sec document
As filed with the Securities and Exchange Commission on February 11, 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
--------------------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------------------
Common Stock, par
value $0.0001 per share
outstanding 8,769,317(2) $6.07(3) $53,229,754.19 $6,265.14
--------------------------------------------------------------------------------------------------------------------
Common Stock
underlying Series A
Convertible Preferred
Stock 4,941,490 $6.07 (4) $29,994,844.30 $3,530.39
--------------------------------------------------------------------------------------------------------------------
Common Stock
underlying $2.50 per
share Unit Warrants to
Purchase 2,470,745 $6.07 (4) $14,997,422.15 $1,765.20
--------------------------------------------------------------------------------------------------------------------
Common Stock
underlying $1.25 per
share Warrants to
Purchase 1,669,149 $6.07 (4) $10,131,734.43 $1,192.51
--------------------------------------------------------------------------------------------------------------------
Common Stock
underlying $1.25 per
share Convertible
Promissory Notes(5) 793,323 $6.07 (4) $4,815,470.61 $566.78
--------------------------------------------------------------------------------------------------------------------
Common Stock
underlying $2.50 per
share Stock Options 680,695 $6.07 (4) $4,131,818.65 $486.32
--------------------------------------------------------------------------------------------------------------------
(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) Includes (i) 3,404,064 shares held by Xechem International, Inc., (ii)
3,031,943 shares issued to certain founders of Registrant, (iii) 554,413 shares
issued to JCR Pharmaceuticals Co., Ltd. under a licensing agreement, (iv)
300,000 shares issued to Brookshire Securities Corporation in connection with a
placement agent agreement, (v) 167,610 shares issued upon conversion of a
promissory note, (vi) 125,000 shares issued in connection with a settlement
agreement, (vii) 487,597 shares issued to former bridge loan holders, (viii)
675,690 shares.
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issued as compensation for assistance with financing transactions and (ix)
23,000 shares issued as payment for legal fees.
(3) Estimated at $6.07 per share, the last sale price of Common Stock as
reported on the OTC Bulletin Board regulated quotation service on February 3,
2005, for the purpose of calculating the registration fee in accordance with
Rule 457(c) under the Securities Act.
(4) Estimated at $6.07 per share, the last sale price of Common Stock as
reported on the OTC Bulletin Board regulated quotation service on February 3,
2005, for the purpose of calculating the registration fee in accordance with
Rule 457(g)(3) under the Securities Act.
(5) Shares issuable upon conversion of principal and accrued interest under
notes through December 8, 2005, the maturity date thereof, in the amount of
$991,653.
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.
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Subject to completion, dated February 11, 2005
PROSPECTUS
CEPTOR CORPORATION
19,324,719 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
19,324,719 shares of common stock, par value $0.0001 per share ("Common Stock"),
which includes (i) 4,941,490 shares issuable upon the conversion of Series A
Preferred Stock (ii) 2,470,745 shares issuable upon the exercise of unit
warrants with an exercise price of $2.50 per share, (iii) 1,669,149 shares
issuable upon the exercise of warrants with an exercise price of $1.25 per
share, (iv) 793,323 shares issuable upon the conversion of promissory notes, and
(v) 680,695 shares issuable upon the exercise of stock options with an exercise
price of $2.50 per share. All of such shares of Common Stock are being offered
for resale by the Selling Stockholders.
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 the
warrants and options if they are exercised by the Selling Stockholders and will
retain proceeds from issuance of certain convertible indebtedness upon
conversion of debt. See "Use of Proceeds."
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 February 3, 2005 as reported by the OTC Bulletin Board was $6.07 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) 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 4 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 February 11, 2005
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY.............................................................1
RISK FACTORS...................................................................4
FORWARD LOOKING STATEMENTS....................................................19
USE OF PROCEEDS...............................................................19
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS...................20
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.....................21
BUSINESS......................................................................23
MANAGEMENT....................................................................33
PRINCIPAL STOCKHOLDERS........................................................38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................39
DESCRIPTION OF THE TRANSACTIONS...............................................40
SELLING STOCKHOLDERS..........................................................41
DESCRIPTION OF SECURITIES.....................................................62
PLAN OF DISTRIBUTION..........................................................64
WHERE YOU CAN FIND MORE INFORMATION...........................................65
LEGAL MATTERS.................................................................66
EXPERTS.......................................................................66
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES................................................66
CHANGES IN ACCOUNTANT.........................................................66
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. Until December
2003 we were closely-held by ten persons and privately funded by the owners,
from research grants, and by development contracts. In December 2003 we were
acquired in a stock-for-stock transaction. Thereafter, our parent 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 whereupon our stockholders acquired a controlling stake in Medallion
Crest Management, Inc., a Florida corporation ("Medallion"). Medallion acquired
all of our outstanding capital stock in exchange for 4,783,919 shares of
Medallion Common Stock, and assumption of certain obligations and contingent
obligations.
On December 8, 2004 we filed an amendment to our Articles of Incorporation to
change our name to CepTor Corporation from Medallion Crest Management, Inc. and
to authorize the issuance of Series A Convertible Preferred Stock, par value
$0.0001 per share, ("Series A Preferred Stock"). On December 9, 2004, we
completed a first closing on our private offering in the amount of $2,590,500,
before commissions and expenses. As a result of these transactions, we succeeded
to the 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 our
parent 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.
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 audited
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 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.
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 highly specific 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 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), Myasthenia Gravis, 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 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
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
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 drastically
decreasing the probability of harmful side effects.
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 file an
investigational new drug application ("IND") for Myodur in the third quarter of
2005.
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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.
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 for the foreseeable future. Our current
emphasis is on filing Phase I IND application for Myodur and pursuing United
States Food and Drug Administration ("FDA") clinical studies and approvals. In
the absence of the availability of such financing on a timely basis, we could be
forced to materially curtail, limit, or cease our operations.
Because of our significant recurring losses, and the lack of certain sources of
capital to fund our operations, our independent registered public accounting
firm as stated in their report for the fiscal year ended December 31, 2003,
included an explanatory paragraph indicating that substantial doubt exists about
our ability to continue as a going concern.
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
Common Stock Offered by Selling Stockholders 19,324,719 shares, including
of (i) 4,941,490 shares
issuable upon the conversion
of Series A Preferred Stock
(ii) 2,470,745 shares
issuable upon the exercise of
unit warrants with an
exercise price of $2.50 per
share, (iii) 1,669,149 shares
issuable upon the exercise of
warrants with an exercise
price of $1.25 per share,
(iv) 793,323 shares issuable
upon the conversion of
promissory notes, and (v)
680,695 shares issuable upon
the exercise of stock options
with an exercise price of
$2.50 per share.
Use of Proceeds We will not receive any
proceeds from the sale of
shares in this offering by
the Selling Stockholders.
However, we will receive
proceeds from the exercise of
the warrants and the stock
options if they are exercised
by the Selling Stockholders
and retain proceeds from
issuance of certain
convertible indebtedness upon
conversion of debt. We intend
to use any proceeds for
working capital and general
corporate purposes.
OTC Bulletin Board Symbol CEPO.OB
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Common Stock Outstanding As of February 3, 2005 we had
15,560,807 shares of Common
Stock issued and outstanding,
which includes shares offered
by this prospectus and
assumes conversion of Series
A Preferred Stock outstanding
which is entitled to vote, on
an as-converted basis, with
Common Stock (10,619,317
shares excluding Series A
Preferred 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.
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information contained in this prospectus:
THE FAILURE TO COMPLETE DEVELOPMENT OF OUR DRUG DELIVERY 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, 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.
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.
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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;
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.
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
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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 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 preclinical 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.
WE HAVE ACCUMULATED DEFICITS IN THE RESEARCH AND DEVELOPMENT OF OUR DRUG
DELIVERY 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 recorded operating losses. As of September
30, 2004, we had a stockholders' deficiency of approximately $3,140,000 and
deficit accumulated during the development stage of approximately $9,551,000. In
addition, we expect to incur increasing operating losses over the next several
years as we continue to incur increasing costs for research and development and
clinical trials. 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 is costly and requires
significant investment. In addition, we may choose to license 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. All
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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 THE FACILITIES OF 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.
We 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 the Health Science Center at
Downstate Medical Center and Stony Brook University for this purpose. 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 the Health Science Center
at Downstate Medical Center and Stony Brook University. 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, other than through the universities, 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
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 PRECLINICAL 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
7
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 International, Inc.
("Xechem") and subsequent closing on our financing during December 2004. Our
operations are expected to continue to change 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.
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.
8
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.
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
MANAGEMENT TEAM'S UNIVERSITY RELATIONSHIPS MAY POTENTIALLY RESULT IN CONFLICTS
OF INTERESTS.
Dr. Alfred Stracher and Dr. Leo Kesner are the 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.
9
Therefore, any disruption in access to the technology could substantially delay
the development of our technology.
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 Industrie
Farmaceutiche Riunite S.p.A. ("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
10
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,
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 DRUG DELIVERY AND THERAPY 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 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,
11
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.
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.
12
WE WILL REQUIRE ADDITIONAL FUNDING WHICH WILL BE SIGNIFICANT AND MAY HAVE
DIFFICULTY RAISING NEEDED CAPITAL IN THE FUTURE BECAUSE OF OUR LIMITED OPERATING
HISTORY AND BUSINESS RISKS ASSOCIATED WITH OUR COMPANY.
Our business currently does 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 research, development and clinical and
pre-clinical testing of our drug delivery technology and compounds. We will
require additional funds to conduct research and development, establish and
conduct clinical and pre-clinical trials, obtain required regulatory approvals
and clearances, establish clinical and commercial-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 from any available source, we may have to delay,
reduce the scope of or eliminate one or more of our research or development
programs or product launches 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.
13
THE MARKET FOR OUR PRODUCTS IS RAPIDLY CHANGING AND COMPETITIVE, AND NEW DRUG
DELIVERY MECHANISMS, DRUG DELIVERY 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
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 RECEIVING 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 new drug application ("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.
14
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
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. Prescribing of approved drugs for 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 United States 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
15
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,
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 51) and Norman W. Barton (age
57). We maintain directors and officers insurance and have applied for "key man"
life insurance policies for Mr. Pursley and Dr. Barton, in the amount of
$1,000,000 each. This insurance may not adequately compensate for the loss of
their 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.
IF WE CANNOT OBTAIN ADDITIONAL FUNDS WHEN NEEDED, OR ACHIEVE PROFITABILITY WE
MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.
Our independent registered public accounting firm for the fiscal year ended
December 31, 2003 have included a qualification in their audit report referring
to our recurring operating losses and a substantial doubt about our ability 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 all of our product development
efforts as planned, and we may need to cease operations or sell assets. In
addition, the existence of the going concern qualification in the audit report
may in and of itself cause our stock price to decline as certain investors may
be restricted or precluded from investing in companies that have received this
notice in an audit report.
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
16
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 Common Stock, or shares of Common Stock underlying
warrants, options or preferred stock or convertible 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. None
of publicly traded shares currently have anti-dilution protection from these
events. The sale of 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 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 Common Stock would result in
a reduction of your percentage interest in our company.
HISTORICALLY, OUR COMMON STOCK HAS EXPERIENCED SIGNIFICANT PRICE FLUCTUATIONS.
One or more of the following factors have influenced and are expected to
continue to influence these fluctuations:
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.
17
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, EXECUTIVE OFFICERS, AND
PRINCIPAL STOCKHOLDER.
Our directors, officers, employees and principal stockholder, Xechem,
beneficially own an aggregate of approximately 42% of our outstanding Common
Stock as of February 3, 2005. 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.
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")
described in "Description of Securities", 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.
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 that 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 NASDAQ OR OTHER LISTING; AND WE MAY BE SUBJECT TO DISCLOSURE RELATING TO LOW
PRICED STOCKS.
Although we intend to apply for listing of our Common Stock on either NASDAQ or
a registered 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 the Common
Stock fails to qualify for initial or continued inclusion in the NASDAQ system
or for initial or continued listing on a registered stock exchange, trading, if
any, in the 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
18
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.
Trading of our Common Stock may be subject to penny stock rules under the
securities laws. 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
market makers in our Common Stock.
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.
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
19
prospectus. We will, however, receive proceeds from the exercise of warrants and
stock options outstanding and retain proceeds from issuance of certain
convertible indebtedness upon conversion of debt. 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. As of February 3, 2005, there were approximately 79
holders of record of our Common Stock and 208 holders of record of our Series A
Preferred 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 (through February 3, 2005) $ 6.50 $ 3.50
The prices reported on the OTC Bulletin Board as high and low sales prices vary
from inter-dealer bids which state inter-dealer quotations. Such inter-dealer
bids (and reported high and low sales prices) do not include retail mark-ups,
mark-downs or commissions. Such prices do not necessarily represent actual
transactions.
We have not declared or paid any 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, to finance the growth and
development of our business. Subject to our obligations to the holders of our
Series A Preferred Stock (See "Description of Securities"), the holders of our
Common Stock are entitled to dividends when and if declared by our Board from
legally available funds.
Equity Compensation Plan Information
We maintain a Founders' Plan and a 2004 Incentive Plan. We have issued 3,031,943
shares of Common Stock under the Founders' Plan, and have outstanding at
February 3, 2005 non-qualified stock options to purchase a total of 680,695
shares of our Common Stock, exercisable at $2.50 per share, under the 2004
Incentive Plan. See "Management - Stock Plans" for a detailed description of our
equity compensation plans.
20
The following table provides information regarding the status of our existing
compensation plans at December 31, 2004:
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) 680,695 $2.50 1,264,640
Equity compensation
plans not approved by
security holders(2) (2) $ (2) (2)
------------------ ----------------- -----------------
Total (2) $ (2) (2)
------------------ ----------------- -----------------
----------------------
(1) Represents the 2004 Stock Incentive Plan and Founders' Plan.
(2) Amount not determinable - Contingent consideration payable in shares of
Common Stock to certain persons in connection with achievement of
certain regulatory milestones under December 23, 2003 Agreement and
Plan of Merger. See "Option/SAR Grants and Fiscal Year End Option
Exercises and Values - Regulatory Incentive Plan."
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Background
We were incorporated in Delaware in 1986 under the name Aloe Scientific
Corporation. In 1988 our name was changed to CepTor Corporation. Until December
2003 we were closely-held by ten persons and privately funded by the owners,
from research grants, and by development contracts. In December 2003 we were
acquired by a company in a stock-for-stock transaction. Thereafter, our parent
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 in which our stockholders acquired a controlling stake in
Medallion. A first closing under our private offering occurred on December 9,
2004.
We are a publicly-held 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.
21
On December 9, 2004, our Board of Directors authorized a change of our state of
incorporation to Delaware from Florida through a merger with our wholly-owned
subsidiary. Approval of the change was authorized by stockholder consent on
January 27, 2005 and filed with the states of Delaware and Florida on January
31, 2005.
Following the reincorporation merger, which became effective on January 31,
2005, the Certificate of Incorporation and by-laws of the Company were amended
and provide additional provisions appropriate for a Delaware incorporated
corporation, including applicability of 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. In addition, the
Delaware by-laws contain provisions providing for advance notice of certain
stockholder actions, such as the nomination of directors and stockholder
proposals.
Cash Requirements
On February 3, 2005, we completed a private placement of $12.35 million of
securities through the sale of approximately 494 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 (the "Private Placement"). 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 three
years after the date of issuance, at an exercise price of $2.50 per share. The
proceeds of the Private Placement are estimated to be sufficient to provide for
our working capital needs for approximately one year.
Research and Development
Over the next twelve months, our primary efforts will be on moving our lead
product, Myodur, into phase I/II clinical trials for Duchenne's muscular
dystrophy. We plan to use the net proceeds from our Private Placement to
continue the pre-clinical development of our technologies, which primarily
includes the manufacture of Myodur, compiling, drafting and submitting an IND
for Myodur, and initiating Phase I/II human clinical trials, if approved by the
FDA. We may also use the proceeds to fund other working capital needs. We
presently expect to file an IND for Myodur in the third quarter of 2005.
Manufacturing
A significant expense anticipated during the next twelve months will be the cost
to manufacture our product candidates. 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 plan to control capital expenditures by using contract
manufacturers to produce product candidates. It is our belief that there are a
sufficient number of high quality contract manufacturers available, and we have
had discussions, and in some instances, established relationships to fulfill our
production needs for research, pre-clinical and clinical use and we have
identified and entered into agreements with two contract manufacturers.
Employees
As of February 3, 2005, we had nine full-time employees, one of whom focuses on
and coordinates our research program, four 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
employees have doctorate and/or M.D. degrees. As our current business strategy
22
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. 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.
In addition, we plan to expand and secure laboratory facilities for our own
internal research activities. We are currently conducting research in various
academic settings, primarily at the State University of New York at Stony Brook
and the Health Science Center at Downstate Medical Center. Our plans include
continuing this practice in addition to expanding the use of third-party
research organizations and facilities to meet specific needs.
BUSINESS
Overview
We are a development-stage biopharmaceutical company engaged in the development
and commercialization of 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 disease that affects less than 200,000 people.
We seek to take advantage of the legislative, regulatory, and commercial
opportunities common to these rare orphan diseases. Our management intends 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.
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 highly specific 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 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"), Myasthenia Gravis, cancer cachexia, AIDS
wasting, traumatic nerve injury, retinal degeneration, ototoxicity, Alzheimer's
disease, Huntington's disease and cardiomyopathies.
23
We have been issued compound patents on both of the 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 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.
Business 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 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 an expected orphan drug fast track, and
relatively low cost development process planned, we currently expect to 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 status and to develop internally drugs for ALS and Myasthenia Gravis.
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) and is also a candidate
for out-licensing and development with large pharmaceutical firms.
LOW-RISK DEVELOPMENT. We believe our technology affords an the opportunity to
minimize development risk because of the following:
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.
24
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 in combination.
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. Additional patients
are indirectly affected. Management believes that about 300 of these orphan
diseases are addressed in definitive, therapeutic manners. Management believes
that one-third of the US population is grossly underserved by the lack of
medical options for many of these often devastating orphan diseases. Management
believes this creates a large, high value health care market opportunity. 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 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 is
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 are also greatly reduced compared to non-orphan drug development.
o COMMERCIALIZATION. 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.
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.
25
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 curative 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.
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 drugs, including orally, 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 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
26
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 in which loss of muscle tissue is a prominent
part of the disease process. These include muscular dystrophy, in which the
genetic disorder resides in the muscle cells, or diseases such as MS, ALS and
spinal cord injury, where muscle wasting is secondary to the primary defect in
the neuron.
CALPAIN INHIBITION. We have hypothesized 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, leupeptin, is a natural 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. The
substantial majority of proteases in the body has serine or threonine at the
active site and are marginally, or not at all, inhibited by leupeptin so the
therapy is predicted to be safe.
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 and heart 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 13-fold more effective in inhibiting calpain intracellularly in skeletal
muscle than is leupeptin alone, although this result is subject to continued
review and assessment and may not be indicative of future successful drug
development or commercialization. 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.
27
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 eye. The reasons for this are not yet understood. 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.
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;
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 Manufacturing product candidates in the near- or mid-term. We plan
to control capital expenditures by using contract manufacturers to produce
product candidates. It is our belief that there are a sufficient number of high
quality GLP (Good Laboratory Practice) and GMP (Good Manufacturing Practice)
contract manufacturers available, and we have had discussions and in some
instances established relationships to fulfill our production needs for research
and clinical use. Myodur and Neurodur require two raw material suppliers, a
contract manufacturer and a contract formulator. Bachem, U.S. and Bachem, AG are
our current, exclusive GLP and GMP contract manufacturers, respectively.
The manufacturer of our product candidates or any future product, whether done
by third-party contractors as planned 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.
28
Intellectual Property
The foundation of our technology are the patents listed below:
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
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 Patent application directed to compound C-301 an anticonvulsant
therapeutic agent for treating epilepsy and bipolar disorder, filed May
7, 2004;
o Provisional application for Myodur specifically in the field of
muscular dystrophy and for other neurodegenerative diseases and for a
new composition of matter (compound), filed June 12, 2004; and
o Provisional application for Neurodur specifically in the field of
multiple sclerosis and for other neuromuscular diseases and for a new
composition of matter, filed in September 2004.
Orphan Drug 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
of Common Stock for $1,000,000 and upon FDA approval of an IND for Myodur for
muscular dystrophy in the United States, is obligated to purchase $1,000,000 of
additional shares of 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
29
addition, JCR is obligated to make a milestone payment of $500,000 to us upon
FDA approval of an IND 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 relations with two companies, Bachem AG and Sigma-Tau,
which we currently utilize as primary suppliers for raw materials for our
research and testing needs.
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 FDC 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 the expenditure of
substantial resources.
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;
30
o The submission to the FDA of an IND 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 and are reviewed by the FDA
prior to the commencement of human clinical trials. Unless the FDA objects to an
IND, the IND will become effective thirty days following its receipt by the FDA.
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.
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.
When 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
31
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 for which the proceeds of this offering will be inadequate. 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 notes 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.
32
Employees
As of February 3, 2005, we had nine 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 $6,200 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.
Legal Proceedings
We are not presently a party to any pending litigation, nor, to the knowledge of
our management, is any litigation threatened against us which may materially
affect our operations or business. In August 2004, we received a letter on
behalf of a company claiming our name infringed certain trademarks issued to
that company which we believe is without merit.
MANAGEMENT
Directors and Executive Officers
Our current directors and executive officers are as follows:
Name Age Position
---- --- --------
William H. Pursley 51 Chief Executive Officer, Chairman
of the Board and Director
Norman W. Barton, M.D., Ph.D. 57 Executive Vice President and Chief
Medical Officer
Donald W. Fallon 50 Senior Vice President, Finance and
Administration, Chief Financial
Officer and Secretary
Leonard A. Mudry 67 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 our
placement agent agreement, Brookshire Securities Corporation 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 any individual for services rendered as a
director. During 2005 we intend to adopt a cash and/or equity compensation plan
for our non-executive directors.
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:
33
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
Public Accountant, received a BS degree in Accounting from the University of
Baltimore and holds an MBA degree in Finance from Loyola College.
34
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.
There are no family relationships between any of our directors or executive
officers.
As a result of the Merger, our directors and officers prior to the Merger,
Thomas Fastiggi, Chief Operating Officer, Sean Miller, Chief Executive Officer,
Chief Financial Officer, Chief Accounting Officer and Director, Vincent Kohen,
President, Lisa Beach, Vice President, and Rose Cabasso, Vice President,
Secretary, and Director resigned from all positions with the Company effective
December 8, 2004.
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.
35
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 $335,467(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) - $ 550(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 issuance (ii) an additional 10% on the twelve month
anniversary of the date of issuance 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 payment of $55,000, $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
underlying the Restricted Stock Awards for Mr. Pursley, Dr. Barton and Mr.
Fallon, respectively, have been valued at $4.08, the closing price of our Common
Stock 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.
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.
36
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. 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.
FOUNDERS' PLAN. We assumed the Company's Founders' Plan, which was previously
adopted by its 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. There are no additional shares available for issuance 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
37
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. We assumed the Company's 2004 Incentive Plan, which was
previously adopted by the board of directors and stockholders on December 9,
2004. Options to acquire an aggregate of 680,695 shares of Common Stock have
been issued under the 2004 Incentive Plan. An aggregate of 2,746,025 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.
REGULATORY INCENTIVE PLAN. We maintain a plan (the "Regulatory Incentive Plan")
intended to reward the former owners of our company for certain milestones
achieved in our business which was agreed as additional consideration for the
initial sale of our company to Xechem which occurred December 23, 2004. We are
obligated to make awards in Common Stock in the amount of $1 million for each
new drug upon the filing of a Phase II application prior to December 22, 2007, a
Phase III application prior to December 22, 2009, or a NDA filing prior to
December 22, 2010 with the FDA.
PRINCIPAL STOCKHOLDERS
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of February 3, 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(4)
------------------- ------------------ ------------------
Xechem International, Inc. 3,404,064 21.9%
100 Jersey Avenue
Building B, Suite 310
New Brunswick, NJ 08910
William H. Pursley(2) 1,563,273 10.0%
38
Name and Address of Number of Shares Percentage
Beneficial Owner(1) Beneficially Owned Beneficially Owned(4)
------------------- ------------------ ------------------
Norman W. Barton, M.D., Ph.D. 454,792 2.9%
Donald W. Fallon 207,905 1.3%
Leonard Mudry 0 0
Sean Miller(3) 0 0
All directors and executive officers 2,225,970 14.3%
as a group (4 persons)
-----------------
(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) A provision of the Spinoff Agreement (See "Certain Relationships and
Related Transactions") provides for 3,031,943 shares of our Common Stock
to be designated for management and founders, or approximately 19.5% of
our outstanding Common Stock as of February 3, 2005. Awards have been made
to eleven persons, other than 315,845 shares which have not yet been
awarded. While such awards are subject to confirmation by our Compensation
Committee, William Pursley is authorized under the Spinoff Agreement to
designate awardees. All awards (other than 1,247,428 owned by William
Pursley as record owner and 315,845 additional shares for which Mr.
Pursley retains the right to vote until awarded), are subject to certain
conditions with respect to vesting and lapse. All of such shares may
revert to Mr. Pursley should the conditions imposed not be achieved. Mr.
Pursley disclaims beneficial ownership of all of such shares for which he
is not the record holder.
(3) Mr. Miller resigned effective as of December 8, 2004.
(4) Excludes shares that may become issuable under the Regulatory Incentive
Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 23, 2003, Xechem entered into a financing plan with its then
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 certain
management members of the Company and others would receive from Xechem the right
to acquire fully vested "options" to acquire shares of the common stock of the
Company, at par value.
The Company also agreed to buy from Xechem and redeem up to $2,000,000 of shares
of Common Stock owned by Xechem ("Put") from proceeds of our future planned
offerings. The Put originally provided for payment at a rate of 25% (up to
$2,000,000) of the gross proceeds 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 Put to
10% (up to $2,000,000) of the gross proceeds of the Private Placement, 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
39
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-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 the Company was 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 or have been
converted into new 10% convertible promissory 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 due on such
outstanding notes ("Replacement Notes").
We are a party to an employment and indemnification 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 and indemnification agreement with Norman W.
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 and indemnification agreement with Donald W.
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 bonuses at the discretion of the Board.
We are party to an indemnification agreement with Leonard Mudry, one of our
directors.
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 upon exercise of
options granted under our Founders' Plan.
DESCRIPTION OF THE TRANSACTIONS
Private Placement
In connection with the Merger, we completed the closing of a private offering of
our securities in which, through February 3, 2005, we sold an aggregate of
approximately 494 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 warrant to purchase Common Stock. 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 Brookshire Securities Corporation, as
placement agent, pursuant to a 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
40
that is sold in the Private Placement. We realized gross proceeds from the
Private Placement of $12,353,725, before payment of commissions and expenses.
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."
Except as expressly set forth below, none of the Selling Stockholders is known
to us to be a registered broker-dealer or an affiliate of a registered
broker-dealer, except for Brookshire Securities Corporation and Dawson James
Securities, Inc. Each of the Selling Stockholders has acquired his, her or 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. Unless otherwise indicated, the address of each Selling
Stockholder is c/o CepTor Corporation, 200 International Circle, Suite 5100,
Hunt Valley, Maryland 21030.
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Xechem International, Inc. 3,404,064 3,404,064 -0- -0-
100 Jersey Avenue
Building B, Suite 310
New Brunswick, NJ 08910
JCR Pharmaceuticals Co., Ltd. 554,413 554,413 -0- -0-
3019 Kasuga-Cho
Asiya City, Japan 659-0021
Brookshire Securities Corporation 794,149(1) 794,149 -0- -0-
4 West Las Olas Boulevard
Fort Lauderdale, FL 33301
Longview Fund L.P. 367,610 367,610 -0- -0-
600 Montgomery Street
San Francisco, CA 98010
Contrarian Cash Fund I Ltd. 243,750(2) 243,750 -0- -0-
c/o Barry Honig
6400 Congress Avenue
Suite 2700
Boca Raton, FL 33487
Ricardo Plummer 228,750(2) 228,750 -0- -0-
4760 SE 72nd Avenue
Davie, FL 33314
Harborview Capital, Inc. 15,000 15,000 -0- -0-
4760 SE 72nd Avenue
Davie, FL 33314
Margie Chassman 243,750(2) 243,750 -0- -0-
445 West 23rd Street, Apt. 16E
New York, NY 10011
Franklin Sir 149,968 149,968 -0- -0-
37 Glen Avenue East
Harrington Porte, NJ 07640
Bluewater Partners, S.A. 125,000 125,000 -0- -0-
751 Sylvan Way
Emerald Hills, CA 94062
41
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Peter Dunne 93,782(2) 93,782 -0- -0-
4350 SW 105 Avenue
Davie, FL 33328
Saddle River Associates, Inc. 120,000 120,000 -0- -0-
400 Rella Boulevard, Suite 174
Montibello, NY 10901
Corinthian Holdings, LLC 80,000 80,000 -0- -0-
10 East 53rd Street
New York, NY 10022
The Harbor Trust 846,378(3) 846,378 -0- -0-
Marge Chassman, Trustee
445 West 23rd Street, Apt. 16E
New York, NY 10011
Michael G. Jesselson 12/18/80 Trust 504,790(4) 504,790 -0- -0-
Claire Strauss, Trustee
450 Park Avenue
New York, NY 10022
CepTor 2004 Delaware Trust 337,845 337,845 -0- -0-
c/o Olshan Grundman Frome
Rosenzweig & Wolosky LLP
65 East 55th Street
New York, NY 10022
William H. Pursley 1,247,428 249,486 997,942 6.4%
Donald W. Fallon 207,905 41,581 166,324 1.1%
Norman W. Barton, M.D., PhD. 454,792 90,958 363,834 2.3%
Alfred Stracher, PhD. 227,396 45,479 181,917 1.2%
Leo Kesner, PhD. 227,396 45,479 181,917 1.2%
Leslie Devos 100,487 20,097 80,390 *
Theresa Michele MD. 100,487 20,097 80,390 *
Francis Zbikowski 100,487 20,097 80,390 *
Ted Carver, PhD 100,195 4,400 95,795 *
Mary Brinker 13,860 2,772 11,088 *
Tomoka Davidsen 13,860 2,772 11,088 *
M. Pennington, PhD 15,000 15,000 -0- -0-
Founders' Plan Shares 315,845 63,169 252,676 1.6%
c/o CepTor Corporation
Alex Tringas 21,657 21,657 -0- -0-
29 Eigin Parkway
Ft. Walton Beach, FL 32548
John Baleno 10,828 10,828 -0- -0-
2895 Hampton Circle E.
Delray Beach, FL 33445
42
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Vestal Venture Capital IV LLC 54,142 54,142 -0- -0-
c/o Allan R. Lyons
6471 Enclave Way
Boca Raton, FL 33496
Karl Scheil 21,657 21,657 -0- -0-
101 Briny Avenue
Pompano Beach, FL 33062
Camden International, Ltd. 43,313 43,313 -0- -0-
Charlotte House
Charlotte Street
P.O. Box N. 9204
Nassau, Bahamas CS 00000
Dawson James Securities, Inc. 19,800 19,800 -0- -0-
925 South Federal Highway
6th Floor
Boca Raton, FL 33432
Robert Keyser, Jr. 14,400 14,400 -0- -0-
925 South Federal Highway
6th Floor
Boca Raton, FL 33432
Viewtrade Financial 1,800 1,800 -0- -0-
7280 W. Palmetto Park Rd.
Suite 105
Boca Raton, FL 33433
Michael Jacobs 15,000 15,000 -0- -0-
6549 Landings Ct.
Boca Raton, FL 33496
Geduld, Irwin Revocable Trust 60,000 60,000 -0- -0-
4040 Island Estates
Aventura, FL 33180
Geduld Cap Mgmt 150,000 150,000 -0- -0-
19495 Biscayne Blvd., Suite 608
Aventura, FL 33180
Arthur and Jane Ballinger (jtwros) 15,000 15,000 -0- -0-
66 Overlook Rd.
Cedar Grove, NJ 07009
Gilder Fund 30,000 30,000 -0- -0-
1800 NE 114th Street, Suite 2110
Miami, FL 33181
43
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
The Jay Goldman Master L.P. 60,000 60,000 -0- -0-
152 W. 57th Street
New York, NY 10019
David Khaghan 15,000 15,000 -0- -0-
250 East 63rd Street
New York, NY 10021
Gary Lieberman 15,000 15,000 -0- -0-
10897 Canary Island Ct.
Plantation, FL 33324
David Dimanna 15,000 15,000 -0- -0-
9211 Shadow Brook Drive
Sylvania, OH 43560
Glenn Hubbard 15,000 15,000 -0- -0-
6474 Blue Heron Pointe Drive
Waterford, WI 53185
John Nolan 15,000 15,000 -0- -0-
7205 Burnside Drive
Sylvania, OH 43560
Rosemarie Manchio 15,000 15,000 -0- -0-
17 Orsego Place
Commack, NY 11725
Rudolph Cane, Jr. 3,750 3,750 -0- -0-
4619 East White Aster Street
Phoenix, AZ 85044
William J. Winter 15,000 15,000 -0- -0-
7353 W. Warnimount Avenue
Milwaukee, WI 53220
Alan Morgillo 15,000 15,000 -0- -0-
38 Woodland Avenue
Farmingdale, NY 11735
Sol Bandiero 60,000 60,000 -0- -0-
9 Dike Drive
Monsey, NY 10952
Crypto Corp. 15,000 15,000 -0- -0-
Jardine House, 3rd Floor
33 Reid Street
Hamilton HM 12, Bermuda
44
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Neurnberger Kapital 15,000 15,000 -0- -0-
Klingenstrasse 12
Seitingen, Germany 78606
John Studnicky 30,000 30,000 -0- -0-
6301 Collins Avenue, #2201
Miami Beach, FL 33141
Edward Feighan 60,000 60,000 -0- -0-
12500 Edgewater Drive, Suite 1007
Lakewood, OH 44107
Kay Garrell 30,000 30,000 -0- -0-
4411 Crooked Mile Rd.
Merritt Island, FL 32952
Solon Kandel 15,000 15,000 -0- -0-
592 Ashwood Rd.
Springfield, NJ 07081
Thomas S. Stephens, IRA 30,000 30,000 -0- -0-
143 NE 90th Street
Miami FL 33138
Steven Zvi Weinreb 30,000 30,000 -0- -0-
152 Parkville Avenue
Brooklyn, NY 11230
Roger Hermes 21,750 21,750 -0- -0-
341 Harrison St.
Annandale, MN 55302
Steven Brandenburg IRA 15,000 15,000 -0- -0-
312 Larch Street
Abbotsford, WI 54405
Charles J. and Harley N. Kane 150,000 150,000 -0- -0-
Tenants-in-Common
2973 Sabalwood Ct.
Delray Beach, FL 33445
Robert Patton 45,000 45,000 -0- -0-
1601 Summit Dr.
Columbus, GA 31906
Ronald Low 15,000 15,000 -0- -0-
35 Huyler Landing Rd.
Cresskill, NJ 07621
45
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Capital Growth Equity Fund I, LLC 30,000 30,000 -0- -0-
6549 Landings Ct.
Boca Raton, FL 33496
Larry Biggs 30,000 30,000 -0- -0-
1007 N. Federal Hwy.
Number 297
Ft. Lauderdale, FL 33304
Lisa Glasband 15,000 15,000 -0- -0-
213 Isle Verde Way
Palm Beach Gardens, FL 33418
Justin Renert 15,000 15,000 -0- -0-
7885 Monarch Ct.
Delray Beach, FL 33446
Douglas Clausen 60,000 60,000 -0- -0-
1000 Industrial Place
Holstein, IA 51025
Loren and Marlene Marko Skeist 60,000 60,000 -0- -0-
50 East 89th Street, Apt. 30D
New York, NY 10128
William Marsh 120,000 120,000 -0- -0-
2325 Stagecoach Rd.
Broad Island, NE 68801
James Lees 60,000 60,000 -0- -0-
8 Walnut Street
Marblehead, MA 01945
Philip Dean, Jr. 15,000 15,000 -0- -0-
31 Channing Rd.
Dedham, MA 02026
David J. Rosenfeld 15,000 15,000 -0- -0-
27 Versailles
New Orleans, LA 70125
Andrew Revocable Trust 180,000 180,000 -0- -0-
4189 W. Milky Way, Unit #3,
Chandler, AZ 85226
Todd Wiseberg 30,000 30,000 -0- -0-
9598 Shepard Place
Wellington, FL 33414
46
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Rudolph Mazurosky 15,000 15,000 -0- -0-
69 Quail Run Rd.
Woodbury, CT 06798
John E. Reynolds Jr. and
Beverly J. Reynolds (jtwros) 7,500 7,500 -0- -0-
9105 North State Road 267
Brownsburg, IN 46112
James Hines 30,000 30,000 -0- -0-
2425 Glenford
Aurora, IL 60504
Randy Guttenberg 15,000 15,000 -0- -0-
36 Pebble Beach Drive
Livingston, NJ 07039
Steven R. Gundry and Penny M. Gundry 30,000 30,000 -0- -0-
840 North Prescott Drive
Palm Springs, CA 92262
Wesley L. Neal 3,000 3,000 -0- -0-
4006 Honduras
Pasadena, TX 77504
Joan Lowlicht 30,000 30,000 -0- -0-
26 St. James Drive
Palm Beach Gardens, FL 33418
Larry D. Anderson 15,000 15,000 -0- -0-
N 6954 538th Street
Menomonio, WI 54751
Alvin Goldstein 15,000 15,000 -0- -0-
1131 Crystal Drive
Palm Beach Gardens, FL 33418
George Smith 15,000 15,000 -0- -0-
2497 Acushmet Avenue
New Bedford, MA 02745
Julian J. Brignac, Jr. 15,000 15,000 -0- -0-
340 Donald Circle
Forest Hill, MD 21050
Alouf Living Trust 7,500 7,500 -0- -0-
5080 Crossbow Circle
Roanoke, VA 24014
47
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Louis T. Bascoy 15,000 15,000 -0- -0-
17066 Marina Bay Drive
Huntington Beach, CA 92649
Bernard Baruch 15,000 15,000 -0- -0-
5480 Renaissance Avenue
San Diego, CA 92122
Andrew S. Taranto 15,000 15,000 -0- -0-
1452 Maine Avenue
Staten Island, NY 10314
Louise E. Rehling Trust 60,000 60,000 -0- -0-
200 East Delaware Place
Apt. #24F
Chicago, IL 60611
Doris Perlmutter 15,000 15,000 -0- -0-
10033 Shadywood Place
Boynton Beach, FL 33437
Jeffrey A. Ludwig and Carol Ludwig (jtwros) 30,000 30,000 -0- -0-
930 Stockbridge Place
Elgin, IL 60120
Dennis G. Trop and Sarah D. Trop (jtwros) 7,500 7,500 -0- -0-
3049 Memorial Circle
South Jordan, UT 84095
Michael Gimeli 15,000 15,000 -0- -0-
713 Lighthouse Road
Brooklyn, NY 11702
Ronald Hankins and
Lydia Barrow Hankins (jtwros) 11,250 11,250 -0- -0-
12500 Edgewater Drive, Suite 1007
Lakewood, OH 44107
Edward G. Roche 60,000 60,000 -0- -0-
18 Westcott Drive
Hopkinton, IA 07148
Randy Draizin and Amy Draizin (jtwros) 15,000 15,000 -0- -0-
119 Barcelona Drive
Jupiter, FL 33458
48
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Scott McNair 30,000 30,000 -0- -0-
967 East Eaglewood Drive
North Salt Lake City, Utah 84054
Neil Senter 15,000 15,000 -0- -0-
849 Zibold Court
River Vale, NJ 07675
Stuart R. Newman 15,000 15,000 -0- -0-
9 Ungava Drive
New City, NY 10956
Edward Wishner 15,000 15,000 -0- -0-
20969 Ventura Blvd.
Woodland Hills, CA 91364
Joel Gillis 15,000 15,000 -0- -0-
22048 Sherman Way, #213
Canoga Place, CA 91303
James Dragoums 30,000 30,000 -0- -0-
231 Coral Cay Terrace
Palm Beach Gardens, FL 33418
Bruce Reingold 15,000 15,000 -0- -0-
21830 Cypress Palm Ct.
Boca Raton, FL 33428
Donna and Michael Splain 120,000 120,000 -0- -0-
1559 Rubino Court
Pleasonton, CA 94566
Francois Archer 30,000 30,000 -0- -0-
245 Rue Du Buyat
Saint Jean De Noist
France 01800
Alpha Capital 150,000 150,000 -0- -0-
Essex House
160 Central Park South
Suite 2701
New York, NY 10019
Solomon Yokoby 15,000 15,000 -0- -0-
6 Hayborn Court
Old Westbury, NY 11568
Walter Sullivan 120,000 120,000 -0- -0-
109 Mill Street
Middleton, MA
49
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Shervin and Cindy Sadigham 7,500 7,500 -0- -0-
845 Autumn Close
Alpharetta, GA 30004
Ross Krutchen 7,500 7,500 -0- -0-
39 Edgemond Place
The Woodlands, TX 77381
A. Dimarino and H. Kroop 15,000 15,000 -0- -0-
140 Rugby Place
Woodbury, NJ 08096
Robert Bea 15,000 15,000 -0- -0-
2548 Dover Rd.
Forked River, NJ 08731
EMES Capital Partners, LLC 180,000 180,000 -0- -0-
400 Rella Boulevard, Suite 174
Montebello, NY 10901
Joseph Frazer 15,000 15,000 -0- -0-
4120A Oaklawn Blvd.
Hopewell, VA 23860
Lydia Barrow Hankins 18,750 18,750 -0- -0-
11515 Momachi
Sawaku Fukudka Japan 814006
Harley Kane 30,000 30,000 -0- -0-
310 Jasmine Dr.
Del Ray Beach, FL 33483
Don Longacre 15,000 15,000 -0- -0-
740 Main Street
Bally, PA 19503
Christine Sheppard 15,000 15,000 -0- -0-
201 East 77th Street, Apt. 19B
New York, NY 10021
Whalehaven Capital Fund 120,000 120,000 -0- -0-
Par-la-Ville Rd.
Hamilton, Bermuda
Strategic Growth International, Inc. 187,500 187,500 -0- -0-
150 East 52nd Street, 22nd Floor
New York, N 10022
50
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Arnaldo and Maria Barros (jtwros) 9,000 9,000 -0- -0-
900 Washington Street
Hollywood, FL 33301
AF Capital, LLC 90,000 90,000 -0- -0-
89 Richmond Avenue, Suite 2
Bedford, CT 06880
Kevin and Brenda Narcomey
(Tenants-in-Common) 120,000 120,000 -0- -0-
89 Rock Road
Kentfield, CA
Jeffrey W. and Gena C. Drinnen (jtwros) 15,000 15,000 -0- -0-
6800 Resolute Road
Knoxville, TN 37918
George Karfunkel 150,000 150,000 -0- -0-
1671 52nd Street
Brooklyn, NY 11204
Lester Draizin 15,000 15,000 -0- -0-
120 Southeast 5th Avenue, #131
Boca Raton, FL 33432
Jed Kruchten 30,000 30,000 -0- -0-
25 Highland Park Village
Suite 100551
Dallas, TX 75205
DEMPCO Investments LLC 3,750 3,750 -0- -0-
22 Avondale Road
West Hartford, CT 06117
Thomas Westley 15,000 15,000 -0- -0-
10 Eastham Court
Sacramento, CA 95833
Robert C. Klinger 15,000 15,000 -0- -0-
3417 Leigh Court
Plano, TX 75025
Richard Prosten IRA 15,000 15,000 -0- -0-
3513 Northampton Street, NW
Washington, D.C. 20015
Roger Dale Weaver 30,000 30,000 -0- -0-
5602 86th Street
Lubbock, TX 79424
51
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Bridge Ventures, Inc. Employees
Pension Plan & Trust 30,000 30,000 -0- -0-
1241 Gulf of Mexico Drive
Longboat Key, FL 34228
Scott Dunlop 30,000 30,000 -0- -0-
Gaye Dunlop JTWROS
93 Branch Street
Medford, NJ 08055
Uriel Cohen 15,000 15,000 -0- -0-
2066 East 14th Street
Brooklyn, NY 11229
Dennis Mullally 15,000 15,000 -0- -0-
370 Northern Parkway
Ridgewood, NJ 07450
Wolfe Axelrod Weinberger Assoc.
LLC Retirement Plan 407,500 407,500 -0- -0-
317 Madison Avenue, Suite 515
New York, NY 10017
John E. Kyees 30,000 30,000 -0- -0-
Judy A. Kyees JTWROS
7300 Lee Road
Westerville, OH 43081
Joel Levin 60,000 60,000 -0- -0-
30 West Monroe #1610
Chicago, IL 60603
Maria Molinsky 15,000 15,000 -0- -0-
51 Lord Highway East
Weston, CT 06883
Kurt G. Jonsson 15,000 15,000 -0- -0-
Rue des Saldons 9
1000 Brussels, Belgium
George Reinfeld 7,500 7,500 -0- -0-
121 15th Street
Garden City, NY 11530
David I. Alter & Sandra Alter 7,500 7,500 -0- -0-
Tenants-by-the-Entirety
1813 Victoria Pointe Circle
Weston, FL 33327
52
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
David R. Shaub, Jr. 15,000 15,000 -0- -0-
19560 Frederick Rd.
Germany
David J. Habib 15,000 15,000 -0- -0-
5 Hot Metal Street
Pittsburgh, PA 15203
Rosemarie Goodman 150,000 150,000 -0- -0-
8650 South Ocean Drive, #906
Jensen Beach, FL 34957
Andy Pashby 15,000 15,000 -0- -0-
17413 Jenege Ct.
Morgan Hill, CA 95037
Anthony Paniccia 15,000 15,000 -0- -0-
721 Mon Forte Drive
Endicott, NY 13760
Kruchten Family Ltd. (Jed Kruchten) 30,000 30,000 -0- -0-
25 Highland Park Village
Suite 100-551
Dallas, TX 75205
William Malenbaum (Rita Malenbaum) (JTWROS) 3,750 3,750 -0- -0-
2149 Prinketon Avenue
Philadelphia, PA 19149
Peter M. Habib 15,000 15,000 -0- -0-
5 Hot Metal Street
Pittsburgh, PA 15203
Ambrosia Fund, L.P. 60,000 60,000 -0- -0-
4505 33rd Ave. W.
Seattle, WA 98199
Paul and Monica Pashby JTWROS 15,000 15,000 -0- -0-
969 Tybalt Drive
San Jose, CA 95127
Philip Whittaker 15,000 15,000 -0- -0-
18 Trafalgar Road
Kingston, S. Jamaica
Xmark Opportunity Fund, L.P. 150,000 150,000 -0- -0-
301 Tresser Boulevard, Suite 1320
Stamford, CT 06901
53
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Jai Gaur 7,500 7,500 -0- -0-
32 Blueberry Hill
Wilton, CT 06897
Xmark Opportunity Fund, Ltd. 150,000 150,000 -0- -0-
301 Tresser Boulevard, Suite 1320
Stamford, CT 06901
Thomas and Patricia Burkhard 30,000 30,000 -0- -0-
JTWROS
25 Paterson Street
San Francisco, CA 94124
Vincent G. Young 60,000 60,000 -0- -0-
15256 74th Trail North
Palm Beach Gardens, FL 33415
Intercontinental Investments, Ltd. 15,000 15,000 -0- -0-
30 NW 42nd Avenue, Suite 210
Miami, FL 33126
Benjamin Jesselson 60,000 60,000 -0- -0-
450 Park Avenue, Suite 2603
New York, NY 10022
Ibrahim Alhusseini 7,500 7,500 -0- -0-
1422 19th Street, #A
Santa Monica, CA 90404
John A. Doyle Jr. and
Virginia B. Doyle JTWROS 15,000 15,000 -0- -0-
1257 Knox Drive
Yardley, PA 19067
Antonio Cataldo 15,000 15,000 -0- -0-
1018 Christina Court
Endicott, NY 13760
Sigma Tau Finanziaria S.p.A. 60,000 60,000 -0- -0-
Via Sudafrica No. 20
Rome, Italy 00144
Northbar Capital 15,000 15,000 -0- -0-
6630 N.W. 101 Ter.
Parkland, FL 33076
Mary Ellen Viola 30,000 30,000 -0- -0-
294 Long Hill Drive
Short Hills, NJ 07078
54
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Wayne Fields 30,000 30,000 -0- -0-
3002 Falmouth Drive
Chesapeake, VA
Robert Dolezal 22,500 22,500 -0- -0-
20 Hillcrest Road
Tiburon, CA 94920
Constance R. Fitzgerald 30,000 30,000 -0- -0-
709 SW 27th Street
Gainesville, FL 32607
Longacre Insurance 15,000 15,000 -0- -0-
740 Main Street
Bally, PA 19503
Tower Roofing 15,000 15,000 -0- -0-
116 Brown Street
Johnson City, NY 13790
Arthur Dunkin 15,000 15,000 -0- -0-
5028 Hunting Hills Circle
Roanoke, VA 24014
Edwin Carl Welter 15,000 15,000 -0- -0-
5473 Golfview Avenue North
Oakdale, MN 55128
Daniel O'Sullivan 120,000 120,000 -0- -0-
31 B Yennicock Avenue
Port Washington, NY 11050
First Mirage, Inc. 150,000 150,000 -0- -0-
333 Sandy Springs Circle, Suite 230
Atlanta, GA 30328
Joseph Raymond 15,000 15,000 -0- -0-
Boca Raton, FL 33342
Gary B. Filler 15,000 15,000 -0- -0-
1389 Box Elder Drive
Alpine, UT 84004
Jay Joseph Levine 30,000 30,000 -0- -0-
13010 Mandarake Way, #4
Marina del Ray, CA 90092
55
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
F. Bradford Wilson Jr. Trustee
Adams & Hemingway 401(k) PSP 15,000 15,000 -0- -0-
PO Box 1956
544 Mulberry Street, Suite 1000
Macon, GA 31202-1956
Stephen Boger 15,000 15,000 -0- -0-
9413 36th Ave.
New Hope, MN 55427
LEBA Investments, LP 45,000 45,000 -0- -0-
17201 NE 13th Avenue
North Miami Beach, FL 33162-2728
Ira Block 6,000 6,000 -0- -0-
215 W. 20th Street
New York, NY 10011
Brian Reich 15,000 15,000 -0- -0-
PO Box 35
Rocky Hill, CT 06067
Daniel P. Nolan 15,000 15,000 -0- -0-
335 NE Third Court
Boca Raton, FL 33432
Sandford Ehrlich 30,000 30,000 -0- -0-
100 Passaic Street, 2nd Floor
Garfield, NJ 07026
Francisco Pulgar 3,750 3,750 -0- -0-
7820 NW 1st, Apt. 202
Pembroke Pines, FL 33024
Donald E. Wray 60,000 60,000 -0- -0-
2601 Johnson Road
Springdale, AK 72762
Arthur Spiller 30,000 30,000 -0- -0-
330 Prospect Avenue
Brooklyn, NY 11215
Gitel Family Partnership LP 60,000 60,000 -0- -0-
17 Beechwood Drive
Lawrence, NY 11559
Sky Ventures LLC 60,000 60,000 -0- -0-
2 Lakeside Drive West
Lawrence, NY 11559
56
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Lindsay A. Rosenwald, M.D. 120,000 120,000 -0- -0-
781 7th Avenue, 48th Floor
New York, NY 10019
Frank and Donna Harkey 15,000 15,000 -0- -0-
10340 SW 16th Place
Davie, FL 33324-2745
New Yankee Investments, LLC 30,000 30,000 -0- -0-
1835 E. Hallandale Beach Blvd., #404
Hallandale, FL 33009
Mike Surman 7,500 7,500 -0- -0-
22297 Vista Lago Drive
Boca Raton, FL 33428
James J. Greed, Jr. 15,000 15,000 -0- -0-
352 Smith Flat Road
Angels Camp, CA 95222
Phyllis Ulrich 15,000 15,000 -0- -0-
24 Farmstead Lane
West Hartford, CT 06117
Elinor Ganz IRA 15,000 15,000 -0- -0-
1000 Island Blvd. PH-3
Aventura, FL 33160
Harold E. Gelber 15,000 15,000 -0- -0-
19800 NE 22nd Avenue
North Miami Beach, FL 33180
Peddle Partners LLP 30,000 30,000 -0- -0-
2445 NW 24th Court
Boca Raton, FL 33431
Elinor Ganz TTEE Elinor Ganz TTL 4/13/94 15,000 15,000 -0- -0-
1000 Island Boulevard PH-3
Aventura, FL 33160
Martin S. Goldfarb, M.D. 60,000 60,000 -0- -0-
919 Crescent Drive
Beverly Hills, CA 90210
Sandra Shore Goldfarb 15,000 15,000 -0- -0-
919 Crescent Drive
Beverly Hills, CA 90210
57
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Chocolate Chip Investments LP 30,000 30,000 -0- -0-
1645 Village Centre Circle
Las Vegas, NV 89134
Melvyn Greenstein IRA Rollover 60,000 60,000 -0- -0-
5990 SW 130th Terrace
Miami, FL 33156
Norman C. Hoffberg 15,000 15,000 -0- -0-
2020 Schiller Avenue
Wilmette, IL 60091
Todd D. Goldberg DC PA 7,500 7,500 -0- -0-
1900 N. Flamingo Rd.
Pembroke Pines, FL 33028
Lance Goldberg 7,500 7,500 -0- -0-
7000 Nova Drive, #206E
Davie, FL 33317
Tommy J. Payne 60,000 60,000 -0- -0-
121 Warwick Green
Winston-Salem, NC 37104
Herbert Linden 7,500 7,500 -0- -0-
2683 Sundance Court
Walnut Creek, CA 94598
Douglas Liu 45,000 45,000 -0- -0-
6801 Wolf Creek Court
Clarksville, MD 21029
James and Karen Griffith 15,000 15,000 -0- -0-
6270 West Bend
Beaumont, TX 77706
John H. Sheehan III 15,000 15,000 -0- -0-
155 Rhode Island Ave.
Newport, RI 02840
Dr. Stanley Rubenstein 30,000 30,000 -0- -0-
3900 Montclair Rd., Suite 300
Birmingham, AL 35213
Robert Mynett 15,000 15,000 -0- -0-
63 Tydraw Rd.
Cardiff, Cf 23 SHD
Colin and Garshaun Harvey 15,000 15,000 -0- -0-
Victoria Street
Hamilton, Bermuda
58
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Certified Systems Ltd. 15,000 15,000 -0- -0-
29 Union Street
Hamilton HM17, Bermuda
Kevin and Pamela Greehan 15,000 15,000 -0- -0-
1019 Greacen Point Rd.
Mamaroneck, NY 10543
Robert Lee Ettenger 3,750 3,750 -0- -0-
22914 Kent Avenue
Torrance, CA 90505
Stephen M. Shea 120,000 120,000 -0- -0-
517 Boston Neck Rd.
Suffield, CT 06078
Howard Thacker 15,000 15,000 -0- -0-
Old Water Mill
Derbyshire, United Kingdom
Alois Wollnik 15,000 15,000 -0- -0-
Lessingstrasse 27
Grossostheim, Germany 63762
Patrick and Kathleen Cullen 15,000 15,000 -0- -0-
Castlecary, United Kingdom
ERBO Real Estate LLC 15,000 15,000 -0- -0-
c/o Erno Bodek
541 West 21st Street
New York, NY 10008
J.E. Deck LLC 15,000 15,000 -0- -0-
c/o Philip Collins
287 Hopewell-Amwell Rd.
Hopewell, NJ 08525
Thomas J. Bean 15,000 15,000 -0- -0-
3612 Berger Rd.
Lutz, FL 33549
James Levine 15,000 15,000 -0- -0-
1010 Seminole Dr., Unit 508
Ft. Lauderdale, FL 33304
Domenico Iannucci 60,000 60,000 -0- -0-
1 Windsor Drive
Muttontown, NY 11753
59
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Kathy Hart and Don Hart 15,000 15,000 -0- -0-
7159 Willow Creek Drive
Nashville, TN 37221
Mark Eaton 30,000 30,000 -0- -0-
11076 Vare Court
Brookpark, CA 93021
Steve Calderon 15,000 15,000 -0- -0-
6100 SW 120th Street
Pinecrest, FL 33156
Gerald F. Heupel, Jr. 60,000 60,000 -0- -0-
211 Apple Tree Lane
Silver Spring, MD 00905
James D. Wade 7,500 7,500 -0- -0-
205 Heathcote Rd.
Henderson, NC 28791
Kirby J. Frank 15,000 15,000 -0- -0-
715 Wildwood Place NE
Atlanta, GA 30324
John and Ruth Elliott (joint tenants) 7,500 7,500 -0- -0-
555 Turnberry Circle
Wichita, KS 67230
Robert A. Mackie 60,000 60,000 -0- -0-
31 Matthiessen Park
Irvington, NY 10533
Joseph J. Seviroli 15,000 15,000 -0- -0-
22 Daisy Avenue
Floral Park, NY
JIG Group, Ltd. 15,000 15,000 -0- -0-
825 East Gate Blvd.
Garden City, NY 11530
Jeffrey S. Shulman 7,500 7,500 -0- -0-
220 Viewpoint Drive
Danville, CA 94506
James Otis Swift Jr. 15,000 15,000 -0- -0-
2908 West 129th Place
Gardelia, CA 90249
60
Shares of Shares of Shares of Percentage of
Common Stock Common Common Stock Common Stock
Owned Prior Stock Owned after Owned After
Name and Address to Offering to be Sold the Offering the Offering(5)
---------------- ----------- ---------- ------------ --------------
Scott Leeb 15,000 15,000 -0- -0-
23 Laurelwood Drive
NT Lakes, N.J. 07046
Jack Grynberg 150,000 150,000 -0- -0-
5299 DTC Blvd, STE 500
Greenwood Village, CO 80111
Rock Capital Partners, LLC 60,000 60,000 -0- -0-
135 E. 57th St.
New York, N.Y. 10022
Howard Katz 30,000 30,000 -0- -0-
782 NE Harbour Dr.
Boca Raton, FL 33431
Shawn Mackey 3,750 3,750 -0- -0-
4 Woodcrest Dr.
Hopewell Jct, N.Y. 12533
Gustavo Hernandez 30,000 30,000 -0- -0-
AV Pral Las Esesmeraldas,
Caracas, Venezuela
Rabbit Trust 15,000 15,000 -0- -0-
4 W Las Olas Blvd.
Ft. Lauderdale FL 33301
Beechwood Ventures, LLC 60,000 60,000 -0- -0-
9 Beechwood Dr.
Lawrence, N.Y. 11559
Rita Bowman 15,000 15,000 -0- -0-
13846 Via Nadian
Del Ray Beach, FL 33446
Olshan Grundman Frome Rosenzweig &
Wolosky LLP 23,000 23,000 -0- -0-
65 East 55th Street
New York, NY 10022
-----------
* Represents less than 1%
(1) Includes 494,149 shares of Common Stock issuable upon exercise of warrants
that are currently exercisable.
61
(2) Issuable upon exercise of warrants that are currently exercisable.
(3) Includes 398,533 shares of Common Stock issuable upon conversion of
promissory notes.
(4) Includes 394,790 shares of Common Stock issuable upon conversion of
promissory notes.
(5) Excludes shares issuable under the Regulatory Incentive Plan.
No Selling Stockholder is an affiliate or is controlled by our affiliates, other
than Xechem, or is now or was a director or officer, except William Pursley, who
is our Chairman and Chief Executive Officer, and a director, Donald Fallon, who
is our Senior Vice President, Finance and Administration, Chief Financial
Officer and Secretary, and Norman Barton who is our Executive Vice President and
Chief Medical Officer. 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, with respect to Xechem
and, except prior to acquisition by Xechem in December 2003, The Harbor Trust
and the Michael G. Jesselson 12/18/80 Trust have provided material financial
support of our operations through advances and indebtedness. In addition, Alfred
Stracher and Leo Kesner served as officers and directors until acquisition by
Xechem in December 2003. Harvey Kesner, a member of the law firm of Olshan
Grundman Frome Rosenzweig & Wolosky, is trustee of the Kesner Family Trust,
a seller of stock to Xechem in December 2003, and presently is trustee of the
Ceptor 2004 Delaware Trust, and exercises voting and dispositive control over
337,845 shares held by such trust. Alfred Stracher, Leo Kesner, The Harbor
Trust, Michael G. Jesselson 12/18/80 Trust and the Kesner Family Trust are
participants in the Regulatory Incentive Plan.
DESCRIPTION OF SECURITIES
We are authorized to issue 100,000,000 shares of Common Stock, par value $0.0001
per share, 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 February 3, 2005, there were 10,619,317 shares of Common Stock, and
494.149 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.
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 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
62
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 2,470,745 shares
of Common Stock in connection with the Private Placement as of February 3, 2005.
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 1,669,149 shares of
Common Stock to the placement agent and certain other parties in connection with
the Private Placement as of February 3, 2005. 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 from three to 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.
Convertible Notes
We have issued convertible promissory notes in an aggregate principal amount
outstanding as of February 3, 2005 of $901,728. These notes mature on December
8, 2005 and earn interest at a rate of 10% per year. The outstanding principal
amount of these notes and accrued unpaid interest thereon may, at the option of
63
the holder, be converted into shares of Common Stock at a conversion price of
$1.25 per share.
Convertible promissory notes may be redeemed by us at any time after the
weighted average daily trading price per share of Common Stock equals or exceeds
$5.00 for 10 consecutive trading days. There is a substantial likelihood that we
will determine to exercise our right of redemption in the event the daily
trading price per share of Common Stock equals or exceeds $5.00 for 10
consecutive trading days in which case it is likely that the holders of
convertible promissory notes would elect to convert their holdings into
additional shares of Common Stock, which would cause additional dilution to our
Series A Preferred stockholders. As of the date of this prospectus, the price of
Common Stock has exceeded $5.00 for in excess of 10 consecutive days.
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.
These lock-up agreements provide, that (i) Xechem, the parent of the Company
prior to the Merger and present owner of approximately 22% of our Common Stock,
may not sell any of its shares for a period of six months following the
effective date of registration of shares purchased in the Private Placement and
may only sell up to 50% thereafter until one-year following registration, and
(ii) shares of Common Stock held by the participants in the Founders' Plan (who
own in the aggregate approximately 20% of Common Stock) may sell 10% on the six
month anniversary following issuance, an additional 10% on the twelve month
anniversary 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 19,324,719 shares of common stock covered by
this prospectus on behalf of the Selling Stockholders. The Selling Stockholders
and any of their donees, pledgees, assignees and successors-in-interest may,
from time to time, offer and sell any and all of their shares of Common Stock on
any stock exchange, market, or trading facility on which such shares are traded.
The Selling Stockholders will act independently of us and each other in making
decisions with respect to the timing, manner and size of each such sale. Sales
may be made at fixed or negotiated or market prices. The shares may be sold by
way of any legally available means, including in one or more of the following
transactions:
o a block trade in which a broker-dealer engaged by a Selling
Stockholder attempts to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the
transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account pursuant to this prospectus;
64
o ordinary brokerage transactions and transactions in which a
broker-dealer solicits purchasers; and
o privately negotiated transactions.
Transactions under this prospectus may or may not involve brokers or dealers.
The Selling Stockholders may sell shares directly to purchasers or to or through
broker-dealers, who may act as agents or principals. Broker-dealers engaged by
the Selling Stockholders may arrange for other broker-dealers to participate in
selling shares. Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from the Selling Stockholders in amounts
to be negotiated in connection with the sale. Broker-dealers or agents also may
receive compensation in the form of discounts, concessions, or commissions from
the purchasers of shares for whom the broker-dealers may act as agents or to
whom they sell as principal, or both. The Selling Stockholders do not expect
these commissions and discounts to exceed what is customary in the types of
transactions involved. Selling Stockholders and any broker-dealers and any other
participating broker-dealers who execute sales for the Selling Stockholders may
be deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. In such event, any commissions received by such
broker-dealers or agents and any profit on the resale of the shares purchased by
them may be deemed to be underwriting discounts and commissions under the
Securities Act. If the Selling Stockholders are deemed to be underwriters, they
may be subject to certain statutory and regulatory liabilities, including
liabilities imposed pursuant to Sections 11, 12 and 17 of the Securities Act and
Rule 10b-5 under the Exchange Act.
To the extent required, the number of shares to be sold, the name of the Selling
Stockholder, the purchase price, the name of any agent or broker and any
applicable commissions, discounts or other compensation to such agents or
brokers and other material facts with respect to a particular offering will be
set forth in a prospectus supplement as required by the Rules and Regulations
under the Securities Act.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act if available, rather than pursuant to this prospectus.
In order to comply with the securities laws of certain states, if applicable,
the shares will be sold in such jurisdictions, if required, only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless the shares have been registered or qualified for
sale in such state or an exemption from registration or qualification is
available and complied with. The anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to sales of the shares offered by
the Selling Stockholders.
We are required to pay all fees and expenses incident to the registration of the
shares. Otherwise, all discounts, commissions or fees incurred in connection
with the sale of Common Stock offered hereby will be paid by the Selling
Stockholders.
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
65
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, 2003 and 2002 and for the period
from August 11, 1986 (inception) through December 31, 2003 included in this
prospectus have been so included in reliance on the report (which contains an
explanatory paragraph relating to our ability to continue as a going concern) of
Withum Smith & Brown, P.C., independent auditors, given on the authority of said
firm as experts in accounting and auditing.
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.
CHANGES IN ACCOUNTANT
On November 22, 2004, the Company replaced Withum Smith & Brown P.C. as its
independent auditors and approved the appointment of Marcum & Kliegman LLP as
its independent auditors 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 auditors 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 auditors 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 past two
fiscal years contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
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.
66
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.
67
NOTES TO FINANCIAL STATEMENTS
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
REPORT OF INDEPENDENT AUDITORS...............................................F-2
AUDITED FINANCIAL STATEMENTS:
BALANCE SHEET AS OF DECEMBER 31, 2003 AND DECEMBER 31, 2002..................F-3
STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
2003 AND DECEMBER 31, 2002 AND SINCE INCEPTION...............................F-4
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY SINCE INCEPTION.................F-5
STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003
AND DECEMBER 31, 2002 AND SINCE INCEPTION....................................F-7
NOTES TO FINANCIAL STATEMENTS........................................F-8 to F-21
UNAUDITED FINANCIAL STATEMENTS:
BALANCE SHEET AS OF SEPTEMBER 30, 2004......................................F-24
STATEMENT OF OPERATIONS FOR THE NINE AND THREE MONTHS ENDED
SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003 AND SINCE INCEPTION...............F-25
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2004....................................................F-26
STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
AND SEPTEMBER 30, 2003......................................................F-27
NOTES TO FINANCIAL STATEMENTS.......................................F-28 To F-38
F-1
INDEPENDENT AUDITORS' REPORT
To 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, 2003 and 2002, and the related
statements of operations, stockholders' equity and cash flows for the years 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 auditing standards generally accepted
in the United States of America. 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, based on our audit these 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 2002, and
the results of their operations and their cash flows for the years 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 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.
WithumSmith+Brown, P.C.
New Brunswick, New Jersey
July 26, 2004, except for Note 14(g), which is dated December 8, 2004
F-2
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31,
------------
2003 2002
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 68,374 $ 131,440
Prepaid expenses 17,697 11,221
--------- ---------
Total current assets 86,071 142,661
Property and equipment, net 137 410
Deferred financing costs -- 41,637
--------- ---------
TOTAL ASSETS $ 86,208 $ 184,708
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses $ 35,517 $ 256,515
Current portion of long-term debt -- 150,000
--------- ---------
Total current liabilities 35,517 406,515
Long-term debt, less current maturities 275,000 125,000
Due to Xechem International, Inc. 50,000 --
Stockholders' Deficit
Common stock, $0.0001; authorized 100,000,000 shares,
issued and outstanding 3,898,213 and 3,898,213
shares at December 31, 2003 and 2002, respectively 390 390
Additional paid-in capital 641,147 641,147
Deficit accumulated during the development stage (915,846) (988,344)
--------- ---------
Total stockholders' deficit (274,309) (346,807)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 86,208 $ 184,708
========= =========
F-3
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
CUMULATIVE
AUGUST 11,
FOR THE YEARS ENDING 1986 (DATE OF
DECEMBER 31, INCEPTION) TO
------------ DECEMBER 31,
2003 2002 2003
REVENUES:
Other income $ -- $ -- $ 75,349
Interest income 713 1,615 9,042
--------- --------- ---------
Total revenue 713 1,615 84,391
--------- --------- ---------
OPERATING EXPENSES:
Research and development (58,785) 272,956 587,737
General and administrative (67,507) 204,010 166,922
Financing costs 41,637 168,460 217,660
Interest expense 12,870 10,788 23,658
--------- --------- ---------
Total operating expenses (71,785) 656,214 995,977
--------- --------- ---------
NET INCOME (LOSS) $ 72,498 $(654,599) $(911,586)
========= ========= =========
Basic and diluted loss per
common share $ 0.02 $ (0.18) $ (0.65)
========= ========= =========
Weighted-average common shares
outstanding 3,898,213 3,603,088 1,411,724
========= ========= =========
F-4
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK
------------ DEFICIT
ACCUMULATED
ADDITIONAL DURING THE TOTAL
PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE EQUITY
------ ------ ------- ----- ------
BALANCE, AUGUST 11, 1986 AND DECEMBER 31, 1986 -- $ -- $ -- $ -- $ --
Issuance of common stock for cash, $0.0012 840,818 84 916 1,000
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1987 840,818 84 916 -- 1,000
========== ========== ========== ========== ==========
BALANCE, DECEMBER 31, 1988 840,818 84 916 -- 1,000
========== ========== ========== ========== ==========
BALANCE, DECEMBER 31, 1989 840,818 84 916 -- 1,000
========== ========== ========== ========== ==========
BALANCE, DECEMBER 31, 1990 840,818 84 916 -- 1,000
========== ========== ========== ========== ==========
BALANCE, DECEMBER 31, 1991 840,818 84 916 -- 1,000
========== ========== ========== ========== ==========
Net loss (8,006) (8,006)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1992 840,818 84 916 (8,006) (7,006)
========== ========== ========== ========== ==========
Net loss (1,169) (1,169)
Issuance of common stock for cash, $0.0001 176,572 18 3 21
Issuance of common stock in exchange for services
rendered. $ 0.0142 176,572 18 2,482 2,500
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1993 1,193,962 120 3,401 (9,175) (5,654)
========== ========== ========== ========== ==========
Net income 10,222 10,222
Distribution to stockholders (4,260) (4,260)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1994 1,193,962 120 3,401 (3,213) 308
========== ========== ========== ========== ==========
Net loss (1,342) (1,342)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995 1,193,962 120 3,401 (4,555) (1,034)
========== ========== ========== ========== ==========
Net loss (8,727) (8,727)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996 1,193,962 120 3,401 (13,282) (9,761)
========== ========== ========== ========== ==========
Net loss (3,975) (3,975)
Issued pursuant to acquisition, $3.3501 59,700 6 199,994 200,000
Issuance of common stock for cash, $3.3501 29,850 3 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 1,283,512 129 373,748 (17,257) 356,620
========== ========== ========== ========== ==========
Net loss (21,102) (21,102)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 1,283,512 129 373,748 (38,359) 335,518
========== ========== ========== ========== ==========
Net loss (25,172) (25,172)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1999 1,283,512 $ 129 $ 373,748 $ (63,531) $ 310,346
========== ========== ========== ========== ==========
F-5
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK
------------ DEFICIT
ACCUMULATED
ADDITIONAL DURING THE TOTAL
PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE EQUITY
------ ------ ------- ----- ------
BALANCE, DECEMBER 31, 1999 (CONTINUED) 1,283,512 $ 129 $ 373,748 $ (63,531) $ 310,346
========== ========== ========== ========== ==========
Net loss (36,256) (36,256)
Issuance of common stock for cash, $3.1409 15,919 2 49,998 50,000
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2000 1,299,431 131 423,746 (99,787) 324,090
========== ========== ========== ========== ==========
Net loss (233,958) (233,958)
Issued pursuant to funding agreement, $0.0838 1,083,729 108 90,659 90,767
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2001 2,383,160 239 514,405 (333,745) 180,899
========== ========== ========== ========== ==========
Net loss (654,599) (654,599)
Issued pursuant to funding agreement, $0.0838 1,515,053 151 126,742 126,893
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2002 3,898,213 390 641,147 (988,344) (346,807)
========== ========== ========== ========== ==========
Net income 72,498 72,498
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2003 3,898,213 $ 390 $ 641,147 $ (915,846) $ (274,309)
========== ========== ========== ========== ==========
F-6
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
CUMULATIVE
AUGUST 11,
1986 (DATE OF
FOR THE YEARS ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31,
2003 2002 2003
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 72,498 $(654,599) $(911,586)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 273 273 2,237
Non-cash financing costs 41,637 168,460 217,660
Non-cash research expenses -- -- 200,000
Non-cash compensation expense -- -- 22,856
Changes in assets and liabilities:
Prepaid expenses (6,476) (11,221) (17,697)
Accounts payable and accrued expenses (220,998) 244,974 35,517
--------- --------- ---------
Net cash used in operating activities (113,066) (252,113) (451,013)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment -- -- (2,374)
--------- --------- ---------
Net cash used in investing activities -- -- (2,374)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuances of common stock -- -- 201,021
Distribution to shareholders -- -- (4,260)
Advance from Xechem International, Inc. 50,000 50,000
Proceeds from issuances of long-term debt -- 225,000 275,000
--------- --------- ---------
Net cash provided by financing activities 50,000 225,000 521,761
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (63,066) (27,113) 68,374
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 131,440 158,553 --
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 68,374 $ 131,440 $ 68,374
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During the year ended December 31, 2002 the
Company issued shares of common stock with a
fair value of $126,893 which was capitalized
as deferred financing costs.
F-7
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS:
CepTor Corporation (the Company) is engaged in the research and
development of therapeutic products for neuromuscular and
neurodegenerative diseases. 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 which, to a large extent, is through the
inhibition of the protease calpain, and to raising the funds
necessary to continue this research.
The Company is a development stage company, which has a limited
history of operations and has not generated any revenues from
operations with the exception of funding received through grants and
collaborations. The Company has no products approved for commercial
sale at the present time. There can be no assurance that the Company
will be successful in obtaining regulatory approval for the sale of
existing or any future products or that any of the Company's
products will be commercially viable.
NOTE 2 - OPERATING AND LIQUIDITY DIFFICULTIES AND MANAGEMENT'S PLANS TO OVERCOME
THEM:
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of
business. The Company has experienced negative cash flows from
operations since inception and had an accumulated deficit at
December 31, 2003 of approximately $915,800. The Company has funded
its activities to date almost exclusively from debt and equity
financings.
The Company is in the development stage and has realized minimal
revenues to date. The Company will continue to require substantial
funds to continue research and development, including preclinical
studies and clinical trials of its product candidates, and to
commence sales and marketing efforts, if the FDA or other regulatory
approvals are obtained. Management's plans in order to meet its
operating cash flow requirements, include offerings of its preferred
stock, offerings of its common stock, as well as entering into
research collaborations through licensing opportunities, which will
provide funding for certain research and development projects.
In order to meet these cash needs, the Company has entered into the
following recent financing agreements:
(a) During April and May 2004, the Company entered into bridge debt
financing in the principal amount of $1,100,000. The intent of this
financing is to provide the Company with operating capital as it
evaluates and negotiates a subsequent round of capital infusion.
(See Note 14)
(b) The Company has entered into negotiations with various parties
in an effort to issue shares of its preferred or common stock
through a private placement. The Company anticipates raising
sufficient capital to fund its operations through its next phase of
development.
(c) The Company has also entered into negotiations with a
pharmaceutical company to grant them a license to its technology for
F-8
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - OPERATING AND LIQUIDITY DIFFICULTIES AND
MANAGEMENT'S PLANS TO OVERCOME THEM (CONTINUED):
a specific indication in a specific geographic area, in exchange for
an upfront equity investment in the Company as well as success-based
milestone payments and royalties on sale of the product.
While the Company believes that it will be successful in obtaining
the necessary financing to fund its operations, there are no
assurances that such additional funding will be achieved and that it
will succeed in its future operations. The financial statements do
not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts of liabilities
that might be necessary should the Company be unable to continue in
existence.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
From August 11, 1986 (inception) through December 31, 2003, the
Company has been primarily engaged in research and development of
its platform technology and raising capital to fund that research
and development. The accompanying financial statements have been
prepared in accordance with the provisions of Statement of Financial
Accounting Standard (SFAS) No. 7, "Accounting and Reporting by
Development Stage Enterprises." The Company operates as one business
segment.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is provided on the straight-line method
over the estimated useful lives of the assets, which is five years.
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.
PATENTS
The Company expenses patent costs, including legal expenses, in the
period in which they are incurred. Patent expenses are included in
research and development expenses in the Company's statements of
operations. Patent costs incurred for products which have been
approved for marketing by the various regulatory organizations,
would be capitalized and amortized over its useful life, presumably
the life of the patent.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
The Company assesses the impairment of its property, equipment and
organizational costs under SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. A determination of impairment (if any) is made based on
estimates of future cash flows.
F-9
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FINANCIAL INSTRUMENTS
Financial instruments include cash, accounts payable, accrued
expenses, and long-term debt. The fair value of such instruments
approximates the carrying value. The amounts reported for financial
instruments are considered to be reasonable approximations of their
fair values, based on information available to management. The use
of different assumptions and/or estimation methodologies could have
a material effect on the estimated fair value amounts.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses research and development costs in the period in
which they are incurred. These costs consist of direct and indirect
costs associated with specific projects as well as fees paid to
various entities that perform research and clinical trial studies on
behalf of the Company.
During 1997, the Company issued 59,700 shares of its common stock
with a fair market value of $200,000, for the rights to certain
in-process research and development. Consequently, the $200,000 was
charged to research and development expense during that year.
DEFERRED FINANCING COSTS
Deferred financing costs, which represent costs associated with
obtaining long-term financing, are capitalized. The costs generally
represent the value of shares of common stock issued in connection
with the financing arrangements. The costs are amortized over the
life of the financing. Amortization expense relating to deferred
financing costs amounted to approximately $41,600, $168,500, and
$217,700 for the years ended December 31, 2003 and 2002 and for the
period from inception to December 31, 2003, respectively.
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," using an intrinsic value
approach to measure compensation expense, if any. Under this method,
compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise
price. Options issued to non-employees are accounted for in
accordance with SFAS 123, "Accounting for Stock-Based Compensation,"
and Emerging Issues Task Force Issue No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods and Services,"
using a fair value approach.
As of December 31, 2003 and 2002 no stock options were granted or
outstanding which would result in a difference between the results
of operations as reported and the pro forma amounts required by SFAS
123.
INCOME TAXES
Income taxes are accounted for under the asset and liability method
prescribed by SFAS No. 109, "Accounting for Income Taxes." Deferred
income taxes are recorded for temporary differences between
financial statement carrying amounts and the tax basis of assets and
liabilities. Deferred tax assets and liabilities reflect the tax
rates expected to be in effect for the years in which the
F-10
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
differences are expected to reverse. A valuation allowance is
provided if it is more likely than not that some, or all, of the
deferred tax asset will not be realized. The primary deferred tax
item is the Company's net operating losses.
CONCENTRATION OF CREDIT RISK
The Company maintains cash balances, at times, with financial
institutions in the amount which are more than amounts insured by
the Federal Deposit Insurance Corporation. Management monitors the
soundness of these institutions and considers the Company's risk
negligible.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
NET LOSS PER SHARE
Basic net loss per share is computed based on the weighted average
shares of common stock outstanding and excludes any potential
dilution. Diluted loss per share reflects the potential dilution
from the exercise or conversion of all dilutive securities, such as
stock options, into common stock. As the Company was in a loss
position for the year ended December 31, 2002 and for the period
from inception to December 31, 2003, certain dilutive securities
outstanding at December 31, 2002 were excluded from the calculation
of diluted loss per share as the shares would have had an
anti-dilutive effect. All per share data and references to shares of
common stock have been adjusted to reflect the reverse merger which
the Company entered into on December 8, 2004 (see Note 10).
NOTE 4 - PROPERTY AND EQUIPMENT:
The costs and accumulated depreciation of property and equipment are
summarized as follows:
December 31,
------------
2003 2002
---- ----
Lab Equipment $ 2,374 $ 2,374
Less Accumulated Depreciation (2,237) (1,964)
---------- ----------
Property Equipment, Net $ 137 $ 410
========== ==========
Depreciation expense amounted to $273, $273 and $2,237 for the years
ended December 31, 2003 and 2002, and for the cumulative period of
inception to December 31, 2003, respectively.
NOTE 5 - DEFERRED FINANCING COSTS:
The costs and accumulated amortization of deferred financing costs
are summarized as follows:
2003 2002
---- ----
Deferred Financing Costs $ 217,660 $ 217,660
Amortization of Deferred Financing Costs (217,660) (176,023)
----------- ----------
Ending Balance, December 31 $ - $ 41,637
=========== ===========
Deferred financing costs amortization expense amounted to $41,637,
$175,063 and $217,660 for the years ended December 31, 2003, and
2002, and for the cumulative period of inception to December 31,
2003, respectively.
F-11
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
December 31,
------------
2003 2002
---- ----
Trade Accounts Payable $ 11,859 $ 11,352
Accrued Interest Expense 23,658 10,788
Accrued Compensation Expense - 234,375
---------- ----------
Total $ 35,517 $ 256,515
========== ==========
Pursuant to the terms of a certain Funding Agreement effective
December 17, 2001, management was to be paid, in the aggregate,
$225,000 per annum beginning on the effective date of the Funding
Agreement. Pursuant to the Agreement and Plan of Merger between the
Company and Xechem International, Inc., (see Note 13) all
compensation accrued pursuant to the Funding Agreement was reversed
and included as a reduction of research and development and general
and administrative expenses. The amount accrued for compensation
expense was approximately $220,100 and $225,000 for the years ended
December 31, 2003, and 2002, respectively, and the balance reversed
during the year ended December 31, 2003 was approximately $454,400.
NOTE 7 - RELATED PARTY:
Amounts included in long-term debt are due to stockholders of the
Company. (See Note 9)
NOTE 8 - INCOME TAXES:
The Company has not provided for income taxes since it has generated
net operating losses for current tax purposes, and all deferred tax
assets have been fully reserved. As of December 31, 2003, the
Company had net operating loss carryforwards (NOL) for federal
income tax purposes. As the Company continues to sell stock, it may
undergo ownership changes within the meaning of Section 382 of the
Internal Revenue Code of 1986 as amended. Internal Revenue Code
Section 382 places a limitation on the utilization of federal net
operating losses and other credit carryforwards when an ownership
change, as defined by the tax law, occurs. Generally, this occurs
when a greater than 50 percent change in ownership occurs.
Accordingly, the actual utilization of the net operating loss
carryforwards and other deferred tax assets for tax purposes may be
limited annually to the percentage of the fair market value of the
Company at the time of any such ownership changes.
As of December 31, 2003 and 2002, the Company had a deferred tax
asset of approximately $230,200 and $189,200, respectively,
primarily arising from its net operating losses. A full valuation
allowance has been provided because management believes it is more
likely than not, that it will not be realized.
Deferred income taxes consist of the following:
F-12
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES (CONTINUED):
December 31,
------------
2003 2002
---- ----
Deferred Tax Assets:
Net operating loss carryforwards $ 230,200 $ 189,200
Other timing difference - -
---------- ------------
Total Deferred Tax Assets 230,200 189,200
Valuation Allowance (230,200) (189,200)
----------- ------------
Net Deferred Income Taxes $ - $ -
=========== ============
NOTE 9 - LONG-TERM DEBT:
Long-term debt consists of the following:
December 31,
------------
2003 2002
---- ----
Unsecured, non-interest bearing, convertible loan,
pursuant to Funding Agreement dated December 17, 2001
and Funding and Stock Pledge Agreement dated March 6,
2002 (A) $ 150,000 $ 150,000
Convertible Note dated February 20, 2002, interest at
10% and due August 1, 2005 (B) 125,000 125,000
---------- -----------
Total Debt 275,000 275,000
Less Current Maturities - 150,000
---------- -----------
Long-Term Debt, Less Current Maturities $ 275,000 $ 125,000
========== ============
(A) In December 2001, the Company entered into a funding agreement
for up to $250,000 of unsecured non-interest bearing convertible
loans (the 2001 Loan). The lender was not able to require repayment
prior to the one-year anniversary unless certain events occurred.
Upon the one-year anniversary, the Company had the right to either
repay the 2001 Loan or convert it into shares of common stock as
defined in the funding agreement. In addition, the Company was
required to issue shares of common stock to the lender which would
result in the founders maintaining a 50.1 percent voting interest in
the Company. The fair value of these shares of approximately $90,800
was recorded as a deferred financing cost to be amortized over the
life of the 2001 Loan (see Note 5). The 2001 Loan also provided for
compensation amounts for key individuals (see Note 6).
In March 2002, the Company renegotiated the 2001 Loan to provide a
total of $375,000 of unsecured, non-interest bearing, convertible
loans (the 2002 Loan). The provision of the 2002 Loan remained
consistent with the 2001 Loan, however, the Company was required to
issue additional shares of common stock which would result in the
F-13
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - LONG-TERM DEBT (CONTINUED):
lender having a 65 percent ownership in the Company. The fair value
of these shares of approximately $110,900 was recorded as a deferred
financing cost to be amortized over the life of the 2002 Loan (see
Note 5).
In December 2003, the Company entered into a letter agreement in
contemplation of the Company's acquisition by Xechem International,
Inc. (Xechem) (see Note 13) with the note holder. This letter
agreement cancelled the Company's option to convert the 2001 and
2002 Loans into shares of common stock, released the Company of its
obligation to pay compensation to certain management in accordance
with the 2001 Loan (see Note 6), confirmed all obligations under the
2001 and 2002 Loans have been satisfied and fixed the interest rate
at 10 percent per annum and a maturity date of December 31, 2005.
(B) In February 2002, the Company issued $125,000 of Convertible
Notes (the February 2002 Notes) due August 1, 2005 bearing 10
percent interest accruing until the earlier of certain events as
defined in the agreement or maturity. The February 2002 Notes were
convertible at the option of the holder into common stock at any
time following a liquidity event. The shares to be issued upon
conversion into common stock was to be determined by dividing the
unpaid principal plus accrued interest by the offering price in an
initial public offering or a liquidity event as defined in the
agreement . The Company was required to issue warrants to purchase
additional shares of common stock in an amount equal to $62,500
divided by the per share price paid in a qualified financing as
defined in the agreement. The Company was also required to issue a
warrant convertible into 5,970 shares of common stock at $0.01 per
share. In addition, the Company issued 4.9 percent of the voting
equity of the Company which has been valued at approximately
$16,000, and is being amortized over the life of the February 2002
Note (see Note 5).
In December 2003, the Company entered into a letter agreement in
contemplation of the Company's acquisition by Xechem (see Note 13)
with the note holder. This letter agreement cancelled the holder's
option to convert the note into shares of common stock, cancelled
the outstanding warrants issued in conjunction with the original
agreement, granted an associated individual the right to receive
preferred stock of Xechem at the conversion rate set forth in the
Agreement and Plan of Merger for 5,970 shares of the Company (as if
the warrant had been exercised) and extended the maturity date of
the loan to December 31, 2005.
Aggregate maturities of long-term debt of the Company
due within the next two years ending December 31, are
as follows:
Year Amount
---- ------
2004 $ -
2005 and thereafter 275,000
---------
Total $ 275,000
==========
F-14
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY:
REVERSE MERGER
On December 8, 2004, Medallion Crest Management, Inc. (Medallion)
issued 4,783,919 shares of common stock to acquire the Company. For
accounting purposes, the acquisition of the Company by Medallion has
been treated as a reverse merger. Accordingly, the 4,783,919 shares
of common stock issued to acquire the Company have been treated as
outstanding from August 11, 1986, as adjusted for historical
issuances of common stock by the Company.
All references in the financial statements to the number of shares
outstanding, per share amounts, and stock option data of the
Company's common stock have been restated to reflect the effect of
the reverse merger for all periods presented.
WARRANTS
As of December 31, 2002, the Company had outstanding (i) warrants to
purchase $62,500 of its common stock upon the happening of certain
events and at an exercise price to be determined, and (ii) an
additional warrant to purchase 5,970 shares of common stock at a
purchase price of $0.01 per share.
In December 2003, these warrants were cancelled pursuant to the
Agreement and Plan of Merger with Xechem. (See Notes 9 and 13)
NOTE 11 - STOCK BASED COMPENSATION:
Effective June 1, 1997, the shareholders of the Company approved the
Long-Term Performance Plan (the Plan) which provides for, among
others, the grant of stock options exercisable for shares of common
stock which may be granted to employees, directors, consultants and
advisors. A total of 150,000 shares of common stock have been
reserved for issuance under the Plan, plus 15% of the amount of
issued and outstanding shares of the Company in excess of 1,000,000
outstanding from time to time.
The Plan is administered by the Compensation Committee (the
Committee). The Committee is authorized to select those individuals
to whom options are to be granted and to determine the number of
shares to be subject to, and the terms and conditions of, the
options. The Committee is also authorized to prescribe, amend and
rescind terms relating to options granted under the Plan. Generally,
the interpretation and construction of any provision of the Plan or
any options granted hereunder is within the discretion of the
Committee.
The Plan provides that options may or may not be incentive stock
options (ISOs) within the meaning of Section 422 of the Internal
Revenue Code. Only employees of the Company are eligible to receive
ISOs, while employees and non-employee directors, advisors and
consultants are eligible to receive options which are not ISOs, i.e.
non-qualified options." The options granted by the Board in
connection with its adoption of the Plans are non-qualified options.
F-15
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - STOCK BASED COMPENSATION (CONTINUED):
There are no stock options outstanding at December 31, 2003.
During the years ended December 31, 2003 and 2002, no amounts were
charged to compensation expense with respect to options granted and
for the cumulative period of inception to December 31, 2003,
approximately $20,400 was charged to expense with respect to options
granted.
NOTE 12 - COLLABORATIVE AGREEMENTS:
EVALUATION AND TESTING AGREEMENT
Effective September 15, 2003, as amended, the Company entered into
an Evaluation Testing Agreement with the Research Foundation of the
State University of New York for the laboratory of Marie
Badalamente, Ph.D. (the "Badalamente Agreement"), to perform certain
studies in the area of muscular dystrophy. The Badalamente Agreement
is for a term of one year and obligates the Company to pay four
quarterly payments of $19,945.
OTHER AGREEMENTS
From time to time, the Company enters into research collaboration,
with the Company providing the collaborator with research material
and the collaborator providing the research results and data to the
Company. These research collaborations do not typically provide for
payments from the Company, but in certain instances minimal amounts
may be exchanged to offset costs.
NOTE 13 - AGREEMENT AND PLAN OF MERGER WITH XECHEM INTERNATIONAL, INC.:
Pursuant to an Agreement and Plan of Merger entered into by the
Company, the prior shareholders of the Company and Xechem
International, Inc. ("Xechem"), as of December 23, 2003 (the "Merger
Agreement"), Xechem agreed to acquire all of the shares of common
stock of the Company in exchange for 6,000 Class C Series 7
Preferred Stock of Xechem. In addition the Merger Agreement provided
for funding of up to $300,000 to the Company of which $50,000 was
advanced prior to December 31, 2003. (See Note 14)
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED):
The following events occurred subsequent to December 31, 2003:
(a) XECHEM INTERNATIONAL, INC. TRANSACTIONS
MERGER
On January 27, 2004, the former shareholders of the Company received
6,000 Class C Series 7 Preferred Stock of Xechem International, Inc.
(Xechem) in connection with the merger of Ceptor into a wholly-owned
subsidiary of Xechem. The new Class C Series 7 Preferred Stock has a
$6,000,000 liquidation preference and is convertible into 30,000,000
shares of common stock of Xechem at the option of the holders of the
Class C Series 7 Preferred Stock, together with piggyback
registration rights for the underlying common shares. Xechem also
agreed to provide a contingent award of $1,000,000 of its stock
(payable in Xechem stock valued at the lesser of $0.20 per share or
market value) to certain former Ceptor shareholders upon the
F-16
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED):
achievement of a designated milestone for each product developed
with Ceptor technology. Xechem is a holding company, which owns all
of the capital stock of Xechem, Inc, a development stage
biopharmaceutical company currently engaged in the research,
development and limited production of niche generic and proprietary
drugs from natural sources.
The merger was accomplished through a reverse triangular merger
whereby Ceptor Acquisition, Inc., a wholly owned subsidiary of
Xechem, with 100 shares issued and outstanding, was merged into the
Company and the Company was the surviving entity.
XECHEM AGREEMENT
On March 31, 2004, the Company entered into an agreement with Xechem
and William Pursley ("Pursley"), intended to provide a framework for
independent financing of the Company (the "Xechem Agreement"). The
Xechem Agreement calls for Pursley to act full time as chief
executive officer of the Company pursuant to a two-year term,
subject to automatic renewal absent delivery of non-renewal. It
calls for base compensation of $330,000 per annum and a five year
option to purchase 43,000,000 shares of common stock of Xechem at a
purchase price of $.0025 per share subject to vesting provisions
stipulated in the option agreement. As part of the Xechem Agreement,
Mr. Pursley has resigned from his positions as president, chief
operating officer, vice chairman and as a member of the Board of
Directors of Xechem.
The Xechem Agreement contemplates that the Company will take the
necessary steps to effect a stock split so that after the split,
Xechem will own 3,898,213 shares of the Company's $0.0001 per share
par value common stock, constituting all of its then issued and
outstanding stock. The Company has further agreed to issue to its
management team members and founders, options to purchase in the
aggregate 3,031,943 shares of common stock, fully vested and
exercisable at par value for a period of 10 years from the date of
grant. These numbers are subject to proportionate increase or
decrease in the event the Subsequent Round of Capital Infusion is
done with a greater or lesser, respectively, valuation of the
Company.
The Xechem Agreement contemplates that the Company will seek to
obtain bridge funding, which has been completed (see "Bridge Loan"
below), to be followed by a subsequent round of capital infusion
(the "Subsequent Round of Capital Infusion"). Xechem has funded
approximately $350,300 of capital contributions in the form of
direct funding to the Company or payments to vendors on behalf of
the Company, as of June 30, 2004.
In addition, Xechem will be entitled to a 2% royalty on sales of the
Company's products which use intellectual property owned by the
Company on March 31, 2004.
The Xechem Agreement provides that Xechem will sell back to the
Company a portion of their shares of common stock for an aggregate
of $2,000,000, payable from 25% of the proceeds of future financing
received by the Company other than the bridge financing. (The Xechem
Agreement was subsequently amended to, among other things, reduce
the amount payable from proceeds to 10%). At the end of two years if
F-17
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED):
the full $2,000,000 has not been paid out to Xechem, Xechem shall
have the right to put the remaining portion of the shares held for
sale back to the Company to cover the deficiency.
In order to induce the funding of the bridge loan, Xechem has agreed
that in the event such a loan is funded and is not paid off when
due, it will permit the bridge lender to convert the unpaid
indebtedness owing with respect to the bridge loan into shares of
Xechem common stock at the lesser of seven cents per share or
seventy five percent (75%) of the average closing price of Xechem's
common stock for the ten trading days preceding the date of funding
of the bridge loan. Xechem has been granted piggyback registration
rights with respect to the shares in the Company it may hold from
time to time, subject to its agreement to lock up the sale of all
such shares on the open market for a period of 180 days following
the initial registration of any the Company's shares pursuant to a
registration statement, and one-half of its shares for an additional
180-day period.
(b) CONSULTING AGREEMENTS
Pursuant to the Agreement and Plan of Merger, Xechem entered into
consulting agreements with Drs. Alfred Stracher and Leo Kesner, the
founding scientists of the Company, for a period of sixty months. In
consideration for the services to be rendered, Xechem was obligated
to pay a total of $276,000, plus expenses as allowed for in the
consulting agreement. In February 2004, in conjunction with the
Xechem Agreement, the Company entered into consulting agreements
with Drs. Stracher and Kesner to replace their consulting agreements
with Xechem with ones of similar terms with the Company. The
consulting agreements are for a period of sixty (60) months
commencing February 1, 2004 and provide for a monthly fee of $5,000
each plus allowable expenses and terminated the consulting
agreements with Xechem.
(c) FACILITY LEASE
The Company leases office space pursuant to a sublease accounted for
as an operating lease. The sublease, effective March 17, 2004,
terminates with the underlying primary lease on December 31, 2006.
Rental commitments for the next three years, is as follows:
2004 $ 58,600
2005 75,800
2006 78,100
----------
TOTAL $ 212,500
===========
The sublease also obligates the Company to reimburse the sublandlord
for certain common area charges levied by the building's landlord.
(d) BRIDGE LOANS
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.
The Bridge Loan offering was completed in May 2004.
The Company recorded a $506,600 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 will be amortized over the six month period from
May 2004 through October 2004 (the term of the Bridge Loans).
The Company was not able to repay the Bridge Loans on October 22,
2004, therefore pursuant to the terms of the Bridge Loans, the
F-18
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED):
Bridge Loan holders have the option 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 will be issued by Xechem and the
remainder from Mr. Pursley's personal Xechem option holdings. As of
December 8, 2004 the closing price of Xechem common stock (XKEM.OB)
was approximately $0.02 per share.
Pursuant to an offer dated October 22, 2004 (the "Exchange Offer")
as amended November 15, 2004 the Company offered to exchange with
its holders of outstanding Bridge Loans and other debt certain newly
issued replacement 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.
(e) EMPLOYMENT AGREEMENTS
The Company entered into employment agreement with certain
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 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 for good reason, as those terms are
defined in the employment agreement, the Company is obligated to pay
Executive his current base salary for an additional twelve months
and continue to pay for his benefits for the same period. If
Executive's employment is terminated due to total disability, the
Company is obligated to continue to pay his current base salary for
an additional thirty-six months and continue to pay for his benefits
for the same period. 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 a confidentiality provision as well as a covenant
not to compete provision for the period of his employment plus and
additional twelve months.
(f) STOCKHOLDERS' EQUITY
FOUNDERS PLAN
Pursuant to the grant of the option to Mr. Pursley contained in the
Xechem Agreement, the Company's Board of Directors has approved the
Ceptor Founders' Plan, effective June 1, 2004 (the "Founders'
Plan"). The maximum number of shares that may be issued under the
Founders Plan is 3,031,943 shares. Terms of the Founders' Plan
provide for the grant of options to purchase shares of the Company's
common stock, at its par value, to the initial founders of the
Company (the "Founders" and each a "Founder") and will be
administered by the Board of Directors or the Compensation Committee
of the Company. 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 and may be
re-designated or re-issued in his sole discretion. Pursuant to the
terms of the Founders' Plan, restrictions on holders of shares
acquired through the Founders' Plan shall lapse 10% on the six month
anniversary following issuance, an additional 10% six months
thereafter, and the balance upon initiation of a Phase III clinical
trial for the Company's "Myodor" technology for muscular dystrophy,
provided such date is not less than six months following the date of
award.
F-19
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED):
On June 1, 2004 the Compensation Committee granted a ten-year
non-qualified stock option to purchase, at the exercise price of
$0.0001 per share an aggregate of 3,031,943 shares to the Founders.
2004 INCENTIVE STOCK PLAN
The 2004 Incentive Stock Plan (the "2004 Plan") was approved by the
Board of Directors and the stockholders of the Company on May 31,
2004 and 1,313,927 shares of the authorized and un-issued shares of
common stock were reserved for issuance under the 2004 Plan. The
purpose of the 2004 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 Plan the Company is authorized to issue
incentive stock options intended to qualify under Section 422 of the
Internal Revenue Code, non-qualified stock options, and restricted
stock. The 2004 Plan shall be administered by the Board of Directors
or the Compensation Committee of the Company. No awards have been
granted to any participant.
(g) AGREEMENT OF MERGER AND PLAN OF REORGANIZATION AND PRIVATE
PLACEMENT
On December 8, 2004, Medallion Crest Management, Inc., a Florida
corporation ("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, the Company filed with the Florida Department of State
Articles of Amendment to the Articles of Incorporation of the
Company to change its name to CepTor Corporation ("New CepTor"), and
to authorize the issuance of up to 300 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 4,783,919 shares of New
CepTor's common stock, par value $0.0001 per share (the "Common
Stock"), 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 is being accounted for as a
"reverse merger," 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 and neurodegenerative
diseases.
Pursuant to an offer dated October 22, 2004 (the "Exchange Offer")
as amended November 15, 2004, made by New CepTor 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. The Exchange Offer provides that
holders of outstanding Bridge Loans who received in connection with
the original issuance of the Bridge Loans, a total of 150,000 shares
of the Company's common stock which converted into a total of up to
300,000 shares of New CepTor Common Stock upon effectiveness of the
Merger. The remaining $350,000 of Bridge Loan principal which did
not accept the Exchange Offer was repaid with interest through the
date of payment. In addition, the 70,000 shares of common stock of
the Company these Bridge Loan holders received in connection with
the issuance of the original Bridge Loans, has converted into
151,597 shares of common stock of New CepTor upon effectiveness of
the Merger.
F-20
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED):
In connection with the Merger New CepTor adopted the Company's
Founders' Stock Plan and 2004 Incentive Plan. On December 9, 2004
the Company issued to CepTor employees and others 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 or restricted
stock for up to a maximum of 2,268,377 shares of Common Stock.
On December 9, 2004 (the "Closing Date"), New CepTor sold 103.62
units (the "Units") to 42 investors pursuant to a Confidential
Private Placement Memorandum dated October 22, 2004 as supplemented
November 16, 2004, (the "Memorandum"), each Unit consisting of one
share of Preferred Stock and a warrant to purchase Common Stock (the
"Offering"). Each share of 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 for $2.50 per share. The
Units were offered by Brookshire Securities Corporation (the
"Placement Agent") pursuant to a Placement Agent Agreement with the
Company dated October 22, 2004. Under the terms of the Placement
Agent Agreement, the Placement Agent is entitled to a selling
commission of 8%, plus a 2% non-accountable expense reimbursement
payable from the proceeds of the Offering plus 150,000 shares of New
CepTor and warrants to purchase 10% of any Common Stock sold. The
Company realized gross proceeds from the Offering of $2,590,500.00,
before payment of Commissions and expenses of the Offering.
(h) LEGAL PROCEEDINGS
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 transaction on the eve
of a closing, that it had breached its agreements, 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. CepTor believes that the
action is substantially without merit and on November 12, 2004, the
parties 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, exchanges
of mutual releases, transfer of 50,000 shares of Company
unrestricted Common Stock, issuance of 125,000 shares of restricted
Company Common Stock, 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 CepTor.
F-21
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
SEPTEMBER 30, 2004
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 457,523
Prepaid expenses 219,293
------------
Total current assets 676,816
Property and equipment, net 61,320
Debt issue costs 37,000
Other assets 18,511
------------
TOTAL ASSETS $ 793,647
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 299,726
Bridge loan financing, net of debt discount of $91,666 1,008,334
Common stock subject to repurchase under put right 2,000,000
------------
Total current liabilities 3,308,060
Long-term debt 275,000
Due to Xechem International, Inc. 350,311
------------
Total liabilities 3,933,371
------------
Stockholders' deficiency:
Preferred stock, $0.0001 par value; authorized 20,000,000
shares; none issued
Common stock, $0.0001 par value; authorized 100,000,000
shares; issued and outstanding 3,302,317, net of
1,637,906 subject to put right 330
Additional paid-in capital 6,411,401
Deficit accumulated during the development stage (9,551,455)
------------
Total stockholders' deficiency (3,139,724)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 793,647
============
F-22
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
AUGUST 11, 1986
(DATE OF
FOR THE THREE-MONTH PERIODS FOR THE NINE-MONTH PERIODS INCEPTION) TO
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 SEPTEMBER 30,
2004 2003 2004 2003 2004
---- ---- ---- ---- ----
REVENUES:
Other income $ - $ - $ $ $ 75,349
Interest income 96 195 9,237
------------- ---------- ------------- ----------- --------------
Total revenue 96 - 195 - 84,586
------------- ---------- ------------- ----------- --------------
OPERATING EXPENSES:
Research and development 501,531 68,425 785,810 181,120 1,373,547
In-process research and development - - 5,034,309 - 5,034,309
General and administrative 438,088 18,750 948,481 50,785 1,115,403
Stock-related compensation pursuant
to spinoff agreement - 2,082,500 2,082,500
Interest expense 415,163 4,268 700,550 42,631 941,868
------------- ---------- ------------- ----------- --------------
Total operating expenses 1,354,782 91,443 9,551,650 274,536 10,547,627
------------- ---------- ------------- ----------- --------------
NET LOSS $(1,354,686) $(91,443) $(9,551,455) $(274,536) $(10,463,041)
=========== ======== =========== ========= ============
Basic and diluted loss per
common share $ (0.31) $ (0.02) $ (2.28) $ (0.07)
=========== ========= =========== =========
Weighted-average common shares
outstanding 4,440,046 3,898,213 4,180,829 3,898,213
=========== ========= =========== =========
F-23
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
DEFICIT
COMMON STOCK ACCUMULATED
--------------------- ADDITIONAL DURING THE TOTAL
PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE DEFICIENCY
------ ------ ------- ----- ----------
BALANCE, JANUARY 1, 2004 3,898,213 $ 390 $ 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 (1,637,906) (164) (1,999,836) (2,000,000)
Common stock issued May 2004, in connection with
bridge loans ($1.31) 487,597 49 639,951 640,000
Common stock issued September 2004,
net of offering expenses of $70,769 ($1.68) 554,413 55 929,176 929,231
Net loss (9,551,455) (9,551,455)
----------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 2004 3,302,317 $ 330 $ 6,411,401 $(9,551,455) $(3,139,724)
=========== =========== =========== =========== ===========
F-24
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(UNAUDITED)
AUGUST 11,
FOR THE NINE-MONTH PERIODS 1986 ((DATE OF
ENDED SEPTEMBER 30 INCEPTION) TO
----------------------- SEPTEMBER 30
2004 2003 2004
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,551,455) $ (274,536) $(10,463,041)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 7,586 205 9,823
Write-off of in-process research and development 5,034,309 5,234,309
Charge for stock option issued pursuant to spinoff
agreement 2,082,500 2,082,500
Non-cash compensation expense 22,856
Non-cash interest expense 643,334 33,257 860,994
Changes in assets and liabilities:
Prepaid expenses (201,596) 11,221 (219,293)
Other assets (18,511) (18,511)
Accounts payable and accrued expenses 264,209 166,772 299,726
----------- ------------ ------------
Net cash used in operating activities (1,739,624) (63,081) (2,190,637)
------------ ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (68,769) (71,143)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuances of common stock, net 929,231 1,130,252
Distribution to shareholders (4,260)
Advance from Xechem International, Inc. 300,311 350,311
Proceeds from issuances of long-term debt 1,100,000 1,375,000
Expenses of issuances of long-term debt (132,000) (132,000)
----------- ------------ ------------
Net cash provided by financing activities 2,197,542 2,719,303
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 389,149 (63,081) 457,523
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 68,374 131,440
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 457,523 $ 68,359 $ 457,523
============ ============ ============
SUPPLEMENTAL DISCLOSURE
Non-Cash Financing Activity:
Issued 487,597 shares of common stock to bridge loan
investors and placement agent $ 640,000 $ 640,000
============ ============
F-25
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
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. The
accompanying financial statements have been prepared in accordance with the
provisions of Statement of Financial Accounting Standard (SFAS) No. 7,
"Accounting and Reporting by Development Stage Enterprises." The Company
operates as one business segment.
The Company's net loss from inception through September 30, 2004 was
approximately $10,463,000 but its deficit accumulated during its development
stage as reported on the Company's Balance Sheet at September 30, 2004 amounted
to approximately $9,551,500. The difference is a result of the acquisition of
the Company by Xechem International, Inc. ("Xechem") and restatement of the
Company's 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.
MERGER BETWEEN MEDALLION CREST MANAGEMENT, INC. AND CEPTOR CORPORATION
As described in Note 9, Medallion Crest Management, Inc. ("Medallion") acquired
all of the common stock of the Company on December 8, 2004. Medallion was an
inactive public shell. 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.
F-26
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
NATURE OF BUSINESS
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 (a disease that affects 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 company, which has a limited history of
operations and has not generated any revenues from operations with the exception
of funding received through grants and collaborations. The Company has no
products approved for commercial sale at the present time.
As a result of the Company's net losses for the year ended December 31, 2003 and
accumulated deficit since inception, the Company's independent registered public
accounting firm, in their report on our financial statements for the year ended
December 31, 2003, included an explanatory paragraph indicating there is
substantial doubt about our ability to continue as a going concern. This
condition has not changed as of September 30, 2004. The Company's research and
development activities and the time and money required to determine the
commercial value and marketability of its proposed products cannot be estimated
with precision. The Company expects research and development activities to
continue to require significant cost expenditures for an indefinite period in
the future. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts of liabilities that might be necessary should the Company be unable to
continue in existence.
The Company received $1,100,000 during April and May, 2004 from the issuances of
bridge loans, described in Note 4, $250,000 from its parent company, Xechem (in
addition to approximately $50,000 in expenses incurred by the Company but paid
by Xechem) (see "Acquisition of CepTor by Xechem International, Inc." below) and
approximately $929,200, net of expenses, from the purchase of shares of common
F-27
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
stock of the Company pursuant to an exclusive license entered into by the
Company and JCR Pharmaceuticals Co., Ltd. (see Note 6). The Company is currently
seeking additional capital, collaborative partners, joint ventures and strategic
alliance agreements within the United States and abroad.
The Company's planned activities will require the addition of new personnel,
including management, and personnel with expertise in areas such as preclinical
testing, clinical trial design and management, regulatory affairs, manufacturing
and marketing. 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 suitable contract manufacturers or be able to have them
produce products at satisfactory prices.
The Company has expended and plans to expend substantial funds, if available, in
connection with the research and development of its proposed products. As a
result of these expenditures, the Company anticipates that losses will continue
for the foreseeable future.
There can be no assurance that management's plans to obtain additional financing
to fund operations will be successful. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event that we cannot continue in existence.
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 International, Inc., 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 considered to be 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. (See Note 3)
Effective with being acquired by Xechem, the Company's balance sheet was
adjusted to record existing assets and liabilities at 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
projects, and interest rates used to discount these cash flows to their present
value. In accordance with Emerging Issues Task Force ("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
F-28
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
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 in-process research and development 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 $5,034,000 of in-process research and
development 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:
Current and Other Assets $ 86,000
In Process Research and Development 5,034,000
------------
Total assets acquired 5,120,000
Current Liabilities 35,000
Notes and Advances Payable 325,000
------------
Net assets acquired $ 4,760,000
============
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited financial statements included herein have been prepared by the
Company, without audit. The financial statements reflect all adjustments that
are, in the opinion of management, necessary to fairly present such information.
All such adjustments are of a normal recurring nature. Although the Company
believes that the disclosures are adequate to make the information presented not
misleading, certain information and footnote disclosures, including a
description of significant accounting policies normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America, have been condensed or omitted.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's December 31, 2003
financial statements. The results of operations for interim periods are not
necessarily indicative of the results for any subsequent quarter or the entire
fiscal year ending December 31, 2004.
F-29
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
The Company is a development stage enterprise, and accordingly, certain
additional financial information is required to be included in the financial
statements from the Company's inception to the date of its current balance
sheet. The Company has included the Company's cumulative statement of operations
from August 11, 1986 (date of inception) to September 30, 2004.
STOCK BASED COMPENSATION
As permitted under SFAS 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 Opinion ("APB") No. 25
"Accounting for Stock Issued to Employees," and related interpretations
including Financial Accounting Standards Board Interpretation No. 44 "Accounting
for Certain Transactions Involving Stock Compensation," an interpretation of APB
No. 25.
The Company recorded compensation expense of $2,082,500 as a result of the grant
of the option to purchase 3,031,943 shares of common stock of the Company, with
an exercise price of par value of the underlying common stock ($0.0001 per
share) pursuant to the Spinoff Agreement. The amount of compensation expense
recognized was determined by applying the percent that these shares of common
stock, if issued, represent of the fully diluted share outstanding (43.75%), to
the fair value of the net assets acquired by Xechem in its acquisition of the
Company ($4,760,000)(See Note 3). If the Company had used an option pricing
model to calculate compensation expense for these options pursuant to SFAS No.
123, the compensation expense would have been approximately $7.0 million, and
amortized over the period April 2004 through December 2004.
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 non-accountable
expense allowance, and issued 36,000 shares of common stock with a value of
$90,000, which are being amortized over the period May 2004 through October
2004.
ESTIMATES
In preparing financial statements in conformity with accounting principles
generally accepted within the United States of America, management is required
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.
NET LOSS PER SHARE
Basic net loss per share is computed based on the weighted average shares of
common stock outstanding and excludes any potential dilution. Diluted loss per
share reflects the potential dilution from the exercise or conversion of all
dilutive securities into common stock. As the Company was in a loss position for
all periods presented, potentially dilutive securities at September 30, 2004
which includes options granted pursuant to the Founders' Plan of 3,031,943
exercisable at $0.0001 per share were excluded from the calculation of diluted
loss per share as the shares would have had an anti-dilutive effect. All per
share data and references to shares of common stock have been retroactively
adjusted to reflect the reverse merger which the Company entered into on
December 8, 2004 (see Note 9).
NOTE 3 - ACQUISITION OF CEPTOR BY XECHEM INTERNATIONAL, INC.
AND SUBSEQUENT SPINOFF
XECHEM AGREEMENT AND PLAN OF MERGER
The Company entered into an agreement dated December 23, 2003 providing for the
acquisition, by a wholly-owned subsidiary of Xechem, of the Company from its
owners which acquisition closed in early 2004. Pursuant to the terms of the
acquisition, the Company's stockholders were issued shares of Xechem preferred
stock and Xechem received 3,898,213 shares, (see Note 8) of the Company's common
stock, whereby the Company became a wholly-owned subsidiary of Xechem. The net
assets of the Company, acquired by Xechem pursuant to this transaction, were
valued at $4,760,000 which became the basis for the 3,898,213 shares of common
stock the Company issued to Xechem in this transaction. This value was
determined based on the average closing price of Xechem's common stock, into
which the preferred stock is convertible, for a reasonable period of time before
and after the terms of the acquisition was agreed to and announced.
F-30
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
XECHEM SPINOFF AGREEMENT
Following the acquisition, 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 spinoff of the Company from Xechem, providing an independent platform
to enable it to obtain financing and develop its technology. As a result, an
agreement dated March 31, 2004, as amended July 23, 2004, (the "Spinoff
Agreement"), was entered into among the Company, Xechem, and William Pursley,
Chairman and CEO of the Company, to provide for the separation of the Company
from Xechem, and to provide additional funding for Xechem through partial
redemption of shares of the Company held by Xechem, out of the proceeds of
future financings of the Company.
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 of any future financing in partial redemption of shares of the
Company held by Xechem, up to $2,000,000.
As additional consideration under the Spinoff Agreement, the Company is
obligated to pay to Xechem royalties 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 any of the
technology owned by the Company on 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 intellectual property.
Furthermore, pursuant to the terms of the acquisition, Xechem agreed to the
payment of a bonus in the form 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 or 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.
Pursuant to the Spinoff Agreement, Mr. Pursley was allocated, initially through
a 10 year option exercisable at $0.0001 per share (par value), 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 these Founders'
Shares. All of the Founders' Shares are to be issued to certain additional
persons designated by Mr. Pursley with importance to the future success of the
Company. All of such Founders' Shares immediately upon exercise will be fully
voting, and will be subject to the Founders' Plan. Pursuant to the terms of the
Founders' Plan, restrictions on holders of Founders' Shares shall 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, provided such
date is not less than six months following the date of award, unless modified by
the board of directors following issuance. Upon the happening of certain events
described in the Founders' Plan, such as the cessation of employment by a
F-31
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
participant following an award, shares issued or issuable to Founders' Plan
participants may revert to William Pursley and may be cancelled, forfeited,
re-designated or re-issued in his sole discretion subject to Board of Directors
or Compensation Committee approvals. Pursuant to the grant of the option to
purchase 3,031,943 shares of the Company's common stock, at the nominal exercise
price of par value, on June 1, 2004 (to 11 persons) the Company recorded
compensation expense of $2,082,500 representing the intrinsic value as
determined by applying the percent that the Founders' Shares represent of the
fully diluted share outstanding to the net assets acquired by Xechem in its
acquisition of the Company.
NOTE 4 - BRIDGE LOANS
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. The Bridge Loan offering was completed in May 2004.
The Company recorded a $506,600 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 will be
amortized over the six month period from May 2004 through October 2004 (the term
of the Bridge Loans). For the nine month period ended September 30, 2004, the
Company amortized approximately $422,100 of the discount to interest expense.
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
were granted 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 will be issued
by Xechem and the remainder from Mr. Pursley's personal Xechem option holdings.
As of December 8, 2004 the closing price of Xechem common stock (XKEM.OB) was
approximately $0.02 per share.
Pursuant to an offer dated October 22, 2004 (the "Exchange Offer") as amended
November 15, 2004 the Company offered to exchange with its holders of
outstanding Bridge Loans and other debt certain newly issued replacement notes
due December 8, 2005 convertible into shares of the common stock of the entity
to which the Company merged into, effective December 8, 2004, at $1.25 per
share, to be issued in amounts equal to the outstanding principal under the
notes cancelled, plus accrued interest. See Note 9 - Subsequent Events.
During the nine month period ended September 30, 2004, the Company accrued
contractual interest expense of approximately $36,600, related to the Bridge
Loans.
F-32
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 5 - COMMON STOCK SUBJECT TO REPURCHASE UNDER PUT RIGHT
The Spinoff Agreement, as amended, provides for the redemption, out of proceeds
of future financings of the Company, of shares of the Company's common stock
held by Xechem, in an amount that is equal to 25% (adjusted to 10% in
contemplation of the Company's next financing transaction) of the gross proceeds
received by the Company, in cancellation of an equivalent number of shares of
common stock of the Company held by Xechem, up to $2,000,000. At the end of two
years if the full $2,000,000 has not been paid out to Xechem, Xechem shall have
the right to put the remaining portion of the shares held for sale back to the
Company to cover the deficiency. In accordance with EITF 00-19, "Accounting for
Derivative Financial Instruments Indexed To, Potentially Settled In, The
Company's Own Stock," the Company classified the common stock as a current
liability in the accompanying balance sheet, since the Company anticipates
repurchasing the full amount of common stock from Xechem out of proceeds of
financings anticipated over the next twelve months (See Note 1). The Company
estimated that this obligation will redeem approximately 1,637,906 shares of
common stock of the Company held by Xechem based on the fair value per share of
common stock received by Xechem in the merger with the Company. The fair value
of consideration that Xechem paid in the merger with the Company for which it
received 3,898,213 shares of the Company's common stock, was $4,760,000,
resulting in a fair value per share of approximately $1.22.
NOTE 6 - 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 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 filing by the Company of an Investigational New Drug
application ("IND") in the United States to initiate Phase I/II clinical studies
for the Company's therapy for muscular dystrophy.
JCR purchased 554,413 shares of common stock of the Company for a payment of
$1,000,000 before expenses of the transaction. JCR has agreed to purchase an
additional $1,000,000 of common stock of the Company at the market price
existing at the time of approval of an IND for the Company's therapy for
muscular dystrophy.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with certain 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 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
F-33
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
cause or for 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 a confidentiality and a covenant not to compete
provisions for the period of his employment plus and additional twelve months.
CONSULTING AGREEMENTS
Pursuant to Xechem's acquisition of the Company, Xechem entered into consulting
agreements with the two founding scientists (the "Scientists") of the Company
for a period of sixty months. In consideration for the services to be rendered,
Xechem was obligated to pay a total of $276,000, plus expenses as allowed for in
the consulting agreements. In February 2004, the Company entered into consulting
agreements with the Scientists to replace their agreements with Xechem with ones
of similar terms. The consulting agreements are for a period of sixty months
commencing February 1, 2004 and provide for a monthly fee of $5,000 each plus
allowable expenses and terminated the consulting agreements with Xechem.
ROYALTY OBLIGATION
As additional consideration under the Spinoff Agreement, the Company is
obligated to pay to Xechem royalties 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 any of the
technology owned by the Company on 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 intellectual property.
CONTINGENT CONSIDERATION
Pursuant to the terms of the acquisition of the Company by Xechem, Xechem agreed
to the payment of a bonus of $1,000,000 in the form of additional consideration
in shares of stock of Xechem to the original shareholders of the Company for
each proposed product resulting from technology owned by the Company at the
effective date of the Spinoff Agreement, upon the earlier to occur of filing (i)
of a Phase II application for any drug in development or 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.
2004 INCENTIVE STOCK PLAN
The 2004 Incentive Stock Plan ("2004 Plan") was approved by the Board of
Directors and the stockholders of the Company on May 31, 2004. The purpose of
the 2004 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
F-34
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
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 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 Plan is administered by the board of directors.
As of September 30, 2004, 871,804 shares of common stock of the Company have
been reserved for issuance under the 2004 Plan and no awards have been granted
to any participant. Subsequent to September 30, 2004, certain option awards have
been recommended under the 2004 Plan to consultants and an employee but are
subject to approval of the Company's board of directors.
MANUFACTURING AND SUPPLY AGREEMENT
Pursuant to a manufacturing arrangement entered into subsequent to September 30,
2004 with Bachem AG, (a contract manufacturer - "Bachem") the Company is
obligated to purchase approximately $2,822,000 of clinical development supplies,
from Bachem, through the end of 2005. Included in prepaid expenses on the
Company's balance sheet at September 30, 2004, the Company recorded a deposit in
the amount of $211,250 paid to Bachem under this manufacturing arrangement.
NOTE 8 - 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 the founders,
which upon exercise would be 1,400,000 shares (3,031,943 shares 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.
NOTE 9 - SUBSEQUENT EVENTS
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION On December 8, 2004, Medallion
Crest Management, Inc., a Florida corporation ("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 the effectiveness of the Merger, the Company filed with the Florida
Department of State Articles of Amendment to the Articles of Incorporation of
the Company to change its name to CepTor Corporation ("New CepTor"), and to
authorize the issuance of up to 1,000 shares of its Series A Convertible
Preferred Stock (the "Preferred Stock").
F-35
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
Pursuant to the Merger, Medallion acquired all of the outstanding capital stock
of the Company in exchange for 4,783,919 shares of New CepTor's common stock,
par value $0.0001 per share (the "Common Stock"), 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 is being accounted
for as a "reverse merger," 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 and neurodegenerative diseases.
NOTE EXCHANGE OFFER
Pursuant to an offer dated October 22, 2004 (the "Exchange Offer") as amended
November 15, 2004, made by New CepTor to the Bridge Loans and other debt holders
of the Company, on December 9, 2004 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. The Exchange Offer
provides that holders of outstanding Bridge Loans who received in connection
with the original issuance of the Bridge Loans, a total of 150,000 shares (on a
pre-merger basis) of the Company's common stock which converted into a total of
up to 300,000 shares of New CepTor Common Stock upon effectiveness of the
Merger. The remaining $350,000 of Bridge Loan principal which did not accept the
Exchange Offer was repaid with interest through the date of payment. In
addition, the 70,000 shares of common stock (on a pre-merger basis) of the
Company these Bridge Loan holders received in connection with the issuance of
the original Bridge Loans, has converted into 151,597 shares of common stock of
New CepTor upon effectiveness of the Merger.
ADOPTION OF STOCK PLANS
In connection with the Merger New CepTor adopted the Company's Founders' Stock
Plan and 2004 Incentive Plan. On December 9, 2004 the Company issued to CepTor
employees and others 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 or
restricted stock for up to a maximum of 2,746,025 shares of Common Stock.
F-36
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
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
Company and 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 International, Inc., the single largest shareholder of
CepTor, agreed to vote for the change of the state of incorporation to Delaware
in connection with the spinout of its majority ownership of CepTor.
PRIVATE PLACEMENT
Pursuant to a Placement Agent Agreement dated October 22, 2004 with Brookshire
Securities Corporation (the "Placement Agent") the Company agreed to sell in a
private placement (the "Offering") up to 240 Units (as defined below) at $25,000
per Unit ($6,000,000), subject to increase to permit sale of up to an additional
36 Units (276 Units) ($6,900,000) 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 Offering to up to 480 Units
($12,000,000), subject to increase to permit sale of up to an additional 72
Units (up to $13,800,000), 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 Offering, five-year warrants exercisable for up to 552,000 shares of
Common Stock (as defined below), and up to 300,000 shares of Common Stock. If
terminated, the adjusted maximum Offering amount could be increased by the
Company and the Placement Agent by 10% to $7,590,000.
On December 9, 2004, CepTor sold 103.62 Units to 42 investors pursuant to a
Confidential Private Placement Memorandum dated October 22, 2004 as supplemented
November 16, 2004, (the "Memorandum"), each Unit (the "Units") consisting of one
share of Series A Convertible Preferred Stock, par value $0.0001 per share (the
"Preferred Stock"), and a three-year warrant to purchase Common Stock, par value
$0.0001 per share (the "Common Stock"). Each share of 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 for $2.50 per share. At the
initial closing, the Company realized gross proceeds of $2,590,500.00, before
payment of commissions and expenses. On December 27, 2004, January 5, 2005,
January 18, 2005, January 31, 2005 and February 3, 2005, CepTor realized
$1,036,250, $1,208,725, $1,906,250, $5,258,275 and $353,725 from the sale of an
additional 41.45, 48.35, 76.25, 210.33 and 14.15 Units, respectively, under the
Offering.
ISSUANCE OF WARRANTS
The Company issued unit warrants to purchase up to an aggregate of 2,470,745
shares of Common Stock in connection with the Private Placement as of February
3, 2005. 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.
The Company issued warrants to purchase up to an aggregate of 494,149 shares of
Common Stock to the placement agent and certain other parties in connection with
the Private Placement as of February 3, 2005. 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.
As compensation for assistance with the Company's various financing
transactions, the Company issued warrants to purchase up to an aggregate of
200,000 shares of common stock at an exercise price of $1.25, which warrants
expire three years after the issue date.
To assist the Company in its resolution of a lawsuit, the Company issued
warrants to purchase an aggregate of 50,000 shares in total to four individuals,
with exercise prices of $1.25, and which will expire three years after their
issue date.
F-37
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
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. 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.
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.
RESTRICTED STOCK ISSUED PURSUANT TO 2004 INCENTIVE PLAN
As compensation for assistance with our Private Placement and as settlement to
our lawsuit, the Company issued 675,690 and 125,000 shares of restricted common
stock, respectively, during the fourth quarter of 2004.
OPTIONS GRANTED PURSUANT TO 2004 INCENTIVE PLAN
In addition to an option to purchase 15,000 shares of common stock granted to a
consultant of the Company, the Company granted an option for approximately
78,200 shares of common stock to a newly hired employee. Pursuant to an
agreement entered into for the purpose of providing investor relations services
to the Company, the Company agreed to issue to its previous investor relations
firm, a five-year option to purchase 187,500 shares of common stock at an
exercise price of $2.50 per share, with piggy-back registration rights. The
Company also granted an option to purchase 400,000 shares of common stock at an
exercise price of $2.50 to its current financial and investor relations firm.
LEGAL PROCEEDINGS
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
transaction on the eve of a closing, that it had breached its agreements,
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 parties 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, exchanges of mutual releases, transfer of 50,000 shares of
Company unrestricted Common Stock, issuance of 125,000 shares of restricted
Company Common Stock, 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 CepTor.
F-38
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 shareholders' 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 $ 13,806.34
Accounting Fees and Expenses 5,000.00
Legal Fees and Expenses 75,000.00
Printing Fees and Expenses 1,000.00
Total $ 94,806.34
II-1
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
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.
Private Placement
On December 9, 2004, we sold an aggregate of 103.62 Units to accredited
investors in the Private Placement, pursuant to the terms of a Confidential
Private Placement Memorandum dated October 22, 2004, as supplemented November
16, 2004. Each Unit consists of one share of Series A Preferred Stock and a
three-year warrant to purchase Common Stock. 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 for $2.50 per
share. The Units were offered by the Placement Agent pursuant to a placement
agent agreement, as amended, 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 at $1.25 per share. At the
initial closing, we realized gross proceeds of $2,590,500, before payment of
commissions and expenses. On December 27, 2004, January 5, 2005, and January 18,
2005, we realized $1,036,250, $1,208,725, and $1,906,250, from the sale of an
additional 41.45, 48.35, and 76.25 Units to 73, 15, and 34 investors,
respectively, under the offering. On January 31, 2005 and February 3, 2005 we
sold an aggregate of 224.48 Units to 86 investors and terminated the Private
Placement other than the right to sell up to an additional 57.85 Units for
over-allotments to prior subscribers, realizing total gross proceeds under the
offering of $12,353,725.00.
On January 31, 2005, we issued three-year warrants to purchase 1,419,149 shares
of Common Stock at $1.25 per share to 6 persons.
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 three-year warrants to purchase 150,000 shares and
on January 31, 2005 150,000 shares to Brookshire Securities Corporation under
the Placement Agent Agreement.
On December 9, 2004, we issued five-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 five-year warrants to purchase an aggregate of
50,000 shares of Common Stock to four entities.
On December 8 and 9, 2004 we issued 5,174,448 shares to three persons and to
participants in the Founders' Plan, respectively.
In April 2003 we issued 4,750,000 shares of Common Stock to fourteen investors
for an aggregate of $4,750.
In April 2003 we sold 415,500 shares of Common Stock to thirty-one investors
for an aggregate of $41,550.
Exchange Offer
Pursuant to the Exchange Offer, we issued $1,111,239.84 of Replacement Notes due
December 8, 2005. The Company offered to exchange with holders of its
outstanding Bridge Loans and 10% convertible promissory notes, Replacement Notes
convertible into shares of our Common Stock at $1.25 per share in amounts equal
to the outstanding principal under the notes cancelled, plus accrued interest.
II-2
The Exchange Offer provided that holders of outstanding Bridge Loans who
received in connection with the issuance a total of 220,000 shares of the
Company's common stock would, upon acceptance of the Exchange Offer, retain such
outstanding shares which would convert into a total of up to 440,000 shares of
our Common Stock upon effectiveness of the Merger on the following basis:
Purchase price of
Shares of Principal amount Unit ($25,000)
Common Stock = Bridge ÷ -----------------------
Loan converted Number shares Common
Stock per Unit ($10,000)
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 herein by reference 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
3.3 Amended and Restated By-laws (incorporated herein by reference
to Exhibit 3.2 to the January 2005 8-K)
4.1 CepTor Agreement, dated March 31, 2004, by and among William
Pursley, Xechem and the Company (incorporated herein by
reference to Exhibit 4.1 to the 2004 Form 8-K).
4.2 First Amendment to CepTor Agreement effective April 23, 2004 by
and among William Pursley, the Company and Xechem (incorporated
herein by reference to Exhibit 4.2 to the 2004 8-K)
4.3 Second Amendment to CepTor Agreement, dated December 9, 2004,
by and among William Pursley, the Company and Xechem
(incorporated by reference to Exhibit 4.3 to the 2004 8-K)
4.4* Form of Unit Warrant
4.5* Form of Convertible Promissory Note
4.6* Form of Subscription Agreement
5** Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP
10.1* Employment Agreement, dated March 31, 2004, with William H.
Pursley
10.2* Employment Agreement, dated April 26, 2004, with Norman A.
Barton, M.D., Ph.D.
10.3* Employment Agreement, dated March 31, 2004, with Donald W.
Fallon
II-3
10.5* Founders' Plan
10.6* 2004 Incentive Plan
10.7* Sublease Agreement, dated March 4, 2004, by and between CepTor
Corporation and Millennium Inorganic Chemicals, Inc.
10.8* Exclusive License Agreement, dated September 15, 2004, with JCR
Pharmaceuticals Co., Ltd.
10.9** Indemnification Agreement, dated June 1, 2004, with William
H. Pursley
10.10** Indemnification Agreement, dated June 1, 2004, with Norman W.
Barton
10.11** Indemnification Agreement, dated June 1, 2004, with Donald W.
Fallon
10.12** Indemnification Agreement, dated June 1, 2004, with Leonard
Mudry
23.1* Consent of WithumSmith+Brown, P.C.
23.2** Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP
(included in Exhibit 5)
24* Power of Attorney (included on signature page)
------------------
*filed herewith
** to be filed by amendment
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, the Registrant will
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 remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
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
II-4
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.
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.
II-5
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 February 11,
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 February 11, 2005
---------------------- Officer and Director
William H. Pursley
/s/ Donald W. Fallon Senior Vice President, February 11, 2005
-------------------- Finance and Administration,
Donald W. Fallon Chief Financial Officer and
Secretary
/s/ Leonard A. Mudry Director February 11, 2005
--------------------
Leonard A. Mudry
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