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 September 30, 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 Incorporation or (I.R.S. Employer
Organization) Identification No.)
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 |_|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of November 14, 2005, there were 10,950,303 shares of the
issuer's common equity outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes |_| No |X|
TABLE OF CONTENTS
Page
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)........................... 1
Condensed Balance Sheets - September 30, 2005 and
December 31, 2004
Condensed Statements of Operations for the three months
ended September 30, 2005 and 2004, for the nine months
ended September 30, 2005 and 2004 and for the period from
August 11, 1986 (date of inception) to September 30, 2005
Condensed Statement of Changes in Stockholders' Deficiency
for the nine months ended September 30, 2005
Condensed Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004 and for the period
from August 11, 1986 (date of inception) to September 30,
2005
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation.. 20
Item 3. Controls and Procedures.................................... 22
Part II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 23
Item 4. Submission of Matters to a Vote of Security Holders......... 23
Item 6. Exhibits.................................................... 24
i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2005 DECEMBER 31, 2004
(UNAUDITED)
------------------ -----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 149,174 $ 1,331,513
Prepaid expenses and other current assets 115,001 107,729
------------- -------------
Total current assets 264,175 1,439,242
Property and equipment, net 60,206 60,615
Security deposit 18,511 18,511
------------- -------------
TOTAL ASSETS $ 342,892 $ 1,518,368
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $ 1,012,007 $ 58,266
Accrued expenses 1,545,764 315,237
Convertible notes 343,708 --
Common stock subject to repurchase under variable shares put right -- 1,637,325
------------- -------------
Total current liabilities 2,901,479 2,010,828
Convertible notes -- 56,821
------------- -------------
TOTAL LIABILITIES 2,901,479 2,067,649
------------- -------------
Commitments and contingencies
Stockholders' Deficiency:
Preferred stock, $0.0001 par value; authorized 20,000,000 shares, issued and
outstanding - 254.15 and 145.07 shares of Series A Convertible Preferred
Stock at September 30, 2005 and December 31, 2004, respectively;
liquidation preference - $6,353,750 and $3,626,750, respectively 6,353,750 3,626,750
Common stock, $0.0001; authorized 100,000,000 shares, issued and
outstanding - 10,552,944 at September 30, 2005 and 10,539,161, net
of 401,305 shares subject to put right at December 31, 2004 1,055 1,054
Subscriptions receivable on common stock -- (303)
Deferred compensation (404,532) (624,750)
Additional paid-in capital 25,533,697 12,294,648
Treasury stock, 145,070 shares, at December 31, 2004, at cost -- (362,675)
Deficit accumulated during the development stage (34,042,557) (15,484,005)
------------- -------------
Total stockholders' deficiency (2,558,587) (549,281)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 342,892 $ 1,518,368
============= =============
(See Notes to Condensed Financial Statements)
1
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
CUMULATIVE
AUGUST 11,
1986
THREE MONTHS ENDED NINE MONTHS ENDED (DATE OF
SEPTEMBER 30, SEPTEMBER 30, INCEPTION) TO
--------------------------- -------------------------- SEPTEMBER 30,
2005 2004 2005 2004 2005
----------- ----------- ------------ ---------- ----------------
REVENUES:
Other income $ - $ - $ - $ - $ 75,349
OPERATING EXPENSES:
Research and development 3,309,554 508,749 6,123,918 785,810 8,717,774
In-process research and development - - - 5,034,309 5,034,309
General and administrative 987,247 430,848 2,957,701 3,030,980 9,510,334
Gain on extinguishment of debt - - (311,281) - (311,281)
Non-cash interest expense 186,007 386,000 598,168 643,333 1,916,743
Interest expense, net of interest income 19,651 29,089 25,546 57,023 60,997
------------ ----------- ----------- ----------- -----------
Total operating expenses 4,502,459 1,354,686 9,394,052 9,551,455 24,928,876
------------ ----------- ----------- ----------- -----------
NET LOSS (4,502,459) (1,354,686) (9,394,052) (9,551,455) (24,853,527)
Deemed preferred stock dividends - - (9,164,500) - (10,100,616)
------------ ----------- ------------ ----------- ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (4,502,459) $(1,354,686) $(18,558,552) $(9,551,455) $(34,954,143)
============ =========== ============ =========== ============
Basic and diluted loss per common share $ (0.46) $ (0.31) $ (1.76) $ (2.28)
Weighted-average common shares outstanding 9,786,241 4,440,642 10,515,243 4,180,829
(See Notes to Condensed Financial Statements)
2
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
PREFERRED STOCK COMMON STOCK SUBSCRIP- DEFERRED
----------------- ------------------- TION COMPEN-
SHARES AMOUNT SHARES AMOUNT RECEIVABLE SATION
------ ------ ------ ------ ---------- ------
BALANCE, JANUARY 1, 2005 145.07 $3,626,750 10,539,161 $1,054 $(303) $(624,750)
Preferred stock and warrants issued pursuant to
units sold on January 5, 2005 in a private
placement ($25,000) 48.35 1,208,750
Deemed dividend of beneficial conversion feature
of units sold January 5, 2005 in private
placement
Acquisition January 5, 2005 of treasury stock
under put right ($2.50)
Preferred stock and warrants issued pursuant to
units sold on January 18, 2005 in a private
placement ($25,000) 76.25 1,906,250
Deemed dividend of beneficial conversion feature
of units sold January 18, 2005 in private
placement
Acquisition January 18, 2005 of treasury stock
under put right ($2.50)
Common stock issued January 2005 in connection
with payment of legal fees ($3.04) 23,000 2
Common stock issued January 2005 pursuant to
amendment of placement agent agreement ($2.50) 150,000 15
Common stock issued February 2005 to advisors for
past services ($6.25) 7,500 1
Preferred stock and warrants issued pursuant to
units sold on February 3, 2005 in a private
placement ($25,000) 224.48 5,612,000
Deemed dividend of beneficial conversion feature
of units sold February 3, 2005 in private
placement
Acquisition February 3, 2005 of treasury stock
under put right ($2.50)
Preferred stock and warrants issued pursuant to
units sold on February 11, 2005 in a private
placement ($25,000) 17.50 437,500
Deemed dividend of beneficial conversion feature
of units sold February 11, 2005 in private
placement
Acquisition February 11, 2005 of treasury stock
under put right ($2.50)
Common stock issued February 2005 pursuant to
cashless exercise of option ($3.05) 100,191 10
Common stock issued March 2005 upon conversion of
preferred shares ($2.50) (44.00) (1,100,000) 440,000 44
(See Notes to Consolidated Financial Statements)
3
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
DEFICIT
ACCUMULATED
ADDITIONAL TREASURY STOCK DURING THE TOTAL
PAID-IN ------------------- DEVELOPMENT STOCKHOLDERS'
CAPITAL SHARES AMOUNT STAGE DEFICIENCY
------- ------ ------ ----- ------
BALANCE, JANUARY 1, 2005 $12,294,648 145,070 $(362,675) $(15,484,005) $ (549,281)
Preferred stock and warrants issued pursuant to
units sold on January 5, 2005 in a private
placement ($25,000) (159,359) 1,049,391
Deemed dividend of beneficial conversion feature
of units sold January 5, 2005 in private
placement 1,208,750 (1,208,750) -
Acquisition January 5, 2005 of treasury stock
under put right ($2.50) 48,350 (120,875) (120,875)
Preferred stock and warrants issued pursuant to
units sold on January 18, 2005 in a private
placement ($25,000) (252,624) 1,653,626
Deemed dividend of beneficial conversion feature
of units sold January 18, 2005 in private
placement 1,906,250 (1,906,250) -
Acquisition January 18, 2005 of treasury stock
under put right ($2.50) 76,250 (190,625) (190,625)
Common stock issued January 2005 in connection
with payment of legal fees ($3.04) 69,998 70,000
Common stock issued January 2005 pursuant to
amendment of placement agent agreement ($2.50) (15) -
Common stock issued February 2005 to advisors for
past services ($6.25) 46,874 46,875
Preferred stock and warrants issued pursuant to
units sold on February 3, 2005 in a private
placement ($25,000) (851,447) 4,760,553
Deemed dividend of beneficial conversion feature
of units sold February 3, 2005 in private
placement 5,612,000 (5,612,000) -
Acquisition February 3, 2005 of treasury stock
under put right ($2.50) 224,480 (561,200) (561,200)
Preferred stock and warrants issued pursuant to
units sold on February 11, 2005 in a private
placement ($25,000) (234,626) 202,874
Deemed dividend of beneficial conversion feature
of units sold February 11, 2005 in private
placement 437,500 (437,500) -
Acquisition February 11, 2005 of treasury stock
under put right ($2.50) 17,500 (43,750) (43,750)
Common stock issued February 2005 pursuant to
cashless exercise of option ($3.05) (10) -
Common stock issued March 2005 upon conversion of
preferred shares ($2.50) 1,099,956 -
(See Notes to Consolidated Financial Statements) (continued)
3a
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
PREFERRED STOCK COMMON STOCK SUBSCRIP- DEFERRED
----------------- ------------------- TION COMPEN-
SHARES AMOUNT SHARES AMOUNT RECEIVABLE SATION
------ ------ ------ ------ ---------- ------
Payments received for common stock issued December
2004 pursuant to exercise of options granted
under spinoff agreement 303
Common stock issued March 2005 pursuant to
exercise of warrants ($1.25) 5,000 1
Common stock issued April 2005 upon conversion of
preferred shares ($2.50) (15.00) (375,000) 150,000 15
Common stock issued May 2005 pursuant to financing
letter agreement ($3.00) 25,000 2
Common stock issued May 2005 upon conversion of
preferred shares ($2.50) (41.00) (1,025,000) 410,000 41
Common stock issued June 2005 upon conversion of
preferred shares ($2.50) (29.00) (725,000) 290,000 29
Capital contribution for repurchase of common
stock pursuant to Stock Purchase Agreement
Common stock repurchased June 2005 pursuant to
Stock Repurchase Agreement ($0.80)
Common stock issued July 2005 pursuant to
Regulatory Milestone Plan ($2.70) 100,000 10
Common stock issued July 2005 upon conversion of
preferred shares ($2.50) (20.00) (500,000) 200,000 20
Common stock issued August 2005 upon conversion of
preferred shares ($2.50) (83.50) (2,087,500) 835,000 84
Common stock issued September 2005 upon conversion
of preferred shares ($2.50) (25.00) (625,000) 250,000 25
Common stock issued September 2005 pursuant to
Stock Purchase Agreement ($0.90) 25,000 2
Retirement of treasury shares (3,398,213) (340)
Reverse common stock subject to repurchase under
variable shares put right at December 31, 2004 401,305 40
Stock option-based compensation for investor
relation services rendered (620,700)
Stock option-based compensation for employees and
directors (293,231)
Fair value adjustment of stock options previously
granted to non-employees 318,400
Amortization of deferred compensation 815,749
Net loss
------- ---------- ---------- -------- -------- -----------
BALANCE, SEPTEMBER 30, 2005 254.15 $6,353,750 10,552,944 $ 1,055 $ - $ (404,532)
======= ========== ========== ======== ======== ===========
(See Notes to Condensed Financial Statements)
4
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
DEFICIT
ACCUMULATED
ADDITIONAL TREASURY STOCK DURING THE TOTAL
PAID-IN ------------------- DEVELOPMENT STOCKHOLDERS'
CAPITAL SHARES AMOUNT STAGE DEFICIENCY
------- ------ ------ ----- ----------
Payments received for common stock issued December
2004 pursuant to exercise of options granted
under spinoff agreement 303
Common stock issued March 2005 pursuant to
exercise of warrants ($1.25) 6,249 6,250
Common stock issued April 2005 upon conversion of
preferred shares ($2.50) 374,985 -
Common stock issued May 2005 pursuant to financing
letter agreement ($3.00) 74,998 75,000
Common stock issued May 2005 upon conversion of
preferred shares ($2.50) 1,024,959 -
Common stock issued June 2005 upon conversion of
preferred shares ($2.50) 724,971 -
Capital contribution for repurchase of common
stock pursuant to Stock Purchase Agreement 424,818 424,818
Common stock repurchased June 2005 pursuant to
Stock Repurchase Agreement ($0.80) 2,886,563 (2,734,068) (2,734,068)
Common stock issued July 2005 pursuant to
Regulatory Milestone Plan ($2.70) 269,990 270,000
Common stock issued July 2005 upon conversion of
preferred shares ($2.50) 499,980 -
Common stock issued August 2005 upon conversion of
preferred shares ($2.50) 2,087,416 -
Common stock issued September 2005 upon conversion
of preferred shares ($2.50) 624,975 -
Common stock issued September 2005 pursuant to
Stock Purchase Agreement ($0.90) 22,498 22,500
Retirement of treasury shares (4,012,853) (3,398,213) 4,013,193 -
Reverse common stock subject to repurchase under
variable shares put right at December 31, 2004 1,637,285 1,637,325
Stock option-based compensation for investor
relation services rendered 620,700 -
Stock option-based compensation for employees and
directors 293,231 -
Fair value adjustment of stock options previously
granted to non-employees (318,400) -
Amortization of deferred compensation 815,749
Net loss (9,394,052) (9,394,052)
------------- --------- -------- ------------ -----------
BALANCE, SEPTEMBER 30, 2005 $25,533,697 - $ - $(34,042,557) $(2,558,587)
============= ========= ======== ============ ===========
(See Notes to Condensed Financial Statements)
4a
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
CUMULATIVE
AUGUST 11, 1986
FOR THE NINE MONTHS ENDED (DATE OF INCEPTION)
SEPTEMBER 30, TO
---------------------------- SEPTEMBER 30,
2005 2004 2005
------------ ------------ --------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (9,394,052) $ (9,551,455) $(24,853,527)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization 13,432 7,586 26,715
Write-off of in-process research and development - 5,034,309 5,034,309
Charge for stock option issued pursuant to spinoff agreement - 2,082,500 2,082,500
Stock-based compensation to employees and directors 98,449 - 98,449
Stock-based compensation to nonemployees 1,109,175 - 4,021,606
Stock-based component of payment of legal fees 70,000 - 70,000
Stock-based component of litigation settlement - - 422,000
Gain on extinguishment of debt (311,281) - (311,281)
Non-cash interest expense 598,168 643,334 1,916,743
Changes in assets and liabilities:
Prepaid expenses & other current assets 15,228 (201,596) (92,501)
Other assets - (18,511) (18,511)
Accounts payable and accrued expenses 2,184,268 264,209 2,581,429
-------------- ------------ ------------
Net cash used in operating activities (5,616,613) (1,739,624) (9,022,069)
-------------- ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (13,023) (68,769) (86,921)
-------------- ------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuances of common stock 6,250 929,231 1,136,502
Collections of subscriptions receivable 303 - 303
Net proceeds from issuances of preferred stock 7,666,444 - 10,470,684
Acquisition of treasury stock under put right (916,450) - (1,279,125)
Acquisition of treasury stock under purchase agreement (2,309,250) - (2,309,250)
Distribution to shareholders - - (4,260)
Capital contributed by Xechem International, Inc. - 300,310 350,310
Proceeds from issuance of bridge loans - 1,100,000 1,375,000
Expense of issuance of long term debt - (132,000) (132,000)
Principal payments on bridge loans - -- (350,000)
-------------- ------------ ------------
Net cash provided by financing activities 4,447,297 2,197,541 9,258,164
-------------- ------------ ------------
Net increase in cash and cash equivalents (1,182,339) 389,148 149,174
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 1,331,513 68,374 -
-------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 149,174 $ 457,522 $ 149,174
============== ============ ============
(See Notes to Condensed Financial Statements)
5
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CUMULATIVE
AUGUST 11, 1986
FOR THE NINE MONTHS ENDED (DATE OF INCEPTION)
SEPTEMBER 30, TO
------------------------- SEPTEMBER 30,
2005 2004 2005
----------- ----------- ------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Deemed dividend of the beneficial conversion feature
of units sold in private placement $ 9,164,500 $ - $10,100,616
Issuance of 2,575,000 shares of common stock upon
conversion of preferred shares 6,437,500 - 6,437,500
Issuance of 100,000 shares of common stock pursuant
to stock plan 270,000 - 270,000
Issuance of 25,000 shares of common stock as
compensation for future financial planning 22,500 - 22,500
Issuance of 7,500 shares of common stock as
compensation for past services 46,875 - 46,875
Issuance of 25,000 shares of common stock as
compensation for financial planning 75,000 - 75,000
Issuance of 23,000 shares of common stock in
payment of accrued legal fees 70,000 - 70,000
Capital contribution for repurchase of common stock
pursuant to Stock Purchase Agreement 424,818 - 424,818
Issuance of 36,000 shares of common stock as debt
issuance costs - - 90,000
Issuance of 451,597 shares of common stock to
bridge loan investors and placement agent - - 550,000
Issuance of 167,610 shares up on conversion of
convertible notes - - 209,512
Issuance of convertible notes in exchange for bridge
loans and long-term debt plus accrued interest - - 1,111,240
(See Notes to Condensed Financial Statements)
6
NOTE 1 - BASIS OF INTERIM FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited Condensed Financial Statements of CepTor Corporation
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and the instructions to
Form 10-QSB. Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows for all periods
presented have been made. The results of operations for the nine-month period
ended September 30, 2005 are not necessarily indicative of the operating results
that may be expected for the entire year ending December 31, 2005.
NOTE 2 - THE COMPANY
ORGANIZATION
The financial statements presented are those of CepTor Corporation (the
"Company"), incorporated in August 1986 in the state of Delaware. CepTor
Corporation is a biopharmaceutical company engaged in the research and
development of therapeutic products for neuromuscular, neurodegenerative and
other diseases with a focus on orphan diseases (defined as those which affect
less than 200,000 people). Since its inception, the Company has devoted its
efforts and resources to the development of its receptor mediated drug-targeting
platform for neuromuscular and neurodegenerative diseases, and to raising the
funds necessary to continue this research.
The Company is a development stage enterprise which has a limited history of
operations and has not generated any material revenues since its inception. The
Company has received a limited amount of funding through grants and
collaborative research efforts in connection with developing its products. The
Company does not have any products that are approved for commercial distribution
at the present time. As a development stage enterprise, the Company is subject
to all of the risks and uncertainties that are associated with developing a new
business.
MERGER OF XECHEM INTERNATIONAL, INC. AND CEPTOR CORPORATION
On January 27, 2004, the former shareholders of the Company received shares of
preferred stock of Xechem International, Inc. ("Xechem") in connection with the
merger of the Company into a wholly-owned subsidiary of Xechem. For financial
reporting purposes, the effective date of the merger was designated January 1,
2004. The results of operations from January 1 to January 27, 2004 were not
significant. The merger was accomplished through a reverse triangular merger
whereby CepTor Acquisition, Inc., a wholly-owned subsidiary of Xechem, was
merged into the Company and the Company was the surviving entity.
Following the acquisition of the Company by Xechem, the board of directors of
Xechem determined that Xechem lacked the resources to fully fund the development
and regulatory approval of the Company's technology. As a result, the board of
directors of Xechem determined that is was in the best interest of Xechem's
stockholders to effect a spin-off of the Company from Xechem, providing the
Company with an independent platform to obtain financing and develop its
technology. As a result the Company, Xechem, and William Pursley, Chairman and
CEO of the Company, entered into an agreement dated March 31, 2004, amended July
23, 2004 and November 17, 2004, (the "Spinoff Agreement"), to provide for the
separation of the Company from Xechem. The Spinoff Agreement provided for the
Company's separation from Xechem under a transaction structured to include (i)
the Company's redemption of a portion of it shares held by Xechem out of the
proceeds of future financing under the Redemption Variable Shares Put Right as
described below in Note 7, (ii) the issuance and allocation of additional shares
of common stock to Mr. Pursley under the Founders' Plan and (iii) the Company's
reverse merger into a public shell. The spin-off of the Company from Xechem
concurrent with Mr. Pursley's exercise of his stock option and the Company's
reverse merger into Medallion was completed on December 8, 2004.
MERGER OF MEDALLION CREST MANAGEMENT, INC. AND CEPTOR CORPORATION
Medallion Crest Management, Inc., a Florida corporation ("Medallion") acquired
all of the common stock of the Company on December 8, 2004. Medallion was an
inactive public shell at the time of acquisition. The Company's shareholders
prior to the merger became the majority shareholders of Medallion after the
merger; accordingly the transaction was accounted for as a recapitalization. The
accompanying financial statements preceding the date of the acquisition have
been retroactively restated to give effect to this transaction.
7
NOTE 3 - LIQUIDITY AND FINANCIAL CONDITION
The Company's net loss for the nine-month period ended September 30, 2005
amounted to $9,394,052, which includes $1,564,511 of non-cash special charges
primarily associated with the Company's issuance of stock and common stock
purchase warrants and options for services rendered and non-cash interest
expense, offset by gain on the extinguishment of debt. The Company used net cash
flows in its operating activities of $5,616,613 during the nine-month period
ending September 30, 2005. The Company's development stage accumulated deficit
amounted to $34,042,557 at September 30, 2005. The Company expects to continue
incurring losses for the foreseeable future due to the inherent uncertainty that
is related to establishing the commercial feasibility of pharmaceutical
products. The Company will require substantial additional funding to support the
development of its proposed products and fund its operations while it continues
its efforts to execute its business plan. The Company estimates that it
currently does not have sufficient liquidity to sustain operations beyond
December 31, 2005.
The Company's working deficit at September 30, 2005 amounted to $2,637,304.
During the nine-month period ended September 30, 2005, the Company received net
proceeds of $4,447,297 from financing activities, including (i) $7,666,444
(gross proceeds of $9,164,500 net of transaction expenses of $1,498,056) from
the sale of preferred stock and common stock purchase warrants ("Units") in a
private placement transaction (see Note 10), (ii) $6,250 from the exercise of
warrants, and (iii) $303 from subscriptions receivable pursuant to the
restricted shares issued under the Company's Founders' Plan during December
2004. From the net proceeds of the sale of the Units, the Company repurchased
3,253,143 shares of its common stock, par value $0.0001 per share from Xechem
for $3,225,700 comprised of (i) $916,450 for 366,580 shares of its common stock
pursuant to the terms of a redemption obligation (see Note 7) and (ii)
$2,734,068 which includes $2,309,250 in cash and the forfeiture of an option
held by the Company's CEO to purchase 43 million shares of common stock of
Xechem with a fair value of $424,818, for an additional 2,886,563 shares of its
common stock.
For the foreseeable future, the Company's primary efforts will be on moving its
lead product, Myodur, into phase I/II clinical trials for Duchenne's muscular
dystrophy. The Company plans to use its available cash resources to continue the
pre-clinical development of its technologies, which primarily includes the
manufacture of Myodur, conducting pre-clinical tests and toxicology studies,
compiling, drafting and submitting an investigational new drug application
("IND") for Myodur, and initiating phase I/II human clinical trials, if allowed
by the Food and Drug Administration ("FDA"). As resources allow, the Company may
also fund other working capital needs. The Company presently expects to submit
its IND for Myodur in January 2006, and initiate human clinical trials for
Myodur early in the second quarter of 2006.
The Company does not have, and does not intend to establish, its own
manufacturing facilities to produce its product candidates in the foreseeable
future. The Company has outsourced the manufacturing of its proposed products to
contract manufacturers. In April 2005, the Company entered into an exclusive
manufacture and supply agreement with Bachem AG ("Bachem") whereby Bachem is
entitled to receive royalty payments in the amount of the lesser of 5% of "net
sales" (as defined in the agreement) or $10 million, $15 million or $25 million
in the first, second and third (and thereafter) years of the agreement,
respectively. During the nine-month period ended September 30, 2005, the Company
incurred approximately $3.0 million for the costs of the proposed product and
related materials of which approximately $1.3 million remains unpaid. As of
September 30, 2005, the Company has sufficient materials required for the
Company's pre-clinical studies and initial toxicology programs and initial human
clinical trials.
The Company may incur significant expenditures during the next twelve months for
the cost to manufacture the Company's product Myodur for use in additional and
follow-on clinical, toxicology and other testing. Further, if the Company
receives regulatory approval for any of its products in the United States or
elsewhere, it will incur substantial expenditures to develop manufacturing,
sales, and marketing capabilities and/or to subcontract or joint venture these
activities with others. There can be no assurance that the Company will ever
recognize revenue or profit from any such products. In addition, the Company may
encounter unanticipated problems, including developmental, regulatory,
manufacturing, or marketing difficulties, some of which may be beyond its
ability to resolve. The Company may lack the capacity to produce its products
in-house and there can be no assurances that it will be able to locate or retain
suitable contract manufacturers or be able to have them produce products at
satisfactory prices.
8
As described in Note 10, the Company entered into a Securities Purchase
Agreement with Xechem on June 17, 2005 pursuant to which it elected to
repurchase 2,886,563 shares of its common stock from Xechem, for a purchase
price of $2,309,250 effectively reducing the total outstanding shares of common
stock of the Company. As additional consideration for the transaction, the
Company's CEO agreed to forfeit an option to purchase 43 million shares of
Xechem, which the Company has recorded as a contribution of capital and a cost
of the treasury shares. Xechem retained 500,000 shares of common stock of the
Company but agreed that it would only sell such shares subject to the volume
restrictions of Rule 144, regardless of whether or not such volume limitations
are applicable at the time of such sale. Additionally, the Securities Purchase
Agreement terminated the Spinoff Agreement.
Due to the substantial amounts that the Company has expended for the manufacture
of its proposed product and the repurchase of shares of its common stock on June
17, 2005 from Xechem, the Company determined that its available capital
resources as of September 30, 2005 were not sufficient to sustain its planned
operations beyond December 31, 2005. In order to address this liquidity
situation, on October 7, 2005 the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC ("Fusion Capital"), pursuant to which
Fusion Capital has agreed, under certain conditions, to purchase on each trading
day $25,000 of the Company's common stock up to an aggregate, under certain
conditions, of $20 million over a 40-month period, subject to earlier
termination at the discretion of the Company. The Company is required to file
and have declared effective a registration statement with the SEC as a
precondition to receipt of any funds with respect to this transaction. There can
be no assurance that the SEC will declare the registration statement effective.
The inability of the Company to obtain financing through this or any other
transaction would have a material adverse effect on the Company's financial
condition and its ability to sustain operations.
Additionally, on October 27, 2005, the Company entered into a stock purchase
agreement for the sale of approximately 265,600 shares of its common stock under
its Founders' Plan and received $167,250 during October 2005. (See Note 11 -
Subsequent Events.)
The Company is continuing to seek additional capital through equity and debt
offerings, collaborative partnerships, joint ventures and strategic alliances,
both within the United States and abroad in an effort to accelerate the
development of its proposed products.
There can be no assurance that management's plans to obtain additional financing
to fund operations will be successful which raises substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that may result from the outcome of this
uncertainty.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company is a development stage enterprise. Accordingly, the Company has
included its cumulative statements of operations and cash flows for the period
of August 11, 1986 (date of inception) to September 30, 2005 in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 7 "Accounting and
Reporting by Development Stage Enterprises."
The Company's net loss available to common shareholders as reported in its
statement of operations for the period of August 11, 1986 (date of inception) to
September 30, 2005 is $34,954,143 whereas the deficit accumulated during its
development stage as reported on its balance sheet at September 30, 2005 is
$34,042,557. The difference is a result of the acquisition of the Company by
Xechem and the restatement of its assets and liabilities to fair value, which
resulted in the Company's accumulated deficit, net of distributions, from
inception through December 31, 2003 (the date of merger for financial reporting
purposes) being reclassified to additional paid-in capital, net of a deemed
dividend to the preferred shareholders.
ACCOUNTING FOR STOCK BASED COMPENSATION
As permitted under SFAS No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure," which amended SFAS No. 123 "Accounting for
Stock-Based Compensation," the Company has elected to use the intrinsic value
method of accounting for its stock-based compensation arrangements as defined by
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to Employees," and related interpretations including Financial Accounting
Standards Board ("FASB") Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation," an interpretation of APB No. 25.
The cost of stock-based compensation awards issued to non-employees for services
are recorded at either the fair value of the services rendered or of the
instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in Emerging
9
Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services."
The following table summarizes the pro forma operating results of the Company had
compensation expense for stock options granted to employees been determined in
accordance with the fair market value based method prescribed by SFAS No. 123. The
Company has presented the following disclosures in accordance with SFAS No. 148.
For the Three-Month Period Ended
September 30,
--------------------------------
2005 2004
------------- ----------------
Net loss available to common stockholders $(4,502,459) $ (1,354,686)
Adjust: Stock-based employee compensation
determined under the fair value method (15,485) -
------------ ---------------
Pro forma net loss $(4,517,944) $ (1,354,686)
============ ===============
Net loss per share available to common stockholders:
Basic and diluted, as reported $ (0.46) $ (0.31)
Basic and diluted, pro forma $ (0.46) $ (0.31)
============ ================
For the Nine-Month Period Ended
September 30,
-------------------------------
2005 2004
--------------- --------------
Net loss available to common stockholders $(18,558,552) $ (9,551,455)
Adjust: Stock-based employee compensation
determined under the fair value method
(44,285) (5,497,358)
-------------- ---------------
Pro forma net loss $(18,602,837) $ (15,048,813)
============== ===============
Net loss per share available to common stockholders:
Basic and diluted, as reported $ (1.76) $ (2.28)
Basic and diluted, pro forma $ (1.77) $ (3.60)
The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect the
portion of the estimated fair value of awards that were earned for the three-month and
nine-month periods ended September 30, 2005.
ACCOUNTING FOR WARRANTS ISSUED IN CONNECTION WITH SALE OF UNITS
The Company accounts for the issuance of common stock purchase warrants issued in
connection with sales of its Units in accordance with the provisions of EITF Issue No.
00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock." Based on the provisions of EITF Issue No. 00-19,
the Company classifies as equity any contracts that (i) require physical settlement or
net-share settlement or (ii) gives the company a choice of net-cash settlement or
settlement in its own shares (physical settlement or net-share settlement). The
Company classifies as assets or liabilities any contracts that (i) require net-cash
settlement (including a requirement to net-cash settle the contract if an event occurs
and if that event is outside the control of the Company) or (ii) give the counterparty
a choice of net-cash settlement or settlement in shares (physical settlement or
net-share settlement).
NET (LOSS) PER SHARE
Net loss per share is presented under SFAS No. 128 "Earnings Per Share." Under SFAS
No. 128, basic net loss per share is computed by dividing net loss per share available
to common stockholders by the weighted average shares of common stock outstanding for
10
the period and excludes any potential dilution. Diluted earnings per share
reflect the potential dilution that would occur upon the exercise or conversion
of all dilutive securities into common stock. The computation of loss per share
for the three-month and nine-month periods ended September 30, 2005 excludes
potentially dilutive securities because their inclusion would be anti-dilutive.
Shares of common stock issuable upon the conversion or exercise of potentially
dilutive securities are as follows:
September 30,
2005 2004
--------- ----------
Series A Preferred Stock 2,541,500 -
Warrants 4,399,900 -
Options 646,695 3,031,943
Convertible Notes 1,299,476 -
--------- ----------
Total 8,887,571 3,031,943
========= ==========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interest. FIN 46 also required
consolidation of a VIE by an enterprise that holds such controlling interest. In
December 2003, the FASB completed its deliberations regarding the proposed
modifications to FIN 46 and issued Interpretation Number 46R, "Consolidation of
Variable Interest Entities - an Interpretation of ARB 51" ("FIN 46R"). The
decisions reached included a deferral of the effective date and provisions for
additional scope exceptions for certain types of variable interests. Application
of FIN 46R is required in financial statements of public entities that have
interests in VIEs or potential VIEs commonly referred to as special-purpose
entities for periods ending after December 15, 2003. Application by public small
business issuers' entities is required in all interim and annual financial
statements for periods ending after December 15, 2004.
The adoption of this pronouncement did not have an effect on the Company's
financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment." This
statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. SFAS No. 123R addresses all
forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that will
be measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest and will result in a charge to
operations for stock-based compensation expense. SFAS No. 123R is effective for
public entities that file as small business issuers as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005.
The Company is currently in the process of evaluating the effect that the
adoption of this pronouncement will have on its financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets." SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in
fiscal periods beginning after December 16, 2004. The provisions of SFAS No. 153
should be applied prospectively.
The adoption of this pronouncement did not have an effect on the Company's
financial statements.
11
In EITF Issue No. 04-8, "The Effect of Contingently Convertible Instruments on
Diluted Earnings Per Share," the EITF reached a consensus that contingently
convertible instruments, such as contingently convertible debt, contingently
convertible preferred stock, and other such securities should be included in
diluted earnings per share (if dilutive) regardless of whether the market price
trigger has been met. The consensus is effective for reporting periods ending
after December 15, 2004.
The Company's adoption of this pronouncement did not have an effect on the
Company's financial statements.
In September 2005, the FASB ratified the Emerging Issues Task Force's ("EITF")
Issue No. 05-7, "Accounting for Modifications to Conversion Options Embedded in
Debt Instruments and Related Issues", which addresses whether a modification to
a conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the debt
(for example, the modification reduces the conversion price of the debt). In
September 2005, the FASB also ratified the EITF's Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature",
which discusses whether the issuance of convertible debt with a beneficial
conversion feature results in a basis difference arising from the intrinsic
value of the beneficial conversion feature on the commitment date (which is
recorded in shareholder's equity for book purposes, but as a liability for
income tax purposes) and, if so, whether that basis difference is a temporary
difference under FASB Statement No. 109, "Accounting for Income Taxes". Both of
these issues are effective for fiscal periods beginning after December 15, 2005.
The Company is currently in the process of evaluating the effect that the
adoption of these pronouncements will have on its financial statements.
NOTE 5 - PREPAID EXPENSES AND GRANT RECEIVABLE
Prepaid expenses and grant receivable primarily consists of unamortized premiums
paid to carriers for insurance policies, amounts due from the National
Institutes of Health for amounts expended by the Company for work on its grant,
and the fair value of common stock and nonrefundable retainer paid as
compensation for ongoing financial consulting.
NOTE 6 - ACCRUED EXPENSES
Accrued expenses at September 30, 2005 are as follows:
Clinical development expenses $ 1,253,873
Financial investor relations fees 188,277
Interest on convertible notes 72,879
Research expenses, miscellaneous 28,386
Other 2,349
-----------
Total $ 1,545,764
===========
In connection with the sale of Units in a private placement, pursuant to the
placement agent agreement, the Company had agreed to spend up to 3% of the gross
proceeds from its private placement on financial investor relations activities,
all of which was accrued and charged to additional paid-in capital upon each
closing of the private placement.
NOTE 7 - COMMON STOCK REPURCHASED UNDER VARIABLE SHARES PUT RIGHT AND SHARE
PURCHASE AGREEMENT
On January 27, 2004, the former shareholders of the Company received shares of
preferred stock of Xechem in connection with the merger of the Company into a
wholly-owned subsidiary of Xechem. Following the acquisition of the Company by
Xechem, the board of directors of Xechem determined that Xechem lacked the
resources to fully fund the development and regulatory approval process of the
Company's technology. As a result, the board of directors of Xechem determined
that it was in the best interest of Xechem's stockholders to effect a spin-off
of the Company from Xechem, providing the Company with an independent platform
to obtain financing and develop its technology. As a result the Company, Xechem,
and William Pursley, Chairman and CEO of the Company, entered into an agreement
dated March 31, 2004, as amended July 23, 2004 and November 17, 2004, (the
"Spinoff Agreement"), to provide for the separation of the Company from Xechem.
The Spinoff Agreement, as amended, provides for the Company to redeem, out of
the proceeds of future financing transactions, an aggregate of $2,000,000 in
shares of common stock of the Company held by Xechem (the "Variable Shares Put
Right"). Pursuant to the terms of the Variable Shares Put Right, the Company is
obligated to use the first 25% (adjusted to 10% of the proceeds from the
Company's private placement initiated in December 2004 and concluded in February
2005) of the gross proceeds received in such financing transactions to redeem an
equivalent number of shares of common stock held by Xechem, derived by dividing
such proceeds by the then price per share of the Company's common stock. Through
February 11, 2005, the Company redeemed 511,650 shares of its common stock for
$1,279,125, which represents 10% of the gross proceeds that the Company received
from the sale of Units in the private placement transactions that were initiated
in December 2004 and completed February 11, 2005.
12
On June 17, 2005, the Company entered into a Securities Purchase Agreement with
Xechem pursuant to which the Company repurchased 2,886,563 shares of common
stock from Xechem, for a purchase price of $2,309,250. As additional
consideration, William Pursley, the Company's Chairman and Chief Executive
Officer, agreed to surrender options to purchase 43,000,000 shares of common
stock of Xechem for which the Company recorded as a contribution to capital and
which was included in the cost of the treasury stock. Xechem retained 500,000
shares of common stock of the Company but agreed that it would only sell such
shares subject to the volume restrictions of Rule 144, regardless of whether or
not such volume limitations are applicable at the time of such sale.
Additionally, the Securities Purchase Agreement terminated the Spinoff
Agreement.
The Company accounted for its redemptions of the aforementioned shares as
treasury stock transactions, at cost. Effective June 17, 2005, the Company
retired the shares of common stock it held in treasury acquired under the
Variable Shares Put Right and purchased pursuant to the Securities Purchase
Agreement.
NOTE 8 - CONVERTIBLE NOTES
Pursuant to an offer dated October 22, 2004 as amended November 15, 2004, made
to the holders of the Company's convertible notes, the Company issued $1,111,240
of its convertible notes due December 8, 2005 which are convertible into shares
of the Company's common stock at $1.25 per share in amounts equal to the
outstanding principal under the notes cancelled, plus accrued interest at 10%
through the date of conversion (the "Convertible Notes"). Since the fair value
of the Company's common stock on the date of exchange was $2.50 per share, the
Company recorded an original issuance discount equal to the principal balance of
the notes, which represents the intrinsic value of this beneficial conversion
feature. The intrinsic value of the beneficial conversion feature was being
amortized as non-cash interest expense over the term of the Convertible Notes
through December 8, 2005. During the three-month and nine-month periods ended
September 30, 2005, the Company amortized $32,116 and $254,460, respectively, of
the intrinsic value of the beneficial conversion feature which is included in
non-cash interest expense in the accompanying statement of operations.
In April 2005, the Company renegotiated certain terms of the Convertible Notes
(the "Amended Notes") to extend the maturity date until July 3, 2006. In
exchange the Company (1) increased the contractual interest rate on the Amended
Notes effective December 8, 2005 to 12% and (2) reduced the conversion rate to
$0.75 from $1.25 per share. In addition, the Company's right to call the Amended
Notes was eliminated. The Company accounted for the issuance of the Amended
Notes in accordance with the guidelines enumerated in EITF Issue No. 96-19
"Debtor's Accounting for a Modification or Exchange of Debt Instruments." EITF
96-19 provides that a substantial modification of terms in an existing debt
instrument should be accounted for like, and reported in the same manner as, an
extinguishment of debt. Further, EITF 96-19 indicates that the modification of a
debt instrument by a debtor and a creditor in a non-troubled debt situation is
deemed to have been accomplished with debt instruments that are substantially
different if the present value of the cash flows under the terms of the new debt
instrument is at least 10 percent different from the present value of the
remaining cash flows under the terms of the original instrument at the date of
the modification.
The Company evaluated its issuance of the Amended Notes to determine whether the
increase in interest rate, extension of the maturity date, and reduction in the
conversion price resulted in the issuance of a substantially different debt
instrument. The Company determined that after giving effect to the changes in
these features, including the substantial increase in the intrinsic value of the
beneficial conversion feature that resulted from reducing the conversion price
that it had issued a substantially different debt instrument that resulted in a
constructive extinguishment of the original debt instrument. Accordingly, the
Company recorded a gain on the extinguishment of debt in the amount of $311,281
that is included in the accompanying statements of operations for the nine-month
period ended September 30, 2005.
Since the fair value of the Company's common stock on the date of amendment was
$4.00 per share, the Company recorded an original issuance discount equal to the
intrinsic value of this beneficial conversion feature, limited to the principal
balance of the Amended Notes. The intrinsic value of the beneficial conversion
feature is being amortized as non-cash interest expense over the term of the
Amended Notes through July 3, 2006. During the three-month and nine-month
periods ended September 30, 2005, the Company amortized $186,007 and $343,708,
respectively, of the intrinsic value of the beneficial conversion feature which
is included in non-cash interest expense in the accompanying statement of
operations.
13
NOTE 9 - COMMITMENTS AND CONTINGENCIES
MANUFACTURING AND SUPPLY AGREEMENT Effective April 11, 2005, the Company entered
into an exclusive manufacture and supply agreement to purchase its product
requirements from Bachem. The Company intends to use these clinical materials to
conduct pre-clinical studies, toxicology tests and human clinical trials. The
agreement also provides for Bachem to receive royalty payments in the amount of
the lesser of 5% of "net sales" (as defined in the agreement) or $10 million,
$15 million or $25 million, in the first, second and third (and thereafter)
years of the agreement, respectively. Through September 30, 2005, the Company
has incurred approximately $3.9 million of costs to produce materials required
to complete the pre-clinical and toxicology studies necessary to file its
investigational new drug application and complete its initial human clinical
trials.
Through September 30, 2005, the Company has made payments to Bachem in the
aggregate of approximately $2.5 million and as of September 30, 2005 the Company
has unpaid amounts of approximately $1.3 million. The Company charged the
aforementioned amounts to research and development expenses during the year
ended December 31, 2004 (approximately $0.8 million) and the nine-month period
ended September 30, 2005 (approximately $3.0 million).
The Company will need to spend substantially more in order to complete the
pre-clinical and toxicology studies and additional human trials in order to file
for approval to market its proposed product.
NOTE 10 - EQUITY TRANSACTIONS
During the nine-month period ended September 30, 2005, the Company issued the
following securities.
PRIVATE PLACEMENT
On January 5, 2005 and January 18, 2005 the Company held closings pursuant to
the terms of a Confidential Private Placement Memorandum dated October 22, 2004,
as supplemented November 16, 2004 and received gross proceeds of $1,208,750 and
$1,906,250, respectively, from the sale of 48.35 and 76.25 Units to 75 and 34
investors, respectively. On January 31, 2005 and February 3, 2005 the Company
held additional closings under the Private Placement and sold an aggregate of
224.48 Units to 86 investors and received gross proceeds of $5,612,000, and on
February 11, 2005 sold 17.50 Units to 4 investors and received gross proceeds of
$437,500. Each Unit consists of one share of Series A Preferred Stock and a
three-year warrant to purchase common stock, par value $0.0001 per share of the
Company at $2.50 per share. Each share of Series A Preferred Stock is
convertible into 10,000 shares of common stock and each warrant entitles the
holder to purchase 5,000 shares of common stock.
The Company issued warrants to purchase 1,832,900 shares of common stock as a
component of the Unit. The Company determined that the 366.58 shares of Series A
Preferred Stock issued during the quarter ended March 31, 2005, was issued with
an effective beneficial conversion feature for which it recorded deemed
dividends of $9,164,500 based upon an allocation of the proceeds to the relative
fair values of the Series A Preferred Stock and the warrants. The Company
calculated the fair value of the warrants using an option pricing model.
Pursuant to the placement agent agreement, the Company issued 150,000 shares of
common stock and warrants to purchase up to an aggregate of 366,580 shares of
common stock to the placement agent in connection with the private placement
transactions closed during the quarter ended March 31, 2005. Each warrant
entitles the placement agent to purchase the stated number of shares of common
stock at an exercise price of $1.25 per share and will expire five years after
its issue date.
The Company accounts for the issuance of common stock purchase warrants issued
in connection with sales of its Units in accordance with the provisions of EITF
Issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock".
The Company issued the aforementioned warrants with registration rights which
provide, among other things, that the Company will file a registration statement
under the Securities Act on or before a date which is sixty days after the
closing time. The Company filed a "resale" registration statement with the
Securities and Exchange Commission on February 11, 2005, within the required
14
timeframe. Substantially all of the Company's warrants are exercisable by the
holders at any time irrespective of whether the registration statement has been
declared effective. In addition, the Company is not (and never is) precluded
from delivering unregistered stock to any warrant holder who elects to exercise
their warrants in the event that the Company's registration statement with
respect to the stock issuable pursuant to such warrants has not been declared
effective.
Since the Company (i) is not precluded from issuing unregistered shares in the
event of its failure to cause a registration statement to be declared effective,
(ii) is permitted to net share settle its warrants by issuing unregistered
shares, and (iii) has met all of the other criteria for equity classification
under EITF Issue No. 00-19, it has classified its warrants as equity
instruments.
COMMON STOCK ISSUED UPON CONVERSION OF SERIES A PREFERRED STOCK
During the nine month period ended September 30, 2005, 2,575,000 shares of
common stock were issued upon conversion of 257.5 shares of Series A Preferred
Stock.
ISSUANCES OF WARRANTS
On March 16, 2005, as a result of an amendment to the private placement to
increase the maximum offering amount to $12.0 million from $6.0 million, the
Company granted the original shareholders of Medallion Crest Management, Inc.
five-year warrants to purchase 925,000 shares of common stock at $1.25 per
share.
On August 16, 2005, the Company issued three-year warrants to purchase 160,000
shares of common stock to two consulting firms for previous financial
assistance. The Company recorded a $180,800 charge to operations for the fair
value of these warrants.
OPTIONS AND WARRANTS GRANTED PURSUANT TO 2004 INCENTIVE STOCK PLAN
During November 2004, the Company granted an option to an employee to purchase
shares of common stock in an amount equal to 1/2% of its common stock
outstanding upon the closing of the Company's private placement. Pursuant to the
terms of the 2004 Incentive Stock Plan under which these options were granted,
the options have an exercise price of $2.50 per share, the fair market value on
the date of grant and such options vest over four years. Upon completion of the
Company's private placement on February 11, 2005, the Company determined that
78,195 shares of common stock were subject to this option. The Company accounted
for this option using variable plan accounting in accordance with APB No. 25
since the number of shares of common stock subject to this option was not known
at the date of grant. Accordingly, the Company recorded deferred compensation of
$293,231 for the excess of the fair value of the common stock over the exercise
price of which $67,199 was amortized through September 30, 2005.
On February 10, 2005, the Company issued a fully-vested, non-forfeitable
five-year warrant to purchase 37,500 shares of its common stock at $6.50 per
share for 12,500 shares, $8.00 per share for 12,500 shares and $9.50 per share
for 12,500 shares, to an investor relations firm for services provided during
the three-month period ended March 31, 2005. The Company's common stock must
trade at or above $8.00 per share for ten consecutive days in order for the
holder to exercise their right to purchase the shares underlying the warrant. In
addition, if the Company's common stock trades at less than $0.67 per share, the
holder of the warrants may request a buyout of the warrant for a $10,000
payment. The Company recorded a $172,750 charge to operations for the fair value
of these warrants.
On February 11, 2005, the Company issued an option to purchase 12,000 shares of
its common stock for $6.25 per share to one of its directors. The right to
exercise this option vests as to 25% on the six-month anniversary of award, as
to 25% on the one-year anniversary of award and as to 25% on each of the
two-year and three-year anniversaries of award.
On March 7, 2005, the Company issued a three-year warrant to purchase 50,000
shares of its common stock at $4.75 per share to a financial relations firm for
services provided during March 2005. The Company recorded a $205,500 charge to
operations for the fair value of this warrant.
15
On March 7, 2005, the Company issued a three-year warrant to purchase 15,000
shares of its common stock at $5.00 per share to a financial relations firm for
services provided during March 2005. The Company recorded a $61,650 charge to
operations for the fair value of this warrant.
On July 20, 2005, the Company issued an option to purchase 10,000 shares of its
common stock for $2.70 per share to one of its directors. The right to exercise
this option vests as to 25% on the six-month anniversary of award, as to 25% on
the one-year anniversary of award and as to 25% on each of the two-year and
three-year anniversaries of award.
On August 15, 2005, the Company issued to an employee upon hire, an option to
purchase 25,000 shares of its common stock for $1.71 per share, and such options
vest over four years.
On September 13, 2005, the Company issued an option to purchase 2,000 shares of
its common stock for $1.02 per share to each of its two outside directors. The
right to exercise this option vests as to 25% on the six-month anniversary of
award, as to 25% on the one-year anniversary of award and as to 25% on each of
the two-year and three-year anniversaries of award.
COMMON STOCK ISSUED UPON CASHLESS EXERCISE OF WARRANTS
On February 15, 2005, a warrant holder exercised their right to purchase 187,500
shares of the Company's common stock at $3.05 per share through a cashless
exercise whereby in exchange for the exercise price of $571,875, the Company
withheld from issuing 87,309 shares of common stock issuable upon exercise of
this warrant based upon a fair market value of $6.55 per share on the date of
exercise. Consequently, the Company issued 100,191 shares of common stock to the
warrant holder.
COMMON STOCK ISSUED IN PAYMENT OF LEGAL FEES
On January 10, 2005, as payment for $70,000 of certain legal fees in connection
with its private placement, the Company issued 23,000 shares of common stock to
its law firm.
COMMON STOCK ISSUED TO ADVISORS FOR PAST SERVICES
On February 11, 2005 the Company issued 2,500 shares of restricted common stock
to a former director and 5,000 shares of restricted common stock to a director
of the Company as compensation for past services to the Company. The Company
recorded a $46,875 charge to operations for the intrinsic value of these
restricted shares of common stock. The restrictions lapse six months from the
date of issuance.
COMMON STOCK ISSUED UPON EXERCISE OF WARRANTS
On March 15, 2005, the Company issued 5,000 shares of common stock upon exercise
of a warrant at an exercise price of $1.25 per share.
COMMON STOCK ISSUED FOR FINANCIAL SERVICES
Pursuant to a letter agreement dated May 20, 2005, the Company issued 25,000
shares of common stock as initial compensation for financial consulting services
to be provided the Company. The fair value of these shares, which amounts to
$75,000 at date of issuance, was initially characterized as a prepaid expense in
the balance sheet at June 30, 2005, and has been charged to operations during
the three-month period ended September 30, 2005.
Pursuant to a letter agreement dated September 14, 2005, the Company issued
25,000 shares of common stock as initial compensation for financial consulting
services to be provided the Company. The fair value of these shares, which
amounts to $22,500 at date of issuance, is characterized as a prepaid expense in
the accompanying balance sheet at September 30, 2005.
TREASURY SHARES ACQUIRED AND RETIRED Pursuant to the Variable Shares Put Right
obligation contained in the Spinoff Agreement with Xechem, the Company
repurchased 366,580 shares of its common stock from Xechem during the
three-month period ended March 31, 2005. In addition, pursuant to a Securities
Purchase Agreement entered into with Xechem effective June 17, 2005, the Company
repurchased 2,886,563 shares of its common stock from Xechem for $2,309,250 in
cash and the forfeiture of an option held by the Company's Chief Executive
Officer to purchase 43 million shares of common stock of Xechem with a fair
value of $424,818. The Company accounted for these share repurchases as treasury
stock transactions, at cost. Xechem retained 500,000 shares of common stock of
16
the Company but agreed that it would only sell such shares subject to the volume
restrictions of Rule 144, regardless of whether or not such volume limitations
are applicable at the time of such sale. Additionally, the Securities Purchase
Agreement terminated the Spinoff Agreement.
Effective June 17, 2005, the Company retired all 3,398,213 shares of its common
stock held in treasury.
CONTINGENT CONSIDERATION
Pursuant to the terms of the acquisition of the Company by Xechem, Xechem agreed
to the future payment of additional consideration in shares of stock of Xechem
to the original shareholders of the Company upon the attainment of certain
defined development milestones. In connection with the Spinoff Agreement,
substantially all of the obligations for the issuance of shares as additional
consideration to the original shareholders of the Company have been assumed by
the Company, and Xechem has been released therefrom.
The Company obtained from substantially all of the original shareholders a
waiver of their rights with respect to the contingent consideration and release
of the Company from its obligations thereunder and on July 20, 2005, the Company
issued a total of 100,000 shares in satisfaction of this obligation. The Company
recorded a $270,000 charge to operations for the charge to operations for the
fair value of these shares.
NOTE 11 - SUBSEQUENT EVENTS
COMMON STOCK ISSUED UPON CONVERSION OF SERIES A PREFERRED STOCK
Subsequent to September 30, 2005, the Company issued 20,000 shares of common
stock upon conversion of 2 shares of Series A Preferred Stock.
LEGAL PROCEEDINGS
On July 26, 2005 Xmark Opportunity Fund, L.P. and Xmark Opportunity Fund, Ltd.
(collectively, "Xmark") filed an action in the United States District Court for
the Southern District of New York (No. 05-CV-6696) against the Company and
William Pursley, the Company's Chief Executive Officer, alleging breach of
contract, breach of the implied covenant of good faith and fair dealing,
detrimental reliance, and quantum meruit/unjust enrichment related to the
Company's registration of Common Stock to be offered for sale by the plaintiffs
and seeking damages under the Securities Exchange Act of 1934, specific
performance of plaintiff's subscription agreement entered into in connection
with the Company's private placement of securities completed on February 11,
2005, damages in an unspecified amount, punitive damages, interest, costs, and
expenses. On September 24, 2005, Xmark filed a stipulation and order of
dismissal with prejudice dismissing the action.
STOCK PURCHASE AGREEMENT - FUSION CAPITAL On October 7, 2005, the Company
entered into a common stock purchase agreement ("Stock Purchase Agreement") with
Fusion Capital Fund II, LLC ("Fusion Capital"), pursuant to which Fusion Capital
has agreed, under certain conditions as outlined below, to purchase on each
trading day $25,000 of the Company's common stock up to an aggregate, under
certain conditions, of $20 million over a 40-month period, subject to earlier
termination at the Company's discretion. If the market price of common stock
increases to certain levels, then in the Company's discretion, the Company may
elect to sell more common stock to Fusion Capital than the minimum daily amount.
The purchase price of the shares of common stock will be calculated based upon
the future market price of the common stock without any fixed discount to the
market price. Fusion Capital does not have the right or the obligation to
purchase shares of common stock in the event that the price of common stock is
less than $0.50 per share. The Company is required to file and have declared
effective a registration statement with the SEC as a precondition to receipt of
any funds with respect to this transaction. There can be no assurance that the
SEC will declare any such registration statement effective. The inability of the
Company to obtain financing through this or any other transaction would have a
material adverse effect on the Company's financial condition and its ability to
sustain operations.
Pursuant to the Stock Purchase Agreement, the Company issued 377,359 shares of
its common stock to Fusion Capital and a warrant to purchase 377,359 shares of
common stock at $0.01 per share which expires December 31, 2010 (the "Fusion
Warrant"), as an initial commitment fee and as an additional commitment fee, the
Company is obligated to issue to Fusion Capital an additional 754,717 shares, on
a pro rata basis, once Fusion Capital has acquired its initial $10 million of
common stock. These shares, upon issuance, will be accounted for at par value
with a corresponding charge to paid-in capital. In addition, the Company issued
25,000 shares to Fusion Capital as an expense reimbursement.
The Company has reserved 6,534,435 shares of common stock for this transaction
consisting of 5,000,000 shares subject to purchase by Fusion Capital pursuant to
the Stock Purchase Agreement, the 377,359 shares and the 377,359 shares
underlying the warrant issued as the initial commitment, 754,717 shares issuable
on a pro rata basis as an additional commitment fee and the 25,000 shares issued
as an expense reimbursement.
17
Under the Stock Purchase Agreement, on each trading day, Fusion Capital is
obligated to purchase a specified dollar amount of the Company's common stock.
Subject to the Company's right to suspend such purchases at any time, and its
right to terminate the Stock Purchase Agreement at any time, Fusion Capital will
purchase on each trading day during the term of the Agreement $25,000 of common
stock. This daily purchase amount may be decreased by the Company at any time.
The Company also has the right to increase the daily purchase amount at any
time, provided however, it may not increase the daily purchase amount above
$25,000 unless the price of the common stock is above $1.60 per share for five
consecutive trading days. Specifically, for every $0.10 increase in Threshold
Price above $1.50, the Company has the right to increase the daily purchase
amount by up to an additional $2,500. For example, if the Threshold Price is
$1.70, the Company would have the right to increase the daily purchase amount up
to an aggregate of $30,000. The "Threshold Price" is the lowest sale price of
the common stock during the five trading days immediately preceding the
Company's notice to Fusion Capital to increase the daily purchase amount. If at
any time during any trading day the sale price of the common stock is below the
Threshold Price, the applicable increase in the daily purchase amount will be
void.
In addition to the daily purchase amount, the Company may elect to require
Fusion Capital to purchase on any single trading day, common stock in an amount
up to $250,000, provided that the price is above $2.00 during the ten prior
trading days. The price at which such shares would be purchased will be the
lowest purchase price during the previous fifteen trading days prior to the date
that such purchase notice was received by Fusion Capital. The Company may
increase this amount to $500,000 if its common stock share price is above $4.00
during the five trading days prior to its delivery of the purchase notice to
Fusion Capital. This amount may also be increased to up to $1,000,000 if the
price of the common stock is above $6.00 during the five trading days prior to
delivery of the purchase notice to Fusion Capital. The Company may deliver
multiple purchase notices; however at least ten trading days must have passed
since the most recent non-daily purchase was completed.
The purchase price per share is equal to the lesser of:
o the lowest sale price of the common stock on the purchase date; or
o the average of the three lowest closing sale prices of the common
stock during the twelve consecutive trading days prior to the date of
a purchase by Fusion Capital.
The purchase price will be adjusted for any reorganization, recapitalization,
non-cash dividend, stock split, or other similar transaction occurring during
the trading days in which the closing bid price is used to compute the purchase
price. Fusion Capital may not purchase shares of common stock under the Stock
Purchase Agreement if Fusion Capital, together with its affiliates, would
beneficially own more than 9.9% of the Company's common stock outstanding at the
time of the purchase by Fusion Capital. Fusion Capital has the right at any time
to sell any shares purchased under the Stock Purchase Agreement which would
allow it to avoid the 9.9% limitation.
Under the Stock Purchase Agreement, the Company has set a minimum purchase price
("floor price") of $0.50 per share. Fusion Capital will not have the right nor
the obligation to purchase any shares of Common Stock in the event that the
purchase price is less than the floor price.
The Company has the unconditional right to suspend purchases at any time for any
reason effective upon one trading day's notice. Any suspension will remain in
effect until the Company's revocation of the suspension.
Generally, Fusion Capital may terminate the Stock Purchase Agreement without any
liability or payment to the Company upon the occurrence of any of the following
events of default:
o the effectiveness of the registration statement lapses for any reason
(including, without limitation, the issuance of a stop order) or is
unavailable to Fusion Capital for sale of the Company's common stock
and such lapse or unavailability continues for a period of ten
consecutive trading days or for more than an aggregate of thirty
trading days in any 365-day period;
o suspension by a principal market of the Company's common stock from
trading for a period of three consecutive trading days;
18
o the de-listing of the Company's common stock from a principal market
provided the common stock is not immediately thereafter trading on the
Nasdaq National Market, the Nasdaq National SmallCap Market, the New
York Stock Exchange or the American Stock Exchange;
o the transfer agent's failure for five trading days to issue to Fusion
Capital shares of common stock which Fusion Capital is entitled to
under the Stock Purchase Agreement ;
o any material breach of the representations or warranties or covenants
contained in the Stock Purchase Agreement or any related agreements
which has or which could have a material adverse affect on the Company
subject to a cure period of ten trading days;
o any participation or threatened participation in insolvency or
bankruptcy proceedings by or against the Company; or
o a material adverse change in the Company's business.
The Company has the unconditional right at any time for any reason to give
notice to Fusion Capital terminating the Stock Purchase Agreement. Such notice
shall be effective one trading day after Fusion Capital receives such notice.
Under the terms of the Stock Purchase Agreement Fusion Capital has received
377,359 shares of the Company's common stock and the Fusion Warrant to purchase
up to 377,359 shares of common stock as an initial commitment fee. In connection
with each purchase of common stock after Fusion Capital has purchased $10
million of common stock, the Company will issue up to 754,717 additional shares
of common stock to Fusion Capital as an additional commitment fee. These
additional shares will be issued pro rata based on the proportion that a dollar
amount purchased by Fusion bears to the $10 million amount under the Stock
Purchase Agreement. Unless an event of default occurs, these shares must be held
and may not be transferred or sold by Fusion Capital until 40 months from the
date of the Stock Purchase Agreement or the date the Stock Purchase Agreement is
terminated.
Until the termination of the Stock Purchase Agreement, the Company has agreed
not to issue, or enter into any agreement with respect to the issuance of, any
variable priced equity or variable priced equity-like securities unless it has
obtained Fusion Capital's prior written consent.
For a period of 40 months from October 7, 2005, the date of the Stock Purchase
Agreement, the Company has granted to Fusion Capital the right to participate in
the purchase of any New Securities (as defined below) that the Company may, from
time to time, propose to issue and sell in connection with any financing
transaction to a third party. In particular, Fusion Capital may purchase up to
25% of such New Securities at the same price and on the same terms as such other
investor, provided that in any single transaction, Fusion Capital may not
purchase in excess of $5,000,000. "New Securities" means any shares of common
stock, preferred stock or any other equity securities or securities convertible
or exchangeable for equity securities of the Company. New Securities shall not
include, (i) shares of common stock issuable upon conversion or exercise of any
securities outstanding as of the date of the Stock Purchase Agreement , (ii)
shares, options or warrants for common stock granted to the Company's officers,
directors or employees pursuant to stock option plans approved by its board of
directors, (iii) shares of common stock or securities convertible or
exchangeable for common stock issued pursuant to the acquisition of another
company by consolidation, merger, or purchase of all or substantially all of the
assets of such company or (iv) shares of common stock or securities convertible
or exchangeable into shares of common stock issued in connection with a
strategic transaction involving the Company and issued to an entity or an
affiliate of such entity that is engaged in the same or substantially related
business as the Company. Fusion Capital's rights shall not prohibit or limit the
Company from selling any securities so long as it makes the same offer to Fusion
PlacementCapital.
COMMON STOCK PURCHASE AGREEMENT - FOUNDERS' PLAN SHARES
The Company entered into a stock purchase agreement for the sale of
approximately 265,600 shares of its common stock under its Founders' Plan and
received $167,250 during October 2005.
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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
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 former parent as required
by our spinoff agreement) through the sale of 511.65 Units at $25,000 per unit,
with each Unit consisting of one share of Series A 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.
In addition to 511,650 shares of Common Stock repurchased from Xechem pursuant
to our spinoff agreement for approximately $1.3 million, on June 17, 2005 we
elected to repurchase an additional 2,886,563 shares from Xechem for
approximately $2.3 million which reduced the number of shares issued and
outstanding at a per share price significantly below market value.
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 and
complete our human clinical trials for our proposed product, Myodur, to treat
muscular dystrophy. We do not have sufficient capital to purchase all the
materials necessary to complete our long-term toxicology studies or to complete
all of our human clinical trials in order to file for approval to market our
proposed product, Myodur. In addition, our planned activities for the
foreseeable future will require us to engage additional consultants and contract
research organizations to support our clinical development programs, and
additional personnel, including management, with expertise in areas such as
preclinical testing, clinical trial design and management, regulatory affairs,
manufacturing and marketing. We will need to raise substantial additional
capital for these purposes and to continue funding the development of Myodur and
our other products. In the absence of the availability of financing from
additional sales of our securities on a timely basis, we could be forced to
materially curtail, limit, or cease our operations.
After giving effect to our repurchase of shares of our common stock from Xechem
and the additional commitments associated with our planned activities, our
current capital resources are not sufficient to allow us to execute our
development plans without raising substantial additional funds. Theses matters
raise substantial doubt about our ability to continue as a going concern.
We continue to seek additional capital through equity and debt offerings,
collaborative partnerships, joint ventures and strategic alliances both within
the United States and abroad in an effort to accelerate the development of our
proposed products. Subsequent to September 30, 2005, we initiated several
programs to address our liquidity situation. We entered into a common stock
20
purchase agreement with Fusion Capital Fund II, LLC ("Fusion Capital"), pursuant
to which Fusion Capital has agreed, under certain conditions, to purchase on
each trading day $25,000 of the our common stock up to an aggregate, under
certain conditions, of $20 million over a 40-month period, subject to earlier
termination at our discretion. We are required to file and have declared
effective a registration statement with the SEC as a precondition to receipt of
any funds with respect to this transaction. There can be no assurance that the
SEC will declare any such registration statement effective. Our inability to
obtain financing through this or any other transaction would have a material
adverse effect on our financial condition and our ability to sustain its
operations.
To address our short term liquidity shortage, we entered into a stock purchase
agreement for the sale of approximately 265,600 shares of our common stock
available under our Founders' Plan and received $167,250 during October 2005. In
addition, we entered into a letter agreement with a placement agent to raise
capital on a best efforts basis.
There can be no assurance that our plans to obtain additional financing to fund
operations will be successful or that the successful implementation of the
business plan will actually improve our operating results. If these financing
programs are not successful in raising the capital we require to execute our
development plans, it may be necessary to curtail, or cease entirely our plan
operations.
RESEARCH, DEVELOPMENT, AND MANUFACTURING
Currently our primary efforts are moving our lead product, Myodur, into phase
I/II clinical trials for Duchenne's muscular dystrophy. We plan to use our
available cash to continue the pre-clinical development of our technologies,
which primarily includes the manufacture of Myodur, conducting pre-clinical
tests and toxicology studies, compiling, drafting and submitting an IND 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
submit our investigational new drug application ("IND") for Myodur during
January 2006, and initiate our human clinical trials early in the second quarter
of 2006.
We do not have, and do not intend to establish, our own manufacturing facilities
to produce ours product candidates in the near or mid-term. We outsourced the
manufacturing of our proposed product, Myodur, to contract manufacturers. On
April 18, 2005, we entered into an exclusive manufacture and supply agreement
with Bachem AG ("Bachem") whereby Bachem is, in addition to cash payments,
entitled to receive royalty payments in the amount of the lesser of 5% of "net
sales" (as defined in the agreement) or $10 million, $15 million or $25 million
in the first, second and third (and thereafter) years of the agreement,
respectively. During the nine-month period ended September 30, 2005, we incurred
approximately $3.0 million for the costs of the proposed product and related
materials of which approximately $1.3 million remains unpaid. As of September
30, 2005, we have sufficient materials for our pre-clinical and toxicology
programs in support of our IND and our initial human clinical trials. We may
incur significant expenditures for the next twelve months for the cost to
manufacture our proposed product in order to execute additional clinical and
other toxicology testing.
EMPLOYEES
As of November 14, 2005, we had ten full-time employees, all of whom are
full-time employees, one of whom focuses on and coordinates our research
program, five that focus on and coordinate clinical and regulatory strategy and
operations, one in business and corporate development, and three in management,
finance, and administration. Three of our employees have doctorate and/or M.D.
degrees. As our current business strategy is primarily to coordinate research,
clinical 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.
21
We plan to expand and secure laboratory facilities for our own internal research
activities. Suitable laboratory facilities have been identified and efforts are
underway to negotiate the lease and purchase of research equipment necessary to
continue our internal research activities. We are currently conducting research
in various third-party commercial and academic settings. Our plans include
continuing this practice in addition to expanding the use of third-party
research organizations and facilities to meet specific needs.
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 Chief Financial Officer, 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 Chief Financial
Officer, 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
consider the effectiveness of our internal controls over financial reporting as
part of the quarterly evaluations of our procedures. In connection therewith, we
reported, for the year ended December 31, 2004 and through the quarter ended
June 30, 2005, that we identified certain matters that we believed constituted
material weaknesses (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 such material weakness related to our ability to ensure
that the accounting for our equity-based transactions is accurate and complete
and the second related to our limited segregation of duties.
With respect to the first material weakness, we have adopted a policy of having
our Chief Financial Officer review all of our agreements to ensure that we
identify the applicable accounting treatments to evaluate any areas that may
involve the application of highly specialized accounting principles including,
but not necessarily limited to, complex equity transactions. In circumstances
where we may become (or contemplate becoming) a party to transactions that would
involve the application of accounting principles in which our expertise is
limited, we would engage the services of outside specialists, if necessary. At
the current time however, we believe that we have gained substantially greater
experience in these areas and that our procedures would enable us to resolve
such issues within time frames needed to comply with our reporting obligations.
22
With respect to the second material weakness, which relates to our segregation
of duties, we have re-evaluated our procedures and believe that due to our small
number of employees (most of whom have limited or no access to Company assets
and/or records that would affect our financial reporting) that our risks of
either material misstatement or misappropriation of assets is minimal. In
addition, substantially all of our general and administrative expenses and
scientific research expenditures are reviewed and approved by employees who are
knowledgeable of those matters. To date our procedures have also enabled us to
comply with our financial reporting obligations within the time frames required
by the SEC. Although we believe our risks with respect to this matter are
minimal, we still acknowledge that it would be beneficial for the Company to
segregate certain procedures to a greater number of employees. We believe that
our limited segregation of duties still constitutes a material deficiency in our
system. However, we currently have limited financial resources and 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. We believe that the costs we would incur to increase our staff (solely
for this purpose) exceed the potential reduction in risk. Our senior management
team is monitoring 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 accounting and financial functions.
Other than our adoption of a policy of having our Chief Financial Officer evaluate
all proposed agreements for the purpose of identifying any applicable accounting
matters, particularly those that may involve accounting for equity transactions,
there have been no changes in our internal controls over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 26, 2005 Xmark Opportunity Fund, L.P. and Xmark Opportunity Fund, Ltd.
(collectively, "Xmark") filed an action in the United States District Court for
the Southern District of New York (No. 05-CV-6696) against our company and
William Pursley, our Chief Executive Officer, alleging breach of contract,
breach of the implied covenant of good faith and fair dealing, detrimental
reliance, and quantum meruit/unjust enrichment related to our registration of
Common Stock to be offered for sale by the plaintiffs and seeking damages under
the Securities Exchange Act of 1934, specific performance of plaintiff's
subscription agreement entered into in connection with our private placement of
securities completed on February 11, 2005, damages in an unspecified amount,
punitive damages, interest, costs, and expenses. On September 24, 2005, Xmark
filed a stipulation and order of dismissal with prejudice dismissing the action.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the period covered by this Report, we have not issued unregistered
securities which have not been "previously reported" as defined in Rule 12b-2 of
the Exchange Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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
23
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)
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"))
24
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)
4.10 Securities Purchase Agreement, dated June 17, 2005 by and
between the Company, Xechem and William Pursley (incorporated
herein by reference to Exhibit 99.01 to the Company's Current
Report on Form 8-K filed on June 20, 2005)
4.11 Common Stock Purchase Agreement, dated October 7, 2005,
between the Company and Fusion Capital Fund II, LLC
("Fusion") (incorporated herein by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K, filed October
11, 2005 (the "October 2005 8-K"))
4.12 Registration Rights Agreement, dated October 7, 2005, between
the Company and Fusion (incorporated herein by reference to
Exhibit 4.2 to the October 2005 8-K)
4.13 Common Stock Warrant with Fusion, dated October 7, 2005
(incorporated by reference herein to Exhibit 4.1 to the
October 2005 8-K)
4.14 Agreement between the Company and Brown Advisory Securities,
LLC, dated May 20, 2005 (incorporated herein by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
SB-2 as filed with the SEC on October 17, 2005 (the "October
2005 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 October 6, 2005, by and
between William H. Pursley and the Company (incorporated
herein by reference to Exhibit 10.9 to the October 2005 SB-2)
10.11 Indemnification Agreement, dated October 6, 2005, by and
between Norman W. Barton and the Company (incorporated herein
by reference to Exhibit 10.10 to the October 2005 SB-2)
10.12 Indemnification Agreement, dated October 6, 2005, by and
between Donald W. Fallon and the Company (incorporated herein
by reference to Exhibit 10.11 to the October 2005 SB-2)
10.13 Indemnification Agreement, dated June 1, 2004, by and between
Leonard A. Mudry and the Company (incorporated herein by
reference to Exhibit 10.12 to the October 2005 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 (incorporated by reference
herein to Exhibit 10.14 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 2005)
25
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
-----------------
* Filed herewith.
26
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: November 15, 2005 By: /s/ William H. Pursley
------------------------------
William H. Pursley
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: November 15, 2005 By: /s/ Donald W. Fallon
--------------------------------
Donald W. Fallon
Chief Financial Officer, Senior Vice
President, Finance and Administration
and Secretary (Principal Financial
Officer and Principal Accounting
Officer)
27
EXHIBIT INDEX
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)
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)
4.10 Securities Purchase Agreement, dated June 17, 2005 by and
between the Company, Xechem and William Pursley (incorporated
herein by reference to Exhibit 99.01 to the Company's Current
Report on Form 8-K filed on June 20, 2005)
4.11 Common Stock Purchase Agreement, dated October 7, 2005,
between the Company and Fusion Capital Fund II, LLC
("Fusion") (incorporated herein by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K, filed October
11, 2005 (the "October 2005 8-K"))
4.12 Registration Rights Agreement, dated October 7, 2005, between
the Company and Fusion (incorporated herein by reference to
Exhibit 4.2 to the October 2005 8-K)
4.13 Common Stock Warrant with Fusion, dated October 7, 2005
(incorporated by reference herein to Exhibit 4.1 to the
October 2005 8-K)
4.14 Agreement between the Company and Brown Advisory Securities,
LLC, dated May 20, 2005 (incorporated herein by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
SB-2 as filed with the SEC on October 17, 2005 (the "October
2005 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 October 6, 2005, by and
between William H. Pursley and the Company (incorporated
herein by reference to Exhibit 10.9 to the October 2005 SB-2)
10.11 Indemnification Agreement, dated October 6, 2005, by and
between Norman W. Barton and the Company (incorporated herein
by reference to Exhibit 10.10 to the October 2005 SB-2)
10.12 Indemnification Agreement, dated October 6, 2005, by and
between Donald W. Fallon and the Company (incorporated herein
by reference to Exhibit 10.11 to the October 2005 SB-2)
10.13 Indemnification Agreement, dated June 1, 2004, by and between
Leonard A. Mudry and the Company (incorporated herein by
reference to Exhibit 10.12 to the October 2005 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 (incorporated by reference
herein to Exhibit 10.14 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 2005)
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
-----------------
* Filed herewith.