sec document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF 1934
For the quarterly period ended March 31, 2006
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________________ to __________________
Commission file number: 333-105793
CEPTOR CORPORATION
--------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 11-2897392
----------------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
200 International Circle, Suite 5100
Hunt Valley, Maryland 21030
----------------------------------------- -------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (410) 527-9998
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of May 16, 2006, there were 14,414,241 shares of the issuer's common
equity outstanding.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
TABLE OF CONTENTS
Page
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)................................ 1
Condensed Balance Sheets - March 31, 2006 and
December 31, 2005
Condensed Statements of Operations for the three
months ended March 31, 2006 and 2005, and for the
period from August 11, 1986 (date of inception) to
March 31, 2006
Condensed Statement of Changes in Stockholders'
Deficiency for the three months ended March 31, 2006
Condensed Statements of Cash Flows for the three
months ended March 31, 2006 and 2005 and for the
period from August 11, 1986 (date of inception) to
March 31, 2006
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation.......18
Item 3. Controls and Procedures.........................................20
Part II OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.....21
Item 6. Exhibits........................................................22
i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
March 31, 2006 December 31, 2005
(Unaudited)
----------------- ------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 22,759 $ 434,277
Prepaid expenses and other current assets 151,253 175,785
------------- -------------
Total current assets 174,012 610,062
Property and equipment, net 50,664 55,431
Deferred financing costs 95,707 106,033
Security deposit 18,511 18,511
------------- -------------
TOTAL ASSETS $ 338,894 $ 790,037
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $ 5,053,936 $ 4,268,469
Accrued expenses 749,679 900,651
Convertible notes, net of discounts $1,800,722 and $2,211,897,
respectively 798,014 774,748
------------- -------------
Total current liabilities 6,601,629 5,943,868
Warrant liability 1,067,285 3,130,957
Conversion option liability 205,658 779,718
------------- -------------
TOTAL LIABILITIES 7,874,572 9,854,543
------------- -------------
Commitments and contingencies
Stockholders' Deficiency:
Preferred stock, $0.0001 par value; authorized 20,000,000 shares, issued and
outstanding - 224.40 and 248.15 shares of Series A Convertible Preferred
Stock at March 31, 2006 and December 31, 2005, respectively; liquidation
preference - $5,610,000 and $6,203,750,
respectively 5,610,000 6,203,750
Common stock, $0.0001; authorized 100,000,000 shares, issued and
outstanding - 13,628,506 and 11,744,120 at March 31, 2006 and
December 31, 2005, respectively 1,363 1,174
Deferred compensation (284,212) (322,830)
Additional paid-in capital 24,724,259 22,969,495
Deficit accumulated during the development stage (37,587,088) (37,916,095)
------------- -------------
Total stockholders' deficiency (7,535,678) (9,064,506)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 338,894 $ 790,037
============= =============
(See Notes to Unaudited Condensed Financial Statements)
1
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Cumulative
August 11, 1986
Three Months Ended (Date of
March 31, Inception) to
-------------------------------- March 31,
2006 2005 2006
------------ ------------ ------------
REVENUES:
Other income $ - $ - $ 75,349
EXPENSES:
Research and development 571,725 659,033 13,173,230
In-process research and development - - 5,034,309
General and administrative 1,259,514 1,411,225 11,376,859
Gain on extinguishment of debt - - (311,281)
Change in fair value of derivative financial instruments (2,637,732) - (3,587,713)
Interest expense 477,486 244,578 2,840,321
Interest income - (18,730) (52,318)
------------ ------------ ------------
Total (329,007) 2,296,106 28,473,407
------------ ------------ ------------
NET INCOME (LOSS) 329,007 (2,296,106) (28,398,058)
Deemed preferred stock dividends - (9,164,500) (10,100,616)
------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 329,007 $(11,460,606) $(38,498,674)
============ ============ ============
EARNINGS (LOSS) PER SHARE:
Basic $ 0.03 $ (1.06)
Diluted 0.02 (1.06)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,704,092 10,815,705
Diluted 24,449,024 10,815,705
(See Notes to Unaudited Condensed Financial Statements)
2
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
Preferred Stock Common Stock Deferred
----------------------- -------------------- Compen-
Shares Amount Shares Amount sation
---------- ---------- ---------- -------- -----------
BALANCE, JANUARY 1, 2006 248.15 $6,203,750 11,744,120 $1,174 $(322,830)
Common stock issued January 2006 upon
conversion of preferred shares ($2.50) (10.00) (250,000) 100,000 10
Common stock issued January 2006 upon
conversion of replacement notes ($0.375) 855,267 85
Common stock issued February 2006 upon
conversion of preferred shares ($2.50) (7.00) (175,000) 70,000 7
Common stock issued February 2006 upon
conversion of 2005 Convertible Debentures
($0.5795) 86,281 9
Common stock issued March 2006 upon conversion
of preferred shares ($2.50) (6.75) (168,750) 67,500 7
Common stock issued March 2006 upon exercise
of options ($0.359) 557,102 56
Expenses incurred pursuant to entering into
Stock Purchase Agreement
Common stock issued March 2006 upon conversion
of 2005 Convertible Debentures ($3.3373) 148,236 15
Stock option-based compensation for
consulting services rendered (464,466)
Adjustment pursuant to SFAS 123R of stock
option based compensation to employees (114,193)
Amortization of deferred compensation 617,277
Net income
---------- ---------- ---------- -------- -----------
BALANCE, MARCH 31, 2006 224.40 $5,610,000 13,628,506 $ 1,363 $ (284,212)
========== ========== ========== ======== ===========
(See Notes to Unaudited Condensed Financial Statements)
3
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
Deficit
Accumulated
Additional During the Total
Paid-in Development Stockholders'
Capital Stage Deficiency
------------ ------------- -------------
BALANCE, JANUARY 1, 2006 $22,969,495 $(37,916,095) $ (9,064,506)
Common stock issued January 2006 upon
conversion of preferred shares ($2.50) 249,990 -
Common stock issued January 2006 upon
conversion of replacement notes ($0.375) 320,640 320,725
Common stock issued February 2006 upon
conversion of preferred shares ($2.50) 174,993 -
Common stock issued February 2006 upon
conversion of 2005 Convertible Debentures
($0.5795) 49,991 50,000
Common stock issued March 2006 upon conversion
of preferred shares ($2.50) 168,743 -
Common stock issued March 2006 upon exercise
of options ($0.359) 199,944 200,000
Expenses incurred pursuant to entering into
Stock Purchase Agreement (38,181) (38,181)
Common stock issued March 2006 upon conversion
of 2005 Convertible Debentures ($3.3373) 49,985 50,000
Stock option-based compensation for
consulting services rendered 464,466 -
Adjustment pursuant to SFAS 123R of stock
option based compensation to employees 114,193 -
Amortization of deferred compensation 617,277
Net income 329,007 329,007
------------ ------------- -------------
BALANCE, MARCH 31, 2006 $24,724,259 $(37,587,088) $ (7,535,678)
============ ============= =============
(See Notes to Unaudited Condensed Financial Statements)
3A
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
Cumulative
August 11, 1986
For the Three Months Ended (Date of Inception)
March 31, to
---------------------------------- March 31,
2006 2005 2006
------------- ------------- -------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income (loss) $ 329,007 $ (2,296,106) $ (28,398,058)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 4,767 4,097 36,257
Write-off of in-process research and development - - 5,034,309
Charge for stock option issued pursuant to
spinoff agreement - - 2,082,500
Stock-based compensation to employees and
directors 37,686 67,595 154,462
Stock-based compensation to nonemployees 579,591 799,175 4,802,822
Stock-based component of payment of legal fees - - 70,000
Stock-based component of litigation settlement - - 422,000
Gain on extinguishment of debt - - (311,281)
Change in fair value of derivative financial
instruments (2,637,732) - (3,587,713)
Non-cash interest expense 419,876 222,344 2,640,071
Changes in assets and liabilities:
Prepaid expenses and other current assets 24,532 (44,845) (151,253)
Other assets - - (18,511)
Accounts payable and accrued expenses 668,936 522,602 5,878,506
------------- ------------- -------------
Net cash used in operating activities (573,337) (725,138) (11,345,889)
------------- ------------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment - (9,049) (86,921)
------------- ------------- -------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuances of common stock 200,000 6,250 1,499,516
Collections of subscriptions receivable - 226 303
Net proceeds from issuances of preferred stock - 7,719,662 10,448,629
Acquisition of treasury stock under put right - (916,450) (1,279,125)
Acquisition of treasury stock under purchase
agreement - - (2,309,250)
Distribution to shareholders - - (4,260)
Capital contributed by Xechem International, Inc. - - 350,310
Proceeds from issuance of bridge loans - - 3,625,000
Expense of issuance of long term debt (38,181) - (525,554)
Principal payments on bridge loans - - (350,000)
------------- ------------- -------------
Net cash provided by financing activities 161,819 6,809,688 11,455,569
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents (411,518) 6,075,501 22,759
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 434,277 1,331,513 -
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 22,759 $ 7,407,014 $ 22,759
============= ============= =============
(See Notes to Unaudited Condensed Financial Statements)
4
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Cumulative
August 11, 1986
For the Three Months Ended (Date of Inception)
March 31, to
------------------------------------- March 31,
2006 2005 2006
---------------- ---------------- ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Deemed dividend of the beneficial
conversion feature of units sold in
private placement $ - $ 9,164,500 $ 10,100,616
Issuance of 2,872,500 shares of common
stock upon conversion of preferred shares 593,750 1,100,000 7,181,250
Issuance of 100,000 shares of common stock
pursuant to stock plan - - 270,000
Issuance of 7,500 shares of common stock
as compensation for past services - - 46,875
Issuance of 25,000 shares of common stock
as compensation for financial planning - - 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
Issuance of 1,340,267 shares of common
stock upon conversion of convertible note 320,725 - 502,600
Issuance of 234,517 shares of common stock
upon conversion of convertible debenture 100,000 - 100,000
Issuance of 36,000 shares of common stock
as debt issuance costs - - 90,000
Issuance of 451,597 shares of common stock
to bridge loan investors and placement
agent - - 550,000
Issuance of 167,610 shares up on
conversion of convertible notes - - 209,512
Issuance of convertible notes in exchange
for bridge loans and long-term debt plus
accrued interest - - 1,111,240
(See Notes to Unaudited Condensed Financial Statements)
5
NOTE 1 - BASIS OF INTERIM FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited Condensed Financial Statements of CepTor Corporation
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and the instructions to
Form 10-QSB. Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows for all periods
presented have been made. The results of operations for the three-months ended
March 31, 2006 are not necessarily indicative of the operating results that may
be expected for the entire year ending December 31, 2006.
NOTE 2 - THE COMPANY
ORGANIZATION
The financial statements presented are those of CepTor Corporation (the
"Company"), incorporated in August 1986 in the state of Delaware.
NATURE OF BUSINESS AND DEVELOPMENT STAGE OPERATIONS
CepTor Corporation is a biopharmaceutical company engaged in the research and
development of therapeutic products for neuromuscular, neurodegenerative and
other diseases with a focus on orphan diseases (defined as those which affect
less than 200,000 people). Since its inception, the Company has devoted its
efforts and resources to the development of its receptor mediated drug-targeting
platform for neuromuscular and neurodegenerative diseases, and to raising the
funds necessary to continue this research.
The Company is a development stage enterprise which has a limited history of
operations and has not generated any material revenues since its inception. The
Company has received a limited amount of funding through grants and
collaborative research efforts in connection with developing its products. The
Company does not have any products that are approved for commercial distribution
at the present time. As a development stage enterprise, the Company is subject
to all of the risks and uncertainties that are associated with developing a new
business.
NOTE 3 - LIQUIDITY AND FINANCIAL CONDITION
During the three months ended March 31, 2006, 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 require payment during the next
nine months. During the three months ended March 31, 2006, the Company received
proceeds from exercises of stock options of $200,000. Subsequent to March 31,
2006, the Company entered into negotiations for additional funding and has
received advance funding of $756,000 as of May 16, 2006, in the form of
unsecured loans (see Note 11). On May 3, 2006, the Company entered into a term
sheet in connection with a private offering of one year 6% convertible notes in
an aggregate principal amount of up to $6,000,000. In addition, on April 28,
2006, the Company entered into a letter agreement with Oppenheimer & Co. Inc.
and has retained the firm as its strategic advisor to assist in the Company's
effort to explore various strategic alternatives to enhance shareholder value
(see Note 11).
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.
Primarily as the result of recording a change in the fair value of its
derivative financial instruments of $2,637,732, offset by stock-based
compensation expense of $617,277 and non-cash interest expense from the
amortization of the beneficial conversion feature in certain convertible debt
instruments of $419,876, the Company recorded net income for the three months
6
ended March 31, 2006 of $329,007. The Company used net cash flows in its
operating activities of $573,337 during the three months ended March 31, 2006.
The Company's working capital deficiency amounted to $6,427,617 and its
development stage accumulated deficit amounted to $37,587,088 at March 31, 2006.
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.
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 Myodur product 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
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. As of March 31, 2006, the Company had sufficient materials
required for the Company's 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.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company is a development stage enterprise. Accordingly, the Company has
included its cumulative statements of operations and cash flows for the period
of August 11, 1986 (date of inception) to March 31, 2006 in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 7 "Accounting and
Reporting by Development Stage Enterprises."
The Company's net loss available to common shareholders as reported in its
statement of operations for the period of August 11, 1986 (date of inception) to
March 31, 2006 is $38,498,674 whereas the deficit accumulated during its
development stage as reported on its balance sheet at March 31, 2006 is
$37,587,088. The difference is a result of the acquisition of the Company by
Xechem and the restatement of its assets and liabilities to fair value, which
resulted in the Company's accumulated deficit, net of distributions, from
inception through December 31, 2003 (the date of merger for financial reporting
purposes) being reclassified to additional paid-in capital, net of a deemed
dividend to the preferred shareholders.
ACCOUNTING FOR STOCK BASED COMPENSATION
Effective January 1, 2006, the Company adopted SFAS No. 123R, "Share Based
Payment," using the modified-prospective-transition method, as a result, the
Company's net income for the three months ended March 31, 2006 is lower than if
it continued to account for share-based compensation under APB No. 25. SFAS No.
123R is a revision of SFAS No. 123, and supersedes APB Opinion No. 25, and its
related implementation guidance. SFAS No. 123R addresses all forms of
share-based payment awards including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation rights. Under SFAS
No. 123R, stock-based awards result in a cost that will be measured at fair
value on the award's grant date, based on the estimated number of awards that
are expected to vest that will result in a charge to operations. Upon adoption
of SFAS 123R, the Company recorded $114,194 as deferred compensation
representing the remaining unamortized balance of the fair value of stock
options at date of grant, granted to employees prior to January 1, 2006. For the
three months ended March 31, 2006, the Company amortized $37,686 of the deferred
compensation. The remaining unamortized balance at March 31, 2006 will be
amortized over the next 24 to 30 months.
7
The Company did not grant any share-based payment awards to employees during the
three months ended March 31, 2006.
Prior to January 1, 2006, The Company accounted for employee stock transactions
in accordance with Accounting Principle Board ("APB") Opinion No. 25.
"Accounting for Stock Issued to Employees." The Company had adopted the pro
forma disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation."
Prior to the Company's adoption of SFAS No. 123R, SFAS No. 123 required that the
Company provide pro-forma information regarding net earnings and net earnings
per share as if the Company's stock-based awards had been determined in
accordance with the fair value method prescribed therein. The Company had
previously adopted the disclosure portion of SFAS No. 148 "Accounting for
Stock-based Compensation - Transition and Disclosure," requiring quarterly SFAS
No. 123 pro-forma disclosures. The pro-forma charge for compensation cost
related to stock-based awards granted was recognized over the service period.
For stock options, the service period represents the period of time between the
date of grant and the date each option becomes exercisable without consideration
of acceleration provisions (e.g., retirement, change of control, etc.)
The following table summarizes the pro forma operating results of the Company
had compensation expense for stock options granted to employees during the
period presented been determined in accordance with the fair market value based
method and had been applied to all awards during that period.
For the Three Months
Ended
March 31,
2005
-----------------------
Net loss available to common stockholders $ (11,460,606)
Adjust: Stock-based employee compensation
determined under the fair value method (11,143)
-----------------------
Pro forma net loss $ (11,471,749)
=======================
Net loss per share available to common stockholders, basic and diluted:
As reported $ (1.06)
Pro forma (1.06)
The pro forma amounts that are disclosed reflect the portion of the estimated
fair value of awards that were earned for the three months ended March 31, 2005.
The cost of stock-based compensation awards issued to non-employees for services
are recorded at either the fair value of the services rendered or of the
instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in Emerging
Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."
The fair value of all options granted was estimated at the date of grant using
the Black-Scholes option valuation model. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. Because the Company's
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, the Company believes the existing models do not
necessarily provide a reliable single measure of the fair value estimate of its
stock options. In calculating the fair values of the stock options during the
three months ended March 31, 2006, the following assumptions were used:
8
Dividend yield - %
Weighted average expected life 3.8 to 5 years
Weighted average risk-free interest rate 4.72%
Expected volatility 130%
ACCOUNTING FOR WARRANTS AND FREESTANDING DERIVATIVE FINANCIAL INSTRUMENTS
The Company accounts for the issuance of common stock purchase warrants and
other freestanding derivative financial instruments in accordance with the
provisions of EITF Issue No. 00-19 "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock."
Based on the provisions of EITF Issue No. 00-19, the Company classifies as
equity any contracts that (i) require physical settlement or net-share
settlement or (ii) gives the company a choice of net-cash settlement or
settlement in its own shares (physical settlement or net-share settlement). The
Company classifies as assets or liabilities any contracts that (i) require
net-cash settlement (including a requirement to net-cash settle the contract if
an event occurs and if that event is outside the control of the Company) or (ii)
give the counterparty a choice of net-cash settlement or settlement in shares
(physical settlement or net-share settlement).
NET INCOME (LOSS) PER SHARE
Net income (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 following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
March 31,
2006 2005
------------- -------------
Numerator:
Net income (loss) $ 329,007 $ (2,296,106)
Deemed preferred stock dividends - (9,164,500)
Numerator for basic earnings per share - net income (loss) ------------- -------------
available to common stockholders, as reported 329,007 (11,460,606)
Effect of dilutive securities:
Interest on convertible debt 55,684
Numerator for basic earnings per share - net income (loss) ------------- -------------
available to common stockholders, as adjusted $ 384,691 $ (11,460,606)
============= =============
Denominator:
Denominator for basic earnings per share - weighted
average shares 12,704,092 10,815,705
Effect of dilutive securities:
Stock options and warrants 698,247
Assumed conversion of Series A Preferred Stock 2,244,000
Assumed conversion of debt 8,802,685
------------- -------------
Dilutive potential common shares 11,744,932 -
------------- -------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 24,449,024 10,815,705
============= =============
Net income (loss) per share available to common stockholders:
Basic $ 0.03 $ (1.06)
Diluted 0.02 (1.06)
The computation of loss per share for the three months ended March 31, 2005
excludes potentially dilutive securities because their inclusion would be
anti-dilutive.
9
Shares of common stock issuable upon the conversion or exercise of potentially
dilutive securities not included in the above calculation, are as follows:
March 31,
----------------------
2006 2005
--------- ----------
Series A Preferred Stock - 4,676,500
Warrants 5,406,812 4,239,900
Options 875,999 607,695
Convertible Notes - 743,517
--------- ----------
Total 6,282,811 10,267,612
========= ==========
CONVERTIBLE NOTES AND CONVERTIBLE PREFERRED STOCK
The Company accounts for conversion options embedded in convertible notes and
convertible preferred stock in accordance with SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") and 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"), and 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 ("December 2005
Convertible Debentures") 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.
WARRANT LIABILITY
The terms of the Company's December 2005 Convertible Debenture (see Note 7)
provide for a conversion price in certain situations based on a floating
conversion price which results in an indeterminable number of shares of common
stock potentially issued upon conversion. Under accounting guidance provided by
EITF 00-19 "Accounting For Derivative Instruments Indexed To And Potentially
Settled In A Company's Own Stock," as of December 9, 2005, the Company recorded
a liability of $3,350,697 representing warrants to purchase approximately 5.5
million shares of common stock which had been granted to non-employees for
services rendered.
The accounting guidance instructs that the warrants are a derivative liability
and are marked to market for each reporting period. During the three months
ended March 31, 2006, the Company recognized a gain of $2,063,672 for the
decrease in fair value of the derivative financial instruments.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 155, which is an amendment of SFAS No. 133 and 140. This Statement; a)
permits fair value re-measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation, b)
clarifies which interest-only strip and principal-only strip are not subject to
the requirements of SFAS 133, c) establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives, e) amends SFAS
140 to eliminate the prohibition on a qualifying special-purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. This Statement is effective
for financial statements for fiscal years beginning after September 15, 2006.
Earlier adoption of this Statement is permitted as of the beginning of an
entity's fiscal year, provided the entity has not yet issued any financial
statements for that fiscal year. The Company is evaluating if this Statement
will have an impact on the financial statements of the Company.
In March 2006, the FASB issued SFAS No. 156, which amends FASB Statement No.
140. This Statement establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. This Statement
amends SFAS 140 to require that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable. This
Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
An entity that uses derivative instruments to mitigate the risks inherent in
servicing assets and servicing liabilities is required to account for those
derivative instruments at fair value. Under this Statement, an entity can elect
subsequent fair value measurement to account for its separately recognized
servicing assets and servicing liabilities. By electing that option, an entity
may simplify its accounting because this Statement permits income statement
recognition of the potential offsetting changes in fair value of those servicing
assets and servicing liabilities and derivative instruments in the same
accounting period. This Statement is effective for financial statements for
fiscal years beginning after September 15, 2006. Earlier adoption of this
Statement is permitted as of the beginning of an entity's fiscal year, provided
the entity has not yet issued any financial statements for that fiscal year. The
Company believes this Statement will not have an impact on the financial
statements of the Company once adopted.
NOTE 5 - PREPAID EXPENSES
Prepaid expenses primarily consists of unamortized premiums paid to carriers for
insurance policies, and an advance payment required under a clinical development
contract.
NOTE 6 - ACCRUED EXPENSES
Accrued expenses at March 31, 2006 are as follows:
Clinical development expenses $ 217,550
Financial investor relations fees 188,278
Professional advisory fees 136,774
Interest on convertible notes 110,210
Compensation 65,164
Research expenses, miscellaneous 31,703
------------
Total $ 749,679
============
In connection with the sale of Units in a private placement, pursuant to the
placement agent agreement, the Company had agreed to spend up to 3% of the gross
proceeds from its private placement on financial investor relations activities,
all of which was accrued and charged to additional paid-in capital upon each
closing of the private placement.
11
NOTE 7 - CONVERTIBLE NOTES
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"). The Bridge Loan offering was completed
in May 2004.
The Company was not able to repay the Bridge Loans on October 22, 2004. Pursuant
to the terms of an offer dated October 22, 2004 as amended on November 15, 2004
that was 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 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 amortized
as interest expense over the term of the December 2004 Convertible Notes through
December 8, 2005.
Immediately following the completion of this note exchange, one of the holders
of the Company's December 2004 Convertible Notes elected to convert its
outstanding principal of $209,512, into 167,610 shares of common stock with a
fair value of $419,024.
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.
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
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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 three months ended March 31, 2006, the Company amortized $209,331 of
the intrinsic value of the beneficial conversion feature which is included in
interest expense in the accompanying statement of operations.
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
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 debt discount associated with the issuance of the
December 2005 Convertible Notes. During the three months ended March 31, 2006,
the Company amortized $61,644 of the debt discount which is included in interest
expense in the accompanying statement of operations.
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 credited $574,060 to changes in fair value of
derivative financial instruments in the accompanying statements of operations
for the change in fair value as of March 31, 2006, 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
13
(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 in connection with the issuance of this warrant, 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 credited $550,000
to changes in fair value of derivative financial instruments in the accompanying
statement of operations for the change in the fair value of the warrant as of
March 31, 2006, 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.
The Company has granted a security interest in all of its assets to the investor
to secure its obligations under the December 2005 Convertible Debentures.
NOTE 8 - EQUITY TRANSACTIONS
During the three months ended March 31, 2006, the Company issued the following
securities.
COMMON STOCK ISSUED UPON CONVERSION OF SERIES A PREFERRED STOCK
During the three months ended March 31, 2006, the Company issued 237,500 shares
of common stock upon conversion of 23.75 shares of Series A Preferred Stock.
OPTIONS GRANTED PURSUANT TO 2004 INCENTIVE STOCK PLAN
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 options were exercised as to an aggregate of
557,102 shares of common stock for proceeds to the Company of $200,000. The
Company recorded a charge to operations of $347,678 representing the fair value,
as determined by a Black-Scholes option pricing model, on the date of grant.
In March 2006, the Company issued a fully-vested option to purchase an aggregate
of 400,000 shares of its common stock at $0.359 per share pursuant to the 2004
Incentive Stock Plan, to its investor relations firm as replacement of options
previously forfeited to allow the Company to restore the options to its 2004
Incentive Stock Plan. These options contain the same expiration date of December
15, 2009 as the original options. This transaction resulted in a $231,913 charge
to operations, comprising a $115,125 charge to amortize the remaining balance of
the deferred compensation expense of the forfeited options and a charge of
$116,788 representing the fair value of the new options on the date of grant.
14
CONVERSION OF AMENDED DECEMBER 2004 CONVERTIBLE NOTE INTO COMMON STOCK
In January 2006, 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
In January 2006, the holder of the Company's December 2005 Convertible
Debentures elected to convert a portion of their aggregate principal balance of
$100,000 into 234,517 shares of common stock at a conversion price pursuant to
the terms of the December 2005 Convertible Debentures.
NOTE 9 - 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.
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.
NOTE 10 - ADOPTION OF 2006 INCENTIVE STOCK PLAN
The 2006 Incentive Stock Plan was approved by the Company's Board of Directors
on February 16, 2006, we intend to submit the 2006 Incentive Stock Plan for
approval of our stockholders within 12 months of the effective date of the Plan.
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 is 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. The Company reserved 2,730,090 shares of common stock
for issuance under the 2006 Incentive Stock Plan.
15
NOTE 11 - SUBSEQUENT EVENTS
COMMON STOCK ISSUED UPON CONVERSION OF SERIES A PREFERRED STOCK
Subsequent to March 31, 2006, the Company issued 30,000 shares of common stock
upon conversion of 3 shares of Series A Preferred Stock.
CONVERSION OF DECEMBER 2005 CONVERTIBLE DEBENTURE INTO COMMON STOCK
Subsequent to March 31, 2006, the holder of the Company's December 2005
Convertible Debentures elected to convert a portion of its aggregate principal
balance of $150,000 into 755,735 shares of common stock at a conversion price
pursuant to the terms of the December 2005 Convertible Debentures.
LETTER AGREEMENT FOR STRATEGIC ADVISORY SERVICES
Subsequent to March 31, 2006, the Company entered into a letter agreement
retaining Oppenheimer & Co. Inc. ("Oppenheimer") as it advisor to assist the
Company in exploring various strategic alternatives to enhance shareholder
value. In consideration for the services rendered, the Company has agreed to
compensate Oppenheimer with a cash fee equal to 3% of the total value of a
transaction if the total consideration is less than $20 million and 5% if $20
million or greater. There is a minimum fee of $400,000 plus reimbursements for
reasonable out-of-pocket expenses.
PRIVATE OFFERING OF CONVERTIBLE NOTES
On May 3, 2006, the Company entered into a term sheet in connection with a
private offering of one-year 6% convertible notes (the "Notes") in an aggregate
principal amount of up to $6,000,000.
The terms of the Notes are summarized below:
MATURITY: The Notes are payable one-year after the date of funding, or earlier
upon acceleration following the occurrence of an "Event of Default", as defined
in the Notes.
INTEREST: Interest on the Notes will accrue from the date of issue at 6% per
annum, or 12 % per annum upon the occurrence of an Event of Default.
RIGHT OF REPURCHASE: The Company may repurchase the Notes for 200% of their
principal amount, plus accrued interest, on or before September 30, 2006, upon
30 days' prior written notice.
OBLIGATION TO REPURCHASE UPON A SALE OR MERGER: The Company must repurchase the
Notes at 200% of their principal amount, plus accrued interest, if on or before
September 30, 2006, the Company announces a sale or merger of the Company or its
assets, which is completed within six months.
CONVERSION INTO COMMON STOCK: The principal of, and accrued interest on, the
Notes is convertible into shares of common stock, par value $0.0001 (the "Common
Stock") of the Company, at the option of the holders of the Notes, at an initial
conversion price per share of $0.15, subject to adjustment for certain issuances
or events that will result in dilution (the "Fixed Conversion Price"). If the
Notes have not been fully converted or repurchased by the Company for 200% of
their principal amount by September 30, 2006, then commencing on October 1,
2006, the conversion price will be the lesser of the Fixed Conversion Price and
the Floating Conversion Price. The "Floating Conversion Price" is defined as 90%
of the lowest closing price (or, if no closing price is available, the average
of closing bid and asked prices) for the 20 trading days immediately preceding
the date on which the notice of conversion is sent to the Company.
ADDITIONAL INDUCEMENT: As an inducement to the purchase of the Notes, the
Company will issue to purchasers of the Notes who purchased shares of Preferred
Stock, a number of additional shares of Common Stock upon conversion of the
Preferred Stock, based upon the principal amount of Notes purchased relative to
16
the total purchase price of the shares of Preferred Stock originally purchased,
which will effectively reduce the per share conversion price of the Preferred
Stock so that it is the same as the conversion price per share of the Notes, or
to the extent purchasers have converted shares of Preferred Stock, but not sold
the Common Stock received upon conversion, the Company will issue a number of
additional shares of Common Stock that will provide equivalent value, in each
case without additional consideration. The Company also will reduce to $0.30 the
per share exercise price of warrants purchasers of the Notes received with their
purchase of Preferred Stock, to the extent of the principal amount of Notes
purchased relative to the total purchase price for the original shares of
Preferred Stock, subject to the right of the Company, after the registration
statement referred to below under the heading "Registration of Shares" has
become effective, to force the exercise of those warrants on 20 days' notice by
offering to purchase those warrants for a nominal price if the closing market
price per share of the Common Stock exceeds $0.45 for ten consecutive trading
days. The Company also will issue warrants to purchase a number of additional
shares of our Common Stock at $0.15 that will provide equivalent value to those
purchasers of Notes who have sold or otherwise disposed of shares of Common
Stock received upon conversion of Preferred Stock.
Purchasers of Notes who have not purchased shares of Preferred Stock will
receive, without additional consideration, five-year warrants (the "Warrants")
to purchase a number of additional shares of Common Stock equal to 100% of the
number of shares that the purchaser may acquire upon conversion of the Notes at
$0.15 per share. The initial exercise price of the Warrants is $0.30 per share,
subject to adjustment for certain issuances and events that will result in
dilution.
REGISTRATION OF SHARES: The Company has agreed to file a registration statement
to register for resale the shares of Common Stock that purchasers of Notes may
acquire upon conversion of the Notes and or exercise of the Warrants, as well as
any additional shares of Common Stock which may be issued as part of the
offering. If the Company fails to file a registration statement for the resale
of these shares by July 19, 2006, or the registration statement is not effective
by September 20, 2006, the Company will be obligated to pay purchasers of the
Notes liquidated damages in an amount equal to 2% of the principal amount of the
Notes for each month, or portion of a month, for which the Company fails to
timely file the registration statement or until the registration statement
becomes effective, but in no event may the liquidated damages exceed 18% of the
principal amount of the Notes. As a condition to their purchase of the Notes,
purchasers will be required to enter into agreement with the Company that they
will not sell, transfer or otherwise dispose of any of our securities prior to
August 31, 2006.
MONTHLY DISBURSEMENT OF PROCEEDS: The proceeds of the offering will be disbursed
to the Company from escrow monthly, to the extent available, as follows: an
additional $244,000 on the closing date and $500,000 by the 10th day of each
succeeding calendar month until fully funded.
SELLING AGENT COMPENSATION: The Company will pay the selling agent for its
efforts in connection with the offering, a yield maintenance fee of 10% of the
gross proceeds of the offering, plus issue to it for a nominal consideration,
five-year warrants to purchase 10% of the shares issuable upon conversion of the
Notes and 10% of the shares of Common Stock that may be acquired upon exercise
of the Warrants, for an exercise price equal to the purchase price paid by
purchasers of the Notes. The selling agent has agreed to pledge the Company's
convertible note which it holds, in the principal amount of $250,000 to secure
their non-recourse obligation to increase the return to purchasers of the
Preferred Stock to the extent required so that investors' avoid a loss on their
investment, measured on the earlier of April 20, 2007 or the date on which all
of the Notes offered are sold or otherwise disposed of, including by conversion.
The Company will pay the placement agent for its efforts in connection with the
offering, a fee of 10% of the gross proceeds of the offering, plus issue to them
for a nominal consideration, five-year warrants to purchase 10% of the shares
issuable upon conversion of the Notes and 10% of the shares of Common Stock that
may be acquired upon exercise of the Warrants, for an exercise price equal to
the purchase price paid by purchasers of the Notes.
CHANGE TO TERMS OF OTHER CONVERTIBLE SECURITIES: As further inducement to
purchase Notes, the Company agreed to revise certain terms of existing
convertible securities:
Certain existing convertible notes in the principal and accrued interest amount
at maturity of $524,026 and $265,000, with original conversion prices of $0.75
per share and $1.00 per share, respectively, will adjust their conversion prices
17
to $0.15 per share. As a result of this adjustment, the Company anticipates it
will need to issue an additional 2,794,806 and 1,501,667 shares, respectively,
assuming conversion at maturity.
Certain convertible debentures in the principal and accrued interest amount at
maturity of $2,206,844 with a Fixed Conversion Price (as that term is defined in
the debenture) of $0.9765, will adjust to a Fixed Conversion Price of $0.15. In
addition, warrants issued at the closing of the convertible debenture
transaction for the purchase of 1 million shares of Common Stock at $1.023 per
share, can be purchased at $0.15 per share. As the terms of this convertible
debenture provide for a lower of Fixed Conversion Price or Floating Conversion
Price (as both terms are defined in the debenture) at conversion, the number of
shares of Common Stock issuable upon conversion can not be determined.
Certain options granted pursuant to the Company's 2004 Incentive Stock Plan and
certain shares of common stock issued upon exercise of those options, contained
anti-dilution provisions whereby, if the Company sold Common Stock or issued
convertible securities at a per share price less than their exercise price of
$0.359 (fair market value on the date of grant), the optionees grant and
exercise transactions would be adjusted to the lesser price per share. As a
result of this provision, the Company will issue an additional 776,231 shares of
Common Stock and increase the remaining unexercised option by an additional
776,230 shares to the optionees.
The Company plans to account for the 6% Convertible Notes under accounting
guidance provided by EITF 00-19 "Accounting for Derivative Instruments Indexed
To And Potentially Settled In A Company's Own Stock," and EITF 05-4, View A "The
Effect of Liquidated Damages Clause On A Freestanding Financial Instrument." Due
to certain factors and the liquidating damage provision in the registration
rights agreement, the Company determined that the embedded conversion option and
the warrants are derivative liabilities. Accordingly, the warrants and the
embedded conversion option will be marked to market through earnings at the end
of each reporting period.
ITEM 2. 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.
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
During the three months ended March 31, 2006, 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 require payment during the next
nine months. Currently, our outstanding debt includes $2,000,000 plus accrued
interest of December 2005 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.
During the three months ended March 31, 2006, the Company received proceeds from
exercises of stock options of $200,000. Subsequent to March 31, 2006, the
Company entered into negotiations for additional funding and has received
advance funding of $756,000 as of May 16, 2006, in the form of unsecured loans.
On May 3, 2006, the Company entered into a term sheet in connection with a
private offering of one year 6% convertible notes in an aggregate principal
amount of up to $6,000,000. In addition, on April 28, 2006, the Company entered
into a letter agreement with Oppenheimer & Co. Inc. and has retained the firm as
its strategic advisor to assist in the Company's effort to explore various
strategic alternatives to enhance shareholder value.
18
The Company is continuing to seek additional capital, collaborative partners,
joint ventures and strategic alliance agreements both within the United States
and abroad in an effort to 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.
Primarily as the result of recording a change in the fair value of its
derivative financial instruments of $2,637,732, offset by stock-based
compensation expense of $617,277 and non-cash interest expense from the
amortization of the beneficial conversion feature in certain convertible debt
instruments of $419,876, the Company recorded net income for the three months
ended March 31, 2006 of $329,007. The Company used net cash flows in its
operating activities of $573,337 during the three months ended March 31, 2006.
The Company's working capital deficiency amounted to $6,427,617 and its
development stage accumulated deficit amounted to $37,587,088 at March 31, 2006.
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.
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
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
preparing for and executing our phase I/II human clinical trial for Myodur, 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 by 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. In 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. As of March 31, 2006, we have sufficient
materials required for our initial human clinical trials. 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.
19
EMPLOYEES
As of May 16, 2006, we had seven employees, all of whom are full-time employees,
one of whom focuses on and coordinates our research program, four that focus on
and coordinate clinical and regulatory strategy and operations, and two 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, and we plan to continue this practice and expand our use of
third-party research organizations and facilities to meet specific needs.
ITEM 3. CONTROLS AND PROCEDURES.
EVALUATION OF OUR DISCLOSURE CONTROLS AND INTERNAL CONTROLS
As of the end of the period covered by this Report, we carried out an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Securities Exchange Act of 1934 Rule 13-d-15 (e) and
15d-15(e)). Based upon that evaluation and management's assessment of the
potential effects of the material weakness described below, our Chief Executive
Officer and Chief Financial Officer, concluded that as of the end of the period
covered by this Report, our disclosure controls and procedures were 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 year ended December 31, 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, during the year ended December 31,
2005, we 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
20
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.
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.
PART II
OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 3, 2006, we issued five-year options to purchase 557,103 shares of our
common stock at $0.359 per share to each of two consultants for financial
services provided to us, and on March 3, 2006 we issued 278,552 shares each to
such consultants upon partial exercise of such option.
On March 3, 2006, we issued a 45 month option to purchase an aggregate of
400,000 shares of our common stock at $0.359 per share to our investor relations
firm as a replacement of a previously forfeited option.
During the period covered by this Report, we have not issued unregistered
securities which have not been "previously reported" as defined in Rule 12b-2 of
the Exchange Act.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains forward-looking statements (as
defined in Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act"). To the extent that any statements
made in this Report contain information that is not historical, these statements
are essentially forward-looking. Forward-looking statements can be identified by
the use of words such as "expects," "plans" "will," "may," "anticipates,"
believes," "should," "intends," "estimates," and other words of similar meaning.
These statements are subject to risks and uncertainties that cannot be predicted
or quantified and consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties include, without limitation, our ability to raise capital to
finance the development of our products, the effectiveness, profitability and
the marketability of those products, our ability to protect our proprietary
21
information, general economic and business conditions, the impact of
technological developments and competition, including entry of newly-developed
alternative drug technologies, our expectations and estimates concerning future
financial performance and financing plans, adverse results of any legal
proceedings, the impact of current, pending or future legislation and regulation
on the healthcare industry, our ability to satisfy government and commercial
customers using our technology, our ability to develop manufacturing
capabilities or the inability to enter into acceptable relationships with one or
more contract manufacturers for our products and key components and the ability
of such contract manufacturers to manufacture products or components of an
acceptable quality on a cost-effective basis, the volatility of our operating
results and financial condition, our ability to attract or retain qualified
senior management personnel, including sales and marketing and scientific
personnel and other risks detailed from time to time in our filings with the
SEC. We do not undertake any obligation to publicly update any forward-looking
statements. As a result, you should not place undue reliance on these
forward-looking statements.
We also use market data and industry forecasts and projections throughout this
prospectus, which we have obtained from market research, publicly available
information and industry publications. These sources generally state that the
information they provide has been obtained from sources believed to be reliable,
but that the accuracy and completeness of the information are not guaranteed.
The forecasts and projections are based on industry surveys and the preparers'
experience in the industry, and the projected amounts may not be achieved.
Similarly, although we believe that the surveys and market research others have
performed are reliable, we have not independently verified this information.
Forecasts and other forward-looking information obtained from these sources are
subject to the same qualifications and the additional uncertainties accompanying
any estimates of future market size, revenue and market acceptance of products
and services.
ITEM 6. EXHIBITS
Exhibit
Number Description
-------- -----------
2.1 Certificate of Ownership and Merger of CepTor Corporation into
CepTor Research and Development Company (incorporated by reference
herein to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated January 31, 2005 (the "January 2005 8-K"))
3.1 Amended and Restated Certificate of Incorporation, dated January
27, 2005 (incorporated herein by reference to Exhibit 3.1 to the
January 2005 8-K)
3.2 Certificate of Correction to Amended and Restated Certificate of
Incorporation (incorporated herein by reference to Exhibit 3.1 to
the Company's Current Report on Form 8-K, dated February 10, 2005)
3.3 Amended and Restated By-laws (incorporated herein by reference to
Exhibit 3.2 to the January 2005 8-K)
4.1 Form of Common Stock Certificate (incorporated herein by reference
to Exhibit 4.1 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2004 (the "2004 10-KSB"))
4.2 CepTor Agreement, dated March 31, 2004 (the "CepTor Agreement"), by
and among William Pursley, Xechem and the Company (incorporated
herein by reference to Exhibit 4.1 to the Company's Current Report
on Form 8-K, dated December 9, 2004 (the "2004 Form 8-K"))
4.3 First Amendment to CepTor Agreement effective April 23, 2004, by
and among William Pursley, the Company and Xechem (incorporated
herein by reference to Exhibit 4.2 to the 2004 8-K)
4.4 Second Amendment to CepTor Agreement, dated December 9, 2004, by
and among William Pursley, the Company and Xechem (incorporated by
reference to Exhibit 4.3 to the 2004 8-K)
4.5 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 (the "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)
22
4.7 Form of Subscription Agreement (incorporated herein by reference to
Exhibit 4.6 to the Form SB-2)
4.8 Securities Purchase Agreement, dated June 17, 2005 by and between
the Company, Xechem and William Pursley (incorporated herein by
reference to Exhibit 99.01 to the Company's Current Report on Form
8-K filed on June 20, 2005)
4.9 Common Stock Purchase Agreement, dated October 7, 2005, between the
Company and Fusion Capital Fund II, LLC ("Fusion") (incorporated
herein by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K, filed October 11, 2005 (the "October 2005 8-K"))
4.10 Registration Rights Agreement, dated October 7, 2005, between the
Company and Fusion (incorporated herein by reference to Exhibit 4.2
to the October 2005 8-K)
4.11 Common Stock Warrant with Fusion, dated October 7, 2005
(incorporated by reference herein to Exhibit 4.1 to the October
2005 8-K)
4.12 Agreement between the Company and Brown Advisory Securities, LLC,
dated May 20, 2005 (incorporated herein by reference to Exhibit 4.1
to the Company's Registration Statement on Form SB-2 as filed with
the SEC on October 17, 2005 (the "October 2005 SB-2"))
4.13 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"))
4.14 Warrant issued to Cornell Capital, dated December 9, 2005
(incorporated herein by reference to Exhibit 4.2 to the December
2005 8-K)
4.15 Form of Redemption Warrant to Cornell Capital (incorporated herein
by reference to Exhibit 4.3 to the December 2005 8-K)
4.16 $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)
4.17 $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)
4.18 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"))
4.19 Non-Qualified Option Certificate and Addendum thereto, dated March
3, 2006, to Little Gem Life Sciences Fund, LLC (incorporated herein
by reference to Exhibit 4.18 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 2005 ("2005 10-KSB"))
4.20 Non-Qualified Option Certificate and Addendum thereto, dated March
3, 2006, to Peter Chung (incorporated herein by reference to
Exhibit 4.19 to the 2005 10-KSB)
10.1 Employment Agreement, dated March 31, 2004, by and between William
H. Pursley and the Company (incorporated herein by reference to
Exhibit 10.1 to the Form SB-2)
10.2 Employment Agreement, dated April 26, 2004, by and between Norman
A. Barton, M.D., Ph.D. and the Company (incorporated herein by
reference to Exhibit 10.2 to the Form SB-2)
10.3 Employment Agreement, dated March 31, 2004, by and between Donald
W. Fallon and the Company (incorporated herein by reference to
Exhibit 10.3 to the Form SB-2)
10.4 Founders' Plan (incorporated herein by reference to Exhibit 10.5 to
the Form SB-2)
10.5 2004 Incentive Stock Plan (incorporated herein by reference to
Exhibit 10.6 to the 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 (incorporated herein by reference to
Exhibit 10.7 to the 2005 10-KSB)
23
10.8 Sublease Agreement, dated March 4, 2004, by and between the Company
and Millennium Inorganic Chemicals, Inc. (incorporated herein by
reference to Exhibit 10.7 to the Form SB-2)
10.9 Exclusive License Agreement, dated September 15, 2004, between the
Company and JCR Pharmaceuticals Company, Ltd. (incorporated herein
by reference to Exhibit 10.8 to the Form SB-2)
10.10 Indemnification Agreement, dated October 6, 2005, by and between
William H. Pursley and the Company (incorporated herein by
reference to Exhibit 10.9 to the October 2005 SB-2)
10.11 Indemnification Agreement, dated October 6, 2005, by and between
Norman W. Barton and the Company (incorporated herein by reference
to Exhibit 10.10 to the October 2005 SB-2)
10.12 Indemnification Agreement, dated October 6, 2005, by and between
Donald W. Fallon and the Company (incorporated herein by reference
to Exhibit 10.11 to the October 2005 SB-2)
10.13 Indemnification Agreement, dated June 1, 2004, by and between
Leonard A. Mudry and the Company (incorporated herein by reference
to Exhibit 10.12 to the October 2005 SB-2)
10.14 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)
10.19 Manufacture and Supply Agreement entered into as of April 18, 2005
by and among Peninsula Laboratories Inc., Bachem AG, Bachem
Americas and the Company (incorporated by reference herein to
Exhibit 10.14 to the Company's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 2005)
10.20 Term Sheet, dated May 3, 2006, by and between the Company and
Margie Chassman (incorporated herein by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K, filed May 9, 2006)
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.
24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CEPTOR CORPORATION
Dated: May 22, 2006 By: /s/ William H. Pursley
---------------------------------------
William H. Pursley
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: May 22, 2006 By: /s/ Donald W. Fallon
---------------------------------------
Donald W. Fallon
Chief Financial Officer, Senior Vice
President, Finance and Administration
and Secretary (Principal Financial
Officer and Principal Accounting
Officer)
25
EXHIBITS INDEX
Exhibit
Number Description
-------- -----------
2.1 Certificate of Ownership and Merger of CepTor Corporation into
CepTor Research and Development Company (incorporated by reference
herein to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated January 31, 2005 (the "January 2005 8-K"))
3.1 Amended and Restated Certificate of Incorporation, dated January
27, 2005 (incorporated herein by reference to Exhibit 3.1 to the
January 2005 8-K)
3.2 Certificate of Correction to Amended and Restated Certificate of
Incorporation (incorporated herein by reference to Exhibit 3.1 to
the Company's Current Report on Form 8-K, dated February 10, 2005)
3.3 Amended and Restated By-laws (incorporated herein by reference to
Exhibit 3.2 to the January 2005 8-K)
4.1 Form of Common Stock Certificate (incorporated herein by reference
to Exhibit 4.1 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2004 (the "2004 10-KSB"))
4.2 CepTor Agreement, dated March 31, 2004 (the "CepTor Agreement"), by
and among William Pursley, Xechem and the Company (incorporated
herein by reference to Exhibit 4.1 to the Company's Current Report
on Form 8-K, dated December 9, 2004 (the "2004 Form 8-K"))
4.3 First Amendment to CepTor Agreement effective April 23, 2004, by
and among William Pursley, the Company and Xechem (incorporated
herein by reference to Exhibit 4.2 to the 2004 8-K)
4.4 Second Amendment to CepTor Agreement, dated December 9, 2004, by
and among William Pursley, the Company and Xechem (incorporated by
reference to Exhibit 4.3 to the 2004 8-K)
4.5 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 (the "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 the Form SB-2)
4.8 Securities Purchase Agreement, dated June 17, 2005 by and between
the Company, Xechem and William Pursley (incorporated herein by
reference to Exhibit 99.01 to the Company's Current Report on Form
8-K filed on June 20, 2005)
4.9 Common Stock Purchase Agreement, dated October 7, 2005, between the
Company and Fusion Capital Fund II, LLC ("Fusion") (incorporated
herein by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K, filed October 11, 2005 (the "October 2005 8-K"))
4.10 Registration Rights Agreement, dated October 7, 2005, between the
Company and Fusion (incorporated herein by reference to Exhibit 4.2
to the October 2005 8-K)
4.11 Common Stock Warrant with Fusion, dated October 7, 2005
(incorporated by reference herein to Exhibit 4.1 to the October
2005 8-K)
4.12 Agreement between the Company and Brown Advisory Securities, LLC,
dated May 20, 2005 (incorporated herein by reference to Exhibit 4.1
to the Company's Registration Statement on Form SB-2 as filed with
the SEC on October 17, 2005 (the "October 2005 SB-2"))
4.13 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"))
4.14 Warrant issued to Cornell Capital, dated December 9, 2005
(incorporated herein by reference to Exhibit 4.2 to the December
2005 8-K)
4.15 Form of Redemption Warrant to Cornell Capital (incorporated herein
by reference to Exhibit 4.3 to the December 2005 8-K)
26
4.16 $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)
4.17 $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)
4.18 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"))
4.19 Non-Qualified Option Certificate and Addendum thereto, dated March
3, 2006, to Little Gem Life Sciences Fund, LLC (incorporated herein
by reference to Exhibit 4.18 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 2005 ("2005 10-KSB"))
4.20 Non-Qualified Option Certificate and Addendum thereto, dated March
3, 2006, to Peter Chung (incorporated herein by reference to
Exhibit 4.19 to the 2005 10-KSB)
10.1 Employment Agreement, dated March 31, 2004, by and between William
H. Pursley and the Company (incorporated herein by reference to
Exhibit 10.1 to the Form SB-2)
10.2 Employment Agreement, dated April 26, 2004, by and between Norman
A. Barton, M.D., Ph.D. and the Company (incorporated herein by
reference to Exhibit 10.2 to the Form SB-2)
10.3 Employment Agreement, dated March 31, 2004, by and between Donald
W. Fallon and the Company (incorporated herein by reference to
Exhibit 10.3 to the Form SB-2)
10.4 Founders' Plan (incorporated herein by reference to Exhibit 10.5 to
the Form SB-2)
10.5 2004 Incentive Stock Plan (incorporated herein by reference to
Exhibit 10.6 to the 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 (incorporated herein by reference to
Exhibit 10.7 to the 2005 10-KSB)
10.8 Sublease Agreement, dated March 4, 2004, by and between the Company
and Millennium Inorganic Chemicals, Inc. (incorporated herein by
reference to Exhibit 10.7 to the Form SB-2)
10.9 Exclusive License Agreement, dated September 15, 2004, between the
Company and JCR Pharmaceuticals Company, Ltd. (incorporated herein
by reference to Exhibit 10.8 to the Form SB-2)
10.10 Indemnification Agreement, dated October 6, 2005, by and between
William H. Pursley and the Company (incorporated herein by
reference to Exhibit 10.9 to the October 2005 SB-2)
10.11 Indemnification Agreement, dated October 6, 2005, by and between
Norman W. Barton and the Company (incorporated herein by reference
to Exhibit 10.10 to the October 2005 SB-2)
10.12 Indemnification Agreement, dated October 6, 2005, by and between
Donald W. Fallon and the Company (incorporated herein by reference
to Exhibit 10.11 to the October 2005 SB-2)
10.13 Indemnification Agreement, dated June 1, 2004, by and between
Leonard A. Mudry and the Company (incorporated herein by reference
to Exhibit 10.12 to the October 2005 SB-2)
10.14 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)
27
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)
10.19 Manufacture and Supply Agreement entered into as of April 18, 2005
by and among Peninsula Laboratories Inc., Bachem AG, Bachem
Americas and the Company (incorporated by reference herein to
Exhibit 10.14 to the Company's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 2005)
10.20 Term Sheet, dated May 3, 2006, by and between the Company and
Margie Chassman (incorporated herein by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K, filed May 9, 2006)
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.
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