sec document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE OF 1934
For the quarterly period ended March 31, 2005
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________________ to __________________
Commission file number: 333-105793
CEPTOR CORPORATION
--------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 11-2897392
------------------------------------- --------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 International Circle, Suite 5100
Hunt Valley, Maryland 21030
------------------------------------- --------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (410) 527-9998
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
As of May 13, 2005, there were 11,554,507 shares of the issuer's
common equity outstanding.
Transitional Small Business Disclosure Format (Check one): Yes / / No /X/
Table of Contents
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Page
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Part 1 FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)....................................1
Balance Sheets - March 31, 2005 (Unaudited) and December 31, 2004
Statements of Operations (Unaudited) for the three months ended March
31, 2005 and 2004 and for the period from August 11, 1986 (date of
inception) to March 31, 2005
Statement of Changes in Stockholders' (Deficiency) Equity (Unaudited)
Statements of Cash Flows (Unaudited) for the three months
ended March 31, 2005 and 2004 and for the period from
August 11, 1986 (date of inception) to March 31, 2005
Notes to Unaudited Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation..........14
Item 3. Controls and Procedures............................................16
Part II OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........18
Item 4. Submission of Matters to a Vote of Security Holders................19
Item 6. Exhibits...........................................................19
i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(unaudited)
March 31, 2005 December 31, 2004
-------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 7,407,014 $ 1,331,513
Prepaid expenses 152,574 107,729
------------ ------------
Total current assets 7,559,588 1,439,242
Property and equipment, net 65,567 60,615
Security deposit 18,511 18,511
------------ ------------
TOTAL ASSETS $ 7,643,666 $ 1,518,368
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current Liabilities:
Accounts payable $ 398,955 $ 58,266
Accrued expenses 427,150 315,237
Common stock subject to repurchase under variable shares put right 720,875 1,637,325
------------ ------------
Total current liabilities 1,546,980 2,010,828
Convertible notes 279,165 56,821
------------ ------------
TOTAL LIABILITIES 1,826,145 2,067,649
------------ ------------
Commitments and contingencies
Stockholders' (Deficiency) Equity:
Preferred stock, $0.0001 par value; authorized 20,000,000 shares, issued and
outstanding - 467.65 and 145.07 shares of Series A Convertible Preferred
Stock at March 31, 2005 and December 31, 2004, respectively; liquidation
preference - $11,691,250 and $3,626,750, respectively 11,691,250 3,626,750
Common stock, $0.0001; authorized 100,000,000 shares, issued and outstanding
11,486,835, net of 179,322 shares subject to put right and 10,539,161, net
of 401,305 shares subject to put right at March 31, 2005 and December 31,
2004, respectively 1,149 1,054
Subscriptions receivable on common stock (77) (303)
Deferred compensation (1,205,186) (624,750)
Additional paid-in capital 23,554,121 12,294,648
Treasury stock, 511,650 and 145,070 shares, at March 31, 2005 and December 31,
2004, respectively, at cost (1,279,125) (362,675)
Deficit accumulated during the development stage (26,944,611) (15,484,005)
------------ ------------
Total stockholders' (deficiency) equity 5,817,521 (549,281)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY $ 7,643,666 $ 1,518,368
============ ============
(See Notes to Condensed Financial Statements)
1
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(Unaudited)
CUMULATIVE
AUGUST 11, 1986
(DATE OF
THREE MONTHS ENDED MARCH 31, INCEPTION) TO
---------------------------- MARCH 31,
2005 2004 2005
---------- ---------- --------------
DEVELOPMENT STAGE REVENUES $ - $ - $ 75,349
OPERATING EXPENSES:
Research and development 602,838 72,960 3,178,844
In-process research and development - 5,034,309 5,034,309
General and administrative 600,650 114,101 1,977,058
Stock-based compensation to employees and directors 67,595 - 67,595
Stock-based compensation pursuant to spinoff agreement - 2,082,500 2,082,500
Stock-based compensation to nonemployees 799,175 - 3,706,410
Stock-based litigation settlement expenses - - 422,000
Non-cash interest expense 222,344 - 1,323,259
Interest expense, net of interest income 3,504 6,803 38,955
------------ ------------ ------------
Total operating expenses 2,296,106 7,310,673 17,830,930
------------ ------------ ------------
NET LOSS (2,296,106) (7,310,673) (17,755,581)
Preferred dividends (9,164,500) - (10,100,616)
------------ ------------ -------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $(11,460,606) $(7,310,673) $(27,856,197)
============ ============ =============
Basic and diluted loss per common share $ (1.02) $ (1.88)
Weighted-average common shares outstanding 11,216,448 3,898,213
(See Notes to Condensed Financial Statements)
2
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY
(Unaudited)
PREFERRED STOCK COMMON STOCK SUBSCRIP- DEFERRED
-------------------- ----------------------- TION COMPEN-
SHARES AMOUNT SHARES AMOUNT RECEIVABLE SATION
--------- -------- ---------- --------- ------------ -----------
BALANCE, JANUARY 1, 2005 145.07 $ 3,626,750 10,539,161 $ 1,054 $ (303) $ (624,750)
Preferred stock and warrants issued pursuant to
units sold on January 5, 2005 in a private
placement ($25,000) 48.35 1,208,750
Deemed dividend of beneficial conversion feature of
units sold January 5, 2005 in private placement
Acquisition January 5, 2005 of treasury stock under
put right ($2.50)
Preferred stock and warrants issued pursuant to units
sold on January 18, 2005 in a private placement
($25,000) 76.25 1,906,250
Deemed dividend of beneficial conversion feature of
units sold January 18, 2005 in private placement
Acquisition January 18, 2005 of treasury stock under
put right ($2.50)
Common stock issued January 2005 in connection with
payment of legal fees ($3.04) 23,000 2
Common stock issued January 2005 pursuant to amendment
of placement agent agreement ($2.50) 150,000 15
Common stock issued January 2005 to advisors for past
services ($6.25) 7,500 1
Preferred Stock and warrants issued pursuant to units
sold February 3, 2005 in a private placement
($25,000) 224.48 5,612,000
Deemed dividend of beneficial conversion feature of
units sold February 3, 2005 in private placement
Acquisition February 3, 2005 of treasury stock under
put right ($2.50)
Preferred stock and warrants issued pursuant to units
sold on February 11, 2005 in a private placement
($25,000) 17.50 437,500
Deemed dividend of beneficial conversion feature of
units sold February 11, 2005 in private placement
Acquisition February 11, 2005 of treasury stock under
put right ($2.50)
3A
DEFICIT
ACCUMULATED TOTAL
ADDITIONAL TREASURY STOCK DURING THE STOCKHOLDERS'
PAID-IN -------------------- DEVELOPMENT (DEFICIENCY)
CAPITAL SHARES AMOUNT STAGE EQUITY
------------- ----------- ------------ --------------- ----------------
BALANCE, JANUARY 1, 2005 $ 12,294,648 145,070 $ (362,675) $(15,484,005) $ (549,281)
Preferred stock and warrants issued pursuant to
units sold on January 5, 2005 in a private
placement ($25,000) (159,359) 1,049,391
Deemed dividend of beneficial conversion feature of
units sold January 5, 2005 in private placement 1,208,750 (1,208,750) -
Acquisition January 5, 2005 of treasury stock under
put right ($2.50) 48,350 (120,875) (120,875)
Preferred stock and warrants issued pursuant to units
sold on January 18, 2005 in a private placement
($25,000) (252,624) 1,653,626
Deemed dividend of beneficial conversion feature of
units sold January 18, 2005 in private placement 1,906,250 (1,906,250) -
Acquisition January 18, 2005 of treasury stock under
put right ($2.50) 76,250 (190,625) (190,625)
Common stock issued January 2005 in connection with
payment of legal fees ($3.04) 69,998 70,000
Common stock issued January 2005 pursuant to amendment
of placement agent agreement ($2.50) (15) -
Common stock issued January 2005 to advisors for past
services ($6.25) 46,874 46,875
Preferred Stock and warrants issued pursuant to units
sold February 3, 2005 in a private placement
($25,000) (851,447) 4,760,553
Deemed dividend of beneficial conversion feature of
units sold February 3, 2005 in private placement 5,612,000 (5,612,000) -
Acquisition February 3, 2005 of treasury stock under
put right ($2.50) 224,480 (561,200) (561,200)
Preferred stock and warrants issued pursuant to units
sold on February 11, 2005 in a private placement
($25,000) (181,408) 256,092
Deemed dividend of beneficial conversion feature of
units sold February 11, 2005 in private placement 437,500 (437,500)
Acquisition February 11, 2005 of treasury stock under
put right ($2.50) 17,500 (43,750) (43,750)
3B
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY (CONTINUED)
(Unaudited)
PREFERRED STOCK COMMON STOCK SUBSCRIP- DEFERRED
-------------------- ----------------------- TION COMPEN-
SHARES AMOUNT SHARES AMOUNT RECEIVABLE SATION
--------- -------- ---------- --------- ------------ -----------
Common stock issued February 2005 pursuant
to cashless exercise of option ($3.05) 100,191 10
Common stock issued March 2005 upon
conversion of preferred shares ($2.50) (44.00) (1,100,000) 440,000 44
Reverse common stock subject to repurchase
under variable shares put right at December
31, 2005 401,305 40
Common stock subject to repurchase under
variable shares put right at March 31, 2005 (179,322) (18)
Payments received for common stock issued
December 2004 pursuant to exercise of
options granted under spinoff agreement 226
Common stock issued March 2005 pursuant to
exercise of warrants ($1.25) 5,000 1
Stock option-based compensation for investor
relation services rendered (439,900)
Stock option-based compensation for
employees and directors (362,831)
Fair value adjustment of stock options previously
granted to non-employees (597,600)
Amortization of deferred compensation 819,895
Net loss
--------- ---------- ---------- --------- ------------ ------------
BALANCE, MARCH 31, 2005 467.65 $11,691,250 11,486,835 $ 1,149 $ (77) $(1,205,186)
========= ========== ========== ========= ============ ============
(See Notes to Condensed Financial Statements)
4A
DEFICIT
ACCUMULATED TOTAL
ADDITIONAL TREASURY STOCK DURING THE STOCKHOLDERS'
PAID-IN -------------------- DEVELOPMENT (DEFICIENCY)
CAPITAL SHARES AMOUNT STAGE EQUITY
------------- ----------- ------------ --------------- ---------------
Common stock issued February 2005 pursuant
to cashless exercise of option ($3.05) (10) -
Common stock issued March 2005 upon
conversion of preferred shares ($2.50) 1,099,956 -
Reverse common stock subject to repurchase
under variable shares put right at December
31, 2005 1,637,285 1,637,325
Common stock subject to repurchase under
variable shares put right at March 31, 2005 (720,857) (720,875)
Payments received for common stock issued
December 2004 pursuant to exercise of
options granted under spinoff agreement 226
Common stock issued March 2005 pursuant to
exercise of warrants ($1.25) 6,249 6,250
Stock option-based compensation for investor
relation services rendered 439,900 -
Stock option-based compensation for
employees and directors 362,831 -
Fair value adjustment of stock options previously
granted to non-employees (597,600)
Amortization of deferred compensation 819,895
Net loss (2,296,106) (2,296,106)
------------ ------- ------------- -------------- ------------
BALANCE, MARCH 31, 2005 $22,956,521 511,650 $ (1,279,125) $ (26,944,611) $ 5,817,521
============ ======= ============= ============== ============
(See Notes to Condensed Financial Statements)
4B
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(Unaudited)
CUMULATIVE
AUGUST 11, 1986
(DATE OF
THREE MONTHS ENDED MARCH 31, INCEPTION)TO
---------------------------- March 31,
2005 2004 2005
------------ ------------ ---------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $(2,296,106) $(7,310,673) $(17,755,581)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 4,097 667 17,380
Write-off of in-process research and development - 5,034,309 5,034,309
Charge for stock option issued pursuant to spinoff agreement - 2,082,500 2,082,500
Stock-based compensation to employees and directors 67,595 - 67,595
Stock-based compensation to nonemployees 799,175 - 3,711,606
Stock-based component of litigation settlement - - 422,000
Non-cash interest expense 222,344 - 1,540,919
Changes in assets and liabilities:
Paid expenses (44,845) (5,478) (152,574)
Other assets - (18,511) (18,511)
Accounts payable and accrued expenses 522,602 63,899 919,763
----------- ----------- ------------
Net cash used in operating activities (725,138) (153,287) (4,130,594)
----------- ----------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (9,049) (31,253) (82,947)
----------- ----------- ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuances of common stock 6,250 - 1,136,502
Collection of subscriptions receivable 226 - 226
Net proceeds from issuances of preferred stock 7,719,662 - 10,523,902
Acquisition of treasury stock under put right (916,450) - (1,279,125)
Distribution to shareholders - - (4,260)
Capital contributed by Xechem International, Inc. - 300,310 350,310
Proceeds from issuance of bridge loans - - 1,375,000
Debt issue costs - - (132,000)
Principal payments on bridge loans - - (350,000)
----------- ----------- ------------
Net cash provided by financing activities 6,809,688 300,310 11,620,555
----------- ----------- ------------
Net increase in cash and cash equivalents 6,075,501 115,770 7,407,014
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 1,331,513 68,374
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 7,407,014 $ 184,144 $ 7,407,014
=========== =========== ============
(See Notes to Condensed Financial Statements)
5
CUMULATIVE
AUGUST 11, 1986
(DATE OF
THREE MONTHS ENDED MARCH 31, INCEPTION)TO
---------------------------- MARCH 31,
2005 2004 2005
------------ ------------ ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Deemed dividend of the beneficial conversion feature of
units sold in private placement $ 9,164,500 $ - $ 10,100,616
Issuance of 440,000 shares of common stock upon
conversion of preferred shares 1,100,000 1,100,000
Remaining obligation to repurchase 179,322 shares of
common pursuant to put right 720,875 - 720,875
Issuance of 23,000 shares of common stock in payment of
accrued legal fees 70,000 - 70,000
Issuance of 36,000 shares of common stock as debt
issuance costs - - 90,000
Issuance of 451,597 shares of common stock to bridge
loan investors and placement agent - - 550,000
Issuance of 167,610 shares upon conversion of convertible
notes - - 209,512
Issuance of convertible notes in exchange for bridge loans
and long-term debt plus accrued interest - - 1,111,240
(See Notes to Condensed Financial Statements)
6
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. CepTor
Corporation is a biopharmaceutical company engaged in the research and
development of therapeutic products for neuromuscular, neurodegenerative and
other diseases with a focus on orphan diseases (defined as those which affect
less than 200,000 people). Since its inception, the Company has devoted its
efforts and resources to the development of its receptor mediated drug-targeting
platform for neuromuscular and neurodegenerative diseases, and to raising the
funds necessary to continue this research.
The Company is a development stage enterprise which has a limited history of
operations and has not generated any material revenues since its inception. The
Company has received a limited amount of funding through grants and
collaborative research efforts in connection with developing its products. The
Company does not have any products that are approved for commercial distribution
at the present time. As a development stage enterprise, the Company is subject
to all of the risks and uncertainties that are associated with developing a new
business.
MERGER OF XECHEM INTERNATIONAL, INC. AND CEPTOR CORPORATION
On January 27, 2004, the former shareholders of the Company received shares of
preferred stock of Xechem International, Inc. ("Xechem") in connection with the
merger of the Company into a wholly-owned subsidiary of Xechem. For financial
reporting purposes, the effective date of the merger was designated January 1,
2004. The results of operations from January 1 to January 27, 2004 were not
significant. The merger was accomplished through a reverse triangular merger
whereby Ceptor Acquisition, Inc., a wholly-owned subsidiary of Xechem, was
merged into the Company and the Company was the surviving entity.
Following the acquisition of the Company by Xechem, the board of directors of
Xechem determined that Xechem lacked the resources to fully fund the development
and regulatory approval of the Company's technology. As a result, the board of
directors of Xechem determined that it was in the best interest of Xechem's
stockholders to effect a spin-off of the Company from Xechem, providing the
Company with an independent platform to obtain financing and develop its
technology. As a result the Company, Xechem, and William Pursley, Chairman and
CEO of the Company, entered into an agreement dated March 31, 2004, amended July
23, 2004 and November 17, 2004, (the "Spinoff Agreement"), to provide for the
separation of the Company from Xechem. The Spinoff Agreement provided for the
Company's separation from Xechem under a transaction structured to include (i)
the Company's redemption of a portion of its shares held by Xechem out of the
proceeds of future financing under the Redemption Obligation described below,
(ii) the issuance and allocation of additional shares of common stock to Mr.
Pursley under the Founders' Plan described below and (iii) the Company's reverse
merger into a public shell. The spin-off of the Company from Xechem concurrent
with Mr. Pursley's exercise of his stock option and the Company's reverse merger
into Medallion was completed on December 8, 2004.
MERGER OF MEDALLION CREST MANAGEMENT, INC. AND CEPTOR CORPORATION
Medallion Crest Management, Inc., a Florida corporation ("Medallion") acquired
all of the common stock of the Company on December 8, 2004. Medallion was an
inactive public shell at the time of acquisition. The Company's shareholders
prior to the merger became the majority shareholders of Medallion after the
merger; accordingly the transaction was accounted for as a recapitalization. The
accompanying financial statements preceding the date of the acquisition have
been retroactively restated to give effect to this transaction.
NOTE 2 - LIQUIDITY AND FINANCIAL CONDITION
The Company's net loss for the three-month period ended March 31, 2005 amounted
to $2,296,106, which includes $1,089,114 of non-cash special charges associated
with the Company's issuance of stock-based compensation and non-cash interest
expense. The Company used net cash flows in its operating activities of
$725,138. The Company's development stage accumulated deficit amounts to
$26,944,611 at March 31, 2005. The Company expects to continue incurring losses
for the foreseeable future due to the inherent uncertainty that is related to
establishing the commercial feasibility of pharmaceutical products. The Company
will require substantial additional funding to support the development of its
proposed products and fund its operations while it continues its efforts to
execute its business plan but estimates that it will have sufficient liquidity
to sustain operations through December 31, 2005.
The Company's working capital at March 31, 2005 amounts to $6,012,608, which
includes the obligation under the variable shares put right, which is payable
only out of proceeds from any subsequent financings, as further described in
Note 6. During the three-month period ended March 31, 2005, the Company received
net proceeds of $6,809,688 from financing activities, including (i) $7,719,662
(gross proceeds of $9,164,500 net of transaction expenses amounting to
$1,444,838) from the sale of preferred stock and common stock purchase warrants
("Units") in a private placement transaction (see Note 9), (ii) $6,250 from the
exercise of warrants, and (iii) $226 from subscriptions receivable pursuant to
the restricted shares issued under the Company's Founders' Plan during December
2004. From the net proceeds of the sale of the Units, the Company repurchased
$916,450 of shares of its common stock, par value $.0001 per share, held by
Xechem pursuant to the terms of a redemption obligation (see Note 6). The
Company is continuing to seek additional capital through equity offerings,
collaborative partnerships, joint ventures and strategic alliances both within
the United States and abroad in an effort to accelerate the development of its
proposed products. There are currently no firm commitments in place for new
capital nor has the Company identified any prospective joint venture partners or
participants with which it could enter into any new strategic alliance
arrangement.
Over the next twelve months, the Company's primary efforts will be on moving its
lead product, Myodur, into phase I/II clinical trials for Duchenne's muscular
dystrophy. The Company plans to use its available cash resources to continue the
pre-clinical development of its technologies, which primarily includes the
manufacture of Myodur, conducting pre-clinical tests and toxicology studies,
compiling, drafting and submitting an investigational new drug application
("IND") for Myodur, and initiating phase I/II human clinical trials, if allowed
by the Food and Drug Administration ("FDA"). As resources allow, the Company may
7
also fund other working capital needs. The Company presently expects to file its
IND for Myodur in 2005, and initiate human clinical trials for Myodur during the
quarter ending March 31, 2006.
The Company expects to incur significant expenditures during the next twelve
months for the cost to manufacture the Company's product Myodur for use in
clinical and other testing. The Company does not have, and does not intend to
establish, its own manufacturing facilities to produce its product candidates in
the near or mid-term. The Company plans to outsource the manufacturing of its
proposed products to contract manufacturers. Following placement of an initial
purchase order for its proposed for product in 2004, the Company learned that
the quantity and delivery time of clinical materials required would cause the
manufacturing costs of its proposed product to exceed its initial estimates. As
a result of discussions with its contract manufacturer occurring during the
latter part of the first quarter of 2005, the Company has increased its
anticipated capital requirements that will need to be devoted to manufacturing
of its proposed product. On April 18, 2005, the Company entered into an
exclusive manufacture and supply agreement with Bachem AG ("Bachem") whereby
Bachem is entitled to receive royalty payments in the amount of the lesser of 5%
of "net sales" (as defined in the agreement) or $10 million, $15 million or $25
million in the first, second and third (and thereafter) years of the agreement,
respectively.
Further, if the Company receives regulatory approval for any of its products in
the United States or elsewhere, it will incur substantial expenditures to
develop manufacturing, sales, and marketing capabilities and/or to subcontract
or joint venture these activities with others. There can be no assurance that
the Company will ever recognize revenue or profit from any such products. In
addition, the Company may encounter unanticipated problems, including
developmental, regulatory, manufacturing, or marketing difficulties, some of
which may be beyond its ability to resolve. The Company may lack the capacity to
produce its products in-house and there can be no assurances that it will be
able to locate or retain suitable contract manufacturers or be able to have them
produce products at satisfactory prices.
There can be no assurance that management's plans to obtain additional financing
to fund operations will be successful or that the successful implementation of
the business plan will actually improve the Company's operating results.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company is a development stage enterprise. Accordingly, the Company has
included its cumulative statements of operations and cash flows for the period
of August 11, 1986 (date of inception) to March 31, 2005 in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 7 "Accounting and
Reporting by Development Stage Enterprises."
The Company's net loss available to common shareholders as reported in its
statement of operations for the period of August 11, 1986 (date of inception) to
March 31, 2005 is $27,856,197 whereas the deficit accumulated during its
development stage as reported on its balance sheet at March 31, 2005 is
$26,944,611. The difference is a result of the acquisition of the Company by
Xechem and the restatement of its assets and liabilities to fair value, which
resulted in the Company's accumulated deficit, net of distributions, from
inception through December 31, 2003 (the date of merger for financial reporting
purposes) being reclassified to additional paid-in capital, net of a deemed
dividend to the preferred shareholders.
ACCOUNTING FOR STOCK BASED COMPENSATION
As permitted under SFAS No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure," which amended SFAS No. 123 "Accounting for
Stock-Based Compensation," the Company has elected to use the intrinsic value
method of accounting for its stock-based compensation arrangements as defined by
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to Employees," and related interpretations including Financial Accounting
Standards Board ("FASB") Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation," an interpretation of APB No. 25.
8
The cost of stock-based compensation awards issued to non-employees for services
are recorded at either the fair value of the services rendered or of the
instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in Emerging
Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."
The following table summarizes the pro forma operating results of the Company
had compensation expense for stock options granted to employees been determined
in accordance with the fair market value based method prescribed by SFAS No.
123. The Company has presented the following disclosures in accordance with SFAS
No. 148.
For the Three-Month Period Ended
--------------------------------
March 31,
---------
2005 2004
---- ----
Net loss available to common stockholders $(11,460,606) $ (7,310,673)
Adjust: Stock-based employee compensation
determined under the fair value method (11,143) (5,497,358)
------------ -------------
Pro forma net loss $(11,471,749) $ (12,808,031)
============ =============
Net loss per share available to common stockholders:
Basic and diluted, as reported $ (1.02) $ (1.88)
Basic and diluted, pro forma (1.02) (3.29)
The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect
the portion of the estimated fair value of awards that were earned for the
three-month period ended March 31, 2005.
ACCOUNTING FOR WARRANTS ISSUED IN CONNECTION WITH SALE OF UNITS
The Company accounts for the issuance of common stock purchase warrants issued
in connection with sales of its Units in accordance with the provisions of EITF
Issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock." Based on the provisions of EITF
Issue No. 00-19, the Company classifies as equity any contracts that (i) require
physical settlement or net-share settlement or (ii) gives the company a choice
of net-cash settlement or settlement in its own shares (physical settlement or
net-share settlement). The Company classifies as assets or liabilities any
contracts that (i) require net-cash settlement (including a requirement to
net-cash settle the contract if an event occurs and if that event is outside the
control of the Company) or (ii) give the counterparty a choice of net-cash
settlement or settlement in shares (physical settlement or net-share
settlement).
NET (LOSS) PER SHARE
Net loss per share is presented under SFAS No. 128 "Earnings Per Share." Under
SFAS No. 128, basic net loss per share is computed by dividing net loss per
share available to common stockholders by the weighted average shares of common
stock outstanding for the period and excludes any potential dilution. Diluted
earnings per share reflect the potential dilution that would occur upon the
exercise or conversion of all dilutive securities into common stock. The
computation of loss per share for the three-month period ended March 31, 2005
excludes potentially dilutive securities because their inclusion would be
anti-dilutive.
Shares of common stock issuable upon the conversion or exercise of potentially
dilutive securities at March 31, 2005 are as follows:
Series A Preferred Stock 4,676,500
Warrants 4,239,900
Options 607,695
Convertible Notes 743,517
----------
TOTAL 10,267,612
==========
9
There were no potentially dilutive securities outstanding during the three-month
period ended March 31, 2004.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interest. FIN 46 also required
consolidation of a VIE by an enterprise that holds such controlling interest. In
December 2003, the FASB completed its deliberations regarding the proposed
modifications to FIN 46 and issued Interpretation Number 46R, "Consolidation of
Variable Interest Entities - an Interpretation of ARB 51" ("FIN 46R"). The
decisions reached included a deferral of the effective date and provisions for
additional scope exceptions for certain types of variable interests. Application
of FIN 46R is required in financial statements of public entities that have
interests in VIEs or potential VIEs commonly referred to as special-purpose
entities for periods ending after December 15, 2003. Application by public small
business issuers' entities is required in all interim and annual financial
statements for periods ending after December 15, 2004.
The adoption of this pronouncement did not have an effect on the Company's
financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment." This
statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. SFAS No. 123R addresses all
forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that will
be measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest and will result in a charge to
operations for stock-based compensation expense. SFAS No. 123R is effective for
public entities that file as small business issuers as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005.
The Company is currently in the process of evaluating the effect that the
adoption of this pronouncement will have on its financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets." SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in
fiscal periods beginning after December 16, 2004. The provisions of SFAS No. 153
should be applied prospectively.
The adoption of this pronouncement did not have an effect on the Company's
financial statements.
In EITF Issue No. 04-8, "The Effect of Contingently Convertible Instruments on
Diluted Earnings Per Share," the EITF reached a consensus that contingently
convertible instruments, such as contingently convertible debt, contingently
convertible preferred stock, and other such securities should be included in
diluted earnings per share (if dilutive) regardless of whether the market price
trigger has been met. The consensus is effective for reporting periods ending
after December 15, 2004.
The Company's adoption of this pronouncement did not have an effect on the
Company's financial statements.
NOTE 4 - PREPAID EXPENSES
Prepaid expenses principally consist of unamortized premiums paid to carriers
for insurance policies including approximately $73,000 at March 31, 2005,
specifically relating to directors and officers' liability insurance.
10
NOTE 5 - ACCRUED EXPENSES
Accrued expenses at March 31, 2005, are as follows:
Financial investor relations fees $ 377,778
Research expenses 21,703
Interest on convertible notes 27,669
----------
Total $ 427,150
==========
In connection with the sale of Units in a private placement, pursuant to the
placement agent agreement, the Company had agreed to spend up to 3% of the gross
proceeds from its private placement on financial and investor relations
activities, all of which was accrued and charged to additional paid-in capital
upon each closing of the private placement.
NOTE 6 - COMMON STOCK SUBJECT TO REPURCHASE UNDER REDEMPTION OBLIGATION
On January 27, 2004, the former shareholders of the Company received shares of
preferred stock of Xechem in connection with the merger of the Company into a
wholly-owned subsidiary of Xechem. Following the acquisition of the Company by
Xechem, the board of directors of Xechem determined that Xechem lacked the
resources to fully fund the development and regulatory approval process of the
Company's technology. As a result, the board of directors of Xechem determined
that it was in the best interest of Xechem's stockholders to effect a spin-off
of the Company from Xechem, providing the Company with an independent platform
to obtain financing and develop its technology. As a result, the Company,
Xechem, and William Pursley, Chairman and CEO of the Company, entered into an
agreement dated March 31, 2004, as amended July 23, 2004 and November 17, 2004,
(the "Spinoff Agreement"), to provide for the separation of the Company from
Xechem.
The Spinoff Agreement, as amended, provides for the Company to redeem, out of
the proceeds of future financing transactions, an aggregate of $2,000,000 of
shares of common stock of the Company held by Xechem (the "Redemption
Obligation"). Pursuant to the terms of the Redemption Obligation, the Company is
obligated to use the first 25% (adjusted to 10% of the proceeds from the
Company's private placement initiated in December 2004 and concluded in February
2005) of the gross proceeds received in such financing transactions to redeem an
equivalent number of shares of common stock held by Xechem, that is derived by
dividing such proceeds by the price per share of common stock of the Company at
which such financing transaction is consummated. If there is any remaining
Redemption Obligation on March 31, 2006, Xechem will have the right to put the
remaining portion of the shares held for sale back to the Company at $2.50 per
share to cover any deficiency.
Through March 31, 2005, the Company redeemed 511,650 shares of its common stock
for $1,279,125, which represents 10% of the gross proceeds that the Company
received from the sale of Units in the private placement transactions that were
initiated in December 2004 and completed in February 2005. At March 31, 2005,
the remaining Redemption Obligation of $720,875 is estimated to redeem
approximately 179,322 shares of the Company's common stock held by Xechem, based
on the fair value of the Company's common stock on March 31, 2005 of $4.02 per
share. In accordance with EITF Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed To, and Potentially Settled In, a Company's Own
Stock," the Company classified the remaining Redemption Obligation as a current
liability in the accompanying balance sheet, since the Company anticipates
repurchasing the remaining amount of common stock from Xechem out of proceeds of
various financings anticipated during the next twelve months.
The Company accounted for its redemptions of the aforementioned shares as
treasury stock transactions, at cost.
NOTE 7 - CONVERTIBLE NOTES
Pursuant to an offer dated October 22, 2004 as amended November 15, 2004, made
to the debt holders of the Company, the Company issued $1,111,240 of its
11
convertible notes due December 8, 2005 which are convertible into shares of the
Company's common stock at $1.25 per share in amounts equal to the outstanding
principal under the notes cancelled, plus accrued interest at 10% through the
date of conversion (the "Convertible Notes"). Since the fair value of the
Company's common stock on the date of exchange was $2.50 per share, the Company
recorded an original issuance discount equal to the principal balance of the
notes, which represents the intrinsic value of this beneficial conversion
feature. The intrinsic value of the beneficial conversion feature is being
amortized as interest expense over the term of the Convertible Notes through
December 8, 2005. During the three-month period ended March 31, 2005, the
Company amortized $222,344 of the intrinsic value of the beneficial conversion
feature which is included in non-cash interest expense in the accompanying
statement of operations.
Subsequent to March 31, 2005, the Company renegotiated certain terms of the
Convertible Notes to extend the maturity date until July 3, 2006. In exchange
the Company increased the contractual interest rate on the Convertible Notes,
effective on the original maturity date (December 8, 2005) to 12% and reduced
the conversion rate to $0.75 from $1.25 per share. In addition, the Company's
right to call the Convertible Notes was eliminated.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
MANUFACTURING AND SUPPLY AGREEMENT
The Company agreed to purchase its clinical materials from Bachem through the
end of 2005 pursuant to a manufacturing arrangement entered into during the year
ended December 31, 2004, and an exclusive manufacture and supply agreement
entered into April 18, 2005. The Company intends to use these clinical materials
to conduct pre-clinical studies, toxicology tests and initial human clinical
trials during the next twelve months. The estimated cost of producing all of the
materials that the Company will require under the manufacture and supply
agreement is approximately $6,000,000. The agreement also provides for Bachem to
receive royalty payments in the amount of the lesser of 5% of "net sales" (as
defined in the agreement) or $10 million, $15 million or $25 million, in the
first, second and third (and thereafter) years of the agreement, respectively.
During 2004, the Company made two non-refundable payments to Bachem in the
aggregate of approximately $811,300, to fund the production of certain compounds
for initial pre-clinical and toxicology studies that are required steps in the
Company's drug validation process. The Company charged the aforementioned
payments to research and development expenses during the year ended December 31,
2004.
NOTE 9 - EQUITY TRANSACTIONS
During the three-month period ended March 31, 2005, the Company has issued the
following unregistered securities.
PRIVATE PLACEMENT
On January 5, 2005 and January 18, 2005 the Company held closings pursuant to
the terms of a Confidential Private Placement Memorandum dated October 22, 2004,
as supplemented November 16, 2004 and received gross proceeds of $1,208,750 and
$1,906,250, respectively, from the sale of 48.35 and 76.25 Units to 75, and 34
investors, respectively. On January 31, 2005 and February 3, 2005 the Company
held additional closings under the Private Placement and sold an aggregate of
224.48 Units to 86 investors and received gross proceeds of $5,612,000, and on
February 11, 2005 sold 17.50 Units to 4 investors and received gross proceeds of
$437,500. Each Unit consists of one share of Series A Preferred Stock and a
three-year warrant to purchase common stock, par value $0.0001 per share of the
12
Company ("Common Stock") at $2.50 per share. Each share of Series A Preferred
Stock is convertible into 10,000 shares of Common Stock and each warrant
entitles the holder to purchase 5,000 shares of Common Stock.
The Company issued warrants to purchase 1,832,900 shares of common stock as a
component of the Unit. The Company determined that the 366.58 shares of Series A
Preferred Stock issued during the quarter ended March 31, 2005, was issued with
an effective beneficial conversion feature for which it recorded deemed
dividends of $9,164,500 based upon an allocation of the proceeds to the relative
fair values of the Series A Preferred Stock and the warrants. The Company
calculated the fair value of the warrants using an option pricing model.
Pursuant to the placement agent agreement, the Company issued 150,000 shares of
common stock and warrants to purchase up to an aggregate of 366,580 shares of
common stock to the placement agent in connection with the private placement
transactions closed during the quarter ended March 31, 2005. Each warrant
entitles the placement agent purchase the stated number of shares of common
stock at an exercise price of $1.25 per share and will expire five years after
its issue date.
The Company accounts for the issuance of common stock purchase warrants issued
in connection with sales of its Units in accordance with the provisions of EITF
Issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock".
The Company issued the aforementioned warrants with registration rights which
provide, among other things, that the Company will file a registration statement
under the Securities Act on or before a date which is sixty days after the
closing time. In the event that such registration statement is not filed on or
before a date that is 180 days after the closing time, the Company is required
to issue additional shares of common stock at the rate of 2% per month for each
month the registration statement is not filed. Substantially all of the
Company's warrants are exercisable by the holders at any time irrespective of
whether the registration statement has been declared effective. In addition, the
Company is not (and never is) precluded from delivering unregistered stock to
any warrant holder who elects to exercise their warrants in the event that the
Company's registration statement with respect to the stock issuable pursuant to
such warrants has not been declared effective.
Since the Company (i) is not precluded from issuing unregistered shares in the
event of its failure to cause a registration statement to be declared effective,
(ii) is permitted to net share settle its warrants by issuing unregistered
shares, and (iii) has met all of the other criteria for equity classification
under EITF Issue No. 00-19, it has classified its warrants as equity
instruments.
COMMON STOCK ISSUED UPON CONVERSION OF SERIES A PREFERRED STOCK
During the quarter ended March 31, 2005, 440,000 shares of common stock were
issued upon conversion of 44 shares of Series A Preferred Stock.
ISSUANCES OF WARRANTS
On March 16, 2005, as a result of an amendment to the private placement to
increase the maximum offering amount to $12.0 million from $6.0 million, the
Company granted the original shareholders of Medallion Crest Management, Inc.
five-year warrants to purchase 925,000 shares of common stock at $1.25 per
share.
OPTIONS GRANTED PURSUANT TO 2004 INCENTIVE STOCK PLAN
During November 2004, the Company granted an option to an employee to purchase
shares of common stock in an amount equal to 1/2% of its common stocK
outstanding upon the closing of the Company's private placement. Pursuant to the
terms of the 2004 Incentive Stock Plan under which these options were granted,
the options have an exercise price of $2.50 per share, the fair market value on
the date of grant and such options vest over four years. Upon completion of the
Company's private placement on February 11, 2005, the Company determined that
78,195 shares of common stock were subject to this option. The Company accounted
for this option using variable plan accounting in accordance with APB No. 25
since the number of shares of common stock subject to this option was not known
at the date of grant. Accordingly, the Company recorded deferred compensation of
$293,231 for the excess of the fair value of the common stock over the exercise
price of which $30,545 was amortized through March 31, 2005.
13
On February 10, 2005, the Company issued a fully-vested, non-forfeitable
five-year warrant to purchase 37,500 shares of its common stock at $6.50 per
share for 12,500 shares, $8.00 per share for 12,500 shares and $9.50 per share
for 12,500 shares, to an investor relations firm for services provided during
the first quarter of 2005. The Company's common stock must trade at or above
$8.00 per share for ten consecutive days in order for the holder to exercise
their right to purchase the shares underlying the warrant. In addition, if the
Company's common stock trades at less than $0.67 per share, the holder of the
warrants may request a buyout of the warrant for a $10,000 payment. The Company
recorded a $172,750 charge to operations for the fair value of these warrants.
On February 11, 2005, the Company issued an option to purchase 12,000 shares of
its common stock for $6.25 per share to one of its directors pursuant to its
2004 Incentive Stock Plan. The right to exercise this option vests as to 25% on
the six-month anniversary of award, as to 25% on the one-year anniversary of
award and as to 25% on each of the two-year and three-year anniversaries of
award. The Company recorded a $5,800 charge to operations for the intrinsic
value of these warrants.
On March 7, 2005, the Company issued a three-year warrant to purchase 50,000
shares of its common stock at $4.75 per share to a financial relations firm for
services provided during March 2005. The Company recorded a $205,500 charge to
operations for the fair value of this warrant.
On March 7, 2005, we issued a three-year warrant to purchase 15,000 shares of
its common stock at $5.00 per share to a financial relations firm for services
provided to us during March 2005. The Company recorded a $61,650 charge to
operations for the fair value of this warrant.
COMMON STOCK ISSUED UPON CASHLESS EXERCISE OF WARRANTS
On February 15, 2005, a warrant holder exercised their right to purchase 187,500
shares of the Company's common stock at $3.05 per share through a cashless
exercise whereby in exchange for the exercise price of $571,875, the Company
withheld from issuing 87,309 shares of common stock issuable upon exercise of
this warrant based upon a fair market value of $6.55 per share on the date of
exercise. Consequently, the Company, issued 100,191 shares of common stock in a
net share settlement to the warrant holder.
COMMON STOCK ISSUED IN PAYMENT OF LEGAL FEES
On January 10, 2005, as payment for $70,000 of certain legal fees in connection
with its private placement, the Company issued 23,000 shares of common stock to
its law firm.
COMMON STOCK ISSUED TO ADVISORS FOR PAST SERVICES
On February 11, 2005 the Company issued 2,500 shares of restricted common stock
to a former director and 5,000 shares of restricted common stock to a director
of the Company as compensation for past services to the Company. The Company
recorded a $46,875 charge to operations for the intrinsic value of these
restricted shares of common stock. The restrictions lapse six months from the
date of issuance.
NOTE 10 - SUBSEQUENT EVENTS
CONTINGENT CONSIDERATION
Pursuant to the terms of the acquisition of the Company by Xechem, Xechem agreed
to the future payment of additional consideration in shares of stock of Xechem
to the original shareholders of the Company upon the attainment of certain
defined development milestones. In connection with the Spinoff Agreement,
substantially all of the obligations for the issuance of shares as additional
consideration to the original shareholders of the Company have been assumed by
the Company, and Xechem has been released therefrom.
Subsequent to March 31, 2005, the Company obtained from substantially all of the
original shareholders a waiver of their rights with respect to the contingent
consideration and release of the Company from its obligations thereunder. The
Company agreed to the issuance of options to purchase up to 100,000 shares of
its common stock at fair market value to certain original shareholders in
connection with their releases.
AMENDED AND RESTATED CONVERTIBLE NOTES
Subsequent to March 31, 2005, the Company revised certain terms of its
Convertible Notes. The maturity date was extended to July 3, 2006 from December
8, 2005 in exchange for an increase in the interest rate to 12%, effective
December 9, 2005 and a change in the conversion price from $1.25 per share to
$0.75 per share.
COMMON STOCK ISSUED UPON CONVERSION OF SERIES A PREFERRED STOCK
Subsequent to March 31, 2005, the Company issued 400,000 shares of common stock
upon conversion of 40 shares of Series A Preferred Stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion of our plan of operation should be read in conjunction
with our Financial Statements and Notes thereto appearing elsewhere in this
document.
OVERVIEW
We are a development-stage biopharmaceutical company engaged in the discovery,
development, and commercialization of proprietary, cell-targeted therapeutic
products for the treatment of neuromuscular and neurodegenerative diseases with
a focus on orphan diseases. An orphan disease is defined in the United States as
a serious or life-threatening disease that affects less than 200,000 people and
for which no definitive therapy currently exists. We are seeking to create an
efficient orphan drug platform by taking advantage of the legislative,
regulatory and commercial opportunities common to these rare diseases. Our plan
14
of operation is to focus on developing and commercializing domestic orphan drug
candidates internally, while working to partner product development
opportunities for non-orphan drug candidates and foreign opportunities with
third parties. Presently our activities primarily include three proprietary
products, Myodur, Neurodur and C-301. In pre-clinical studies Myodur has
demonstrated efficacy in muscular dystrophy, Neurodur has demonstrated efficacy
in multiple sclerosis, and C-301 has demonstrated efficacy in epilepsy.
CAPITAL RESOURCES AND CASH REQUIREMENTS
In February 2005, we completed our private placement of an aggregate of
approximately $12.8 million of securities (approximately $9.2 million after
expenses of approximately $2.3 million and following the required repurchase of
common stock for approximately $1.3 million from our parent stockholder pursuant
to an arrangement entered into to effect our spinoff) through the sale of 511.65
Units at $25,000 per unit, with each Unit consisting of one share of Series A
Preferred Stock and a detachable, transferable, three-year warrant to purchase
shares of common stock. Each share of Series A Preferred Stock is convertible
initially into 10,000 shares of common stock at any time. The Unit warrants
entitled the holder to purchase 5,000 shares of common stock during the
three-year period after the date of issuance, at an exercise price of $2.50 per
share. The proceeds from our private placement are believed to be sufficient to
provide for our working capital needs through December 31, 2005.
Our planned activities over the next twelve months may require the use of
additional consultants and contract research organizations to support our
clinical development programs, and additional personnel, including management,
with expertise in areas such as preclinical testing, clinical trial design and
management, regulatory affairs, manufacturing and marketing. During the quarter
ended March 31, 2005, we had discussions with several contract manufacturers and
in April 2005 we entered into a manufacture and supply agreement to provide
materials for both our pre-clinical and toxicology studies and to initiate our
human clinical trials for our proposed product to treat muscular dystrophy. We
do not anticipate that we will have sufficient capital to purchase materials
necessary to continue our long-term toxicology studies or to complete our
initial human clinical trials for Myodur expected to commence in 2006. We will
need to raise additional capital for these purposes and to continue funding the
development of Myodur and our other products.
RESEARCH, DEVELOPMENT, AND MANUFACTURING
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 our available cash to continue the pre-clinical
development of our technologies, which primarily includes the manufacture of
Myodur, conducting pre-clinical tests and toxicology studies, compiling,
drafting and submitting an IND for Myodur, and preparing for initiation of Phase
I/II human clinical trials in 2006, if approved by the Food and Drug
Administration ("FDA"). As resources permit, we may also fund other working
capital needs. We presently expect to file our investigational new drug
application ("IND") for Myodur before the end of 2005, and initiate our human
clinical trials during the first quarter of 2006.
A significant expense anticipated during the next twelve months is the cost to
manufacture the Company's product Myodur for use in clinical and other testing.
The Company does not have, and does not intend to establish, its own
manufacturing facilities to produce its product candidates in the near or
mid-term. The Company plans to utilize contract manufacturers exclusively to
produce product candidates. Following placement of an initial purchase order for
product during the end of 2004, the Company learned that the quantity and
delivery time of clinical materials required would cause the manufacturing costs
of its proposed product to exceed initial estimates. As a result of discussions
with its manufacturer during the latter part of the first quarter of 2005, the
Company has increased its anticipated capital requirements that will need to be
devoted to manufacturing of its proposed product. On April 18, 2005, the Company
entered into an exclusive manufacture and supply agreement with Bachem AG
("Bachem") whereby Bachem is entitled to receive royalty payments in the amount
of the lesser of 5% of "net sales" (as defined in the agreement) or $10 million,
$15 million or $25 million in the first, second and third (and thereafter) years
of the agreement, respectively. Such royalty arrangement results in the
reduction of the Company's initial out-of-pocket outlays for the purchase of
product but increase its long-term costs for product.
15
EMPLOYEES
As of May 13, 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 of our employees
have doctorate and/or M.D. degrees. As our current business strategy is
primarily to coordinate research, clinical developments, and manufacturing
activities by third parties, we do not anticipate hiring a significant number of
additional employees over the next twelve months.
PROPERTIES
We currently lease our executive offices in Hunt Valley, Maryland consisting of
approximately 5,200 square feet for approximately $6,500 per month, subject to a
3% annual rent escalation clause. This lease expires on December 31, 2006 and we
believe it should provide sufficient space for our clinical, regulatory, and
other administrative functions during the remaining term of the lease.
We plan to expand and secure laboratory facilities for our own internal research
activities. 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 as well as through contract research
organizations. Our plans include continuing this practice in addition to
expanding the use of third-party research organizations and facilities to meet
specific needs.
ITEM 3. CONTROLS AND PROCEDURES.
EVALUATION OF OUR DISCLOSURE CONTROLS AND INTERNAL CONTROLS
As of the end of the period covered by this Report, we carried out an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Securities Exchange Act of 1934 Rule 13-d-15(e) and
15d-15(e)). Based upon that evaluation and management's assessment of the
potential effects of the material weakness described below, our Chief Executive
Officer and Senior Vice President, Finance and Administration, concluded that as
of the end of the period covered by this Report, our disclosure controls and
procedures were adequate to enable us to record, process, summarize and report
information required to be included in our periodic SEC filings within the
required time period.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS
Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934, as amended, such as this Report, is
recorded, processed, summarized, and reported within the time periods specified
in the SEC's rules and forms. Disclosure controls are also designed with the
objective of ensuring that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Senior Vice President,
Finance and Administration, as appropriate, to allow timely decisions regarding
required disclosure. Internal controls are procedures which are designed with
the objective of providing reasonable assurance that our transactions are
properly authorized, recorded, and reported and our assets are safeguarded
against unauthorized or improper use, and to permit the preparation of our
financial statements in conformity with generally accepted accounting
principles.
Our company is not an "accelerated filer" (as defined in the Exchange Act) and
is not required to deliver management's report on control over our financial
reporting until our fiscal year ended December 31, 2006. Nevertheless, we
identified certain matters that would constitute material weakness (as such term
is defined under the Public Company Accounting Oversight Board Auditing Standard
No. 2) in our internal controls over financial reporting.
The first material weakness we identified relates to our limited segregation of
duties. Segregation of duties within our company is limited due to the small
16
number of employees that are assigned to positions that involve the processing
of financial information. This condition constitutes a material weakness in our
financial reporting system.
We believe any such risks are partially mitigated by the fact that our research
and development expenditures (which are significant to the business) and certain
other general and administrative-related expenditures are reviewed and approved
by employees who are knowledgeable of those matters. However, we acknowledge
that additional control procedures are necessary with respect to all
expenditures in order to ensure that our transactions are properly recorded.
Accordingly, we are currently evaluating what additional procedures may be
instituted to mitigate the risks associated with having a limited segregation of
duties. Such additional procedures may include, but not necessarily be limited
to, requiring dual approval of all expenditures by our Chief Executive Officer,
Senior Vice President, Finance and Administration, and/or applicable department
heads, and two authorized signatures with respect to expenditures in excess of
defined dollar amounts.
Although we are aware that segregation of duties within our company is limited,
we believe (based on our current roster of employees and certain control
mechanisms we do have in place), that the risks associated with having limited
segregation of duties are currently insignificant. Under these circumstances we
do not believe that at this time, it would be prudent for us to further
constrain our liquidity by allocating resources to hiring additional employees
as a corrective measure because the costs of increasing our staff (solely for
this purpose) exceeds the potential reduction in risk. We will periodically
reevaluate this situation to determine if these circumstances change. If the
situation changes and sufficient capital is secured, it is our intention to
increase staffing within our general administrative and financial functions.
The second material weakness we identified is in our ability to ensure that the
accounting for our equity-based transactions is accurate and complete. During
the year ended December 31, 2004 and the quarter ended March 31, 2005, we
consummated a series of complex equity transactions involving the application of
highly specialized accounting principles. The equity-based transactions that we
consummated during those periods specifically related to unique events including
our spin-off from Xechem, reverse merger with Medallion, settlement of certain
litigation, exchanges and conversions of notes for stock, and private placement
of preferred stock with detachable common stock purchase warrants. Although we
believe that these events are unique and that our equity-based transactions in
the future are likely to be substantially reduced, we are evaluating certain
corrective measures we may take including the possibility of hiring an outside
consultant to provide us with the guidance we need at such times that we may
engage in equity-based transactions.
We believe that, for the reasons described above, we will be able to improve our
disclosure controls and procedures and remedy the material weaknesses identified
above.
There have been no changes in our internal controls over financial reporting
during the our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
17
PART II
OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the period covered by this Report, 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.
On January 5, 2005 and January 18, 2005 we held closings pursuant to the terms
of a Confidential Private Placement Memorandum dated October 22, 2004, as
supplemented November 16, 2004 ("Private Placement") and received gross proceeds
of $1,208,750 and $1,906,250, respectively, from the sale of 48.35 and 76.25
Units to 75, and 34 investors, respectively. On January 31, 2005 and February 3,
2005 we held additional closings under the Private Placement and sold an
aggregate of 224.48 Units to 86 investors and received gross proceeds of
$5,612,000, and on February 11, 2005 sold 17.50 Units to 4 investors and
received gross proceeds of $437,500. Each Unit consists of one share of Series A
Preferred Stock and a three-year warrant to purchase common stock at $2.50 per
share. Each share of Series A Preferred Stock is convertible into 10,000 shares
of common stock and each warrant entitles the holder to purchase 5,000 shares of
common stock.
On February 10, 2005, we issued a five-year warrant to purchase 37,500 shares of
our common stock at $6.50 per share 12,500 shares, $8.00 per share for 12,500
shares and $9.50 per share for 12,500 shares, to an investor relations firm for
services provided during the first quarter of 2005. Our common stock must trade
at or above $8.00 per share for ten consecutive days in order for the holder to
exercise their right to purchase the shares underlying the warrant. In addition,
if our common stock trades at less than $0.67 per share, the holder of the
warrants may request a buyout of the warrant for a $10,000 payment.
Concurrent with the final close of the Private Placement on February 11, 2005,
we were able to calculate the number of shares of common stock subject to the
option previously granted to an employee upon hire during November 2004, of
78,195 shares of common stock. Pursuant to the terms of the 2004 Incentive Stock
Plan, the options have an exercise price of $2.50 per share, the fair market
value on the date of grant and such options will vest over four years.
On February 11, 2005, we issued an option to purchase 12,000 shares of our
common stock for $6.25 per share to one of our directors pursuant to our 2004
Incentive Stock Plan. The right to exercise this option vests as to 25% on the
six-month anniversary of award, as to 25% on the one-year anniversary of award
and as to 25% on each of the two-year and three-year anniversaries of award.
On February 11, 2005, we issued 2,500 shares of restricted common stock to a
former director and 5,000 shares of restricted common stock to a director of our
company as compensation for past services. The restrictions lapse six months
after issuance of the shares of common stock.
On February 11, 2005, we issued 50,000 shares of restricted common stock to a
member of our law firm as compensation for past services. The restrictions lapse
as to 5,000 shares on each of August 11, 2005 and December 11, 2005 and as to
the remaining 40,000 shares upon our IND Phase III filing with the FDA for
Myodur.
On February 15, 2005, a warrant holder exercised its right to purchase 187,500
shares of common stock at $3.05 per share through a cashless exercise whereby in
exchange for the exercise price of $571,875, we cancelled 87,309 shares of
common stock with a value of $6.55 per share on date of exercise, resulting in
us issuing 100,191 shares of common stock.
On March 7, 2005, we issued a three-year warrant to purchase 50,000 shares of
our common stock at $4.75 per share to a financial relations firm for services
provided to us during March 2005.
On March 7, 2005, we issued a three-year warrant to purchase 15,000 shares of
our common stock at $5.00 per share to a financial relations firm for services
provided to us during March 2005.
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On March 16, 2005, as a result of the amendment of our Private Placement to
increase the total amount to be raised from $6.0 million to $12.0 million, we
granted the original shareholders of Medallion Crest Management, Inc. five-year
warrants to purchase, in the aggregate, 925,000 shares of common stock at $1.25
per share.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following matters were submitted during the first quarter of 2005 to a vote
of our stockholders:
On December 9, 2004, our board of directors authorized a parent-subsidiary
merger and our reincorporation in Delaware. Approval of the merger was
authorized by written consent of our stockholders on January 25, 2005.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB 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 Report 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. 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.
We also use market data and industry forecasts and projections throughout this
prospectus, which we have obtained from market research, publicly available
information and industry publications. These sources generally state that the
information they provide has been obtained from sources believed to be reliable,
but that the accuracy and completeness of the information are not guaranteed.
The forecasts and projections are based on industry surveys and the preparers'
experience in the industry, and the projected amounts may not be achieved.
Similarly, although we believe that the surveys and market research others have
performed are reliable, we have not independently verified this information.
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.
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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 Company's Current Report on Form 8-K dated January
31, 2005 (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)
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3.2 Certificate of Correction to Amended and Restated Certificate of
Incorporation (incorporated herein by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K, dated February 10, 2005)
3.3 Amended and Restated By-laws (incorporated herein by reference to
Exhibit 3.2 to the January 2005 8-K)
4.1 Form of Common Stock Certificate (incorporated herein by reference to
Exhibit 4.1 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2004 (the "2004 10-KSB"))
4.2 CepTor Agreement, dated March 31, 2004 (the "CepTor Agreement"), by
and among William Pursley, Xechem and the Company (incorporated herein
by reference to Exhibit 4.1 to the Company's Current Report on Form
8-K, dated December 9, 2004 (the "2004 Form 8-K"))
4.3 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)
4.4 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)
4.6 Form of Unit Warrant (incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement on Form SB-2 as filed with the SEC on
February 11, 2005 (the "Form SB-2"))
4.7 Form of Amended and Restated Convertible Promissory Note (incorporated
herein by reference to Exhibit 4.7 to the 2004 10-KSB)
4.9 Form of Subscription Agreement (incorporated herein by reference to
Exhibit 4.6 to the Form SB-2)
10.1 Employment Agreement, dated March 31, 2004, by and between William H.
Pursley and the Company (incorporated herein by reference to Exhibit
10.1 to the Form SB-2)
10.2 Employment Agreement, dated April 26, 2004, by and between Norman A.
Barton, M.D., Ph.D. and the Company (incorporated herein by reference
to Exhibit 10.2 to the Form SB-2)
10.3 Employment Agreement, dated March 31, 2004, by and between Donald W.
Fallon and the Company (incorporated herein by reference to Exhibit
10.3 to the Form SB-2)
10.5 Amended and Restated Founders' Plan (incorporated herein by reference
to Exhibit 10.5 to the 2004 10-KSB)
10.6 2004 Incentive Stock Plan (incorporated herein by reference to Exhibit
10.6 to Form SB-2)
10.7 Deferred Stock Plan for Non-Employee Directors under the 2004
Incentive Stock Plan (incorporated herein by reference to Exhibit 10.7
to the 2004 10-KSB)
10.8 Sublease Agreement, dated March 4, 2004, by and between the Company
and Millennium Inorganic Chemicals, Inc. (incorporated herein by
reference to Exhibit 10.7 to the Form SB-2)
10.9 Exclusive License Agreement, dated September 15, 2004, between the
Company and JCR Pharmaceuticals Company, Ltd. (incorporated herein by
reference to Exhibit 10.8 to the Form SB-2)
10.10 Indemnification Agreement, dated June 1, 2004, by and between William
Pursley and the Company (incorporated herein by reference to Exhibit
10.9 to the Form SB-2)
10.11 Indemnification Agreement, dated June 1, 2004, by and between Norman
W. Barton and the Company (incorporated herein by reference to Exhibit
10.10 to the Form SB-2)
10.12 Indemnification Agreement, dated June 1, 2004, by and between Donald
W. Fallon and the Company (incorporated herein by reference to Exhibit
10.11 to the Form SB-2)
10.13 Indemnification Agreement, dated June 1, 2004, by and between Leonard
Mudry and the Company (incorporated herein by reference to Exhibit
10.12 to the Form SB-2)
10.14* Manufacture and Supply Agreement entered into as of April 18, 2005 by
and among Peninsula Laboratories Inc., Bachem AG, Bachem Americas and
the Company
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31.1* Section 302 Certification of Principal Executive Officer
31.2* Section 302 Certification of Principal Financial Officer
32.1* Section 906 Certification of Principal Executive Officer
32.2* Section 906 Certification of Principal Financial Officer
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* Filed herewith.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CEPTOR CORPORATION
Dated: May 16, 2005 By: /s/ William H. Pursley
---------------------------------------------
William H. Pursley
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: May 16, 2005 By: /s/ Donald W. Fallon
----------------------------------------------
Donald W. Fallon
Chief Financial Officer, Senior Vice
President, Finance and Administration
and Secretary (Principal Accounting and Financial
Officer)
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