sec document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF 1934
For the fiscal year ended December 31, 2005
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF
1934
For the transition period from __________________ to __________________
Commission file number: 333-105793
CEPTOR CORPORATION
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(Name of Small Business Issuer in Its Charter)
Delaware 11-2897392
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 International Circle, Suite 5100
Hunt Valley, Maryland 21030
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (410) 527-9998
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $0.0001 per share
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|
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
|_|
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The issuer had no revenues during the fiscal year ended December 31,
2005.
The aggregate market value of the issuer's common equity held by
non-affiliates, as of April 11, 2006 was $3,059,339.
As of April 11, 2005, there were 14,033,364 shares of the issuer's
common equity outstanding.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (Check one): Yes |_| No
|X|
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business.................................................................1
Item 2. Description of Property................................................................28
Item 3. Legal Proceedings......................................................................28
Item 4. Submission of Matters to a Vote of Security Holders....................................28
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Purchase of Equity
Securities.............................................................................28
Item 6. Management's Discussion and Analysis or Plan of Operation..............................30
Item 7. Financial Statements...................................................................33
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure.............................................................................43
Item 8A. Controls and Procedures................................................................43
Item 8B. Other Information......................................................................44
PART III
Item 9. Directors and Executive Officers.......................................................44
Item 10. Executive Compensation.................................................................47
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters....................................................................50
Item 12. Certain Relationships and Related Transactions.........................................51
Item 13. Exhibits...............................................................................53
Item 14. Principal Accountant Fees and Services.................................................55
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Corporate History
We were incorporated in Delaware in 1986 under the name Aloe Scientific
Corporation. In 1988 our name was changed to CepTor Corporation. Until December
2003 our stock was held by ten persons and our operations were privately funded
by loans from our owners, through research grants, and by testing and
development agreements with third parties. In January 2004 we were acquired by
Xechem International, Inc. ("Xechem") in a stock-for-stock transaction.
Thereafter, Xechem determined that it would be in their best interest and our
best interest to spin-off our company to permit us to seek separate financing in
order to pursue further development of our products. As a result, on December 8,
2004, we completed a merger (the "Merger") with Medallion Crest Management,
Inc., a Florida corporation ("Medallion"). Medallion acquired all of our
outstanding capital stock in exchange for 5,278,068 shares of Medallion common
stock and assumption of certain obligations.
On December 8, 2004 we also filed an amendment to our Articles of
Incorporation in order to adopt the name CepTor Corporation and to authorize our
Series A Convertible Preferred Stock, par value $0.0001 per share ("Series A
Preferred Stock"). As a result transactions, we succeeded to the type of
business conducted by CepTor Corporation since 1986 as our sole line of business
under the direction of a management team appointed by Xechem in 2004, and
relocated our principal executive offices to Hunt Valley, Maryland.
On January 31, 2005, we merged with our wholly-owned subsidiary to
change our domicile to Delaware from Florida and to collapse the
parent-subsidiary relationship resulting from the December 8, 2004 transactions.
The information in this Report is presented as if the company existing
since 1986 had been the registrant for all periods presented. The section
"Management's Discussion and Analysis or Plan of Operation" and the audited
financial statements presented in this Report are exclusive of any assets or
results of operations or business attributable to Medallion. As used in this
Report, unless otherwise indicated, the terms "we," "us," "our" and "the
Company" refer to CepTor Corporation.
Private Placement
In connection with the Merger, we also completed the closing of a
private offering of our securities ("Private Placement") in which, through
February 11, 2005 we sold an aggregate of 511.65 Units to accredited investors
in the Private Placement, pursuant to the terms of a Confidential Private
Placement Memorandum dated October 22, 2004, as supplemented. Each Unit consists
of one share of Series A Preferred Stock and a three-year warrant to purchase
our common stock, par value $0.0001 per share ("Common Stock") at $2.50 per
share. Each share of Series A Preferred Stock is convertible into 10,000 shares
of Common Stock and each unit warrant entitles the holder to purchase 5,000
shares of Common Stock for $2.50 per share. The Units were offered by Brookshire
Securities Corporation ("Placement Agent") pursuant to a placement agent
agreement, as amended ("Placement Agent Agreement"), under which the Placement
Agent is entitled, in addition to a percentage of gross proceeds of the Private
Placement, to receive 300,000 shares of Common Stock and a warrant to purchase
up to an aggregate of 10% of the shares of Common Stock into which the Series A
Preferred Stock may be converted that is sold in the Private Placement. We
realized gross proceeds from the Private Placement of $12,791,250, before
payment of commissions and expenses.
Financings
On October 7, 2005, we entered a stock purchase agreement ("Stock
Purchase Agreement") with Fusion Capital Fund II, LLC, a Chicago-based
institutional investor ("Fusion Capital"), pursuant to which Fusion Capital has
agreed to purchase on each trading day $25,000 of Common Stock up to an
aggregate, under certain conditions, of $20 million over a 40-month period from
October 7, 2005, subject to earlier termination at our discretion. If the market
price of our Common Stock increases to certain levels, then in our discretion,
we may elect to sell more Common Stock to Fusion Capital than the minimum daily
amount. The purchase price of the shares of Common Stock will be calculated
1
based upon the market price of the Common Stock on the date of sale without any
fixed discount to the market price. We have the right to control the timing and
amount of Common Stock sold to Fusion Capital. Fusion Capital does not have the
right or the obligation to purchase shares of Common Stock in the event that the
price of our Common Stock is less than $0.50 per share. We also have the right
to terminate the Stock Purchase Agreement at any time without cost. Fusion
Capital is prohibited from engaging in any direct or indirect short selling or
hedging.
In connection with entering into the Stock Purchase Agreement, we
authorized the sale and issuance to Fusion Capital of up to 5,000,000 shares of
Common Stock for maximum proceeds of $20 million. The selling price of the
Common Stock will have to average at least $4.00 per share for us to receive the
maximum proceeds of $20 million. Assuming Fusion Capital purchases all $20
million of Common Stock, we estimate that the maximum number of shares of Common
Stock we will sell to Fusion Capital under the Stock Purchase Agreement will be
5,000,000 shares (exclusive of 377,359 shares of Common Stock (the "Initial
Commitment Shares") issued 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, 25,000 shares issued to Fusion
Capital as an expense reimbursement and up to an additional 754,717 shares of
Common Stock that will be issued to Fusion Capital as an additional commitment
fee after Fusion Capital has purchased $10 million shares of Common Stock (pro
rata based on the proportion that a dollar amount purchased by Fusion Capital
after Fusion Capital has purchased the first $10 million bears to the remaining
$10 million amount under the Stock Purchase Agreement)). Unless an event of
default occurs, Fusion Capital may not transfer or sell the Initial Commitment
Shares, the shares issuable pursuant to the Fusion Warrant or the additional
754,717 shares representing an additional commitment fee until the earlier of 40
months from the date of the Stock Purchase Agreement or the date the Stock
Purchase Agreement is terminated.
Fusion Capital may not purchase shares of Common Stock under the Stock
Purchase Agreement if Fusion Capital, together with its affiliates, would
beneficially own more than 9.9% of the Common Stock outstanding at the time of
the purchase by Fusion Capital. Fusion Capital has the right at any time to sell
any shares purchased under the Stock Purchase Agreement which would allow it to
avoid the 9.9% limitation. Therefore, we do not believe that Fusion Capital will
ever reach the 9.9% limitation.
For a period of 40 months from October 7, 2005, the date of the Stock
Purchase Agreement, we have granted to Fusion Capital the right to participate
in the purchase of any New Securities (as defined below) that we may, from time
to time, propose to issue and sell in connection with any financing transaction
to a third party. In particular, Fusion Capital can purchase up to 25% of such
New Securities at the same price and on the same terms as such other investor,
provided that in any single transaction, Fusion Capital may not purchase in
excess of $5,000,000. "New Securities" means any shares of Common Stock, our
preferred stock or any other of our equity securities or our securities
convertible or exchangeable for our equity securities. New Securities shall not
include, (i) shares of Common Stock issuable upon conversion or exercise of any
securities outstanding as of the date of the Stock Purchase Agreement , (ii)
shares, options or warrants for Common Stock granted to our officers, directors
or employees pursuant to stock option plans approved by our board of directors,
(iii) shares of Common Stock or securities convertible or exchangeable for
Common Stock issued pursuant to the acquisition of another company by
consolidation, merger, or purchase of all or substantially all of the assets of
such company or (iv) shares of Common Stock or securities convertible or
exchangeable into shares of Common Stock issued in connection with a strategic
transaction involving us and issued to an entity or an affiliate of such entity
that is engaged in the same or substantially related business as we are. Fusion
Capital's rights shall not prohibit or limit us from selling any securities so
long as we make the same offer to Fusion Capital.
On December 9, 2005, we entered into a securities purchase agreement
(the "Securities Purchase Agreement") with Cornell Capital Partners, LP
("Cornell Capital") pursuant to which Cornell Capital purchased from us, in a
private placement, secured convertible debentures in the principal amount of
$1,000,000 (the "Debentures") on each of December 9, 2005 and December 28, 2005,
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which Debentures bear interest at the rate of 8% per year. Each Debenture has a
three-year maturity from the date of issuance and is subject to earlier
conversion or redemption pursuant to its terms.
Cornell Capital has the right to convert a portion or all of the
outstanding principal and interest under the Debentures into shares of Common
Stock at a conversion price per share equal to the lesser of $0.9765 (105% of
the closing bid price of the Common Stock on December 8, 2005) (the "Fixed
Price") or (ii) 95% of the lowest closing bid price of the Common Stock for the
twenty trading days immediately preceding the conversion date (the "Floating
Price" and together with the Fixed Price, the "Conversion Price"), subject to
adjustment as provided in the Debentures; provided, that any such conversion
based on the Floating Price will generally be limited to $150,000 of principal
outstanding under the Debentures in any thirty day period; and further provided,
that Cornell Capital may not convert the Debentures into shares of Common Stock
if such conversion would result in Cornell Capital, together with its
affiliates, beneficially owning in excess of 4.9% of the then issued and
outstanding shares of Common Stock, but upon 65 days notice, may waive this
restriction. The Conversion Price and number of shares of Common Stock issuable
upon conversion of the Debentures is subject to certain exceptions and
adjustment for stock splits and combinations and other dilutive events.
Subject to the terms and condition of the Debentures, we have the right
at any time upon three business day's notice to redeem the Debentures, in whole
or in part. If the closing bid price of the Common Stock, is less than the Fixed
Price at the time of the redemption, we are obligated to pay, in addition to the
principal and accrued interest being redeemed, a redemption premium of 8% of the
principal amount being redeemed (the "Redemption Amount"). If the closing bid
price is greater than the Fixed Price, we may redeem up to 50% of the principal
amount at the Redemption Amount and the remaining 50% at the greater of the (x)
Redemption Amount or (y) the market value of the Common Stock. In addition,
Cornell Capital will receive a three-year warrant to purchase 25,000 shares of
Common Stock for every $100,000 redeemed by us, on a pro rata basis, at an
exercise price per share of $0.9765 (the "Redemption Warrant").
If an Event of Default (as such term is defined in the Debentures)
occurs, any principal and accrued interest outstanding will become immediately
due and payable, in cash or Common Stock, at Cornell Capital's election.
Pursuant to the Securities Purchase Agreement, on December 9, 2005, we
issued to Cornell Capital a three-year warrant at an exercise price per share of
$1.023 (110% of the closing bid price of the Common Stock on December 8, 2005)
("Cornell Warrant") and (ii) 268,817 shares of Common Stock, and on each of
December 9, 2005 and December 28, 2005, we made a cash payment to an affiliate
of Cornell Capital of $80,000 for expenses incurred in connection with the
transaction.
We have granted a security interest in all of our assets to Cornell
Capital to secure our obligations under the Debentures.
On December 9, 2005, we issued a convertible promissory note (the
"Harbor Note") in the principal amount of $250,000 to Harbor Trust which bears
interest at the rate of 6% percent per year. All unpaid principal and interest
under the Harbor Note will be due and payable on December 9, 2006. The Harbor
Note is convertible, in whole or in part, at any time, into Common Stock at a
conversion price of $1.00 per share, subject to certain limitations on
conversion as set forth in the Harbor Note, including where the resulting number
of shares converted on a cumulative basis, would exceed 19.99% of the total
number of shares of Common Stock outstanding and, subject to a conversion price
adjustment in the event we offer or sell an option to acquire Common Stock at a
price per share less than the conversion price.
BUSINESS
We are a development-stage biopharmaceutical company focusing on the
development of proprietary, cell-targeted therapeutic products for neuromuscular
and neurodegenerative diseases. Our goal is to increase the quality and quantity
of life of people suffering with these diseases. Primary efforts are currently
being focused on moving our lead product, "Myodur", into phase I/II clinical
trials for Duchenne muscular dystrophy. Our broad platform technology also
includes the development of products for multiple sclerosis, amyotrophic lateral
sclerosis (ALS) and chronic inflammatory demyelinating polyneuropathy (CIDP).
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We currently have no revenues from operations and are funding the
development of our products through the sale of our securities and will continue
to fund our activities through sales of securities or partnering arrangements
for the foreseeable future. Currently our available capital resources are not
sufficient to sustain planned operations, which raises substantial doubt about
our ability to continue as a going concern. Our current emphasis is on obtaining
approval of an investigational new drug ("IND") application for Myodur which we
submitted to the United States Food and Drug Administration ("FDA") on January
12, 2006, manufacturing supplies required for pre-clinical studies and initial
clinical trials of our proposed product, conducting toxicological and other
pre-clinical studies and pursuing clinical studies and FDA approvals.
TECHNOLOGY
Through an existing proprietary platform technology, we intend to
pursue drug candidates that exploit the understanding that activation of the
cysteine protease calpain initiates the cellular degradation that accompanies
many neuromuscular and neurodegenerative diseases. Early studies undertaken by
us found that the calpain inhibitor leupeptin substantially ameliorated the
degenerative effects of these diseases. Our technology includes utilizing the
carrier molecules carnitine and taurine, which are used to target various
passenger molecules, including our analogue of leupeptin, to skeletal muscle
cells and nerve cells, respectively. This provides for potential applications of
this technology in muscular dystrophy, multiple sclerosis (MS), epilepsy, ALS,
CIDP, cancer cachexia, AIDS wasting, traumatic nerve injury, retinal
degeneration, ototoxicity, Alzheimer's disease, Huntington's disease and
cardiomyopathies.
We have been issued compound patents on both carrier molecules
(carnitine and taurine) in combination with any passenger molecule and have
received orphan drug status for Myodur for Duchenne and Becker muscular
dystrophy. Additional provisional and other patent applications have been filed
or are in process.
Much of our technology is based on muscle and nerve cell targeting for
calpain inhibition. Calpain exists in every cell of the body and is a protease
that degrades cells naturally, in a normal metabolic process, in concert with
new cells that are constantly being generated. If calpain is up regulated
abnormally, the cellular degradation process breaks down cells and tissues
faster than they can be restored, resulting in several serious neuromuscular and
neurodegenerative diseases. Whether by genetic defect, trauma or insult, if cell
membrane integrity is compromised, it can lead to up regulation of calpain
causing deleterious muscle or nerve cell and tissue degradation. Although the
subject of our continued research, we believe this to be because the cell
membrane defect allows the entry of extracellular calcium ions into the cell,
which, consequently, up regulates calpain. Our technology is designed to target
calpain inhibitors to muscle and nerve cells preventing degradation of those
tissues.
STRATEGY
We are focusing on a two-pronged business strategy to minimize product
development risk and time to market and maximize market protection through a
combination of internal development and licensing and the orphan drug model. We
seek to take advantage of the legislative, regulatory, and commercial
opportunities common to rare orphan diseases. We currently intend to focus on
developing and commercializing orphan drug candidates internally, while working
to partner product development opportunities for non-orphan drug candidates with
third parties. This strategy may be further refined to take into account foreign
partnering opportunities, including for our orphan drug candidates.
We estimate the current total market potential of Myodur in Duchenne
muscular dystrophy at approximately $2.9 billion worldwide. FDA approval of
Myodur would require an effective compound. With a possible expected orphan drug
fast track, and efforts to maintain a relatively low cost development process
plan, we currently expect to internally develop and commercialize Myodur
world-wide, with the exception of the Pacific Rim where we have granted an
exclusive license for Myodur. We also plan to apply for orphan drug status and
develop internally drugs for ALS and CIDP.
Preliminary worldwide partnering discussions are currently underway for
multiple sclerosis. We believe our largest potential indication for long-term
drug development to be for cardiomyopathies (cardiac skeletal muscle
deterioration) which would also be a candidate for out-licensing and development
with large pharmaceutical firms.
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LOW-RISK DEVELOPMENT. We believe our technology affords an the
opportunity to minimize development risk because of the following:
o MINIMAL DOSING FOR MAXIMUM EFFECTIVENESS. Due to the targeting
effects of the carrier molecules, only minimal dosing of the
therapeutic passenger molecules is anticipated to be required,
suggesting a direct, positive safety effect in combination.
o NATURALLY OCCURRING CARRIERS. Carnitine and taurine are
benign, naturally occurring, endogenous molecules that reside
in all humans. Carnitine and taurine perform the same
transport function with our compounds as occurs naturally.
o CARNITINE APPROVED AS A PRODUCT. Carnitine is already an
approved compound for carnitine deficiency in dialysis
patients. Carnitine is currently administered at higher doses
than we anticipate we will use in our activities.
o LEUPEPTIN TESTED IN CHILDREN. The active ingredient in Myodur,
leupeptin, in an integrated approach, has already been studied
in a limited Duchenne muscular dystrophy pediatric population
at doses higher than we envision using.
o MOLECULES FAMILIAR TO FDA. Carnitine and taurine, as well as
the current passenger molecule, leupeptin, are well known and
established molecules to the FDA and no denaturing of the
individual molecules in combination has been demonstrated.
ORPHAN DRUG MODEL. According to the National Institutes of Health
(NIH), there are over 6,000 orphan diseases (diseases affecting less than
200,000 people) in the U.S. directly affecting approximately 24,000,000
patients. The U.S. gene pool is also representative of Western Europe, Canada
and Australia. Accordingly, management also expects orphan disease statistics to
be similar in those regions.
We believe there are a significant number of efficiencies that can be
capitalized on to create a realistic, focused orphan disease platform for
numerous potential orphan diseases including:
o UNMET MEDICAL NEED. By definition, an orphan drug is one that
addresses a disease that affects less than 200,000 patients in
the U.S., is for a serious or life threatening condition and
has no definitive therapy available.
o MITIGATED RISKS. Since the Orphan Drug Act in 1983, 1544 drugs
have been designated as orphans and 283 (and more to come)
have been approved representing a significantly higher success
rate than non-orphan development.
o MARKET EXCLUSIVITY. Government legislation protects and
rewards companies for the development of drugs for orphan
diseases by providing for seven years of market exclusivity in
the U.S., and ten years in the European Union, creating a
competition-free environment with that technology and
providing for an absence of patent issues for those same
periods of time.
o REGULATORY. As a result of the orphan drug legislation,
regulatory challenges for product approval can be less
daunting than for non-orphan drugs. Fewer total patient
exposures, fewer clinical trials, and acceptance of surrogate
markers along with clinical outcomes is possible for orphan
drug candidates. The FDA is mandated to review an orphan drug
approval application (new drug application ("NDA") or
biological drug license application ("BLA")) in six months
(fast track), instead of from one to two years. Understanding
the orphan drug legislation and designing clinical trials for
orphan drugs provides efficiencies across many different
diseases. Overall clinical trial costs are also greatly
reduced compared to non-orphan drug development.
o COMMERCIALIZATION AND HIGH VALUE. Orphan drugs demand a high
premium because of their potential to increase the quality and
quantity of life in areas where there is very little or no
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other hope. Examples include Genzyme's Cerezyme(TM) for
Gaucher disease, costing up to $300,000 per year per patient;
TKT's Replagal(TM) at $160,000 per year for Fabry disease;
factor XIII costs hemophiliacs $70,000 per year; and even for
non-life threatening disorders like growth hormone deficiency,
hGH costs $20,000 per year. Servicing the niche markets may
permit low fixed costs, and efficient target marketing. A
small sales force can focus on a specialty audience in a very
connected community with similar tactics for many diseases.
o DISTRIBUTION. Due to the costs, administration, shipping and
handling requirements for orphan drugs, a very specialized
distribution system is required. Similarities may allow using
the same "internal" distribution system and infrastructure.
Today, most orphan drugs are contracted out separately to
specialty distribution companies at a significant cost,
usually between 6-7% of top line revenues.
o REIMBURSEMENT. The costs of orphan drugs is often not borne by
the individual patient and insurance complications cannot be
tolerated for the prescribing physicians requiring expert
reimbursement service to assure uninterrupted therapy without
undue complication. Orphan drugs continue to be reimbursed at
a rate greater than 95% in the U.S.
o COST OF GOODS SOLD. The gross amount of material required to
supply an orphan market is low relative to non-orphan drugs so
that a favorable relationship is possible between quantity and
relative sales price, allowing for potential high gross
margins.
TECHNOLOGY OVERVIEW
DRUG TARGETING/DELIVERY TECHNOLOGY. When a pharmaceutical agent is
administered to a patient, either orally or by injection, the drug distributes
itself in most of the whole body water and tissues while only a small portion
administered goes to the diseased area where it is expected to have its clinical
effect. In some cases, larger doses must be administered which can produce
severe undesirable side effects in organs for which it was not intended. Thus,
the means by which a drug reaches its target site or its delivery at the right
moment and frequency, takes on increasing significance.
Recent developments have fueled an increased intensity in research
aimed at creating new drug delivery systems. Much of this interest has stemmed
from the advances in biotechnology immunology, which has resulted in the
creation of a new class of peptide and protein drugs. Concurrent attempts to
overcome barriers which limit the availability of these macromolecules has led
to an exploration of non-parenteral routes for their systemic delivery as well
as means to overcome the enzymatic and absorption barriers for the purpose of
increasing bioavailability.
Although for conventional drugs the oral route is convenient and
popular, most peptide and protein drugs have low uptake due to proteolytic
degradation in the gastrointestinal tract and poor permeability of the
intestinal mucosa to high molecular weight substances. Several approaches to
overcome these obstacles have been under intense industry investigation: (i)
inhibiting proteolytic degradation, (ii) increasing the permeability across the
relevant membrane, (iii) structural modification to improve their resistance to
breakdown or to enhance permeability, and (iv) specific pharmaceutical
formulation to prolong their retention time at the site of administration using
controlled delivery systems.
CONTROLLED-RELEASE SYSTEMS. A number of combination and variations on
these themes have been investigated. For example, linkage of drugs to monoclonal
antibodies, encapsulation of drugs in liposomes, modification of the liposome
surface to alter the pharmacokinetics, coating of proteins and/or liposomes with
polymers or polysaccharides, fusion of toxins to antibodies via recombinant
technology and many others. All of these modifications are designed to
accelerate and control the transport of pharmacologically-active agents from
sites of administration to organs. These systems do not address overcoming
physical barriers common to macromolecules.
SITE-SPECIFIC DELIVERY (TARGETING). These alterations in drug structure
are not limited entirely to enhancing the stability of drugs, but are also
designed to improve the targeting of the drug to a specific organ or tissue. By
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taking advantage of a feature on a cell membrane that becomes a focal point for
incorporating a specific carrier into the design of the drug to carry it to its
designated goal, targeting or site-specific delivery can be improved. The
carriers generally utilized have been monoclonal antibodies that target specific
cell membrane epitopes or receptors; however, a greater understanding of
membrane-specific features might enable one to design small molecular carriers
attached to drugs for enhanced uptake. Thus, new drugs in the form of peptides,
proteins, oligonucleotides, and genes are now on the horizon. The limitations at
this juncture relate to how to deliver them, intact, to preferred sites in order
to achieve maximal physiologic effectiveness and reduced side effects.
OUR TECHNOLOGY
We have developed a unique technology that we believe has broad
application and which may be used to target oral drugs to many organ and tissue
systems in the human body. The basis of this technology is a concept that
integrates the special chemical properties of active, currently available, and
naturally occurring pharmaceuticals and the specific biological characteristics
of targeting drugs to cells. Our technology provides a means for targeting drugs
to the site for which the drug has therapeutic effect. This targeting capability
has the potential effect of reducing, potentially markedly, the amount of drug
that is circulated to other places in the body. Therefore, effective targeting
would make it possible to use much less drug in the patient's body, thereby
drastically decreasing the probability of harmful side effects and delivering it
much more efficiently, in terms of efficacy directly to the affected site. Both
carnitine and taurine, naturally occurring substances, have been initially
utilized in our technology as specific carriers of drugs, particularly to muscle
and nerve. Any drug, new or old, can potentially be linked to these carriers if
a functional group is available to carry out the linkage.
There are many medical conditions in which loss of muscle tissue is a
prominent part of the disease process. There are also several diseases such as
MS, ALS and spinal cord injury, where nerve cell degradation is secondary to the
primary defect.
CALPAIN INHIBITION. It has been published that a protease, calpain, is
involved in initiating the degenerative process in each of muscular dystrophy,
MS, ALS, and spinal cord injury. Calpains are a family of Ca++ activated
intracellular proteases, whose activity is accelerated when abnormal amounts of
Ca++ enter the cell by virtue of increased membrane permeability as a result of
some traumatic or ischemic event and/or a genetic defect, such as the absence of
dystrophin in Duchenne muscular dystrophy. Our research program has identified
an inhibitor of calpain, and has demonstrated usefulness in halting the loss of
muscle tissue in certain circumstances. The inhibitor, (an analogue) leupeptin,
is a tripeptide produced by streptomyces strains.
Calpain is one of a relatively small family of cysteine proteases which
also include the caspases which are active in promoting programmatic cell death,
or apoptosis. It has been implicated in the initiation of both necrotic and
apoptotic cell death. The trigger which activates calpain is Ca++ ions leaking
into cells, where the levels are generally very low. The dystrophin gene
responsible for muscular dystrophy, for instance, is involved in maintaining
muscle cell membrane integrity and when it is mutated the membrane is leaky for
calcium. Overstimulation of neural receptors by GABA and other excitatory
molecules following abnormal GABA release accompanying injury, can lead to
excitatory neurotoxicity by allowing entrance of too much Ca++. Calpain has been
implicated in the neurotoxicity that follows spinal cord injury. Tissues
weakened by ischemia/reperfusion injury such as occurs following stroke or
myocardial infarct, admit Ca++. Over the past ten years it has emerged that
calpain enzymatic activity plays a key role in a very large number of cellular
degenerative conditions. Leupeptin, the tripeptide aldehyde has been shown to be
a potent inhibitor of thiol proteases of the calpain class of enzymes.
One of the problems in using leupeptin, either by oral or injection
administration, is that it distributes itself indiscriminately to all parts of
the body, when only skeletal muscle or nerve tissue should be targeted. One
approach involving larger doses than are necessary to get the desired result
often causes side effects in other parts of the body and in the case of
leupeptin, would be very expensive. We have investigated a way to more
specifically target the calpain inhibitor to muscle by linking the active part
of the inhibitor to a natural occurring substance in the body which is attracted
to skeletal muscle and heart muscle by an active transport mechanism. This
substance is called carnitine which is normally used to transport fatty acids
into muscle cell mitochondria. We have successfully linked leupeptin to
carnitine to create a more efficient calpain inhibitor we call Myodur. Our
studies suggest that the chemical entity carnityl-leu-argininal (Myodur) is at
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least 100 times more effective in inhibiting calpain intracellularly in skeletal
muscle than is leupeptin alone. This has resulted in adoption of Myodur as a new
potential candidate for therapy for the treatment of muscle wasting diseases, be
they primary or secondary.
Leupeptin is not patent-protected, having been first isolated and
characterized in 1969. We have been granted orphan drug status for the use of
leupeptin in nerve repair and filed for Orphan Drug status in muscular dystrophy
for Myodur, which includes the active part of leupeptin.
Another naturally occurring substance, taurine, is attracted to nervous
tissue and to the retina. In our preliminary studies, when leupeptin is linked
to taurine, calpain appears to be inhibited in a number of nerve-related disease
states. This result is subject to continued review and assessment and may not be
indicative of future successful drug development or commercialization. The
diseases affected could include deafness as a result of antibiotic damage to
hair cells in the ear, diabetic and age-related retinopathy, seizures, and
possibly Alzheimer's disease. We believe this drug, named Neurodur, could be a
particularly effective drug for the treatment of hearing loss due to nerve
damage, as well as diabetic retinopathy, MS, and spinal cord injury.
In summary, our technology provides us with the ability and potential
to seek to:
o Explore potential therapeutic, including oral, agents in a
variety of neuromuscular and neurodegenerative disorders;
o Improve the safety profile of new, as well as existing,
pharmaceuticals currently on the market;
o Investigate new and abandoned pharmaceutical research projects
where untargeted therapeutics possess toxic characteristics
that have not been able to be successfully managed when
delivered untargeted;
o Extend the patent life of existing major drugs by using them
in a targeted compound and provide a means of product
differentiation in the generic pharmaceutical industry; and
o Investigate the potential for developing cardioactive drugs.
MANUFACTURING
We do not have, and do not intend to establish, manufacturing
facilities to produce our product candidates in the near or mid-term. We plan to
utilize contract manufacturers for all of our production requirements. We
believe that there are a number of high quality Good Laboratory Practice (GLP)
and Good Manufacturing Practice (GMP) contract manufacturers available for these
purposes.
CONTRACT MANUFACTURING AGREEMENT WITH BACHEM
In April 2005, we entered into an exclusive manufacturing and supply
agreement to purchase our requirement of clinical materials for our proposed
product for Duchenne muscular dystrophy from Bachem AG. In addition to cash
payments pursuant to purchase orders for clinical materials, we have also agreed
to make royalty payments in the amount of the lesser of 5% of "net sales" (as
defined in the agreement) or $10 million, $15 million or $25 million, in the
first, second and third (and thereafter) years of the agreement, respectively.
We currently purchase certain patented components required for our products from
Sigma-Tau Industrie Farmaceutiche Riunite S.p.A. ("Sigma Tau"). We expect the
cost of the required product for our remaining pre-clinical studies and clinical
trials to be significant.
FDA OVERSIGHT OF MANUFACTURING
The manufacturer of our product candidates or any future product,
whether done by third-party contractors or internally, will be subject to
rigorous regulations, including the need to comply with the FDA's current GMP
standards. As part of obtaining FDA approval for each product, each of the
manufacturing facilities must be inspected, approved by and registered with the
FDA. In addition to obtaining FDA approval of the prospective manufacturer's
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quality control and manufacturing procedures, domestic and foreign manufacturing
facilities are subject to periodic inspection by the FDA and/or foreign
regulatory authorities which have the authority to suspend or withdraw
approvals.
INTELLECTUAL PROPERTY
Our intellectual property portfolio includes:
o Patent 4,742,081 - Carnitine, which preferentially accumulates
in cardiac and skeletal muscle, is coupled to a protease
inhibitor or any other pharmaceutically active compound, for
the purpose of site-specific drug delivery to these tissues.
These products may be useful in a variety of muscle wasting
diseases as well as cardiac conditions including cardiac
ischemia;
o Patents 4,866,040, 5,008,288 and 5,876,747 - These patents
cover the compounds carnitine, aminocarnitine and cysteic acid
(taurine) as carriers linked to protease inhibitors,
propranolol, procainamide and quinidine and, as well,
phosphatidyl carnitine incorporated into liposomes for the
treatment of muscle disorders as well as cardiac arrhythmias;
o PCT international patent application no. PCT/US05/16132, which
was filed on May 6, 2005, covers compound C-301 and related
compounds to treat a number of neurologic, otologic, and
ophthalmologic disorders such as epilepsy and bipolar
disorder. The international application claims priority upon a
U.S. provisional application no. 60/568,720, which was filed
on May 6, 2004.
o PCT international patent application (no. to be assigned),
which was filed on June 13, 2005 and covers Myodur and related
compounds as well as their use to treat muscle disorders. The
application claims new compositions of matter (i.e., oral
prodrugs and pharmaceutical formulations thereof), kits, and
use of these materials to treat a variety of diseases such as
muscular dystrophy. The international application claims
priority upon U.S. provisional application nos. 60/578,914 and
60/633,274, which were filed on June 12, 2004 and December 3,
2004, respectively. A U.S. utility application will be filed
shortly with the U.S. Patent and Trademark office.
o PCT international patent application (no. to be assigned),
which was filed on September 29, 2005, covers Neurodur and
related compounds to treat a number of neurologic, otologic,
and ophthalmologic disorders. The application claims new
compositions of matter and use of these compositions as oral
pro-drugs to treat a variety of diseases such as multiple
sclerosis. The international application claims priority upon
U.S. provisional application, which was filed on September 29,
2004. A U.S. utility application will be filed shortly with
the U.S. Patent and Trademark office.
We have made, or currently plan to make the following orphan drug
designation filings:
o Orphan Drug Designation has been granted for leupeptin in
denervation injury;
o Orphan Drug Designation has been granted for Duchenne and
Becker muscular dystrophies;
o Orphan Drug Designation for C-202 in ALS will be applied for
in 2006 or 2007; and
o Orphan Drug Designation for C-208 in CIDP will be applied for
in 2006 or 2007.
We also rely on protection afforded by confidentiality and invention
acknowledgement agreements with key personnel in order to secure and protect our
intellectual property rights that are not subject to patent or other statutory
protection.
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LICENSES
On September 15, 2004 we granted an exclusive fifteen-year license to
JCR Pharmaceuticals Co., Ltd. ("JCR") to develop, manufacture, use, sell, and
sublicense Myodur for the treatment of muscular dystrophy in Japan, South Korea,
China, Taiwan and Singapore. The licensing agreement provides, among other
things, for royalty payments to us in the amount of 25% of "net sales" (as such
term is defined in the agreement) provided that the sum of the cost of goods
sold, plus royalty payments does not exceed 35% of net sales. Pursuant to the
license agreement, JCR acquired 554,413 shares of our Common Stock for
$1,000,000 ($929,231 after expenses), and upon FDA approval of an IND
application for Myodur for muscular dystrophy in the United States, is obligated
to purchase $1,000,000 of additional shares of our Common Stock. The purchase
price at the time of the second $1,000,000 investment required under the license
agreement will be the then market price of our Common Stock which may be higher,
or lower, on a price per share basis, than the purchase price applicable to the
initial investment. In addition, JCR is obligated to make a milestone payment of
$500,000 to us upon FDA approval of an IND application to initiate Phase I/II
clinical studies for Myodur for muscular dystrophy in the United States.
COMPETITIVE BUSINESS CONDITIONS AND COMPETITIVE POSITION IN THE INDUSTRY;
METHODS OF COMPETITION
We currently have no products or drugs in commercial production and are
exclusively engaged in research and development, pre-clinical and pre-regulatory
review and preparation. Accordingly, we do not compete with any product or in
any market or industry. While there is no assurance that any of our products
will be capable of commercialization, we believe that competition in our planned
area of concentration, should any of our products obtain regulatory clearances
required for commercialization, will primarily involve effectiveness of our
products for the approved indications, dosage, delivery, and, to a lesser
degree, price and insurance availability.
DISTRIBUTION METHODS
We currently have no distribution methods since all of our products are
presently in development and we have neither applied for nor received any
regulatory approvals.
SOURCES AND AVAILABILITY OF RAW MATERIALS
We presently maintain relationships with two companies, Bachem AG and
Sigma Tau, for raw materials for our research and testing needs. The raw
materials required by us are available from a limited number of suppliers
capable of production which meets our requirements and FDA standards. We
presently expect to purchase certain components of our product which are
manufactured under patent protection.
CUSTOMERS
We currently have no customers.
GOVERNMENT REGULATION
The manufacturing and marketing of all of our drug and drug delivery
technology, including Myodur and Neurodur, and our related research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. We anticipate that these regulations will apply separately to each
drug and compound in our drug delivery technology. Compliance with these
regulations will involve a considerable amount of time, expense and uncertainty.
In the United States, drugs are subject to rigorous federal regulation
and, to a lesser extent, state regulation. The United States Food, Drug and
Cosmetic Act, the regulations promulgated thereunder, and other federal and
state statutes and regulations govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, record keeping, approval,
advertising and promotion of our drugs. Drug development and approval within
this regulatory framework is difficult to predict and will take a number of
years and involve material expenditures that cannot be accurately projected at
this early stage of development of our products but which will exceed our
current resources and will require sources of funds which are presently
uncertain.
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The steps required before a pharmaceutical agent may be marketed in the
United States include:
o Pre-clinical laboratory tests, in vivo pre clinical studies
and formulation studies;
o The submission to the FDA of an IND application for human
clinical testing which must become effective before human
clinical trials can commence;
o Adequate and well controlled human clinical trials to
establish the safety and efficacy of the product;
o The submission of a NDA or BLA to the FDA; and
o FDA approval of the NDA or BLA prior to any commercial sale or
shipment of the product.
In addition to obtaining FDA approval for each product, each domestic
product manufacturing facility must be registered with, and approved by, the
FDA. Domestic manufacturing facilities are subject to biennial inspections by
the FDA and must comply with the FDA's Good Laboratory Practices for products,
drugs and devices.
PRE-CLINICAL TESTING. Pre-clinical testing includes laboratory
evaluation of chemistry and formulation, as well as tissue culture and animal
studies to assess the potential safety and efficacy of the product. Pre-clinical
safety tests must be conducted by laboratories that comply with FDA regulations
regarding Good Laboratory Practices. No assurance can be given as to the
ultimate outcome of such pre-clinical testing. The results of pre-clinical
testing are submitted to the FDA as part of an IND application and are reviewed
by the FDA prior to the commencement of human clinical trials.
We have relied upon contractors to perform pre-clinical studies and
will continue to do so in the future.
CLINICAL TRIALS. Clinical trials involve the administration of the new
product to healthy volunteers or to patients under the supervision of a
qualified principal investigator. Clinical trials must be conducted in
accordance with Good Clinical Practices under protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as
part of the IND application. Further, each clinical study must be conducted
under the auspices of an independent institutional review board at the
institution where the study will be conducted. The institutional review board
will consider, among other things, ethical factors, the safety of human subjects
and the possible liability of the institution. Compounds must be formulated
according to Good Manufacturing Practices.
Clinical trials are typically conducted in three sequential phases, but
the phases may overlap. In Phase I, the initial introduction of the product into
healthy human subjects, the drug is tested for safety (adverse side effects),
absorption, dosage tolerance, metabolism, bio distribution, excretion and
pharmacodynamics (clinical pharmacology). Phase II is the proof of principal
stage and involves studies in a limited patient population in order to:
o Determine the efficacy of the product for specific, targeted
indications;
o Determine dosage tolerance and optimal dosage; and
o Identify possible adverse side effects and safety risks.
If there is evidence that the product is found to be effective and has
an acceptable safety profile in Phase II evaluations, Phase III trials may be
undertaken to further evaluate clinical efficacy and to test for safety within
an expanded patient population at geographically dispersed multi-center clinical
study sites. Phase III frequently involves randomized controlled trials and,
whenever possible, double blind studies. We, or the FDA, may suspend clinical
trials at any time if it is believed that the individuals participating in
trials are exposed to unacceptable health risks.
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We intend to rely upon contractors to perform our clinical trials.
NDA AND FDA APPROVAL PROCESS. The results of pharmaceutical
development, pre-clinical studies and clinical studies are required to be
submitted to the FDA in the form of a NDA for approval of the marketing and
commercial shipment of all regulated products. The testing and approval process
is likely to require substantial cost, time and effort. In addition to the
results of pre-clinical and clinical testing, the NDA applicant must submit
detailed information about chemistry, manufacturing and controls that will
determine how the product will be made. The approval process is affected by a
number of factors, including the severity of the disease, the availability of
alternative treatments and the risks and benefits demonstrated in clinical
trials. Consequently, there can be no assurance that any approval will be
granted on a timely basis, if at all. The FDA may deny a NDA if applicable
regulatory criteria are not satisfied, require additional testing or information
or require post-marketing testing and surveillance to monitor the safety of a
company's product if it does not believe the NDA contains adequate evidence of
the safety and efficacy of the drug. Notwithstanding the submission of such
data, the FDA may ultimately decide that a NDA does not satisfy its regulatory
criteria for approval. Moreover, if regulatory approval of a drug is granted,
such approval may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Post approval studies may be conducted as Phase IV to explore further
intervention, new indications, or new product uses.
Among the conditions for NDA approval is the requirement that any
manufacturer's quality control and manufacturing procedures conform to Good
Manufacturing Practices and the requirement specifications of the FDA. In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, money and effort in the area of drug application and
quality control to ensure full technical compliance. Manufacturing facilities,
both foreign and domestic, also are subject to inspections by or under the
authority of the FDA and by other federal, state or local agencies.
INTERNATIONAL APPROVAL. Whether or not FDA approval has been obtained,
approval of a product by regulatory authorities in foreign countries must also
be obtained prior to the commencement of commercial sales of the drug in such
countries. The requirements governing the conduct of clinical trials and drug
approvals vary widely from country to country, and the time required for
approval may be longer or shorter than that required for FDA approval. Although
there are some procedures for unified filings for certain European countries, in
general, each country at this time has its own procedures and requirements.
OTHER REGULATION. In addition to regulations enforced by the FDA, we
are also subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act, and other present and future federal, state or
local regulations. Our research and development may involve the controlled use
of hazardous materials, chemicals, and various radioactive compounds. Although
we believe that our safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of any accident, we could be held liable for
any damages that result and any such liability could exceed our resources.
In pre-clinical studies Myodur has demonstrated efficacy in muscular
dystrophy, Neurodur has demonstrated efficacy in MS, and C-301 has demonstrated
efficacy in animal models for epilepsy. We filed an IND application with the FDA
for Myodur on January 12, 2006. The FDA approval process typically takes
approximately 30 days but may be extended if the FDA has questions regarding the
IND application or requires additional data.
RISK FACTORS
The following risk factors should be considered carefully in addition
to the other information contained in this Report. Our most significant risks
and uncertainties are described below; however, they are not the only risks we
face. If any of the following risks actually occur, our business, financial
condition, or results or operations could be materially adversely affected.
12
IF WE CANNOT OBTAIN ADDITIONAL FUNDS WHEN NEEDED, OR ACHIEVE
PROFITABILITY WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.
Absent additional funding from private or public equity or debt
financings, collaborative or other partnering arrangements, or other sources, we
will be unable to conduct our product development efforts as planned, and we may
need to curtail our development plans, cease operations or sell assets.
WE HAVE A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT
LOSSES TO CONTINUE FOR THE FORESEEABLE FUTURE.
We have yet to establish any history of profitable operations. At
December 31, 2005, we had an accumulated deficit of $37,916,095. Our revenues
have not been sufficient to sustain our operations. We expect that our revenues
will not be sufficient to sustain our operations for the foreseeable future. Our
profitability will require the successful commercialization of our proposed
products. No assurances can be given when, or if, this will occur or that we
will ever be profitable.
Our ability to obtain additional funding will determine our ability to
continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
EVEN WITH THE SALE OF COMMON STOCK TO FUSION CAPITAL, WHICH HAS NOT YET
COMMENCED, WE WILL REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND
WITHOUT IT WE WILL NOT BE ABLE TO CONTINUE OPERATIONS.
We only have the right to receive $25,000 per trading day under the
Stock Purchase Agreement with Fusion Capital unless our stock price equals or
exceeds $1.60, in which case the daily amount may be increased under certain
conditions as the price of the Common Stock increases. Fusion Capital shall not
have the right nor the obligation to purchase any shares of Common Stock on any
trading days that the market price of the Common Stock is less than $0.50. Since
we initially registered 5,000,000 shares for sale by Fusion Capital, the selling
price of the Common Stock to Fusion Capital will have to average at least $4.00
per share for us to receive the maximum proceeds of $20 million without
registering additional shares of Common Stock.
The extent we rely on Fusion Capital as a source of funding will depend
on a number of factors including, the prevailing market price of the Common
Stock and the extent to which we are able to secure working capital from other
sources. Specifically, Fusion Capital shall not have the right nor the
obligation to purchase any shares of Common Stock on any trading days that the
market price of our common stock is less than $0.50 per share. If obtaining
sufficient financing from Fusion Capital were to prove unavailable or
prohibitively dilutive and if we are unable to commercialize and sell our
proposed products, we will need to secure other sources of funding in order to
satisfy our working capital needs. Even if we are able to access the full $20
million under the Stock Purchase Agreement with Fusion Capital, we may still
need additional capital to fully implement our business, operating and
development plans. Should the financing we require to sustain our working
capital needs be unavailable or prohibitively expensive when we require it, the
consequences would be a material adverse effect on our business, operating
results, financial condition and prospects.
EVEN WITH THE PROCEEDS FROM THE DEBENTURES ISSUED TO CORNELL CAPITAL
AND THE POTENTIAL SALE OF COMMON STOCK TO FUSION CAPITAL, WE WILL REQUIRE
ADDITIONAL FUNDING WHICH WILL BE SIGNIFICANT AND WE MAY HAVE DIFFICULTY RAISING
NEEDED CAPITAL IN THE FUTURE BECAUSE OF OUR LIMITED OPERATING HISTORY AND
BUSINESS RISKS ASSOCIATED WITH OUR COMPANY.
We currently do not generate any revenue from our proposed products and
revenue from grants and collaborative agreements may not be sufficient to meet
our future capital requirements. We do not know when, or if, this will change.
13
We have expended substantial funds in research, development and contract
manufacturing and will continue to expend substantial funds in contract
manufacturing, research, development and pre-clinical testing and clinical
trials of our drug delivery technology and compounds. We will require
substantial additional funds to conduct research and development, establish and
conduct clinical and pre-clinical trials, obtain required regulatory approvals
and clearances, establish clinical and, if our products are subsequently
considered candidates for FDA approval, commercial scale manufacturing
arrangements, and provide for the marketing and distribution of our products.
Additional funds may not be available on acceptable terms, if at all. If
adequate funds are unavailable or are not available on terms deemed acceptable
by management, we may have to delay, reduce the scope of or eliminate one or
more of our research or development programs or product or marketing efforts
which may materially harm our business, financial condition, and results of
operations. Our long term capital requirements are expected to depend on many
factors, including:
o the number of potential products and technologies in
development;
o continued progress and cost of our research and development
programs;
o progress with pre-clinical studies and clinical trials;
o the time and costs involved in obtaining regulatory clearance;
o costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims;
o costs of developing sales, marketing and distribution channels
and our ability to sell our drugs;
o costs involved in establishing manufacturing capabilities for
clinical trial and commercial quantities of our drugs;
o competing technological and market developments;
o market acceptance of our products;
o costs for recruiting and retaining management, employees, and
consultants; and
o costs for training physicians.
We may consume available resources more rapidly than currently
anticipated, resulting in the need for additional funding. We may seek to raise
any necessary additional funds through the exercise of warrants, equity, or debt
financings, collaborative arrangements with corporate partners, or other
sources. Any such equity financing may be dilutive to existing stockholders and
debt financing, if available, may involve restrictive covenants that would limit
how we conduct our business or finance our operations, or otherwise have a
material effect on our current or future business prospects. In addition, in the
event that additional funds are obtained through arrangements with collaborative
partners or other sources, we may have to relinquish economic and/or proprietary
rights to some of our technologies or products under development that we would
otherwise seek to develop or commercialize by ourselves. If adequate funds are
not available, we may be required to significantly reduce, refocus, or delay our
development efforts with regard to our drug delivery technology, compounds, and
drugs.
OUR FINANCIAL CONDITION AND THE RESTRICTIVE COVENANTS CONTAINED IN OUR
OUTSTANDING DEBT MAY LIMIT OUR ABILITY TO BORROW ADDITIONAL FUNDS OR TO RAISE
ADDITIONAL EQUITY AS MAY BE REQUIRED TO FUND OUR FUTURE OPERATIONS.
The terms of our outstanding Debentures with Cornel Capital may limit
our ability, without Cornell Capital's consent, to, among other things:
o enter into certain transactions;
o create additional liens on our assets;
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o issue preferred stock or Common Stock at certain discounts
below market prices; or
o merge or consolidate with other entities.
and could adversely affect our liquidity and our ability to attract additional
funding as required.
WE MAY NOT BE ABLE TO PAY OUR DEBT AND OTHER OBLIGATIONS AND OUR ASSETS
MAY BE SEIZED AS A RESULT.
We do not have sufficient funds to repay our outstanding debt at
maturity and we may not generate the cash flow required to pay our liabilities
as they become due. As of April 11, 2006, our outstanding debt includes
$2,000,000 of principal plus accrued interest of our Debentures with Cornell
Capital due in December 2006 and an aggregate of $698,736 of principal plus
accrued interest of convertible notes, of which $448,736 plus accrued interest
is due on July 3, 2006 and $250,000 plus accrued interest is due on December 9,
2006. Cornell Capital may require us to repay all of the principal and interest
outstanding under the Debentures under certain circumstances. We may not have
sufficient cash reserves to repay the Debentures at such time, which would cause
an event of default under the Debentures and may force us to declare bankruptcy.
If we raise additional funds to repay the convertible notes and Debentures by
selling equity securities, the relative equity ownership of our existing
investors could be diluted and new investors could obtain terms more favorable
than previous investors.
OUR OBLIGATIONS UNDER THE DEBENTURES ARE SECURED BY ALL OF OUR ASSETS.
Our obligations under the Debentures are secured by all of our assets.
As a result, if we default under the terms of the Debentures or related
agreements, including our failure to issue shares of Common Stock upon
conversion by Cornell Capital, our failure to timely file a registration
statement or have such registration statement declared effective, our breach of
any covenant, representation or warranty in the Securities Purchase Agreement or
Debentures or the commencement of a bankruptcy, insolvency, reorganization or
liquidation proceeding against us could require the early repayment of the
Debentures, if the default is not cured within the specified grace period. In
addition, Cornell Capital could foreclose its security interest and liquidate
some or all of our assets and we could cease to operate. Any such issuance of
shares could cause a significant drop in the price of our stock and significant
dilution to our stockholders.
THE FAILURE TO COMPLETE DEVELOPMENT OF OUR TECHNOLOGY, OBTAIN
GOVERNMENT APPROVALS, INCLUDING REQUIRED FDA APPROVALS, OR TO COMPLY WITH
ONGOING GOVERNMENTAL REGULATIONS COULD DELAY OR LIMIT INTRODUCTION OF PROPOSED
PRODUCTS AND RESULT IN FAILURE TO ACHIEVE REVENUES OR MAINTAIN OUR ONGOING
BUSINESS.
Our research and development activities and the manufacture and
marketing of our intended products are subject to extensive regulation for
safety, efficacy, and quality by numerous government authorities in the United
States and abroad. Before receiving FDA clearance to market our proposed
products, we will have to demonstrate that our products are safe and effective
on the patient population and for the diseases that are to be treated. Clinical
trials, manufacturing and marketing of drugs are subject to the rigorous testing
and approval process of the FDA and equivalent foreign regulatory authorities.
The Federal Food, Drug and Cosmetic Act ("FDC Act") and other federal, state,
and foreign statutes and regulations govern and influence the testing,
manufacture, labeling, advertising, distribution, and promotion of drugs and
medical devices. As a result, clinical trials and regulatory approval can take a
number of years or longer to accomplish and require the expenditure of
substantial financial, managerial, and other resources.
In order to be commercially viable, we must successfully research,
develop, obtain regulatory approval for, manufacture, introduce, market, and
distribute our technologies. For each drug utilized with our drug delivery
technology, and for Myodur and Neurodur, we must successfully meet a number of
critical developmental milestones, including:
o demonstrate benefit from delivery of each specific drug
through our drug delivery technology;
o demonstrate through pre-clinical and clinical trials that our
drug delivery technology and patient specific therapy is safe
and effective;
15
o establish a viable Good Manufacturing Process capable of
potential scale-up.
The time frame necessary to achieve these developmental milestones may
be long and uncertain, and we may not successfully complete these milestones for
any of our intended products in development.
In addition to the risks previously discussed, our technology is
subject to additional developmental risks which include the following:
o the uncertainties arising from the rapidly growing scientific
aspects of drug delivery, therapies, and potential treatments;
o uncertainties arising as a result of the broad array of
potential treatments related to nerve and muscle injury and
disease; and
o anticipated expense and time believed to be associated with
the development and regulatory approval of treatments for
nerve and muscle injury and disease.
In order to conduct clinical trials that are necessary to obtain
approval by the FDA to market a product it is necessary to receive clearance
from the FDA to conduct such clinical trials. The FDA can halt clinical trials
at any time for safety reasons or because our clinical investigators do not
follow the FDA's requirements for conducting clinical trials. If we are unable
to receive clearance to conduct clinical trials or the trials are halted by the
FDA, we would not be able to achieve any revenue from such product, as it is
illegal to sell any drug or medical device in the United States for human
consumption without FDA approval, and many foreign countries are influenced in
granting their own required approvals by the FDA.
DATA OBTAINED FROM CLINICAL TRIALS IS SUSCEPTIBLE TO VARYING
INTERPRETATIONS, WHICH COULD DELAY, LIMIT OR PREVENT REGULATORY CLEARANCES.
Data already obtained, or in the future obtained, from pre-clinical
studies and clinical trials (as of the date of this Report no clinical trials of
our technology have been undertaken) do not necessarily predict the results that
will be obtained from later pre-clinical studies and clinical trials. Moreover,
pre-clinical and clinical data is susceptible to varying interpretations, which
could delay, limit or prevent regulatory approval. A number of companies in the
pharmaceutical industry have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials. The failure to
adequately demonstrate the safety and effectiveness of an intended product under
development could delay or prevent regulatory clearance of a potential drug,
resulting in delays to commercialization, and could materially harm our
business. Our clinical trials may not demonstrate sufficient levels of safety
and efficacy necessary to obtain the requisite regulatory approvals for our
drugs, and thus our proposed drugs may not be approved for marketing. Even after
approval, further studies could result in withdrawal of FDA and other regulatory
approvals and voluntary or involuntary withdrawal of products from the market.
We may encounter delays or rejections based upon additional government
regulation from future legislation or administrative action or changes in FDA
policy during the period of development, clinical trials and FDA regulatory
review. We may encounter similar delays in foreign countries. Sales of our
products outside the U.S. would be subject to foreign regulatory approvals that
vary from country to country. The time required to obtain approvals from foreign
countries may be shorter or longer than that required for FDA approval, and
requirements for foreign licensing may differ from FDA requirements. We may be
unable to obtain requisite approvals from the FDA and foreign regulatory
authorities, and even if obtained, such approvals may not be on a timely basis,
or they may not cover the uses that we request.
In the future, we may select drugs for "molecular binding" using our
drug delivery technology which may contain controlled substances which are
subject to state, federal and foreign laws and regulations regarding their
manufacture, use, sale, importation and distribution. For such drugs containing
controlled substances, we and any suppliers, manufacturers, contractors,
customers and distributors may be required to obtain and maintain applicable
registrations from state, federal and foreign law enforcement and regulatory
agencies and comply with state, federal and foreign laws and regulations
regarding the manufacture, use, sale, importation and distribution of controlled
16
substances. These regulations are extensive and include regulations governing
manufacturing, labeling, packaging, testing, dispensing, prescription, and
procurement quotas, record keeping, reporting, handling, shipment, and disposal.
Failure to obtain and maintain required registrations or comply with any
applicable regulations could delay or preclude us from developing and
commercializing our drugs containing controlled substances and subject us to
enforcement action. In addition, because of their restrictive nature, these
regulations could limit our commercialization of drugs containing controlled
substances.
OUR DRUGS OR TECHNOLOGY MAY NOT GAIN FDA APPROVAL IN CLINICAL TRIALS OR
BE EFFECTIVE AS A THERAPEUTIC AGENT WHICH COULD AFFECT OUR FUTURE PROFITABILITY
AND PROSPECTS.
In order to obtain regulatory approvals, we must demonstrate that the
procedure is safe and effective for use in humans and functions as a therapeutic
against the effects of injury or disease. To date, we have not conducted any
human pilot study pursuant to Institutional Review Board oversight in
anticipation of our initial FDA submission for patient-specific or other
therapy. Further, we have conducted only sporadic and limited animal studies to
observe the effects of our drugs and have not subjected our drugs or
technologies to all of the rigorous testing standards that would be acceptable
for publication in scientific peer review journals.
We may not be able to demonstrate that any potential drug or
technology, including Myodur or Neurodur, although appearing promising in
pre-clinical and animal observations, is safe or effective in advanced clinical
trials that involve human patients. We are also not able to assure that the
results of the tests already conducted and which we intend to repeat will be
consistent with our prior observations or support our applications for
regulatory approval. As a result, our drug and technology research program may
be curtailed, redirected or eliminated at any time.
The diseases and illnesses to which our drugs and technologies are
directed are very complex and may be prone to genetic mutations. These mutations
may prove resistant to currently approved therapeutics or our drugs or
technologies. Even if we gain regulatory approval there may develop resistance
to our treatment. This could have a material adverse effect on our business,
financial condition, and results of operations.
WE HAVE ACCUMULATED DEFICITS IN THE RESEARCH AND DEVELOPMENT OF OUR
TECHNOLOGY AND THERE IS NO GUARANTEE THAT WE WILL EVER GENERATE REVENUE OR
BECOME PROFITABLE EVEN IF ONE OR MORE OF OUR DRUGS ARE APPROVED FOR
COMMERCIALIZATION.
Since our inception in 1986, we have incurred operating losses. As of
December 31, 2005, our accumulated deficit amounted to $37,916,095. In addition,
we expect to continue incurring operating losses for the foreseeable future as
we continue to develop our products which will cause us to incur substantial
research and development and clinical trials costs. Our ability to generate
revenue and achieve profitability depends upon our ability, alone or with
others, to complete the development of our proposed products, obtain the
required regulatory approvals and manufacture, market, and sell our proposed
products. Development, including the cost of contract manufacturing of our
proposed products for pre-clinical testing and human clinical trials is
extremely costly and requires significant investment. In the absence of
additional financing we may not be able to continue our development activities.
In addition, we may choose to license the rights to particular drugs or other
technology. License fees may increase our costs.
We have not generated any revenue from the commercial sale of our
proposed products or any drugs and do not expect to receive such revenue in the
near future. Our primary activity to date has been research and development of
our technology. All revenues to date are from grants, both public and private,
and collaborative agreements. We cannot be certain as to when or whether to
anticipate commercializing and marketing our proposed products in development,
and do not expect to generate sufficient revenues from proposed product sales to
cover our expenses or achieve profitability in the foreseeable future.
WE HAVE RELIED SOLELY ON THIRD-PARTY RESEARCH INSTITUTIONS FOR ALL OF
OUR RESEARCH AND DEVELOPMENT, WHICH COULD BE MATERIALLY DELAYED SHOULD WE LOSE
ACCESS TO THOSE FACILITIES.
We currently have no research and development facilities of our own. We
are entirely dependent on third parties to use their facilities to conduct
research and development. To date, we have primarily relied on third-party
17
research institutions for this purpose including the Health Science Center at
Downstate Medical Center and Stony Brook University. Our inability to have
continued access to these facilities to conduct research and development may
delay or impair our ability to gain FDA approval and commercialization of our
drug delivery technology and products.
We currently maintain a good working relationship with our third-party
research institutions. Although we are evaluating various facilities in which to
establish our laboratories, should we be required to relocate on short notice,
we do not currently have an alternate facility where we could relocate our
research activities. The cost and time to establish or locate an alternative
research and development facility to develop our technology will be substantial
and may delay gaining FDA approval and commercializing our products.
WE ARE DEPENDENT ON OUR COLLABORATIVE AGREEMENTS FOR THE DEVELOPMENT OF
OUR TECHNOLOGIES AND BUSINESS DEVELOPMENT WHICH EXPOSES US TO THE RISK OF
RELIANCE ON THE VIABILITY OF THIRD PARTIES.
In conducting our research and development activities, we rely and
expect in the future to rely upon numerous collaborative agreements with
universities, governmental agencies, charitable foundations, manufacturers,
contract research organizations, and corporate partners. The loss of or failure
to perform under any of these arrangements, by any of these entities, may
substantially disrupt or delay our research and development activities including
our anticipated clinical trials.
WE ARE EXPOSED TO PRODUCT LIABILITY, CLINICAL AND PRE-CLINICAL
LIABILITY RISKS WHICH COULD PLACE A SUBSTANTIAL FINANCIAL BURDEN UPON US SHOULD
WE BE SUED, BECAUSE WE DO NOT CURRENTLY HAVE PRODUCT LIABILITY INSURANCE ABOVE
AND BEYOND OUR GENERAL INSURANCE COVERAGE.
Our business exposes us to potential product liability and other
liability risks that are inherent in the testing, manufacturing, marketing and
sale of pharmaceutical products. We cannot assure that such potential claims
will not be asserted against us. In addition, the use in our clinical trials of
pharmaceutical products that we may develop and the subsequent sale of these
products by us or our potential collaborators may cause us to bear a portion of
or all product liability risks. A successful liability claim or series of claims
brought against us could have a material adverse effect on our business,
financial condition, and results of operations.
All of our pre-clinical trials have been and all of our proposed
clinical and pre-clinical trials are anticipated to be conducted by
collaborators and third party contractors. We do not currently have any product
liability insurance or other liability insurance relating to clinical trials or
any products or compounds. We intend to seek insurance against such risks before
we initiate clinical trials or before our product sales are commenced. We cannot
assure that we will be able to obtain or maintain adequate product liability
insurance on acceptable terms, if at all, or that such insurance will provide
adequate coverage against our potential liabilities. An inability to obtain
sufficient insurance coverage at an acceptable cost or otherwise to protect
against potential product liability claims could prevent or inhibit the
commercialization of our drug delivery technology. A product liability claim
could also significantly harm our reputation and delay market acceptance of our
intended products. Furthermore, our current and potential partners with whom we
have collaborative agreements or our future licensees may not be willing to
indemnify us against these types of liabilities and may not themselves be
sufficiently insured or have a net worth sufficient to satisfy any product
liability claims. Product liability claims or other claims related to our
intended products, regardless of their outcome, could require us to spend
significant time and money in litigation or to pay significant settlement
amounts or judgments. Any successful product liability or other claim may
prevent us from obtaining adequate liability insurance in the future on
commercially desirable or reasonable terms. Claims or losses in excess of any
product liability insurance coverage that may be obtained by us could have a
material adverse effect on our business, financial condition, and results of
operations.
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS MORE
DIFFICULT, AND THEREFORE, INVESTORS HAVE LIMITED INFORMATION UPON WHICH TO RELY.
An investor can only evaluate our business based on a limited operating
history. While we were organized in 1986, our current level of activity and
operations only recently began following our acquisition by Xechem and
subsequent closing on our financing during the period December 2004 through
February 2005. Our operations will continue to change and our costs will
increase dramatically as we evolve from primarily a technology holding company
18
to a capitalized company with employees and internal operations. Since
inception, we have engaged primarily in research and development, relied to a
great extent on third-party efforts, sought avenues for licensing technology,
sought grants, raised capital, and recruited scientific and management personnel
external to us. We have not generated any meaningful revenue to date, and have
no royalty revenue or products ready for use and in the marketplace. This
limited history may not be adequate to enable an investor to fully assess our
ability to develop our technologies and proposed products, obtain FDA approval,
and achieve market acceptance of our proposed products, and respond to
competition, or conduct such affairs as are presently contemplated.
THE SALE OF THE COMMON STOCK TO FUSION CAPITAL MAY CAUSE DILUTION AND
THE SALE OF THE SHARES OF COMMON STOCK ACQUIRED BY FUSION CAPITAL COULD CAUSE
THE PRICE OF THE COMMON STOCK TO DECLINE.
The purchase price for the Common Stock to be sold to Fusion Capital
pursuant to the Stock Purchase Agreement entered into in October 2005 will
fluctuate based on the price of the Common Stock. Fusion Capital may sell none,
some or all of the shares of Common Stock purchased from us at any time. We
expect that the shares purchased by Fusion Capital will be sold over a period of
up to 40 months from the date of the Stock Purchase Agreement with Fusion
Capital. Depending upon market liquidity at the time, a sale of shares at any
given time could cause the trading price of the Common Stock to decline. The
sale of a substantial number of shares of the Common Stock, or anticipation of
such sales, could make it more difficult for us to sell equity or equity-related
securities in the future at a time and at a price that we might otherwise wish
to effect sales.
FUTURE SALES BY CORNELL CAPITAL MAY ADVERSELY AFFECT OUR STOCK PRICE
AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.
The sale of shares issued upon conversion of the Debentures with
Cornell Capital will have a dilutive impact on our stockholders. If the
aggregate principal amount of the $2,000,000 Debentures and accrued interest are
converted at maturity into shares of our Common Stock at the Fixed Price of
$0.9765, up to 2,546,965 shares of Common Stock will be issued to Cornell
Capital. If the Debentures are converted, in whole or in part, at the Floating
Price, the number of shares issuable to Cornell Capital upon conversion may be
substantially greater. Cornell Capital may sell such shares in the market
immediately, which could cause our stock price to decline. In addition, the
interest on the Debentures may be payable, at the option of Cornell Capital, in
shares of our Common Stock in lieu of cash, which could have a further dilutive
impact on our stockholders and could cause our stock price to decline.
ACCEPTANCE OF OUR PRODUCTS IN THE MARKETPLACE IS UNCERTAIN AND FAILURE
TO ACHIEVE MARKET ACCEPTANCE WILL PREVENT OR DELAY OUR ABILITY TO GENERATE
REVENUES.
Our future financial performance will depend, in part, upon the
introduction and customer acceptance of our proposed products. Even if approved
for marketing by the necessary regulatory authorities, our products may not
achieve market acceptance. The degree of market acceptance will depend upon a
number of factors, including:
o the receipt of regulatory clearance of marketing claims for
the uses that we are developing;
o the establishment and demonstration of the advantages, safety
and efficacy of our technologies;
o pricing and reimbursement policies of government and third
party payors such as insurance companies, health maintenance
organizations and other health plan administrators;
o our ability to attract corporate partners, including
pharmaceutical companies, to assist in commercializing our
intended products; and
o our ability to market our products.
Physicians, patients, payors or the medical community in general may be
unwilling to accept, utilize, or recommend any of our products. If we are unable
to obtain regulatory approval, commercialize, and market our proposed products
when planned, we may not achieve any market acceptance or generate revenue.
19
WE MAY FACE LITIGATION FROM THIRD PARTIES THAT CLAIM OUR PRODUCTS
INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, PARTICULARLY BECAUSE THERE IS
SUBSTANTIAL UNCERTAINTY ABOUT THE VALIDITY AND BREADTH OF MEDICAL PATENTS.
We may be exposed to future litigation by third parties based on claims
that our technologies, products, or activities infringe the intellectual
property rights of others or that we have the trade secrets of others. This risk
is exacerbated by the fact that the validity and breadth of claims covered in
medical technology patents and the breadth and scope of trade secret protection
involve complex legal and factual questions for which important legal principles
are unresolved. Any litigation or claims against us, whether or not valid, could
result in substantial costs, could place a significant strain on our financial
and managerial resources, and could harm our reputation. Most of our license
agreements would likely require that we pay the costs associated with defending
this type of litigation. In addition, intellectual property litigation or claims
could force us to do one or more of the following:
o cease selling, incorporating or using any of our technologies
and/or products that incorporate the challenged intellectual
property, which would adversely affect our future revenue;
o obtain a license from the holder of the infringed intellectual
property right, which license may be costly or may not be
available on reasonable terms, if at all; or
o redesign our products, which would be costly and time
consuming.
We have not engaged in discussions, received any communications, nor do
we have any reason to believe that any third party is challenging or has the
proper legal authority to challenge our intellectual property rights or those of
the actual patent holders, other than a letter received during August 2004 from
counsel to a company named Ceptyr Corporation alleging infringement of
trademarks issued to Ceptyr with respect to our name CepTor. In light of our
formation and use of the name CepTor in commerce many years prior to the
formation of Ceptyr and issuance of their trademark, we believe the demand to
cease and desist from future infringement to be substantially without merit. No
further communication has been received since mid-2004.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OR ENFORCE OUR RIGHTS TO
INTELLECTUAL PROPERTY OR SECURE RIGHTS TO THIRD PARTY PATENTS, WE MAY LOSE
VALUABLE RIGHTS, EXPERIENCE REDUCED MARKET SHARE, ASSUMING ANY, OR INCUR COSTLY
LITIGATION TO PROTECT SUCH RIGHTS.
Our ability to obtain licenses to third-party patents, maintain trade
secret protection, and operate without infringing the proprietary rights of
others will be important to our commercialization of any products under
development. Therefore, any disruption in access to the technology could
substantially delay the development of our technology.
The patent positions of biotechnology and pharmaceutical companies,
including ours, which also involve licensing agreements, are frequently
uncertain and involve complex legal and factual questions. In addition, the
coverage claimed in a patent application can be significantly reduced before the
patent is issued. Consequently, our patent applications and any issued and
licensed patents may not provide protection against competitive technologies or
may be held invalid if challenged or circumvented. Our competitors may also
independently develop drug delivery technologies or products similar to ours or
design around or otherwise circumvent patents issued or licensed to us. In
addition, the laws of some foreign countries may not protect our proprietary
rights to the same extent as U.S. law.
We also rely upon trade secrets, technical know how, and continuing
technological innovation to develop and maintain our competitive position. We
generally require our employees, consultants, advisors and collaborators to
execute appropriate confidentiality and assignment of inventions agreements.
These agreements typically provide that all materials and confidential
information developed or made known to the individual during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances, and that all inventions
arising out of the individual's relationship with us shall be our exclusive
property. These agreements may be breached and we may not have an appropriate
remedy available for breach of the agreements. Furthermore, our competitors may
independently develop substantially equivalent proprietary information and
techniques, reverse engineer our information and techniques, or otherwise gain
20
access to our proprietary technology. We may be unable to meaningfully protect
our rights in trade secrets, technical know how, and other non patented
technology.
Although our trade secrets and technical know how are important, our
continued access to the patents is a significant factor in the development and
commercialization of our drug delivery technology. Aside from the general body
of scientific knowledge from other drug delivery processes and technology, we
believe these patents, based upon our current scientific data, are the only
intellectual property necessary to develop our short-term plans for our current
drug delivery system using our proposed Myodur, Neurodur and other drugs. We do
not believe that we are or will be violating any other patents in developing our
technology although we anticipate seeking a license from Sigma-Tau in order to
employ a manufacturing method useful for large scale manufacturing of Myodur.
We may have to resort to litigation to protect our rights for certain
intellectual property, or to determine their scope, validity, or enforceability.
Enforcing or defending our rights is expensive, could cause diversion of our
resources, and may not prove successful. Any failure to enforce or protect our
rights could cause us to lose the ability to exclude others from using our
technology to develop or sell competing products.
We currently depend and will continue to depend heavily on third
parties for support in research and development and clinical and pre-clinical
testing. Under certain circumstances, others may acquire certain rights in newly
developed intellectual property developed in conjunction with us.
Research and development and clinical trials involve a complex process,
and these third parties' facilities may not be sufficient. Inadequate facilities
could delay clinical trials of our drugs and result in delays in regulatory
approval and commercialization of our drugs, either of which would materially
harm our business. We may, if adequate funding is obtained, decide to establish
an independent facility to replace or supplement those facilities. To date, we
have not identified the location, negotiated leases or equipment purchases, and,
accordingly, we are subject to various uncertainties and risks that may be
associated with the potential establishment of a new facility.
We may rely on third party contract research organizations, service
providers, and suppliers to support development and clinical testing of our
products. Failure of any of these contractors to provide the required services
in a timely manner or on reasonable commercial terms could materially delay the
development and approval of our products, increase our expenses, and materially
harm our business, financial condition, and results of operations.
KEY COMPONENTS OF OUR TECHNOLOGIES MAY BE PROVIDED BY SOLE OR LIMITED
NUMBERS OF SUPPLIERS, AND SUPPLY SHORTAGES OR LOSS OF THESE SUPPLIERS COULD
RESULT IN INTERRUPTIONS IN SUPPLY OR INCREASED COSTS.
Certain components used in our research and development activities such
as leupeptin, carnitine and taurine compounds, are currently purchased or
manufactured for us from a single or a limited number of outside sources. The
reliance on a sole or limited number of suppliers could result in:
o potential delays associated with research and development and
clinical and pre-clinical trials due to an inability to timely
obtain a single or limited source component;
o potential inability to timely obtain an adequate supply of
required components; and
o potential of reduced control over pricing, quality, and timely
delivery.
We do not have long-term agreements with any of our suppliers, and
therefore the supply of a particular component could be terminated without
penalty to the supplier. Any interruption in the supply of components could
cause us to seek alternative sources of supply or manufacture these components
internally. If the supply of any components is interrupted, components from
alternative suppliers may not be available in sufficient volumes within required
timeframes, if at all, to meet our needs. This could delay our ability to
complete clinical trials, obtain approval for commercialization or commence
marketing, or cause us to lose sales, incur additional costs, delay new product
introductions, or harm our reputation. Further, components from a new supplier
may not be identical to those provided by the original supplier. Such
differences if they exist could affect product formulations or the safety and
effect of our products that are being developed and delay regulatory approvals.
21
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND ONCE OUR PRODUCTS ARE
APPROVED, IF AT ALL, WE MAY NOT BE ABLE TO MANUFACTURE SUFFICIENT QUANTITIES AT
AN ACCEPTABLE COST.
Our products remain in the research and development and pre-clinical
trial phase of commercialization. Once our products are approved for commercial
sale, if at all, we will need to establish the capability to commercially
manufacture our products in accordance with FDA and other regulatory
requirements. We have limited experience in establishing, supervising, and
conducting commercial manufacturing. If we fail to adequately establish,
supervise, and conduct all aspects of the manufacturing processes, we may not be
able to commercialize our products. We do not presently own manufacturing
facilities necessary to provide clinical or commercial quantities of our
intended products.
We presently plan to rely on third party contractors to manufacture
part or all of our products. This may expose us to the risk of not being able to
directly oversee the production and quality of the manufacturing process.
Furthermore, these contractors, whether foreign or domestic, may experience
regulatory compliance difficulty, mechanic shut downs, employee strikes, or any
other unforeseeable acts that may delay production.
DUE TO OUR LIMITED MARKETING, SALES, AND DISTRIBUTION EXPERIENCE, WE
MAY BE UNSUCCESSFUL IN OUR EFFORTS TO SELL OUR PRODUCTS, ENTER INTO
RELATIONSHIPS WITH THIRD PARTIES, OR DEVELOP A DIRECT SALES ORGANIZATION.
We have yet had to establish any marketing, sales, or distribution
capabilities for our proposed products. Until such time as our products are
further along in the regulatory process, we will not devote any meaningful time
or resources to this effort. At the appropriate time, we intend to enter into
agreements with third parties to sell our products or we may develop our own
sales and marketing force. We may be unable to establish or maintain third party
relationships on a commercially reasonable basis, if at all. In addition, these
third parties may have similar or more established relationships with our
competitors who may exist after our introduction of products, if any.
If we do not enter into relationships with third parties for the sales
and marketing of our products, we will need to develop our own sales and
marketing capabilities. We have limited experience in developing, training, or
managing a sales force. If we choose to establish a direct sales force, we may
incur substantial additional expenses in developing, training, and managing such
an organization. We may be unable to build a sales force on a cost effective
basis or at all. Any such direct marketing and sales efforts may prove to be
unsuccessful. In addition, we will compete with many other companies that
currently have extensive marketing and sales operations. Our marketing and sales
efforts may be unable to compete against these other companies. We may be unable
to establish a sufficient sales and marketing organization on a timely basis, if
at all, and may be unable to engage qualified distributors. Even if engaged,
these distributors may:
o fail to satisfy financial or contractual obligations to us;
o fail to adequately market our products;
o cease operations with little or no notice; or
o offer, design, manufacture, or promote competing products.
If we fail to develop sales, marketing, and distribution channels, we
would experience delays in product sales and incur increased costs, which would
harm our financial results.
IF WE ARE UNABLE TO CONVINCE PHYSICIANS AS TO THE BENEFITS OF OUR
INTENDED PRODUCTS, WE MAY INCUR DELAYS OR ADDITIONAL EXPENSE IN OUR ATTEMPT TO
ESTABLISH MARKET ACCEPTANCE.
Broad use of our drug delivery technology may require physicians to be
informed regarding our intended products and the intended benefits. The time and
cost of such an educational process may be substantial. Inability to
successfully carry out this physician education process may adversely affect
market acceptance of our products. We may be unable to timely educate physicians
regarding our intended products in sufficient numbers to achieve our marketing
plans or to achieve product acceptance. Any delay in physician education may
materially delay or reduce demand for our products. In addition, we may expend
22
significant funds towards physician education before any acceptance or demand
for our products is created, if at all.
THE MARKET FOR OUR PRODUCTS IS RAPIDLY CHANGING AND COMPETITIVE, AND
NEW MECHANISMS, TECHNOLOGIES, NEW THERAPEUTICS, NEW DRUGS, AND NEW TREATMENTS
WHICH MAY BE DEVELOPED BY OTHERS COULD IMPAIR OUR ABILITY TO MAINTAIN AND GROW
OUR BUSINESS AND REMAIN COMPETITIVE.
The pharmaceutical and biotechnology industries are subject to rapid
and substantial technological change. Developments by others may render our
technologies and intended products noncompetitive or obsolete, or we may be
unable to keep pace with technological developments or other market factors.
Technological competition from pharmaceutical and biotechnology companies,
universities, governmental entities and others diversifying into the field is
intense and is expected to increase. Many of these entities have significantly
greater research and development capabilities and budgets than we do, as well as
substantially more marketing, manufacturing, financial and managerial resources.
These entities represent significant competition for us. Acquisitions of, or
investments in, competing pharmaceutical or biotechnology companies by large
corporations could increase such competitors' financial, marketing,
manufacturing, and other resources.
We are a start-up development stage enterprise that prior to early 2005
has operated in all material respects only as a virtual company with no
day-to-day business management, operating as a vehicle to hold certain
technology for possible future exploration, and have been and will continue to
be engaged in the development of novel untested drug delivery and therapeutic
technologies. As a result, our resources are limited and we may experience
management, operational, or technical challenges inherent in such activities and
novel technologies. Other companies, which may become competitors, have
developed or are in the process of developing technologies that could now be, or
in the future become, the basis for competition. Some of these technologies may
have an entirely different approach or means of accomplishing similar
therapeutic effects compared to our technology. Our competitors may develop drug
delivery technologies and drugs that are safer, more effective, or less costly
than our intended products and, therefore, present a serious competitive threat
to us. The potential widespread acceptance of therapies that are alternatives to
ours may limit market acceptance of our products even if commercialized. Many of
our targeted diseases and conditions can also be treated by other medication or
drug delivery technologies. These treatments may be widely accepted in medical
communities and have a longer history of use. The established use of these
competitive drugs may limit the potential for our technologies and products to
receive widespread acceptance if commercialized.
WE MAY NOT BE SUCCESSFUL IN OBTAINING ORPHAN DRUG STATUS FOR CERTAIN OF
OUR PRODUCTS OR, IF THAT STATUS IS OBTAINED, FULLY ENJOYING THE BENEFITS OF
ORPHAN DRUG STATUS.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to
drugs intended to treat a rare disease or condition generally affecting fewer
than 200,000 people in the United States. We may not be successful in receiving
orphan drug status for certain of our products. Orphan drug designation must be
requested before submitting a NDA. After the FDA grants orphan drug designation,
the generic identity of the therapeutic agent and its potential orphan use are
publicized by the FDA. Under current law, orphan drug status is conferred upon
the first company to receive FDA approval to market the designated drug for the
designated indication. Orphan drug status also grants marketing exclusivity in
the United States for a period of seven years following approval of the NDA,
subject to limitations. Orphan drug designation does not provide any advantage
in, or shorten the duration of, the FDA regulatory approval process. Although
obtaining FDA approval to market a product with orphan drug status can be
advantageous, the scope of protection or the level of marketing exclusivity that
is currently afforded by orphan drug status and marketing approval may not
remain in effect in the future.
Our business strategy involves obtaining orphan drug designation for
certain of the products we have under development. We have been granted orphan
drug designation for our proposed product for muscular dystrophy. We do not know
whether any of our other products will receive an orphan drug designation.
Orphan drug designation does not prevent other manufacturers from attempting to
develop similar drugs for the designated indication or from obtaining the
approval of an NDA for their drug prior to the approval of our NDA application.
If another sponsor's NDA for a competing drug in the same indication is approved
first, that sponsor is entitled to exclusive marketing rights if that sponsor
has received orphan drug designation for its drug. In that case, the FDA would
refrain from approving an application by us to market our competing product for
23
seven years, subject to limitations. Competing products may receive orphan drug
designations and FDA marketing approval before the products under development by
us may receive orphan drug designation.
NDA approval for a drug with an orphan drug designation does not
prevent the FDA from approving the same drug for a different indication, or a
molecular variation of the same drug for the same indication. Because doctors
are not restricted by the FDA from prescribing an approved drug for uses not
approved by the FDA, it is also possible that another company's drug could be
prescribed for indications for which products developed by us have received
orphan drug designation and NDA approval. The prescribing of approved drugs for
alternative uses, commonly referred to as "off label" sales, could adversely
affect the marketing potential of products that have received an orphan drug
designation and NDA approval. In addition, NDA approval of a drug with an orphan
drug designation does not provide any marketing exclusivity in foreign markets.
The possible amendment of the Orphan Drug Act by the U.S. Congress has
been the subject of frequent discussion. Although no significant changes to the
Orphan Drug Act have been made for a number of years, members of Congress have
from time to time proposed legislation that would limit the application of the
Orphan Drug Act. The precise scope of protection that may be afforded by orphan
drug designation and marketing approval may be subject to change in the future.
IF USERS OF OUR PRODUCTS ARE UNABLE TO OBTAIN ADEQUATE REIMBURSEMENT
FROM THIRD PARTY PAYORS, OR IF NEW RESTRICTIVE LEGISLATION IS ADOPTED, MARKET
ACCEPTANCE OF OUR PRODUCTS MAY BE LIMITED AND WE MAY NOT ACHIEVE ANTICIPATED
REVENUES.
The continuing efforts of government and insurance companies, health
maintenance organizations, and other payors of healthcare costs to contain or
reduce costs of health care may affect our future revenues and profitability,
and the future revenues and profitability of our potential customers, suppliers
and collaborative partners, and the availability of capital. For example, in
certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. In the United States, given
recent federal and state government initiatives directed at lowering the total
cost of health care, the U.S. Congress and state legislatures will likely
continue to focus on health care reform, the cost of prescription
pharmaceuticals, and on the reform of the Medicare and Medicaid systems. While
we cannot predict whether any such legislative or regulatory proposals will be
adopted, the announcement or adoption of such proposals could materially harm
our business, financial condition, and results of operations.
Our ability to commercialize our products will depend in part on the
extent to which appropriate reimbursement levels for the cost of our products
and related treatment are obtained by governmental authorities, private health
insurers and other organizations, such as HMOs. Third party payors are
increasingly challenging the prices charged for medical drugs and services.
Also, the trend toward managed health care in the United States and the
concurrent growth of organizations such as HMOs, which could control or
significantly influence the purchase of health care services and drugs, as well
as legislative proposals to reform health care or reduce government insurance
programs, may all result in lower prices for or rejection of our drugs. The cost
containment measures that health care payors and providers are instituting and
the effect of any health care reform could materially harm our ability to
operate profitably.
OUR BUSINESS INVOLVES ENVIRONMENTAL RISKS RELATED TO HANDLING REGULATED
SUBSTANCES THAT COULD SEVERELY AFFECT OUR ABILITY TO CONDUCT RESEARCH AND
DEVELOPMENT OF OUR DRUG DELIVERY TECHNOLOGY.
In connection with our research and development activities and
manufacture of materials and drugs, we are subject to federal, states and local
laws, rules, regulations, and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling, and disposal
of certain materials, biological specimens, and wastes. Although we believe that
we have complied with the applicable laws, regulations, and policies in all
material respects and have not been required to correct any material
noncompliance, we may be required to incur significant costs to comply with
environmental and health and safety regulations in the future. Our research and
development may in the future involve the controlled use of hazardous materials,
including but not limited to certain hazardous chemicals and narcotics. Although
we believe that our safety procedures for storing, handling, and disposing of
such materials will comply with the standards prescribed by state and federal
regulations, we cannot completely eliminate the risk of accidental contamination
24
or injury from these materials. In the event of such an occurrence, we could be
held liable for any damages that result and any such liability could exceed our
resources.
WE DEPEND UPON KEY PERSONNEL WHO MAY TERMINATE THEIR EMPLOYMENT WITH US
AT ANY TIME, AND WE WILL NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL WHICH MAY
BE UNAVAILABLE DUE TO THE NECESSITY OF UNIQUE SKILLS AND RESOURCES.
Our success will depend to a significant degree upon the continued
services of key management, including William H. Pursley (age 52) and Norman W.
Barton (age 58). We maintain directors and officers insurance for our directors
and executive officers. Our success will depend on the ability to attract and
retain highly skilled personnel. Competition for qualified personnel is intense,
and the process of hiring and integrating such qualified personnel is often
lengthy. We may be unable to recruit such personnel on a timely basis, if at
all. Management and other employees may voluntarily terminate their employment
at any time. The loss of the services of key personnel, or the inability to
attract and retain additional qualified personnel, could result in delays to
development or approval, loss of sales and diversion of management resources.
Additionally, failure to attract and retain highly qualified management
personnel would damage our business prospects.
Risks Related to Our Common Stock
WE HAVE RAISED SUBSTANTIAL AMOUNTS OF CAPITAL IN PRIVATE PLACEMENTS
FROM TIME TO TIME.
The securities offered in such private placements were not registered
under the Securities Act or any state "blue sky" law in reliance upon exemptions
from such registration requirements. Such exemptions are highly technical in
nature and if we inadvertently failed to comply with the requirements of any of
such exemptive provisions, investors would have the right to rescind their
purchase of our securities or sue for damages. If one or more investors were to
successfully seek such rescission or prevail in any such suit, we could face
severe financial demands that could materially and adversely affect our
financial position. Financings that may be available to us under current market
conditions frequently involve sales at prices below the prices at which our
Common Stock currently is reported on the OTC Bulletin Board or exchange on
which our Common Stock may in the future, be listed, as well as the issuance of
warrants or convertible securities at a discount to market price.
INVESTORS IN OUR SECURITIES MAY SUFFER DILUTION.
The issuance of shares of our Common Stock, or shares of our Common
Stock underlying warrants, options or preferred stock or convertible debentures
or notes will dilute the equity interest of existing stockholders who do not
have anti-dilution rights and could have a significant adverse effect on the
market price of our Common Stock. The sale of our Common Stock acquired at a
discount could have a negative impact on the market price of our Common Stock
and could increase the volatility in the market price of our Common Stock. In
addition, we may seek additional financing which may result in the issuance of
additional shares of our Common Stock and/or rights to acquire additional shares
of our Common Stock. The issuance of our Common Stock in connection with such
financing may result in substantial dilution to the existing holders of our
Common Stock who do not have anti-dilution rights. Those additional issuances of
our Common Stock would result in a reduction of an existing holder's percentage
interest in our company.
OUR COMMON STOCK IS THINLY TRADED, SO YOU MAY BE UNABLE TO SELL AT OR
NEAR ASK PRICES OR AT ALL IF YOU NEED TO SELL YOUR SHARES TO RAISE MONEY OR
OTHERWISE DESIRE TO LIQUIDATE YOUR SHARES.
Our Common Stock historically been sporadically or "thinly-traded" on
the OTC Bulletin Board, meaning that the number of persons interested in
purchasing our Common Stock at or near ask prices at any given time may be
relatively small or non-existent. As of April 11, 2006, our average trading
volume per day for the past three months was approximately 84,275 shares a day
with a high of 546,500 shares traded and a low of no shares traded. This
situation is attributable to a number of factors, including the fact that we are
a small company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they may tend to be risk-averse and may be reluctant to follow an
25
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price. There can be no assurance that a
broader or more active public trading market for our Common Stock will develop
or be sustained, or that current trading levels will be sustained.
Fusion Capital's purchase and sale into the market of $25,000 of our
Common Stock each trading day could cause our Common Stock price to decline due
to the additional shares available in the market, particularly in light of the
relatively thin trading volume of our Common Stock. For example, using the
closing price per share on April 11, 2006, of $0.26, Fusion Capital would be
issued 96,154 shares each trading day if we elected to have them purchase the
daily purchase amount, whereas our average trading volume for the prior three
months was approximately 84,275 shares per day. The market price of our Common
Stock could decline given our minimal average trading volume compared to the
number of shares potentially issuable to Fusion Capital and the voting power and
value of your investment would be subject to continual dilution if Fusion
Capital purchases the shares and resells those shares into the market, although
there is no obligation for Fusion Capital to sell such shares. Any adverse
affect on the market price of our Common Stock would increase the number of
shares issuable to Fusion Capital each trading day which would increase the
dilution of your investment. Although we have the right to reduce or suspend
Fusion Capital purchases at any time, our financial condition at the time may
require that we not exercise our right to suspend such purchases even if there
is a decline in the market price.
Contractual 9.9% beneficial ownership limitations prohibit Fusion
Capital, together with its affiliates, from beneficially owning more than 9.9%
of our outstanding Common Stock. This 9.9% limitation does not prevent Fusion
Capital from purchasing shares of our Common Stock and then reselling those
shares in stages over time where Fusion Capital and its affiliates do not, at
any given time, beneficially own shares in excess of the 9.9% limitation.
Consequently, these limitations will not necessarily prevent substantial
dilution of the voting power and value of your investment.
HISTORICALLY, OUR COMMON STOCK HAS EXPERIENCED SIGNIFICANT PRICE
FLUCTUATIONS.
There can be no assurance that the market price for our Common Stock
will remain at its current level and a decrease in the market price could result
in substantial losses for investors. The market price of our Common Stock may be
significantly affected by one or more of the following factors:
o announcements or press releases relating to the
bio-pharmaceutical sector or to our own business or prospects;
o regulatory, legislative, or other developments affecting us or
the healthcare industry generally;
o conversion of our preferred stock and convertible debt into
Common Stock at conversion rates based on then current market
prices or discounts to market prices of our Common Stock, and
exercise of options and warrants at below current market
prices;
o sales by those financing our company through convertible
securities of the underlying Common Stock of which have been
registered with the SEC and may be sold into the public market
immediately upon conversion; and
o market conditions specific to bio-pharmaceutical companies,
the healthcare industry and general market conditions.
IN ADDITION, IN RECENT YEARS THE STOCK MARKET HAS EXPERIENCED
SIGNIFICANT PRICE AND VOLUME FLUCTUATIONS.
These fluctuations, which are often unrelated to the operating
performance of specific companies, have had a substantial effect on the market
price for many healthcare and life science related technology companies. Factors
such as those cited above, as well as other factors that may be unrelated to our
operating performance, may adversely affect the price of our Common Stock.
26
WE HAVE NOT HAD EARNINGS, BUT IF EARNINGS WERE AVAILABLE, IT IS OUR
GENERAL POLICY TO RETAIN ANY EARNINGS FOR USE IN OUR OPERATIONS.
We do not anticipate paying any cash dividends on our Common Stock or
Series A Preferred Stock in the foreseeable future despite the recent reduction
of the federal income tax rate on dividends. Any payment of cash dividends on
our Common Stock or Series A Preferred Stock in the future will be dependent
upon our financial condition, results of operations, current and anticipated
cash requirements, preferred rights of holders of preferred stock, restrictive
covenants in debt or other instruments or agreements, plans for expansion, as
well as other factors that our board of directors deems relevant. We anticipate
that any future financing agreements may restrict or prohibit the payment of
dividends without prior consent.
WE ARE SIGNIFICANTLY INFLUENCED BY OUR DIRECTORS AND EXECUTIVE OFFICERS.
As of April 11, 2006, our directors, officers and employees
beneficially own an aggregate of approximately 16.2% (or 13.9% giving effect to
the rights of currently outstanding Series A Preferred Stock holders) of our
outstanding Common Stock. These stockholders, acting together, would be able to
exert significant influence on substantially all matters requiring approval by
our stockholders, including the election of directors and approval of mergers
and other significant corporate transactions.
CERTAIN PROVISIONS OF DELAWARE CORPORATE LAWS AND OTHER PROVISIONS THAT
MAY HAVE CERTAIN ANTI-TAKEOVER EFFECTS.
The anti-takeover provisions of the Delaware General Corporation Law
("DGCL") may have the effect of discouraging a future takeover attempt which
individual or Series A Preferred stockholders may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
shares over then-current market prices. We are subject to such anti-takeover
provisions which could prohibit or delay a merger or other takeover or change of
control and may discourage attempts by other companies to acquire us.
Stockholders who might desire to participate in such a transaction may not have
an opportunity to do so.
Following the reincorporation merger, which became effective on January
31, 2005, our certificate of incorporation and by-laws were amended and provide
additional provisions applicable to a Delaware corporation, including Section
203 of the DGCL "Business Combinations With Interested Stockholders" which, in
general, restricts a corporation organized under the laws of Delaware from
certain business combinations for a period of three years with an "interested"
stockholder (generally, 15% ownership) without approval of the board of
directors. In addition, our by-laws contain provisions providing for advance
notice of certain stockholder actions, such as the nomination of directors and
stockholder proposals.
OUR BOARD OF DIRECTORS HAS ADOPTED A STOCKHOLDER RIGHTS PLAN.
Our stockholder rights plan may prevent a change in control or sale of
our company in a manner or on terms not previously approved by our board of
directors.
A stockholder rights plan, in general, is a right granted as a dividend
to existing stockholders as of a record date as a defensive mechanism to prevent
unwanted takeovers and are triggered upon the announcement that a party has
acquired a specified percentage or more of the outstanding voting stock of a
company without approval by the company's board of directors.
THERE MAY BE A LIMITED PUBLIC MARKET FOR OUR SECURITIES; WE MAY FAIL TO
QUALIFY FOR LISTING.
Although we intend to apply for listing of our Common Stock on either
the AMEX, NASDAQ or other registered stock exchange, there can be no assurance
if and when initial listing criteria could be met or if such application would
be granted, or that the trading of our Common Stock will be sustained. In the
event that our Common Stock fails to qualify for initial or continued listing on
a registered stock exchange or for initial or continued inclusion in the NASDAQ
system, trading, if any, in our Common Stock, would then continue to be
conducted on the NASD's "Electronic Bulletin Board" in the over-the-counter
27
market and in what are commonly referred to as "pink sheets." As a result, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of our Common Stock, and our Common Stock
would become substantially less attractive for margin loans, for investment by
financial institutions, as consideration in future capital raising transactions
or other purposes. We do not presently satisfy the listing criteria for the
NASDAQ or AMEX markets.
Trading of our Common Stock may be subject to penny stock rules under
the Exchange Act. Unless exempt, for any transaction involving a penny stock,
the regulations require broker-dealers making a market in our Common Stock to
provide risk disclosure to their customers including regarding the risks
associated with our Common Stock, the suitability for the customer of an
investment in our Common Stock, the duties of the broker-dealer to the customer,
information regarding prices for our Common Stock and any compensation the
broker-dealer would receive. The application of these rules may result in fewer
market makers in our Common Stock. Our Common Stock is presently subject to the
rules on penny stocks, and the liquidity of the Common Stock could be materially
adversely affected so long as we remain subject to such rule.
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC
DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
Keeping abreast of, and in compliance with, changing laws, regulations
and standards relating to corporate governance and public disclosure, including
the Sarbanes-Oxley Act of 2002, new SEC regulations and, in the event we are
approved for listing on either NASDAQ or a registered exchange, NASDAQ and stock
exchange rules, will require an increased amount of management attention and
external resources. We intend to continue to invest all reasonably necessary
resources to comply with evolving standards, which may result in increased
general and administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance activities.
EMPLOYEES
As of April 11, 2006, we had seven employees, all of whom are full time
employees. Three of our employees have doctorate and/or M.D. degrees.
ITEM 2. DESCRIPTION OF PROPERTY.
We lease our executive offices in Hunt Valley, Maryland consisting of
approximately 5,200 square feet for approximately $7,200 per month. This lease
expires on December 31, 2006 and we believe should provide sufficient space for
our clinical, regulatory and other administrative functions during the remaining
term of the lease.
ITEM 3. LEGAL PROCEEDINGS.
We are not presently a party to any pending litigation, nor, to the
knowledge of our management, is any litigation threatened against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of 2005 to a vote
of our stockholders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
PURCHASE OF EQUITY SECURITIES.
Market Information
Our Common Stock has been quoted on the OTC Bulletin Board since
December 13, 2004 under the symbol CEPO.OB. Prior to that date, there was no
28
active market for our Common Stock. Based upon information furnished by our
transfer agent, as of April 11, 2006, we had approximately 290 holders of record
of our Common Stock.
The following table sets forth the high and low sales prices for our
Common Stock for the periods indicated, as reported by the OTC Bulletin Board.
The prices state inter-dealer quotations, which do not include retail mark-ups,
mark-downs or commissions. Such prices do not necessarily represent actual
transactions.
Fiscal Year 2004 High Low
---------------- ---- ---
First Quarter $ N/A $ N/A
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter 4.80 3.00
FISCAL YEAR 2005
First Quarter $ 6.70 $ 3.85
Second Quarter 4.09 2.25
Third Quarter 3.00 0.88
Fourth Quarter 1.84 0.71
FISCAL YEAR 2006
First Quarter $ 0.84 $ 0.27
Second Quarter (through April 11, 2006) 0.31 0.26
Dividends
We have not declared or paid dividends on our Common Stock and do not
anticipate declaring or paying any cash dividends on our Common Stock in the
foreseeable future. We currently expect to retain future earnings, if any, for
the development of our business. Dividends may be paid on our Common Stock only
if and when declared by our board of directors and paid on an as-converted basis
to the holders of our Series A Preferred Stock.
EQUITY COMPENSATION PLAN INFORMATION
We maintain a Founders' Plan, a 2004 Incentive Stock Plan and a 2006
Incentive Stock Plan. As of April 11, 2006 we have issued (i) 3,031,943 shares
of Common Stock under the Founders' Plan, (ii) 1,465,483 shares of Common Stock
under the 2004 Incentive Stock Plan and (iii) have outstanding non-qualified
stock options to purchase a total of 1,203,799 shares of Common Stock, with
exercise prices at or in excess of the fair market value on the date of grant,
under the 2004 Incentive Stock Plan. (See "Executive Compensation - Stock Plans"
for a detailed description of our equity compensation plans.)
The following table provides information as of December 31, 2005 with
respect to the shares of Common Stock that may be issued under our existing
equity compensation plans:
Number of
Number of securities to Weighted-average securities
be issued upon exercise price of remaining
exercise of outstanding outstanding options, available for
Plan Category options, warrants and rights warrants and rights future issuance
------------- ----------------------------- ------------------------ ------------------
Equity compensation
plans approved by
security holders (1) 646,695 $ 3.08 1,131,435
Equity compensation
plans not approved by
security holders - - -
_______________
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(1) Represents the 2004 Incentive Stock Plan and the Founders' Plan.
RECENT SALES OF UNREGISTERED SECURITIES
During the period covered by this Report, we have issued the following
unregistered securities which have not been previously reported. None of these
transactions involved any underwriters, underwriting discounts or commissions,
except as specified below, or any public offering, and we believe that each
transaction was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof and/or Regulation D promulgated thereunder.
In April 2005, the Replacement Note was amended to extend the maturity
date to July 3, 2006 from December 8, 2005, to increase the interest rate to
12%, effective December 9, 2005, and to change the conversion price to $0.75
from $1.25 per share.
On June 21, 2005, we issued 25,000 shares of Common Stock to an
investment advisory firm for services rendered to us.
On August 16, 2005, we issued a three-year warrant to purchase 100,000
shares of Common Stock at $1.70 per share to a financial relations firm for
services rendered to us.
On August 16, 2005, we issued a three-year warrant to purchase 60,000
shares of Common Stock at $1.70 per shares to the Placement Agent for financial
relation services.
On September 16, 2005, we issued 25,000 shares of Common Stock as an
expense reimbursement and on October 7, 2005, we issued 377,359 shares of Common
Stock as initial commitment shares and the Fusion Warrant to purchase 377,359
shares of Common Stock at $0.01 per share to Fusion Capital under the Stock
Purchase Agreement.
On December 9, 2005, we further amended the Replacement Note to Harbor
Trust to change the conversion price to $0.375 from $0.75 per share.
On December 9, 2005, we issued a $250,000 convertible promissory note
at a conversion price of $1.00 per share to Harbor Trust which bears interest at
6% per year and matures on December 9, 2006.
On December 9, 2005, we issued (i) a $1,000,000 Debenture, (ii) a
warrant to purchase 1,000,000 shares of Common Stock at $1.023 per share and
(ii) 268,817 shares of Common Stock, to Cornell Capital.
On December 28, 2005, we issued a $1,000,000 Debenture to Cornell
Capital.
PURCHASES OF EQUITY SECURITIES
On June 17, 2005, we entered into a securities purchase agreement with
Xechem pursuant to which we repurchased 2,886,563 shares of Common Stock from
Xechem, which was the former owner of approximately 29% of our Common Stock, for
a purchase price of $2,309,250 and terminated the Spinoff Agreement. As
additional consideration, William Pursley, our Chairman and Chief Executive
Officer, surrendered options to purchase 43,000,000 shares of common stock of
Xechem. Xechem retained 500,000 shares of Common Stock, but agreed that it would
only sell such shares subject to the volume restrictions of Rule 144, regardless
of whether or not such volume limitations are applicable at the time of such
sale.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion of our plan of operations should be read in
conjunction with our financial statements and notes thereto appearing elsewhere
in this document.
30
OVERVIEW
We are a development-stage biopharmaceutical company focusing on the
development of proprietary, cell-targeted therapeutic products for the treatment
of neuromuscular and neurodegenerative diseases. Our goal is to increase the
quality and quantity of life of people suffering with these diseases. Primary
efforts are currently being focused on moving our lead product into phase I/II
clinical trials for Duchenne muscular dystrophy. Our broad platform technology
also includes the development of products for multiple sclerosis, amyotrophic
lateral sclerosis and chronic inflammatory demyelinating polyneuropathy.
CAPITAL RESOURCES AND CASH REQUIREMENTS
Subsequent to December 31, 2005, we exhausted our cash resources and
have not been able to remain current with respect to the payment terms of our
operating obligations. In addition, currently we do not have sufficient funds to
repay our outstanding debt at maturity. Currently, our outstanding debt includes
$2,000,000 plus accrued interest of our secured convertible debentures due as to
$1,000,000 on each of December 9, 2006 and December 28, 2006, and an aggregate
of $698,736 plus accrued interest of convertible notes, of which $448,736 plus
accrued interest is due on July 3, 2006 and $250,000 plus accrued interest is
due on December 9, 2006. We are continuing to seek additional capital,
collaborative partners, joint ventures and strategic alliance agreements both
within the United States and abroad in an effort to continue the development of
our proposed products; however, there are currently no firm commitments in place
for new capital. Absent additional funding from private or public equity or debt
financings, collaborative or other partnering arrangements, or other sources, we
will be unable to conduct our product development efforts as planned, and may
need to curtail our development plans, cease operations or sell our assets,
raising substantial doubt about our ability to continue as a going concern.
During the year ended December 31, 2005, we received net proceeds of
$6,482,883 from financing activities, including (i) $7,644,389 (gross proceeds
of $9,164,500 net of transaction expenses of $1,520,111) from the sale of
preferred stock and common stock purchase warrants ("Units") in a private
placement transaction, (ii) $2,250,000 in gross proceeds from the issuance of
convertible debt, offset by $355,373 in expenses, and (iii) $169,567 from the
issuance of common stock to various investors. From these net proceeds, we
repurchased 3,253,143 shares of its common stock, par value $0.0001 per share
from Xechem for $3,225,700. comprised of (x) $916,450 for 366,580 shares of its
common stock pursuant to the terms of a redemption obligation and (y) $2,309,250
and the forfeiture of an option held by our Chief Executive Officer 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 which reduced the number of
shares of common stock issued and outstanding at a per share price below the
then applicable market price.
In addition, subsequent to December 31, 2005, we initiated several
other programs to address our liquidity situation:
o During October 2005, we 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 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. Due to certain restrictive
provisions in the agreement, we do not currently anticipate
common stock sales to begin any time in the near future.
o During March 2006, we received net proceeds of $300,000 from
the exercise of common stock options.
31
Our planned activities for the foreseeable future will continue to
require us to engage 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.
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 raising capital and moving our lead
product into phase I/II clinical trials for Duchenne muscular dystrophy. If we
are successful in raising capital, we plan to use our available cash to continue
the development of our technologies, which currently is primarily focused on
Myodur, preparing for and executing our phase I/II human clinical trial, if
approved by the FDA. As resources permit, we may also fund other development of
Myodur or any of our other technologies. We presently expect to initiate human
clinical trials before the end of 2006.
We currently rely on third party contract research organizations,
service providers, and suppliers for support in research and development and
pre-clinical, toxicology and clinical testing. In addition, we do not have, and
do not intend to establish, our own manufacturing facilities to produce our
product candidates in the near or mid-term. We outsource the manufacturing of
our proposed product, Myodur, to contract manufacturers. During April 2005, we
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 year ended December 31, 2005, we
incurred approximately $3.6 million for the costs of the proposed product and
related materials of which approximately $1.4 million remains unpaid. As of
December 31, 2005, we have sufficient materials required for currently on-going
pre-clinical and toxicology studies and for initial human clinical trial. 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.
OFF BALANCE SHEET ARRANGEMENTS
Currently, we do not have any off balance sheet arrangements which
would require disclosure in our financial statements.
EMPLOYEES
As of April 11, 2006, we had seven employees, all of whom are full-time
employees, one of whom focuses on and coordinates our research program, five
that focus on and coordinate clinical and regulatory strategy and operations,
one in business and corporate development, and three in management, finance, and
administration. Three of our employees have doctorate and/or M.D. degrees. As
our current business strategy is primarily to coordinate research, clinical
development, and manufacturing activities by third parties, we do not anticipate
hiring a significant number of additional employees over the next twelve months.
PROPERTIES
We currently lease our executive offices in Hunt Valley, Maryland
consisting of approximately 5,200 square feet for approximately $7,200 per
month. This lease expires on December 31, 2006 and we believe it should provide
sufficient space for our clinical, regulatory and other administrative functions
during the remaining term of the lease. We are currently evaluating our needs
for office space beyond December 31, 2006 and laboratory space. If financing is
available, we may secure laboratory facilities for our own 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.
32
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains forward-looking statements
(as defined in Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"). To the extent that any
statements made in this Report contain information that is not historical, these
statements are essentially forward-looking. Forward-looking statements can be
identified by the use of words such as "expects," "plans" "will," "may,"
"anticipates," believes," "should," "intends," "estimates," and other words of
similar meaning. These statements are subject to risks and uncertainties that
cannot be predicted or quantified and consequently, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Such risks and uncertainties include, without limitation, our ability to raise
capital to finance the development of our products, the effectiveness,
profitability and the marketability of those products, our ability to protect
our proprietary information, general economic and business conditions, the
impact of technological developments and competition, including entry of
newly-developed alternative drug technologies, our expectations and estimates
concerning future financial performance and financing plans, adverse results of
any legal proceedings, the impact of current, pending or future legislation and
regulation on the healthcare industry, our ability to satisfy government and
commercial customers using our technology, our ability to develop manufacturing
capabilities or the inability to enter into acceptable relationships with one or
more contract manufacturers for our products and key components and the ability
of such contract manufacturers to manufacture products or components of an
acceptable quality on a cost-effective basis, the volatility of our operating
results and financial condition, our ability to attract or retain qualified
senior management personnel, including sales and marketing and scientific
personnel and other risks detailed from time to time in our filings with the
SEC. We do not undertake any obligation to publicly update any forward-looking
statements. As a result, you should not place undue reliance on these
forward-looking statements.
We also use market data and industry forecasts and projections
throughout this Report, 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 7. FINANCIAL STATEMENTS.
See the Company's Financial Statements beginning on page F-1.
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
CepTor Corporation:
We have audited the accompanying balance sheets of CepTor Corporation (a
development stage company) as of December 31, 2005 and 2004 and the related
statements of operations, changes in stockholders' equity (deficiency), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
The financial statements of the Company for the period from August 11, 1986
(date of inception) to December 31, 2003 were audited by another independent
registered public accounting firm whose report dated July 26, 2004 expressed an
unqualified opinion on those statements and included an explanatory paragraph
regarding the Company's ability to continue as a going concern. The financial
statements for the period August 11, 1986 (date of inception) to December 31,
2003 reflect a net loss of $911,586 of the total inception to date net loss of
$22,432,090. The other independent registered public accounting firm's report
has been furnished to us, and our opinion, insofar as it related to the amounts
included for such prior periods are based solely on the report of such other
independent registered public accounting firm.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based upon our report and the report of the other independent
registered public accounting firm, the financial statements referred to above
present fairly, in all material respects, the financial position of CepTor
Corporation (a development stage company) as of December 31, 2005 and 2004, and
the results of its operations and its cash flows for the years then ended and
for the period from August 11, 1986 (date of inception) to December 31, 2005 in
conformity with United States generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company has incurred significant losses since inception and has limited capital
resources, which raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Marcum & Kliegman LLP
New York, New York
April 10, 2006
F-1
CEPTOR CORPORATION
(A Development Stage Company)
BALANCE SHEETS
December 31,
-----------------------------------
2005 2004
--------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 434,277 $ 1,331,513
Prepaid expenses 175,785 107,729
--------------- -----------------
Total current assets 610,062 1,439,242
Property and equipment, net 55,431 60,615
Deferred financing costs 106,033 -
Security deposit 18,511 18,511
--------------- -----------------
TOTAL ASSETS $ 790,037 $ 1,518,368
=============== =================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $ 4,268,469 $ 58,266
Accrued expenses 900,651 315,237
Common stock subject to repurchase under put right - 1,637,325
Convertible notes (net of debt discount of $2,211,897) 774,748 -
--------------- -----------------
Total current liabilities 5,943,868 2,010,828
Convertible notes - 56,821
Warrant liability 3,130,957 -
Conversion option liability 779,718 -
--------------- -----------------
TOTAL LIABILITIES 9,854,543 2,067,649
--------------- -----------------
Commitments and contingencies
Stockholders' Deficiency:
Preferred stock, $0.0001 par value; authorized 20,000,000 shares, issued
and outstanding - 248.15 and 145.07 shares of Series A Convertible
Preferred Stock at December 31, 2005 and 2004, respectively; liquidation
preference
- $6,203,750 and $3,626,750, respectively 6,203,750 3,626,750
Common stock, $0.0001; authorized 100,000,000 shares, issued and outstanding
- 11,744,120 at December 31, 2005 and 10,539,161, net of 401,305 shares
subject to put right at December 31, 2004 1,174 1,054
Subscriptions receivable on common stock - (303)
Deferred compensation (322,830) (624,750)
Additional paid-in capital 22,969,495 12,294,648
Treasury stock, at cost, 145,070 shares at December 31, 2004 - (362,675)
Deficit accumulated during the development stage (37,916,095) (15,484,005)
--------------- -----------------
Total stockholders' deficiency (9,064,506) (549,281)
--------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 790,037 $ 1,518,368
=============== =================
F-2
(See notes to financial statements.)
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Cumulative
August 11, 1986
For the Years Ended (Date of
December 31, Inception) to
------------------------------------ December 31,
2005 2004 2005
---------------- ----------------- ------------------
REVENUES:
Other income $ - $ - $ 75,349
OPERATING EXPENSES:
Research and development 10,007,649 2,006,119 12,601,505
In-process research and development - 5,034,309 5,034,309
General and administrative 3,564,712 6,385,711 10,117,345
Gain on extinguishment of debt (311,281) - (311,281)
Change in fair value of derivative
financial instruments (949,981) - (949,981)
Interest expense 998,394 1,123,123 2,362,835
Interest income (41,903) (1,373) (52,318)
---------------- ----------------- ------------------
Total operating expenses 13,267,590 14,547,889 28,802,414
---------------- ----------------- ------------------
NET LOSS (13,267,590) (14,547,889) (28,727,065)
Preferred dividends (9,164,500) (936,116) (10,100,616)
---------------- ----------------- ------------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (22,432,090) $ (15,484,005) $ (38,827,681)
================ ================= ==================
Basic and diluted loss per common share $ (2.11) $ (3.25)
Weighted-average number of common shares outstanding 10,653,286 4,757,477
F-3
(See notes to financial statements.)
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock Common Stock Deferred
--------------------- ---------------------- Subscription Compen-
Shares Amount Shares Amount Receivable Sation
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, AUGUST 11, 1986 AND DECEMBER 31, 1986 - $ - - $ - $ - $ -
Issuance of common stock for cash, $0.0012 840,818 84
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 1987 - - 840,818 84 - -
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 1988 - - 840,818 84 - -
-------- ---------- --------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 1989 - - 840,818 84 - -
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 1990 - - 840,818 84 - -
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 1991 - - 840,818 84 - -
Net loss
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 1992 - - 840,818 84 - -
Net loss
Convertible notes 176,572 18
Issuance of common stock in exchange
for services rendered, $0.0142 176,572 18
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 1993 - - 1,193,962 120 - -
Net income
Distribution to stockholders
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 1994 - - 1,193,962 120 - -
Net loss
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 1995 - - 1,193,962 120 - -
Net loss
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 1996 - - 1,193,962 120 - -
Net loss
Issued pursuant to acquisition, $3.3501 59,700 6
Issuance of common stock for cash, $3.3501 29,850 3
Capital contribution by stockholder
Expense pursuant to grant of stock option
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 1997 - - 1,283,512 129 - -
Net loss
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 1998 - - 1,283,512 129 - -
Net loss
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 1999 - - 1,283,512 129 - -
Net loss
Issuance of common stock for cash, $3.1409 15,919 2
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 2000 - - 1,299,431 131 - -
Net loss
Issued pursuant to funding
agreement, $0.0838 1,083,729 108
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 2001 - $ - 2,383,160 $ 239 $ - $ -
F-4
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Deficit
Accumulated
Additional During the Total
Paid-in Treasury Stock Development Stockholders
Capital Shares Amount Stage Deficiency
----------- --------- ---------- -------------- --------------
BALANCE, AUGUST 11, 1986 AND DECEMBER 31, 1986 $ - - $ - $ - $ -
Issuance of common stock for cash, $0.0012 916 1,000
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 1987 916 - - - 1,000
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 1988 916 - - - 1,000
---------- --------- ---------- ------------- -------------
BALANCE, DECEMBER 31, 1989 916 - - - 1,000
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 1990 916 - - - 1,000
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 1991 916 - - - 1,000
Net loss (8,006) (8,006)
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 1992 916 - - (8,006) (7,006)
Net loss (1,169) (1,169)
Convertible notes 3 21
Issuance of common stock in exchange
for services rendered, $0.0142 2,482 2,500
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 1993 3,401 - - (9,175) (5,654)
Net income 10,222 10,222
Distribution to stockholders (4,260) (4,260)
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 1994 3,401 - - (3,213) 308
Net loss (1,342) (1,342)
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 1995 3,401 - - (4,555) (1,034)
Net loss (8,727) (8,727)
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 1996 3,401 - - (13,282) (9,761)
Net loss (3,975) (3,975)
Issued pursuant to acquisition, $3.3501 199,994 200,000
Issuance of common stock for cash, $3.3501 99,997 100,000
Capital contribution by stockholder 50,000 50,000
Expense pursuant to grant of stock option 20,356 20,356
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 1997 373,748 - - (17,257) 356,620
Net loss (21,102) (21,102)
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 1998 373,748 - - (38,359) 335,518
Net loss (25,172) (25,172)
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 1999 373,748 - - (63,531) 310,346
Net loss (36,256) (36,256)
Issuance of common stock for cash, $3.1409 49,998 50,000
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 2000 423,746 - - (99,787) 324,090
Net loss (233,958) (233,958)
Issued pursuant to funding
agreement, $0.0838 90,659 90,767
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 2001 $ 514,405 - $ - $ (333,745) $ 180,899
F-4A
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Preferred Stock Common Stock Deferred
--------------------- ---------------------- Subscription Compen-
Shares Amount Shares Amount Receivable Sation
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 2001 - $ - 2,383,160 $ 239 $ - $ -
Net loss
Issued pursuant to funding agreement,
$0.0838 1,515,053 151
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 2002 - - 3,898,213 390 - -
Net income
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 2003 - - 3,898,213 390 - -
Acquisition by Xechem International,
Inc. and application of push-down
accounting - -
Option granted pursuant to spinoff
agreement - -
Common stock subject to repurchase
under put right (401,305) (40)
Common stock issued May 2004, in
connection with bridge loans ($1.22) 451,597 45
Common stock issued May 2004, to
placement agent for bridge loans($2.50) 36,000 4
Common stock issued September 2004,
net of offering expenses of
$70,760 ($1.68) 554,413 55
Common stock issued December 2004 to
advisors for past services ($2.50) 675,690 68
Reclassification in December 2004 of
advances from Xechem as contribution
to capital
Minority shareholders pursuant to
recapitalization 1,850,000 185
Common stock issued December 2004
pursuant to exercise of options granted
pursuant to spinoff agreement ($0.00001) 3,031,943 303 (303)
Intrinsic value of beneficial
conversion feature of replacement notes
Common stock issued December 2004 in
conversion of convertible note ($1.25) 167,610 17
Common stock issued December 2004 in
connection with litigation settlement
($2.50) 125,000 12
Warrants issued in connection with
litigation settlement
Common stock issued December 2004
pursuant to placement agent agreement
($2.50) 150,000 15
Warrants issued to nonemployees for
services
Preferred stock and warrants issued
pursuant to units sold December 2004
in a private placement ($25,000/Unit) 145.07 3,626,750
Acquisition December 2004 of treasury
stock under put right ($2.50)
Deemed dividend of beneficial conversion
feature of units sold in private
placement
Stock option-based compensation for
investor relation services rendered (1,198,500)
Stock option-based compensation for
research consulting services rendered (30,600)
Amortization of deferred compensation 604,350
Net loss
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 2004 145.07 $3,626,750 10,539,161 $ 1,054 $ (303) $ (624,750)
F-5
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Deficit
Accumulated
Additional During the Total
Paid-in Treasury Stock Development Stockholders
Capital Shares Amount Stage Deficiency
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 2001 $ 514,405 - $ - $ (333,745) $ 180,899
Net loss (654,599) (654,599)
Issued pursuant to funding agreement,
$0.0838 126,742 126,893
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 2002 641,147 - - (988,344) (346,807)
Net income 72,498 72,498
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 2003 641,147 - - (915,846) (274,309)
Acquisition by Xechem International,
Inc. and application of push-down
accounting 4,118,463 915,846 5,034,309
Option granted pursuant to spinoff
agreement 2,082,500 2,082,500
Common stock subject to repurchase
under put right (1,637,285) (1,637,325)
Common stock issued May 2004, in
connection with bridge loans ($1.22) 549,955 550,000
Common stock issued May 2004, to
placement agent for bridge loans($2.50) 89,996 90,000
Common stock issued September 2004,
net of offering expenses of
$70,760 ($1.68) 929,176 929,231
Common stock issued December 2004 to
advisors for past services ($2.50) 1,689,157 1,689,225
Reclassification in December 2004 of
advances from Xechem as contribution
to capital 350,310 350,310
Minority shareholders pursuant to
recapitalization (185) -
Common stock issued December 2004
pursuant to exercise of options granted
pursuant to spinoff agreement ($0.00001) -
Intrinsic value of beneficial
conversion feature of replacement notes 1,111,240 1,111,240
Common stock issued December 2004 in
conversion of convertible note ($1.25) 209,495 209,512
Common stock issued December 2004 in
connection with litigation settlement
($2.50) 312,488 312,500
Warrants issued in connection with
litigation settlement 109,500 109,500
Common stock issued December 2004
pursuant to placement agent agreement
($2.50) (15) -
Warrants issued to nonemployees for
services 396,000 396,000
Preferred stock and warrants issued
pursuant to units sold December 2004
in a private placement ($25,000/Unit) (822,510) 2,804,240
Acquisition December 2004 of treasury
stock under put right ($2.50) 145,070 (362,675) (362,675)
Deemed dividend of beneficial conversion
feature of units sold in private
placement 936,116 (936,116) -
Stock option-based compensation for
investor relation services rendered 1,198,500 -
Stock option-based compensation for
research consulting services rendered 30,600 -
Amortization of deferred compensation 604,350
Net loss (14,547,889) (14,547,889)
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 2004 $12,294,648 145,070 $(362,675) $ (15,484,005) $ (549,281)
F-5A
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Preferred Stock Common Stock Deferred
--------------------- ---------------------- Subscription Compen-
Shares Amount Shares Amount Receivable Sation
-------- ---------- --------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 2004 145.07 $3,626,750 10,539,161 $ 1,054 $ (303) $ (624,750)
Preferred stock and warrants issued 48.35 1,208,750
pursuant to units sold on January 5,
2005 in a private placement ($25,000)
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
pursuantto 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
Payment for common stock issued
December 2004 pursuant to exercise
of options granted pursuant to
spinoff agreement ($0.00001) 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)
F-6
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Deficit
Accumulated
Additional During the Total
Paid-in Treasury Stock Development Stockholders
Capital Shares Amount Stage Deficiency
---------- --------- ---------- ------------- -------------
BALANCE, DECEMBER 31, 2004 $12,294,648 145,070 $(362,675) $ (15,484,005) $ (549,281)
Preferred stock and warrants issued (159,359) 1,049,391
pursuant to units sold on January 5,
2005 in a private placement ($25,000)
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
pursuantto 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) (256,681) 180,819
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 -
Payment for common stock issued
December 2004 pursuant to exercise
of options granted pursuant to
spinoff agreement ($0.00001) 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)
F-6A
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Preferred Stock Common Stock Deferred
--------------------- ---------------------- Subscription Compen-
Shares Amount Shares Amount Receivable Sation
-------- ---------- --------- ---------- ------------ ----------
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 25,000 2
Expenses incurred pursuant to entering
into Stock Purchase Agreement
Net proceeds from October 2005 sale of
common stock issued December 2004
pursuant to exercise of options
granted pursuant to spinoff
agreement ($0.63)
Common stock issued October 2005
pursuant to Stock Purchase Agreement 377,359 38
Common stock issued November 2005 upon
conversion of preferred shares ($2.50) (2.00) (50,000) 20,000 2
Common stock issued December 2005
pursuant to Securities Purchase Agreement 268,817 27
Reclassification of warrants as liabilities
in accordance with EITF 00-19
Common stock issued December 2005 upon
conversion of replacement notes ($0.375) 485,000 48
Common stock issued December 2005 upon
conversion of preferred shares ($2.50) (4.00) (100,000) 40,000 4
Discount of secured convertible
debenture upon fair value allocation
of proceeds
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 180,150
Amortization of deferred compensation 1,035,701
Net loss
-------- ---------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 2005 248.15 $6,203,750 11,744,120 $ 1,174 $ - $ (322,830)
======== ========== ========== ========== ============ ==========
F-7
(See notes to financial statements.)
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Deficit
Accumulated
Additional During the Total
Paid-in Treasury Stock Development Stockholders
Capital Shares Amount Stage Deficiency
---------- --------- ---------- ------------- -------------
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 (2) -
Expenses incurred pursuant to entering
into Stock Purchase Agreement (89,340) (89,340)
Net proceeds from October 2005 sale of
common stock issued December 2004
pursuant to exercise of options
granted pursuant to spinoff
agreement ($0.63) 163,014 163,014
Common stock issued October 2005
pursuant to Stock Purchase Agreement (38) -
Common stock issued November 2005 upon
conversion of preferred shares ($2.50) 49,998 -
Common stock issued December 2005
pursuant to Securities Purchase Agreement 37,343 37,370
Reclassification of warrants as liabilities
in accordance with EITF 00-19 (3,350,697) (3,350,697)
Common stock issued December 2005 upon
conversion of replacement notes ($0.375) 181,827 181,875
Common stock issued December 2005 upon
conversion of preferred shares ($2.50) 99,996 -
Discount of secured convertible
debenture upon fair value allocation
of proceeds 250,000 250,000
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 (180,150) -
Amortization of deferred compensation 1,035,701
Net loss (13,267,590) (13,267,590)
----------- --------- ---------- -------------- --------------
BALANCE, DECEMBER 31, 2005 $22,969,495 - $ - $(37,916,095) $(9,064,506)
=========== ========= ========== ============== ==============
F-7A
(See notes to financial statements.)
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Cumulative
August 11, 1986
For the Years Ended (Date of
December 31, Inception) to
------------------------------------- December 31,
2005 2004 2005
------------------ ------------------ ------------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (13,267,590) $ (14,547,889) $ (28,727,065)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 18,207 11,046 31,490
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 116,776 - 116,776
Stock-based compensation to nonemployees 1,310,800 2,689,575 4,223,231
Stock-based component of payment of legal fees 70,000 - 70,000
Stock-based component of litigation settlement - 422,000 422,000
Gain on extinguishment of debt (311,281) - (311,281)
Change in fair value of derivative
financial instruments (949,981) - (949,981)
Non-cash interest expense 901,620 1,100,915 2,220,195
Changes in assets and liabilities:
Prepaid expenses (68,056) (90,032) (175,785)
Other assets - (18,511) (18,511)
Accounts payable and accrued expenses 4,812,409 361,644 5,209,570
---------------- ---------------- ----------------
Net cash used in operating activities (7,367,096) (2,954,443) (10,772,552)
---------------- ---------------- ----------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (13,023) (71,524) (86,921)
---------------- ---------------- ----------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from issuances of common stock 169,567 929,231 1,299,819
Net proceeds from issuances of preferred stock 7,644,389 2,804,240 10,448,629
Acquisition of treasury stock under put right (916,450) (362,675) (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 2,250,000 1,100,000 3,625,000
Debt issue costs (355,373) (132,000) (487,373)
Principal payments on bridge loans - (350,000) (350,000)
---------------- ---------------- ----------------
Net cash provided by financing activities 6,482,883 4,289,106 11,293,750
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash
equivalents (897,236) 1,263,139 434,277
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 1,331,513 68,374 -
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 434,277 $ 1,331,513 $ 434,277
================ ================ ================
F-8
(See notes to financial statements.)
CEPTOR CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Cumulative
August 11, 1986
For the Years Ended (Date of
December 31, Inception) to
----------------------------------- December 31,
2005 2004 2005
--------------- ------------------ -------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Deemed dividend of the beneficial conversion feature of
Units sold in private placement $ 9,164,500 $ 936,116 $10,100,616
Issuance of 2,635,000 shares of common stock upon
conversion of preferred shares 6,587,500 - 6,587,500
Issuance of 100,000 shares of common stock pursuant to
stock plan 270,000 - 270,000
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 485,000 shares of common stock upon
conversion of convertible note 181,875 - 181,875
Issued 36,000 shares of common stock as debt issuance
costs $ 90,000 $ 90,000
Issued 451,597 shares of common stock to bridge loan
investors and placement agent 550,000 550,000
Issued 167,610 shares upon conversion of convertible
notes 209,512 209,512
Issuance of convertible notes in exchange for bridge
loans and long-term debt plus accrued interest 1,111,240 1,111,240
Obligation to repurchase 401,305 shares of common stock
pursuant to put right 1,637,325 1,637,325
Cash paid during the year for:
Interest - 16,773 -
F-9
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
NOTE 1 - THE COMPANY
ORGANIZATION
The financial statements presented are those of CepTor Corporation (the
"Company"), incorporated in August 1986 in the state of Delaware.
MERGER OF MEDALLION CREST MANAGEMENT, INC. AND CEPTOR CORPORATION
As described in Note 6, Medallion Crest Management, Inc., a Florida corporation
("Medallion") acquired all of the common stock of the Company on December 8,
2004. Medallion was an inactive public shell at the time of acquisition. The
Company's shareholders prior to the merger became the majority shareholders of
Medallion after the merger; accordingly the transaction was accounted for as a
recapitalization. The accompanying financial statements have been retroactively
restated to give effect to this transaction.
NATURE OF BUSINESS AND DEVELOPMENT STAGE OPERATIONS
CepTor Corporation is a biopharmaceutical company focusing on the development of
proprietary, cell-targeted therapeutic products for neuromuscular and
neurodegenerative diseases. Since its inception, the Company has devoted its
efforts and resources to the development of its receptor mediated drug-targeting
platform for neuromuscular and neurodegenerative diseases, and to raising the
funds necessary to continue this research.
The Company is a development stage enterprise, which has a limited history of
operations and has not generated any material revenues since its inception. The
Company has received a limited amount of funding through grants and
collaborative research efforts in connection with developing its products. The
Company does not have any products that are approved for commercial distribution
at the present time. As a development stage enterprise, the Company is subject
to all of the risks and uncertainties that are associated with developing a new
business.
NOTE 2 - LIQUIDITY AND FINANCIAL CONDITION
Subsequent to December 31, 2005, the Company exhausted its cash resources and
has not been able to remain current with respect to the payment terms of its
operating obligations. In addition, the Company has substantial convertible debt
obligations with terms that may require payment over the next twelve months. The
Company is continuing to seek additional capital, collaborative partners, joint
ventures and strategic alliance agreements both within the United States and
abroad in an effort to continue the development of its proposed products;
however, there are currently no firm commitments in place for new capital nor
has the Company identified any prospective joint venture partners or
participants with which it would enter into a strategic alliance arrangement.
Absent additional funding from private or public equity or debt financings,
collaborative or other partnering arrangements, or other sources, the Company
will be unable to conduct its product development efforts as planned, and may
need to curtail its development plans, cease operations or sell assets. These
matters raise 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.
The Company's net loss for the year ended December 31, 2005 amounted to
$13,267,590, which includes $2,087,915 of net non-cash charges associated with
the Company's issuance of stock and common stock purchase warrants and options
for services rendered and non-cash interest expense from the amortization of the
beneficial conversion feature in certain convertible debt instruments, offset by
a gain on the extinguishment of debt. The Company used net cash flows in its
operating activities of $7,367,096 during the year ended December 31, 2005. The
Company's working capital deficiency amounted to $5,333,806 and its development
stage accumulated deficit amounted to $37,916,095 at December 31, 2005. The
Company expects to continue incurring losses for the foreseeable future due to
the inherent uncertainty that is related to establishing the commercial
feasibility of pharmaceutical products. The Company will require substantial
additional funding to support the development of its proposed products and fund
its operations while it continues its efforts to execute its business plan.
During the year ended December 31, 2005, the Company received net proceeds of
$6,482,883 from financing activities, including (i) $7,644,389 (gross proceeds
of $9,164,500 net of transaction expenses of $1,520,111) from the sale of
preferred stock and common stock purchase warrants ("Units") in a private
placement transaction (see Note 16), (ii) $2,250,000 in gross proceeds from the
issuance of convertible debt (see Note 12), offset by $355,373 of debt issue
F-10
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
costs, and (iii) $169,567 from the issuance of common stock to various
investors. From these net proceeds, 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 (x) $916,450 for 366,580 shares of its common stock pursuant to the
terms of a redemption obligation (see Note 11) and (y) $2,309,250 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.
If the Company is able to secure suitable financing to continue the development
of its technologies, it may incur significant expenditures during the next
twelve months as it initiates human clinical trials for Myodur and for the cost
to manufacture the Company's product Myodur for use in additional clinical and
other testing. 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 presently expects to initiate human
clinical trials for Myodur before the end 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. During 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 year ended December 31, 2005, the Company incurred
approximately $3.6 million for the costs of the proposed product and related
materials of which approximately $1.4 million remains unpaid. As of December 31,
2005, the Company has sufficient materials required for the Company's currently
on-going pre-clinical studies and toxicology programs and for its initial human
clinical trials. As resources allow, the Company may also fund other working
capital needs.
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.
The Company initiated several programs to address its liquidity situation during
the fourth quarter of 2005 and subsequent to December 31, 2005:
o During October 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 (see Note
16). Due to certain restrictive provisions in the agreement, the
Company does not anticipate common stock sales to begin any time
in the near future.
o During October 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 net proceeds of
$163,014 (see Note 16).
o On December 9, 2005, the Company issued a convertible note in the
principal amount of $250,000 which bears interest at the rate of
6% percent per year. All unpaid principal and interest under the
note will be due and payable on December 9, 2006. The note is
convertible, in whole or in part, at any time, into common stock
at a conversion price of $1.00 per share, subject to certain
limitations on conversion as set forth in the note, including
where the resulting number of shares converted on a cumulative
F-11
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
basis, would exceed 19.99% of the total number of shares of common
stock outstanding and, subject to a conversion price adjustment in
the event the Company offers or sells an option to acquire common
stock at a price per share less than the conversion price (see
Note 12).
o On December 9, 2005, the Company entered into a securities
purchase agreement pursuant to which an investor had agreed to
purchase from the Company, in a private placement, the December
2005 Convertible Debentures, which bear interest at the rate of 8%
per year. Pursuant to the securities purchase agreement, the
Company issued the December 2005 Convertible Debentures in the
cumulative principal amount of $2,000,000 during December 2005,
which have a three-year maturity from the date of issuance and are
subject to earlier conversion or redemption pursuant to its terms
(see Note 12).
o During March 2006, the Company received net proceeds of $200,000
from the exercise of common stock options (see Note 16).
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company is a development stage enterprise. Accordingly, the Company has
included its cumulative statements of operations, cash flows and statement
changes in stockholders' deficiency for the period of August 11, 1986 (date of
inception) to December 31, 2005 in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 7 "Accounting and Reporting by Development
Stage Enterprises".
The Company's net loss as reported in its statement of operations for the period
of August 11, 1986 (date of inception) to December 31, 2005 is $39,417,444
whereas the deficit accumulated during its development stage as reported on its
balance sheet at December 31, 2005 is $38,505,858. The difference is a result of
the acquisition of the Company by Xechem and the restatement of its assets and
liabilities to fair value, which resulted in the Company's accumulated deficit,
net of distributions, from inception through December 31, 2003 (the date of
merger for financial reporting purposes) being reclassified to additional
paid-in capital, net of a deemed dividend to the preferred shareholders.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost less accumulated depreciation.
Property and equipment acquired for the sole purpose to be used in research and
development is charged to operations when acquired. Depreciation is provided on
the straight-line method over the estimated useful lives of the assets, which is
primarily five years. Leasehold improvements are amortized over the terms of
their respective leases or service lives of the improvements, whichever is
shorter. Gains and losses on depreciable assets retired or sold are recognized
in the statement of operations in the year of disposal. Repairs and maintenance
expenditures are expensed as incurred.
DEBT ISSUE COSTS
Pursuant to a common stock purchase agreement entered into during October 2005,
the Company incurred expenses of $89,340 in legal and accounting fees, SEC
registration fees and non-accountable expense reimbursement. These expenses were
F-12
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
charged to additional paid-in capital during the year ended December 31, 2005.
In addition, the Company issued 25,000 shares of common stock with a value of
$22,500 on the date of issuance charging additional paid-in capital for par
value of the issued shares (see Note 16).
Pursuant to a securities purchase agreement entered into during December 2005,
the Company incurred expenses of $86,033 for legal fees, accounting fees, and
SEC registration fees. In addition, the Company also paid the investor $20,000
in deal-related expenses reimbursement and commitment fees of $160,000. These
expenses will be amortized over the three-year term of the secured convertible
note (see Note 12).
Pursuant to the Bridge Loans entered into during April 2004 and May 2004, the
Company paid the placement agent $132,000 in commissions and a non-accountable
expense allowance and issued 36,000 shares of common stock with a value of
$90,000, which were amortized over the term of the Bridge Loans from May 2004
through October 2004 (see Note 12).
ACCOUNTING FOR STOCK BASED COMPENSATION
As permitted under SFAS No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure," which amended SFAS No. 123 "Accounting for
Stock-Based Compensation," the Company has elected to continue to follow the
intrinsic value method in accounting for its stock-based compensation
arrangements as defined by Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees," and related interpretations
including Financial Accounting Standards Board ("FASB") Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB No. 25.
The cost of stock based compensation awards issued to non-employees for services
are recorded at either the fair value of the services rendered or the
instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in Emerging
Issues Task Force Issue ("EITF") 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."
The following table summarizes the pro forma operating results of the Company
had compensation expense for stock options granted to employees been determined
in accordance with the fair market value based method prescribed by SFAS No.
123. The Company has presented the following disclosures in accordance with SFAS
No. 148.
For the Year Ended December 31,
------------------------------------
2005 2004
----------------- -----------------
Net loss available to common stockholders $(22,432,090) $(15,484,005)
Adjust: Stock-based employee compensation
Determined under the fair value method (81,399) (5,504,786)
------------ ------------
Pro forma net loss $(22,513,489) $ (20,988,791)
============ ============
Net loss per share available to common stockholders:
Basic and diluted, as reported $(2.11) $(3.25)
Basic and diluted, pro forma (2.11) (4.41)
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 years
ended December 31, 2005 and 2004.
ACCOUNTING FOR WARRANTS ISSUED IN CONNECTION WITH SALE OF UNIT
The Company accounts for the issuance of common stock purchase warrants issued
in connection with sales of its Units in accordance with the provisions of EITF
00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock". Based on the provisions of EITF
00-19, the Company classifies as equity any contracts that (i) require physical
settlement or net-share settlement or (ii) gives the company a choice of
F-13
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
net-cash settlement or settlement in its own shares (physical settlement or
net-share settlement). The Company classifies as assets or liabilities any
contracts that (i) require net-cash settlement (including a requirement to net
cash settle the contract if an event occurs and if that event is outside the
control of the Company) or (ii) give the counterparty a choice of net-cash
settlement or settlement in shares (physical settlement or net-share
settlement).
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
NON-EMPLOYEE STOCK BASED COMPENSATION
The cost of stock based compensation awards issued to non-employees for services
are recorded at either the fair value of the services rendered or the
instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in EITF 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."
NET LOSS PER SHARE
Net loss per share is presented under SFAS No. 128 "Earnings Per Share." Under
SFAS No. 128, basic net loss per share is computed by dividing net loss per
share available to common stockholders by the weighted average shares of common
stock outstanding for the period and excludes any potential dilution. Diluted
earnings per share reflect the potential dilution that would occur upon the
exercise or conversion of all dilutive securities into common stock. The
computation of loss per share for the years ended December 31, 2005 and 2004
excludes potentially dilutive securities because their inclusion would be
anti-dilutive.
Shares of common stock issuable upon conversion or exercise of potentially
dilutive securities at December 31, 2005 and 2004 are as follows:
December 31,
---------------------------------
2005 2004
--------------- ---------------
Series A Preferred Stock 2,481,500 1,450,700
Warrants 5,777,259 1,120,420
Options 646,695 662,340
Convertible Notes 4,404,279 725,730
---------- ---------
TOTAL 13,309,733 3,959,190
========== =========
As described further in Note 18, subsequent to December 31, 2005, the Company
granted options to purchase 1,114,206 shares of common stock of which 557,102
shares were issued upon exercise resulting in 557,104 shares of common stock
issuable upon exercise of the remaining options.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, accounts payable
and accrued expenses approximate fair value based upon the short term nature of
those instruments. The carrying amount of the convertible notes approximates
their fair value as the effective rate of such instruments, which takes into
consideration the allocation of proceeds based on the relative fair values of
the notes and equity instruments issued concurrently, are consistent with market
rates for investments with similar levels of risk.
CONVERTIBLE NOTES AND CONVERTIBLE PREFERRED STOCK
The Company accounts for conversion options embedded in convertible notes and
convertible preferred stock in accordance with Statement of Financial Accounting
Standard ("SFAS) No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") and Emerging Issues Task Force Issue ("EITF") 00-19
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock" ("EITF 00-19"). SFAS 133 generally requires
Companies to bifurcate conversion options embedded in convertible notes and
preferred shares from their host instruments and to account for them as free
standing derivative financial instruments in accordance with EITF 00-19. SFAS
133 provides for an exception to this rule when convertible notes and
mandatorily redeemable preferred shares, as host instruments, are deemed to be
conventional as that term is described in the implementation guidance provided
in paragraph 61 (k) of Appendix A to SFAS 133 and further clarified in EITF 05-2
"The Meaning of "Conventional Convertible Debt Instrument" in Issue No. 00-19.
SFAS 133 provides for an additional exception to this rule when the economic
characteristics and risks of the embedded derivative instrument are clearly and
closely related to the economic characteristics and risks of the host
instrument.
The Company accounts for convertible notes (deemed conventional) in accordance
with the provisions of EITF 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features," ("EITF 98-5"), EITF 00-27 "Application of EITF
98-5 to Certain Convertible Instruments." Accordingly, the Company records, as a
discount to convertible notes, the intrinsic value of such conversion options
based upon the differences between the fair value of the underlying common stock
at the commitment date of the note transaction and the effective conversion
price embedded in the note. Debt discounts under these arrangements are
amortized over the term of the related debt to their earliest date of
redemption.
The Company issued $2,000,000 in principal of convertible notes with an embedded
conversion option accounted for as a free standing derivative financial
instrument in accordance with SFAS 133 and EITF 00-19. The Company also
determined that the conversion option embedded in its Series A Preferred stock
is not a free standing derivative in accordance with the implementation guidance
provided in paragraph 61 (l) of Appendix A to SFAS 133.
CONCENTRATION OF CREDIT RISK
The Company maintains cash balances, at times, with financial institutions in an
amount which is more than amounts insured by the Federal Deposit Insurance
Corporation. Management monitors the soundness of these institutions and
considers the Company's risk negligible.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
This interpretation of Accounting Research Bulletin ("ARB") No. 51,
"Consolidated Financial Statements," provides guidance for identifying a
controlling interest in a variable interest entity ("VIE") established by means
F-14
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
other than voting interest. FIN 46 also required consolidation of a VIE by an
enterprise that holds such controlling interest. In December 2003, the FASB
completed its deliberations regarding the proposed modifications to FIN 46 and
issued Interpretation Number 46R, "Consolidation of Variable Interest Entities -
an Interpretation of ARB 51" ("FIN No. 46 R"). The decisions reached included a
deferral of the effective date and provisions for additional scope exceptions
for certain types of variable interests. Application of FIN No. 46R is required
in financial statements of public entities that have interests in VIEs or
potential VIEs commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public small business issuers'
entities is required in all interim and annual financial statements for periods
ending after December 15, 2004.
The adoption of this pronouncement did not have an effect on the Company's
financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment". This
statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and its related implementation guidance. SFAS 123R addresses all
forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS 123R, SBP awards result in a cost that will be
measured at fair value on the awards' grant date, based on the estimated number
of awards that are expected to vest and will result in a charge to operations
for stock-based compensation expense. SFAS 123R is effective for public entities
that file as small business issuers as of the beginning of the first annual
reporting period that begins after December 15, 2005.
The adoption of this pronouncement under the modified prospective method
effective January 1, 2006 will result in the recognition of stock-based
compensation expense using the fair value method.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets." SFAS 153 amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS 153 are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after December 16, 2004. The provisions of this Statement
should be applied prospectively.
The adoption of this pronouncement did not have an effect on the Company's
financial statements.
In EITF Issue No. 04-8, "The Effect of Contingently Convertible Instruments on
Diluted Earnings Per Share", the EITF reached a consensus that contingently
convertible instruments, such as contingently convertible debt, contingently
convertible preferred stock, and other such securities should be included in
diluted earnings per share (if dilutive) regardless of whether the market price
trigger has been met. The consensus is effective for reporting periods ending
after December 15, 2004.
The Company's adoption of this pronouncement did not have an effect on the
Company's financial statements.
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 154, "Accounting Changes and Error
Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS
154"). This Statement replaces APB Opinion No. 20, "Accounting Changes", and
FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements," and changes the requirements for the accounting for and reporting
of a change in accounting principle. This Statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed.
APB Opinion No. 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. When it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, this
Statement requires that the new accounting principle be applied to the balances
of assets and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding adjustment be
made to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) for
that period rather than being reported in an income statement. When it is
impracticable to determine the cumulative effect of applying a change in
accounting principle to all prior periods, this Statement requires that the new
accounting principle be applied as if it were adopted prospectively from the
earliest date practicable. This Statement shall be effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The Company does not believe that the adoption of SFAS 154 will have a
significant effect on its financial statements.
On June 29, 2005, the EITF ratified Issue No. 05-2, "The Meaning of
`Conventional Convertible Debt Instrument' in EITF Issue No. 00-19, `Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock.'" EITF Issue 05-2 provides guidance on determining whether
a convertible debt instrument is "conventional" for the purpose of determining
when an issuer is required to bifurcate a conversion option that is embedded in
convertible debt in accordance with SFAS 133. Issue No. 05-2 is effective for
new instruments entered into and instruments modified in reporting periods
beginning after June 29, 2005. The adoption of this pronouncement did not have a
material effect on the Company's financial statements.
In September 2005, the EITF issued Issue No. 05-4, "The Effect of a Liquidated
Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No.
00-19, `Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock.'" EITF 05-4 provides guidance to
issuers as to how to account for registration rights agreements that require an
issuer to use its "best efforts" to file a registration statement for the resale
of equity instruments and have it declared effective by the end of a specified
grace period and, if applicable, maintain the effectiveness of the registration
statement for a period of time or pay a liquidated damage penalty to the
investor. The Task Force has not reached a consensus on this issue.
In September 2005, the FASB ratified the 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). This issue is effective
for future modifications of debt instruments beginning in the first interim or
annual reporting period beginning after December 15, 2005. The Company is
currently in the process of evaluating what effect, if any, that the adoption of
this pronouncement may have on its financial statements.
In September 2005, the FASB also ratified EITF 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 the 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." This
Issue should be applied by retrospective application pursuant to Statement 154
to all instruments with a beneficial conversion feature accounted for under
Issue 00-27 included in financial statements for reporting periods beginning
after December 15, 2005. The Company is currently in the process of evaluating
the effect that the adoption of this pronouncement may have on its financial
statements.
NOTE 4 - ACQUISITION OF CEPTOR CORPORATION BY XECHEM INTERNATIONAL, INC.
On January 27, 2004, the former shareholders of the Company received shares of
preferred stock of Xechem (convertible into 30,000,000 shares of common stock of
Xechem) in connection with the merger of the Company into a wholly-owned
subsidiary of Xechem. For financial reporting purposes, the effective date of
the merger was designated January 1, 2004. The results of operations from
January 1 to January 27, 2004 were not significant. The merger was accomplished
through a reverse triangular merger whereby Ceptor Acquisition, Inc., a
wholly-owned subsidiary of Xechem, was merged into the Company and the Company
was the surviving entity.
Effective upon the acquisition of the Company by Xechem, the Company's balance
sheet was adjusted to record existing assets and liabilities to fair value. Fair
value was generally assigned to these assets based on the net present value of
F-15
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
the projected cash flows expected to be generated by those assets. Significant
assumptions underlying these cash flows include the Company's assessment of the
timing and ability to successfully complete the in-process research and
development ("IPR&D") projects, and interest rates used to discount these cash
flows to their present value. In accordance with EITF Issue No. 99-12,
"Determination of the Measurement Date for the Market Price of an Acquirer's
Securities Issued in a Business Combination," the Company determined the fair
value of the consideration paid in the transaction was the average closing price
of Xechem's common stock for a reasonable period of time before and after the
terms of the acquisition were agreed to and announced. The fair value of the
consideration determined under this method amounted to $4,760,000. In allocating
the consideration paid, the fair value of the recorded assets and liabilities
were determined to equal the carrying value with the excess value assigned to
the IPR&D which represents the value assigned to the acquired intangible
assets which had not reached technological feasibility and for which there is no
alternative use.
During the year ended December 31, 2004, the Company recorded approximately
$5,034,300 of IPR&D, consisting of granted patents and pending patent
applications, which has been expensed as in-process research and development
costs. The following table summarizes the fair value of the assets acquired and
liabilities assumed in the acquisition:
Consideration paid by Xechem to former stockholders of Ceptor
Corporation $ 4,760,000
Net Liabilities Assumed:
Current liabilities (35,000)
Notes and advances payable (325,000)
Current and other assets 85,691
-------------
(274,309)
-------------
Purchase price in excess of net liabilities assumed by Xechem -
allocated to in-process research and development $ 5,034,309
=============
NOTE 5 - SPINOFF OF CEPTOR CORPORATION BY XECHEM INTERNATIONAL, INC.
DESCRIPTION OF XECHEM SPINOFF AGREEMENT
Following the acquisition of the Company by Xechem, the board of directors of
Xechem determined that Xechem lacked the resources to fully fund the development
and regulatory approval of the Company's technology. As a result, the board of
directors of Xechem determined that it was in the best interest of Xechem's
stockholders to effect a spin-off of the Company from Xechem, providing the
Company with an independent platform to obtain financing and develop its
technology. As a result the Company, Xechem, and William Pursley, Chairman and
CEO of the Company, entered into an agreement dated March 31, 2004, amended July
23, 2004 and November 17, 2004, (the "Spinoff Agreement"), to provide for the
separation of the Company from Xechem. The Spinoff Agreement provided for the
Company's separation from Xechem under a transaction structured to include (i)
the Company's redemption of a portion of its shares held by Xechem out of the
proceeds of future financing under the Redemption Obligation described below,
(ii) the issuance and allocation of additional shares of common stock to Mr.
Pursley under the Founders' Plan described below and (iii) the Company's reverse
merger into a public shell described in Note 6. The Company also agreed to pay
royalties on future revenues and assume certain obligation for contingent
consideration payable to the former stockholders of the Company (who sold their
shares to Xechem).
The Spinoff of the Company from Xechem concurrent with Mr. Pursley's exercise of
his stock option and the Company's reverse merger into Medallion was completed
on December 8, 2004.
REDEMPTION OBLIGATION
Under the terms of the original Spinoff Agreement, Xechem was entitled to
receive 25% of the proceeds of any offering of securities of the Company, up to
$2,000,000. Following discussion with prospective selling agents for a proposed
private placement of the Company's securities, Xechem agreed to accept 10% of
the proceeds, up to $2,000,000, of any future financing in partial redemption of
shares of the Company held by Xechem. During the year ended December 31, 2005,
the Company satisfied this redemption obligation (see Note 11).
F-16
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
ALLOCATION OF STOCK UNDER FOUNDERS' PLAN
Pursuant to the Spinoff Agreement, Mr. Pursley was allocated, initially through
a 10-year option exercisable at par value ($0.0001 per share), the right to
designate for issuance 3,031,943 shares of the common stock of the Company,
equal to 43.75% of the fully diluted common stock outstanding (the "Founders'
Shares") assuming the issuance of all of the Founders' Shares. The
aforementioned right of Mr. Pursley provided him the irrevocable right to
allocate such award to certain other employees and persons designated by Mr.
Pursley as having importance to the future success of the Company, on a
discretionary basis.
Pursuant to the grant of the option to purchase the 3,031,943 shares of the
Company's common stock at the nominal exercise price of par value during the
year ended December 31, 2004, the Company recorded compensation expense of
$2,082,500 representing the intrinsic value of the option determined by applying
the percent that the Founders' Shares represent of the fully diluted shares
outstanding, to the net assets acquired by Xechem in its acquisition of the
Company.
As of December 31, 2005, Mr. Pursley has allocated all shares of the option,
retaining 1,247,428. All shares were issued concurrent with the Company's
spin-off from Xechem and reverse merger with Medallion on December 9, 2004. All
of the Founders' Shares immediately upon issuance became fully voting, and are
subject to the terms of the Founders' Plan, as amended. Pursuant to the terms of
the Founders' Plan, restrictions on holders of Founders' Shares will lapse 10%
on the six month anniversary following issuance, 10% on the twelve month
anniversary following issuance, and the balance upon initiation of a Phase III
clinical trial for the Myodor technology for muscular dystrophy. Upon the
happening of certain events described in the Founders' Plan, such as the
cessation of employment by a participant following an award, shares issued or
issuable to Founders' Plan participants may revert to Mr. Pursley and may be
cancelled, forfeited, re-designated or re-issued in his sole discretion subject
to Board of Directors or Compensation Committee approvals.
FUTURE ROYALTY COMMITMENT
The Company agreed to pay royalties to Xechem in an amount equal to 2% of the
gross revenues received by the Company, its subsidiaries, affiliates and
assigns, with respect to the sale of any products incorporating any of the
technology owned by the Company as of March 31, 2004 or the licensing of any of
the Company's intellectual property, or the sale of the licensing rights to any
of the Company's intellectual property. This future royalty commitment was
eliminated upon termination of the Spinoff Agreement upon satisfaction of the
Redemption Obligation (see Note 11).
CONTINGENT CONSIDERATION
Pursuant to the terms of the acquisition of CepTor by Xechem, Xechem agreed to
the future payment of additional consideration in shares of stock of Xechem to
the original shareholders of the Company upon the earlier to occur of filing (i)
of a Phase II application for any drug in development which relies, in whole or
in part, on the technology or the efforts of its management, provided such Phase
II application is filed (or substantial steps taken to be filed) within 36
months of the date of the final acquisition or merger; (ii) of any Phase III
application for such technology or efforts provided such Phase III application
is filed (or substantial steps taken to filed) within 60 months of the date of
acquisition or merger; and (iii) of any NDA filings made within 72 months of the
date of the final acquisition or merger with Xechem. In connection with the
Spinoff Agreement, substantially all of the obligations for the issuance of
shares as additional consideration to the original shareholders of the Company
have been assumed by the Company, and Xechem has been released therefrom.
The Company 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 during July 2005, the Company
issued a total of 100,000 shares of its common stock in satisfaction of this
obligation. For the year ended December 31, 2005, the Company recorded a
$270,000 charge to general and administrative expenses in the accompanying
statement of operations, representing the fair value of these shares.
F-17
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
NOTE 6 - MERGER WITH MEDALLION CREST MANAGEMENT, INC. AND RELATED TRANSACTIONS
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
On December 8, 2004, Medallion, CepTor Acquisition Corp., a Delaware corporation
and wholly-owned subsidiary of Medallion ("Acquisition Corp."), and the Company,
entered into an Agreement of Merger and Plan of Reorganization (the "Merger
Agreement"). Pursuant to the Merger Agreement, on December 8, 2004 the Company
merged with Acquisition Corp., with the Company surviving as a wholly-owned
subsidiary of Medallion (the "Merger"). Upon effectiveness of the Merger,
Medallion filed with the Florida Department of State, Articles of Amendment to
the Articles of Incorporation to change its name to CepTor Corporation ("New
CepTor" and now the Company), and to authorize the issuance of up to 1,000
shares of its Series A Convertible Preferred Stock (the "Preferred Stock").
Pursuant to the Merger, Medallion acquired all of the outstanding capital stock
of the Company in exchange for 5,278,068 shares of New CepTor's common stock,
par value $0.0001 per share, and assumption of certain obligations of the
Company. As a result, the Company's former stockholders became the majority
stockholders of New CepTor. The Merger was accounted for as a recapitalization,
since the former stockholders of the Company owned a majority of the outstanding
shares of New CepTor's common stock immediately following the Merger. New CepTor
intended to carry on the Company's business as its sole line of business and
remained in Hunt Valley, Maryland and continued as a development-stage
bio-pharmaceutical company focusing on therapeutic products for neuromuscular,
neurodegenerative diseases and other orphan diseases.
REINCORPORATION OF COMPANY
On December 9, 2004, the Board of Directors of the Company authorized a change
of the state of incorporation to Delaware from Florida through a merger of the
New CepTor and the Company (its wholly-owned subsidiary). Approval of the change
was authorized by shareholder consent during January 2005. Pursuant to an
Agreement dated November 15, 2004, Xechem, the single largest shareholder of New
CepTor, agreed to vote for the change of the state of incorporation to Delaware
in connection with the spin-off of its majority ownership of the Company
pursuant to the Spinoff Agreement. On January 31, 2005, the Company merged with
New Ceptor to change its domicile to Delaware from Florida and to collapse the
parent-subsidiary relationship resulting from the Merger, with the Company being
the surviving entity.
NOTE EXCHANGE OFFER
Pursuant to an offer dated October 22, 2004 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 (the "December 2004 Convertible
Notes"). See Note 12 for a description of further amendments made to the
December 2004 Convertible Notes.
ADOPTION OF STOCK PLANS
In connection with the Merger, New CepTor adopted the Company's Founders' Stock
Plan and 2004 Incentive Stock Plan. On December 9, 2004 the Company issued to
Mr. Pursley and certain other employees, designated by Mr. Pursley, 3,031,943
shares of restricted common stock under the Founders' Stock Plan. Under the 2004
Incentive Stock Plan, officers, consultants, third-party collaborators, and
employees of the Company or its subsidiaries may be granted rights in the form
of options or shares of restricted stock for up to a maximum of 2,773,820 shares
of common stock.
NOTE 7 - PREPAID EXPENSES
Prepaid expenses principally consist of unamortized premiums paid to carriers
for insurance policies and advance payment on a clinical contract.
F-18
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
NOTE 8 - DEFERRED FINANCING COSTS
Deferred financing costs consist of the expenses incurred pursuant to the
secured convertible debenture transaction described in Note 12. These deferred
financing costs will be amortized over the three-year term of the debt beginning
in January 2006.
NOTE 9 - PROPERTY AND EQUIPMENT
Property and equipment, is as follows:
December 31,
--------------------------------
2005 2004
--------------- ------------
Office equipment $ 68,908 $ 60,134
Lab equipment 500 500
Leasehold improvements 15,640 11,390
---------- ----------
85,048 72,024
Less-accumulated depreciation and amortization 29,617 11,409
---------- ----------
Total $ 55,431 $ 60,615
========== ==========
For the years ended December 31, 2005 and 2004, depreciation expense was $18,207
and $11,046, respectively.
NOTE 10 - ACCRUED EXPENSES
Accrued expenses are as follows:
December 31,
--------------------------------
2005 2004
--------------- ------------
Professional fees (legal and accounting) $ 108,862 $ 172,485
Financial investor relations fees 188,278 108,803
Clinical development expenses 471,174 26,811
Research expenses 46,921 1,703
Interest on convertible notes 85,416 5,435
---------- ----------
Total $ 900,651 $ 315,237
========== ==========
NOTE 11 - COMMON STOCK SUBJECT TO REPURCHASE UNDER REDEMPTION OBLIGATION
The Spinoff Agreement, as amended, provided for the Company to redeem, out of
the proceeds of future financing transactions, an aggregate of $2,000,000 of
shares of common stock of the Company held by Xechem (the "Redemption
Obligation"). Pursuant to the terms of the Redemption Obligation, the Company
was obligated to use the first 25% (adjusted to 10% of the proceeds from the
Company's private placement initiated in December 2004 and concluded in February
2005) of the gross proceeds received in such financing transactions to redeem an
equivalent number of shares of common stock held by Xechem, that is derived by
dividing such proceeds by the price per share of common stock of the Company at
which such financing transaction is consummated. At the end of two years, Xechem
had the right to put the remaining portion of the shares held for sale back to
the Company to cover any deficiency.
During the year ended December 31, 2004, the Company redeemed 145,070 shares of
its common stock for $362,675, which represents 10% of the gross proceeds that
the Company received from the sale of Units in the private placement
transactions that were consummated in December 2004. The remaining Redemption
Obligation at December 31, 2004 of $1,637,325 was estimated to redeem
approximately 401,305 shares of the Company's common stock held by Xechem, based
on the fair value of the Company's common stock on December 31, 2004 of $4.08
per share. In accordance with EITF Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed To, Potentially Settled In, The Company's Own
F-19
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
Stock," the Company classified the remaining Redemption Obligation as a current
liability in the accompanying balance sheet at December 31, 2004, since the
Company anticipated repurchasing the remaining amount of common stock from
Xechem out of proceeds of various financings anticipated over the next twelve
months.
During the year ended December 31, 2005, the Company redeemed 366,580 shares of
its common stock for $916,450, which represents 10% of the gross proceeds that
the Company received from the sale of Units in the private placement
transactions that were consummated during the period January 2005 through
February 11, 2005. Pursuant to a securities purchase agreement entered into with
Xechem effective June 17, 2005, the Company repurchased an additional 2,886,563
shares of its common stock from Xechem in exchange 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, which satisfied the Company's Redemption Obligation with Xechem.
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.
NOTE 12 -DEBT
DECEMBER 2004 CONVERTIBLE NOTES
Pursuant to the terms of the Spinoff Agreement and actions taken thereafter, the
Company entered into a selling agreement dated April 23, 2004 providing for the
private placement of $1,100,000 of 8% convertible notes due on the earlier of
October 22, 2004 or the date of closing on the next financing of $1,000,000 or
more by the Company (the "Bridge Loans"), secured by certain rights to put
Bridge Loans to Xechem for Xechem shares in certain circumstances. Purchasers of
the Bridge Loans received 451,597 shares of common stock of the Company as
additional consideration. The selling agent received 36,000 shares of common
stock of the Company, plus commissions in the amount of $110,000 and a
non-accountable expense allowance in the amount of $22,000, in connection with
its services. The Bridge Loan offering was completed in May 2004.
The Company recorded a $550,000 discount, representing an allocation of the
proceeds of the Bridge Loans based on the relative fair value of common stock
and the Bridge Loans issued to the Bridge Loan participants, which was fully
amortized over the term of the Bridge Loans from May 2004 through October 2004.
The amortization of the discount is included in interest expense in the
accompanying statement of operations for the year ended December 31, 2004.
The Company was not able to repay the Bridge Loans on October 22, 2004,
therefore pursuant to the terms of the Bridge Loans, the Bridge Loan holders had
the right to convert their notes into shares of common stock of Xechem at the
lower of $0.07 per share or 75% of the market price of the previous 20 market
days prior to conversion, a portion of which would have been required to be
issued by Xechem and the remainder from Mr. Pursley's personal Xechem holdings.
Pursuant to an offer dated October 22, 2004 as amended November 15, 2004 made to
the holders of the Bridge Loans and certain other convertible notes, the Company
issued $1,111,240 of convertible notes due December 8, 2005 in exchange for
Bridge Loans in the principal amount of $750,000 plus accrued interest of
$36,696 and certain other convertible notes in the principal amount of $275,000
plus accrued interest of $49,544 (the "December 2004 Convertible Notes"). In
addition, the Company redeemed Bridge Loans in the principal amount of $350,000
plus accrued interest of $16,772. The contractual interest expense on the notes
repaid is included in interest expense and the contractual interest expense on
the Bridge Loans exchanged for the December 2004 Convertible Notes, prior to
exchange, is included in interest expense in the accompanying statement of
operations for the year ended December 31, 2004.
The December 2004 Convertible Notes were 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. 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 limited to the principal balance of the December 2004 Convertible
Notes, which represents the intrinsic value of this beneficial conversion
feature. The intrinsic value of the beneficial conversion feature was being
F-20
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
amortized as interest expense over the term of the December 2004 Convertible
Notes through December 8, 2005. During the years ended December 31, 2005 and
2004, the Company amortized $254,460 and $56,821, respectively, of the intrinsic
value of the beneficial conversion feature which is included in interest expense
in the accompanying statements of operations.
Immediately following the completion of this note exchange, one of the holders
of the Company's December 2004 Convertible Notes elected to convert their
outstanding principal of $209,512, into 167,610 shares of common stock with a
fair value of $419,024. The excess of the fair value of shares issued in
exchange for such December 2004 Convertible Notes, which amounts to $209,512, is
included in interest expense in the accompanying statement of operations for the
year ended December 31, 2004. Accordingly, the remaining principal balance of
the December 2004 Convertible Notes amounted to $901,728, before giving effect
to the net unamortized discount associated with the beneficial conversion
feature.
AMENDED DECEMBER 2004 CONVERTIBLE NOTES
In April 2005, the Company renegotiated certain terms of the December 2004
Convertible Notes to extend the maturity date until July 3, 2006 and in exchange
the Company (1) increased the contractual interest rate effective December 8,
2005 to 12%, (2) reduced the conversion rate from $1.25 to $0.75 per share and
(3) eliminated the Company's right to call the December 2004 Convertible Notes
(the "Amended December 2004 Convertible Notes"). The Company accounted for the
issuance of the Amended December 2004 Convertible 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 ten 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 December 2004 Convertible
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 statement of operations for the year ended December 31, 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 December 2004 Convertible Notes. The intrinsic value of
the beneficial conversion feature is being amortized as interest expense over
the term of the Amended December 2004 Convertible Notes through July 3, 2006.
During the year ended December 31, 2005, the Company amortized $597,820 of the
intrinsic value of the beneficial conversion feature which is included in
interest expense in the accompanying statement of operations.
An investor holding $452,991 in principal of the Company's Amended December 2004
Convertible Notes elected to participate in the Company's December 2005
Convertible Note offering. The Company, in exchange for such investor's
participation, agreed to reduce the conversion price of the Amended December
2004 Convertible Notes from $0.75 to $0.375 per share, subject to certain
limitations on conversion, including where the resulting number of shares
converted, on a cumulative basis, would exceed 19.99% of the total number of
shares of common stock outstanding. The Company evaluated the reduction of the
conversion price and determined that $573,789 for the fair value of the 603,988
additional shares issuable upon conversion of the Amended December 2004
Convertible Notes represents a direct cost of the investors participation in the
December 2005 Convertible Note offering. Accordingly, the Company recorded the
additional fair value as a debt discount associated with the issuance of the
December 2005 Convertible Notes.
DECEMBER 2005 CONVERTIBLE NOTE
On December 9, 2005, the Company issued a convertible note in the principal
amount of $250,000 which bears interest at the rate of 6% percent per year (the
"December 2005 Convertible Note"). All unpaid principal and interest under the
December 2005 Convertible Note will be due and payable on December 9, 2006 and
is convertible, in whole or in part, at any time, into shares of common stock of
F-21
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
the Company at a conversion price of $1.00 per share, subject to certain
limitations on conversion as set forth in the December 2005 Convertible Note,
including where the resulting number of shares converted on a cumulative basis,
would exceed 19.99% of the total number of shares of common stock outstanding
and, subject to a conversion price adjustment in the event the Company offers or
sells an option to acquire common stock at a price per share less than the
conversion price.
An investor holding $452,991 in principal of the Company's Amended December 2004
Convertible Notes elected to participate in the Company's December 2005
Convertible Note offering. The Company, in exchange for such investor's
participation, agreed to reduce the conversion price of the Amended December
2004 Convertible Notes from $0.75 to $0.375 per share, subject to certain
limitations on conversion, including where the resulting number of shares
converted, on a cumulative basis, would exceed 19.99% of the total number of
shares of common stock outstanding. The Company evaluated the reduction of the
conversion price and determined that $573,789 for the fair value of the 603,988
additional shares issuable upon conversion of the Amended December 2004
Convertible Notes represents a direct cost of the investors participation in the
December 2005 Convertible Note offering. Accordingly, the Company recorded the
additional fair value as a deferred financing cost associated with the issuance
of the December 2005 Convertible Notes.
DECEMBER 2005 CONVERTIBLE DEBENTURES
On December 9, 2005, the Company entered into a securities purchase agreement
with an investor pursuant to which the investor purchased from the Company in a
private placement, two convertible debentures which bear interest at the rate of
8% per year in the principal amount of $1,000,000 on each of December 9, 2005
and December 28, 2005 (the "December 2005 Convertible Debentures"). The December
2005 Convertible Debentures have a three-year maturity from the date of issuance
and are subject to earlier conversion or redemption pursuant to its terms.
The investor has the right to convert a portion or all of the outstanding
principal and interest under the December 2005 Convertible Debentures into
shares of common stock at a conversion price per share equal to the lesser of
(i) the fixed Price or (ii) the floating price, subject to adjustment as
provided in the December 2005 Convertible Debentures; provided, that any such
conversion based on the Floating Price will generally be limited to $150,000 of
principal outstanding under the December 2005 Convertible Debentures in any
thirty day period; and further provided, that the investor may not convert the
December 2005 Convertible Debentures into shares of common stock if such
conversion would result in the investor beneficially owning in excess of 4.9% of
the then issued and outstanding shares of common stock. Upon 65 days notice,
this limitation may be waived by the investor. The conversion price and number
of shares of common stock issuable upon conversion of the December 2005
Convertible Debentures is subject to certain exceptions and adjustment in the
event the Company offers or sells an option to acquire common stock at a price
per share less than the conversion price and for stock splits and combinations
and other dilutive events. The Company accounted for this embedded conversion
option as a free standing derivative financial instrument in accordance with
SFAS 133 and EITF 00-19. The Company recorded a liability of $789,958 on
December 9, 2005 and has charged $10,240 to changes in fair value in the
accompanying statements of operations for the change in fair value as of the
reporting date of the Company's balance sheet.
Subject to the terms and conditions of the December 2005 Convertible Debentures,
the Company has the right at any time upon three business days notice to redeem
the December 2005 Convertible Debentures, in whole or in part. If the closing
bid price of the common stock, is less than the Fixed Price at the time of the
redemption, the Company is obligated to pay, in addition to the principal amount
being redeemed, an amount equal to 8% of the principal amount being redeemed
(the "Redemption Amount"). If the closing bid price on the date of redemption is
greater than the Fixed Price, the Company may redeem up to 50% of the principal
amount at the Redemption Amount and the remaining 50% at the greater of the (x)
Redemption Amount and (y) the market value of the Common Stock. In addition, the
investor will receive a Redemption Warrant equal to the right to purchase 25,000
shares of common stock for each $100,000 in principal redeemed up to a total of
500,000 shares of common stock, at an exercise price of $0.9765.
If an Event of Default (as such term is defined in the December 2005 Convertible
Debentures) occurs, any principal and accrued interest outstanding will become
immediately due and payable, in cash or common stock, at the investor's option.
Pursuant to the securities purchase agreement, on December 9, 2005, the Company
issued to the investor (i) a warrant to purchase up to 1,000,000 shares of
common stock, at an exercise price per share of $1.023 (110% of the closing bid
price of the common stock on December 8, 2005) and (ii) 268,817 shares of common
stock and, (iii) on each of December 9, 2005 and December 28, 2005, the Company
made cash payments to an affiliate of the investor in the amounts of $80,000 for
expenses incurred in connection with the transaction. The Company recorded a
warrant liability on its balance sheet of $720,000 on December 9, 2005 based on
the fair value of the warrant as determined by a Black-Scholes calculation and
has charged $10,000 to changes in fair value in the accompanying statement of
operations for the change in the fair value of the warrant as of the reporting
date of the Company's balance sheet.
The Company also entered into an investor registration rights agreement pursuant
to which the Company is required to register shares issuable to the investor in
connection with the Securities Purchase Agreement. The Company filed a
registration statement which was declared effective by the SEC on January 23,
2006. If the Company does not keep the registration statement effective, the
Company is obligated to pay the investor, as liquidated damages, an amount equal
to 1% of the value of the December 2005 Convertible Debentures outstanding, in
cash or in shares of common stock, at the investor's option, for each 30-day
period.
F-22
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
The Company has granted a security interest in all of its assets to the investor
to secure its obligations under the Debentures.
NOTE 13 - LICENSE AGREEMENT WITH JCR PHARMACEUTICALS CO., LTD.
On September 15, 2004 the Company entered into an exclusive license agreement
with JCR Pharmaceuticals Co., Ltd. ("JCR") to manufacture and sell Myodur, the
Company's proposed product for muscular dystrophy, in certain Pacific Rim
countries consisting of Japan, South Korea, China, Taiwan, and Singapore. Under
the terms of the JCR license, the Company will receive royalties in the amount
of 25% of net sales (as defined), provided that the sum of cost of goods sold
plus royalty payments does not exceed 35% of net sales in total. In addition,
JCR is obligated to make a $500,000 payment upon approval of an Investigational
New Drug application ("IND") in the United States for the Company's therapy for
muscular dystrophy. Pursuant to the agreement, JCR purchased 554,413 shares of
common stock of the Company for a payment of $1,000,000. In addition, JCR has
agreed to purchase an additional $1,000,000 of common stock of the Company at
the then market price existing at the time of IND approval from the Food and
Drug Administration for the Company's therapy for muscular dystrophy.
NOTE 14 - INCOME TAXES
At December 31, 2005 the Company estimates that it has federal and state net
operating loss carry forwards of approximately $9.4 million that will be
available to offset future taxable income, if any, through 2015. The Company's
utilization of its net operating loss carry forwards could be subject to
substantial limitation due to the "change of ownership" provisions under Section
382 of the Internal Revenue Code and similar state provisions. Such limitation
may result in the expiration of the net operating loss carry forwards prior to
their utilization.
The tax effects of significant temporary difference which give rise to the
Company's deferred tax assets and liabilities are as follows:
December 31,
-----------------------------
2005 2004
---------- ----------
Deferred tax assets:
Net operating loss carry forwards $ 6,071,705 $ 1,360,198
Stock-based compensation 2,581,375 2,156,767
Non-cash interest expense 845,045 509,234
Gain on extinguishment of debt (120,217) -
----------- -----------
9,377,908 4,026,199
Valuation allowance (9,377,908) (4,026,199)
----------- -----------
$ - $ -
=========== ===========
The Company's recorded income benefit, net of the change in the valuation
allowance for each period presented, is as follows:
Years Ended December 31,
-----------------------------
2005 2004
---------- ----------
Current
Federal $ - $ -
State - -
----------- -----------
- -
----------- -----------
Deferred
Federal (4,711,500) (3,234,617)
State (640,209) (439,528)
----------- -----------
(5,351,709) (3,674,145)
Change in valuation allowance 5,351,709 3,674,145
----------- -----------
$ - $ -
=========== ===========
Pursuant to SFAS No. 109 "Accounting for Income Taxes," management has evaluated
the recoverability of the deferred income tax assets and the level of the
valuation allowance required with respect to such deferred income tax assets.
After considering all available facts, the Company has fully reserved for its
deferred tax assets because it is more likely than not that their benefit will
not be realized in future periods. The Company will continue to evaluate its
deferred tax assets to determine whether any changes in the circumstances could
affect the realization of their future benefit. If it is determined in future
periods that portions of the Company's deferred tax assets satisfies the
realization standard of SFAS No. 109, the valuation allowance will be adjusted
accordingly.
A reconciliation of the expected federal statutory rate of 34% to the Company's
actual rate as reported for each of the periods presented is as follows:
Years Ended December 31,
-----------------------------
2005 2004
---------- ----------
Expected statutroy rate (34.0%) (34.0%)
State income tax rate, net of federal benefit (4.6%) (4.6%)
Effect of permanent differences 0.0% 13.4%
------- -------
(38.6%) (25.2%)
Valuation allowance 38.6% 25.2%
------- -------
0.0% 0.0%
======= =======
NOTE 15 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with certain of its executives
commencing March 31, 2004 and April 26, 2004 (the "Executives"), which provide
each Executive with a base salary for an initial term of two years,
automatically renewable annually thereafter. The Company is obligated to pay, in
the aggregate, approximately $865,000 for the year ended December 31, 2006. If
Executive's employment with the Company is terminated without cause or good
reason, as those terms are defined in the employment agreement, the Company is
obligated to pay Executive his current base salary and his benefits for an
additional twelve months. If Executive's employment is terminated due to total
disability, the Company is obligated to continue to pay his current base salary
and his benefits for an additional thirty-six months. If Executive's employment
is terminated due to his death, the Company is obligated to continue to pay his
current base salary for an additional three months and continue to pay for his
benefits for the next twelve months. In addition, the employment agreement
contains confidentiality and covenant not to compete provisions for the period
of his employment plus and additional twelve months.
LEASE ARRANGEMENT
Effective March 17, 2004, the Company entered into a sublease for 5,200 square
feet of office space in Hunt Valley, Maryland that expires on December 31, 2006.
Minimum lease payments (including common area operating expenses) under this
arrangement will amount to approximately $85,400 during the year ending December
31, 2006. Rent expense under this lease amounted to $82,807 for the year ended
December 31, 2005.
DEFINED CONTRIBUTION PLAN
During the year ended December 31, 2004, the Company instituted an Internal
Revenue Service-approved defined contribution plan under Section 401(k) of the
Internal Revenue Code. This type of plan requires the Company to match its
employee's contributions in an amount up to 4% of each eligible participant's
compensation. The Company's contributions to the plan amounted to approximately
$60,600 and $30,700 for the years ended December 31, 2005 and 2004,
F-23
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
respectively, which are included in general and administrative expenses in the
accompanying statements of operations.
CONSULTING AGREEMENTS
Pursuant to Xechem's acquisition of the Company, Xechem entered into consulting
agreements with its two founding scientists (the "Scientists") for a period of
sixty months. In consideration for the services to be rendered, Xechem was
obligated to pay a total of $276,000 to each Scientist, plus expenses as allowed
for in the consulting agreements. Pursuant to the Spinoff Agreement, the Company
entered into new consulting agreements to replace and supersede their agreements
with Xechem. The consulting agreements are non-cancelable for a period of sixty
months, effective February 1, 2004 and provide for a monthly fee of $5,000 each,
plus allowable expenses.
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 December 31, 2005 and 2004, the Company incurred costs of
product requirements from Bachem in the aggregate of approximately $3.6 million
and $0.8 million, respectively, and as of December 31, 2005 the Company has
amounts payable to Bachem of approximately $1.4 million. The Company charged the
aforementioned costs to research and development expenses.
The Company believes the amount of product requirements produced to date is
sufficient to complete the pre-clinical and toxicology studies executed in
support of the IND submission and to complete its initial human clinical trials.
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 16 - EQUITY TRANSACTIONS
STOCK SPLIT
In April 2004, the Company's board of directors declared an 18,000-for-one stock
split (based upon the then outstanding shares of common stock of the Company,
prior to the share exchange and merger with Medallion), affected in the form of
a stock dividend, on the shares of the Company's common stock. Each shareholder
of record received additional shares of common stock for each share of common
stock held without the capital of the Company being increased or decreased by
the transfer of surplus to capital account or the transfer of capital to
surplus, or otherwise. Stockholders' equity reflects the stock split by
reclassifying from "Additional paid-in capital" to "Common stock" an amount
equal to the par value of the additional shares arising from the stock split. As
the result of the stock split, the pre-merger shares held by Xechem increased
from 100 shares to 1,800,000 shares (3,898,213 shares on a post-Medallion merger
basis) and the shares held in reserve for options to be granted to pursuant to
the Founders' Plan, which upon exercise would be 1,400,000 shares (3,031,943 on
a post-Medallion merger basis).
In conjunction with the reverse merger (see Note 6), the Company's Certificate
of Incorporation was amended to increase the authorized capital stock to
120,000,000 shares, and 100,000,000 was designated as shares of common stock,
$0.0001 par value per share and 20,000,000 shares of preferred stock.
COMMON STOCK ISSUED FOR CASH
As described in Note 13, the Company issued 554,413 shares of common stock to
JCR Pharmaceuticals Co., Ltd. for net proceeds of $929,231 (gross proceeds of
$1,000,000 less transaction expenses of $70,769).
COMMON STOCK ISSUED IN CONNECTION WITH BRIDGE LOANS
As described in Note 12, the Company issued 451,597 shares of common stock with
an allocated fair value of $550,000 to the holders of the Bridge Loans and
36,000 shares of common stock with a fair of $90,000 to the placement agent in
the Bridge Loan transaction.
F-24
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
CONVERSION OF DECEMBER 2004 CONVERTIBLE NOTES INTO COMMON STOCK
As described in Note 12, on December 9, 2004, one of the holders of the
Company's December 2004 Convertible Notes elected to convert its principal
balance of $209,512 into 167,610 shares of common stock with a fair value of
$419,024.
COMMON STOCK ISSUED UNDER FOUNDERS' PLAN
On December 9, 2004 the Company issued to employees of the Company and others
3,031,943 shares of restricted common stock under the Founders' Stock Plan (see
Note 5).
ISSUANCES OF WARRANTS
During the year ended December 31, 2004, the Company issued three-year warrants
to purchase 200,000 shares of common stock to two advisors for past services
performed earlier in 2004 and, based on an option pricing model, recorded the
fair value of the warrants as stock-based compensation to nonemployees in the
accompanying statement of operations, in the amount of $396,000.
During December 2004, the Company issued warrants for the purchase of 50,000
shares of common stock at an exercise price of $1.25 per share and with a fair
value of $109,500 in connection with the settlement of litigation.
During March 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.
During August 2005, the Company issued three-year warrants to purchase 160,000
shares of common stock at $1.70 per share to two consulting firms for past
financial assistance. The Company recorded a charge to general and
administrative expenses for the fair value of these warrants of $180,800.
Pursuant to a common stock purchase agreement dated October 7, 2005, the Company
issued a warrant to purchase 377,359 shares of common stock at $0.01 per share
which expires December 31, 2010, as an initial commitment fee.
On December 9, 2005, the Company entered into a securities purchase agreement
with an investor pursuant to which the investor purchased the December 2005
Convertible Debentures from the Company in a private placement during December
2005. Pursuant to the securities purchase agreement, the Company issued to the
investor a warrant to purchase up to 1,000,000 shares of common stock, at an
exercise price per share of $1.023 (110% of the closing bid price of the common
stock on December 8, 2005). The Company recorded $720,000 as a debt discount,
which represents an allocation of a portion of the offering proceeds to the
warrants based upon the relative fair value of such warrants to all securities
issued under this arrangement.
PRIVATE PLACEMENT OF PREFERRED STOCK
Pursuant to a placement agent agreement dated October 22, 2004, the Company
agreed to sell in a private placement up to 240 Units at $25,000 per Unit,
subject to increase to permit sale of up to an additional 36 Units upon
agreement of the Company and the placement agent. On January 13, 2005, CepTor
and the placement agent amended the placement agent agreement to increase the
private placement to up to 480 Units, subject to increase to permit sale of up
to an additional 72 Units, provided that such increase could be terminated at
any time prior to closing by the Company. Under the terms of the placement agent
agreement, as amended, the placement agent was entitled to a selling commission
of 8%, plus a 2% non-accountable expense reimbursement payable from the proceeds
of the private placement, five-year warrants exercisable at $1.25 per share for
an amount equivalent to 10% of the shares of common stock to which the Units
would be convertible into, and up to 300,000 shares of common stock.
Pursuant to the placement agent agreement, as amended, the Company issued
300,000 shares of common stock and warrants to purchase up to an aggregate of
511,650 shares of common stock to the placement agent in connection with the
private placement. Each warrant entitles the placement agent to purchase the
stated number of shares of common stock at an exercise price of $1.25 per share
and will expire five years after its issue date.
Commencing December 9, 2004 through February 11, 2005, CepTor sold 511.65 Units
to investors pursuant to a Confidential Private Placement Memorandum dated
October 22, 2004 as supplemented, each Unit consisting of one share of Series A
F-25
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
Convertible Preferred Stock, and a three-year warrant to purchase up to 5,000
shares of common stock for $2.50 per share. Each share of Series A Convertible
Preferred Stock is convertible into 10,000 shares of common stock. The Company
received gross proceeds of $12,791,250 (net proceeds of $10,448,629, after the
payment of commissions and other expenses of the transactions which amounted to
$2,342,621), from the sale of the Units.
Holders of Series A Preferred Stock will be entitled at any time to convert
their shares of Series A Preferred Stock into common stock, without any further
payment therefore. Each share of Series A Preferred Stock is initially
convertible into 10,000 shares of common stock. The number of shares of common
stock issuable upon conversion of the Series A Preferred Stock is subject to
adjustment upon the occurrence of certain events, including, among others, a
stock split, reverse stock split or combination of our common stock, an issuance
of common stock or other securities as a dividend or distribution on the common
stock, a reclassification, exchange or substitution of the common stock, or our
capital reorganization. Upon merger or consolidation of the Company with or into
another company, or any transfer, sale or lease by us of substantially all of
the common stock or assets of the Company, the Series A Preferred Stock will be
treated as common stock for all purposes, including the determination of any
assets, property or stock to which holders of the Series A Preferred Stock are
entitled to receive, or into which the Series A Preferred Stock is converted, by
reason of the consummation of such merger, consolidation, sale or lease.
Except as otherwise required by law, the holders of Series A Preferred Stock are
entitled to vote their shares on an as-if-converted to common stock basis, and
shall vote together with the holders of the common stock, and not as a separate
class.
In the event of voluntary or involuntary liquidation, dissolution or winding-up
of the Company, holders of Series A Preferred Stock will be entitled to receive
out of our assets available for distribution to our stockholders, before any
distribution is made to holders of our common stock, liquidating distributions
in an amount equal to $25,000 per share. After payment of the full amount of the
liquidating distributions to which the holders of the Series A Preferred Stock
are entitled, holders of the Series A Preferred Stock will receive liquidating
distributions pro rata with holders of common stock, based on the number of
shares of common stock into which the Series A Preferred Stock is convertible at
the conversion rate then in effect.
The Series A Preferred Stock may not be redeemed.
Holders of Series A Preferred Stock will not be entitled to receive dividends,
if any.
The Company issued warrants to purchase 2,558,250 shares of common stock at an
exercise price of $2.50 per share, as a component of the Unit. The Company
determined that the preferred stock was issued with an effective beneficial
conversion feature for which it recorded a deemed dividend of $10,100,616 based
upon an allocation of the proceeds to the relative fair values of the preferred
stock and the warrants. The Company calculated the fair value of the warrants
using an option pricing model.
The warrants may not be redeemed by the Company at any time. The warrants
contain provisions that protect the holders against dilution by adjustment of
the purchase price in certain events, such as stock dividends, stock splits, and
other similar events. Prior to exercise, the warrants do not confer upon holders
any voting or any other rights as a stockholder.
F-26
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
Substantially all of the warrants issued in these transctions are exercisable by
the holders at any time. In addition, the registration rights do not preclude
the Company 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 00-19, it has classified its
warrants as equity instruments.
The Company filed a registration statement covering the resale of all of the
common stock issuable under this arrangement that became effective on July 27,
2005.
COMMON STOCK ISSUED UPON CONVERSION OF SERIES A PREFERRED STOCK
During the year ended December 31, 2005, the Company issued 2,635,000 shares of
common stock upon conversion of 263.50 shares of Series A Preferred Stock.
OPTIONS GRANTED PURSUANT TO 2004 INCENTIVE STOCK PLAN
During November 2004, the Company granted an option to an employee to purchase
shares of common stock in an amount equal to 1/2% of its common stock
outstanding upon the closing of the Company's private placement. Pursuant to the
terms of the 2004 Incentive Stock Plan under which these options were granted,
the options have an exercise price of $2.50 per share, the fair market value on
the date of grant and such options vest over four years. Upon completion of the
Company's private placement on February 11, 2005, the Company determined that
78,195 shares of common stock were subject to this option. The Company accounted
for this option using variable plan accounting in accordance with APB No. 25
since the number of shares of common stock subject to this option was not known
at the date of grant. Accordingly, the Company recorded deferred compensation of
$293,231 for the excess of the fair value of the common stock over the exercise
price of which $85,526 was amortized during the year ended December 31, 2005 and
is included in research expense in the accompanying statement of operations.
Pursuant to an agreement entered into during the year ended December 31, 2004,
for the purpose of providing investor relations services to the Company, the
Company agreed to issue to one of its investor relations firm, five-year options
to purchase up to 187,500 shares of common stock at an exercise price of $3.05
per share, with piggy-back registration rights. Based on an option pricing
model, the fair value of these options of $382,500 was recorded as deferred
stock compensation expense at the date of award.
During the year ended December 31, 2004, the Company entered into an agreement
with an investor relations firm in which such firm agreed to provide the Company
with investor relations service for a period of 24 months in exchange for
compensation consisting of five-year options to purchase up to 400,000 shares of
the Company's common stock at an exercise price of $2.50 per share. These
options vest at the rate of 25% on the date of grant, and 25% at each of dates
that are 6 months, 12 months and 18 months following the date of grant. The
Company is accounting for this award in accordance with the measurement date
guidelines enumerated in EITF 96-18. Accordingly, the Company recorded deferred
compensation of $816,000, representing the aggregate fair value of the option
granted under this arrangement of which $204,000 was amortized during the year
ended December 31, 2004. In addition, the Company recorded cumulative
mark-to-market adjustments amounting to approximately $201,750 and $295.125 in
compensation expense to give effect to increases and decreases in the trading
price of the Company's common stock during the year ended December 31, 2005,
Unamortized compensation expense under this arrangement amounted to $115,125 at
December 31, 2005.
In addition, during the year ended December 31, 2004, the Company granted an
option to purchase 15,000 shares of common stock to a research consultant of the
Company and, based on an option pricing model, recorded the fair value of the
options as deferred stock compensation, in the amount of $52,200. The Company
recognized research expense of $ 34,350 and $17,850, during the years ended
December 31, 2005 and 2004, respectively, and is included in research expense in
the accompanying statements of operations.
During November and December 2004, the Company issued 675,690 shares of
restricted common stock with a fair value of $1,689,225 to an advisor for
services performed during 2004. The restrictions as to these shares lapse twelve
months after the dates of issuance.
F-27
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
During December 2004, the Company issued 125,000 shares of common stock with a
fair value of $312,500 in connection with the settlement of litigation
During February 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 its 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
for which the Company recorded a liability. The Company recorded a $172,750
charge to general and administrative expenses in the accompanying statement of
operations for the fair value of these warrants during the year ended December
31, 2005.
During February 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. 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.
During February 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 general and administrative expenses in the
accompanying statement of operations for the intrinsic value of these restricted
shares of common stock. The restrictions on these shares lapsed in August 2005.
During March 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
general and administrative expenses in the accompanying statement of operations
for the fair value of this warrant during the year ended December 31, 2005.
During March 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
general and administrative expenses in the accompanying statement of operations
for the fair value of this warrant.
During July 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. 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.
During August 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.
During September 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. 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
During February 2005, a non-employee warrant holder exercised its right to
purchase 187,500 shares of common stock of the Company 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
During January 2005, in lieu of a cash 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.
F-28
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
COMMON STOCK ISSUED UPON EXERCISE OF WARRANTS
During March 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 amounted to
$75,000 at date of issuance, was initially characterized as a prepaid expense in
the balance sheet at June 30, 2005, and upon termination of the letter
agreement, has been amortized to general and administrative expenses in the
accompanying statement of operations for the year ended December 31, 2005.
Pursuant to a letter agreement dated September 14, 2005, the Company issued
25,000 shares of common stock as initial compensation in connection with a
subsequent common stock purchase agreement. Pursuant to a common stock purchase
agreement dated October 7, 2005, the Company issued 377,359 shares of its common
stock as an initial commitment fee. The par value of $0.0001 per share for the
shares issued was charged to additional paid-in capital in the accompanying
balance sheet at December 31, 2005.
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 net proceeds of $163,014 (gross proceeds of $167,250 less expenses of
$4,236) during October 2005.
TREASURY SHARES ACQUIRED AND RETIRED
Pursuant to the redemption obligation contained in the Spinoff Agreement with
Xechem (see Note 11), the Company repurchased 511,650 shares of its common stock
from Xechem. 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 $2,734,068 and terminated the Spinoff
Agreement. The Company accounted for these share repurchases as treasury stock
transactions, at cost. 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.
During June 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 during July 2005, the Company
issued a total of 100,000 shares in satisfaction of this obligation. The Company
recorded a $270,000 charge to additional paid-in capital for the fair value of
these shares.
COMMON 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, 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.
F-29
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
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. 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.
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.
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:
F-30
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
o the effectiveness of the previously filed registration statement
which became effective on December 7, 2005 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;
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.
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 ISSUED PURSUANT TO SECURITIES PURCHASE AGREEMENT - DECEMBER 2005
CONVERTIBLE DEBENTURES
On December 9, 2005, the Company entered into a Securities Purchase Agreement
with an investor pursuant to which the investor purchased the December 2005
Convertible Debentures from the Company in a private placement during December
2005 (see Note 12). Pursuant to the Securities Purchase Agreement, the Company
issued to the investor 268,817 shares of common stock for expenses incurred in
connection with the transaction. The Company recorded $37,370 as a debt
discount, which represents an allocation of a portion of the offering proceeds
to the shares based upon the relative fair value of such shares to all
securities issued under the arrangement. The Company charged additional paid-in
capital for the par value of these shares.
F-31
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
CONVERSION OF AMENDED DECEMBER 2004 CONVERTIBLE NOTE INTO COMMON STOCK
During December 2005, the holder of the Company's Amended December 2004
Convertible Note elected to convert a portion of the principal balance plus
accrued interest of $181,875 into 485,000 shares of common stock at a conversion
price of $0.375 per share.
NOTE 17 - ADOPTION OF 2004 INCENTIVE STOCK PLAN
The 2004 Incentive Stock Plan was first approved by the Board of Directors and
the stockholders of the Company on May 31, 2004 and re-approved on December 8,
2004. The purpose of the 2004 Incentive Stock Plan is to provide an incentive to
retain in the employ of and as directors, officers, consultants, advisors and
employees of the Company, persons of training, experience and ability, to
attract new directors, officers, consultants, advisors and employees whose
services are considered valuable, to encourage the sense of proprietorship and
to stimulate the active interest of such persons into the development and
financial success of the Company. Under the 2004 Incentive Stock Plan, the
Company will be authorized to issue Incentive Stock options intended to qualify
under Section 422 of the Code, non-qualified stock options, and restricted
stock. The 2004 Incentive Stock Plan is administered by the board of directors
or the Compensation Committee. Upon approval, 2,773,820 shares of common stock
of the Company were reserved for issuance under the 2004 Incentive Stock Plan.
Through December 31, 2005, options for the purchase of 834,195 shares of common
stock of the Company, of which 705,000 are to nonemployees for services
rendered, have been granted. In addition, through December 31, 2005, the Company
issued 808,190 shares of restricted common stock of the Company pursuant to the
2004 Incentive Stock Plan as payment for services rendered. As of December 31,
2005, there were 1,131,435 shares available for grant under the 2004 Incentive
Stock Plan.
The following table summarizes the stock option activity for the years ended
December 31, 2005 and 2004 (there was no activity prior to January 1, 2004):
2005 2005 2004 2004
------------- -------------------- -------------- -------------------
Weighted- Weighted-
Average Average
Options Exercise Price Options Exercise Price
------------- -------------------- -------------- -------------------
Outstanding - January 1 662,340 $ 2.50 - $ -
Granted 171,855 4.70 662,340 2.64
Exercised (187,500) 3.00
Canceled - 3.00 -
------- ------- ---------
Outstanding - December 31 646,695 3.08 662,340 2.64
======= ======= =========
Options exercisable at December 31 417,549 3.29 295,000 $ 2.82
======= ======= =========
The following table summarizes additional information about outstanding and exercisable stock options at December 31, 2005:
Weighted-
Average Weighted-
Number Remaining Average
Exercise Prices Outstanding Contractual Life ExercisePrice Number Exercisable Exercise Price
------------------- --------------------- ------------------- ----------------- --------------------- --------------------
$0.00-$2.50 522,195 5.00 years $2.45 327,049 $2.50
$2.51-$5.00 75,000 3.2 $4.53 50,000 $4.75
$5.01-$9.50 49,500 5.3 $7.58 40,500 $7.87
------- -------
Total 646,695 4.8 $3.08 417,549 $3.29
======= =======
All options granted have exercise prices equal to the fair market value on the date of grant.
The fair value of stock option grants is estimated using the Black-Scholes option-pricing model with the following assumptions:
F-32
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
Term (years) 10
Volatility 120%
Risk-free interest rate 3.32%
Dividend yield 0
NOTE 18 - SUBSEQUENT EVENTS
CONVERSION OF AMENDED DECEMBER 2004 CONVERTIBLE NOTE INTO COMMON STOCK
Subsequent to December 31, 2005, the holder of the Company's Amended December
2004 Convertible Note elected to convert the remaining principal balance plus
accrued interest of $320,725 into 855,267 shares of common stock at a conversion
price of $0.375 per share.
CONVERSION OF DECEMBER 2005 CONVERTIBLE DEBENTURE INTO COMMON STOCK
Subsequent to December 31, 2005, the holder of the Company's December 2005
Convertible Debentures elected to convert a portion of their aggregate principal
balance of $200,000 into 639,375 shares of common stock at a conversion price
pursuant to the terms of the December 2005 Convertible Debentures (see Note
12).
ADOPTION OF SHAREHOLDER RIGHTS PLAN
At its February board meeting, the directors of the Company approved a
shareholder rights plan pursuant to which the Company issued one preferred share
purchase right for each share of the Company's common stock held by shareholders
of record as of the close of business on March 7, 2006. Each right will entitle
the holder to purchase one one-hundredth of a share of Series B Preferred Stock
at an exercise price of $168. These preferred shares are structured so that the
value of one one-hundredth of a preferred share will approximate the value of
one share of the Company's common stock. The purpose of the plan is to protect
the long-term value of the Company for its shareholders and to protect
shareholders from various abusive takeover tactics, including attempts to
acquire control of the Company at an inadequate price. The plan is designed to
give the Company's Board of Directors sufficient time to study and respond to an
unsolicited takeover attempt. Adoption of the plan was unanimously approved by
the Company's directors and was not in response to any specific attempt to
acquire the Company or its shares, and the Company is not aware of any current
efforts to do so.
The terms of the plan provide for the Company's shareholders of record at the
close of business on March 7, 2006 to receive one right for each outstanding
common share held. In general, the rights will become exercisable if a person or
group acquires 15% or more of the Company's common stock or announces a tender
offer or exchange offer for 15% or more of the Company's common stock. Depending
on the circumstances, the effect of the exercise of rights will vary. When the
rights initially become exercisable, as described above, each holder of a right
will be allowed to purchase one one-hundredth of a share of a newly created
series of the Company's preferred shares at an exercise price of $168. However,
if a person acquires 15% or more of the Company's common stock in a transaction
that was not approved by the Board of Directors, each right would instead
entitle the holder (other than such an acquiring person) to purchase common
stock at 50% of the market price of the Company's common stock at that time.
The rights will expire on March 6, 2016. The Company may redeem the rights for
$0.0001 each at any time until the tenth business day following public
announcement that a person or group has acquired 15% or more of its outstanding
common stock.
COMMON STOCK ISSUED UPON CONVERSION OF SERIES A PREFERRED STOCK
Subsequent to December 31, 2005, the Company issued 237,500 shares of common
stock upon conversion of 23.75 shares of Series A Preferred Stock.
F-33
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2005
LETTER AGREEMENT FOR FINANCIAL SERVICES
Pursuant to a letter agreement dated January 24, 2006, the Company paid $8,925
as an advance of expenses for financial consulting services to be provided the
Company. This payment was characterized as a prepaid expense in the balance
sheet subsequent to December 31, 2005.
ADOPTION OF 2006 INCENTIVE STOCK PLAN
The 2006 Incentive Stock Plan was approved by the Board of Directors on February
16, 2006, subject to shareholder approval. The purpose of the 2006 Incentive
Stock Plan is to provide an incentive to retain in the employ of and as
directors, officers, consultants, advisors and employees of the Company, persons
of training, experience and ability, to attract new directors, officers,
consultants, advisors and employees whose services are considered valuable, to
encourage the sense of proprietorship and to stimulate the active interest of
such persons into the development and financial success of the Company. Under
the 2006 Incentive Stock Plan, the Company will be authorized to issue Incentive
Stock options intended to qualify under Section 422 of the Code, non-qualified
stock options, and restricted stock. The 2006 Incentive Stock Plan is
administered by the board of directors or the Compensation Committee. Upon
approval, 2,730,090 shares of common stock of the Company were reserved for
issuance under the 2006 Incentive Stock Plan.
OPTIONS GRANTED AND COMMON STOCK ISSUED PURSUANT TO INCENTIVE STOCK PLANS
In March 2006, the Company issued fully-vested, five-year options to purchase an
aggregate of 1,114,206 shares of its common stock at $0.359 per share pursuant
to the 2004 Incentive Stock Plan, to two financial consultants for services
previously provided, of which the options were exercised as to an aggregate of
557,102 shares of common stock for aggregate proceeds of $200,000.
F-34
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 8A.
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 effective 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 years ended December 31, 2004 and 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.
43
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 year that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 8B. OTHER INFORMATION.
Not Applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS.
Directors and Executive Officers
Our directors and executive officers are as follows:
Name Age Position
---- --- --------
William H. Pursley 52 Chief Executive Officer, Chairman of the
Board and Director
Norman W. Barton, M.D., Ph.D. 58 Executive Vice President and Chief Medical
Officer
Donald W. Fallon 52 Senior Vice President, Finance and
Administration, Chief Financial
Officer and Secretary
44
Leonard A. Mudry 68 Director
John W. Griffin, M.D. 63 Director
Each director holds office until the next annual meeting of
stockholders or until their successors have been duly elected and qualified.
Executive officers are elected annually and serve at the discretion of our
Board.
In February 2005, we adopted a cash and equity compensation plan for
our non-employee directors. We paid $2,000 to Mr. Mudry and $1,000 to Dr.
Griffin for services rendered as a director during 2005. During 2005, we granted
5,000 shares of Common Stock and an option to purchase an aggregate of 12,000
and 2,000 shares of Common Stock at $6.25 and $1.02 per share, respectively, to
Mr. Mudry, and an option to purchase an aggregate of 10,000 shares and 2,000
shares of Common Stock, at $2.70 and $1.02 per share, respectively, to Dr.
Griffin under our Directors Plan.
The principal occupations for the past five years (and, in some
instances, for prior years) of each of our directors and executive officers are
as follows:
WILLIAM H. PURSLEY, has served as our Chief Executive Officer and
Chairman of our Board since March 2004. From September 2003 to March 2004, Mr.
Pursley was President and Vice Chairman of Xechem, where he developed a new
focus for that company, significantly increasing its value and spearheading the
acquisition of the Company. From August 2002 until September 2003, Mr. Pursley
was Chief Executive Officer of Osiris where he led a turnaround that revamped
management and operations through corporate partnerships with Boston Scientific
Corporation (BSX-NYSE), among others. Prior thereto, from April 1999 until
August 2002, Mr. Pursley was Senior Vice President, Commercial Operations for
Transkaryotic Therapies, Inc. (TKTC-NASDAQ) where he developed its European
business unit to launch Replagal(TM), an orphan drug for Fabry disease.
Previously, Mr. Pursley has served in executive positions at Genentech, Inc.
(DNA-NYSE), Genzyme, Inc. (GENZ-NASDAQ), and Bio-Technology General Corporation
(BTGC-NASDAQ) where he played key roles in the commercialization of over $2
billion in orphan drugs. The long-time industry executive started his career
twenty-five years ago at Merck & Co., Inc. Mr. Pursley holds a BA degree in
Biology from the University of Louisville.
NORMAN W. BARTON, M.D., PH.D., has served as our Executive Vice
President and Chief Medical Officer since April 2004, and previously was Senior
Vice President and Chief Medical Officer with Osiris Therapeutics, Inc., a
privately held biotechnology company ("Osiris"), from September 2002 to April
2004. Dr. Barton has had a distinguished career over two decades in
investigative medicine and development of novel therapeutic agents in both the
academic and commercial sectors. Dr. Barton is formally trained in biological
chemistry and internal medicine and is certified as a specialist in neurology.
From 1996 until September 2002, Dr. Barton was at Bio-Technology General
Corporation (BTGC-NASDAQ) where he was Senior Vice President and Chief Medical
Officer. In this capacity, Dr. Barton had overall responsibility for the
worldwide development and registration programs for four proprietary recombinant
protein products. Successful advancement of these programs required frequent
interaction with US and European regulatory authorities and development of core
competencies in clinical research, data management and biostatistics. In
addition to product development responsibilities, Dr. Barton also created and
supervised a medical affairs group that provided critical support for
commercialized products in both US and international markets. From 1981 to 1996,
Dr. Barton served as a physician scientist and Chief of the Clinical
Investigations Section (1985-96) with the Neurological Institute at the National
Institutes of Health (NIH). While at the NIH, Dr. Barton was responsible for the
development of enzyme replacement therapy for a severely debilitating lipid
storage disorder known as Gaucher disease. For this precedent setting
achievement, Dr. Barton was awarded both the Outstanding and Meritorious Service
Medals of the United States Public Health Service. Dr. Barton received his MD
and Ph.D. from Pennsylvania State University, and he completed his residency in
Internal Medicine at Albany Medical College Hospital and his residency in
Neurology at Cornell University New York Hospital.
DONALD W. FALLON, has served as our Senior Vice President, Finance and
Administration, Chief Financial Officer and Secretary since March 2004. Mr.
Fallon has over 20 years of broad financial management experience gained at both
public and private companies. Prior to joining our company, from May 2002 until
December 2003, he was Vice President of Finance and Chief Financial Officer for
Osiris and was involved in strategic partnering, fund raising and strategic
planning activities. From January 2000 to May 2002, Mr. Fallon was Senior
Director of Finance and Accounting with Guilford Pharmaceuticals Inc., where he
45
was responsible for financial and strategic planning systems in addition to
accounting operations and internal and external financial reporting. From June
1998 through January 2000, Mr. Fallon was Vice President of Finance and Chief
Financial Officer with Small Molecule Therapeutics, Inc., a venture-backed drug
discovery company. In addition, Mr. Fallon has held various positions with other
start-up and established life sciences companies. Mr. Fallon is a Certified
Public Accountant, received a BS degree in Accounting from the University of
Baltimore and holds an MBA degree in Finance from Loyola College.
LEONARD A. MUDRY, has been a member of our Board since December 2,
2004. Mr. Mudry provides consulting and financial services to a number of
businesses which, from June 2000 to January 2004, included Xechem. From January
2004 to October 2004, Mr. Mudry was, a director of Xechem. Mr. Mudry was from
November 1998 to June 2000, a business consultant with Strategic Business Group
in Cranford, NJ, from May 1994 to October 1998, Senior Vice President, Finance
and Operations of Xechem and from February 1991 to April 1994, Vice President,
Operations of Medigene, Inc., a pre-natal testing company. Prior to joining
Medigene, Mr. Mudry was Vice President, Operations/Finance for Princeton
Diagnostic Labs, from March 1990 to January 1991 and Senior Vice President and
Chief Financial Officer of American Medical Laboratories, from January 1987 to
March 1990. Prior thereto, Mr. Mudry held various positions with Hoffmann-La
Roche, Inc. a major pharmaceutical company, and its subsidiaries, from 1969 to
1987.
JOHN W. GRIFFIN, M.D., is Professor and Director of the Department of
Neurology at Johns Hopkins University School of Medicine and Professor of
Neuroscience and Pathology and Neurologist-in-Chief at Johns Hopkins Hospital.
Dr. Griffin has been on the faculty at Johns Hopkins since 1976, and Professor
of Neurology and Neuroscience since 1986. Dr. Griffin is President of the
American Neurological Association and was Past President of the Peripheral Nerve
Society and the Society for Experimental Neuropathology, and in 2005 was elected
to the Institute of Medicine of the National Academy of Science. Dr. Griffin
trained and was a medical intern and resident at Stanford University School of
Medicine and did his neurology residency at Johns Hopkins, before going to the
NIH as a Clinical Associate. Dr. Griffin's clinical and research career has been
devoted to the neurobiology and neuropathology of the peripheral nervous system,
and to studies of peripheral neuropathies. Dr. Griffin's honors include Jacob
Javits Award from the NIH, and multiple teaching awards, including the
Professor's Award of the Johns Hopkins University School of Medicine. Dr.
Griffin has given many named lectures, including the Robert Wartenberg Lecture
of the American Academy of Neurology and the Soriano Lecture of the American
Neurological Association. Dr. Griffin is a former member of the National
Advisory Council to the National Institute of Neurologic Disease and Stroke and
is currently Chair of the Burroughs Wellcome Fund Program in Translational
Research. Dr. Griffin is the Editor-in-Chief of the journal, NATURE NEUROLOGY.
There are no family relationships between any of our directors or
executive officers.
AUDIT COMMITTEE
Our Board of Directors has determined that Leonard Mudry is the
financial expert serving on our Audit Committee and that Mr. Mudry is
independent as such term is used in Item 7(d)(3)(iv) of Schedule 14A under the
Exchange Act.
CODE OF ETHICS
We adopted a code of ethics that applies to our officers, directors and
employees, including our chief executive officer and chief financial officer.
46
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, which requires executive officers
and directors, and persons who beneficially own more than ten percent of the
common stock of a company with a class of securities registered under the
Exchange Act, to file initial reports of ownership and reports of changes in
ownership with the Securities and Exchange Commission, was not applicable to us
in 2005.
ITEM 10. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth information for the three most recently
completed fiscal years concerning the compensation of (i) the Chief Executive
Officer and (ii) all other executive officers who earned in excess of $100,000
in salary and bonus in the fiscal year ended December 31, 2005 ("Named Executive
Officers").
Long Term Compensation
-----------------------------------------
Annual Compensation Restricted Securities
------------------- Stock Underlying All Other
Salary Award(s) Options Compensation
Name and Principal Position Year ($) ($)(1) (#) ($)
--------------------------- ---- ---------- -------------- ----------- ------------
William H. Pursley 2005 353,525(2) - - 1,630(3)
Chairman and Chief 2004 351,967(4) 885,674(5) - 1,630(3)
Executive Officer 2003 - - - -
Norman W. Barton, M.D., Ph.D. 2005 285,546(2) - - 1,170(3)
Executive Vice President and 2004 187,152(4) 322,902(5) - 1,364(3)
Chief Medical Officer 2003 - - - -
Donald W. Fallon 2005 238,296(2) - - 550(3)
Senior Vice President, 2004 179,667(4) 147,613(5) - 500(3)
Finance and Administrative, 2003 - - - -
Chief Financial Officer and
Secretary
---------------------
(1) Vesting restrictions on such shares lapse as to (i) 10% on the sixth month
anniversary of the date of award, (ii) an additional 10% on the twelve month
anniversary of the date of award, and (iii) the balance upon initiation of phase
III clinical trials for Myodur in muscular dystrophy.
(2) Includes $8,400 of 401(k) contributions.
(3) Represents reimbursement of premiums paid by such executive officer under
certain term life insurance policies.
(4) Includes $5,467, $5,467 and $4,667 of 401(k) contributions for Mr. Pursley,
Dr. Barton and Mr. Fallon, respectively. Includes payments of $71,500 and
$29,167 paid by Xechem to Mr. Pursley and Mr. Fallon, respectively, during 2004.
(5) 1,247,428 shares, 454,792 shares, and 207,905 shares of restricted stock
underlying the Restricted Stock Awards granted in 2004 for Mr. Pursley, Dr.
Barton and Mr. Fallon, respectively, have been valued at $0.71, the closing
price per share of our Common Stock as reported by the OTC Bulletin Board on
December 31, 2005.
47
Option Grants in Last Fiscal Year
No stock options or stock appreciation rights were granted to or
exercised by our Named Executive Officers during 2005.
STOCK PLANS
Prior to our adoption of our Founders' Stock Plan and 2004 Incentive
Stock Plan in December 2004, we did not have a stock option, long-term incentive
or other similar plan for officers, directors, and employees.
FOUNDERS' PLAN. Our Founders' Plan was adopted by the board of
directors and stockholders on December 27, 2004. An aggregate of 3,031,943
shares of Common Stock have been issued under the Founders' Plan. The Founders'
Plan is administered by the Board or the Compensation Committee, which
Compensation Committee presently consists of Leonard Mudry. Upon the happening
of certain events described in the Founders' Plan, such as the cessation of
employment by a participant following an award, shares issued or issuable to
Founders' Plan participants may revert to William Pursley, our Chief Executive
Officer, and may be cancelled, forfeited, re-designated or re-issued by us in
Mr. Pursley's sole discretion subject to Board and Compensation Committee
approvals. Unless vesting is accelerated by the Board or Compensation Committee,
Founders' Stock Plan shares will vest 10% upon the six month anniversary of the
date of issuance, 10% upon the one-year anniversary of the date of issuance and
the remainder upon initiation of a Phase III clinical trial for "Myodur" in
muscular dystrophy, provided such date is not less than six months following the
date of award. In the discretion of the Board or the Compensation Committee,
vesting may be accelerated upon the achievement of significant scientific,
regulatory, or other development milestones subject to approval of the Placement
Agent.
2004 INCENTIVE PLAN. Our 2004 Incentive Plan was adopted by the board
of directors and stockholders on December 27, 2004. An aggregate of 2,773,820
shares of Common Stock have been reserved for issuance under the 2004 Incentive
Plan. The purpose of the 2004 Incentive Plan is to provide an incentive to
retain in the employ of and as directors, officers, consultants, advisors and
employees of our company, persons of training, experience and ability, to
attract new directors, officers, consultants, advisors and employees whose
services are considered valuable, to encourage the sense of proprietorship and
to stimulate the active interest of such persons into our development and
financial success. Under the 2004 Incentive Plan, we are authorized to issue
incentive stock options intended to qualify under Section 422 of the Code,
non-qualified stock options and restricted stock. The 2004 Incentive Plan is
administered by the Board or the Compensation Committee, which Compensation
Committee presently consists of Leonard Mudry. As of April 11, 2005, 1,465,483
shares of Common Stock have been issued under the 2004 Incentive Plan, options
to purchase 1,203,799 shares of Common Stock were outstanding and 17,229 shares
remain available for issuance.
2006 INCENTIVE PLAN. Our 2006 Incentive Plan was adopted by the board
of directors on March 8, 2006. We intend to submit the 2006 Incentive Plan for
approval of our stockholders within 12 months of the effective date of the Plan.
An aggregate of 2,730,090 shares of Common Stock have been reserved for issuance
under the 2006 Incentive Plan. The purpose of the 2006 Incentive Plan is to
provide an incentive to retain in the employ of and as directors, officers,
consultants, advisors and employees of our company, persons of training,
experience and ability, to attract new directors, officers, consultants,
advisors and employees whose services are considered valuable, to encourage the
sense of proprietorship and to stimulate the active interest of such persons
into our development and financial success. Under the 2006 Incentive Plan, we
are authorized to issue incentive stock options intended to qualify under
Section 422 of the Code, non-qualified stock options and restricted stock. The
2006 Incentive Plan is administered by the Board or the Compensation Committee,
which Compensation Committee presently consists of Leonard Mudry. As of April
11, 2005, no grants have been made under the 2006 Incentive Plan.
48
EMPLOYMENT AGREEMENTS
Each of Messrs. Pursley and Fallon and Dr. Barton are parties to
employment agreements. Under such agreements each such employee is generally
obligated to commit substantially all of his time and attention to our affairs.
William H. Pursley, our Chairman of the Board and Chief Executive
Officer, has an employment agreement ending March 31, 2007. The agreement may be
renewed for additional one-year terms unless either party notifies the other at
least sixty days prior to the end of the then current term of its desire to
terminate the agreement. The agreement provides that Mr. Pursley will be
compensated at an annual base salary of $330,000 with annual increases and a
discretionary annual bonus in an amount (in cash, stock or other property) to be
determined by the Board. The agreement may be terminated by us for "cause", by
Mr. Pursley for "good reason" (as such terms are defined in the agreement), by
Mr. Pursley for any reason, upon thirty days notice, and by us without cause,
upon sixty days notice. If Mr. Pursley is terminated by us without cause, or by
Mr. Pursley for good reason he will be entitled to his base salary and a
continuation of benefits under our benefit plans for senior executives for a
twelve month period after the date of termination.
Norman W. Barton, our Executive Vice President and Chief Medical
Officer, has an employment agreement ending April 26, 2007. The agreement may be
renewed for additional one-year terms unless either party notifies the other at
least sixty days prior to the end of the then current term of its desire to
terminate the agreement. The agreement provides that Dr. Barton will be
compensated at an annual base salary of $265,000 with annual increases and an
annual bonus in an amount (in cash, stock or other property) to be determined by
the discretion of the Board. The agreement may be terminated by us for "cause",
by Dr. Barton for "good reason" (as such terms are defined in the agreement), by
Dr. Barton for any reason, upon thirty days notice, and by us without cause,
upon sixty days notice. If Dr. Barton is terminated by us without cause or by
Dr. Barton for good reason, he will be entitled to his base salary and
continuation of benefits under our benefit plans for senior executives for a
twelve month period after the date of termination.
Donald W. Fallon, our Senior Vice President, Finance and Administration
and Chief Financial Officer and Secretary, has an employment agreement ending
March 31, 2007. The agreement may be renewed for additional one-year terms
unless either party notifies the other at least sixty days prior to the end of
the then current term of its desire to terminate the agreement. The agreement
provides that Mr. Fallon will be compensated at an annual base salary initially
of $175,000 with annual increases and an annual bonus in an amount (in cash,
stock or other property) to be determined by the discretion of the Board. As of
March 1, 2005, Mr. Fallon's annual base salary was increased to $240,000. The
agreement may be terminated by us for "cause", by Mr. Fallon for "good reason"
(as such terms are defined in the agreement), by Mr. Fallon for any reason, upon
thirty days notice, and by us without cause, upon sixty days notice. If Mr.
Fallon is terminated by us without cause or by Mr. Fallon for good reason, he
will be entitled to his base salary and continuation of benefits under our
benefit plans for senior executives for a twelve month period after the date of
termination.
COMPENSATION OF DIRECTORS
On February 11, 2005, our Board adopted a Deferred Stock Plan for
Non-Employee Directors (the "Directors Plan") as an amendment to our 2004
Incentive Stock Plan. An aggregate of 200,000 shares of Common Stock have been
reserved under the Directors Plan. The purpose of the Directors Plan is to
provide an incentive for non-employee directors to promote the financial success
and progress of our company. The Directors Plan is administered by the Board or
the Compensation Committee. Under the Directors Plan we are authorized to issue
non-qualified stock options to a director who is not, at the time of grant, an
employee. The Directors Plan provides for (i) the automatic initial grant of
options to purchase 10,000 shares of Common Stock to each non-employee director
who joins our Board at an exercise price equal to the fair market value at the
date of such election or appointment to the Board, and (ii) the grant of options
to purchase 2,000 shares of Common Stock on the date of each Board meeting
thereafter attended by such non-employee director at an exercise price equal to
the fair market value on the date of such Board meeting, subject to vesting as
follows: one-fourth of the shares issuable pursuant to the option are
exercisable six months from the date of grant, and an additional one-fourth of
the shares are exercisable on each of the first, second and third anniversaries
of the date of grant, subject to such person serving as a director at the time
of vesting. The Directors Plan provides for a maximum lifetime award of 30,000
49
shares to any director. The term of each option under the Directors Plan is ten
years. In addition, on February 11, 2005, our Board approved the payment of
$1,000 to each non-employee director for each Board meeting attended, in person
or by telephone, plus reimbursement of reasonable expenses incurred in attending
such meeting.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
The information regarding beneficial ownership of our Common Stock has
been presented in accordance with the rules of the SEC. Under these rules, a
person or entity may be deemed to beneficially own any shares as to which such
person or entity, directly or indirectly, has or shares voting power or
investment power, or has the right to acquire voting or investment power within
60 days through the exercise of any stock option or other right. The percentage
of beneficial ownership as to any person as of a particular date is calculated
by dividing (a) (i) the number of shares beneficially owned by such person, plus
(ii) the number of shares as to which such person has the right to acquire
voting or investment power within 60 days, by (b) the total number of shares
outstanding as of such date, plus any shares that such person has the right to
acquire from us within 60 days. Including those shares in the tables does not,
however, constitute an admission that the named stockholder is a direct or
indirect beneficial owner of those shares.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Based solely upon information available to us, the following table sets
forth certain information regarding beneficial ownership of our Common Stock as
of April 11, 2006 by (i) each person or entity known by us to own beneficially
more than 5% of our outstanding Common Stock, (ii) each of our directors and
Named Executive Officers, and (iii) all directors and executive officers as a
group. Except as otherwise indicated, each of the stockholders named below has
sole voting and investment power with respect to such shares of Common Stock:
Name and Address of Number of Shares Percentage Beneficially
Beneficial Owner(1) Beneficially Owned Owned(2)
------------------------------------------ ------------------ -----------------------
William H. Pursley 1,245,897(3) 7.7%
Norman W. Barton, M.D., Ph.D. 452,992(4) 2.8%
Donald W. Fallon 207,905(5) 1.3%
Leonard A. Mudry 11,500(6) *
John W. Griffin, M.D. 3,000(7) *
Cornell Capital Partners LP(8) 3,815,782(9) 19.9%
101 Hudson Street
Suite 3700
Jersey City, New Jersey 07302
All directors and executive officers as a 1,921,294 11.8%
group (5 persons)
50
------------------------
* Represents less than 1%.
(1) Unless otherwise indicated, the address of each stockholder listed
above is c/o CepTor Corporation, 200 International Circle, Suite 5100,
Hunt Valley, Maryland 21030.
(2) Includes shares of Common Stock issuable upon the conversion of
currently outstanding shares of Series A Preferred Stock.
(3) Includes 500 shares held by Mr. Pursley's wife and children.
(4) Includes 300 shares held by Dr. Barton's wife and children.
(5) Includes 200 shares held by Mr. Fallon's wife and child.
(6) Includes 6,500 shares subject to an option which are exercisable within
60 days.
(7) Represents shares subject to an option which are exercisable within 60
days.
(8) Mark Angelo, the managing member of Yorkville Advisors, LLC, the
general partner of Cornell Capital, has sole voting and dispositive
power over such shares.
(9) Includes 1,000,000 shares issuable upon exercise of the Cornell Warrant
and an estimate of 1,907,590 shares issuable upon conversion of the
Debentures, based upon the Fixed Price at maturity; provided, however,
the terms of the Debentures and the Cornell Warrant provide that
Cornell Capital may not convert the Debentures into or exercise the
Cornell Warrant for shares of Common Stock if, giving effect to such
conversion and/or exercise, Cornell Capital, together with its
affiliates, would beneficially own more than 4.9% of Common Stock
outstanding following such conversion and/or exercise.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During April and May 2004, as contemplated by a spin-off agreement
entered into in connection with the spin-off of our company ("Spin-off
Agreement"), we entered into certain interim financing agreements (the "Bridge
Loans") in anticipation of the spin-off. The terms of the Bridge Loans provided
us with $1,100,000 pursuant to 8% convertible promissory notes maturing on
October 22, 2004. In addition, we agreed to issue up to 515,430 shares of Common
Stock to the Bridge Loan holders, and others. Since we were unable to repay the
Bridge Loans on their maturity date, the Bridge Loan holders had a right to
convert their promissory notes into shares of common stock of Xechem. No Bridge
Loan holder exercised its conversion right and pursuant to an exempt exchange
offer dated October 22, 2004, as amended November 15, 2004, all of the Bridge
Loans were either repaid with the proceeds of the initial closing of the Private
Placement or converted into new 10% convertible promissory notes ("Replacement
Notes") with a December 8, 2005 maturity date, convertible into shares of Common
Stock at $1.25 per share in an amount equal to the outstanding principal and
interest. An aggregate of 238,000 shares of Common Stock originally issued in
connection with the Bridge Loans was converted into a total of 487,597 shares of
Common Stock upon the effectiveness of the Merger. In April 2005, the
51
Replacement Notes were amended to extend the maturity date to July 3, 2006 from
December 8, 2005, to increase the interest rate to 12%, effective December 9,
2005 and to change the conversion price to $0.75 from $1.25 per share. On
December 9, 2005, we further amended the Replacement Note to change the
conversion price to $0.375 from $0.75 per share.
On June 17, 2005, we entered into a securities purchase agreement with
Xechem pursuant to which we repurchased 2,886,563 shares of Common Stock from
Xechem, which was the former owner of approximately 29% of our Common Stock, for
a purchase price of $2,309,250 and terminated the Spinoff Agreement. As
additional consideration, William Pursley, our Chairman and Chief Executive
Officer, surrendered options to purchase 43,000,000 shares of common stock of
Xechem. Xechem retained 500,000 shares of Common Stock, but agreed that it would
only sell such shares subject to the volume restrictions of Rule 144, regardless
of whether or not such volume limitations are applicable at the time of such
sale.
We are a party to an employment agreement with William Pursley, a
director and our Chief Executive Officer and Chairman of the Board, which
employment agreement expires on March 31, 2007 (with automatic one-year renewal
terms) for an annual base salary of $330,000 and annual increases and bonuses at
the discretion of our Board.
We are a party to an employment agreement with Norman Barton, M.D.,
Ph.D., our Executive Vice President and Chief Medical Officer, which employment
agreement expires on April 26, 2007 (with automatic one-year renewal terms) for
an annual base salary of $265,000 and annual increases and bonuses at the
discretion of the Board.
We are a party to an employment agreement with Donald Fallon, our
Senior Vice President, Finance and Administration, Chief Financial Officer and
Secretary, which employment agreement expires March 31, 2007 (with automatic
one-year renewal terms) for an annual base salary of $175,000 and annual
increases and bonuses at the discretion of the Board. As of March 1, 2005, Mr.
Fallon's annual base salary was increased to $240,000.
In December 2004, Mr. Pursley, Mr. Fallon and Dr. Barton were issued
1,247,428, 207,905 and 454,792 shares of Common Stock, respectively, under our
Founders' Plan.
On February 11, 2005, we granted a non-qualified option to Leonard
Mudry, a director, to purchase an aggregate of 12,000 shares of Common Stock at
$6.25 per share, the closing price per share of our Common Stock on the OTC
Bulletin Board on the date of grant. The options become exercisable as to 3,000
shares on each of August 11, 2005, February 11, 2006, February 11, 2007 and
February 11, 2008.
On February 11, 2005, we awarded 5,000 restricted shares of Common
Stock to Leonard Mudry, which restrictions lapsed as to all of the shares
awarded on August 11, 2005.
On July 20, 2005, we granted a non-qualified option to purchase 10,000
shares of Common Stock at $2.70 per share, the closing price per share of the
Common Stock on the OTC Bulletin Board on the date of grant, to John Griffin, a
director, in accordance with the terms of the Directors Plan.
On September 13, 2005, we granted an option to purchase 2,000 shares of
Common Stock at $1.02 per share, the closing price per share of the Common Stock
on the OTC Bulletin Board on the date of grant, to each of Dr. Griffin and Mr.
Mudry, our non-employee directors, for participation in our Board meetings in
accordance with the terms of the Directors Plan.
On September 16, 2005, we issued 25,000 shares of Common Stock as an
expense reimbursement and on October 7, 2005, we issued 377,359 shares of Common
Stock as initial commitment shares and the Fusion Warrant to purchase 377,359
shares of Common Stock at $0.01 per share to Fusion Capital under the Stock
Purchase Agreement.
On December 9, 2005, we issued a $250,000 convertible promissory note
at a conversion price of $1.00 per share to Harbor Trust which bears interest at
6% per year and matures on December 9, 2006.
52
On December 9, 2005, we issued (i) a $1,000,000 Debenture, (ii) a
warrant to purchase 1,000,000 shares of Common Stock at $1.023 per share and
(ii) 268,817 shares of Common Stock, to Cornell Capital.
On December 28, 2005, we issued a $1,000,000 Debenture to Cornell
Capital.
ITEM 13. EXHIBITS
Exhibit
Number Description
------- -----------
2.1 Certificate of Ownership and Merger of CepTor Corporation into
CepTor Research and Development Company (incorporated herein
by reference to Exhibit 2.1 to our Current Report on Form 8-K,
filed on January 31, 2005 ("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 our 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 our Annual Report on Form 10-KSB
for the year ended December 31, 2004 ("2004 10-KSB")
4.2 CepTor Agreement, dated March 31, 2004 ("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
("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)
4.5 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 ("Form SB-2"))
4.6 Form of Amended and Restated Convertible Promissory Note
(incorporated herein by reference to Exhibit 4.7 to the 2004
10-KSB)
4.7 Form of Subscription Agreement (incorporated herein by
reference to Exhibit 4.6 to Form SB-2)
4.8 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 dated October 17, 2005 ("October 2005 SB-2"))
4.9 Common Stock Purchase Agreement, dated October 7, 2005,
between the Company and Fusion Capital (incorporated herein by
reference to Exhibit 10.1 to our Current Report on Form 8-K,
filed October 11, 2005 ("October 2005 8-K"))
4.10 Registration Rights Agreement, dated October 7, 2005, between
the Company and Fusion Capital (incorporated herein by
reference to Exhibit 4.2 to the October 2005 8-K)
4.11 Common Stock Warrant with Fusion Capital, dated October 7,
2005 (incorporated by reference herein to Exhibit 4.1 to the
October 2005 8-K)
4.12 Secured Convertible Debenture, dated December 9, 2005, issued
by the Company to Cornell Capital (incorporated herein by
reference to Exhibit 4.1 to our Current Report on Form 8-K,
filed December 15, 2005 ("December 2005 8-K"))
4.13 Warrant issued to Cornell Capital, dated December 9, 2005
(incorporated herein by reference to Exhibit 4.2 to the
December 2005 8-K)
53
4.14 Form of Redemption Warrant to Cornell Capital (incorporated
herein by reference to Exhibit 4.3 to the December 2005 8-K)
4.15 $250,000 Convertible Promissory Note, dated December 9, 2005,
to Harbor Trust (incorporated herein by reference to Exhibit
4.4 to the December 2005 8-K)
4.16 $452,991.10 Amended Promissory Note, dated December 9, 2005,
to Harbor Trust (incorporated herein by reference to Exhibit
4.5 to the December 2005 8-K)
4.17 Secured Convertible Debenture, dated December 28, 2005, issued
by the Company to Cornell Capital (incorporated herein by
reference to Exhibit 4.10 to the Company's Registration
Statement on Form SB-2, dated December 29, 2005 ("December
2005 SB-2"))
4.18* Non-Qualified Option Certificate and Addendum thereto, dated
March 3, 2006, to Little Gem Life Sciences Fund, LLC
4.19* Non-Qualified Option Certificate and Addendum thereto, dated
March 3, 2006, to Peter Chung
10.1 Employment Agreement, dated March 31, 2004, with William H.
Pursley (incorporated herein by reference to Exhibit 10.1 to
Form SB-2)
10.2 Employment Agreement, dated April 26, 2004, with Norman A.
Barton, M.D., Ph.D. (incorporated herein by reference to
Exhibit 10.2 to Form SB-2)
10.3 Employment Agreement, dated March 31, 2004, with Donald W.
Fallon (incorporated herein by reference to Exhibit 10.3 to
Form SB-2)
10.4 Founders' Plan (incorporated herein by reference to Exhibit
10.5 to the SB-2)
10.5 2004 Incentive Stock Plan (incorporated herein by reference to
Exhibit 10.6 to Form SB-2)
10.6 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)
10.7* 2006 Incentive Stock Plan
10.8 Sublease Agreement, dated March 4, 2004, by and between CepTor
Corporation and Millennium Inorganic Chemicals, Inc.
(incorporated herein by reference to Exhibit 10.7 to Form
SB-2)
10.9 Exclusive License Agreement, dated September 15, 2004, with
JCR Pharmaceuticals Company, Ltd. (incorporated herein by
reference to Exhibit 10.8 to Form SB-2)
10.10 Indemnification Agreement, dated October 6, 2005, with William
H. Pursley (incorporated herein by reference to Exhibit 10.9
to the October 2005 Form SB-2)
10.11 Indemnification Agreement, dated October 6, 2005, with Norman
W. Barton, M.D. (incorporated herein by reference to Exhibit
10.10 to the October 2005 SB-2)
10.12 Indemnification Agreement, dated October 6, 2005, with Donald
W. Fallon (incorporated herein by reference to Exhibit 10.11
to the October 2005 SB-2)
10.13 Indemnification Agreement, dated October 6, 2005, with Leonard
A. Mudry (incorporated herein by reference to Exhibit 10.12 to
the October 2005 SB-2)
10.14 Securities Purchase Agreement, dated December 9, 2005, between
the Company and Cornell Capital (incorporated herein by
reference to Exhibit 10.1 to the December 2005 8-K)
10.15 Side Letter, dated December 9, 2005, between the Company and
Cornell Capital (incorporated herein by reference to Exhibit
10.2 to the December 2005 8-K)
10.16 Investor Registration Rights Agreement, dated December 9,
2005, between the Company and Cornell Capital (incorporated
herein by reference to Exhibit 10.3 to the December 2005 8-K)
54
10.17 Security Agreement, dated December 9, 2005, between the
Company and Cornell Capital (incorporated herein by reference
to Exhibit 10.4 to the December 2005 8-K)
10.18 Rights Agreement, dated March 7, 2006, between the Company and
American Stock Transfer & Trust Company (incorporated herein
by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A, dated March 8, 2006)
14 Code of Ethics (incorporated herein by reference to Exhibit 14
to the 2004 10-KSB)
23 Independent Registered Public Accounting Firm's Consent
24* Power of Attorney (included on signature page)
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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Our principal accountant for the audit of our annual financial
statements for our fiscal years ended December 31, 2004 and 2005, was Marcum &
Kliegman LLP. The following table shows the fees paid or accrued by us to Marcum
& Kliegman LLP during the periods indicated.
Type of Service Fiscal 2004 Fiscal 2005
--------------- ----------- -----------
Audit Fees (1) $ 40,000 $135,509
Audit-Related Fees (2) 28,500 64,941
Tax Fees (3) - -
ALL OTHER FEES (4) - -
--------------- ----------- -----------
Total $ 68,500 $200,450
(1) Comprised of the audit of our annual financial statements and reviews
of our quarterly financial statements.
(2) Comprised of services rendered in connection with our capital raising
efforts, registration statement and consultations regarding financial
accounting and reporting.
(3) Comprised of services for tax compliance, tax return preparation, tax
advice and tax planning.
(4) Fees related to other filings with the SEC, including consents.
In accordance with the Sarbanes-Oxley Act of 2002, the Audit Committee
established policies and procedures under which all audit and non-audit services
performed by our principal accountants must be approved in advance by the Audit
Committee. As provided in the Sarbanes-Oxley Act of 2002, all audit and
non-audit services to be provided after May 6, 2003 must be pre-approved by the
Audit Committee in accordance with these policies and procedures. Based in part
on consideration of the non-audit services provided by Marcum & Kliegman LLP
during our 2005 fiscal year, the Audit Committee determined that such non-audit
services were compatible with maintaining the independence of Marcum & Kliegman
LLP.
55
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CEPTOR CORPORATION
By: /s/ William H. Pursley
------------------------------------
Name: William H. Pursley
Title: Chairman and Chief Executive Officer
Date: April 17, 2006
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below hereby makes, constitutes and appoints William H. Pursley and
Donald W. Fallon his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-KSB and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or either of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
Chairman, Chief Executive Officer
/s/ William H. Pursley and Director (Principal Executive
-------------------------- Officer) April 17, 2006
William H. Pursley
Chief Financial Officer, Senior
Vice President, Finance and
Administration and Secretary
/s/ Donald W. Fallon (Principal Accounting and
-------------------------- Financial Officer) April 17, 2006
Donald W. Fallon
/s/ Leonard A. Mudry
-------------------------- Director April 17, 2006
Leonard A. Mudry
56
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
2.1 Certificate of Ownership and Merger of CepTor Corporation into
CepTor Research and Development Company (incorporated herein
by reference to Exhibit 2.1 to our Current Report on Form 8-K,
filed on January 31, 2005 ("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 our 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 our Annual Report on Form 10-KSB
for the year ended December 31, 2004 ("2004 10-KSB")
4.2 CepTor Agreement, dated March 31, 2004 ("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
("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)
4.5 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 ("Form SB-2"))
4.6 Form of Amended and Restated Convertible Promissory Note
(incorporated herein by reference to Exhibit 4.7 to the 2004
10-KSB)
4.7 Form of Subscription Agreement (incorporated herein by
reference to Exhibit 4.6 to Form SB-2)
4.8 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 dated October 17, 2005 ("October 2005 SB-2"))
4.9 Common Stock Purchase Agreement, dated October 7, 2005,
between the Company and Fusion Capital (incorporated herein by
reference to Exhibit 10.1 to our Current Report on Form 8-K,
filed October 11, 2005 ("October 2005 8-K"))
4.10 Registration Rights Agreement, dated October 7, 2005, between
the Company and Fusion Capital (incorporated herein by
reference to Exhibit 4.2 to the October 2005 8-K)
4.11 Common Stock Warrant with Fusion Capital, dated October 7,
2005 (incorporated by reference herein to Exhibit 4.1 to the
October 2005 8-K)
4.12 Secured Convertible Debenture, dated December 9, 2005, issued
by the Company to Cornell Capital (incorporated herein by
reference to Exhibit 4.1 to our Current Report on Form 8-K,
filed December 15, 2005 ("December 2005 8-K"))
4.13 Warrant issued to Cornell Capital, dated December 9, 2005
(incorporated herein by reference to Exhibit 4.2 to the
December 2005 8-K)
4.14 Form of Redemption Warrant to Cornell Capital (incorporated
herein by reference to Exhibit 4.3 to the December 2005 8-K)
4.15 $250,000 Convertible Promissory Note, dated December 9, 2005,
to Harbor Trust (incorporated herein by reference to Exhibit
4.4 to the December 2005 8-K)
4.16 $452,991.10 Amended Promissory Note, dated December 9, 2005,
to Harbor Trust (incorporated herein by reference to Exhibit
4.5 to the December 2005 8-K)
4.17 Secured Convertible Debenture, dated December 28, 2005, issued
by the Company to Cornell Capital (incorporated herein by
reference to Exhibit 4.10 to the Company's Registration
Statement on Form SB-2, dated December 29, 2005 ("December
2005 SB-2"))
4.18* Non-Qualified Option Certificate and Addendum thereto, dated
March 3, 2006, to Little Gem Life Sciences Fund, LLC
4.19* Non-Qualified Option Certificate and Addendum thereto, dated
March 3, 2006, to Peter Chung
10.1 Employment Agreement, dated March 31, 2004, with William H.
Pursley (incorporated herein by reference to Exhibit 10.1 to
Form SB-2)
10.2 Employment Agreement, dated April 26, 2004, with Norman A.
Barton, M.D., Ph.D. (incorporated herein by reference to
Exhibit 10.2 to Form SB-2)
10.3 Employment Agreement, dated March 31, 2004, with Donald W.
Fallon (incorporated herein by reference to Exhibit 10.3 to
Form SB-2)
10.4 Founders' Plan (incorporated herein by reference to Exhibit
10.5 to the SB-2)
10.5 2004 Incentive Stock Plan (incorporated herein by reference to
Exhibit 10.6 to Form SB-2)
10.6 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)
10.7* 2006 Incentive Stock Plan
10.8 Sublease Agreement, dated March 4, 2004, by and between CepTor
Corporation and Millennium Inorganic Chemicals, Inc.
(incorporated herein by reference to Exhibit 10.7 to Form
SB-2)
10.9 Exclusive License Agreement, dated September 15, 2004, with
JCR Pharmaceuticals Company, Ltd. (incorporated herein by
reference to Exhibit 10.8 to Form SB-2)
10.10 Indemnification Agreement, dated October 6, 2005, with William
H. Pursley (incorporated herein by reference to Exhibit 10.9
to the October 2005 Form SB-2)
10.11 Indemnification Agreement, dated October 6, 2005, with Norman
W. Barton, M.D. (incorporated herein by reference to Exhibit
10.10 to the October 2005 SB-2)
10.12 Indemnification Agreement, dated October 6, 2005, with Donald
W. Fallon (incorporated herein by reference to Exhibit 10.11
to the October 2005 SB-2)
10.13 Indemnification Agreement, dated October 6, 2005, with Leonard
A. Mudry (incorporated herein by reference to Exhibit 10.12 to
the October 2005 SB-2)
10.14 Securities Purchase Agreement, dated December 9, 2005, between
the Company and Cornell Capital (incorporated herein by
reference to Exhibit 10.1 to the December 2005 8-K)
10.15 Side Letter, dated December 9, 2005, between the Company and
Cornell Capital (incorporated herein by reference to Exhibit
10.2 to the December 2005 8-K)
10.16 Investor Registration Rights Agreement, dated December 9,
2005, between the Company and Cornell Capital (incorporated
herein by reference to Exhibit 10.3 to the December 2005 8-K)
10.17 Security Agreement, dated December 9, 2005, between the
Company and Cornell Capital (incorporated herein by reference
to Exhibit 10.4 to the December 2005 8-K)
10.18 Rights Agreement, dated March 7, 2006, between the Company and
American Stock Transfer & Trust Company (incorporated herein
by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A, dated March 8, 2006)
14 Code of Ethics (incorporated herein by reference to Exhibit 14
to the 2004 10-KSB)
23 Independent Registered Public Accounting Firm's Consent
24* Power of Attorney (included on signature page)
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.