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (71,524) - (73,898)
----------------- ------------------ ------------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from issuances of common stock 929,231 - 1,130,252
Net proceeds from issuances of preferred stock 2,804,240 - 2,804,240
Acquisition of treasury stock under put right (362,675) - (362,675)
Distribution to shareholders - - (4,260)
Capital contributed by Xechem International, Inc. 300,310 50,000 350,310
Proceeds from issuance of bridge loans 1,100,000 - 1,375,000
Debt issue costs (132,000) - (132,000)
Principal payments on bridge loans (350,000) - (350,000)
----------------- ------------------ ------------------
Net cash provided by financing activities 4,289,106 50,000 4,810,867
----------------- ------------------ ------------------
Net increase (decrease) in cash and cash equivalents 1,263,139 (63,066) 1,331,513
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 68,374 131,440 -
----------------- ------------------ ------------------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 1,331,513 $ 68,374 $ 1,331,513
================= ================== ==================
F-7
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
CUMULATIVE
AUGUST 11, 1986
FOR THE YEARS ENDED (DATE OF
DECEMBER 31, INCEPTION) TO
--------------------------------- DECEMBER 31,
2004 2003 2004
---------------- --------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Issued 36,000 shares of common stock as
debt issuance costs $ 90,000 - $ 90,000
Issued 451,597 shares of common stock to bridge
loan investors and placement agent 550,000 - 550,000
Issued 167,610 shares upon conversion of
convertible notes 209,512 - 209,512
Deemed dividend of the beneficial conversion feature
of units sold in private placement 936,116 - 936,116
Issuance of convertible notes in exchange for bridge
loans and long-term debt plus accrued interest 1,111,240 - 1,111,240
Obligation to repurchase 401,305 shares of common
pursuant to put right 1,637,325 - 1,637,325
Cash paid during the year for:
Interest 16,773 - -
F-8
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 1 - THE COMPANY
ORGANIZATION
The financial statements presented are those of CepTor Corporation (the
"Company"), incorporated in August 1986 in the state of Delaware.
MERGER OF MEDALLION CREST MANAGEMENT, INC. AND CEPTOR CORPORATION As described
in Note 13, Medallion Crest Management, Inc., a Florida corporation
("Medallion") acquired all of the common stock of the Company on December 8,
2004. Medallion was an inactive public shell at the time of acquisition. The
Company's shareholders prior to the merger became the majority shareholders of
Medallion after the merger; accordingly the transaction was accounted for as a
recapitalization. The accompanying financial statements have been retroactively
restated to give effect to this transaction.
NATURE OF BUSINESS AND DEVELOPMENT STAGE OPERATIONS
CepTor Corporation is a biopharmaceutical company engaged in the research and
development of therapeutic products for neuromuscular, neurodegenerative and
other diseases with a focus on orphan diseases (defined as those which affect
less than 200,000 people). Since its inception, the Company has devoted its
efforts and resources to the development of its receptor mediated drug-targeting
platform for neuromuscular and neurodegenerative diseases, and to raising the
funds necessary to continue this research.
The Company is a development stage enterprise, which has a limited history of
operations and has not generated any material revenues since its inception. The
Company has received a limited amount of funding through grants and
collaborative research efforts in connection with developing its products. The
Company does not have any products that are approved for commercial distribution
at the present time. As a development stage enterprise, the Company is subject
to all of the risks and uncertainties that are associated with developing a new
business.
NOTE 2 - LIQUIDITY AND FINANCIAL CONDITION (REVISED)
The Company's net loss for the year ended December 31, 2004 amounted to
$14,547,889, which includes $11,329,299 of non-cash special charges associated
with the Company's acquisition by and subsequent spin-off from its former parent
Xechem International, Inc. ("Xechem"), the issuance of stock and common stock
purchase warrants to non-employees for services and in settlement of certain
litigation and non-cash interest expense. The Company used net cash flows in its
operating activities of $2,954,443, its development stage accumulated deficit
amounts to $15,484,005 and its working capital deficiency amounts to $571,586,
which includes the obligation under the put right, which during the year ending
December 31, 2005, is payable only out of proceeds from any subsequent
financings, as further described in Note 10. In addition, the Company was
released from its obligation to use 3% of the proceeds from its private
placement for investor and financial relations activities unless it has
liquidity in excess of that required to fund its research and development
activities. The Company expects to continue incurring losses for the foreseeable
future due to the inherent uncertainty that is related to establishing the
commercial feasibility of pharmaceutical products. The Company will require
substantial additional funding to support the development of its proposed
products and fund its operations while it continues its efforts to execute its
business plan but estimates that it has sufficient liquidity to sustain
operations through December 31, 2005.
During the year ended December 31, 2004, the Company received net proceeds of
$4,289,106 from financing activities, including (i) $2,804,240 (gross proceeds
of $3,626,750 net of transactions expenses amounting to $822,510) from the sale
of preferred stock and common stock purchase warrants ("Units") in a private
placement transaction (see Note 16), (ii) $300,310 contributed by Xechem, (iii)
$968,000 (gross proceeds of $1,100,000 from the issuances of Bridge Loans, net
of debt issuance costs of $132,000, (see Note 11) and (iv) $929,231 (gross
proceeds of $1,000,000 net of transactions expenses amounting to $70,769) in a
sale of common stock to JCR Pharmaceuticals Co., Ltd. (see Note 12) concurrent
with entering into an exclusive license agreement. From the net proceeds of the
sale of the Units, the Company repaid $350,000 of principal on certain bridge
loans pursuant to their terms and repurchased $362,675 of shares of its common
stock held by Xechem pursuant to the terms of a redemption obligation (see Note
5). Subsequent to December 31, 2004 and through February 11, 2005, the Company
F-9
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 2 - LIQUIDITY AND FINANCIAL CONDITION (CONTINUED)
received net proceeds of approximately $7,897,422 (gross proceeds of $9,164,500
net of transactions expenses amounting to $1,267,078), through the additional
sales of Units described in Note 18. The Company is continuing to seek
additional capital, collaborative partners, joint ventures and strategic
alliance agreements both within the United States and abroad in an effort to
accelerate the development of its proposed products; however, there are
currently no firm commitments in place for new capital nor has the Company
identified any prospective joint venture partners or participants with which it
would enter into a strategic alliance arrangement.
The Company's planned activities will require the use of additional consultants
and contract research organizations in support of its clinical development
programs, and additional personnel, including management, with expertise in
areas such as preclinical testing, clinical trial design and management,
regulatory affairs, manufacturing and marketing. The Company has been in
discussions with several contract manufacturers to provide the Company with
sufficient clinical materials for both its pre-clinical studies and to initiate
its human clinical trials for its proposed product to treat muscular dystrophy.
Based on these discussions, the Company anticipates that it will likely need to
raise additional capital to continue funding the development of its products.
Further, if the Company receives regulatory approval for any of its products in
the United States or elsewhere, it will incur substantial expenditures to
develop manufacturing, sales and marketing capabilities and/or subcontract or
joint venture these activities with others. There can be no assurance that the
Company will ever recognize revenue or profit from any such products. In
addition, the Company may encounter unanticipated problems, including
developmental, regulatory, manufacturing or marketing difficulties, some of
which may be beyond its ability to resolve. The Company may lack the capacity to
produce its products in-house and there can be no assurances that it will be
able to locate or retain suitable contract manufacturers or be able to have them
produce products at satisfactory prices.
There can be no assurance that management's plans to obtain additional financing
to fund operations will be successful or that the successful implementation of
the business plan will actually improve the Company's operating results.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company is a development stage enterprise. Accordingly, the Company has
included its cumulative statements of operations, cash flows and statement
changes in stockholders' deficiency for the period of August 11, 1986 (date of
inception) to December 31, 2004 in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 7 "Accounting and Reporting by Development
Stage Enterprises".
The Company's net loss as reported in its statement of operations for the period
of August 11, 1986 (date of inception) to December 31, 2004 is $15,459,475
whereas the deficit accumulated during its development stage as reported on its
balance sheet at December 31, 2004 is $15,484,005. The difference is a result of
the acquisition of the Company by Xechem and the restatement of its assets and
liabilities to fair value, which resulted in the Company's accumulated deficit,
net of distributions, from inception through December 31, 2003 (the date of
merger for financial reporting purposes) being reclassified to additional
paid-in capital, net of a deemed dividend to the preferred shareholders.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated useful
lives of the assets, which is primarily five years. Leasehold improvements are
F-10
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortized over the terms of their respective leases or service lives of the
improvements, whichever is shorter Gains and losses on depreciable assets
retired or sold are recognized in the statement of operations in the year of
disposal. Repairs and maintenance expenditures are expensed as incurred.
DEBT ISSUE COSTS
Pursuant to the Bridge loans entered into during April 2004 and May 2004, the
Company paid the placement agent $132,000 in commissions and a non-accountable
expense allowance and issued 36,000 shares of common stock with a value of
$90,000, which were amortized over the term of the Bridge Loans from May 2004
through October 2004 (see Note 11).
ACCOUNTING FOR STOCK BASED COMPENSATION As permitted under SFAS No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure," which
amended SFAS No. 123 "Accounting for Stock-Based Compensation," the Company has
elected to continue to follow the intrinsic value method in accounting for its
stock-based compensation arrangements as defined by Accounting Principles Board
("APB") Opinion No. 25 "Accounting for Stock Issued to Employees," and related
interpretations including Financial Accounting Standards Board ("FASB")
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation," an interpretation of APB No. 25.
The cost of stock based compensation awards issued to non-employees for services
are recorded at either the fair value of the services rendered or the
instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in Emerging
Issues Task Force Issue ("EITF") 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."
The following table summarizes the pro forma operating results of the Company
had compensation expense for stock options granted to employees been determined
in accordance with the fair market value based method prescribed by SFAS No.
123. The Company has presented the following disclosures in accordance with SFAS
No. 148.
For the Year Ended December 31,
-------------------------------
2004 2003
---- ----
Net (loss) income available to common stockholders $(15,484,005) $ 72,498
Adjust: Stock-based employee compensation
determined under the fair value method (2,930) -
------------ -------------
Pro forma net (loss) income $(15,486,935) $ 72,498
============= =============
Net (loss) income per share available to common stockholders:
Basic and diluted, as reported $(3.25) $0.02
Basic and diluted, pro forma (3.26) 0.02
The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect
the portion of the estimated fair value of awards that were earned for the year
ended December 31, 2004.
F-11
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR WARRANTS ISSUED IN CONNECTION WITH SALE OF UNIT The Company
accounts for the issuance of common stock purchase warrants issued in connection
with sales of its Units in accordance with the provisions of EITF 00-19
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock". Based on the provisions of EITF 00-19, the
Company classifies as equity any contracts that (i) require physical settlement
or net-share settlement or (ii) gives the company a choice of net-cash
settlement or settlement in its own shares (physical settlement or net-share
settlement). The Company classifies as assets or liabilities any contracts that
(i) require net-cash settlement (including a requirement to net cash settle the
contract if an event occurs and if that event is outside the control of the
Company) or (ii) give the counterparty a choice of net-cash settlement or
settlement in shares (physical settlement or net-share settlement).
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is presented under SFAS No. 128 "Earnings Per
Share." Under SFAS No. 128, basic net income (loss) per share is computed by
dividing net income (loss) per share available to common stockholders by the
weighted average shares of common stock outstanding for the period and excludes
any potential dilution. Diluted earnings per share reflect the potential
dilution that would occur upon the exercise or conversion of all dilutive
securities into common stock. The computation of loss per share for the year
ended December 31, 2004 excludes potentially dilutive securities because their
inclusion would be anti-dilutive.
Shares of common stock issuable upon conversion or exercise of potentially
dilutive securities at December 31, 2004 are as follows:
Series A Preferred Stock 1,450,700
Warrants 1,120,420
Options 662,340
Convertible Notes 725,730
---------
TOTAL 3,959,190
=========
There were no potentially dilutive securities outstanding during the year ended
December 31, 2003. As described further in Note 18, subsequent to December 31,
2004, the Company sold, pursuant to the private placement described in Note 16,
an additional 366.58 Units, including 366.58 shares of preferred stock
convertible into an aggregate of 3,665,800 shares of common stock plus warrants
issued to the investors in the private placement to purchase 1,832,900 shares of
common stock and warrants issued to the placement agent to purchase 366,580
shares of common stock. In addition, as described further in Note 18, the
Company revised certain terms of its Convertible Notes which may result in an
additional 678,297 shares of common stock to be issuable upon conversion of the
Convertible Notes, upon maturity.
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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-12
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, accounts payable
and accrued expenses approximate fair value based upon the short term nature of
those instruments. The carrying amount of the convertible notes approximates
their fair value as the effective rate of such instruments, which takes into
consideration the allocation of proceeds based on the relative fair values of
the notes and equity instruments issued concurrently, are consistent with market
rates for investments with similar levels of risk.
CONCENTRATION OF CREDIT RISK
The Company maintains cash balances, at times, with financial institutions in an
amount which is more than amounts insured by the Federal Deposit Insurance
Corporation. Management monitors the soundness of these institutions and
considers the Company's risk negligible.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
This interpretation of Accounting Research Bulletin ("ARB") No. 51,
"Consolidated Financial Statements," provides guidance for identifying a
controlling interest in a variable interest entity ("VIE") established by means
other than voting interest. FIN 46 also required consolidation of a VIE by an
enterprise that holds such controlling interest. In December 2003, the FASB
completed its deliberations regarding the proposed modifications to FIN 46 and
issued Interpretation Number 46R, "Consolidation of Variable Interest Entities -
an Interpretation of ARB 51" ("FIN No. 46 R"). The decisions reached included a
deferral of the effective date and provisions for additional scope exceptions
for certain types of variable interests. Application of FIN No. 46R is required
in financial statements of public entities that have interests in VIEs or
potential VIEs commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public small business issuers'
entities is required in all interim and annual financial statements for periods
ending after December 15, 2004.
The adoption of this pronouncement did not have an effect on the Company's
financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment". This
statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and its related implementation guidance. SFAS 123R addresses all
forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS 123R, SBP awards result in a cost that will be
measured at fair value on the awards' grant date, based on the estimated number
of awards that are expected to vest and will result in a charge to operations
for stock-based compensation expense. SFAS 123R is effective for public entities
that file as small business issuers as of the beginning of the first interim or
annual reporting period that begins after December 15, 2005.
The Company is currently in the process of evaluating the effect that the
adoption of this pronouncement will have on its financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets." SFAS 153 amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS 153 are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after December 16, 2004. The provisions of this Statement
should be applied prospectively.
F-13
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The adoption of this pronouncement did not have an effect on the Company's
financial statements.
In EITF Issue No. 04-8, "The Effect of Contingently Convertible Instruments on
Diluted Earnings Per Share", the EITF reached a consensus that contingently
convertible instruments, such as contingently convertible debt, contingently
convertible preferred stock, and other such securities should be included in
diluted earnings per share (if dilutive) regardless of whether the market price
trigger has been met. The consensus is effective for reporting periods ending
after December 15, 2004.
The Company's adoption of this pronouncement did not have an effect on the
Company's financial statements.
NOTE 4 - ACQUISITION OF CEPTOR CORPORATION BY XECHEM INTERNATIONAL, INC.
On January 27, 2004, the former shareholders of the Company received shares of
preferred stock of Xechem (convertible into 30,000,000 shares of common stock of
Xechem) in connection with the merger of the Company into a wholly-owned
subsidiary of Xechem. For financial reporting purposes, the effective date of
the merger was designated January 1, 2004. The results of operations from
January 1 to January 27, 2004 were not significant. The merger was accomplished
through a reverse triangular merger whereby Ceptor Acquisition, Inc., a
wholly-owned subsidiary of Xechem, was merged into the Company and the Company
was the surviving entity.
Effective upon the acquisition of the Company by Xechem, the Company's balance
sheet was adjusted to record existing assets and liabilities to fair value. Fair
value was generally assigned to these assets based on the net present value of
the projected cash flows expected to be generated by those assets. Significant
assumptions underlying these cash flows include our assessment of the timing and
our ability to successfully complete the in-process research and development
("IPR&D") projects, and interest rates used to discount these cash flows to
their present value. In accordance with EITF Issue No. 99-12, "Determination of
the Measurement Date for the Market Price of an Acquirer's Securities Issued in
a Business Combination," the Company determined the fair value of the
consideration paid in the transaction was the average closing price of Xechem's
common stock for a reasonable period of time before and after the terms of the
acquisition were agreed to and announced. The fair value of the consideration
determined under this method amounted to $4,760,000. In allocating the
consideration paid, the fair value of the recorded assets and liabilities were
determined to equal the carrying value with the excess value assigned to the
IPR&D which represents the value assigned to the acquired intangible assets
which had not reached technological feasibility and for which there is no
alternative use.
The Company recorded approximately $5,034,300 of IPR&D, consisting of granted
patents and pending patent applications, which has been expensed as in-process
research and development costs. The following table summarizes the fair value of
the assets acquired and liabilities assumed in the acquisition:
Consideration paid by Xechem to former
stockholders of Ceptor Corporation $ 4,760,000
Net Liabilities Assumed:
Current liabilities (35,000)
Notes and advances payable (325,000)
Current and other assets 85,691
---------------
(274,309)
---------------
Purchase price in excess of net liabilities
assumed by Xechem - allocated to in-process
research and development $ 5,034,309
===============
F-14
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 5 - SPINOFF OF CEPTOR CORPORATION BY XECHEM INTERNATIONAL, INC.
DESCRIPTION OF XECHEM SPINOFF AGREEMENT
Following the acquisition of the Company by Xechem, the board of directors of
Xechem determined that Xechem lacked the resources to fully fund the development
and regulatory approval of the Company's technology. As a result, the board of
directors of Xechem determined that it was in the best interest of Xechem's
stockholders to effect a spin-off of the Company from Xechem, providing the
Company with an independent platform to obtain financing and develop its
technology. As a result the Company, Xechem, and William Pursley, Chairman and
CEO of the Company ("Mr. Pursley"), entered into an agreement dated March 31,
2004, amended July 23, 2004 and November 17, 2004, (the "Spinoff Agreement"), to
provide for the separation of the Company from Xechem. The Spinoff Agreement
provided for the Company's separation from Xechem under a transaction structured
to include (i) the Company's redemption of a portion of its shares held by
Xechem out of the proceeds of future financing under the Redemption Obligation
described below, (ii) the issuance and allocation of additional shares of common
stock to Mr. Pursley under the Founders' Plan described below and (iii) the
Company's reverse merger into a public shell described in Note 13. The Company
also agreed to pay royalties on future revenues and assume certain obligation
for contingent consideration payable to the former stockholders of the Company
(who sold their shares to Xechem).
The Spinoff of the Company from Xechem concurrent with Mr. Pursley's exercise of
his stock option and the Company's reverse merger into Medallion was completed
on December 8, 2004.
REDEMPTION OBLIGATION
Under the terms of the original Spinoff Agreement, Xechem was entitled to
receive 25% of the proceeds of any offering of securities of the Company, up to
$2,000,000. Following discussion with prospective selling agents for a proposed
private placement of the Company's securities, Xechem agreed to accept 10% of
the proceeds, up to $2,000,000, of any future financing in partial redemption of
shares of the Company held by Xechem (see Note 10).
ALLOCATION OF STOCK UNDER FOUNDERS' PLAN
Pursuant to the Spinoff Agreement, Mr. Pursley was allocated, initially through
a 10-year option exercisable at par value ($0.0001 per share), the right to
designate for issuance 3,031,943 shares of the common stock of the Company,
equal to 43.75% of the fully diluted common stock outstanding (the "Founders'
Shares") assuming the issuance of all of the Founders' Shares. The
aforementioned right of Mr. Pursley provided him the irrevocable right to
allocate such award to certain other employees and persons designated by Mr.
Pursley having importance to the future success of the Company, on a
discretionary basis.
Pursuant to the grant of the option to purchase the 3,031,943 shares of the
Company's common stock at the nominal exercise price of par value, the Company
recorded compensation expense of $2,082,500 representing the intrinsic value of
the option determined by applying the percent that the Founders' Shares
represent of the fully diluted shares outstanding, to the net assets acquired by
Xechem in its acquisition of the Company.
Mr. Pursley allocated 1,468,670 shares of the option to ten other persons,
retaining 1,247,428 with the remaining 315,845 shares to be allocated to others
in the future. All shares were issued concurrent with the Company's spin-off
from Xechem and reverse merger with Medallion on December 9, 2004. All of the
Founders' Shares immediately upon issuance became fully voting, and are subject
to the terms of the Founders' Plan, as amended. Pursuant to the terms of the
Founders' Plan, restrictions on holders of Founders' Shares will lapse 10% on
the six month anniversary following issuance, 10% on the twelve month
anniversary following issuance, and the balance upon initiation of a Phase III
clinical trial for the Myodor technology for muscular dystrophy. Upon the
happening of certain events described in the Founders' Plan, such as the
cessation of employment by a participant following an award, shares issued or
issuable to Founders' Plan participants may revert to Mr. Pursley and may be
cancelled, forfeited, re-designated or re-issued in his sole discretion subject
to Board of Directors or Compensation Committee approvals.
FUTURE ROYALTY COMMITMENT
The Company agreed to pay royalties to Xechem in an amount equal to two (2%)
percent of the gross revenues received by the Company, its subsidiaries,
affiliates and assigns, with respect to the sale of any products Incorporating
F-15
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 5 - SPINOFF OF CEPTOR BY CORPORATION XECHEM INTERNATIONAL, INC. (CONTINUED)
any of the technology owned by the Company as of March 31, 2004 or the licensing
of any of the Company's intellectual property, or the sale of the licensing
rights to any of the Company's intellectual property.
CONTINGENT CONSIDERATION
Pursuant to the terms of the acquisition of CepTor by Xechem, Xechem agreed to
the future payment of additional consideration in shares of stock of Xechem to
the original shareholders of the Company upon the earlier to occur of filing (i)
of a Phase II application for any drug in development which relies, in whole or
in part, on the technology or the efforts of its management, provided such Phase
II application is filed (or substantial steps taken to be filed) within 36
months of the date of the final acquisition or merger; (ii) of any Phase III
application for such technology or efforts provided such Phase III application
is filed (or substantial steps taken to filed) within 60 months of the date of
acquisition or merger; and (iii) of any NDA filings made within 72 months of the
date of the final acquisition or merger with Xechem. In connection with the
Spinoff Agreement, substantially all of the obligations for the issuance of
shares as additional consideration to the original shareholders of the Company
have been assumed by the Company, and Xechem has been released therefrom. The
Company will be required to record compensation expense based on the fair value
of the shares on the date of attainment of any of the aforementioned events.
This compensation charge could be substantial.
NOTE 6 - PREPAID EXPENSES
Prepaid expenses principally consist of unamortized premiums paid to carriers
for insurance policies including approximately $100,800 at December 31, 2004,
specifically relating to directors and officers' liability insurance.
NOTE 7 - DEBT ISSUE COSTS
Debt issue costs of $222,000 include $132,000 of fees paid in cash and $90,000
representing the fair value of 36,000 shares of common stock issued as
compensation to the placement agent in the Bridge Loan transaction described in
Note 11. The debt issues costs were fully amortized during the year ended
December 31, 2004.
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment, is as follows:
At December 31,
---------------
2004 2003
--------- --------
Office equipment $60,134 $ -
Lab equipment 500 2,374
Leasehold improvements 11,390 -
--------- --------
72,024 2,374
Less-accumulated depreciation
and amortization 11,409 2,237
--------- --------
Total $60,615 $ 137
========= ========
For the years ended December 31, 2004 and 2003, depreciation expense was $11,046
and $273, respectively.
F-16
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 9 - ACCRUED EXPENSES
Accrued expenses at December 31, 2004, are as follows:
Legal fees incurred in connection with the $ 152,485
private placement and related matters
Financial investor relations fees 108,803
Clinical development expenses 26,811
Research expenses 21,703
Interest on convertible notes 5,435
--------------
Total $ 315,237
==============
NOTE 10 - COMMON STOCK SUBJECT TO REPURCHASE UNDER REDEMPTION OBLIGATION
The Spinoff Agreement, as amended, provides for the Company to redeem, out of
the proceeds of future financing transactions, an aggregate of $2,000,000 of
shares of common stock of the Company held by Xechem (the "Redemption
Obligation"). Pursuant to the terms of the Redemption Obligation, the Company is
obligated to use the first 25% (adjusted to 10% of the proceeds from the
Company's private placement initiated in December 2004 and concluded in February
2005) of the gross proceeds received in such financing transactions to redeem an
equivalent number of shares of common stock held by Xechem, that is derived by
dividing such proceeds by the price per share of common stock of the Company at
which such financing transaction is consummated. At the end of two years, Xechem
will have the right to put the remaining portion of the shares held for sale
back to the Company to cover any deficiency.
During December 2004, the Company redeemed 145,070 of its common shares for
$362,675, which represents 10% of the gross proceeds that the Company received
from the sale of Units in the private placement transactions that were
consummated in December 2004. At December 31, 2004, the remaining Redemption
Obligation of $1,637,325 is estimated to redeem approximately 401,305 shares of
the Company's common stock held by Xechem, based on the fair value of the
Company's common stock on December 31, 2004 of $4.08 per share. In accordance
with EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments
Indexed To, Potentially Settled In, The Company's Own Stock," the Company
classified the remaining Redemption Obligation as a current liability in the
accompanying balance sheet, since the Company anticipates repurchasing the
remaining amount of common stock from Xechem out of proceeds of various
financings anticipated over the next twelve months.
The Company accounted for its redemptions of the aforementioned shares as
treasury stock transactions, at cost.
Subsequent to December 31, 2004, pursuant to additional financing transactions
under the private placement completed in February 2005, the Company redeemed an
additional 366,580 shares of common stock of the Company held by Xechem for
$916,450, which represents 10% of the gross proceeds that the Company received
from the sale of 366.58 Units (see Note 18).
NOTE 11 - BRIDGE LOANS AND LONG TERM DEBT
BRIDGE NOTES
Pursuant to the terms of the Spinoff Agreement and actions taken thereafter, the
Company entered into a selling agreement dated April 23, 2004 providing for the
private placement of $1,100,000 of 8% convertible notes due on the earlier of
October 22, 2004 or the date of closing on the next financing of $1,000,000 or
more by the Company (the "Bridge Loans"), secured by certain rights to put
Bridge Loans to Xechem for Xechem shares in certain circumstances. Purchasers of
the Bridge Loans received 451,597 shares of common stock of the Company as
additional consideration. The selling agent received 36,000 shares of common
stock of the Company, plus commissions in the amount of $110,000 and a
non-accountable expense allowance in the amount of $22,000, in connection with
its services (see Note 7). The Bridge Loan offering was completed in May 2004.
F-17
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 11 - BRIDGE LOANS AND LONG TERM DEBT (CONTINUED)
The Company recorded a $550,000 discount, representing an allocation of the
proceeds of the Bridge Loans based on the relative fair value of common stock
and the Bridge Loans issued to the Bridge Loan participants, which was fully
amortized over the six month period from May 2004 through October 2004 (the term
of the Bridge Loans). The amortization of the discount is included in non-cash
interest expense in the accompanying statement of operations for the year ended
December 31, 2004.
The Company was not able to repay the Bridge Loans on October 22, 2004,
therefore pursuant to the terms of the Bridge Loans, the Bridge Loan holders had
the right to convert their notes into shares of common stock of Xechem at the
lower of $0.07 per share or 75% of the market price of the previous 20 market
days prior to conversion, a portion of which would have been required to be
issued by Xechem and the remainder from Mr. Pursley's personal Xechem holdings.
As of December 8, 2004 the closing price of Xechem common stock (XKEM.OB) was
approximately $0.02 per share.
Pursuant to the exchange offer described in Note 13, the Company offered to
exchange with the holders of the outstanding Bridge Loans and other debt,
certain newly issued notes due December 8, 2005 convertible into shares of the
Company's common stock, at $1.25 per share, to be issued in amounts equal to the
outstanding principal under the notes cancelled, plus accrued interest through
December 9, 2004 (the "Convertible Notes").
On December 9, 2004, the remaining balance of principal and accrued interest of
the Bridge Loans were either repaid or exchanged for the Convertible Notes (as
further described in Note 13), as follows:
Accrued
Principal Interest Total
------------ ------------ --------------
Repaid in cash $ 350,000 $ 16,773 $ 366,773
Exchanged for Convertible Notes 750,000 36,696 786,696
------------ ------------ --------------
$ 1,100,000 $ 53,469 $ 1,153,469
============ ============ ==============
The contractual interest expense on the notes repaid, which amounted to $16,773
is included in interest expense in the accompanying statements of operations.
The contractual interest expense on the notes exchanged for the Convertible
Notes, prior to exchange, of $36,696 is included in non-cash interest expense in
the accompanying statements of operations.
LONG TERM DEBT
During the year ended December 31, 2004, the Company exchanged $275,000 of
principal on long term debt plus $49,544 of accrued interest through the date of
exchange (aggregate of $324,544) for Convertible Notes under the exchange offer
described in Note 13. Contractual interest expense on these notes, which
amounted to $25,886 for the year ended December 31, 2004 is included in non-cash
interest expense and $12,870 for the year ended December 31, 2003, is included
in interest expense in the accompanying statements of operations.
NOTE 12 - LICENSE AGREEMENT WITH JCR PHARMACEUTICALS CO., LTD.
On September 15, 2004 the Company entered into an exclusive license agreement
with JCR Pharmaceuticals Co., Ltd. ("JCR") to manufacture and sell Myodur, the
Company's proposed product for muscular dystrophy, in certain Pacific Rim
countries consisting of Japan, South Korea, China, Taiwan, and Singapore. Under
the terms of the JCR license, the Company will receive royalties in the amount
of 25% of net sales (as defined), provided that the sum of cost of goods sold
plus royalty payments does not exceed 35% of net sales in total. In addition,
JCR is obligated to make a $500,000 payment upon approval of an Investigational
New Drug application ("IND") in the United States for the Company's therapy for
muscular dystrophy.
F-18
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 12 - LICENSE AGREEMENT WITH JCR PHARMACEUTICALS CO., LTD. (CONTINUED)
Pursuant to the agreement, JCR purchased 554,413 shares of common stock of the
Company for a payment of $1,000,000. In addition, JCR has agreed to purchase an
additional $1,000,000 of common stock of the Company at the then market price
existing at the time of IND approval from the Food and Drug Administration for
the Company's therapy for muscular dystrophy.
NOTE 13 - MERGER WITH MEDALLION CREST MANAGEMENT, INC. AND RELATED TRANSACTIONS
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
On December 8, 2004, Medallion, CepTor Acquisition Corp., a Delaware corporation
and wholly-owned subsidiary of Medallion ("Acquisition Corp."), and the Company,
entered into an Agreement of Merger and Plan of Reorganization (the "Merger
Agreement"). Pursuant to the Merger Agreement, on December 8, 2004 the Company
merged with Acquisition Corp., with the Company surviving as a wholly-owned
subsidiary of Medallion (the "Merger"). Upon effectiveness of the Merger,
Medallion filed with the Florida Department of State, Articles of Amendment to
the Articles of Incorporation to change its name to CepTor Corporation ("New
CepTor" and now the Company), and to authorize the issuance of up to 1,000
shares of its Series A Convertible Preferred Stock (the "Preferred Stock").
Pursuant to the Merger, Medallion acquired all of the outstanding capital stock
of the Company in exchange for 5,278,068 shares of New CepTor's common stock,
par value $0.0001 per share, and assumption of certain obligations of the
Company. As a result, the Company's former stockholders became the majority
stockholders of New CepTor. The Merger was accounted for as a recapitalization,
since the former stockholders of the Company own a majority of the outstanding
shares of New CepTor's common stock immediately following the Merger. New CepTor
intends to carry on the Company's business as its sole line of business and will
remain in Hunt Valley, Maryland and continue as a development-stage
bio-pharmaceutical company focusing on therapeutic products for neuromuscular,
neurodegenerative diseases and other orphan diseases.
REINCORPORATION OF COMPANY
On December 9, 2004, the Board of Directors of the Company authorized a change
of the state of incorporation to Delaware from Florida through a merger of the
New CepTor and the Company (its wholly-owned subsidiary). Approval of the change
was authorized by shareholder consent during January 2005. Pursuant to an
Agreement dated November 15, 2004, Xechem, the single largest shareholder of New
CepTor, agreed to vote for the change of the state of incorporation to Delaware
in connection with the spin-off of its majority ownership of the Company
pursuant to the Spinoff Agreement. On January 31, 2005, the Company merged with
New Ceptor to change its domicile to Delaware from Florida and to collapse the
parent-subsidiary relationship resulting from the Merger, with the Company being
the surviving entity.
NOTE EXCHANGE OFFER Pursuant to an offer dated October 22, 2004 (the "Exchange
Offer") as amended November 15, 2004, made to the Bridge Loans and other debt
holders of the Company, New CepTor issued $1,111,240 of its Convertible Notes
due December 8, 2005 which are convertible into shares of New CepTor's common
stock at $1.25 per share in amounts equal to the outstanding principal under the
notes cancelled, plus accrued interest through the date of conversion.
(Subsequent to December 31, 2004, the maturity date was extended to July 3, 2006
and the conversion rate was amended to $0.75 per share, as further described in
Note 18). Since the fair value of New CepTor's common stock on the date of
exchange was $2.50 per share, the Company recorded an original issuance discount
equal to the principal balance of the notes, which represents the intrinsic
value of this beneficial conversion feature. The intrinsic value of the
beneficial conversion feature is being amortized to interest expense over the
term of the Convertible Notes through December 8, 2005. During the year ended
December 31, 2004, the Company amortized $56,821 of the intrinsic value of the
beneficial conversion feature which is included in non-cash interest expense in
the accompanying statement of operations.
F-19
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 13 - MERGER WITH MEDALLION CREST MANAGEMENT, INC. AND RELATED TRANSACTIONS
(CONTINUED)
Immediately following the completion of the note exchange, one of the holders of
the Company's convertible notes elected to convert their outstanding principal
of $209,512, into 167,610 shares of common stock with a fair value of $419,024.
The excess of the fair value of shares issued in exchange for such Convertible
Notes, which amounts to $209,512, is included in non-cash interest expense in
the accompanying statement of operations for the year ended December 31, 2004.
Accordingly, the remaining principal balance of the Convertible Notes amounts to
$901,728, before giving effect to the net unamortized discount associated with
the beneficial conversion feature.
ADOPTION OF STOCK PLANS
In connection with the Merger, New CepTor adopted the Company's Founders' Stock
Plan and 2004 Incentive Stock Plan. On December 9, 2004 the Company issued to
Mr. Pursley and certain other employees, designated by Mr. Pursley, 3,031,943
shares of restricted common stock under the Founders' Stock Plan.
Under the 2004 Incentive Stock Plan, officers, consultants, third-party
collaborators, and employees of the Company or its subsidiaries may be granted
rights in the form of options or shares of restricted stock for up to a maximum
of 2,773,820 shares of common stock. As of December 31, 2004, options to
purchase 59,840 shares of common stock of the Company have been granted to an
employee and options to purchase 602,500 shares of common stock have been
granted to non-employees. In addition, the Company has issued 800,690 shares of
restricted stock to non-employees (see Note 17).
NOTE 14 - INCOME TAXES
As of December 31, 2004 the Company estimates that it has net operating loss
carryforwards of approximately $3,200,000 that will be available to offset
future taxable income, if any, through 2024. The Company's utilization of its
net operating loss carryforwards could be subject to substantial limitation due
to the "change of ownership" provisions under Section 382 of the Internal
Revenue Code and similar state provisions. Such limitation may result in the
expiration of the net operating loss carryforwards prior to their utilization.
The Company has established a 100% valuation allowance for the deferred tax
assets arising from the net operating loss and other temporary differences as
management believes that it is more likely than not that their benefit will not
be realized in the future.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with certain of its executives
commencing March 31, 2004 and April 26, 2004 (the "Executives"), which provide
each Executive with a base salary for an initial term of two years, renewable
annually thereafter. The Company is obligated to pay, in the aggregate,
approximately $555,000, $770,000 and $215,000 for the years ended December 31,
2004, 2005 and 2006, respectively. If Executive's employment with the Company is
terminated without cause or good reason, as those terms are defined in the
employment agreement, the Company is obligated to pay Executive his current base
salary and his benefits for an additional twelve months. If Executive's
employment is terminated due to total disability, the Company is obligated to
continue to pay his current base salary and his benefits for an additional
thirty-six months. If Executive's employment is terminated due to his death, the
Company is obligated to continue to pay his current base salary for an
additional three months and continue to pay for his benefits for the next twelve
months. In addition, the employment agreement contains confidentiality and
covenant not to compete provisions for the period of his employment plus and
additional twelve months.
LEASE ARRANGEMENT
Effective March 17, 2004, the Company entered into a sublease for 5,200 square
feet of office space in Hunt Valley, Maryland that expires on December 31, 2006.
Minimum lease payments under this arrangement will amount to approximately
$76,000 during each of the years ending December 31, 2005 and 2006. In addition,
F-20
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
the lease provides for the Company to reimburse the landlord for its pro rata
share of the building common area operating expenses. Rent expense under this
arrangement amounted to $62,400 for the year ended December 31, 2004.
DEFINED CONTRIBUTION PLAN
During the year ended December 31, 2004, the Company instituted a defined
contribution plan under Section 401(k) of the Internal Revenue Code. The plan
provides for the Company to match its employee's contributions in an amount up
to 4% of each eligible participant's compensation. The Company's contributions
to the plan amounted to approximately $30,700 for the year ended December 31,
2004, which are included the accompanying statement of operations.
CONSULTING AGREEMENTS
Pursuant to Xechem's acquisition of the Company, Xechem entered into consulting
agreements with its two founding scientists (the "Scientists") for a period of
sixty months. In consideration for the services to be rendered, Xechem was
obligated to pay a total of $276,000 to each Scientist, plus expenses as allowed
for in the consulting agreements. Pursuant to the Spinoff Agreement, the Company
entered into new consulting agreements to replace and supersede their agreements
with Xechem. The consulting agreements are non-cancelable for a period of sixty
months, effective February 1, 2004 and provide for a monthly fee of $5,000 each,
plus allowable expenses.
ROYALTY OBLIGATION
As described in Note 5, the Company is obligated to pay royalties to Xechem
equal to two (2%) percent of the gross revenues on certain future product sales,
if any.
CONTINGENT CONSIDERATION
As described in Note 5, the Company assumed Xechem's obligation to make
additional payments of an indeterminable amount of shares of common stock to the
Company's former stockholders upon the attainment of certain product development
milestones.
MANUFACTURING AND SUPPLY AGREEMENT
Pursuant to a manufacturing arrangement entered into during the year ended
December 31, 2004, with Bachem AG (a contract manufacturer - "Bachem"), the
Company has agreed to purchase its clinical materials through the end of 2005,
from Bachem. The estimated cost of producing all of the materials that the
Company will require under this contract manufacturing arrangement is
approximately $6,000,000. During the year ended December 31, 2004, the Company
made two non-refundable payments to Bachem in the aggregate of approximately
$811,300, to fund the production of certain compounds for certain pre-clinical
studies that are required steps in the Company's drug validation process. The
Company charged the aforementioned payments to research and development expenses
in the accompanying statement of operations for the year ended December 31,
2004. The payment of additional amounts to Bachem is contingent upon Bachem's
ability to supply the Company with certain levels of the required compounds.
SETTLEMENT OF LITIGATION
During June 2004, the Company's management was introduced to a financial
intermediary, as a means to locate a candidate for a public transaction and to
seek funding. The Company executed a "Non-Binding Letter of Intent" for the
purposes of structuring a potential transaction. In late September 2004, the
Company advised the financial intermediary that it was not prepared to proceed
with the proposed transaction. The financial intermediary thereafter on October
8, 2004 commenced an action in the Northern District of California, entitled
Bluewater Partners S.A. v. CepTor Corporation (Case No. C 04 4277 JCS) alleging,
among other things, that the Company abandoned its obligations to close a
F-21
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
transaction on the eve of a closing, that it had breached its agreements with
Bluewater, promissory estoppel, breach of implied covenant of good faith and
fair dealing, Quantum Meruit, unjust enrichment; and seeking declaratory relief,
and damages in the amount of $3.6 million. On November 12, 2004, the Company and
Bluewater entered into a written proposal outlining material terms for permanent
dismissal of the action providing, among other things, for immediate withdrawal,
without prejudice, of the complaint by Bluewater, exchanges of mutual releases,
receipt by Bluewater of 50,000 shares of unrestricted common stock of the
Company, from certain existing shareholders of the Company as an accommodation
who were further compensated with warrants to purchase 50,000 shares of common
stock of the Company for $1.25 per share, 125,000 shares of restricted common
stock of the Company, and payment of $25,000 in full settlement of the action.
On November 12, 2004 Bluewater filed an application withdrawing, without
prejudice, their complaint against the Company.
NOTE 16 - EQUITY TRANSACTIONS
STOCK SPLIT
In April 2004, the Company's board of directors declared an 18,000-for-one stock
split (based upon the then outstanding shares of common stock of the Company,
prior to the share exchange and merger with Medallion), affected in the form of
a stock dividend, on the shares of the Company's common stock. Each shareholder
of record received additional shares of common stock for each share of common
stock held without the capital of the Company being increased or decreased by
the transfer of surplus to capital account or the transfer of capital to
surplus, or otherwise. Stockholders' equity reflects the stock split by
reclassifying from "Additional paid-in capital" to "Common stock" an amount
equal to the par value of the additional shares arising from the stock split. As
the result of the stock split, the pre-merger shares held by Xechem increased
from 100 shares to 1,800,000 shares (3,898,213 shares on a post-Medallion merger
basis) and the shares held in reserve for options to be granted to pursuant to
the Founders' Plan, which upon exercise would be 1,400,000 shares (3,031,943 on
a post-Medallion merger basis).
In conjunction with the reverse merger, the Company's Certificate of
Incorporation was amended to increase the authorized capital stock to
120,000,000 shares, and 100,000,000 was designated as shares of common stock,
$0.0001 par value per share and 20,000,000 shares of preferred stock.
COMMON STOCK ISSUED FOR CASH
As described in Note 12, the Company issued 554,413 shares of common stock to
JCR Pharmaceuticals Co., Ltd. for net proceeds of $929,231 (gross proceeds of
$1,000,000 less transaction expenses of $70,769).
COMMON STOCK ISSUED IN CONNECTION WITH BRIDGE LOANS
As described in Note 11, the Company issued 451,597 shares of common stock with
an allocated fair value of $550,000 to the holders of the Bridge Loans and
36,000 shares of common stock with a fair of $90,000 to the placement agent in
the Bridge Loan transaction.
COMMON STOCK AND WARRANTS ISSUED IN SETTLEMENT OF LITIGATION The Company issued
125,000 shares of common stock with a fair value of $312,500 and warrants for
the purchase of 50,000 shares of common stock with a fair value of $109,500 in
connection with the settlement of litigation described in Note 15.
CONVERSION OF NOTES INTO COMMON STOCK
As described in Note 13 one of the holders of the Company's Convertible Notes
elected to convert their balance into 167,610 shares of common stock with a fair
value of $419,024.
COMMON STOCK ISSUED UNDER FOUNDERS' PLAN
On December 9, 2004 the Company issued to employees of the Company and others
3,031,943 shares of restricted common stock under the Founders' Stock Plan (see
Note 5).
F-22
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 16 - EQUITY TRANSACTIONS (CONTINUED)
COMMON STOCK ISSUED TO AGENT IN PRIVATE PLACEMENT TRANSACTION The Company issued
150,000 shares of common stock to the placement agent in private placement
transactions described below as partial payment for services rendered.
COMMON STOCK ISSUED TO AN ADVISOR FOR PAST SERVICES During November and December
2004, the Company issued 675,690 shares of restricted common stock with a fair
value of $1,689,225 to an advisor for services performed during 2004. The
restrictions as to these shares lapse twelve months after the dates of issuance.
ISSUANCES OF WARRANTS
The Company issued three-year warrants to purchase 200,000 shares of common
stock to two advisors for past services performed earlier in 2004 and, based on
an option pricing model, recorded the fair value of the warrants as stock-based
compensation to nonemployees in the accompanying statement of operations, in the
amount of $396,000 during the fourth quarter of 2004.
Pursuant to agreements entered into for the purpose of providing investor
relations services to the Company, the Company agreed to issue to its investor
relations firms, five-year options to purchase up to an aggregate of 587,500
shares of common stock at an exercise price of $2.50 per share, with piggy-back
registration rights. Based on an option pricing model, the fair value of these
options of $1,198,500 was recorded as deferred stock compensation expense at the
date of award. As these awards were for past and future services, the Company
recognized stock-related compensation expense of $586,500 during the fourth
quarter of 2004 and is included in stock-based compensation to nonemployees for
the year ended December 31, 2004 in the accompanying statement of operations.
The Company will amortize the remaining balance of the deferred stock
compensation expense of $612,000 through June 2006, the remaining period of the
agreement.
In addition, the Company granted an option to purchase 15,000 shares of common
stock to a research consultant of the Company and, based on an option pricing
model, recorded the fair value of the options as deferred stock compensation, in
the amount of $30,600. The Company recognized research expense of $17,850,
during the third and fourth quarters of 2004 and is included in stock-based
compensation to nonemployees for the year ended December 31, 2004 in the
accompanying statement of operations. The Company will amortize the remaining
balance of the deferred stock compensation expense of $12,750 through May 2005,
the remaining period of the agreement.
PRIVATE PLACEMENT
Pursuant to a placement agent agreement dated October 22, 2004, the Company
agreed to sell in a private placement up to 240 Units at $25,000 per Unit,
subject to increase to permit sale of up to an additional 36 Units upon
agreement of the Company and the placement agent. On January 13, 2005, CepTor
and the placement agent amended the placement agent agreement to increase the
private placement to up to 480 Units, subject to increase to permit sale of up
to an additional 72 Units, provided that such increase could be terminated at
any time prior to closing by the Company. Under the terms of the placement agent
agreement, as amended, the placement agent is entitled to a selling commission
of 8%, plus a 2% non-accountable expense reimbursement payable from the proceeds
of the private placement, five-year warrants exercisable at $1.25 per share for
an amount equivalent to 10% of the shares of common stock to which the Units
would be convertible into, and up to 300,000 shares of common stock.
During December 2004, CepTor sold 145.07 Units to investors pursuant to a
Confidential Private Placement Memorandum dated October 22, 2004 as
supplemented, each Unit consisting of one share of Series A Convertible
Preferred Stock, and a three-year warrant to purchase up to 5,000 shares of
common stock for $2.50 per share. Each share of Series A Convertible Preferred
Stock is convertible into 10,000 shares of common stock. During December 2004,
the Company received gross proceeds of $3,626,750 (net proceeds of $2,804,240,
after the payment of commissions and other expenses of the transactions which
amounted to $822,510), from the sale of the Units.
F-23
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 16 - EQUITY TRANSACTIONS (CONTINUED)
Holders of Series A Preferred Stock will be entitled at any time to convert
their shares of Series A Preferred Stock into common stock, without any further
payment therefore. Each share of Series A Preferred Stock is initially
convertible into 10,000 shares of common stock. The number of shares of common
stock issuable upon conversion of the Series A Preferred Stock is subject to
adjustment upon the occurrence of certain events, including, among others, a
stock split, reverse stock split or combination of our common stock, an issuance
of common stock or other securities as a dividend or distribution on the common
stock, a reclassification, exchange or substitution of the common stock, or our
capital reorganization. Upon merger or consolidation of the Company with or into
another company, or any transfer, sale or lease by us of substantially all of
the common stock or assets of the Company, the Series A Preferred Stock will be
treated as common stock for all purposes, including the determination of any
assets, property or stock to which holders of the Series A Preferred Stock are
entitled to receive, or into which the Series A Preferred Stock is converted, by
reason of the consummation of such merger, consolidation, sale or lease.
Except as otherwise required by law, the holders of Series A Preferred Stock are
entitled to vote their shares on an as-if-converted to common stock basis, and
shall vote together with the holders of the common stock, and not as a separate
class.
In the event of our voluntary or involuntary liquidation, dissolution or
winding-up, holders of Series A Preferred Stock will be entitled to receive out
of our assets available for distribution to our stockholders, before any
distribution is made to holders of our common stock, liquidating distributions
in an amount equal to $25,000 per share. After payment of the full amount of the
liquidating distributions to which the holders of the Series A Preferred Stock
are entitled, holders of the Series A Preferred Stock will receive liquidating
distributions pro rata with holders of common stock, based on the number of
shares of common stock into which the Series A Preferred Stock is convertible at
the conversion rate then in effect.
The Series A Preferred Stock may not be redeemed.
Holders of Series A Preferred Stock will not be entitled to receive dividends,
if any.
The Company issued warrants to purchase 725,350 shares of common stock as a
component of the Unit. The Company determined that the preferred stock was
issued with an effective beneficial conversion feature for which it recorded a
deemed dividend of $936,116 based upon an allocation of the proceeds to the
relative fair values of the preferred stock and the warrants. The Company
calculated the fair value of the warrants using an option pricing model.
Pursuant to the placement agent agreement, the Company issued warrants to
purchase up to an aggregate of 145,070 shares of Common Stock to the placement
agent in connection with the private placement. Each warrant entitles the
placement agent to purchase the stated number of shares of common stock at an
exercise price of $1.25 per share and will expire five years after its issue
date.
The warrants may not be redeemed by us at any time. The warrants contain
provisions that protect the holders against dilution by adjustment of the
purchase price in certain events, such as stock dividends, stock splits, and
other similar events. Prior to exercise, the warrants do not confer upon holders
any voting or any other rights as a stockholder.
The Company accounts for the issuance of common stock purchase warrants issued
in connection with sales of its Units in accordance with the provisions of EITF
00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock". Based on the provisions of EITF
00-19, the Company classifies as equity any contracts that (i) require physical
settlement or net-share settlement or (ii) gives the company a choice of
net-cash settlement or settlement in its own shares (physical settlement or
net-share settlement). The Company classifies as assets or liabilities any
contracts that (i) require net-cash settlement (including a requirement to net
cash settle the contract if an event occurs and if that event is outside the
control of the Company) or (ii) give the counterparty a choice of net-cash
settlement or settlement in shares (physical settlement or net-share
settlement).
F-24
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 16 - EQUITY TRANSACTIONS (CONTINUED)
The Company issued the aforementioned warrants with registration rights
agreements which stipulate that the Company will file a registration statement
under the Securities Act on or before February 6, 2005. Substantially all of the
Company's warrants are exercisable by the holders at any time irrespective of
whether the registration statement has been declared effective. In addition, the
Company is not (and never is) precluded from delivering unregistered stock to
any warrant holder who elects to exercise their warrants in the event that the
Company's registration statement with respect to the stock issuable pursuant to
such warrants has not been declared effective.
The Company's registration rights agreements generally contain a provision
requiring the Company to pay defined damages in the form of additional shares of
common stock of the Company if it has not filed the registration statement
before June 7, 2005.
Since the Company (i) is not precluded from issuing unregistered shares in the
event of its failure to cause a registration statement to be declared effective,
(ii) is permitted to net share settle its warrants by issuing unregistered
shares, and (iii) has met all of the other criteria for equity classification
under EITF 00-19, it has classified its warrants as equity instruments.
OPTIONS GRANTED PURSUANT TO 2004 INCENTIVE STOCK PLAN
The Company granted an option to purchase approximately 60,000 shares of common
stock to an employee. Pursuant to the terms of the 2004 Incentive Stock Plan,
the options have an exercise price of $2.50 per share, the fair market value on
the date of grant and such options will vest over four years.
NOTE 17 - ADOPTION OF 2004 INCENTIVE STOCK PLAN
The 2004 Incentive Stock Plan was first approved by the Board of Directors and
the stockholders of the Company on May 31, 2004 and re-approved on December 8,
2004. The purpose of the 2004 Incentive Stock Plan is to provide an incentive to
retain in the employ of and as directors, officers, consultants, advisors and
employees of the Company, persons of training, experience and ability, to
attract new directors, officers, consultants, advisors and employees whose
services are considered valuable, to encourage the sense of proprietorship and
to stimulate the active interest of such persons into the development and
financial success of the Company. Under the 2004 Incentive Stock Plan, the
Company will be authorized to issue Incentive Stock options intended to qualify
under Section 422 of the Code, non-qualified stock options, and restricted
stock. The 2004 Incentive Stock Plan is administered by the board of directors
or the Compensation Committee. As of December 31, 2004, 2,773,820 shares of
common stock of the Company have been reserved for issuance under the 2004
Incentive Stock Plan and options for the purchase of 662,340 shares of common
stock of the Company, of which all but approximately 60,000 are to nonemployees
for services rendered, have been recommended to the Board of Directors for
approval. In addition during the year ended December 31, 2004, the Company
issued 800,690 shares of restricted common stock of the Company pursuant to the
2004 Incentive Stock Plan as payment for services rendered by nonemployees.
Subsequent to December 31, 2004, the option awards and issuances of restricted
common stock which had been recommended under the 2004 Incentive Stock Plan to
various consultants and an employee were approved by the Company's board of
directors.
The following table summarizes the stock option activity for the year ended
December 31, 2004 (there was no activity prior to January 1, 2004):
Weighted-Average
Options Exercise Price
---------- --------------
Outstanding - January 1, 2004 - $ -
Granted 662,340
Canceled -
---------- -----
Outstanding - December 31, 2004 662,340 2.50
==========
Options exercisable at December 31, 2004 295,000 $2.50
F-25
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2004
NOTE 17 - ADOPTION OF 2004 INCENTIVE STOCK PLAN (CONTINUED)
The following table summarizes additional information about outstanding and
exercisable stock options at December 31, 2004:
Weighted-Average
----------------
Remaining
Number Contractual Exercise Number Weighted-Average
Exercise Prices Outstanding Life Price Exercisable Exercise Price
--------------- ----------- ----------- -------- ----------- ----------------
$0.00-$2.50 662,340 5.29 years $2.50 295,000 $2.50
All options granted have exercise prices equal to the fair market value on the
date of grant.
The fair value of stock option grants is estimated using the Black-Scholes
option-pricing model with the following assumptions:
Term (years) 10
Volatility 115%
Risk-free interest rate 3.32%
Dividend yield 0
NOTE 18 - SUBSEQUENT EVENTS
PRIVATE PLACEMENT
Pursuant to the private placement initiated in December 2004, the Company
received additional gross proceeds of $9,164,500 (net proceeds of $7,897,422
after deducting the expenses of the sale of the Units of $1,267,078) from the
sale of 366.58 Units during January and February 2005. Each Unit consisted of
one share of Series A Convertible Preferred Stock and a three-year warrant to
purchase up to 5,000 shares of common stock at $2.50 per share. If the 366.58
Units are converted into common stock of the Company by the holders, the Company
will issue an additional 3,665,800 shares of common stock. If the warrants
issued as a component of the 366.58 Units are exercised by the holders, the
Company will receive an additional $4,582,250 and will issue an aggregate of
1,832,900 shares of common stock.
Additionally, the Company issued warrants to purchase up to an aggregate of
366,580 shares of common stock to the placement agent in connection with the
placement agent agreement. Each warrant entitles the holder to purchase the
stated number of shares of common stock at an exercise price of $1.25 per share
and will expire five years after its issue date.
Pursuant to the January 13, 2005 amendment to the placement agent agreement, the
Company issued warrants to purchase up to 925,000 shares of common stock to
certain original shareholders of the Company prior to the merger with Medallion.
Each warrant entitles the holder to purchase the stated number of shares of
common stock at an exercise price of $1.25 per share and will expire three years
after its issue date.
Subsequent to December 31, 2004, pursuant to additional financing transactions
under the private placement completed in February 2005, the Company redeemed an
additional 366,580 shares of common stock of the Company held by Xechem for
$916,450, which represents 10% of the gross proceeds that the Company received
from the sale of 366.58 Units.
SETTLEMENT OF LEGAL FEES IN SHARES OF COMMON STOCK
Subsequent to December 31, 2004, the Company and its legal counsel agreed to
settle a portion of its legal fees incurred in connection with the private
placement during November and December 2004, in shares of common stock of the
Company. The Company issued 23,000 shares of unregistered common stock with a
fair value of $138,000 in settlement of $70,000 in legal fees.
AMENDED AND RESTATED CONVERTIBLE NOTES
Subsequent to December 31, 2004, the Company revised certain terms of its
Convertible Notes. The maturity date was extended to July 3, 2006 from December
8, 2005 in exchange for an increase in the interest rate to 12%, effective
December 9, 2005 and a change in the conversion price from $1.25 per share to
$0.75 per share.
F-26
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEET
SEPTEMBER 30, 2005
(UNAUDITED)
------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 149,174
Prepaid expenses and other current assets 115,001
-------------
Total current assets 264,175
Property and equipment, net 60,206
Security deposit 18,511
-------------
TOTAL ASSETS $ 342,892
=============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $ 1,012,007
Accrued expenses 1,545,764
Convertible notes 343,708
Common stock subject to repurchase under variable shares put right --
-------------
Total current liabilities 2,901,479
Convertible notes --
-------------
TOTAL LIABILITIES 2,901,479
-------------
Commitments and contingencies
Stockholders' Deficiency:
Preferred stock, $0.0001 par value; authorized 20,000,000 shares, issued and
outstanding - 254.15 and 145.07 shares of Series A Convertible Preferred
Stock at September 30, 2005 and December 31, 2004, respectively;
liquidation preference - $6,353,750 and $3,626,750, respectively 6,353,750
Common stock, $0.0001; authorized 100,000,000 shares, issued and
outstanding - 10,552,944 at September 30, 2005 and 10,539,161, net
of 401,305 shares subject to put right at December 31, 2004 1,055
Subscriptions receivable on common stock --
Deferred compensation (404,532)
Additional paid-in capital 25,533,697
Treasury stock, 145,070 shares, at December 31, 2004, at cost --
Deficit accumulated during the development stage (34,042,557)
-------------
Total stockholders' deficiency (2,558,587)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 342,892
=============
(See Notes to Condensed Financial Statements)
F-27
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
CUMULATIVE
AUGUST 11,
1986
NINE MONTHS ENDED (DATE OF
SEPTEMBER 30, INCEPTION) TO
-------------------------- SEPTEMBER 30,
2005 2004 2005
------------ ---------- ----------------
REVENUES:
Other income $ - $ - $ 75,349
OPERATING EXPENSES:
Research and development 6,123,918 785,810 8,717,774
In-process research and development - 5,034,309 5,034,309
General and administrative 2,957,701 3,030,980 9,510,334
Gain on extinguishment of debt (311,281) - (311,281)
Non-cash interest expense 598,168 643,333 1,916,743
Interest expense, net of interest income 25,546 57,023 60,997
----------- ----------- -----------
Total operating expenses 9,394,052 9,551,455 24,928,876
----------- ----------- -----------
NET LOSS (9,394,052) (9,551,455) (24,853,527)
Deemed preferred stock dividends (9,164,500) - (10,100,616)
------------ ----------- ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $(18,558,552) $(9,551,455) $(34,954,143)
============ =========== ============
Basic and diluted loss per common share $ (1.76) $ (2.28)
Weighted-average common shares outstanding 10,515,243 4,180,829
(See Notes to Condensed Financial Statements)
F-28
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
PREFERRED STOCK COMMON STOCK SUBSCRIP- DEFERRED
----------------- ------------------- TION COMPEN-
SHARES AMOUNT SHARES AMOUNT RECEIVABLE SATION
------ ------ ------ ------ ---------- ------
BALANCE, JANUARY 1, 2005 145.07 $3,626,750 10,539,161 $1,054 $(303) $(624,750)
Preferred stock and warrants issued pursuant to
units sold on January 5, 2005 in a private
placement ($25,000) 48.35 1,208,750
Deemed dividend of beneficial conversion feature
of units sold January 5, 2005 in private
placement
Acquisition January 5, 2005 of treasury stock
under put right ($2.50)
Preferred stock and warrants issued pursuant to
units sold on January 18, 2005 in a private
placement ($25,000) 76.25 1,906,250
Deemed dividend of beneficial conversion feature
of units sold January 18, 2005 in private
placement
Acquisition January 18, 2005 of treasury stock
under put right ($2.50)
Common stock issued January 2005 in connection
with payment of legal fees ($3.04) 23,000 2
Common stock issued January 2005 pursuant to
amendment of placement agent agreement ($2.50) 150,000 15
Common stock issued February 2005 to advisors for
past services ($6.25) 7,500 1
Preferred stock and warrants issued pursuant to
units sold on February 3, 2005 in a private
placement ($25,000) 224.48 5,612,000
Deemed dividend of beneficial conversion feature
of units sold February 3, 2005 in private
placement
Acquisition February 3, 2005 of treasury stock
under put right ($2.50)
Preferred stock and warrants issued pursuant to
units sold on February 11, 2005 in a private
placement ($25,000) 17.50 437,500
Deemed dividend of beneficial conversion feature
of units sold February 11, 2005 in private
placement
Acquisition February 11, 2005 of treasury stock
under put right ($2.50)
Common stock issued February 2005 pursuant to
cashless exercise of option ($3.05) 100,191 10
Common stock issued March 2005 upon conversion of
preferred shares ($2.50) (44.00) (1,100,000) 440,000 44
(See Notes to Consolidated Financial Statements)
F-29
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
DEFICIT
ACCUMULATED
ADDITIONAL TREASURY STOCK DURING THE TOTAL
PAID-IN ------------------- DEVELOPMENT STOCKHOLDERS'
CAPITAL SHARES AMOUNT STAGE DEFICIENCY
------- ------ ------ ----- ------
BALANCE, JANUARY 1, 2005 $12,294,648 145,070 $(362,675) $(15,484,005) $ (549,281)
Preferred stock and warrants issued pursuant to
units sold on January 5, 2005 in a private
placement ($25,000) (159,359) 1,049,391
Deemed dividend of beneficial conversion feature
of units sold January 5, 2005 in private
placement 1,208,750 (1,208,750) -
Acquisition January 5, 2005 of treasury stock
under put right ($2.50) 48,350 (120,875) (120,875)
Preferred stock and warrants issued pursuant to
units sold on January 18, 2005 in a private
placement ($25,000) (252,624) 1,653,626
Deemed dividend of beneficial conversion feature
of units sold January 18, 2005 in private
placement 1,906,250 (1,906,250) -
Acquisition January 18, 2005 of treasury stock
under put right ($2.50) 76,250 (190,625) (190,625)
Common stock issued January 2005 in connection
with payment of legal fees ($3.04) 69,998 70,000
Common stock issued January 2005 pursuant to
amendment of placement agent agreement ($2.50) (15) -
Common stock issued February 2005 to advisors for
past services ($6.25) 46,874 46,875
Preferred stock and warrants issued pursuant to
units sold on February 3, 2005 in a private
placement ($25,000) (851,447) 4,760,553
Deemed dividend of beneficial conversion feature
of units sold February 3, 2005 in private
placement 5,612,000 (5,612,000) -
Acquisition February 3, 2005 of treasury stock
under put right ($2.50) 224,480 (561,200) (561,200)
Preferred stock and warrants issued pursuant to
units sold on February 11, 2005 in a private
placement ($25,000) (234,626) 202,874
Deemed dividend of beneficial conversion feature
of units sold February 11, 2005 in private
placement 437,500 (437,500) -
Acquisition February 11, 2005 of treasury stock
under put right ($2.50) 17,500 (43,750) (43,750)
Common stock issued February 2005 pursuant to
cashless exercise of option ($3.05) (10) -
Common stock issued March 2005 upon conversion of
preferred shares ($2.50) 1,099,956 -
(See Notes to Consolidated Financial Statements) (continued)
F-29a
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
PREFERRED STOCK COMMON STOCK SUBSCRIP- DEFERRED
----------------- ------------------- TION COMPEN-
SHARES AMOUNT SHARES AMOUNT RECEIVABLE SATION
------ ------ ------ ------ ---------- ------
Payments received for common stock issued December
2004 pursuant to exercise of options granted
under spinoff agreement 303
Common stock issued March 2005 pursuant to
exercise of warrants ($1.25) 5,000 1
Common stock issued April 2005 upon conversion of
preferred shares ($2.50) (15.00) (375,000) 150,000 15
Common stock issued May 2005 pursuant to financing
letter agreement ($3.00) 25,000 2
Common stock issued May 2005 upon conversion of
preferred shares ($2.50) (41.00) (1,025,000) 410,000 41
Common stock issued June 2005 upon conversion of
preferred shares ($2.50) (29.00) (725,000) 290,000 29
Capital contribution for repurchase of common
stock pursuant to Stock Purchase Agreement
Common stock repurchased June 2005 pursuant to
Stock Repurchase Agreement ($0.80)
Common stock issued July 2005 pursuant to
Regulatory Milestone Plan ($2.70) 100,000 10
Common stock issued July 2005 upon conversion of
preferred shares ($2.50) (20.00) (500,000) 200,000 20
Common stock issued August 2005 upon conversion of
preferred shares ($2.50) (83.50) (2,087,500) 835,000 84
Common stock issued September 2005 upon conversion
of preferred shares ($2.50) (25.00) (625,000) 250,000 25
Common stock issued September 2005 pursuant to
Stock Purchase Agreement ($0.90) 25,000 2
Retirement of treasury shares (3,398,213) (340)
Reverse common stock subject to repurchase under
variable shares put right at December 31, 2004 401,305 40
Stock option-based compensation for investor
relation services rendered (620,700)
Stock option-based compensation for employees and
directors (293,231)
Fair value adjustment of stock options previously
granted to non-employees 318,400
Amortization of deferred compensation 815,749
Net loss
------- ---------- ---------- -------- -------- -----------
BALANCE, SEPTEMBER 30, 2005 254.15 $6,353,750 10,552,944 $ 1,055 $ - $ (404,532)
======= ========== ========== ======== ======== ===========
(See Notes to Condensed Financial Statements)
F-30
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
DEFICIT
ACCUMULATED
ADDITIONAL TREASURY STOCK DURING THE TOTAL
PAID-IN ------------------- DEVELOPMENT STOCKHOLDERS'
CAPITAL SHARES AMOUNT STAGE DEFICIENCY
------- ------ ------ ----- ----------
Payments received for common stock issued December
2004 pursuant to exercise of options granted
under spinoff agreement 303
Common stock issued March 2005 pursuant to
exercise of warrants ($1.25) 6,249 6,250
Common stock issued April 2005 upon conversion of
preferred shares ($2.50) 374,985 -
Common stock issued May 2005 pursuant to financing
letter agreement ($3.00) 74,998 75,000
Common stock issued May 2005 upon conversion of
preferred shares ($2.50) 1,024,959 -
Common stock issued June 2005 upon conversion of
preferred shares ($2.50) 724,971 -
Capital contribution for repurchase of common
stock pursuant to Stock Purchase Agreement 424,818 424,818
Common stock repurchased June 2005 pursuant to
Stock Repurchase Agreement ($0.80) 2,886,563 (2,734,068) (2,734,068)
Common stock issued July 2005 pursuant to
Regulatory Milestone Plan ($2.70) 269,990 270,000
Common stock issued July 2005 upon conversion of
preferred shares ($2.50) 499,980 -
Common stock issued August 2005 upon conversion of
preferred shares ($2.50) 2,087,416 -
Common stock issued September 2005 upon conversion
of preferred shares ($2.50) 624,975 -
Common stock issued September 2005 pursuant to
Stock Purchase Agreement ($0.90) 22,498 22,500
Retirement of treasury shares (4,012,853) (3,398,213) 4,013,193 -
Reverse common stock subject to repurchase under
variable shares put right at December 31, 2004 1,637,285 1,637,325
Stock option-based compensation for investor
relation services rendered 620,700 -
Stock option-based compensation for employees and
directors 293,231 -
Fair value adjustment of stock options previously
granted to non-employees (318,400) -
Amortization of deferred compensation 815,749
Net loss (9,394,052) (9,394,052)
------------- --------- -------- ------------ -----------
BALANCE, SEPTEMBER 30, 2005 $25,533,697 - $ - $(34,042,557) $(2,558,587)
============= ========= ======== ============ ===========
(See Notes to Condensed Financial Statements)
F-30a
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CUMULATIVE
AUGUST 11, 1986
FOR THE NINE MONTHS ENDED (DATE OF INCEPTION)
SEPTEMBER 30, TO
---------------------------- SEPTEMBER 30,
2005 2004 2005
------------ ------------ --------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (9,394,052) $ (9,551,455) $(24,853,527)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization 13,432 7,586 26,715
Write-off of in-process research and development - 5,034,309 5,034,309
Charge for stock option issued pursuant to spinoff agreement - 2,082,500 2,082,500
Stock-based compensation to employees and directors 98,449 - 98,449
Stock-based compensation to nonemployees 1,109,175 - 4,021,606
Stock-based component of payment of legal fees 70,000 - 70,000
Stock-based component of litigation settlement - - 422,000
Gain on extinguishment of debt (311,281) - (311,281)
Non-cash interest expense 598,168 643,334 1,916,743
Changes in assets and liabilities:
Prepaid expenses & other current assets 15,228 (201,596) (92,501)
Other assets - (18,511) (18,511)
Accounts payable and accrued expenses 2,184,268 264,209 2,581,429
-------------- ------------ ------------
Net cash used in operating activities (5,616,613) (1,739,624) (9,022,069)
-------------- ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (13,023) (68,769) (86,921)
-------------- ------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuances of common stock 6,250 929,231 1,136,502
Collections of subscriptions receivable 303 - 303
Net proceeds from issuances of preferred stock 7,666,444 - 10,470,684
Acquisition of treasury stock under put right (916,450) - (1,279,125)
Acquisition of treasury stock under purchase agreement (2,309,250) - (2,309,250)
Distribution to shareholders - - (4,260)
Capital contributed by Xechem International, Inc. - 300,310 350,310
Proceeds from issuance of bridge loans - 1,100,000 1,375,000
Expense of issuance of long term debt - (132,000) (132,000)
Principal payments on bridge loans - -- (350,000)
-------------- ------------ ------------
Net cash provided by financing activities 4,447,297 2,197,541 9,258,164
-------------- ------------ ------------
Net increase in cash and cash equivalents (1,182,339) 389,148 149,174
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 1,331,513 68,374 -
-------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 149,174 $ 457,522 $ 149,174
============== ============ ============
(See Notes to Condensed Financial Statements)
F-31
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CUMULATIVE
AUGUST 11, 1986
FOR THE NINE MONTHS ENDED (DATE OF INCEPTION)
SEPTEMBER 30, TO
------------------------- SEPTEMBER 30,
2005 2004 2005
----------- ----------- ------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Deemed dividend of the beneficial conversion feature
of units sold in private placement $ 9,164,500 $ - $10,100,616
Issuance of 2,575,000 shares of common stock upon
conversion of preferred shares 6,437,500 - 6,437,500
Issuance of 100,000 shares of common stock pursuant
to stock plan 270,000 - 270,000
Issuance of 25,000 shares of common stock as
compensation for future financial planning 22,500 - 22,500
Issuance of 7,500 shares of common stock as
compensation for past services 46,875 - 46,875
Issuance of 25,000 shares of common stock as
compensation for financial planning 75,000 - 75,000
Issuance of 23,000 shares of common stock in
payment of accrued legal fees 70,000 - 70,000
Capital contribution for repurchase of common stock
pursuant to Stock Purchase Agreement 424,818 - 424,818
Issuance of 36,000 shares of common stock as debt
issuance costs - - 90,000
Issuance of 451,597 shares of common stock to
bridge loan investors and placement agent - - 550,000
Issuance of 167,610 shares up on conversion of
convertible notes - - 209,512
Issuance of convertible notes in exchange for bridge
loans and long-term debt plus accrued interest - - 1,111,240
(See Notes to Condensed Financial Statements)
F-32
NOTE 1 - BASIS OF INTERIM FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited Condensed Financial Statements of CepTor Corporation
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and the instructions to
Form 10-QSB. Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows for all periods
presented have been made. The results of operations for the nine-month period
ended September 30, 2005 are not necessarily indicative of the operating results
that may be expected for the entire year ending December 31, 2005.
NOTE 2 - THE COMPANY
ORGANIZATION
The financial statements presented are those of CepTor Corporation (the
"Company"), incorporated in August 1986 in the state of Delaware. CepTor
Corporation is a biopharmaceutical company engaged in the research and
development of therapeutic products for neuromuscular, neurodegenerative and
other diseases with a focus on orphan diseases (defined as those which affect
less than 200,000 people). Since its inception, the Company has devoted its
efforts and resources to the development of its receptor mediated drug-targeting
platform for neuromuscular and neurodegenerative diseases, and to raising the
funds necessary to continue this research.
The Company is a development stage enterprise which has a limited history of
operations and has not generated any material revenues since its inception. The
Company has received a limited amount of funding through grants and
collaborative research efforts in connection with developing its products. The
Company does not have any products that are approved for commercial distribution
at the present time. As a development stage enterprise, the Company is subject
to all of the risks and uncertainties that are associated with developing a new
business.
MERGER OF XECHEM INTERNATIONAL, INC. AND CEPTOR CORPORATION
On January 27, 2004, the former shareholders of the Company received shares of
preferred stock of Xechem International, Inc. ("Xechem") in connection with the
merger of the Company into a wholly-owned subsidiary of Xechem. For financial
reporting purposes, the effective date of the merger was designated January 1,
2004. The results of operations from January 1 to January 27, 2004 were not
significant. The merger was accomplished through a reverse triangular merger
whereby CepTor Acquisition, Inc., a wholly-owned subsidiary of Xechem, was
merged into the Company and the Company was the surviving entity.
Following the acquisition of the Company by Xechem, the board of directors of
Xechem determined that Xechem lacked the resources to fully fund the development
and regulatory approval of the Company's technology. As a result, the board of
directors of Xechem determined that is was in the best interest of Xechem's
stockholders to effect a spin-off of the Company from Xechem, providing the
Company with an independent platform to obtain financing and develop its
technology. As a result the Company, Xechem, and William Pursley, Chairman and
CEO of the Company, entered into an agreement dated March 31, 2004, amended July
23, 2004 and November 17, 2004, (the "Spinoff Agreement"), to provide for the
separation of the Company from Xechem. The Spinoff Agreement provided for the
Company's separation from Xechem under a transaction structured to include (i)
the Company's redemption of a portion of it shares held by Xechem out of the
proceeds of future financing under the Redemption Variable Shares Put Right as
described below in Note 7, (ii) the issuance and allocation of additional shares
of common stock to Mr. Pursley under the Founders' Plan and (iii) the Company's
reverse merger into a public shell. The spin-off of the Company from Xechem
concurrent with Mr. Pursley's exercise of his stock option and the Company's
reverse merger into Medallion was completed on December 8, 2004.
MERGER OF MEDALLION CREST MANAGEMENT, INC. AND CEPTOR CORPORATION
Medallion Crest Management, Inc., a Florida corporation ("Medallion") acquired
all of the common stock of the Company on December 8, 2004. Medallion was an
inactive public shell at the time of acquisition. The Company's shareholders
prior to the merger became the majority shareholders of Medallion after the
merger; accordingly the transaction was accounted for as a recapitalization. The
accompanying financial statements preceding the date of the acquisition have
been retroactively restated to give effect to this transaction.
F-33
NOTE 3 - LIQUIDITY AND FINANCIAL CONDITION
The Company's net loss for the nine-month period ended September 30, 2005
amounted to $9,394,052, which includes $1,564,511 of non-cash special charges
primarily associated with the Company's issuance of stock and common stock
purchase warrants and options for services rendered and non-cash interest
expense, offset by gain on the extinguishment of debt. The Company used net cash
flows in its operating activities of $5,616,613 during the nine-month period
ending September 30, 2005. The Company's development stage accumulated deficit
amounted to $34,042,557 at September 30, 2005. The Company expects to continue
incurring losses for the foreseeable future due to the inherent uncertainty that
is related to establishing the commercial feasibility of pharmaceutical
products. The Company will require substantial additional funding to support the
development of its proposed products and fund its operations while it continues
its efforts to execute its business plan. The Company estimates that it
currently does not have sufficient liquidity to sustain operations beyond
December 31, 2005.
The Company's working deficit at September 30, 2005 amounted to $2,637,304.
During the nine-month period ended September 30, 2005, the Company received net
proceeds of $4,447,297 from financing activities, including (i) $7,666,444
(gross proceeds of $9,164,500 net of transaction expenses of $1,498,056) from
the sale of preferred stock and common stock purchase warrants ("Units") in a
private placement transaction (see Note 10), (ii) $6,250 from the exercise of
warrants, and (iii) $303 from subscriptions receivable pursuant to the
restricted shares issued under the Company's Founders' Plan during December
2004. From the net proceeds of the sale of the Units, the Company repurchased
3,253,143 shares of its common stock, par value $0.0001 per share from Xechem
for $3,225,700 comprised of (i) $916,450 for 366,580 shares of its common stock
pursuant to the terms of a redemption obligation (see Note 7) and (ii)
$2,734,068 which includes $2,309,250 in cash and the forfeiture of an option
held by the Company's CEO to purchase 43 million shares of common stock of
Xechem with a fair value of $424,818, for an additional 2,886,563 shares of its
common stock.
For the foreseeable future, the Company's primary efforts will be on moving its
lead product, Myodur, into phase I/II clinical trials for Duchenne's muscular
dystrophy. The Company plans to use its available cash resources to continue the
pre-clinical development of its technologies, which primarily includes the
manufacture of Myodur, conducting pre-clinical tests and toxicology studies,
compiling, drafting and submitting an investigational new drug application
("IND") for Myodur, and initiating phase I/II human clinical trials, if allowed
by the Food and Drug Administration ("FDA"). As resources allow, the Company may
also fund other working capital needs. The Company presently expects to submit
its IND for Myodur in January 2006, and initiate human clinical trials for
Myodur early in the second quarter of 2006.
The Company does not have, and does not intend to establish, its own
manufacturing facilities to produce its product candidates in the foreseeable
future. The Company has outsourced the manufacturing of its proposed products to
contract manufacturers. In April 2005, the Company entered into an exclusive
manufacture and supply agreement with Bachem AG ("Bachem") whereby Bachem is
entitled to receive royalty payments in the amount of the lesser of 5% of "net
sales" (as defined in the agreement) or $10 million, $15 million or $25 million
in the first, second and third (and thereafter) years of the agreement,
respectively. During the nine-month period ended September 30, 2005, the Company
incurred approximately $3.0 million for the costs of the proposed product and
related materials of which approximately $1.3 million remains unpaid. As of
September 30, 2005, the Company has sufficient materials required for the
Company's pre-clinical studies and initial toxicology programs and initial human
clinical trials.
The Company may incur significant expenditures during the next twelve months for
the cost to manufacture the Company's product Myodur for use in additional and
follow-on clinical, toxicology and other testing. Further, if the Company
receives regulatory approval for any of its products in the United States or
elsewhere, it will incur substantial expenditures to develop manufacturing,
sales, and marketing capabilities and/or to subcontract or joint venture these
activities with others. There can be no assurance that the Company will ever
recognize revenue or profit from any such products. In addition, the Company may
encounter unanticipated problems, including developmental, regulatory,
manufacturing, or marketing difficulties, some of which may be beyond its
ability to resolve. The Company may lack the capacity to produce its products
in-house and there can be no assurances that it will be able to locate or retain
suitable contract manufacturers or be able to have them produce products at
satisfactory prices.
F-34
As described in Note 10, the Company entered into a Securities Purchase
Agreement with Xechem on June 17, 2005 pursuant to which it elected to
repurchase 2,886,563 shares of its common stock from Xechem, for a purchase
price of $2,309,250 effectively reducing the total outstanding shares of common
stock of the Company. As additional consideration for the transaction, the
Company's CEO agreed to forfeit an option to purchase 43 million shares of
Xechem, which the Company has recorded as a contribution of capital and a cost
of the treasury shares. Xechem retained 500,000 shares of common stock of the
Company but agreed that it would only sell such shares subject to the volume
restrictions of Rule 144, regardless of whether or not such volume limitations
are applicable at the time of such sale. Additionally, the Securities Purchase
Agreement terminated the Spinoff Agreement.
Due to the substantial amounts that the Company has expended for the manufacture
of its proposed product and the repurchase of shares of its common stock on June
17, 2005 from Xechem, the Company determined that its available capital
resources as of September 30, 2005 were not sufficient to sustain its planned
operations beyond December 31, 2005. In order to address this liquidity
situation, on October 7, 2005 the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC ("Fusion Capital"), pursuant to which
Fusion Capital has agreed, under certain conditions, to purchase on each trading
day $25,000 of the Company's common stock up to an aggregate, under certain
conditions, of $20 million over a 40-month period, subject to earlier
termination at the discretion of the Company. The Company is required to file
and have declared effective a registration statement with the SEC as a
precondition to receipt of any funds with respect to this transaction. There can
be no assurance that the SEC will declare the registration statement effective.
The inability of the Company to obtain financing through this or any other
transaction would have a material adverse effect on the Company's financial
condition and its ability to sustain operations.
Additionally, on October 27, 2005, the Company entered into a stock purchase
agreement for the sale of approximately 265,600 shares of its common stock under
its Founders' Plan and received $167,250 during October 2005. (See Note 11 -
Subsequent Events.)
The Company is continuing to seek additional capital through equity and debt
offerings, collaborative partnerships, joint ventures and strategic alliances,
both within the United States and abroad in an effort to accelerate the
development of its proposed products.
There can be no assurance that management's plans to obtain additional financing
to fund operations will be successful which raises substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that may result from the outcome of this
uncertainty.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company is a development stage enterprise. Accordingly, the Company has
included its cumulative statements of operations and cash flows for the period
of August 11, 1986 (date of inception) to September 30, 2005 in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 7 "Accounting and
Reporting by Development Stage Enterprises."
The Company's net loss available to common shareholders as reported in its
statement of operations for the period of August 11, 1986 (date of inception) to
September 30, 2005 is $34,954,143 whereas the deficit accumulated during its
development stage as reported on its balance sheet at September 30, 2005 is
$34,042,557. The difference is a result of the acquisition of the Company by
Xechem and the restatement of its assets and liabilities to fair value, which
resulted in the Company's accumulated deficit, net of distributions, from
inception through December 31, 2003 (the date of merger for financial reporting
purposes) being reclassified to additional paid-in capital, net of a deemed
dividend to the preferred shareholders.
ACCOUNTING FOR STOCK BASED COMPENSATION
As permitted under SFAS No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure," which amended SFAS No. 123 "Accounting for
Stock-Based Compensation," the Company has elected to use the intrinsic value
method of accounting for its stock-based compensation arrangements as defined by
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to Employees," and related interpretations including Financial Accounting
Standards Board ("FASB") Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation," an interpretation of APB No. 25.
The cost of stock-based compensation awards issued to non-employees for services
are recorded at either the fair value of the services rendered or of the
instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in Emerging
F-35
Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services."
The following table summarizes the pro forma operating results of the Company had
compensation expense for stock options granted to employees been determined in
accordance with the fair market value based method prescribed by SFAS No. 123. The
Company has presented the following disclosures in accordance with SFAS No. 148.
For the Three-Month Period Ended
September 30,
--------------------------------
2005 2004
------------- ----------------
Net loss available to common stockholders $(4,502,459) $ (1,354,686)
Adjust: Stock-based employee compensation
determined under the fair value method (15,485) -
------------ ---------------
Pro forma net loss $(4,517,944) $ (1,354,686)
============ ===============
Net loss per share available to common stockholders:
Basic and diluted, as reported $ (0.46) $ (0.31)
Basic and diluted, pro forma $ (0.46) $ (0.31)
============ ================
For the Nine-Month Period Ended
September 30,
-------------------------------
2005 2004
--------------- --------------
Net loss available to common stockholders $(18,558,552) $ (9,551,455)
Adjust: Stock-based employee compensation
determined under the fair value method
(44,285) (5,497,358)
-------------- ---------------
Pro forma net loss $(18,602,837) $ (15,048,813)
============== ===============
Net loss per share available to common stockholders:
Basic and diluted, as reported $ (1.76) $ (2.28)
Basic and diluted, pro forma $ (1.77) $ (3.60)
The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect the
portion of the estimated fair value of awards that were earned for the three-month and
nine-month periods ended September 30, 2005.
ACCOUNTING FOR WARRANTS ISSUED IN CONNECTION WITH SALE OF UNITS
The Company accounts for the issuance of common stock purchase warrants issued in
connection with sales of its Units in accordance with the provisions of EITF Issue No.
00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock." Based on the provisions of EITF Issue No. 00-19,
the Company classifies as equity any contracts that (i) require physical settlement or
net-share settlement or (ii) gives the company a choice of net-cash settlement or
settlement in its own shares (physical settlement or net-share settlement). The
Company classifies as assets or liabilities any contracts that (i) require net-cash
settlement (including a requirement to net-cash settle the contract if an event occurs
and if that event is outside the control of the Company) or (ii) give the counterparty
a choice of net-cash settlement or settlement in shares (physical settlement or
net-share settlement).
NET (LOSS) PER SHARE
Net loss per share is presented under SFAS No. 128 "Earnings Per Share." Under SFAS
No. 128, basic net loss per share is computed by dividing net loss per share available
to common stockholders by the weighted average shares of common stock outstanding for
F-36
the period and excludes any potential dilution. Diluted earnings per share
reflect the potential dilution that would occur upon the exercise or conversion
of all dilutive securities into common stock. The computation of loss per share
for the three-month and nine-month periods ended September 30, 2005 excludes
potentially dilutive securities because their inclusion would be anti-dilutive.
Shares of common stock issuable upon the conversion or exercise of potentially
dilutive securities are as follows:
September 30,
2005 2004
--------- ----------
Series A Preferred Stock 2,541,500 -
Warrants 4,399,900 -
Options 646,695 3,031,943
Convertible Notes 1,299,476 -
--------- ----------
Total 8,887,571 3,031,943
========= ==========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interest. FIN 46 also required
consolidation of a VIE by an enterprise that holds such controlling interest. In
December 2003, the FASB completed its deliberations regarding the proposed
modifications to FIN 46 and issued Interpretation Number 46R, "Consolidation of
Variable Interest Entities - an Interpretation of ARB 51" ("FIN 46R"). The
decisions reached included a deferral of the effective date and provisions for
additional scope exceptions for certain types of variable interests. Application
of FIN 46R is required in financial statements of public entities that have
interests in VIEs or potential VIEs commonly referred to as special-purpose
entities for periods ending after December 15, 2003. Application by public small
business issuers' entities is required in all interim and annual financial
statements for periods ending after December 15, 2004.
The adoption of this pronouncement did not have an effect on the Company's
financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment." This
statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. SFAS No. 123R addresses all
forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that will
be measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest and will result in a charge to
operations for stock-based compensation expense. SFAS No. 123R is effective for
public entities that file as small business issuers as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005.
The Company is currently in the process of evaluating the effect that the
adoption of this pronouncement will have on its financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets." SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in
fiscal periods beginning after December 16, 2004. The provisions of SFAS No. 153
should be applied prospectively.
The adoption of this pronouncement did not have an effect on the Company's
financial statements.
F-37
In EITF Issue No. 04-8, "The Effect of Contingently Convertible Instruments on
Diluted Earnings Per Share," the EITF reached a consensus that contingently
convertible instruments, such as contingently convertible debt, contingently
convertible preferred stock, and other such securities should be included in
diluted earnings per share (if dilutive) regardless of whether the market price
trigger has been met. The consensus is effective for reporting periods ending
after December 15, 2004.
The Company's adoption of this pronouncement did not have an effect on the
Company's financial statements.
In September 2005, the FASB ratified the Emerging Issues Task Force's ("EITF")
Issue No. 05-7, "Accounting for Modifications to Conversion Options Embedded in
Debt Instruments and Related Issues", which addresses whether a modification to
a conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the debt
(for example, the modification reduces the conversion price of the debt). In
September 2005, the FASB also ratified the EITF's Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature",
which discusses whether the issuance of convertible debt with a beneficial
conversion feature results in a basis difference arising from the intrinsic
value of the beneficial conversion feature on the commitment date (which is
recorded in shareholder's equity for book purposes, but as a liability for
income tax purposes) and, if so, whether that basis difference is a temporary
difference under FASB Statement No. 109, "Accounting for Income Taxes". Both of
these issues are effective for fiscal periods beginning after December 15, 2005.
The Company is currently in the process of evaluating the effect that the
adoption of these pronouncements will have on its financial statements.
NOTE 5 - PREPAID EXPENSES AND GRANT RECEIVABLE
Prepaid expenses and grant receivable primarily consists of unamortized premiums
paid to carriers for insurance policies, amounts due from the National
Institutes of Health for amounts expended by the Company for work on its grant,
and the fair value of common stock and nonrefundable retainer paid as
compensation for ongoing financial consulting.
NOTE 6 - ACCRUED EXPENSES
Accrued expenses at September 30, 2005 are as follows:
Clinical development expenses $ 1,253,873
Financial investor relations fees 188,277
Interest on convertible notes 72,879
Research expenses, miscellaneous 28,386
Other 2,349
-----------
Total $ 1,545,764
===========
In connection with the sale of Units in a private placement, pursuant to the
placement agent agreement, the Company had agreed to spend up to 3% of the gross
proceeds from its private placement on financial investor relations activities,
all of which was accrued and charged to additional paid-in capital upon each
closing of the private placement.
NOTE 7 - COMMON STOCK REPURCHASED UNDER VARIABLE SHARES PUT RIGHT AND SHARE
PURCHASE AGREEMENT
On January 27, 2004, the former shareholders of the Company received shares of
preferred stock of Xechem in connection with the merger of the Company into a
wholly-owned subsidiary of Xechem. Following the acquisition of the Company by
Xechem, the board of directors of Xechem determined that Xechem lacked the
resources to fully fund the development and regulatory approval process of the
Company's technology. As a result, the board of directors of Xechem determined
that it was in the best interest of Xechem's stockholders to effect a spin-off
of the Company from Xechem, providing the Company with an independent platform
to obtain financing and develop its technology. As a result the Company, Xechem,
and William Pursley, Chairman and CEO of the Company, entered into an agreement
dated March 31, 2004, as amended July 23, 2004 and November 17, 2004, (the
"Spinoff Agreement"), to provide for the separation of the Company from Xechem.
The Spinoff Agreement, as amended, provides for the Company to redeem, out of
the proceeds of future financing transactions, an aggregate of $2,000,000 in
shares of common stock of the Company held by Xechem (the "Variable Shares Put
Right"). Pursuant to the terms of the Variable Shares Put Right, the Company is
obligated to use the first 25% (adjusted to 10% of the proceeds from the
Company's private placement initiated in December 2004 and concluded in February
2005) of the gross proceeds received in such financing transactions to redeem an
equivalent number of shares of common stock held by Xechem, derived by dividing
such proceeds by the then price per share of the Company's common stock. Through
February 11, 2005, the Company redeemed 511,650 shares of its common stock for
$1,279,125, which represents 10% of the gross proceeds that the Company received
from the sale of Units in the private placement transactions that were initiated
in December 2004 and completed February 11, 2005.
F-38
On June 17, 2005, the Company entered into a Securities Purchase Agreement with
Xechem pursuant to which the Company repurchased 2,886,563 shares of common
stock from Xechem, for a purchase price of $2,309,250. As additional
consideration, William Pursley, the Company's Chairman and Chief Executive
Officer, agreed to surrender options to purchase 43,000,000 shares of common
stock of Xechem for which the Company recorded as a contribution to capital and
which was included in the cost of the treasury stock. Xechem retained 500,000
shares of common stock of the Company but agreed that it would only sell such
shares subject to the volume restrictions of Rule 144, regardless of whether or
not such volume limitations are applicable at the time of such sale.
Additionally, the Securities Purchase Agreement terminated the Spinoff
Agreement.
The Company accounted for its redemptions of the aforementioned shares as
treasury stock transactions, at cost. Effective June 17, 2005, the Company
retired the shares of common stock it held in treasury acquired under the
Variable Shares Put Right and purchased pursuant to the Securities Purchase
Agreement.
NOTE 8 - CONVERTIBLE NOTES
Pursuant to an offer dated October 22, 2004 as amended November 15, 2004, made
to the holders of the Company's convertible notes, the Company issued $1,111,240
of its convertible notes due December 8, 2005 which are convertible into shares
of the Company's common stock at $1.25 per share in amounts equal to the
outstanding principal under the notes cancelled, plus accrued interest at 10%
through the date of conversion (the "Convertible Notes"). Since the fair value
of the Company's common stock on the date of exchange was $2.50 per share, the
Company recorded an original issuance discount equal to the principal balance of
the notes, which represents the intrinsic value of this beneficial conversion
feature. The intrinsic value of the beneficial conversion feature was being
amortized as non-cash interest expense over the term of the Convertible Notes
through December 8, 2005. During the three-month and nine-month periods ended
September 30, 2005, the Company amortized $32,116 and $254,460, respectively, of
the intrinsic value of the beneficial conversion feature which is included in
non-cash interest expense in the accompanying statement of operations.
In April 2005, the Company renegotiated certain terms of the Convertible Notes
(the "Amended Notes") to extend the maturity date until July 3, 2006. In
exchange the Company (1) increased the contractual interest rate on the Amended
Notes effective December 8, 2005 to 12% and (2) reduced the conversion rate to
$0.75 from $1.25 per share. In addition, the Company's right to call the Amended
Notes was eliminated. The Company accounted for the issuance of the Amended
Notes in accordance with the guidelines enumerated in EITF Issue No. 96-19
"Debtor's Accounting for a Modification or Exchange of Debt Instruments." EITF
96-19 provides that a substantial modification of terms in an existing debt
instrument should be accounted for like, and reported in the same manner as, an
extinguishment of debt. Further, EITF 96-19 indicates that the modification of a
debt instrument by a debtor and a creditor in a non-troubled debt situation is
deemed to have been accomplished with debt instruments that are substantially
different if the present value of the cash flows under the terms of the new debt
instrument is at least 10 percent different from the present value of the
remaining cash flows under the terms of the original instrument at the date of
the modification.
The Company evaluated its issuance of the Amended Notes to determine whether the
increase in interest rate, extension of the maturity date, and reduction in the
conversion price resulted in the issuance of a substantially different debt
instrument. The Company determined that after giving effect to the changes in
these features, including the substantial increase in the intrinsic value of the
beneficial conversion feature that resulted from reducing the conversion price
that it had issued a substantially different debt instrument that resulted in a
constructive extinguishment of the original debt instrument. Accordingly, the
Company recorded a gain on the extinguishment of debt in the amount of $311,281
that is included in the accompanying statements of operations for the nine-month
period ended September 30, 2005.
Since the fair value of the Company's common stock on the date of amendment was
$4.00 per share, the Company recorded an original issuance discount equal to the
intrinsic value of this beneficial conversion feature, limited to the principal
balance of the Amended Notes. The intrinsic value of the beneficial conversion
feature is being amortized as non-cash interest expense over the term of the
Amended Notes through July 3, 2006. During the three-month and nine-month
periods ended September 30, 2005, the Company amortized $186,007 and $343,708,
respectively, of the intrinsic value of the beneficial conversion feature which
is included in non-cash interest expense in the accompanying statement of
operations.
F-39
NOTE 9 - COMMITMENTS AND CONTINGENCIES
MANUFACTURING AND SUPPLY AGREEMENT Effective April 11, 2005, the Company entered
into an exclusive manufacture and supply agreement to purchase its product
requirements from Bachem. The Company intends to use these clinical materials to
conduct pre-clinical studies, toxicology tests and human clinical trials. The
agreement also provides for Bachem to receive royalty payments in the amount of
the lesser of 5% of "net sales" (as defined in the agreement) or $10 million,
$15 million or $25 million, in the first, second and third (and thereafter)
years of the agreement, respectively. Through September 30, 2005, the Company
has incurred approximately $3.9 million of costs to produce materials required
to complete the pre-clinical and toxicology studies necessary to file its
investigational new drug application and complete its initial human clinical
trials.
Through September 30, 2005, the Company has made payments to Bachem in the
aggregate of approximately $2.5 million and as of September 30, 2005 the Company
has unpaid amounts of approximately $1.3 million. The Company charged the
aforementioned amounts to research and development expenses during the year
ended December 31, 2004 (approximately $0.8 million) and the nine-month period
ended September 30, 2005 (approximately $3.0 million).
The Company will need to spend substantially more in order to complete the
pre-clinical and toxicology studies and additional human trials in order to file
for approval to market its proposed product.
NOTE 10 - EQUITY TRANSACTIONS
During the nine-month period ended September 30, 2005, the Company issued the
following securities.
PRIVATE PLACEMENT
On January 5, 2005 and January 18, 2005 the Company held closings pursuant to
the terms of a Confidential Private Placement Memorandum dated October 22, 2004,
as supplemented November 16, 2004 and received gross proceeds of $1,208,750 and
$1,906,250, respectively, from the sale of 48.35 and 76.25 Units to 75 and 34
investors, respectively. On January 31, 2005 and February 3, 2005 the Company
held additional closings under the Private Placement and sold an aggregate of
224.48 Units to 86 investors and received gross proceeds of $5,612,000, and on
February 11, 2005 sold 17.50 Units to 4 investors and received gross proceeds of
$437,500. Each Unit consists of one share of Series A Preferred Stock and a
three-year warrant to purchase common stock, par value $0.0001 per share of the
Company at $2.50 per share. Each share of Series A Preferred Stock is
convertible into 10,000 shares of common stock and each warrant entitles the
holder to purchase 5,000 shares of common stock.
The Company issued warrants to purchase 1,832,900 shares of common stock as a
component of the Unit. The Company determined that the 366.58 shares of Series A
Preferred Stock issued during the quarter ended March 31, 2005, was issued with
an effective beneficial conversion feature for which it recorded deemed
dividends of $9,164,500 based upon an allocation of the proceeds to the relative
fair values of the Series A Preferred Stock and the warrants. The Company
calculated the fair value of the warrants using an option pricing model.
Pursuant to the placement agent agreement, the Company issued 150,000 shares of
common stock and warrants to purchase up to an aggregate of 366,580 shares of
common stock to the placement agent in connection with the private placement
transactions closed during the quarter ended March 31, 2005. Each warrant
entitles the placement agent to purchase the stated number of shares of common
stock at an exercise price of $1.25 per share and will expire five years after
its issue date.
The Company accounts for the issuance of common stock purchase warrants issued
in connection with sales of its Units in accordance with the provisions of EITF
Issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock".
The Company issued the aforementioned warrants with registration rights which
provide, among other things, that the Company will file a registration statement
under the Securities Act on or before a date which is sixty days after the
closing time. The Company filed a "resale" registration statement with the
Securities and Exchange Commission on February 11, 2005, within the required
F-40
timeframe. Substantially all of the Company's warrants are exercisable by the
holders at any time irrespective of whether the registration statement has been
declared effective. In addition, the Company is not (and never is) precluded
from delivering unregistered stock to any warrant holder who elects to exercise
their warrants in the event that the Company's registration statement with
respect to the stock issuable pursuant to such warrants has not been declared
effective.
Since the Company (i) is not precluded from issuing unregistered shares in the
event of its failure to cause a registration statement to be declared effective,
(ii) is permitted to net share settle its warrants by issuing unregistered
shares, and (iii) has met all of the other criteria for equity classification
under EITF Issue No. 00-19, it has classified its warrants as equity
instruments.
COMMON STOCK ISSUED UPON CONVERSION OF SERIES A PREFERRED STOCK
During the nine month period ended September 30, 2005, 2,575,000 shares of
common stock were issued upon conversion of 257.5 shares of Series A Preferred
Stock.
ISSUANCES OF WARRANTS
On March 16, 2005, as a result of an amendment to the private placement to
increase the maximum offering amount to $12.0 million from $6.0 million, the
Company granted the original shareholders of Medallion Crest Management, Inc.
five-year warrants to purchase 925,000 shares of common stock at $1.25 per
share.
On August 16, 2005, the Company issued three-year warrants to purchase 160,000
shares of common stock to two consulting firms for previous financial
assistance. The Company recorded a $180,800 charge to operations for the fair
value of these warrants.
OPTIONS AND WARRANTS GRANTED PURSUANT TO 2004 INCENTIVE STOCK PLAN
During November 2004, the Company granted an option to an employee to purchase
shares of common stock in an amount equal to 1/2% of its common stock
outstanding upon the closing of the Company's private placement. Pursuant to the
terms of the 2004 Incentive Stock Plan under which these options were granted,
the options have an exercise price of $2.50 per share, the fair market value on
the date of grant and such options vest over four years. Upon completion of the
Company's private placement on February 11, 2005, the Company determined that
78,195 shares of common stock were subject to this option. The Company accounted
for this option using variable plan accounting in accordance with APB No. 25
since the number of shares of common stock subject to this option was not known
at the date of grant. Accordingly, the Company recorded deferred compensation of
$293,231 for the excess of the fair value of the common stock over the exercise
price of which $67,199 was amortized through September 30, 2005.
On February 10, 2005, the Company issued a fully-vested, non-forfeitable
five-year warrant to purchase 37,500 shares of its common stock at $6.50 per
share for 12,500 shares, $8.00 per share for 12,500 shares and $9.50 per share
for 12,500 shares, to an investor relations firm for services provided during
the three-month period ended March 31, 2005. The Company's common stock must
trade at or above $8.00 per share for ten consecutive days in order for the
holder to exercise their right to purchase the shares underlying the warrant. In
addition, if the Company's common stock trades at less than $0.67 per share, the
holder of the warrants may request a buyout of the warrant for a $10,000
payment. The Company recorded a $172,750 charge to operations for the fair value
of these warrants.
On February 11, 2005, the Company issued an option to purchase 12,000 shares of
its common stock for $6.25 per share to one of its directors. The right to
exercise this option vests as to 25% on the six-month anniversary of award, as
to 25% on the one-year anniversary of award and as to 25% on each of the
two-year and three-year anniversaries of award.
On March 7, 2005, the Company issued a three-year warrant to purchase 50,000
shares of its common stock at $4.75 per share to a financial relations firm for
services provided during March 2005. The Company recorded a $205,500 charge to
operations for the fair value of this warrant.
F-41
On March 7, 2005, the Company issued a three-year warrant to purchase 15,000
shares of its common stock at $5.00 per share to a financial relations firm for
services provided during March 2005. The Company recorded a $61,650 charge to
operations for the fair value of this warrant.
On July 20, 2005, the Company issued an option to purchase 10,000 shares of its
common stock for $2.70 per share to one of its directors. The right to exercise
this option vests as to 25% on the six-month anniversary of award, as to 25% on
the one-year anniversary of award and as to 25% on each of the two-year and
three-year anniversaries of award.
On August 15, 2005, the Company issued to an employee upon hire, an option to
purchase 25,000 shares of its common stock for $1.71 per share, and such options
vest over four years.
On September 13, 2005, the Company issued an option to purchase 2,000 shares of
its common stock for $1.02 per share to each of its two outside directors. The
right to exercise this option vests as to 25% on the six-month anniversary of
award, as to 25% on the one-year anniversary of award and as to 25% on each of
the two-year and three-year anniversaries of award.
COMMON STOCK ISSUED UPON CASHLESS EXERCISE OF WARRANTS
On February 15, 2005, a warrant holder exercised their right to purchase 187,500
shares of the Company's common stock at $3.05 per share through a cashless
exercise whereby in exchange for the exercise price of $571,875, the Company
withheld from issuing 87,309 shares of common stock issuable upon exercise of
this warrant based upon a fair market value of $6.55 per share on the date of
exercise. Consequently, the Company issued 100,191 shares of common stock to the
warrant holder.
COMMON STOCK ISSUED IN PAYMENT OF LEGAL FEES
On January 10, 2005, as payment for $70,000 of certain legal fees in connection
with its private placement, the Company issued 23,000 shares of common stock to
its law firm.
COMMON STOCK ISSUED TO ADVISORS FOR PAST SERVICES
On February 11, 2005 the Company issued 2,500 shares of restricted common stock
to a former director and 5,000 shares of restricted common stock to a director
of the Company as compensation for past services to the Company. The Company
recorded a $46,875 charge to operations for the intrinsic value of these
restricted shares of common stock. The restrictions lapse six months from the
date of issuance.
COMMON STOCK ISSUED UPON EXERCISE OF WARRANTS
On March 15, 2005, the Company issued 5,000 shares of common stock upon exercise
of a warrant at an exercise price of $1.25 per share.
COMMON STOCK ISSUED FOR FINANCIAL SERVICES
Pursuant to a letter agreement dated May 20, 2005, the Company issued 25,000
shares of common stock as initial compensation for financial consulting services
to be provided the Company. The fair value of these shares, which amounts to
$75,000 at date of issuance, was initially characterized as a prepaid expense in
the balance sheet at June 30, 2005, and has been charged to operations during
the three-month period ended September 30, 2005.
Pursuant to a letter agreement dated September 14, 2005, the Company issued
25,000 shares of common stock as initial compensation for financial consulting
services to be provided the Company. The fair value of these shares, which
amounts to $22,500 at date of issuance, is characterized as a prepaid expense in
the accompanying balance sheet at September 30, 2005.
TREASURY SHARES ACQUIRED AND RETIRED Pursuant to the Variable Shares Put Right
obligation contained in the Spinoff Agreement with Xechem, the Company
repurchased 366,580 shares of its common stock from Xechem during the
three-month period ended March 31, 2005. In addition, pursuant to a Securities
Purchase Agreement entered into with Xechem effective June 17, 2005, the Company
repurchased 2,886,563 shares of its common stock from Xechem for $2,309,250 in
cash and the forfeiture of an option held by the Company's Chief Executive
Officer to purchase 43 million shares of common stock of Xechem with a fair
value of $424,818. The Company accounted for these share repurchases as treasury
stock transactions, at cost. Xechem retained 500,000 shares of common stock of
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the Company but agreed that it would only sell such shares subject to the volume
restrictions of Rule 144, regardless of whether or not such volume limitations
are applicable at the time of such sale. Additionally, the Securities Purchase
Agreement terminated the Spinoff Agreement.
Effective June 17, 2005, the Company retired all 3,398,213 shares of its common
stock held in treasury.
CONTINGENT CONSIDERATION
Pursuant to the terms of the acquisition of the Company by Xechem, Xechem agreed
to the future payment of additional consideration in shares of stock of Xechem
to the original shareholders of the Company upon the attainment of certain
defined development milestones. In connection with the Spinoff Agreement,
substantially all of the obligations for the issuance of shares as additional
consideration to the original shareholders of the Company have been assumed by
the Company, and Xechem has been released therefrom.
The Company obtained from substantially all of the original shareholders a
waiver of their rights with respect to the contingent consideration and release
of the Company from its obligations thereunder and on July 20, 2005, the Company
issued a total of 100,000 shares in satisfaction of this obligation. The Company
recorded a $270,000 charge to operations for the charge to operations for the
fair value of these shares.
NOTE 11 - SUBSEQUENT EVENTS
COMMON STOCK ISSUED UPON CONVERSION OF SERIES A PREFERRED STOCK
Subsequent to September 30, 2005, the Company issued 20,000 shares of common
stock upon conversion of 2 shares of Series A Preferred Stock.
LEGAL PROCEEDINGS
On July 26, 2005 Xmark Opportunity Fund, L.P. and Xmark Opportunity Fund, Ltd.
(collectively, "Xmark") filed an action in the United States District Court for
the Southern District of New York (No. 05-CV-6696) against the Company and
William Pursley, the Company's Chief Executive Officer, alleging breach of
contract, breach of the implied covenant of good faith and fair dealing,
detrimental reliance, and quantum meruit/unjust enrichment related to the
Company's registration of Common Stock to be offered for sale by the plaintiffs
and seeking damages under the Securities Exchange Act of 1934, specific
performance of plaintiff's subscription agreement entered into in connection
with the Company's private placement of securities completed on February 11,
2005, damages in an unspecified amount, punitive damages, interest, costs, and
expenses. On September 24, 2005, Xmark filed a stipulation and order of
dismissal with prejudice dismissing the action.
STOCK PURCHASE AGREEMENT - FUSION CAPITAL
On October 7, 2005, the Company entered into a common stock purchase agreement
("Stock Purchase Agreement") with Fusion Capital Fund II, LLC ("Fusion
Capital"), pursuant to which Fusion Capital has agreed, under certain conditions
as outlined below, to purchase on each trading day $25,000 of the Company's
common stock up to an aggregate, under certain conditions, of $20 million over a
40-month period, subject to earlier termination at the Company's discretion. If
the market price of common stock increases to certain levels, then in the
Company's discretion, the Company may elect to sell more common stock to Fusion
Capital than the minimum daily amount. The purchase price of the shares of
common stock will be calculated based upon the future market price of the common
stock without any fixed discount to the market price. Fusion Capital does not
have the right or the obligation to purchase shares of common stock in the event
that the price of common stock is less than $0.50 per share. The Company is
required to file and have declared effective a registration statement with the
SEC as a precondition to receipt of any funds with respect to this transaction.
There can be no assurance that the SEC will declare any such registration
statement effective. The inability of the Company to obtain financing through
this or any other transaction would have a material adverse effect on the
Company's financial condition and its ability to sustain operations.
Pursuant to the Stock Purchase Agreement, the Company issued 377,359 shares of
its common stock to Fusion Capital and a warrant to purchase 377,359 shares of
common stock at $0.01 per share which expires December 31, 2010 (the "Fusion
Warrant"), as an initial commitment fee and as an additional commitment fee, the
Company is obligated to issue to Fusion Capital an additional 754,717 shares, on
a pro rata basis, once Fusion Capital has acquired its initial $10 million of
common stock. These shares, upon issuance, will be accounted for at par value
with a corresponding charge to paid-in capital. In addition, the Company issued
25,000 shares to Fusion Capital as an expense reimbursement.
The Company has reserved 6,534,435 shares of common stock for this transaction
consisting of 5,000,000 shares subject to purchase by Fusion Capital pursuant to
the Stock Purchase Agreement, the 377,359 shares and the 377,359 shares
underlying the warrant issued as the initial commitment, 754,717 shares issuable
on a pro rata basis as an additional commitment fee and the 25,000 shares issued
as an expense reimbursement.
F-43
Under the Stock Purchase Agreement, on each trading day, Fusion Capital is
obligated to purchase a specified dollar amount of the Company's common stock.
Subject to the Company's right to suspend such purchases at any time, and its
right to terminate the Stock Purchase Agreement at any time, Fusion Capital will
purchase on each trading day during the term of the Agreement $25,000 of common
stock. This daily purchase amount may be decreased by the Company at any time.
The Company also has the right to increase the daily purchase amount at any
time, provided however, it may not increase the daily purchase amount above
$25,000 unless the price of the common stock is above $1.60 per share for five
consecutive trading days. Specifically, for every $0.10 increase in Threshold
Price above $1.50, the Company has the right to increase the daily purchase
amount by up to an additional $2,500. For example, if the Threshold Price is
$1.70, the Company would have the right to increase the daily purchase amount up
to an aggregate of $30,000. The "Threshold Price" is the lowest sale price of
the common stock during the five trading days immediately preceding the
Company's notice to Fusion Capital to increase the daily purchase amount. If at
any time during any trading day the sale price of the common stock is below the
Threshold Price, the applicable increase in the daily purchase amount will be
void.
In addition to the daily purchase amount, the Company may elect to require
Fusion Capital to purchase on any single trading day, common stock in an amount
up to $250,000, provided that the price is above $2.00 during the ten prior
trading days. The price at which such shares would be purchased will be the
lowest purchase price during the previous fifteen trading days prior to the date
that such purchase notice was received by Fusion Capital. The Company may
increase this amount to $500,000 if its common stock share price is above $4.00
during the five trading days prior to its delivery of the purchase notice to
Fusion Capital. This amount may also be increased to up to $1,000,000 if the
price of the common stock is above $6.00 during the five trading days prior to
delivery of the purchase notice to Fusion Capital. The Company may deliver
multiple purchase notices; however at least ten trading days must have passed
since the most recent non-daily purchase was completed.
The purchase price per share is equal to the lesser of:
o the lowest sale price of the common stock on the purchase date; or
o the average of the three lowest closing sale prices of the common
stock during the twelve consecutive trading days prior to the date of
a purchase by Fusion Capital.
The purchase price will be adjusted for any reorganization, recapitalization,
non-cash dividend, stock split, or other similar transaction occurring during
the trading days in which the closing bid price is used to compute the purchase
price. Fusion Capital may not purchase shares of common stock under the Stock
Purchase Agreement if Fusion Capital, together with its affiliates, would
beneficially own more than 9.9% of the Company's common stock outstanding at the
time of the purchase by Fusion Capital. Fusion Capital has the right at any time
to sell any shares purchased under the Stock Purchase Agreement which would
allow it to avoid the 9.9% limitation.
Under the Stock Purchase Agreement, the Company has set a minimum purchase price
("floor price") of $0.50 per share. Fusion Capital will not have the right nor
the obligation to purchase any shares of Common Stock in the event that the
purchase price is less than the floor price.
The Company has the unconditional right to suspend purchases at any time for any
reason effective upon one trading day's notice. Any suspension will remain in
effect until the Company's revocation of the suspension.
Generally, Fusion Capital may terminate the Stock Purchase Agreement without any
liability or payment to the Company upon the occurrence of any of the following
events of default:
o the effectiveness of the registration statement lapses for any reason
(including, without limitation, the issuance of a stop order) or is
unavailable to Fusion Capital for sale of the Company's common stock
and such lapse or unavailability continues for a period of ten
consecutive trading days or for more than an aggregate of thirty
trading days in any 365-day period;
o suspension by a principal market of the Company's common stock from
trading for a period of three consecutive trading days;
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o the de-listing of the Company's common stock from a principal market
provided the common stock is not immediately thereafter trading on the
Nasdaq National Market, the Nasdaq National SmallCap Market, the New
York Stock Exchange or the American Stock Exchange;
o the transfer agent's failure for five trading days to issue to Fusion
Capital shares of common stock which Fusion Capital is entitled to
under the Stock Purchase Agreement ;
o any material breach of the representations or warranties or covenants
contained in the Stock Purchase Agreement or any related agreements
which has or which could have a material adverse affect on the Company
subject to a cure period of ten trading days;
o any participation or threatened participation in insolvency or
bankruptcy proceedings by or against the Company; or
o a material adverse change in the Company's business.
The Company has the unconditional right at any time for any reason to give
notice to Fusion Capital terminating the Stock Purchase Agreement. Such notice
shall be effective one trading day after Fusion Capital receives such notice.
Under the terms of the Stock Purchase Agreement Fusion Capital has received
377,359 shares of the Company's common stock and the Fusion Warrant to purchase
up to 377,359 shares of common stock as an initial commitment fee. In connection
with each purchase of common stock after Fusion Capital has purchased $10
million of common stock, the Company will issue up to 754,717 additional shares
of common stock to Fusion Capital as an additional commitment fee. These
additional shares will be issued pro rata based on the proportion that a dollar
amount purchased by Fusion bears to the $10 million amount under the Stock
Purchase Agreement. Unless an event of default occurs, these shares must be held
and may not be transferred or sold by Fusion Capital until 40 months from the
date of the Stock Purchase Agreement or the date the Stock Purchase Agreement is
terminated.
Until the termination of the Stock Purchase Agreement, the Company has agreed
not to issue, or enter into any agreement with respect to the issuance of, any
variable priced equity or variable priced equity-like securities unless it has
obtained Fusion Capital's prior written consent.
For a period of 40 months from October 7, 2005, the date of the Stock Purchase
Agreement, the Company has granted to Fusion Capital the right to participate in
the purchase of any New Securities (as defined below) that the Company may, from
time to time, propose to issue and sell in connection with any financing
transaction to a third party. In particular, Fusion Capital may purchase up to
25% of such New Securities at the same price and on the same terms as such other
investor, provided that in any single transaction, Fusion Capital may not
purchase in excess of $5,000,000. "New Securities" means any shares of common
stock, preferred stock or any other equity securities or securities convertible
or exchangeable for equity securities of the Company. New Securities shall not
include, (i) shares of common stock issuable upon conversion or exercise of any
securities outstanding as of the date of the Stock Purchase Agreement , (ii)
shares, options or warrants for common stock granted to the Company's officers,
directors or employees pursuant to stock option plans approved by its board of
directors, (iii) shares of common stock or securities convertible or
exchangeable for common stock issued pursuant to the acquisition of another
company by consolidation, merger, or purchase of all or substantially all of the
assets of such company or (iv) shares of common stock or securities convertible
or exchangeable into shares of common stock issued in connection with a
strategic transaction involving the Company and issued to an entity or an
affiliate of such entity that is engaged in the same or substantially related
business as the Company. Fusion Capital's rights shall not prohibit or limit the
Company from selling any securities so long as it makes the same offer to Fusion
PlacementCapital.
COMMON STOCK PURCHASE AGREEMENT - FOUNDERS' PLAN SHARES
The Company entered into a stock purchase agreement for the sale of
approximately 265,600 shares of its common stock under its Founders' Plan and
received $167,250 during October 2005.
F-45
CONVERTIBLE DEBENTURES
On December 9, 2005, the Company entered into a securities purchase agreement
(the "Securities Purchase Agreement") with Cornell Capital Partners, LP
("Cornell Capital") pursuant to which Cornell Capital has agreed to purchase
from the Company, in a private placement, secured convertible debentures in the
aggregate principal amount of $2,000,000 (the "Debentures"), which Debentures
bear interest at the rate of 8% per year. Pursuant to the Securities Purchase
Agreement, the Company issued a Debenture in the principal amount of $1,000,000
on each of December 9, 2005 and December 28, 2005. Each Debenture has a
three-year maturity from the date of issuance and is subject to earlier
conversion or redemption pursuant to its terms.
Cornell Capital has the right to convert a portion or all of the outstanding
principal and interest under the Debentures into shares of Common Stock at a
conversion price per share equal to the lesser of $0.9765 (105% of the closing
bid price of the Common Stock on December 8, 2005) (the "Fixed Price") or (ii)
95% of the lowest closing bid price of the Common Stock for the twenty trading
days immediately preceding the conversion date (the "Floating Price" and
together with the Fixed Price, the "Conversion Price"), subject to adjustment as
provided in the Debentures; provided, that any such conversion based on the
Floating Price will generally be limited to $150,000 of principal outstanding
under the Debentures in any thirty day period; and further provided, that
Cornell Capital may not convert the Debentures into shares of Common Stock if
such conversion would result in Cornell Capital, together with its affiliates,
beneficially owning in excess of 4.9% of the then issued and outstanding shares
of Common Stock. The Conversion Price and number of shares of Common Stock
issuable upon conversion of the Debentures is subject to certain exceptions and
adjustment for stock splits and combinations and other dilutive events.
Subject to the terms and conditions of the Debentures, the Company has the right
at any time upon three business days notice to redeem the Debentures, in whole
or in part. If the closing bid price of the Common Stock, is less than the Fixed
Price at the time of the redemption, the Company is obligated to pay, in
addition to the principal and accrued interest being redeemed, a redemption
premium of 8% of the principal amount being redeemed (the "Redemption Amount").
If the closing bid price is greater than the Fixed Price, the Company may redeem
up to 50% of the principal amount at the Redemption Amount and the remaining 50%
at the greater of the (x) Redemption Amount or (y) the market value of the
Common Stock. In addition, Cornell Capital will receive a three-year warrant to
purchase 25,000 shares of Common Stock for every $100,000 redeemed by the
Company, on a pro rata basis, at an exercise price per share of $0.9765 (the
"Redemption Warrant").
If an Event of Default (as such term is defined in the Debentures) occurs, any
principal and accrued interest outstanding will become immediately due and
payable, in cash or Common Stock, at Cornell Capital's election.
Pursuant to the Securities Purchase Agreement, on December 9, 2005, the Company
issued to Cornell Capital a warrant to purchase 1,000,000 shares of Common Stock
at an exercise price per share of $1.023 (110% of the closing bid price of the
Common Stock on December 8, 2005) and (ii) 268,817 shares of Common Stock, and
on each of December 9, 2005 and December 28, 2005, the Company made a cash
payment to an affiliate of Cornell Capital of $80,000 for expenses incurred in
connection with the transaction.
In connection with the Securities Purchase Agreement, the Company also entered
into an investor registration rights agreement with Cornell Capital pursuant to
which the Company is obligated to register 500% of the amount of shares issuable
upon conversion of the Debenture at maturity based upon the Fixed Price and to
file a registration statement within 30 days of December 9, 2005 (the
"Registration Statement"). If the Registration Statement is not deemed effective
by the SEC within 90 days after December 9, 2005 due to the Company's failure to
use best efforts, the Company is obligated to pay Cornell, as liquidated
damages, an amount equal to 1% of the value of the Debentures outstanding, in
cash or in shares of Common Stock, at Cornell Capital's option, for each 30-day
period thereafter.
F-46
The Company has granted a security interest in all of its assets to Cornell
Capital to secure our obligations under the Debentures.
CONVERTIBLE PROMISSORY NOTES
On December 9, 2005, the Company issued a convertible promissory note (the
"Note") in the principal amount of $250,000 to Harbor Trust which bears interest
at the rate of 6% percent per year. All unpaid principal and interest under the
Note will be due and payable on December 9, 2006. The Note is convertible, in
whole or in part, at any time, into Common Stock at a conversion price of $1.00
per share, subject to certain limitations on conversion as set forth in the
Note, including where the resulting number of shares converted on a cumulative
basis, would exceed 19.99% of the total number of shares of Common Stock
outstanding and, subject to a conversion price adjustment in the event the
Company offers or sells an option to acquire Common Stock at a price per share
less than the conversion price.
On December 9, 2005, the Company issued an amended convertible promissory note
(the "Amended Note") to Harbor Trust which amends a convertible promissory note,
dated December 9, 2004 with Harbor Trust in the principal amount of $452,991.10
reducing the conversion price to $0.375 from $0.75 per share. The Amended Note
bears interest at the rate of 10% per year through December 9, 2005 and 12% per
year thereafter. All unpaid principal and interest under the Amended Note will
be due and payable on July 3, 2006. The Amended Note is convertible, in whole or
in part, at any time, into Common Stock at the conversion price of $0.375 per
share subject to certain limitations on conversion as set forth in the Amended
Note, including where the resulting number of shares converted, on a cumulative
basis, would exceed 19.99% of the total number of shares of Common Stock
outstanding.
F-47
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the DGCL provides, in general, that a corporation incorporated
under the laws of the State of Delaware, such as us, may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (other than a derivative action
by or in the right of the corporation) by reason of the fact that such person is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. In the case of a derivative action, a Delaware corporation
may indemnify any such person against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification will be made in
respect of any claim, issue or matter as to which such person will have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or any other court in which such
action was brought determines such person is fairly and reasonably entitled to
indemnity for such expenses.
Our Certificate of Incorporation and Bylaws provide that we will indemnify our
directors, officers, employees and agents to the extent and in the manner
permitted by the provisions of the DGCL, as amended from time to time, subject
to any permissible expansion or limitation of such indemnification, as may be
set forth in any stockholders' or directors' resolution or by contract. We also
have director and officer indemnification agreements with each of our executive
officers and directors which provide, among other things, for the
indemnification to the fullest extent permitted or required by Delaware law,
provided that such indemnitee shall not be entitled to indemnification in
connection with any "claim" (as such term is defined in the agreement) initiated
by the indemnitee against us or our directors or officers unless we join or
consent to the initiation of such claim, or the purchase and sale of securities
by the indemnitee in violation of Section 16(b) of the Exchange Act.
Item 25. Other Expenses of Issuance and Distribution
The expenses payable by us in connection with this Registration Statement are
estimated as follows:
SEC Registration Fee $ 1,272
Accounting Fees and Expenses 10,000
Legal Fees and Expenses 20,000
Printing Fees and Expenses 0
----------------
Total $ 31,272
Item 26. Recent Sales of Unregistered Securities
During the last three years, we have issued the following unregistered
securities. None of these transactions involved any underwriters, underwriting
discounts or commissions, except as specified below, or any public offering, and
II-1
we believe that each transaction was exempt from the registration requirements
of the Securities Act by virtue of Section 4(2) thereof and/or Regulation D
promulgated thereunder.
On August 25, 2004, we granted an option to purchase 15,000 shares of Common
Stock at $2.50 per share to a research consultant of our company. Shares subject
to the option vest as to 25% on the date of grant and 25% each three months
thereafter.
On December 2, 2004, we granted an option to purchase an aggregate of 400,000
shares of Common Stock at $2.50 per share to a consulting firm for financial
public relation services. Shares subject to the option vest as to 25% on the
grant date and 25% on each six months thereafter.
On January 25, 2005, we issued 23,000 shares of Common Stock to our law firm as
compensation for past services.
On December 9, 2004 we sold an aggregate of 103.62 Units to approximately 42
accredited investors and received gross proceeds of $2,590,500, before payment
of commissions and expenses, pursuant to the terms of a Confidential Private
Placement Memorandum dated October 22, 2004, as supplemented November 16, 2004
in the Private Placement. Each Unit consists of one share of Series A Preferred
Stock and a three-year warrant to purchase our common stock, par value $0.0001
per share ("Common Stock") at $2.50 per share. Each share of Series A Preferred
Stock is convertible into 10,000 shares of Common Stock and each warrant
entitles the holder to purchase 5,000 shares of Common Stock.
On December 27, 2004, January 5, 2005 and January 18, 2005 we held additional
closings under the Private Placement and received gross proceeds of $1,036,250,
$1,208,750 and $1,906,250, from the sale of an additional 41.45, 48.35, and
76.25 Units to 73, 75, and 34 investors, respectively. On January 31, 2005 and
February 3, 2005 we sold an aggregate of 224.48 Units to 86 investors and
received gross proceeds of $5,612,000, and on February 11, 2005 we sold 17.50
Units to 4 investors and received gross proceeds of $437,500 and terminated the
Private Placement, realizing total gross proceeds from the Private Placement of
$12,791,250.
On December 8, 2004 we issued 5,278,068 shares of Common Stock to Xechem and
other stockholders pursuant to the Merger.
On December 9, 2004, we issued an aggregate of 3,031, 943 shares of Common
Stock, at par value, to be designated to participants in the Founders' Plan.
On December 9, 2004, we issued 167,610 shares of Common Stock to a Replacement
Note holder which converted its Replacement Note.
On December 9, 2004, we issued 150,000 shares of Common Stock and on January 31,
2005, we issued 150,000 shares of Common Stock to the Placement Agent under the
Placement Agent Agreement. Pursuant to the Placement Agent Agreement, we issued
warrants to purchase 511,650 shares of Common Stock to the Placement Agent.
On December 9, 2004, we issued three-year warrants to purchase an aggregate of
200,000 shares of Common Stock at $1.25 per share to two entities which assisted
us in the Private Placement.
On December 9, 2004, we issued 125,000 shares of Common Stock to an unaffiliated
entity in settlement of a lawsuit.
II-2
On December 9, 2004 we issued 337,845 shares of Common Stock to a financial
advisor for services provided to us during 2004.
On December 9, 2004 we issued five-year warrants to purchase an aggregate of
50,000 shares of Common Stock to four entities.
On February 10, 2005, we issued a five-year warrant to purchase 37,500 shares of
Common Stock at $6.50 per share for 12,500 shares, $8.00 per share for 12,500
shares and $9.50 per share for 12,500 shares, to an investor relations firm for
services provided during the first quarter of 2005. Our Common Stock must trade
at or above $8.00 per share for ten consecutive days in order for the holder to
exercise their right to purchase the shares underlying the warrant. In addition,
if our Common Stock trades at less than $0.67 per share, the holder of the
warrants may request a buyout of the warrant for a $10,000 payment.
Concurrent with the final close of the Private Placement on February 11, 2005,
we were able to calculate the number of shares of Common Stock subject to the
option previously granted to an employee upon hire during November 2004, of
78,195 shares of Common Stock. Pursuant to the terms of the 2004 Incentive Stock
Plan, the options have an exercise price of $2.50 per share, the fair market
value on the date of grant and such options will vest over four years.
On February 11, 2005, we issued an option to purchase 12,000 shares of Common
Stock for $6.25 per share to one of our directors pursuant to our 2004 Incentive
Stock Plan. The right to exercise this option vests as to 25% on the six-month
anniversary of award, as to 25% on the one-year anniversary of award and as to
25% on each of the two-year and three-year anniversaries of award.
On February 11, 2005, we issued 2,500 shares of restricted Common Stock to a
former director and 5,000 shares of restricted Common Stock to a director of our
company as compensation for past services. The restrictions lapse six months
after issuance of the shares of Common Stock.
On February 11, 2005, we issued 50,000 shares of restricted Common Stock (from
the 3,031,943 shares designated on December 9, 2004) to a member of our law firm
as compensation for past services. The restrictions lapse as to 5,000 shares on
each of August 11, 2005 and December 11, 2005 and as to the remaining 40,000
shares upon our IND Phase III filing with the FDA for Myodur.
On February 15, 2005, a warrant holder exercised its right to purchase 187,500
shares of Common Stock at $3.05 per share through a cashless exercise whereby in
exchange for the exercise price of $571,875, we cancelled 87,309 shares of
Common Stock with a value of $6.55 per share on date of exercise, resulting in
us issuing 100,191 shares of Common Stock.
On March 7, 2005, we issued a three-year warrant to purchase 50,000 shares of
Common Stock at $4.75 per share to a financial relations firm for services
provided to us during March 2005.
On March 7, 2005, we issued a three-year warrant to purchase 15,000 shares of
Common Stock at $5.00 per share to a financial relations firm for services
provided to us during March 2005.
On March 16, 2005, as a result of the amendment of our Private Placement to
increase the total amount to be raised from $6.0 million to $12.0 million, we
granted the original shareholders of Medallion five-year warrants to purchase,
in the aggregate, 925,000 shares of Common Stock at $1.25 per share.
II-3
In April 2005, the Replacement Notes were amended to extend the maturity date to
July 3, 2006 from December 8, 2005, to increase the interest rate to 12%,
effective December 9, 2005, and to change the conversion price to $0.75 from
$1.25 per share.
On June 21, 2005, we issued 25,000 shares of Common Stock to an investment
advisory firm for services rendered to us.
On August 16, 2005, we issued a three-year warrant to purchase 100,000 shares of
Common Stock at $1.70 per share to a financial relations firm for services
rendered to us.
On August 16, 2005, we issued a three-year warrant to purchase 60,000 shares of
Common Stock at $1.70 per shares to the Placement Agent for financial relation
services.
On September 16, 2005, we issued 25,000 shares of Common Stock as an expense
reimbursement and on October 7, 2005, we issued 377,359 shares of Common Stock
as initial commitment shares and the Fusion Warrant to purchase 377,359 shares
of Common Stock at $0.01 per share to Fusion Capital under the Stock Purchase
Agreement.
On December 9, 2005, we amended the Replacement Note to Harbor Trust to change
the conversion price to $0.375 from $0.75 per share.
On December 9, 2005, we issued a $250,000 convertible promissory note at a
conversion price of $1.00 per share to Harbor Trust which bears interest at 6%
per year and matures on December 9, 2006.
On December 9, 2005, we issued (i) a $1,000,000 Debenture, (ii) a warrant to
purchase 1,000,000 shares of Common Stock at $1.023 per share and (ii) 268,817
shares of Common Stock, to Cornell Capital.
On December 28, 2005, we issued a $1,000,000 Debenture to Cornell Capital.
Item 27. Exhibits.
Exhibit
Number Description
------ -----------
1.1 Placement Agent Agreement, dated as of October 22, 2004,
between us, the Company and the Brookshire Securities
Corporation (incorporated herein by reference to Exhibit 1.1
to our Current Report on Form 8-K, filed on December 14, 2004
("2004 8-K"))
1.2 Amendment No. 1 to Placement Agent Agreement, dated as of
January 13, 2005, between us and Brookshire Securities
Corporation (incorporated herein by reference to Exhibit 1.2
to our Current Report on Form 8-K, dated January 31, 2005
("January 2005 8-K"))
2.1 Certificate of Ownership and Merger of CepTor Corporation into
CepTor Research and Development Company (incorporated by
reference herein to Exhibit 2.1 to the January 2005 8-K)
3.1 Amended and Restated Certificate of Incorporation, dated
January 27, 2005 (incorporated by reference herein to Exhibit
3.1 to the January 2005 8-K)
II-4
3.2 Certificate of Correction to Amended and Restated Certificate
of Incorporation, filed February 4, 2005 (incorporated by
reference herein to Exhibit 3.2 to our Registration Statement
on Form SB-2 dated February 11, 2005 ("Form SB-2"))
3.3 Amended and Restated By-laws (incorporated herein by reference
to Exhibit 3.2 to the January 2005 8-K)
4.1 Agreement between the Company and Brown Advisory Securities,
LLC, dated May 20, 2005 (incorporated herein by reference to
Exhibit 4.1 to our Registration Statement on Form SB-2 dated
October 17, 2005 ("October 2005 SB-2"))
4.2 Common Stock Purchase Agreement, dated October 7, 2005,
between the Company and Fusion Capital Fund II, LLC ("Fusion")
(incorporated herein by reference to Exhibit 10.1 to our
Current Report on Form 8-K, filed October 11, 2005 ("October
2005 8-K"))
4.3 Registration Rights Agreement, dated October 7, 2005, between
the Company and Fusion (incorporated herein by reference to
Exhibit 4.2 to the October 2005 8-K)
4.4 Common Stock Warrant with Fusion, dated October 7, 2005
(incorporated by reference herein to Exhibit 4.1 to the
October 2005 8-K)
4.5 Secured Convertible Debenture, dated December 9, 2005, issued
by the Company to Cornell Capital (incorporated herein by
reference to Exhibit 4.1 to our Current Report on Form 8-K,
filed December 15, 2005 ("December 2005 8-K"))
4.6 Warrant issued to Cornell Capital, dated December 9, 2005
(incorporated herein by reference to Exhibit 4.2 to the
December 2005 8-K)
4.7 Form of Redemption Warrant to Cornell Capital (incorporated
herein by reference to Exhibit 4.3 to the December 2005 8-K)
4.8 $250,000 Convertible Promissory Note, dated December 9, 2005,
to Harbor Trust (incorporated herein by reference to Exhibit
4.4 to the December 2005 8-K)
4.9 $452,991.10 Amended Promissory Note, dated December 9, 2005,
to Harbor Trust (incorporated herein by reference to Exhibit
4.5 to the December 2005 8-K)
4.10* Secured Convertible Debenture, dated December 28, 2005, issued
by the Company to Cornell Capital
5* Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP
10.1 Employment Agreement, dated March 31, 2004, with William H.
Pursley (incorporated herein by reference to Exhibit 10.1 to
the Form SB-2)
10.2 Employment Agreement, dated April 26, 2004, with Norman W.
Barton, M.D., Ph.D. (incorporated herein by reference to
Exhibit 10.2 to the Form SB-2)
10.3 Employment Agreement, dated March 31, 2004, with Donald W.
Fallon (incorporated herein by reference to Exhibit 10.3 to
the Form SB-2)
10.5 Founders' Plan (incorporated herein by reference to Exhibit
10.5 to the Form SB-2)
II-5
10.6 2004 Incentive Plan (incorporated herein by reference to
Exhibit 10.6 to the Form SB-2)
10.7 Sublease Agreement, dated March 4, 2004, by and between CepTor
Corporation and Millennium Inorganic Chemicals, Inc.
(incorporated herein by reference to Exhibit 10.7 to the Form
SB-2)
10.8 Exclusive License Agreement, dated September 15, 2004, with
JCR Pharmaceuticals Company, Ltd. (incorporated herein by
reference to Exhibit 10.8 to the Form SB-2)
10.9 Indemnification Agreement, dated October 6, 2005, with William
H. Pursley (incorporated herein by reference to Exhibit 10.9
to the October 2005 SB-2)
10.10 Indemnification Agreement, dated October 6, 2005, with Norman
W. Barton, M.D. (incorporated herein by reference to Exhibit
10.10 to the October 2005 SB-2)
10.11 Indemnification Agreement, dated October 6, 2005, with Donald
W. Fallon (incorporated herein by reference to Exhibit 10.11
to the October 2005 SB-2)
10.12 Indemnification Agreement, dated October 6, 2005, with Leonard
A. Mudry (incorporated herein by reference to Exhibit 10.12 to
the October 2005 SB-2)
10.13 Securities Purchase Agreement, dated December 9, 2005, between
the Company and Cornell Capital (incorporated herein by
reference to Exhibit 10.1 to the December 2005 8-K)
10.14 Side Letter, dated December 9, 2005, between the Company and
Cornell Capital (incorporated herein by reference to Exhibit
10.2 to the December 2005 8-K)
10.15 Investor Registration Rights Agreement, dated December 9,
2005, between the Company and Cornell Capital (incorporated
herein by reference to Exhibit 10.3 to the December 2005 8-K)
10.16 Securities Agreement, dated December 9, 2005, between the
Company and Cornell Capital (incorporated herein by reference
to Exhibit 10.4 to the December 2005 8-K)
16 Letter from Daszkal Bolton LLP to the Securities and Exchange
Commission, dated August 17, 2005 (incorporated herein by
reference to Exhibit 16 to our Current Report on Form 8-K/A,
filed on August 19, 2005)
23.1* Consent of WithumSmith+Brown, P.C.
23.2* Consent of Marcum & Kliegman LLP
23.3* Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP
24* Power of Attorney (included on signature page)
------------------
*filed herewith
II-6
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a) (3) of the Securities Act
of 1933;
(ii) Reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement;
(iii) Include any additional or changed information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each such
post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at that time to be the initial bona
fide offering.
(3) To file a post-effective amendment to remove from registration any of the
securities being registered which remain unsold at the end of the offering.
(4) For determining liability of the undersigned Registrant under the Securities
Act to any purchaser in the initial distribution of the securities, the
Registrant undertakes that in a primary offering of securities of the Registrant
pursuant to this Registration Statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities are offered or
sold to such purchaser by means of any of the following communications, the
Registrant will be a seller to the purchaser and will be considered to offer or
sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the Registrant relating to the
offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on
behalf of the Registrant or used or referred to by the Registrant;
(iii) The portion of any other free writing prospectus relating to the offering
containing material information about the Registrant or its securities provided
by or on behalf of the Registrant; and
(iv) Any other communication that is an offer in the offering made by the
Registrant to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described under Item 24 above, or otherwise, the
Registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
II-7
In the event that a claim for indemnification against such liabilities, other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding, is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 340A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. PROVIDED, HOWEVER, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is a part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
II-8
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement on Form SB-2 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Hunt Valley, State of Maryland, on December 29,
2005.
CEPTOR CORPORATION
By: /s/ William H. Pursley
-------------------------------------
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below in so signing also makes, constitutes and appoints William H.
Pursley and Donald W. Fallon his true and lawful attorney-in-fact and agent,
with full power of substitution and reconstitution, for him and in his name,
place, and stead, in any and all capacities, to sign and file Registration
Statement(s) and any and all pre-or post-effective amendments to such
Registration Statement(s), with all exhibits thereto and hereto, and other
documents with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, and each of them, full power and authority to do and
perform each and every act and thing requisite or necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
Signatures Title Date
---------- ----- ----
/s/ William H. Pursley Chairman, Chief Executive Officer December 29, 2005
-------------------------------------- and Director (principal executive
William H. Pursley officer)
/s/ Donald W. Fallon Senior Vice President, Finance and December 29, 2005
-------------------------------------- Administration, Chief Financial
Donald W. Fallon Officer and Secretary (principal
financial officer and principal
accounting officer)
/s/ Leonard A. Mudry Director December 29, 2005
--------------------------------------
Leonard A. Mudry
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
1.1 Placement Agent Agreement, dated as of October 22, 2004,
between us, the Company and the Brookshire Securities
Corporation (incorporated herein by reference to Exhibit 1.1
to our Current Report on Form 8-K, filed on December 14, 2004
("2004 8-K"))
1.2 Amendment No. 1 to Placement Agent Agreement, dated as of
January 13, 2005, between us and Brookshire Securities
Corporation (incorporated herein by reference to Exhibit 1.2
to our Current Report on Form 8-K, dated January 31, 2005
("January 2005 8-K"))
2.1 Certificate of Ownership and Merger of CepTor Corporation into
CepTor Research and Development Company (incorporated by
reference herein to Exhibit 2.1 to the January 2005 8-K)
3.1 Amended and Restated Certificate of Incorporation, dated
January 27, 2005 (incorporated by reference herein to Exhibit
3.1 to the January 2005 8-K)
3.2 Certificate of Correction to Amended and Restated Certificate
of Incorporation, filed February 4, 2005 (incorporated by
reference herein to Exhibit 3.2 to our Registration Statement
on Form SB-2 dated February 11, 2005 ("Form SB-2"))
3.3 Amended and Restated By-laws (incorporated herein by reference
to Exhibit 3.2 to the January 2005 8-K)
4.1 Agreement between the Company and Brown Advisory Securities,
LLC, dated May 20, 2005 (incorporated herein by reference to
Exhibit 4.1 to our Registration Statement on Form SB-2 dated
October 17, 2005 ("October 2005 SB-2"))
4.2 Common Stock Purchase Agreement, dated October 7, 2005,
between the Company and Fusion Capital Fund II, LLC ("Fusion")
(incorporated herein by reference to Exhibit 10.1 to our
Current Report on Form 8-K, filed October 11, 2005 ("October
2005 8-K"))
4.3 Registration Rights Agreement, dated October 7, 2005, between
the Company and Fusion (incorporated herein by reference to
Exhibit 4.2 to the October 2005 8-K)
4.4 Common Stock Warrant with Fusion, dated October 7, 2005
(incorporated by reference herein to Exhibit 4.1 to the
October 2005 8-K)
4.5 Secured Convertible Debenture, dated December 9, 2005, issued
by the Company to Cornell Capital (incorporated herein by
reference to Exhibit 4.1 to our Current Report on Form 8-K,
filed December 15, 2005 ("December 2005 8-K"))
4.6 Warrant issued to Cornell Capital, dated December 9, 2005
(incorporated herein by reference to Exhibit 4.2 to the
December 2005 8-K)
4.7 Form of Redemption Warrant to Cornell Capital (incorporated
herein by reference to Exhibit 4.3 to the December 2005 8-K)
4.8 $250,000 Convertible Promissory Note, dated December 9, 2005,
to Harbor Trust (incorporated herein by reference to Exhibit
4.4 to the December 2005 8-K)
4.9 $452,991.10 Amended Promissory Note, dated December 9, 2005,
to Harbor Trust (incorporated herein by reference to Exhibit
4.5 to the December 2005 8-K)
4.10* Secured Convertible Debenture, dated December 28, 2005, issued
by the Company to Cornell Capital
5* Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP
10.1 Employment Agreement, dated March 31, 2004, with William H.
Pursley (incorporated herein by reference to Exhibit 10.1 to
the Form SB-2)
10.2 Employment Agreement, dated April 26, 2004, with Norman W.
Barton, M.D., Ph.D. (incorporated herein by reference to
Exhibit 10.2 to the Form SB-2)
10.3 Employment Agreement, dated March 31, 2004, with Donald W.
Fallon (incorporated herein by reference to Exhibit 10.3 to
the Form SB-2)
10.5 Founders' Plan (incorporated herein by reference to Exhibit
10.5 to the Form SB-2)
10.6 2004 Incentive Plan (incorporated herein by reference to
Exhibit 10.6 to the Form SB-2)
10.7 Sublease Agreement, dated March 4, 2004, by and between CepTor
Corporation and Millennium Inorganic Chemicals, Inc.
(incorporated herein by reference to Exhibit 10.7 to the Form
SB-2)
10.8 Exclusive License Agreement, dated September 15, 2004, with
JCR Pharmaceuticals Company, Ltd. (incorporated herein by
reference to Exhibit 10.8 to the Form SB-2)
10.9 Indemnification Agreement, dated October 6, 2005, with William
H. Pursley (incorporated herein by reference to Exhibit 10.9
to the October 2005 SB-2)
10.10 Indemnification Agreement, dated October 6, 2005, with Norman
W. Barton, M.D. (incorporated herein by reference to Exhibit
10.10 to the October 2005 SB-2)
10.11 Indemnification Agreement, dated October 6, 2005, with Donald
W. Fallon (incorporated herein by reference to Exhibit 10.11
to the October 2005 SB-2)
10.12 Indemnification Agreement, dated October 6, 2005, with Leonard
A. Mudry (incorporated herein by reference to Exhibit 10.12 to
the October 2005 SB-2)
10.13 Securities Purchase Agreement, dated December 9, 2005, between
the Company and Cornell Capital (incorporated herein by
reference to Exhibit 10.1 to the December 2005 8-K)
10.14 Side Letter, dated December 9, 2005, between the Company and
Cornell Capital (incorporated herein by reference to Exhibit
10.2 to the December 2005 8-K)
10.15 Investor Registration Rights Agreement, dated December 9,
2005, between the Company and Cornell Capital (incorporated
herein by reference to Exhibit 10.3 to the December 2005 8-K)
10.16 Securities Agreement, dated December 9, 2005, between the
Company and Cornell Capital (incorporated herein by reference
to Exhibit 10.4 to the December 2005 8-K)
16 Letter from Daszkal Bolton LLP to the Securities and Exchange
Commission, dated August 17, 2005 (incorporated herein by
reference to Exhibit 16 to our Current Report on Form 8-K/A,
filed on August 19, 2005)
23.1* Consent of WithumSmith+Brown, P.C.
23.2* Consent of Marcum & Kliegman LLP
23.3* Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP
24* Power of Attorney (included on signature page)
------------------
*filed herewith