S-1
As filed with the Securities and Exchange Commission on
November 30, 2006
Registration
No. 333-
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
EPICEPT CORPORATION
(Exact name of registrant as
specified in its charter)
|
|
|
|
|
Delaware
|
|
2834
|
|
52-1841431
|
(State or Other Jurisdiction
of
Incorporation or Organization)
|
|
(Primary Standard Industrial
Classification Code Number)
|
|
(I.R.S. Employer
Identification No.)
|
270 Sylvan Avenue
Englewood Cliffs, NJ
07632
(201) 894-8980
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrant’s
Principal Executive Offices)
John V. Talley
Chief Executive
Officer
EpiCept Corporation
270 Sylvan Avenue
Englewood Cliffs, NJ
07632
(201) 894-8980
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent For
Service)
Copies to:
Alexander D.
Lynch, Esq.
Weil, Gotshal & Manges
LLP
767 Fifth Avenue
New York, New York
10153
(212) 310-8000
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended (the
“Securities Act”), check the following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this form is a post effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following
box. o
CALCULATION
OF REGISTRATION FEE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposed Maximum
|
|
|
Proposed Maximum
|
|
|
Amount of
|
Title of Each Class of
|
|
|
Amount to be
|
|
|
Offering
|
|
|
Aggregate Offering
|
|
|
Registration
|
Securities to be Registered
|
|
|
Registered(1)
|
|
|
Price per Share
|
|
|
Price
|
|
|
Fee
|
Shares of common stock underlying
selling stockholder warrants(2)
|
|
|
471,698
|
|
|
$2.65(3)
|
|
|
$1,250,000
|
|
|
$133.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Pursuant to Rule 415 of the
Securities Act of 1933, as amended, or the Securities Act, this
registration statement also registers such additional shares of
common stock of the Registrant as may hereafter be offered or
issued to prevent dilution resulting from stock splits, stock
dividends, recapitalizations or other capital adjustments.
|
|
(2)
|
|
Represents 471,698 shares of
our common stock issuable upon the exercise of warrants issued
by us pursuant to a private placement on August 30, 2006.
|
|
(3)
|
|
Estimated solely for purposes of
calculating the registration fee pursuant to Rule 457(g) of
the Securities Act, based on the higher of (a) the exercise
price of the warrants or (b) the offering price of the
securities of the same class included in this registration
statement.
|
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
|
Subject to completion, dated
November 30, 2006
471,698 Shares
Common Stock
par value $0.0001 per
share
This prospectus relates solely to the resale of up to an
aggregate of 471,698 shares of common stock of EpiCept
Corporation (“EpiCept” or the “Company”) by
the selling stockholder identified in this prospectus. These
shares include the shares of our common stock issued, or
issuable upon the exercise of warrants that were sold, to the
investor identified in this prospectus.
The selling stockholder identified in this prospectus (which
term as used herein includes its pledgees, donees, transferees
or other
successors-in-interest)
may offer the shares from time to time as it may determine
through public or private transactions or through other means
described in the section entitled “Plan of
Distribution” beginning on page at
prevailing market prices, at prices different than prevailing
market prices or at privately negotiated prices. The prices at
which the selling stockholder may sell the shares may be
determined by the prevailing market price for the shares at the
time of sale, may be different than such prevailing market
prices or may be determined through negotiated transactions with
third parties.
We will not receive any of the proceeds from the sale of these
shares by the selling stockholder. If the warrants are exercised
by the payment of cash, however, we would receive the exercise
price of the warrants, which is initially $2.65 per share.
However, all the warrants covered by the registration statement
of which this prospectus is a part have a cashless exercise
provision that allows the holder to receive a reduced number of
shares of our common stock, without paying the exercise price in
cash. To the extent any of the warrants are exercised in this
manner, we will not receive any additional proceeds from such
exercise. We have agreed to pay all expenses relating to
registering the securities. The selling stockholder will pay any
brokerage commissions
and/or
similar charges incurred for the sale of these shares of our
common stock.
Our common stock is dual-listed on the Nasdaq Stock Market and
the OM Stockholm Exchange under the ticker symbol
“EPCT.” The last reported sale price of our common
stock on November 29, 2006 was $1.65 per share.
Investing in our common stock involves significant risks. See
“Risk Factors” beginning on page 8 to read about
factors you should consider before buying shares of our common
stock.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the adequacy of accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
Prospectus
dated ,
2006
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
different information. We are not making an offer of these
securities in any state where the offer is not permitted. You
should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the
front of this prospectus.
TABLE OF
CONTENTS
“EpiCept”, “LidoPAIN” and the EpiCept logo
are our trademarks. Other service marks, trademarks, and trade
names referred to in this prospectus are the property of their
respective owners. As indicated in this prospectus, we have
included market data and industry forecasts that were obtained
from industry publications.
PROSPECTUS
SUMMARY
This summary highlights key information contained elsewhere
in this prospectus and is qualified in its entirety by the more
detailed information and financial statements included elsewhere
in this prospectus. It may not contain all of the information
that is important to you. You should read the entire prospectus,
including “Risk Factors,” our consolidated financial
statements and the related notes thereto and condensed
consolidated financial statements and the related notes thereto,
and the other documents to which this prospectus refers, before
making an investment decision. In this prospectus, the terms
“EpiCept,” “we,” “our” and
“us” refer to EpiCept Corp. and its subsidiaries.
Our
Company
We are a specialty pharmaceutical company that focuses on the
development of pharmaceutical products for the treatment of pain
and cancer. We have a portfolio of nine product candidates in
various stages of development: an oncology product candidate
submitted for European registration, three pain product
candidates that are ready to enter, or have entered,
Phase IIb or Phase III clinical trials, three pain
product candidates that have completed initial Phase II
clinical trials and two oncology compounds, one of which is
completing a Phase I clinical trial and the second of which
is expected to enter clinical development in the next few
months. Our portfolio of pain management and oncology product
candidates allows us to be less reliant on the success of any
single product candidate. We have yet to generate product
revenues from any of our product candidates in development.
Our oncology product candidate is Ceplene, which is intended as
remission maintenance therapy in the treatment of acute myeloid
leukemia, or AML specifically for patients who are in their
first complete remission (CR 1). Our late stage pain product
candidates are: EpiCept
NP-1, a
prescription topical analgesic cream designed to provide
effective long-term relief of peripheral neuropathies; LidoPAIN
SP, a sterile prescription analgesic patch designed to provide
sustained topical delivery of lidocaine to a post-surgical or
post-traumatic sutured wound while also providing a sterile
protective covering for the wound; and LidoPAIN BP, a
prescription analgesic non-sterile patch designed to provide
sustained topical delivery of lidocaine for the treatment of
acute or recurrent lower back pain. None of the our product
candidates has been approved by the U.S. Food and Drug
Administration (“FDA”) or any comparable agency in
another country.
1
Our
Product Candidates
We have a broad range of product portfolio candidates in pain
and cancer. This includes topical pain therapies, a cancer
product in registration in Europe, and an early stage discovery
program for apoptosis inducers designed to address unmet medical
needs in oncology.
Ceplene
Ceplene is our leading oncology drug candidate, which is based
on the naturally occurring molecule histamine. The mechanism of
action is via the inhibition of oxidative stress, thereby
protecting critical immune cells, which can then attack cancer
cells. We have completed an international, multicenter,
open-label, randomized phase III study to evaluate the
efficacy and safety of treatment with Ceplene + IL-2
(Proleukin®)
in 320 patients with Acute Myeloid Leukemia or AML in first
or subsequent complete remission. The treatment group met the
primary endpoint of preventing relapse as shown by increased
leukemia-free survival for AML patients in remission, which was
highly statistically significant (p<0.01, analyzed according
to
Intent-to-Treat).
Even more impressive was the benefit observed in patients in
their first remission (CR1). In this subgroup, the patients had
a 55% improvement in leukemia free survival. On October 6,
2006, we filed for regulatory approval with the European
Medicines Agency or EMEA for the proposed indication: Ceplene,
administered in conjunction with interleukin-2, is indicated for
maintenance of remission in adult patients with acute myeloid
leukemia in first remission to prolong the duration of leukemia
free survival.
EPC-2407
EPC2407, a novel small molecular weight compound, was discovered
by our Apoptosis Screening Anticancer Platform. It is in a class
of anticancer drugs called vascular disruption agents. Unlike
antiangiogenic drugs, which attempt to prevent the formation of
new tumor blood vessels, vascular disruption agents starve
existing solid tumors by depriving them of blood flow, thereby
causing tumor cell death. The molecular target for EPC2407 is
tubulin, a cellular substance which helps maintain cell shape
and is involved with cellular movement, intracellular transport,
and cell division. While there are a number of tubulins
targeting anticancer drugs, the dose-limiting toxicities and
emergence of drug-resistant tumor cells have limited their
effectiveness. In contrast, EPC2407 is active in multi-drug
resistant cells and interacts with tubulin at sites, which are
different from those of the taxanes and vinca alkaloids. As
such, we believe EPC2407 is differentiated from such drugs as
paclitaxel and vinblastine. We have submitted an investigational
new drug application or IND to the U.S. Food and Drug
Administration to begin Phase I clinical studies of
EPC2407, for the treatment of advanced cancer patients with
solid tumors that are well vascularized. These studies are
scheduled to start by the end of 2006.
2
MPC-6827
MPC-6827 is a compound discovered from the drug discovery
platform at EpiCept and licensed to Myriad Genetics Inc. for
clinical development. The antitumor activity of MPC-6827
demonstrated a broad range of activities against many tumor
types in various animal models as well as activity against
different types of multi-drug resistant cell lines. The
Phase I clinical testing is being conducted by Myriad, on
patients with solid tumors with a particular focus on brain
cancers or brain metastases due to its pharmacologic properties
in pre-clinical animal studies that indicated higher drug levels
in the brain than in the blood. MPC-6827 is expected to enter
Phase II clinical studies in the foruth quarter of 2006.
EpiCept
NP-1
EpiCept NP-1
is a prescription topical analgesic cream containing a patented
formulation, the contents of which include two FDA-approved
drugs, amitriptyline and ketamine. Amitriptyline is a
widely-used antidepressant, and ketamine is an NMDA, or
N-methyl-D-aspartate, antagonist (i.e., a compound that blocks
the effects of NMDA, a protein associated with the feeling of
pain) that is used as an anesthetic. EpiCept
NP-1 is
designed to provide effective, long-term relief from the pain of
peripheral neuropathies. We believe the topical delivery of our
patented combination represents a fundamentally new approach for
the treatment of pain associated with peripheral neuropathy and
will significantly reduce the risk of adverse side effects
associated with the systemic delivery of the active ingredients.
Peripheral neuropathies are medical conditions caused by damage
to the nerves in the nervous system. The initial indications for
this product candidate are post-herpetic neuralgia, or PHN, a
specific type of peripheral neuropathy associated with shingles,
a condition caused by the herpes zoster virus and diabetic
peripheral neuropathy or DPN. We have completed Phase II
clinical trials in the United States and Canada that included
343 subjects and plan to commence a Phase III clinical
trial in the United States during the first half of 2007 that
will include at least 400 subjects. We are also planning a
Phase IIb trial in diabetic neuropathic pain to commence in
the first half of 2007 that we anticipate will include
200 patients.
LidoPAIN
SP
LidoPAIN SP is a sterile prescription analgesic patch designed
to provide sustained topical delivery of lidocaine to a
post-surgical or post-traumatic sutured wound while also
providing a sterile protective covering for the wound. If
approved, we believe that LidoPAIN SP would be the first sterile
prescription analgesic patch on the market. We have completed a
Phase II clinical trial in Germany that included 221
subjects who underwent hernia repair. A Phase III clinical
trial in Europe was initiated during the fourth quarter of 2004
and completed in the third quarter of 2006. This study included
approximately 440 subjects undergoing hernia repair.
LidoPAIN
BP
LidoPAIN BP is a prescription analgesic non-sterile patch
designed to provide sustained topical delivery of lidocaine for
the treatment of acute or recurrent lower back pain. We have
completed Phase IIa and Phase IIb clinical trials in
the United States that included 242 subjects and plan to
commence a pivotal Phase IIb clinical trial in the United
States during the first half of 2007 that will include at least
300 subjects. In December 2003, we entered into an agreement
with Endo Pharmaceuticals Inc. for the commercialization of
LidoPAIN BP worldwide.
Strategic
Alliances
During 2003, we entered into two strategic alliances, the first
in July 2003 with Adolor Corporation for the development and
commercialization of certain products, including LidoPAIN SP in
North America, and the second in December 2003 with Endo
Pharmaceuticals, Inc. for the worldwide commercialization of
LidoPAIN BP. On October 27, 2006, we were informed of the
decision by Adolor to discontinue its licensing agreement with
us. As a result, we now have the full worldwide development and
commercialization rights to LidoPAIN SP. We received a total of
$10.5 million in upfront nonrefundable license and
milestone fees in connection with these agreements.
In connection with our merger with Maxim Pharmaceuticals Inc. on
January 4, 2006, we acquired a license agreement with
Myriad Genetics, Inc. under which we licensed our MX90745 series
of caspase-inducer anti-cancer compounds to Myriad. Myriad has
initiated clinical trials for
Azixatm
also known as MPC6827 for the treatment of brain cancer and
other solid tumors. Under the terms of the agreement, Myriad is
responsible for the worldwide
3
development and commercialization of any drug candidates from
this series of compounds. The agreement requires that Myriad
make licensing, research and milestone payments to us assuming
the successful commercialization of a compound for the treatment
of cancer, as well as pay a royalty on product sales.
These strategic alliances are designed to provide us with
operating capital and marketing capabilities and to supplement
our development efforts. We are eligible to receive an
additional $106.5 million in milestone payments under the
above mentioned relationships. The agreements also provide for
royalty payments from each of Endo and Myriad based on the net
sales of certain licensed products. There is no assurance that
any of these additional milestones will be earned or any
royalties paid. Our ability to generate additional revenue in
the future will depend on our ability to meet development or
regulatory milestones under our existing license agreements that
trigger additional payments, to enter into new license
agreements for other products or territories, and to receive
regulatory approvals for, and successfully commercialize, our
product candidates either directly or through commercial
partners. We also intend to pursue other strategic alliances as
appropriate.
Recent
Events
On September 20, 2006, we were notified by the Nasdaq
Listings Qualification Department that we did not comply with
the continued listing requirements of the Nasdaq Global Market
because the market value of our listed securities had fallen
below $50.0 million for ten consecutive days (pursuant to
Rule 4450(b)(1)(A) of the Nasdaq Marketplace Rules). Nasdaq
also informed us that we were not in compliance with Marketplace
Rule 4450(b)(1)(B), which requires total assets and total
revenue of $50.0 million each for the most recently
completed fiscal year or two of the last three most recently
completed fiscal years. We had until October 20, 2006 to
comply with the listing requirements. As of October 20,
2006, we did not regain compliance with the listing requirements
and an appeal was requested. Our securities on the Nasdaq Global
Market remain listed pending a final decision of this appeal
process.
On August 30, 2006, we entered into a senior secured term
loan in the amount of $10.0 million with Hercules
Technology Growth Capital, Inc. The interest rate on the loan is
11.7% per year. In addition, we issued five year common
stock purchase warrants to Hercules granting them the right to
purchase 0.5 million shares of our common stock at an
exercise price of $2.65 per share. The warrants are
exercisable for our common stock until August 29, 2011,
beginning six (6) months from the date they are issued. BMO
Capital Markets acted as the placement agent in the private
placement.
In connection with the senior secured term loan, we also entered
into a registration rights agreement with Hercules pursuant to
which we are required to file this registration statement to
register for resale the shares of our common stock issuable upon
exercise of the warrants.
Risks
Affecting Us
We are subject to a number of risks of which you should be aware
before you decide to buy our common stock. These risks are
discussed more fully under the heading “Risk Factors.”
All of our product candidates are in development. We have not
received regulatory approval for, or generated commercial
revenues from, any of our product candidates. We may never
obtain regulatory approval for our product candidates or
successfully commercialize any of our product candidates. If we
do not successfully obtain regulatory approval for, and
commercialize any of our product candidates or enter into
successful strategic alliances, we will be unable to achieve our
business objective. Since inception, we have incurred net
losses. As of September 30, 2006, we had an accumulated
deficit of $137.2 million. We expect to continue to incur
increasing net losses for the foreseeable future, and we may
never become profitable.
Corporate
Information
We were incorporated in Delaware in March 1993. We have two
wholly-owned subsidiaries, EpiCept GmbH, based in Munich,
Germany, which is engaged in research and development activities
on our behalf and Maxim Pharmaceuticals, Inc. which we acquired
on January 4, 2006. Our executive offices are located at
270 Sylvan Avenue, Englewood Cliffs, New Jersey 07632, our
telephone number at that location is
(201) 894-8980,
and our website can be accessed at www.epicept.com. Information
contained in our website does not constitute part of this
prospectus.
4
THE
OFFERING
|
|
|
Common stock outstanding prior to the private placement
|
|
25,508,830 shares |
|
Common stock being offered for resale to the public by the
selling stockholder(1)
|
|
471,698 shares |
|
Common stock to be outstanding after this offering(1)
|
|
25,980,528 shares |
|
Total proceeds raised by offering
|
|
We will not receive any proceeds from the resale of our common
stock pursuant to this offering. We may receive proceeds upon
the exercise of the warrants to the extent such warrants are
exercised for cash. |
|
Use of proceeds |
|
Any proceeds we may receive will be used to meet our working
capital needs and general corporate purposes. |
|
Nasdaq National Market symbol |
|
EPCT |
|
Risk factors |
|
See “Risk Factors” and the other information included
in this prospectus for a discussion of risk factors you should
carefully consider before deciding to invest in our common stock. |
|
|
|
(1) |
|
The number of shares of our common stock to be outstanding after
this offering is based on the number of shares of our common
stock outstanding as of November 1, 2006. This number does
not include, as of November 1, 2006: |
|
|
|
|
•
|
3,139,076 shares of our common stock issuable upon exercise
of options outstanding, at a weighted average exercise price of
$7.10 per share; and
|
|
|
•
|
2,035,570 shares of our common stock reserved for issuance
under our 2005 Equity Incentive Plan and our 2005 Employee Stock
Purchase Plan.
|
5
Summary
Financial and Other Data
The following tables set forth our summary statement of
operations data for the fiscal years ended December 31,
2003, 2004 and 2005 and for the nine months ended
September 30, 2006 and our summary balance sheet as of
September 30, 2006. Our statement of operations data for
the fiscal years ended December 31, 2003, 2004 and 2005
were derived from our audited financial statements included
elsewhere in this prospectus. Our statement of operations data
for the nine months ended September 30, 2006 and 2005 and
our balance sheet data as of September 30, 2006 were
derived from our unaudited condensed consolidated financial
statements included elsewhere in this prospectus. In the opinion
of management, the unaudited condensed consolidated financial
statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary for a
fair presentation of our operating results and financial
position for those periods and as of such dates. The results for
any interim period are not necessarily indicative of the results
that may be expected for a full year.
The results indicated below and elsewhere in this prospectus are
not necessarily indicative of our future performance. You should
read this information together with “Capitalization,”
“Selected Financial and Other Data,”
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” our consolidated
financial statements and related notes and our condensed
consolidated financial statements and related notes included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006(1)
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
377
|
|
|
$
|
1,115
|
|
|
$
|
829
|
|
|
$
|
1,134
|
|
|
$
|
733
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
3,407
|
|
|
|
4,408
|
|
|
|
5,783
|
|
|
|
4,589
|
|
|
|
11,776
|
|
Research and development
|
|
|
1,641
|
|
|
|
1,785
|
|
|
|
1,846
|
|
|
|
1,387
|
|
|
|
12,267
|
|
Acquired in-process research and
development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,048
|
|
|
|
6,193
|
|
|
|
7,629
|
|
|
|
5,976
|
|
|
|
57,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,671
|
)
|
|
|
(5,078
|
)
|
|
|
(6,800
|
)
|
|
|
(4,842
|
)
|
|
|
(56,672
|
)
|
Other income (expense), net
|
|
|
(5,364
|
)
|
|
|
(2,806
|
)
|
|
|
(698
|
)
|
|
|
(305
|
)
|
|
|
(3,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit for income
taxes
|
|
|
(10,035
|
)
|
|
|
(7,884
|
)
|
|
|
(7,499
|
)
|
|
|
(5,147
|
)
|
|
|
(60,452
|
)
|
Benefit for income taxes
|
|
|
74
|
|
|
|
275
|
|
|
|
284
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(9,961
|
)
|
|
|
(7,609
|
)
|
|
|
(7,215
|
)
|
|
|
(5,147
|
)
|
|
|
(60,452
|
)
|
Deemed dividend and redeemable
convertible preferred stock dividends
|
|
|
(1,254
|
)
|
|
|
(1,404
|
)
|
|
|
(1,254
|
)
|
|
|
(940
|
)
|
|
|
(8,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to common
stockholder
|
|
$
|
(11,215
|
)
|
|
$
|
(9,013
|
)
|
|
$
|
(8,469
|
)
|
|
$
|
(6,087
|
)
|
|
$
|
(69,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common
share
|
|
$
|
(6.79
|
)
|
|
$
|
(5.35
|
)
|
|
$
|
(4.95
|
)
|
|
$
|
(3.56
|
)
|
|
$
|
(2.94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
1,650,717
|
|
|
|
1,683,199
|
|
|
|
1,710,306
|
|
|
|
1,709,822
|
|
|
|
23,633,883
|
|
6
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2006
|
|
|
Balance Sheet Data:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,461
|
|
Working capital deficit
|
|
|
(2,046
|
)
|
Total assets
|
|
|
14,659
|
|
Long-term debt, net of current
portion
|
|
|
9,789
|
|
Accumulated deficit
|
|
|
(137,154
|
)
|
Total stockholders’ deficit
|
|
|
(15,654
|
)
|
|
|
|
(1) |
|
On January 4, 2006, we completed our merger with Maxim
Pharmaceuticals, Inc. |
7
RISK
FACTORS
An investment in our common stock involves a high degree of
risk. You should carefully consider the risk factors described
below as well as the other information contained in this
prospectus before buying shares of our common stock. If any of
the following risks or uncertainties occurs, our business,
financial conditions and operating results could be materially
and adversely affected. As a result, the trading price of our
common stock could decline and you may lose all or a part of
your investment in our common stock.
Risks
Relating to our Financial Condition
We
have had limited operating activities, which may make it
difficult for you to evaluate the success of our business to
date and to assess our future viability.
Our activities to date have been limited to organizing and
staffing our operations, acquiring, developing and securing our
technology, licensing product candidates, and undertaking
preclinical and clinical studies and clinical trials. We have
not yet demonstrated an ability to obtain regulatory approval,
manufacture products or conduct sales and marketing activities.
Consequently, it is difficult to make any predictions about our
future success, viability or profitability based on our
historical operations.
We
have a history of losses, and as a result we may not be able to
generate sufficient net revenue from product sales in the
foreseeable future.
We have incurred significant losses since our inception, and we
expect that we will experience net losses and negative cash flow
for the foreseeable future. Since our inception in 1993, we have
incurred significant net losses in each year. Our losses have
resulted principally from costs incurred in connection with our
development activities and from general and administrative costs
associated with our operations. Our net loss for the nine months
ended September 30, 2006 and the fiscal year ended
December 31, 2005 was $60.5 and $7.2 million,
respectively. As of September 30, 2006 and
December 31, 2005, our accumulated deficit was $137.2 and
$67.7 million, respectively. Even if we succeed in
developing and commercializing one or more of our product
candidates, we may never become profitable. Accordingly, we may
never generate sufficient net revenue to achieve or sustain
profitability.
We expect to continue to incur increasing expenses over the next
several years as we:
|
|
|
|
•
|
continue to conduct clinical trials for our product candidates;
|
|
|
•
|
seek regulatory approvals for our product candidates;
|
|
|
•
|
develop, formulate and commercialize our product candidates;
|
|
|
•
|
implement additional internal systems and develop new
infrastructure;
|
|
|
•
|
acquire or in-license additional products or technologies or
expand the use of our technologies;
|
|
|
•
|
maintain, defend and expand the scope of our intellectual
property; and
|
|
|
•
|
hire additional personnel.
|
We expect that we will have large fixed expenses in the future,
including significant expenses for research and development and
general and administrative expenses. We will need to generate
significant revenues to achieve and maintain profitability. If
we cannot successfully develop and commercialize our product
candidates, we will not be able to generate significant revenue
from product sales or achieve profitability in the future. As a
result, our ability to achieve and sustain profitability will
depend on our ability to generate and sustain substantially
higher revenue while maintaining reasonable cost and expense
levels.
8
We
will need substantial additional funding, may be unable to raise
additional capital when needed and may not be able to continue
as a going concern. This could force us to delay, reduce or
eliminate our product development and commercialization
activities.
Developing drugs, conducting clinical trials and commercializing
products is time-consuming and expensive. Our future funding
requirements will depend on many factors, including:
|
|
|
|
•
|
the progress and cost of our clinical trials and other
development activities;
|
|
|
•
|
the costs and timing of obtaining regulatory approval;
|
|
|
•
|
the costs of filing, prosecuting, defending and enforcing any
patent applications, claims, patent and other intellectual
property rights;
|
|
|
•
|
the cost and timing of securing manufacturing capabilities for
our clinical product candidates and commercial products, if any;
|
|
|
•
|
the costs of establishing sales, marketing and distribution
capabilities; and
|
|
|
•
|
the terms and timing of any collaborative, licensing and other
arrangements that we may establish.
|
We believe that, after giving effect to the exercise of common
stock purchase warrants, our existing cash resources will be
sufficient to meet our projected operating requirements into the
second quarter of 2007. However, we will need to raise
additional capital or incur indebtedness to continue to fund our
operations in the future. We cannot assure you that sufficient
funds will be available to us when required or on satisfactory
terms. If necessary funds are not available, we may have to
delay, reduce the scope of or eliminate some of our development
programs, which could delay the time to market for any of our
product candidates.
We may raise additional capital through public or private equity
offerings, debt financings or corporate collaboration and
licensing arrangements. Our ability to raise additional capital
will depend on financial, economic and market conditions and
other factors, many of which are beyond our control. We cannot
be certain that such additional funding will be available upon
acceptable terms, or at all. To the extent that we raise
additional capital by issuing equity securities, our
then-existing stockholders may experience further dilution. Debt
financing, if available, may subject us to restrictive covenants
that could limit our flexibility in conducting future business
activities. To the extent that we raise additional capital
through collaboration and licensing arrangements, it may be
necessary for us to relinquish valuable rights to our product
candidates that we might otherwise seek to develop or
commercialize independently.
Our
stock may be delisted from NASDAQ, which may make it more
difficult for you to sell your shares.
Currently, our common stock trades on the NASDAQ Global Market.
NASD Marketplace Rule 4450 provides that a company must
comply with continuing listing criteria to maintain its NASDAQ
listing. On September 20, 2006, the Company was notified by
The NASDAQ Stock Market (NASDAQ) that for the previous 10
consecutive trading days the market value of the Company’s
Common Stock had been below the minimum $50,000,000 requirement
for continued inclusion by Marketplace Rule 4450(b)(1)(A).
In addition, we did not comply with the alternative continued
listing criteria provided in Marketplace
Rule 4450(b)(1)(B), which requires total assets and total
revenue of $50,000,000 each for the most recently completed
fiscal year or two of the last three most recently completed
fiscal years. In accordance with Marketplace
Rule 4450(c)(4), we had until October 20, 2006 to
regain compliance. We were not in compliance as of
October 20, 2006, and an appeal was requested relating to
the determination to delist our securities. Our securities will
remain listed until the completion of this appeal process.
If we were to be delisted from the NASDAQ Global Market, our
common stock would be listed on the NASDAQ Capital Market,
assuming we meet those listing requirements. If we failed to
meet the NASDAQ Capital Market listing requirements, our common
stock would be considered a penny stock under regulations of the
Securities and Exchange Commission and would therefore be
subject to rules that impose additional sales practice
requirements on broker-dealers who sell our securities. The
additional burdens imposed upon broker-dealers by these
requirements could discourage broker-dealers from effecting
transactions in our common stock, which could severely limit the
market liquidity of our common stock and your ability to sell
our securities in the secondary
9
market. In addition, if we fail to maintain a listing on NASDAQ
or on any other United States securities exchange, quotation
system, market or
over-the-counter
bulletin board, we will be subject to cash penalties under
certain agreements to which we are a party until a listing is
obtained.
Our
quarterly financial results are likely to fluctuate
significantly, which could have an adverse effect on our stock
price.
Our quarterly operating results will be difficult to predict and
may fluctuate significantly from period to period, particularly
because we are a relatively small company with no approved
products. The level of our revenues, if any, and results of
operations at any given time could fluctuate as a result of any
of the following factors:
|
|
|
|
•
|
research and development expenses incurred in connection with
our license agreement with Endo Pharmaceuticals and other
license agreements;
|
|
|
•
|
results of our clinical trials;
|
|
|
•
|
our ability to obtain regulatory approval for our product
candidates;
|
|
|
•
|
our ability to achieve milestones under our strategic
relationships on a timely basis or at all;
|
|
|
•
|
timing of new product offerings, acquisitions, licenses or other
significant events by us or our competitors;
|
|
|
•
|
regulatory approvals and legislative changes affecting the
products we may offer or those of our competitors;
|
|
|
•
|
our ability to establish and maintain a productive sales force;
|
|
|
•
|
demand and pricing of any products we may offer;
|
|
|
•
|
physician and patient acceptance of our products;
|
|
|
•
|
levels of third-party reimbursement for our products;
|
|
|
•
|
interruption in the manufacturing or distribution of our
products;
|
|
|
•
|
the effect of competing technological and market developments;
|
|
|
•
|
litigation involving patents, licenses or other intellectual
property rights; and
|
|
|
•
|
product failures or product liability lawsuits.
|
Until we obtain regulatory approval for any of our product
candidates, we cannot begin to market or sell them. As a result,
it will be difficult for us to forecast demand for our products
with any degree of certainty. It is also difficult to predict
the timing of the achievement of various milestones under our
strategic relationships. In addition, we will be increasing our
operating expenses as we develop product candidates and build
commercial capabilities. Accordingly, we may experience
significant, unanticipated quarterly losses. Because of these
factors, our operating results in one or more future quarters
may fail to meet the expectations of securities analysts or
investors, which could cause our stock price to decline
significantly.
We
determined that material weaknesses related to our internal
controls and procedures exist, which could adversely impact our
ability to report our consolidated financial results accurately
and on a timely basis.
As a result of our inability to complete our financial
statements for the quarter ended March 31, 2006 and to file
our corresponding
Form 10-Q
on a timely basis; and the journal entry adjustments primarily
related to the accounting for the Maxim merger, management
determined that material weaknesses existed in our internal
control over financial reporting at March 31, 2006. Our
independent registered public accounting firm identified certain
matters for the first quarter ended March 31, 2006
involving our internal control over financial reporting that it
considered to be material weaknesses under standards established
by the Public Company Accounting Oversight Board, including
errors on the statement of cash flows, errors in recording the
purchase price allocation relating to the Maxim merger, and
other errors either of omission of required footnote information
or requiring correcting journal entries. Our independent
registered public accounting firm informed management and the
audit committee
10
of its findings. In light of the additional complexity of the
financial statements resulting from the merger with Maxim and
the findings of our independent registered public accounting
firm for the first quarter ended March 31, 2006, management
has implemented certain improvements in its financial reporting
close process. We have retained the services of outside external
accountants to provide additional training, process support and
internal review of the financial statements. In addition, we
developed and utilize detailed checklists for the financial
reporting process to ensure completeness in the preparation of
SEC reports. We have improved documentation of our conclusions
relating to technical accounting issues and determinations. In
addition, during the quarter ended September 30, 2006, we
initiated a plan for our San Diego subsidiary to adopt the
same accounting software being utilized by us, in order to
facilitate the accuracy and timeliness of that subsidiary’s
financial disclosure process. Since we have had only limited
experience with the improvements we have made to date, we cannot
assure you that the steps we have taken to date or any future
measures will fully remediate the material weaknesses identified
by our independent registered public accounting firm or that we
will be successful in implementing and maintaining adequate
controls over our financial reporting in the future. We cannot
assure you that new material weaknesses in our internal control
over financial reporting will not be discovered in the future.
Any failure to remediate any reported material weaknesses or
implement required new or improved internal controls, or
difficulties encountered in their implementation, could cause us
to fail to meet our reporting obligations or result in material
misstatements in our consolidated financial statements.
Inadequate internal controls could also cause investors to lose
confidence in our reported consolidated financial statements,
which could result in a decline in value for our stock.
For 2006, we are required to comply with Section 404(a) of
the Sarbanes-Oxley Act of 2002, which requires annual management
assessments of the effectiveness of our internal control over
financial reporting and an attestation to, and testing and
assessment of, our internal control over financial reporting by
our independent registered public accounting firm. We have
performed certain testing of our internal control over financial
reporting in preparation for our first annual assessment of the
effectiveness of such internal controls over financial reporting
as required by Section 404(a). We have remediated certain
control deficiencies and will complete the review during the
fourth quarter of 2006.
Our
recurring losses and stockholders’ deficit has raised
substantial doubt regarding our ability to continue as a going
concern.
EpiCept’s recurring losses from operations and
EpiCept’s stockholders’ deficit raise substantial
doubt about EpiCept’s ability to continue as a going
concern and as a result EpiCept’s independent registered
public accounting firm included an explanatory paragraph in its
report on EpiCept’s consolidated financial statements for
the year ended December 31, 2005 with respect to this
uncertainty. EpiCept will need to raise additional debt or
equity capital to fund our product development efforts and to
meet our obligations, including servicing our existing
indebtedness and performing our contractual obligations under
our license agreements and strategic alliances. In addition, the
perception that we may not be able to continue as a going
concern may cause others to choose not to deal with us due to
concerns about our ability to meet our contractual obligations.
Clinical
and Regulatory Risks
If we
are unable to successfully design, conduct and complete clinical
trials, we will not be able to obtain regulatory approval for
product candidates, which could delay or prevent us from being
able to generate revenue from product sales.
We currently have no products for sale, and we cannot guarantee
you that we will ever have marketable products. Before our
product candidates can be commercialized, we or our partners
must submit a NDA, to the FDA. The NDA must demonstrate that the
product candidate is safe and effective in humans for its
intended use. To support our NDAs, we or our partners must
conduct extensive human tests, which are referred to as clinical
trials. Satisfaction of all regulatory requirements typically
takes many years and requires the expenditure of substantial
resources.
We currently have several product candidates in various stages
of clinical testing. All of our product candidates are prone to
the risks of failure inherent in drug development and testing.
Product candidates in later-stage clinical trials may fail to
show desired safety and efficacy traits despite having
progressed through initial clinical testing. In
11
addition, the data collected from clinical trials of our product
candidates may not be sufficient to support FDA approval, or FDA
officials could interpret the data differently than we do. The
FDA may require us or our partners to conduct additional
clinical testing, in which case we would have to expend
additional time and resources. The approval process may also be
delayed by changes in government regulation, future legislation
or administrative action or changes in FDA policy that occur
prior to or during regulatory review.
Any failure or significant delay in completing clinical trials
for our product candidates, or in receiving regulatory approval
for the sale of our product candidates, may severely harm our
business and delay or prevent us from being able to generate
revenue from product sales, and our stock price will likely
decline.
We may
not obtain regulatory clearance to market our product candidates
on a timely basis, or at all.
Our product candidates will be subject to extensive government
regulations related to development, clinical trials,
manufacturing and commercialization. The process of obtaining
FDA, European Medicines Agency for the Evaluation of Medicinal
Products or EMEA, and other governmental and similar
international regulatory approvals is costly, time consuming,
uncertain and subject to unanticipated delays. Even if we
believe that preclinical and clinical data are sufficient to
support regulatory approval for a drug candidate, the FDA, EMEA
and similar international regulatory authorities may not
ultimately approve the candidate for commercial sale in any
jurisdiction. The FDA, EMEA or similar international regulators
may refuse to approve an application for approval of a drug
candidate if they believe that applicable regulatory criteria
are not satisfied. The FDA, EMEA or similar international
regulators may also require additional testing for safety and
efficacy. Any failure or delay in obtaining these approvals
could prohibit or delay us from marketing product candidates. If
our product candidates do not meet applicable regulatory
requirements for approval, we may not have the financial
resources to continue research and development of these product
candidates, and we may not generate revenues from the commercial
sale of any of our products.
Clinical
trial designs that were discussed with regulatory authorities
prior to their commencement may subsequently be considered
insufficient for approval at the time of application for
regulatory approval.
We or our partners discuss with and obtain guidance from
regulatory authorities on clinical trial protocols. Over the
course of conducting clinical trials, circumstances may change,
such as standards of safety, efficacy or medical practice, which
could affect regulatory authorities’ perception of the
adequacy of any of our clinical trial designs or the data we
develop from our studies. Changes in circumstances could affect
our ability to conduct clinical trials as planned. Even with
successful clinical safety and efficacy data, we may be required
to conduct additional, expensive trials to obtain regulatory
approval. For example, in May 2004, Maxim announced the results
of an international Phase III clinical trial testing the
combination of Ceplene plus IL-2 in patients with acute myeloid
leukemia, or AML, in complete remission. The primary endpoint of
the Phase III trials was achieved using
intent-to-treat
analysis, as patients treated with the Ceplene plus IL-2
combination therapy experienced a statistically significant
increase in leukemia-free survival compared to patients in the
control arm of the trial. In January 2005, Maxim announced that
based on ongoing correspondence with the FDA, as well as
consultations with external advisors, it determined that an
additional Phase III clinical trial would be necessary to
further evaluate Ceplene plus IL-2 combination therapy for the
treatment of AML patients in complete remission before applying
for regulatory approval in the United States. In October 2006,
we submitted a Market Authorization Application to EMEA for
Ceplene, our lead oncology product candidate, administered in
conjunction with interleukin-2 (IL-2), for the maintenance of
first remission in patients with acute myeloid leukemia, or AML.
However, we have no assurance that (i) the EMEA or similar
regulatory agencies will not require an additional
Phase III trial, (ii) the EMEA or similar regulatory
agencies would approve regulatory filings for drug approval, or
(iii) if an additional Phase III trial is required,
that the results from such additional Phase III trial would
confirm the results from the first Phase III trial.
12
If we
receive regulatory approval, our marketed products will also be
subject to ongoing FDA
and/or
foreign regulatory agency obligations and continued regulatory
review, and if we fail to comply with these regulations, we
could lose approvals to market any products, and our business
would be seriously harmed.
Following initial regulatory approval of any of our product
candidates, we will be subject to continuing regulatory review,
including review of adverse experiences and clinical results
that are reported after our products become commercially
available. This would include results from any post-marketing
tests or vigilance required as a condition of approval. The
manufacturer and manufacturing facilities we use to make any of
our product candidates will also be subject to periodic review
and inspection by the FDA or foreign regulatory agencies. If a
previously unknown problem or problems with a product,
manufacturing or laboratory facility used by us is discovered,
the FDA or foreign regulatory agency may impose restrictions on
that product or on the manufacturing facility, including
requiring us to withdraw the product from the market. Any
changes to an approved product, including the way it is
manufactured or promoted, often require FDA approval before the
product, as modified, can be marketed. We and our manufacturers
will be subject to ongoing FDA requirements for submission of
safety and other post-market information. If we and our
manufacturers fail to comply with applicable regulatory
requirements, a regulatory agency may:
|
|
|
|
•
|
issue warning letters;
|
|
|
•
|
impose civil or criminal penalties;
|
|
|
•
|
suspend or withdraw regulatory approval;
|
|
|
•
|
suspend any ongoing clinical trials;
|
|
|
•
|
refuse to approve pending applications or supplements to
approved applications;
|
|
|
•
|
impose restrictions on operations;
|
|
|
•
|
close the facilities of manufacturers; or
|
|
|
•
|
seize or detain products or require a product recall.
|
In addition, the policies of the FDA or other applicable
regulatory agencies may change and additional government
regulations may be enacted that could prevent or delay
regulatory approval of our product candidates. We cannot predict
the likelihood, nature, or extent of adverse government
regulation that may arise from future legislation or
administrative action, either in the United States or abroad.
Even
if the FDA approves our product candidates, the approval will be
limited to those indications and conditions for which we are
able to show clinical safety and efficacy.
Any regulatory approval that we may receive for our current or
future product candidates will be limited to those diseases and
indications for which such product candidates are clinically
demonstrated to be safe and effective. In addition to the FDA
approval required for new formulations, any new indication to an
approved product also requires FDA approval. If we are not able
to obtain FDA approval for a broad range of indications for our
product candidates, our ability to effectively market and sell
our product candidates may be greatly reduced and may harm our
ability to generate revenue.
While physicians may choose to prescribe drugs for uses that are
not described in the product’s labeling and for uses that
differ from those tested in clinical studies and approved by
regulatory authorities, our regulatory approvals will be limited
to those indications that are specifically submitted to the FDA
for review. These “off-label” uses are common across
medical specialties and may constitute the best treatment for
many patients in varied circumstances. Regulatory authorities in
the United States generally do not regulate the behavior of
physicians in their choice of treatments. Regulatory authorities
do, however, restrict communications by pharmaceutical companies
on the subject of off-label use. If our promotional activities
fail to comply with these regulations or guidelines, we may be
subject to warnings from, or enforcement action by, these
authorities. In addition, our failure to follow FDA rules and
guidelines relating to promotion and advertising may cause the
FDA to delay its approval or refuse to approve a
13
product, the suspension or withdrawal of an approved product
from the market, recalls, fines, disgorgement of money,
operating restrictions, injunctions or criminal prosecutions,
any of which could harm our business.
The
results of our clinical trials are uncertain, which could
substantially delay or prevent us from bringing our product
candidates to market.
Before we can obtain regulatory approval for a product
candidate, we must undertake extensive clinical testing in
humans to demonstrate safety and efficacy to the satisfaction of
the FDA or other regulatory agencies. Clinical trials are very
expensive and difficult to design and implement. The clinical
trial process is also time consuming. The commencement and
completion of our clinical trials could be delayed or prevented
by several factors, including:
|
|
|
|
•
|
delays in obtaining regulatory approvals to commence or continue
a study;
|
|
|
•
|
delays in reaching agreement on acceptable clinical trial
parameters;
|
|
|
•
|
slower than expected rates of patient recruitment and enrollment;
|
|
|
•
|
inability to demonstrate effectiveness or statistically
significant results in our clinical trials;
|
|
|
•
|
unforeseen safety issues;
|
|
|
•
|
uncertain dosing issues;
|
|
|
•
|
inability to monitor patients adequately during or after
treatment; and
|
|
|
•
|
inability or unwillingness of medical investigators to follow
our clinical protocols.
|
We cannot assure you that our planned clinical trials will begin
or be completed on time or at all, or that they will not need to
be restructured prior to completion. Significant delays in
clinical testing will impede our ability to commercialize our
product candidates and generate revenue from product sales and
could materially increase our development costs. Completion of
clinical trials may take several years or more, but the length
of time generally varies according to the type, complexity,
novelty and intended use of a drug candidate. The cost of
clinical trials may vary significantly over the life of a
project as a result of differences arising during clinical
development, including:
|
|
|
|
•
|
the number of sites included in the trials;
|
|
|
•
|
the length of time required to enroll suitable patient subjects;
|
|
|
•
|
the number of patients that participate in the trials;
|
|
|
•
|
the number of doses that patients receive;
|
|
|
•
|
the duration of
follow-up
with the patient;
|
|
|
•
|
the product candidate’s phase of development; and
|
|
|
•
|
the efficacy and safety profile of the product.
|
The
use of FDA-approved therapeutics in certain of our product
candidates could require us to conduct additional preclinical
studies and clinical trials, which could increase development
costs and lengthen the regulatory approval
process.
Certain of our product candidates utilize proprietary
formulations and topical delivery technologies to administer
FDA-approved pain management therapeutics. Although the
therapeutics utilized in our product candidates are
FDA-approved, we may still be required to conduct preclinical
studies and clinical trials to determine if our product
candidates are safe and effective. In addition, we may also be
required to conduct additional preclinical studies and
Phase I clinical trials to establish the safety of the
topical delivery of these therapeutics and the level of
absorption of the therapeutics into the bloodstream. The FDA may
also require us to conduct clinical studies to establish that
our delivery mechanisms are safer or more effective than the
existing
14
methods for delivering these therapeutics. As a result, we may
be required to conduct complex clinical trials, which could be
expensive and time-consuming and lengthen the anticipated
regulatory approval process.
In
some instances, we rely on third parties, over which we have
little or no control, to conduct clinical trials for our
products and their failure to perform their obligations in a
timely or competent manner may delay development and
commercialization of our product candidates.
The nature of clinical trials and our business strategy requires
us to rely on clinical research centers and other contractors to
assist us with clinical testing and certain research and
development activities, such as our agreement with Myriad
Genetics, Inc. related to the MX90745 series of
apoptosis-inducer anti-cancer compounds. As a result, our
success is dependent upon the success of these outside parties
in performing their responsibilities. Although we believe the
contractors are economically motivated to perform on their
contractual obligations, we cannot directly control the adequacy
and timeliness of the resources and expertise applied to these
activities by such contractors. If such contractors do not
perform their activities in an adequate or timely manner, the
development and commercialization of our product candidates
could be delayed. In addition, we rely on Myriad for research
and development related to the MX90745 series of
apoptosis-inducer anti-cancer compounds. We may enter into
similar agreements from time to time with additional third
parties for our other product candidates whereby these third
parties undertake significant responsibility for research,
clinical trials or other aspects of obtaining FDA approval. As a
result, we may face delays if Myriad or these additional third
parties do not conduct clinical studies and trials, or prepare
or file regulatory related documents, in a timely or competent
fashion. The conduct of the clinical studies by, and the
regulatory strategies of, Myriad or these additional third
parties, over which we have limited or no control, may delay or
prevent regulatory approval of our product candidates, which
would delay or limit our ability to generate revenue from
product sales.
Risks
Relating to Commercialization
If we
fail to enter into and maintain successful strategic alliances
for our product candidates, we may have to reduce or delay our
product commercialization or increase our
expenditures.
Our strategy for developing, manufacturing and commercializing
potential product candidates in multiple therapeutic areas
currently requires us to enter into and successfully maintain
strategic alliances with pharmaceutical companies that have
product development resources and expertise, established
distribution systems and direct sales forces to advance our
development programs and reduce our expenditures on each
development program and market any products that we may develop.
EpiCept has formed a strategic alliance with Endo with respect
to EpiCept’s LidoPAIN BP product candidate and with Myriad
with respect to the MX90745 series of apoptosis-inducer
anti-cancer compounds. Although we have ongoing discussions with
other companies with respect to certain of our product
candidates, we may not be able to negotiate additional strategic
alliances on acceptable terms, or at all.
We intend to rely on collaborative partners to market and sell
Ceplene in international markets, if approved for sale in such
markets. We have not yet entered into any collaborative
arrangements with respect to marketing or selling Ceplene with
the exception of agreements relating to Australia, New Zealand
and Israel. We cannot assure you that we will be able to enter
into any such arrangements on terms favorable to us, or at all.
If we are unable to maintain our existing strategic alliances or
establish and maintain additional strategic alliances, we may
have to limit the size or scope of, or delay, one or more of our
product development or commercialization programs, or undertake
the various activities at our own expense. In addition, our
dependence on strategic alliances is subject to a number of
risks, including:
|
|
|
|
•
|
the inability to control the amount or timing of resources that
our collaborators may devote to developing the product
candidates;
|
|
|
•
|
the possibility that we may be required to relinquish important
rights, including intellectual property, marketing and
distribution rights;
|
|
|
•
|
the receipt of lower revenues than if we were to commercialize
such products ourselves;
|
15
|
|
|
|
•
|
our failure to receive future milestone payments or royalties
should a collaborator fail to commercialize one of our product
candidates successfully;
|
|
|
•
|
the possibility that a collaborator could separately move
forward with a competing product candidate developed either
independently or in collaboration with others, including our
competitors;
|
|
|
•
|
the possibility that our collaborators may experience financial
difficulties;
|
|
|
•
|
business combinations or significant changes in a
collaborator’s business strategy that may adversely affect
that collaborator’s willingness or ability to complete its
obligations under any arrangement; and
|
|
|
•
|
the chance that our collaborators may operate in countries where
their operations could be negatively impacted by changes in the
local regulatory environment or by political unrest.
|
If the
market does not accept and use our product candidates, we will
not achieve sufficient product revenues and our business will
suffer.
Even if we receive regulatory approval to market our product
candidates, physicians, patients, healthcare payors and the
medical community may not accept and use them. The degree of
market acceptance and use of any approved products will depend
on a number of factors, including:
|
|
|
|
•
|
perceptions by members of the healthcare community, including
physicians, about the safety and effectiveness of our products;
|
|
|
•
|
cost effectiveness of our products relative to competing
products;
|
|
|
•
|
relative convenience and ease of administration;
|
|
|
•
|
availability of reimbursement for our products from government
or healthcare payors; and
|
|
|
•
|
effectiveness of marketing and distribution efforts by us and
our licensees and distributors.
|
Because we expect to rely on sales and royalties generated by
our current lead product candidates for a substantial portion of
our product revenues for the foreseeable future, the failure of
any of these drugs to find market acceptance would harm our
business and could require us to seek additional funding to
continue our other development programs.
Our
product candidates could be rendered obsolete by technological
change and medical advances, which would adversely affect the
performance of our business.
Our product candidates may be rendered obsolete or uneconomical
by the development of medical advances to treat the conditions
that our product candidates are designed to address. Pain
management therapeutics are the subject of active research and
development by many potential competitors, including major
pharmaceutical companies, specialized biotechnology firms,
universities and other research institutions. While we will seek
to expand our technological capabilities to remain competitive,
research and development by others may render our technology or
product candidates obsolete or noncompetitive or result in
treatments or cures superior to any therapy we developed.
Technological advances affecting costs of production could also
harm our ability to cost-effectively produce and sell products.
We
have no manufacturing capacity and anticipate continued reliance
on third parties for the manufacture of our product
candidates.
We do not currently operate manufacturing facilities for our
product candidates. We lack the resources and the capabilities
to manufacture any of our product candidates. We currently rely
on a single contract manufacturer for each product candidate to
supply, store and distribute drug supplies for our clinical
trials. Any performance failure or delay on the part of our
existing manufacturers could delay clinical development or
regulatory approval of our product candidates and
commercialization of our drugs, producing additional losses and
depriving us of potential product revenues.
16
If the FDA or other regulatory agencies approve any of our
product candidates for commercial sale, the product will need to
be manufactured in larger quantities. To date our product
candidates have only been manufactured in small quantities for
preclinical and clinical trials, our third party manufacturers
may not be able to successfully increase their manufacturing
capacity in a timely or economical manner, or at all. We may be
forced to identify alternative or additional third party
manufacturers, which may prove difficult because the number of
potential manufacturers is limited and the FDA must approve any
replacement contractor prior to manufacturing our products. Such
approval would require new testing and compliance inspections.
In addition, a new manufacturer would have to be educated in, or
develop substantially equivalent processes for, production of
our product candidates. It may be difficult or impossible for us
to find a replacement manufacturer on acceptable terms quickly,
or at all. If we are unable to successfully increase the
manufacturing capacity for a drug candidate in a timely and
economical manner, the regulatory approval or commercial launch
of any related products may be delayed or there may be a
shortage in supply, both of which may have an adverse effect on
our business.
Our product candidates require precise, high quality
manufacturing. A failure to achieve and maintain high
manufacturing standards, including the incidence of
manufacturing errors, could result in patient injury or death,
product recalls or withdrawals, delays or failures in product
testing or delivery, cost overruns or other problems that could
seriously hurt our business. Manufacturers often encounter
difficulties involving production yields, quality control and
quality assurance, as well as shortages of qualified personnel.
These manufacturers are subject to ongoing periodic unannounced
inspection by the FDA, the U.S. Drug Enforcement Agency, or
DEA, and corresponding state agencies to ensure strict
compliance with current Good Manufacturing Practice and other
applicable government regulations and corresponding foreign
standards; however, we do not have control over third party
manufacturers’ compliance with these regulations and
standards. If one of our manufacturers fails to maintain
compliance, the production of our product candidates could be
interrupted, resulting in delays, additional costs and
potentially lost revenues. Additionally, third-party
manufacturers must pass a pre-approval inspection before we can
obtain marketing approval for any of our products in development.
Furthermore, our existing and future contract manufacturers may
not perform as agreed or may not remain in the contract
manufacturing business for the time required to successfully
produce, store and distribute our product candidates. Even if
any third party manufacturer or licensee makes improvements in
the manufacturing process for our product candidates, we may not
own, or may have to share, the intellectual property rights to
such innovation. In the event of a natural disaster, equipment
failure, power failure, strike or other difficulty, we may be
unable to replace our third party manufacturers in a timely
manner.
We may
be the subject of costly product liability claims or product
recalls, and we may be unable to obtain or maintain insurance
adequate to cover potential liabilities.
The risk of product liability is inherent in the development,
manufacturing and marketing of human therapeutic products.
Regardless of merit or eventual outcome, product liability
claims may result in:
|
|
|
|
•
|
delays in, or failure to complete, our clinical trials;
|
|
|
•
|
withdrawal of clinical trial participants;
|
|
|
•
|
decreased demand for our product candidates;
|
|
|
•
|
injury to our reputation;
|
|
|
•
|
litigation costs;
|
|
|
•
|
substantial monetary awards against us; and
|
|
|
•
|
diversion of management or other resources from key aspects of
our operations.
|
If we succeed in marketing our products, product liability
claims could result in an FDA investigation of the safety or
efficacy of our products or our marketing programs. An FDA
investigation could also potentially lead to a recall of our
products or more serious enforcement actions, or limitations on
the indications for which our products may be used, or
suspension or withdrawal of approval.
17
Although we currently maintain product liability insurance that
covers our clinical trials, we cannot be certain that the
coverage limits of the insurance policies or those of our
strategic partners will be adequate. We further intend to expand
our insurance coverage to include the sale of commercial
products if marketing approval is obtained for our product
candidates. However, insurance coverage is increasingly
expensive. We may not be able to obtain additional insurance or
maintain our existing insurance coverage at a reasonable cost or
at all. If we are unable to obtain sufficient insurance at an
acceptable cost or if a claim is brought against us, whether
fully covered by insurance or not, our business, results of
operations and financial condition could be materially adversely
affected.
The
coverage and reimbursement status of newly approved healthcare
drugs is uncertain and failure to obtain adequate coverage and
reimbursement could limit our ability to market our
products.
Our ability to commercialize any products successfully will
depend in part on the extent to which reimbursement will be
available from governmental and other third-party payors, both
in the United States and in foreign markets. Even if we succeed
in bringing one or more products to the market, the amount
reimbursed for our products may be insufficient to allow them to
compete effectively with products that are reimbursed at a
higher level. If the price we are able to charge for any
products we develop is inadequate in light of our development
costs, our profitability would be reduced.
Reimbursement by a governmental and other third-party payor may
depend upon a number of factors, including the governmental and
other third-party payor’s determination that the use of a
product is:
|
|
|
|
•
|
a covered benefit under its health plan;
|
|
|
•
|
safe, effective and medically necessary;
|
|
|
•
|
appropriate for the specific patient;
|
|
|
•
|
cost-effective; and
|
|
|
•
|
neither experimental nor investigational.
|
Obtaining reimbursement approval for a product from each
third-party and governmental payor is a time consuming and
costly process that could require us to provide supporting
scientific, clinical and cost effectiveness data for the use of
our products to each payor. We may not be able to provide data
sufficient to obtain reimbursement.
Eligibility for coverage does not imply that any drug product
will be reimbursed in all cases or at a rate that allows us to
make a profit. Interim payments for new products, if applicable,
may also not be sufficient to cover our costs and may not become
permanent. Reimbursement rates may vary according to the use of
the drug and the clinical setting in which it is used, may be
based on payments allowed for lower-cost drugs that are already
reimbursed, may be incorporated into existing payments for other
products or services and may reflect budgetary constraints
and/or
Medicare or Medicaid data used to calculate these rates. Net
prices for products also may be reduced by mandatory discounts
or rebates required by government health care programs or by any
future relaxation of laws that restrict imports of certain
medical products from countries where they may be sold at lower
prices than in the United States.
The health care industry is experiencing a trend toward
containing or reducing costs through various means, including
lowering reimbursement rates, limiting therapeutic class
coverage and negotiating reduced payment schedules with service
providers for drug products. There have been, and we expect that
there will continue to be, federal and state proposals to
constrain expenditures for medical products and services, which
may affect reimbursement levels for our future products. In
addition, the Centers for Medicare and Medicaid Services
frequently change product descriptors, coverage policies,
product and service codes, payment methodologies and
reimbursement values. Third-party payors often follow Medicare
coverage policies and payment limitations in setting their own
reimbursement rates and may have sufficient market power to
demand significant price reductions.
18
Foreign
governments tend to impose strict price controls, which may
adversely affect our future profitability.
In some foreign countries, particularly in the European Union,
prescription drug pricing is subject to governmental control. In
these countries, pricing negotiations with governmental
authorities can take considerable time after the receipt of
marketing approval for a product. To obtain reimbursement or
pricing approval in some countries, we may be required to
conduct a clinical trial that compares the cost-effectiveness of
our product candidates to other available therapies. If
reimbursement of our products is unavailable or limited in scope
or amount, or if pricing is set at unsatisfactory levels, our
profitability would be reduced.
Risks
Relating to the Our Business and Industry
Our
failure to attract and retain skilled personnel could impair our
product development and commercialization efforts.
Our success is substantially dependent on our continued ability
to attract, retain and motivate highly qualified management,
scientific and technical personnel and our ability to develop
and maintain important relationships with leading institutions,
clinicians and scientists. We will be highly dependent upon our
key management personnel, particularly John V. Talley, our
President and Chief Executive Officer, Robert Cook, our Chief
Financial Officer, and Dr. Ben Tseng, our Chief Scientific
Officer. We will also be dependent on certain scientific and
technical personnel. The loss of the services of any member of
senior management, or scientific or technical staff may
significantly delay or prevent the achievement of product
development, commercialization and other business objectives.
Messrs. Talley and Cook have entered into employment
agreements with EpiCept. However, either of them may decide to
voluntarily terminate his employment with us. We do not maintain
key-man life insurance on any of our employees.
We believe that we will need to recruit additional management
and technical personnel. There is currently a shortage of, and
intense competition for, skilled executives and employees with
relevant scientific and technical expertise, and this shortage
is likely to continue. The inability to attract and retain
sufficient scientific, technical and managerial personnel could
limit or delay our product development efforts, which would
reduce our ability to successfully commercialize product
candidates and our business.
We
expect to expand our operations, and as a result, we may
encounter difficulties in managing our growth, which could
disrupt our operations.
We expect to have significant growth in the scope of our
operations as our product candidates are commercialized. To
manage our anticipated future growth, we must implement and
improve our managerial, operational and financial systems,
expand facilities and recruit and train additional qualified
personnel. Due to our limited resources, we may not be able to
effectively manage the expansion of our operations or recruit
and train additional qualified personnel. The physical expansion
of our operations may lead to significant costs and may divert
management and business development resources. Any inability to
manage growth could delay the execution of our business strategy
or disrupt our operations.
Our
competitors may develop and market drugs that are less
expensive, safer, or more effective, which may diminish or
eliminate the commercial success of any of our product
candidates.
The biotechnology and pharmaceutical industries are highly
competitive and characterized by rapid technological change.
Because we anticipate that our research approach will integrate
many technologies, it may be difficult for us to stay abreast of
the rapid changes in technology. If we fail to stay at the
forefront of technological change, we will be unable to compete
effectively. Our competitors may render our technologies
obsolete by advances in existing technological approaches or the
development of different approaches by one or more of our
current or future competitors.
We will compete with Pfizer and Endo in the treatment of
neuropathic pain; Purdue Pharmaceuticals, Johnson &
Johnson and Endo in the treatment of post-operative pain; and
Johnson & Johnson and others in the treatment of back
pain. There are also many companies, both publicly and privately
held, including well-known
19
pharmaceutical companies and academic and other research
institutions, engaged in developing pharmaceutical products for
the treatment of life-threatening cancers and liver diseases.
Our competitors may:
|
|
|
|
•
|
develop and market product candidates that are less expensive
and more effective than our future product candidates;
|
|
|
•
|
adapt more quickly to new technologies and scientific advances;
|
|
|
•
|
commercialize competing product candidates before we or our
partners can launch any product candidates developed from our
product candidates;
|
|
|
•
|
initiate or withstand substantial price competition more
successfully than we can;
|
|
|
•
|
have greater success in recruiting skilled scientific workers
from the limited pool of available talent;
|
|
|
•
|
more effectively negotiate third-party licenses and strategic
alliances; and
|
|
|
•
|
take advantage of acquisition or other opportunities more
readily than we can.
|
We will compete for market share against fully-integrated
pharmaceutical companies and smaller companies that are
collaborating with larger pharmaceutical companies, new
companies, academic institutions, government agencies and other
public and private research organizations. Many of these
competitors, either alone or together with their partners, may
develop new product candidates that will compete with our
product candidates, as these competitors may operate larger
research and development programs or have substantially greater
financial resources than us. Our competitors may also have
significantly greater experience in:
|
|
|
|
•
|
developing drugs;
|
|
|
•
|
undertaking preclinical testing and human clinical trials;
|
|
|
•
|
building relationships with key customers and opinion-leading
physicians;
|
|
|
•
|
obtaining and maintaining FDA and other regulatory approvals of
drugs;
|
|
|
•
|
formulating and manufacturing drugs; and
|
|
|
•
|
launching, marketing and selling drugs.
|
These and other competitive factors may negatively impact our
financial performance.
EpiCept
GmbH, our German subsidiary, is subject to various risks
associated with its international operations.
Our subsidiary, EpiCept GmbH, operates in Germany, and we face a
number of risks associated with its operations, including:
|
|
|
|
•
|
difficulties and costs associated in complying with German laws
and regulations;
|
|
|
•
|
changes in the German regulatory environment;
|
|
|
•
|
increased costs associated with operating in Germany;
|
|
|
•
|
increased costs and complexities associated with financial
reporting; and
|
|
|
•
|
difficulties in maintaining international operations.
|
Expenses incurred by our German operations are typically
denominated in euros. In addition, EpiCept GmbH has incurred
indebtedness that is denominated in euros and requires that
interest be paid in euros. As a result, our costs of maintaining
and operating our German subsidiary, and the interest payments
and costs of repaying its indebtedness, increase if the value of
the U.S. dollar relative to the euro declines.
20
Risks
Relating to Intellectual Property
If we
are unable to protect our intellectual property, our competitors
could develop and market products with features similar to our
products and demand for our products may decline.
Our commercial success will depend in part on obtaining and
maintaining patent protection and trade secret protection of our
technologies and product candidates as well as successfully
defending these patents and trade secrets against third party
challenges. We will only be able to protect our intellectual
property from unauthorized use by third parties to the extent
that valid and enforceable patents or trade secrets cover them.
The patent positions of pharmaceutical and biotechnology
companies can be highly uncertain and involve complex legal and
factual questions for which important legal principles remain
unresolved. In addition, changes in either the patent laws or in
interpretations of patent laws in the United States or other
countries may diminish the value of the combined
organization’s intellectual property. Accordingly, we
cannot predict the breadth of claims that may be allowed or
enforced in our patents or in third party patents.
The degree of future protection for our proprietary rights is
uncertain because legal means afford only limited protection and
may not adequately protect our rights or permit us to gain or
keep our competitive advantage. For example:
|
|
|
|
•
|
we might not have been the first to make the inventions covered
by each of its pending patent applications and issued patents,
and we could lose our patent rights as a result;
|
|
|
•
|
we might not have been the first to file patent applications for
these inventions or our patent applications may not have been
timely filed, and we could lose our patent rights as a result;
|
|
|
•
|
others may independently develop similar or alternative
technologies or duplicate any of our technologies;
|
|
|
•
|
it is possible that none of our pending patent applications will
result in issued patents;
|
|
|
•
|
our issued patents may not provide a basis for commercially
viable drugs or therapies, may not provide us with any
protection from unauthorized use of our intellectual property by
third parties, and may not provide us with any competitive
advantages;
|
|
|
•
|
our patent applications or patents may be subject to
interference, opposition or similar administrative proceedings;
|
|
|
•
|
the organization may not develop additional proprietary
technologies that are patentable; or
|
|
|
•
|
the patents of others may have an adverse effect on our business.
|
Moreover, the issuance of a patent is not conclusive as to its
validity or enforceability and it is uncertain how much
protection, if any, will be afforded by our patents if we
attempt to enforce them and they are challenged in court or in
other proceedings, such as oppositions, which may be brought in
U.S. or foreign jurisdictions to challenge the validity of
a patent. A third party may challenge the validity or
enforceability of a patent after its issuance by the
U.S. Patent and Trademark Office, or USPTO. It is possible
that a third party could attempt to challenge the validity or
enforceability of EpiCept’s two issued patents related to
LidoPAIN SP based upon a short videotape prepared by the
inventor more than one year prior to the filing of the initial
patent application related to LidoPAIN SP. It is possible that a
third party could attempt to challenge the validity and
enforceability of these patents based on the videotape
and/or its
nondisclosure to the USPTO.
The defense and prosecution of intellectual property suits,
interferences, oppositions and related legal and administrative
proceedings in the United States are costly, time consuming to
pursue and result in diversion of resources. The outcome of
these proceedings is uncertain and could significantly harm our
business.
We will also rely on trade secrets to protect our technology,
especially where we do not believe patent protection is
appropriate or obtainable. However, trade secrets are difficult
to protect. We will use reasonable efforts to protect our trade
secrets, our employees, consultants, contractors, outside
scientific partners and other advisors may unintentionally or
willfully disclose its confidential information to competitors.
Enforcing a claim that a third party improperly obtained and is
using our trade secrets is expensive and time consuming, and the
outcome is
21
unpredictable. In addition, courts outside the United States are
sometimes less willing to protect trade secrets. Moreover, our
competitors may independently develop equivalent knowledge,
methods and know-how.
If we are not able to defend the patent protection position of
our technologies and product candidates, then we will not be
able to exclude competitors from marketing product candidates
that directly compete with our product candidates, and we may
not generate enough revenue from our product candidates to
justify the cost of their development and to achieve or maintain
profitability.
If we
are sued for infringing intellectual property rights of third
parties, such litigation will be costly and time consuming, and
an unfavorable outcome could increase our costs or have a
negative impact on our business.
Our ability to commercialize our products depends on our ability
to sell our products without infringing the proprietary rights
of third parties. Numerous U.S. and foreign issued patents and
pending applications, which are owned by third parties, exist
with respect to the therapeutics utilized in our product
candidates and topical delivery mechanisms. Because we are
utilizing existing therapeutics, we will continue to need to
ensure that we can utilize these therapeutics without infringing
existing patent rights. Accordingly, we have reviewed related
patents known to us and, in some instances, licensed related
patented technologies. In addition, because patent applications
can take several years to issue, there may be currently pending
applications, unknown to us, which may later result in issued
patents that the combined organization’s product candidates
may infringe. There could also be existing patents of which we
are not aware that our product candidates may inadvertently
infringe.
Although we are not aware that any of our product candidates
infringe the intellectual property of others, they cannot assure
you that this is the case. There is a substantial amount of
litigation involving patent and other intellectual property
rights in the biotechnology and biopharmaceutical industries
generally. If a third party claims that we infringe on their
technology, we could face a number of issues that could increase
its costs or have a negative impact on its business, including:
|
|
|
|
•
|
infringement and other intellectual property claims which, with
or without merit, can be costly and time consuming to litigate
and can delay the regulatory approval process and divert
management’s attention from our core business strategy;
|
|
|
•
|
substantial damages for past infringement, which we may have to
pay if a court determines that our products infringes a
competitor’s patent;
|
|
|
•
|
an injunction prohibiting us from selling or licensing our
product unless the patent holder licenses the patent to us,
which the holder is not required to do; and
|
|
|
•
|
if a license is available from a patent holder, we may have to
pay substantial royalties or grant cross licenses to our patents.
|
We may
be subject to damages resulting from claims that our employees
have wrongfully used or disclosed alleged trade secrets of their
former employers.
Many of our employees were previously employed at other
biotechnology or pharmaceutical companies, including competitors
or potential competitors. No claims against us are currently
pending, we may be subject to claims that we or these employees
have inadvertently or otherwise used or disclosed trade secrets
or other proprietary information of their former employers.
Litigation may be necessary to defend against these claims. If
we fail in defending such claims, in addition to paying monetary
claims, we may lose valuable intellectual property rights or
personnel. A loss of key research personnel or their work
product could hamper or prevent our ability to commercialize
certain product candidates, which could severely harm our
business. Even if we are successful in defending against these
claims, litigation could result in substantial costs and be a
distraction to management.
22
Risks
Relating to our Common Stock
We
expect that our stock price will fluctuate significantly due to
external factors.
Our common stock trades on the Nasdaq National Market and on the
OM Stockholm Exchange. Prior to January 4, 2006, our common
stock did not trade on an exchange. Sales of substantial amounts
of our common stock in the public market could adversely affect
the prevailing market prices of the common stock and our ability
to raise equity capital in the future.
The volatility of biopharmaceutical stocks often does not relate
to the operating performance of the companies represented by the
stock. Factors that could cause this volatility in the market
price of our common stock include:
|
|
|
|
•
|
results from and any delays in our clinical trial programs;
|
|
|
•
|
announcements concerning our collaborations with Endo
Pharmaceuticals Inc. and Myriad Genetics, Inc. or future
strategic alliances;
|
|
|
•
|
delays in the development and commercialization of our product
candidates due to inadequate allocation of resources by our
strategic collaborators or otherwise;
|
|
|
•
|
market conditions in the broader stock market in general, or in
the pharmaceutical and biotechnology sectors in particular;
|
|
|
•
|
issuance of new or changed securities analysts’ reports or
recommendations;
|
|
|
•
|
actual and anticipated fluctuations in our quarterly financial
and operating results;
|
|
|
•
|
developments or disputes concerning our intellectual property or
proprietary rights;
|
|
|
•
|
introduction of technological innovations or new commercial
products by us or our competitors;
|
|
|
•
|
additions or departures of key personnel;
|
|
|
•
|
FDA or international regulatory actions affecting us or our
industry;
|
|
|
•
|
issues in manufacturing our product candidates;
|
|
|
•
|
market acceptance of our product candidates;
|
|
|
•
|
third party healthcare reimbursement policies; and
|
|
|
•
|
litigation or public concern about the safety of our product
candidates.
|
These and other factors may cause the market price and demand
for our common stock to fluctuate substantially, which may limit
or prevent investors from readily selling their shares of common
stock and may otherwise reduce the liquidity of our common
stock. In addition, in the past, when the market price of a
stock has been volatile, holders of that stock have instituted
securities class action litigation against the company that
issued the stock. If any of our stockholders brought a lawsuit
against us, we could incur substantial costs defending the
lawsuit. Such a lawsuit could also divert the time and attention
of our management.
If the
ownership of our common stock continues to be highly
concentrated, it may prevent stockholders from influencing
significant corporate decisions and may result in conflicts of
interest that could cause our stock price to
decline.
Our executive officers, directors and their affiliates
beneficially own or control approximately 22.74% of the
outstanding shares of our common stock as of November 1,
2006. Accordingly, these executive officers, directors and their
affiliates, acting as a group, will have substantial influence
over the outcome of corporate actions requiring stockholder
approval, including the election of directors, any merger,
consolidation or sale of all or substantially all of our assets
or any other significant corporate transactions. These
stockholders may also delay or prevent a change of control of
us, even if such a change of control would benefit our other
stockholders. The significant concentration of stock ownership
may cause the trading price of our common stock to decline due
to investor perception that conflicts of interest may exist or
arise.
23
If
securities or industry analysts do not publish research or
reports about the combined organization’s business, if they
change their recommendations regarding our stock adversely or if
our operating results do not meet their expectations, our stock
price and trading volume could decline.
The trading market for our common stock will be influenced by
the research and reports that industry or securities analysts
publish about us. If one or more of these analysts cease
coverage of us or fail to regularly publish reports on us, we
could lose visibility in the financial markets, which in turn
could cause our stock price or trading volume to decline.
Moreover, if one or more of the analysts who cover us downgrade
our stock or if our operating results do not meet their
expectations, our stock price could decline.
Future
sales of common stock by our existing stockholders may cause our
stock price to fall.
The market price of our common stock could decline as a result
of sales by our then existing stockholders in the market after
the completion of the merger, or the perception that these sales
could occur. These sales might also make it more difficult for
us to sell equity securities at a time and price that we deem
appropriate.
Provisions
of our charter documents or Delaware law could delay or prevent
an acquisition of us, even if the acquisition would be
beneficial to our stockholders, and could make it more difficult
for you to change management.
Provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger, acquisition or other
change in control that stockholders may consider favorable,
including transactions in which stockholders might otherwise
receive a premium for their shares. This is because these
provisions may prevent or frustrate attempts by stockholders to
replace or remove our management. These provisions include:
|
|
|
|
•
|
a classified board of directors;
|
|
|
•
|
a prohibition on stockholder action through written consent;
|
|
|
•
|
a requirement that special meetings of stockholders be called
only by the board of directors or a committee duly designated by
the board of directors whose powers and authorities include the
power to call such special meetings;
|
|
|
•
|
advance notice requirements for stockholder proposals and
nominations; and
|
|
|
•
|
the authority of the board of directors to issue preferred stock
with such terms as the board of directors may determine.
|
In addition, Section 203 of the Delaware General
Corporation Law prohibits a publicly held Delaware corporation
from engaging in a business combination with an interested
stockholder, generally a person that together with its
affiliates owns or within the last three years has owned 15% of
voting stock, for a period of three years after the date of the
transaction in which the person became an interested
stockholder, unless the business combination is approved in a
prescribed manner. Accordingly, Section 203 may discourage,
delay or prevent a change in control of us.
As a result of these provisions in our charter documents and
Delaware law, the price investors may be willing to pay in the
future for shares of our common stock may be limited.
We
have never paid dividends on our capital stock, and we do not
anticipate paying any cash dividends in the foreseeable
future.
We have never paid cash dividends on any of our classes of
capital stock to date, and we intend to retain our future
earnings, if any, to fund the development and growth of our
business. In addition, the terms of existing or any future debt
may preclude us from paying these dividends. As a result,
capital appreciation, if any, of our common stock will be your
sole source of gain for the foreseeable future.
24
Existing
stockholders may experience some dilution.
The current trading price of our common stock is within a range
between $1.55 and $12.00 for the period of January 4, 2006
to November 27, 2006. The selling stockholder’s
warrants are exercisable for an aggregate of approximately
0.5 million shares of our common stock and are exercisable
until August 29, 2011, at an exercise price of $2.65,
subject to adjustment. Exercise of these warrants may cause
dilution in the interests of other stockholders as a result of
the additional common stock that would be issued upon exercise.
In addition, sales of the shares of our common stock issuable
upon exercise of the warrants could have a depressive effect on
the price of our stock, particularly if there is not a
coinciding increase in demand by purchasers of our common stock.
Further, the terms on which we may obtain additional financing
during the period any of the warrants remain outstanding may be
adversely affected by the existence of these warrants.
Moreover, we will need to raise additional funds in the future
to finance new developments or expand existing operations. If we
raise additional funds through the issuance of new equity or
equity-linked securities, other than on a pro rata basis to our
existing stockholders, the percentage ownership of the existing
stockholders may be reduced. Existing stockholders may
experience subsequent dilution
and/or such
newly issued securities may have rights, preferences and
privileges senior to those of existing stockholders.
The
requirements of being a public company may strain our resources
and distract management.
As a public company, we are subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended,
the Sarbanes-Oxley Act and the listing requirements of the
Nasdaq National Market and the OM Stockholm Exchange. The
obligations of being a public company require significant
additional expenditures and place additional demands on our
management as we comply with the reporting requirements of a
public company. We may need to hire additional accounting and
financial staff with appropriate public company experience and
technical accounting knowledge.
FORWARD-LOOKING
STATEMENTS
This prospectus, including the sections entitled
“Summary,” “Risk Factors,”
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and
“Business,” contains forward-looking statements.
Forward-looking statements include, but are not limited to,
statements about:
|
|
|
|
•
|
the progress of preclinical development and laboratory testing
and clinical trials;
|
|
|
•
|
the time and costs involved in obtaining regulatory approvals;
|
|
|
•
|
delays that may be caused by evolving requirements of regulatory
agencies;
|
|
|
•
|
the number of drug candidates we pursue;
|
|
|
•
|
the costs involved in filing and prosecuting patent applications
and enforcing or defending patent claims;
|
|
|
•
|
the establishment of sales, marketing
and/or
manufacturing capabilities;
|
|
|
•
|
our ability to establish, enforce and maintain selected
strategic alliances and activities required for product
commercialization;
|
|
|
•
|
the acquisition of technologies, products and other business
opportunities that require financial commitments; and
|
|
|
•
|
our revenues, if any, from successful development and
commercialization of our drug candidates.
|
These statements relate to future events or our future financial
performance, and involve known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different
from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking
statements. These risks and other factors include those listed
under “Risk Factors” and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by
terminology such as “may,” “will,”
“should,” “expects,” “intends,”
“plans,” “anticipates,”
“believes,” “estimates,”
25
“predicts,” “potential,”
“continue” or the negative of these terms or other
comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We do not intend to
update any of the forward-looking statements after the date of
this prospectus or to conform these statements to actual
results. Neither the Private Securities Litigation Reform Act of
1995 nor Section 27A of the Securities Act of 1933 provides
any protection for statements made in this prospectus.
USE OF
PROCEEDS
We are registering these shares pursuant to the registration
rights granted to the selling stockholder in our recent private
placement. We will not receive any proceeds from the resale of
our common stock under this offering. We have, however, received
gross proceeds of approximately $10.0 million from the
entering into of the senior term loan and the issuance of the
warrants in the private placement. Net proceeds were
approximately $9.2 million after deducting all fees and
expenses of the August 2006 private placement, which were
approximately $0.8 million.
We may receive proceeds from the issuance of shares of common
stock upon exercise of warrants if any of the warrants are
exercised for cash. We estimate that we may receive up to an
additional $1.3 million. We intend to use any proceeds that
we may receive from the issuance of shares of our common stock
upon exercise of warrants to meet our working capital needs and
for general corporate purposes.
If the warrants issued in connection with the August 2006
private placement are exercised pursuant to their cashless
exercise provision, we will not receive any additional proceeds
from such exercise.
DIVIDEND
POLICY
We have never declared or paid cash dividends on our capital
stock. We do not anticipate paying any cash dividends on our
capital stock in the foreseeable future. We intend to retain all
available funds and any future earnings to reduce debt and fund
the development and growth of our business.
26
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
our capitalization as of September 30, 2006.
You should read this table in conjunction with the sections of
this prospectus entitled “Selected Historical Financial and
Other Data” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and with our condensed consolidated financial statements and the
notes thereto included elsewhere in this prospectus.
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2006
|
|
|
Cash and cash equivalents
|
|
$
|
10,461
|
|
|
|
|
|
|
Long-term debt, less current
portion
|
|
$
|
9,789
|
|
Stockholders’ deficit:
|
|
|
|
|
Common stock, $0.0001 par
value, authorized 50,000,000 shares, 24,537,526 shares
issued and outstanding
|
|
|
2
|
|
Preferred stock, $0.0001 par
value, 5,000,000 shares authorized, 0 shares issued
and outstanding
|
|
|
—
|
|
Additional paid-in capital
|
|
|
121,134
|
|
Warrants
|
|
|
1,400
|
|
Accumulated deficit
|
|
|
(137,154
|
)
|
Accumulated other comprehensive
loss
|
|
|
(961
|
)
|
Treasury stock, 12,500 shares
|
|
|
(75
|
)
|
|
|
|
|
|
Total stockholders’ deficit
|
|
|
(15,654
|
)
|
|
|
|
|
|
Total capitalization
|
|
$
|
(5,865
|
)
|
|
|
|
|
|
27
SELECTED
FINANCIAL AND OTHER DATA
The following tables present our selected balance sheet and
statement of operations data as of and for the years ended
December 31, 2001, 2002, 2003, 2004 and 2005 and for the
nine months ended September 30, 2006 and 2005. Our balance
sheet data as of December 31, 2004 and 2005 and our
statement of operations data for the years ended
December 31, 2003, 2004 and 2005 have been derived from our
audited consolidated financial statements included elsewhere in
this prospectus. Our balance sheet data as of December 31,
2002 and 2003 and our statement of operations data for the years
ended December 31, 2001 and 2002 have been derived from our
audited financial statements not included in this prospectus.
Our condensed consolidated balance sheet data as of
December 31, 2001 have been derived from our unaudited
consolidated financial statements not included in this
prospectus. Our balance sheet data as of September 30, 2006
and statements of operations data for the nine months ended
September 30, 2005 and 2006 have been derived from our
unaudited condensed consolidated financial statements included
elsewhere in this prospectus.
The results indicated below and elsewhere in this prospectus are
not necessarily indicative of our future performance. You should
read this information together with “Capitalization,”
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” our consolidated
financial statements and related notes, and our condensed
consolidated financial statements and related notes included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006(1)
|
|
|
|
(Dollars in thousands, except share and per share data)
|
|
|
Statements of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
377
|
|
|
$
|
1,115
|
|
|
$
|
829
|
|
|
$
|
1,134
|
|
|
$
|
733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
3,394
|
|
|
|
3,493
|
|
|
|
3,407
|
|
|
|
4,408
|
|
|
|
5,783
|
|
|
|
4,589
|
|
|
|
11,776
|
|
Research and development
|
|
|
4,085
|
|
|
|
4,874
|
|
|
|
1,641
|
|
|
|
1,785
|
|
|
|
1,846
|
|
|
|
1,387
|
|
|
|
12,267
|
|
Acquired in-process research and
development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,479
|
|
|
|
8,367
|
|
|
|
5,048
|
|
|
|
6,193
|
|
|
|
7,629
|
|
|
|
5,976
|
|
|
|
57,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,479
|
)
|
|
|
(8,367
|
)
|
|
|
(4,671
|
)
|
|
|
(5,078
|
)
|
|
|
(6,800
|
)
|
|
|
(4,842
|
)
|
|
|
(56,672
|
)
|
Other income (expense), net
|
|
|
186
|
|
|
|
(1,509
|
)
|
|
|
(5,364
|
)
|
|
|
(2,806
|
)
|
|
|
(698
|
)
|
|
|
(305
|
)
|
|
|
(3,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit for income taxes
|
|
|
(7,293
|
)
|
|
|
(9,876
|
)
|
|
|
(10,035
|
)
|
|
|
(7,884
|
)
|
|
|
(7,499
|
)
|
|
|
(5,147
|
)
|
|
|
(60,452
|
)
|
Benefit for income taxes
|
|
|
278
|
|
|
|
225
|
|
|
|
74
|
|
|
|
275
|
|
|
|
284
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(7,015
|
)
|
|
|
(9,651
|
)
|
|
|
(9,961
|
)
|
|
|
(7,609
|
)
|
|
|
(7,215
|
)
|
|
|
(5,147
|
)
|
|
|
(60,452
|
)
|
Deemed dividend and redeemable
convertible preferred stock dividends
|
|
|
(1,254
|
)
|
|
|
(1,288
|
)
|
|
|
(1,254
|
)
|
|
|
(1,404
|
)
|
|
|
(1,254
|
)
|
|
|
(940
|
)
|
|
|
(8,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to common
stockholders
|
|
$
|
(8,269
|
)
|
|
$
|
(10,939
|
)
|
|
$
|
(11,215
|
)
|
|
$
|
(9,013
|
)
|
|
$
|
(8,469
|
)
|
|
$
|
(6,087
|
)
|
|
$
|
(69,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common
share
|
|
$
|
(5.05
|
)
|
|
$
|
(6.63
|
)
|
|
$
|
(6.79
|
)
|
|
$
|
(5.35
|
)
|
|
$
|
(4.95
|
)
|
|
$
|
(3.56
|
)
|
|
$
|
(2.94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
1,637,905
|
|
|
|
1,649,409
|
|
|
|
1,650,717
|
|
|
|
1,683,199
|
|
|
|
1,710,306
|
|
|
|
1,709,822
|
|
|
|
23,633,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of December 31,
|
|
|
September 30,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(1)
|
|
|
|
(Dollars in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,356
|
|
|
$
|
620
|
|
|
$
|
8,007
|
|
|
$
|
1,254
|
|
|
$
|
403
|
|
|
$
|
10,461
|
(2)
|
Working capital (deficit)
|
|
|
4,590
|
|
|
|
(933
|
)
|
|
|
4,518
|
|
|
|
(4,953
|
)
|
|
|
(19,735
|
)
|
|
|
(2,046
|
)
|
Total assets
|
|
|
5,654
|
|
|
|
951
|
|
|
|
8,196
|
|
|
|
2,627
|
|
|
|
2,747
|
|
|
|
14,659
|
|
Long-term debt
|
|
|
5,407
|
|
|
|
7,085
|
|
|
|
10,272
|
|
|
|
11,573
|
|
|
|
4,705
|
|
|
|
9,789
|
|
Redeemable convertible preferred
stock
|
|
|
19,201
|
|
|
|
20,456
|
|
|
|
24,099
|
|
|
|
25,354
|
|
|
|
26,608
|
|
|
|
—
|
(3)
|
Accumulated deficit
|
|
|
(30,013
|
)
|
|
|
(39,664
|
)
|
|
|
(50,411
|
)
|
|
|
(59,292
|
)
|
|
|
(67,739
|
)
|
|
|
(137,154
|
)(4)
|
Total stockholders’ deficit
|
|
|
(21,174
|
)
|
|
|
(31,430
|
)
|
|
|
(43,652
|
)
|
|
|
(52,379
|
)
|
|
|
(60,122
|
)
|
|
|
(15,654
|
)
|
|
|
|
(1) |
|
On January 4, 2006, we completed our merger with Maxim
Pharmaceuticals, Inc. |
28
|
|
|
(2) |
|
Upon completion of our merger with Maxim Pharmaceuticals, Inc.
on January 4, 2006, we acquired cash and cash equivalents. |
|
(3) |
|
Reflects the conversion of our redeemable convertible preferred
stock into common stock upon the completion of our merger with
Maxim Pharmaceuticals, Inc. on January 4, 2006. |
|
(4) |
|
Includes the in-process research and development acquired upon
the completion of our merger with Maxim Pharmaceuticals, Inc. on
January 4, 2006 and the beneficial conversion features
related to the conversion of certain of our notes outstanding
and preferred stock into our common stock and from certain
anti-dilution adjustments to our preferred stock as a result of
the exercise of the bridge warrants. |
29
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
the information contained elsewhere in this prospectus under the
caption “Selected Financial and Other Data,” our
consolidated financial statements and related notes thereto and
our condensed consolidated financial statements and related
notes thereto. This discussion contains forward-looking
statements that are subject to known and unknown risks and
uncertainties. Actual results and the timing of events may
differ significantly from those expressed or implied in such
forward-looking statements due to a number of factors, including
those set forth in the sections entitled “Risk
Factors” and “Forward-Looking Statements” and
elsewhere in this prospectus.
Overview
We are a specialty pharmaceutical company that focuses on the
development and commercialization of pharmaceutical products for
the treatment of pain and cancer. We have a portfolio of nine
product candidates in various stages of development: an oncology
product candidate submitted for European registration, three
pain product candidates in late-stage development that are ready
to enter, or have entered, Phase IIb or Phase III
clinical trials, three pain product candidates that have
completed initial Phase II clinical trials, and two
oncology compounds, one of which has completed a Phase I
clinical trial and the second of which is expected to enter
clinical development in the next several months. Our portfolio
of pain management and oncology product candidates allows us to
be less reliant on the success of any one product candidate.
Our oncology product candidate, Ceplene, was submitted for
European registration in October 2006. Ceplene is intended as
remission maintenance therapy in the treatment of acute myeloid
leukemia, or AML. Our late stage pain product candidates are:
EpiCept
NP-1, a
prescription topical analgesic cream designed to provide
effective long-term relief of peripheral neuropathies; LidoPAIN
SP, a sterile prescription analgesic patch designed to provide
sustained topical delivery of lidocaine to a post-surgical or
post-traumatic sutured wound while also providing a sterile
protective covering for the wound; and LidoPAIN BP, a
prescription analgesic non-sterile patch designed to provide
sustained topical delivery of lidocaine for the treatment of
acute or recurrent lower back pain. Our portfolio of pain
product candidates targets
moderate-to-severe
pain that is influenced, or mediated, by nerve receptors located
just beneath the skin’s surface. Our product candidates
utilize proprietary formulations and several topical delivery
technologies to administer U.S. Food and Drug
Administration, or FDA, approved pain management therapeutics,
or analgesics directly on the skin’s surface at or near the
site of the pain. None of our product candidates has been
approved by the FDA or any comparable agency in another country.
Our merger with Maxim Pharmaceuticals, Inc. in January 2006
created a specialty pharmaceutical company that leverages our
portfolio of topical pain therapies with product candidates
having market potential to treat cancer. In addition to entering
into opportunistic development and commercial alliances for its
product candidates, our strategy is to focus our development
efforts on:
|
|
|
|
•
|
topically-delivered analgesics targeting peripheral nerve
receptors;
|
|
|
•
|
alternative uses for FDA-approved drugs; and
|
|
|
•
|
innovative cancer therapeutics.
|
None of our product candidates has been approved by the FDA or
any comparable foreign agencies. We have yet to generate
revenues from product sales. We currently have license
agreements with the following partners: Endo Pharmaceuticals,
for the worldwide commercialization of certain products,
including LidoPAIN BP; and Myriad Genetics, Inc.
(“Myriad”), for the development and commercialization
of the MX90745 family of compounds including Azixa (MPC6827). A
license agreement with Adolor Corporation (“Adolor”)
terminated in October 2006.
Since inception, we have incurred significant net losses each
year. Our net loss for the year ended December 31, 2005 and
the nine months ended September 30, 2006 was
$7.2 million and $60.5 million, respectively, and
EpiCept had an accumulated deficit of $137.2 million as of
September 30, 2006. Our recurring losses from operations
and our accumulated deficit raise substantial doubt about our
ability to continue as a going concern. Our condensed
30
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. Our
losses have resulted principally from costs incurred in
connection with its development activities and from general and
administrative expenses. Even if we succeed in developing and
commercializing one or more of our product candidates, it may
never become profitable. We expect to continue to incur
increasing expenses over the next several years as it:
|
|
|
|
•
|
continues to conduct clinical trials for our product candidates;
|
|
|
•
|
seeks regulatory approvals for our product candidates;
|
|
|
•
|
develops, formulates, and commercializes our product candidates;
|
|
|
•
|
implements additional internal systems and develops new
infrastructure;
|
|
|
•
|
acquires or in-licenses additional products or technologies or
expands the use of our technologies;
|
|
|
•
|
maintains, defends and expands the scope of our intellectual
property; and
|
|
|
•
|
hires additional personnel.
|
Our operations to date have been funded principally through the
proceeds from the sale of common and preferred securities, debt
instruments, revenue from collaborative relationships,
investment income earned on cash balances and short-term
investments and the sale of a portion of its New Jersey net
operating loss carry forwards.
We have two wholly-owned subsidiaries, Maxim, based in
San Diego, CA and EpiCept GmbH, based in Munich, Germany,
which is engaged in research and development activities on our
behalf.
In October 2006, Adolor informed us of their decision to
discontinue their licensing agreement with us for LidoPAIN SP,
our sterile prescription analgesic patch designed to provide
sustained topical delivery of lidocaine to a post-surgical or
post-traumatic sutured wound. Accordingly, we regained the North
American rights for LidoPAIN SP. We currently have regained the
full worldwide development and commercialization rights to our
product candidate. As a result of the termination of the
contract, we will recognize approximately $1.2 million of
deferred revenue during the fourth quarter 2006, as we have no
further obligations to Adolor. We originally received
non-refundable payments of $3.0 million, which were
deferred and were being recognized as revenue ratably over the
estimated product development period. Since inception through
September 30, 2006, we recognized approximately
$1.8 million as revenue.
In October 2006, we submitted a Market Authorization
Application, or MAA, to the European Medicines Agency for the
Evaluation of Medicinal Products, or EMEA, for Ceplene, our lead
oncology product candidate, administered in conjunction with
interleukin-2 (IL-2), for the maintenance of first remission in
patients with acute myeloid leukemia, or AML.
In September 2006, we submitted an investigational new drug, or
IND, application to the FDA to begin Phase I clinical
studies of EPC2407 in cancer patients. EPC2407 is a new chemical
entity discovered at the Company which inhibits the formation of
new blood vessels in cancerous tumors known as vascular
disruptive activity (VDA) as well as inducing apoptosis or
programmed cell death, as evidenced by pre-clinical studies. The
Phase I clinical trial is intended to determine the
maximally tolerated dose in patients with vascularized tumors as
well as any signs of anti-tumor efficacy. The Phase I
clinical trial for EPC2407 is expected to commence in the fourth
quarter of 2006.
In September 2006, Myriad reported positive clinical results for
Azixa, a compound discovered by us and licensed to Myriad.
Myriad expects to begin Phase II trials for Azixa in 2006.
In September 2006, we announced that LidoPAIN SP did not meet
its co-primary endpoints in a Phase III clinical trial in
Europe. The Phase III clinical trial was a randomized,
double-blind, placebo-controlled trial of approximately
440 patients who underwent hernia repair surgery. The trial
results indicate that LidoPAIN SP did not achieve a
statistically significant effect relative to placebo with
respect to the primary endpoint of self-assessed pain intensity
between 4 and 24 hours. We are studying the impact of these
findings in conjunction with other data generated from the trial
in order determine what changes in trial design could be made to
improve the likelihood of a positive result in a subsequent
trial.
31
In September 2006, we were notified by the Nasdaq Listings
Qualification Department that we did not comply with the
continued listing requirements of the Nasdaq Global Market
because the market value of our listed securities had fallen
below $50.0 million for ten consecutive days (pursuant to
Rule 4450(b)(1)(A) of the Nasdaq Marketplace Rules). Nasdaq
also informed us that we were not in compliance with Marketplace
Rule 4450(b)(1)(B), which requires total assets and total
revenue of $50.0 million each for the most recently
completed fiscal year or two of the last three most recently
completed fiscal years. We had until October 20, 2006 to
comply with the listing requirements. As of October 20,
2006, we did not regain compliance with the listing requirements
and an appeal was requested. Our securities remain listed
pending final resolution of the appeal process.
In August 2006, we entered into a senior secured term loan in
the amount of $10.0 million with Hercules Technology Growth
Capital, Inc.. The interest rate on the loan is 11.7% per
year. In addition, we issued five year common stock purchase
warrants to Hercules granting them the right to purchase
0.5 million shares of our common stock at an exercise price
of $2.65 per share. Gross proceeds of $10.0 million
was received.
In July 2006, Maxim, a wholly-owned subsidiary of EpiCept,
issued a six-year non-interest bearing promissory note in the
amount of $0.8 million to Pharmaceutical Research
Associates, Inc. The note is payable in seventy-two equal
installments of approximately $11,000 per month. We
terminated our lease of certain property in San Diego, CA
as part of our exit plan upon the completion of the merger with
Maxim on January 4, 2006 (see Note 12 to the unaudited
condensed consolidated financial statements).
Acquisition
of Maxim Pharmaceuticals, Inc.
On January 4, 2006, Magazine Acquisition Corp., a wholly
owned subsidiary of EpiCept, merged with Maxim pursuant to the
terms of the Merger Agreement, among the Company, Magazine and
Maxim, dated as of September 6, 2005.
Under the terms of the merger agreement, Magazine merged with
and into Maxim, with Maxim continuing as the surviving
corporation and as a wholly-owned subsidiary of the Company. We
issued 5.8 million shares of our common stock to Maxim
stockholders in exchange for all of the outstanding shares of
Maxim, with Maxim stockholders receiving 0.203969 of a share of
our common stock for each share of Maxim common stock. Our
stockholders retained approximately 72%, and the former Maxim
stockholders received approximately 28%, of outstanding shares
of our common stock. We accounted for the merger as an asset
acquisition as Maxim is a development stage company. The
transaction valued Maxim at approximately $45.1 million.
In connection with the merger, Maxim option holders who held
options granted under Maxim’s Amended and Restated 1993
Long Term Incentive Plan also known as the 1993 Plan, and
options granted under the other Maxim stock option plans, with a
Maxim exercise price of $20.00 per share or less, received
a total of 0.4 million options to purchase our common stock
at an exercise price range of $3.24 — $77.22 per
share in exchange for the options to purchase Maxim common stock
they held at the Maxim exercise price divided by the exchange
ratio of 0.203969. Maxim obtained agreements from each holder of
options granted under the 1993 Plan, with a Maxim exercise price
above $20.00 per share, to terminate those options immediately
prior to the completion of the merger and agreed to take action
under the other plans so that each outstanding Maxim option
granted under the other Maxim stock option plans that has an
exercise price above $20.00 per share terminated on or
prior to the completion of the merger. In addition, we issued
warrants to purchase approximately 0.3 million shares at an
exercise price range of $13.48 — $37.75 per share of
our common stock in exchange for Maxim’s outstanding
warrants.
32
Purchase
Price Allocation
The total purchase price of $45.1 million includes costs of
$3.7 million to complete the transaction and has been
allocated based on a preliminary valuation of Maxim’s
tangible and intangible assets and liabilities based on their
fair values (table in thousands) as follows:
|
|
|
|
|
Cash, cash equivalents and
marketable securities
|
|
$
|
15,135
|
|
Prepaid expenses
|
|
|
1,323
|
|
Property and equipment
|
|
|
2,034
|
|
Other assets
|
|
|
456
|
|
In-process technology
|
|
|
33,362
|
|
Intangible assets (assembled
workforce)
|
|
|
546
|
|
Total current liabilities
|
|
|
(7,731
|
)
|
|
|
|
|
|
Total
|
|
$
|
45,125
|
|
|
|
|
|
|
We initially acquired in-process research and development assets
of approximately $33.7 million, which were immediately
expensed to research and development on January 4, 2006. A
reduction of approximately $0.3 million of in-process
research and development expense was recognized during the nine
months ended September 30, 2006. The reduction of
$0.3 million was a result of the decrease in merger
restructuring and litigation accrued liabilities by
approximately $0.6 million due to the termination of one
lease in San Diego, which was partially offset by an
increase in legal litigation settlements of approximately
$0.4 million. We acquired assembled workforce of
approximately $0.5 million, which was capitalized and is
being amortized over its useful life of 6 years. We also
acquired fixed assets of approximately $2.0 million, which
are being amortized over their remaining useful life.
The value assigned to the acquired in-process research and
development was determined by identifying the acquired
in-process research projects for which: (a) there is
exclusive control by the acquirer; (b) significant progress
has been made towards the project’s completion;
(c) technological feasibility has not been established,
(d) there is no alternative future use, and (e) the
fair value is estimable based on reasonable assumptions. The
total acquired in-process research and development is valued at
$33.4 million, assigned entirely to one qualifying program,
the use of Ceplene as remission maintenance therapy for the
treatment of AML in Europe, and expensed on the closing date of
the merger. The value of in-process research and development was
based on the income approach that focuses on the
income-producing capability of the asset. The underlying premise
of the approach is that the value of an asset can be measured by
the present worth of the net economic benefit (cash receipts
less cash outlays) to be received over the life of the asset. In
determining the value of in-process research and development,
the assumed commercialization date for the product was 2007.
Given the risks associated with the development of new drugs,
the revenue and expense forecast was probability-adjusted to
reflect the risk of advancement through the approval process.
The risk adjustment was applied based on Ceplene’s stage of
development at the time of the assessment and the historical
probability of successful advancement for compounds at that
stage. The modeled cash flow was discounted back to the net
present value. The projected net cash flows for the project were
based on management’s estimates of revenues and operating
profits related to such project. Significant assumptions used in
the valuation of in-process research and development included:
the stage of development of the project; future revenues; growth
rates; product sales cycles; the estimated life of a
product’s underlying technology; future operating expenses;
probability adjustments to reflect the risk of developing the
acquired technology into commercially viable products; and a
discount rate of 30% to reflect present value, which
approximates the implied rate of return on the merger.
In connection with the merger with Maxim on January 4,
2006, we originally recorded estimated merger-related
liabilities for severance, lease termination, and legal
settlements of $1.2 million, $1.1 million and
$2.3 million, respectively. During the second quarter of
2006, the gross amounts of merger-related liabilities for lease
termination and legal settlements were revised to
$0.8 million and $2.8 million, respectively. In July
2006, in connection with the lease termination, Maxim issued a
six year non-interest bearing note in the amount of
$0.8 million to the new tenant. Total future payments
including broker fees amount to $1.0 million. The fair
value of the note and broker fees was $0.8 million and is
now classified on the balance sheet as a note payable. In
addition, we increased our legal accrual by $0.4 million
during the second quarter of 2006 to $2.8 million. As of
33
September 30, 2006, we paid $0.3 million for the
estimated settlement cost of Maxim’s lawsuits based on the
signing of a definitive agreement settling one suit. On
October 2, 2006, The Superior Court for the State of
California, County of San Diego, gave final approval to a
settlement reached in the case entitled 3I Bioscience Trust, PLC
et al. v. Maxim Pharmaceuticals, Inc. et al.
Under the terms of the settlement agreement, we made an
additional payment of approximately $0.7 million and issued
approximately 0.2 million shares of our common stock with a
market value of approximately $0.4 million to the
plaintiffs. Maxim’s insurer also made a payment in the
amount of approximately $1.1 million. We recognized total
estimated merger-related liabilities of $4.7 million, which
were included in the allocated purchase price of Maxim, of which
$1.0 million was paid through September 30, 2006.
Conversion
and Exercise of Preferred Stock, Warrants and Notes, Loans and
Financings
On January 4, 2006, immediately prior to the closing of the
merger with Maxim, we issued common stock to certain
stockholders upon the conversion or exercise of all outstanding
preferred stock, convertible debt and warrants. The following
tables illustrate the carrying value and the amount of shares
issued for each instrument converted into our common stock as of
January 4, 2006:
Preferred
Stock:
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Common
|
|
Series of Preferred Stock
|
|
Value
|
|
|
Shares Issued
|
|
|
A
|
|
$
|
8,225,806
|
|
|
|
1,501,349
|
|
B
|
|
|
7,077,767
|
|
|
|
1,186,374
|
|
C
|
|
|
19,543,897
|
|
|
|
3,375,594
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,847,470
|
|
|
|
6,063,317
|
|
|
|
|
|
|
|
|
|
|
Upon the closing of the merger with Maxim, we recorded a
beneficial conversion feature or BCF charge relating to the
anti-dilution rights of each of the Series A convertible
preferred stock, the Series B redeemable convertible
preferred stock and the Series C redeemable convertible
preferred stock which we refer to collectively as the Preferred
Stock, of approximately $2.1 million, $1.7 million,
and $4.8 million, respectively related to the conversion of
the Preferred Stock. In accordance with Emerging Issues Task
Force, or EITF, Issue
No. 98-5,
“Accounting For Convertible Securities With Beneficial
Conversion Features Or Contingently Adjustable Conversion
Ratio” or EITF 98-5 and EITF
No. 00-27,
“Application Of EITF Issue
No. 98-5
To Certain Convertible Instruments” or
EITF 00-27,
the BCF was calculated as the difference between the number of
shares of common stock each holder of each series of Preferred
Stock would have received under anti-dilution provisions prior
to the merger and the number of shares of common stock received
at the time of the merger multiplied by the implied stock value
of our on January 4, 2006 and charged to deemed dividends
in the consolidated statement of operations for the nine months
ended September 30, 2006.
Warrants:
The following table illustrates the carrying value and the
amount of shares issued for warrants exercised into the
Company’s common stock as of January 4, 2006:
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Common
|
|
|
|
Value
|
|
|
Shares Issued
|
|
|
Series B Preferred Warrants
|
|
$
|
300,484
|
|
|
|
58,229
|
|
Series C Preferred Warrants
|
|
|
649,473
|
|
|
|
131,018
|
|
2002 Bridge Warrants
|
|
|
3,634,017
|
|
|
|
3,861,462
|
|
March 2005 Senior
Note Warrants
|
|
|
42,248
|
|
|
|
22,096
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,626,222
|
|
|
|
4,072,805
|
|
|
|
|
|
|
|
|
|
|
Upon the closing of the merger with Maxim, we recorded a BCF
relating to the anti-dilution rights of each of the
Series B convertible preferred stock warrants and the
Series C redeemable convertible preferred stock warrants
which we refer to as the Preferred Warrants, of approximately
$0.1 million and $0.3 million, respectively related to
34
the conversion of the Preferred Warrants into common shares. In
accordance with EITF 98-5, and
EITF 00-27,
the BCF was calculated as the difference between the number of
shares of common stock each holder of each series of Preferred
Warrants would have received under anti-dilution provisions
prior to the merger and the number of shares of common stock
received at the time of the merger multiplied by the implied
stock value of our on January 4, 2006 of $5.84 and charged
to deemed dividends in the consolidated statement of operations
for the nine months ended September 30, 2006.
Notes,
Loans and Financings:
The following table illustrates the principal balances and the
amount of shares issued for each debt instrument converted into
our common stock upon the closing of the merger on
January 4, 2006:
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Common
|
|
|
|
Value
|
|
|
Shares Issued(1)
|
|
|
Ten-year,
non-amortizing
convertible loan due December 31, 2007
|
|
$
|
2,438,598
|
|
|
|
282,885
|
|
Convertible bridge loans due
October 30, 2006
|
|
|
4,850,000
|
|
|
|
593,121
|
|
March 2005 Senior Notes due
October 30, 2006
|
|
|
3,000,000
|
|
|
|
1,126,758
|
|
November 2005 Senior Notes due
October 30, 2006
|
|
|
2,000,000
|
|
|
|
711,691
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,288,598
|
|
|
|
2,714,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The shares of common stock issued include the conversion of
principal and accrued interest. The conversion rates were
determined by the underlying debt agreements. |
Upon the closing of the merger with Maxim, we recorded
BCF’s related to the difference between the fair value of
our common stock on the closing date and the conversion rates of
certain of the Company’s debt instruments. In accordance
with EITF 98-5, and
EITF 00-27,
BCF’s amounting to $4.4 million were expensed as
interest expense for the conversion of March 2005 Senior Notes
and the November 2005 Senior Notes. Since the conversion of the
March 2005 Senior Notes and the November 2005 Senior Notes were
contingent upon the closing of the merger with Maxim, no
accounting was required at the modification date or issuance
date of each instrument in accordance with EITF 98-5 and
EITF 00-27
as the completion of the merger with Maxim was dependent on an
affirmative vote of Maxim’s shareholders and other
customary closing conditions.
Reverse
Stock Split
On September 5, 2005, our stockholders approved a
one-for-four
reverse stock split of our common stock, which was contingent on
the merger with Maxim. The reverse stock split occurred
immediately prior to the completion of the merger. As a result
of the reverse stock split, every four shares of our common
stock were combined into one share of common stock and any
fractional shares created by the reverse stock split were
rounded down to whole shares. The reverse stock split affected
all of our common stock, stock options and warrants outstanding
immediately prior to the effective time of the reverse stock
split. The number of authorized shares of common stock was fixed
at 50 million upon closing of the merger with Maxim. All
references to common stock and per common share amounts for all
periods presented have been retroactively restated to reflect
this reverse split.
Critical
Accounting Policies and Estimates
Our discussion and analysis of its financial condition and
results of operations are based on our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States. The
preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of
assets, liabilities and expenses and related disclosure of
contingent assets and liabilities. We review our estimates on an
ongoing basis. We base our estimates on historical experience
and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more
detail in the notes to our financial statements included in this
annual report, we believe the following accounting policies to
be critical to the judgments and estimates used in the
preparation of our financial statements.
35
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board or
FASB issued FAS 157, “Fair Value Measurements” or
FAS 157. Financial Accounting Standards or FAS 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands
disclosures about fair value measurements. FAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 with earlier application
encouraged. We are evaluating the impact of adopting
FAS 157 on our financial statements.
In September 2006, the SEC issued Staff Accounting
Bulletin 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year
Financial Statements SAB 108, to address diversity in
practice in quantifying financial statement misstatements.
SAB 108 requires that we quantify misstatements based on
their impact on each of our financial statements and related
disclosures. SAB 108 is effective as of the end of our 2006
fiscal year, allowing a one-time transitional cumulative effect
adjustment to retained earnings as of January 1, 2006 for
errors that were not previously deemed material, but are
material under the guidance in SAB 108. SAB 108 will
not have an impact on our financial statements.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue
Recognition
We recognize revenue relating to our collaboration agreements in
accordance with the SEC Staff Accounting
Bulletin SAB 104, “Revenue Recognition,” and
EITF Issue
No. 00-21,
“Revenue Arrangements with Multiple Deliverables” or
EITF 00-21
Revenue under collaborative arrangements may result from license
fees, milestone payments, research and development payments and
royalties.
Our application of these standards requires subjective
determinations and requires management to make judgments about
value of the individual elements and whether they are separable
from the other aspects of the contractual relationship. We
evaluate our collaboration agreements to determine units of
accounting for revenue recognition purposes. To date, we have
determined that its upfront non-refundable license fees cannot
be separated from its ongoing collaborative research and
development activities and, accordingly, do not treat them as a
separate element. We recognize revenue from non-refundable,
up-front licenses and related payments, not specifically tied to
a separate earnings process, either on the proportional
performance method or ratably over the development period in
which we are obligated to participate on a continuing and
substantial basis in the research and development activities
outlined in the contract. Ratable revenue recognition is only
utilized if the research and development services are performed
systematically over the development period. Proportional
performance is measured based on costs incurred compared to
total estimated costs over the development period which
approximates the proportion of the value of the services
provided compared to the total estimated value over the
development period. The proportional performance method
currently results in revenue recognition at a slower pace than
the ratable method as many of our costs are incurred in the
latter stages of the development period. We periodically review
our estimates of cost and the length of the development period
and, to the extent such estimates change, the impact of the
change is recorded at that time.
We will recognize milestone payments as revenue upon achievement
of the milestone only if (1) it represents a separate unit
of accounting as defined in
EITF 00-21;
(2) the milestone payments are nonrefundable;
(3) substantive effort is involved in achieving the
milestone; and (4) the amount of the milestone is
reasonable in relation to the effort expended or the risk
associated with the achievement of the milestone. If any of
these conditions are not met, we will recognize milestones as
revenue in accordance with its accounting policy in effect for
the respective contract. At the time of a milestone payment
receipt, we will recognize revenue based upon the portion of the
development services that are completed to date and defer the
remaining portion and recognize it over the remainder
36
of the development services on the proportional or ratable
method, whichever is applicable. When payments are specifically
tied to a separate earnings process, revenue will be recognized
when the specific performance obligation associated with the
payment has been satisfied. Deferred revenue represents the
excess of cash received compared to revenue recognized to date
under licensing agreements.
Stock-Based
Compensation
In December 2004, FASB issued FAS 123R. This statement is a
revision to FAS 123, “Accounting for Stock-Based
Compensation” (“FAS 123”), supersedes
Accounting Principle Board (“APB”) “Accounting
for Stock Issued to Employees,” and amends FAS 95,
“Statement of Cash Flows.” FAS 123R eliminates
the ability to account for share-based compensation using the
intrinsic value method allowed under APB 25 and requires
public companies to recognize such transactions as compensation
expense in the statement of operations based on the fair values
of such equity on the date of the grant, with the compensation
expense recognized over the period in which the recipient is
required to provide service in exchange for the equity award.
This statement also provides guidance on valuing and expensing
these awards, as well as disclosure requirements of these equity
arrangements. The Company adopted FAS 123R on
January 1, 2006 using the modified prospective application
as permitted by FAS 123R. Accordingly prior period amounts
have not been restated. We are now required to record
compensation expense at fair value for all future awards granted
after the date of adoption. As of the adoption of FAS 123R,
there was no effect on the condensed consolidated financial
statements because there was no compensation expense to be
recognized. We had no unvested granted awards on January 1,
2006. During 2006, we issued approximately 2.5 million
stock options with varying vesting provisions to our employees
and board of directors. Based on the Black-Scholes valuation
method (volatility — 69% — 83%, risk free
rate — 4.28% — 5.10%,
dividends — zero, weighted average life —
5 years; forfeiture — 10%), we estimated
$8.1 million of share-based compensation will be recognized
as compensation expense over the vesting period. During the nine
months ended September 30, 2006, we recognized total
share-based compensation of approximately $3.5 million,
related to the options granted during 2006 and the unvested
outstanding Maxim options as of January 4, 2006 that were
converted into EpiCept options based on the vesting of those
options during the 2006. Future grants of options will result in
additional charges for stock-based compensation that will be
recognized over the vesting periods of the respective options.
We account for stock-based transactions with non-employees in
which services are received in exchange for the equity
instruments based upon the fair value of the equity instruments
issued, in accordance with FAS No. 123 and 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 two factors that most affect
charges or credits to operations related to stock-based
compensation are the estimated fair market value of the common
stock underlying stock options for which stock-based
compensation is recorded and the estimated volatility of such
fair market value. The value of such options is periodically
re-measured and income or expense is recognized during the
vesting terms.
Summarized information for stock option grants to former
directors for the nine months ended September 30, 2006 are
as follows:
|
|
|
|
|
Nine Months Ended
|
|
|
September 30, 2006
|
|
Granted
|
|
40,000
|
Volatility
|
|
69% - 82%
|
Risk free rate
|
|
4.59% - 5.21%
|
Dividends
|
|
—
|
Weighted average life
|
|
5 Yrs
|
Compensation expense
|
|
$52,000
|
Accounting for our equity instruments by us requires fair value
estimates of the equity instrument granted or sold. If our
estimates of fair value of these equity instruments are too high
or too low, it would have the effect of overstating or
understating expenses. When equity instruments are granted in
exchange for the receipt of goods or services, we estimate the
value of the equity instruments based upon the market price of
the stock as of the date of the grant. Changes in the market
price of our common stock and its stock price volatility could
have a significant effect on the determination of future
stock-based compensation. Due to limited specific historical
volatility data, we
37
based its estimate of expected volatility of stock awards upon
historical volatility rates of comparable public companies to
the extent it was not materially lower than our actual
volatility. In the third quarter of 2006, our actual stock
volatility rate was higher than the volatility rates of
comparable public companies. Therefore, we used its historical
volatility rate of 82% for the third quarter of 2006 as
management believes that this rate is a better estimate of
future volatility.
Deferred
Financing and Acquisition Costs
Deferred financing costs represent legal and other costs and
fees incurred to negotiate and obtain financing. These costs are
capitalized and amortized using the effective interest rate
method over the life of the applicable financing. Deferred
acquisition costs associated with the merger with Maxim of
$3.7 million were included in the purchase price of Maxim.
We incurred deferred financing costs related to the senior
secured term loan from Hercules in the amount of
$0.8 million, of which $0.6 million was unpaid at
September 30, 2006. Deferred initial public offering costs
of $1.7 million were expensed during the second quarter of
2005 following the withdrawal of our proposed initial public
offering in May 2005.
Derivatives
As a result of certain financings, derivative instruments were
created that we have measured at fair value and mark to market
at each reporting period. Fair value of the derivative
instruments will be affected by estimates of various factors
that may affect the respective instrument, including our cost of
capital, risk free rate of return, volatility in the fair value
of our stock price, future foreign exchange rates of the
U.S. dollar to the euro and future profitability of our
German subsidiary. At each reporting date, we review applicable
assumptions and estimates relating to fair value and records any
changes in the statement of operations. We determined that as a
result of a delay on potential licensing of a product candidate
during the quarter ended September 30, 2006, the fair value
of the contingent interest should be reduced to $0 and
accordingly reversed contingent interest of $1.0 million
for the nine months ended September 30, 2006.
Beneficial
Conversion Feature of Certain Instruments
The convertible feature of certain financial instruments
provided for a rate of conversion that was below market value at
the commitment date. Such feature is normally characterized as a
BCF. Pursuant to EITF 98-5 and
EITF 00-27,
the estimated fair value of a BCF is recorded as interest
expense if it related to debt or a dividend if it is related to
preferred stock. If the conversion feature is contingent, then
the BCF is measured but not recorded until the contingency is
resolved. Our Senior Notes and the November Senior Notes both
contained contingent BCF’s. Upon closing of the merger with
Maxim, the contingency was resolved and we recorded a BCF of
approximately $4.4 million as an additional charge to
interest expense. Our Preferred Stock and warrants contained
anti-dilution provisions. Upon the closing of the merger with
Maxim on January 4, 2006, a BCF of approximately
$8.9 million was recorded as a result of the anti-dilution
provisions contained in our outstanding Preferred Stock and
related warrants.
Foreign
Exchange Gains and Losses
We have a 100%-owned subsidiary in Germany, EpiCept GmbH, that
performs certain research and development activities on our
behalf pursuant to a research collaboration agreement. EpiCept
GmbH has been unprofitable since its inception. Its functional
currency is the euro. The process by which EpiCept GmbH’s
financial results are translated into U.S. dollars is as
follows: income statement accounts are translated at average
exchange rates for the period and balance sheet asset and
liability accounts are translated at end of period exchange
rates. Translation of the balance sheet in this manner affects
the stockholders’ equity account, referred to as the
cumulative translation adjustment account. This account exists
only in EpiCept GmbH’s U.S. dollar balance sheet and
is necessary to keep the foreign balance sheet stated in
U.S. dollars in balance.
Two of our debt instruments, originally expressed in German
deutsche marks, are now denominated in euros. Changes in the
value of the euro relative to the value of the U.S. dollar
could affect the U.S. dollar value of our indebtedness at
each reporting date as substantially all of our assets are held
in U.S. dollars. We recognize these
38
changes as a foreign currency transaction gain or loss, as
applicable, and report it in other expense or income in our
consolidated statements of operations.
Results
of Operations
Nine
months ended September 30, 2006 and 2005
Revenues. During the nine months ended
September 30, 2006 and 2005, we recognized deferred revenue
of approximately $0.7 million and $1.1 million,
respectively, from the upfront licensing fees and milestone
payments received from Adolor and Endo. We are recognizing
revenue from our agreement with Adolor on a straight line basis
over the estimated development period of LidoPAIN SP, and we use
the proportional performance method to recognize revenue from
our agreement with Endo with respect to LidoPAIN BP. We
increased the length of our estimated development period with
respect to the Adolor agreement during the third quarter 2006
which negatively impacted revenue by $0.1 million. In the
fourth quarter of 2006, we anticipate that we will recognize all
remaining deferred revenue of $1.2 million relating to the
Adolor license agreement that was terminated in October 2006 by
Adolor. Accordingly, there will be no revenue in 2007 or
thereafter related to this license agreement. We also recognized
revenue of $36,000 from royalties with respect to acquired Maxim
technology.
General and administrative expense. General
and administrative expense increased by $7.2 million to
$11.8 million for the nine months ended September 30,
2006 from $4.6 million for the nine months ended
September 30, 2005. A significant factor in the increase
was our adoption of FAS 123R, which resulted in a
$3.2 million charge for stock-based compensation granted
during the nine months ended September 30, 2006. In
addition, as a result of the merger with Maxim, we incurred
$2.9 million in legal and other general and administrative
expense related to the activities we are continuing at the
San Diego facility including information technology and
human resources. We also incurred an increase in staff
compensation due to the payment of certain one-time bonuses
totaling $0.5 million in connection with the closing of the
merger with Maxim and the February 2006 sale of common stock and
warrants, and began accruing bonuses in connection with our
anticipated 2006 results. We incurred higher insurance fees,
legal, accounting and Sarbanes-Oxley compliance of
$0.4 million, $0.3 million, $0.3 million and
$0.2 million, respectively, as well as higher travel and
recruiting expenses for the nine months ended September 30,
2006 as compared to the same period in 2005. Finally, as we
became a public company upon the closing of the merger, we
incurred $0.9 million in costs related to our activity as a
public company including listing fees, investor relations
activities and expenses related to the production of its annual
report. Deferred initial public offering costs of
$1.7 million were expensed in 2005 following the withdrawal
of our initial public offering in May 2005.
Research and development expense. Research and
development expense increased by $10.9 million to
$12.3 million for the nine months ended September 30,
2006 from $1.4 million for the nine months ended
September 30, 2005. As a result of the merger with Maxim,
we continued development of two programs: the registration of
Ceplene in Europe as remission maintenance therapy for AML, and
an early stage program to discover and develop novel compounds
that induce apoptosis and may be indicated for the treatment of
certain cancers. The continuation of these programs contributed
$8.8 million in research and development expenses during
the nine months ended September 30, 2006, including
staffing and direct third party costs. We also continued our
Phase III trial for LidoPAIN SP in Europe and our
manufacturing and commercial
scale-up
efforts with respect to our EpiCept
NP-1 and
LidoPAIN BP product candidates. In addition, our adoption of
FAS 123R resulted in a $0.3 million stock-based
compensation charge during the nine months ended
September 30, 2006. We incurred higher payroll and
recruiting fees of $0.3 million and $0.1 million for
the nine months ended September 30, 2006 as compared to the
same period in 2005.
We expect that a large percentage of our future research and
development expenses will be incurred in support of current and
future preclinical and clinical development programs. These
expenditures are subject to numerous uncertainties in timing and
cost to completion. We test our product candidates in numerous
preclinical studies for toxicology, safety and efficacy. We then
conduct early stage clinical trials for each drug candidate. As
we obtain results from clinical trials, we may elect to
discontinue or delay clinical trials for certain product
candidates or programs in order to focus resources on more
promising product candidates or programs. Completion of clinical
trials may take several years but the length of time generally
varies according to the type, complexity, novelty and
39
intended use of a drug candidate. The cost of clinical trials
may vary significantly over the life of a project as a result of
differences arising during clinical development, including:
|
|
|
|
•
|
the number of sites included in the trials;
|
|
|
•
|
the length of time required to enroll suitable patients;
|
|
|
•
|
the number of patients that participate in the trials;
|
|
|
•
|
the number of doses that patients receive;
|
|
|
•
|
the duration of
follow-up
with the patient;
|
|
|
•
|
the product candidate’s phase of development; and
|
|
|
•
|
the efficacy and safety profile of the product.
|
Expenses related to clinical trials are based on estimates of
the services received and efforts expended pursuant to contracts
with multiple research institutions and clinical research
organizations that conduct clinical trials on the Company’s
behalf. The financial terms of these agreements are subject to
negotiation and vary from contract to contract and may result in
uneven payment flows. If timelines or contracts are modified
based upon changes in the clinical trial protocol or scope of
work to be performed, estimates of expenses are modified
accordingly on a prospective basis.
None of our drug candidates has received FDA or foreign
regulatory marketing approval. In order to grant marketing
approval, the FDA or foreign regulatory agencies must conclude
that we and our collaborators’ clinical data establishes
the safety and efficacy of our drug candidates. Furthermore, our
strategy includes entering into collaborations with third
parties to participate in the development and commercialization
of our products. In the event that third parties have control
over the preclinical development or clinical trial process for a
product candidate, the estimated completion date would largely
be under control of that third party rather than under our
control. we cannot forecast with any degree of certainty which
of its drug candidates will be subject to future collaborations
or how such arrangements would affect our development plan or
capital requirements.
Acquired In-Process Research and
Development. In connection with the merger with
Maxim on January 4, 2006, we recorded an in-process
research and development charge of $33.4 million
representing the estimated fair value of the acquired in-process
research and development related to the acquired interest that
had not yet reached technological feasibility and had no
alternative future use (see Purchase Price Allocation).
Other income (expense). Other income
(expense), net, increased $3.5 million to $3.8 million
for the nine months ended September 30, 2006 from
$0.3 million for the nine months ended September 30,
2005. Our Senior Notes and the November Senior Notes both
contained contingent BCF’s. Upon the closing of the merger
with Maxim, the contingency was resolved and we recorded BCFs of
approximately $4.4 million as an additional charge to
interest expense. During the quarter ended September 30,
2006, we determined that we were unlikely to be profitable in
2007 as a result of the LidoPAIN SP Phase III clinical
trial in Europe. Accordingly, we determined that the fair value
of the contingent interest should be valued at $0 as of
September 30, 2006 and reversed contingent interest of
$1.0 million for the nine months ended September 30,
2006. The fair value of the contingent interest was
approximately $0.9 million as of December 31, 2005.
Also during the period, the fair value of warrants and
derivatives decreased by $0.4 million. We mark to market
these instruments at each reporting period with the change
included in other income (expense). Interest income increased by
approximately $0.3 million due to higher cash balances
resulting from the cash and marketable securities acquired in
connection with the merger with Maxim, proceeds of senior
secured term loan from Hercules and sales of common stock and
warrants. During the second quarter of 2006, we entered into an
agreement to sell one of our web site addresses for
$0.1 million which was recognized in other income in 2006.
Deemed Dividends and Convertible Preferred Stock
Dividends. Deemed and accreted convertible
preferred stock dividends amounted to $9.0 million and
$0.9 million for the nine months ended September 30,
2006 and 2005, respectively, relating to our Series A,
Series B and C convertible preferred stock. Our Preferred
Stock contained anti-dilution provisions and upon the closing of
the merger with Maxim on January 4, 2006, a BCF of
approximately $8.9 million was recorded as a deemed
dividend in accordance with EITF 98-5 as a result of the
anti-dilution
40
provisions. Due to the conversion of all of the Preferred Stock
to common stock on January 4, 2006, there will be no
further accretion of dividends.
Years
Ended December 31, 2005 and 2004
Revenues. During 2005 and 2004, we recognized
deferred revenue of approximately $0.8 million and
$1.1 million, respectively, from the upfront licensing fees
and milestone payments received from Adolor and Endo. In July
2003, we entered into a license agreement with Adolor relating
to certain products, including LidoPAIN SP, which resulted in
our receipt of a $2.5 million payment upon signing. In
September 2005, we received a milestone payment of
$0.5 million from Adolor in connection with Adolor’s
initiation of a Phase II trial of LidoPAIN SP in the United
States. Of this payment, $0.2 million was recognized as
revenue upon receipt based on the portion of development service
already completed and the balance has been deferred and will be
recognized as revenue on a straight-line basis over the
estimated development period of LidoPAIN SP. During 2005 and
2004, we recognized revenue from Adolor of $0.4 million and
$0.7 million, respectively. We increased the length of the
development period of LidoPAIN SP by fifteen months in the
fourth quarter of 2005 based on an updated development plan
prepared by Adolor. This change in estimate resulted in a
reduction of revenue of $0.6 million in the fourth quarter
of 2005. In December 2003, we signed a license agreement with
Endo, which resulted in our receipt of a $7.5 million
payment upon signing. This payment has also been deferred and is
being recognized as revenue on the proportional performance
method. During 2005 and 2004, we recognized revenue from Endo of
$0.4 million and $0.5 million, respectively.
The current portion of deferred revenue as of December 31,
2005 of $2.8 million represents our estimate of revenue to
be recognized in 2006 related to the upfront payments from
Adolor and Endo.
General and administrative expense. General
and administrative expense increased by 31% or $1.4 million
to $5.8 million in 2005 from $4.4 million in 2004. The
increase is due primarily to the write-off of $1.7 million
of deferred initial public offering costs due to the withdrawn
initial public offering in May 2005 and a $0.6 million
increase in salaries and benefits in 2005 as compared 2004. The
increase in salaries and benefits is attributable to the hiring
of a chief financial officer in April 2004 and additional
personnel to support our anticipated operation as a public
company, and to bonuses of approximately $0.5 million in
2005 paid in 2006. These increased expenses were partially
offset by a decrease in audit fees, amortization of stock based
compensation for options granted to employees, consulting fees
and legal fees by $0.4 million, $0.3 million,
$0.2 million and $0.1 million, respectively, in 2005
as compared to 2004.
Research and development expense. Research and
development expense was unchanged at $1.8 million in 2005
compared to 2004. Major research and development expense
included clinical trial, license fee, and manufacturing
expenses. Primary research and development expense in 2005
included costs associated with the Phase III clinical trial
of LidoPAIN SP in Germany and ongoing work with respect to the
design of pivotal clinical trials for EpiCept
NP-1 and
LidoPAIN BP. Included in 2005 research and development was a
$0.2 million maintenance fee payment relating to our
license agreement for
NP-1.
Other income (expense). Other income
(expense), net, decreased $2.1 million from
$2.8 million in 2004 to $0.7 million in 2005. Loan
discount and beneficial conversion feature related to the
convertible bridge loan in 2002 and 2003 were fully accreted
during the first three months of 2004. As a result, interest
expense decreased to $1.9 million in 2005 from
$2.7 million in 2004, including the loan discount
amortization related to the 8% Senior Notes due in 2006 of
approximately $0.4 million. Other income (expense) for 2005
included a warrant derivative gain of $0.8 million related
to stock purchase warrants issued with the March 2005 Senior
Notes. The gain represents the change in fair value of the stock
purchase warrants from March 2005 to December 31, 2005. The
change in fair value was a result of the withdrawal of our
initial public offering, the merger with Maxim and changes with
the warrant terms in connection with the merger. We also
benefited in 2005 from a stronger U.S. dollar against the
euro as compared to 2004. As a result of the higher exchange
rate on inter-company borrowings, we recorded a foreign currency
gain of $0.4 million in 2005 as compared to a loss of
$0.2 million in 2004.
Benefit for Income Taxes. Income tax benefit
for the year ended December 31, 2005 and 2004 was
$0.3 million. The 2005 income tax benefit consists
primarily of a New Jersey state income tax benefit resulting
from the sale of a portion of our New Jersey state NOLs.
41
The sales of cumulative state NOLs are a result of a New Jersey
law enacted January 1, 1999 allowing emerging technology
and biotechnology companies to transfer or “sell”
their unused New Jersey net operating loss carryforwards and New
Jersey research and development tax credits to any profitable
New Jersey company qualified to purchase them for cash. We
received approval from the State of New Jersey to sell NOLs in
November 2005 and 2004 and entered into a contract with a third
party to sell the NOLs and received cash of approximately
$0.2 million and $0.3 million in December 2005 and
2004, respectively.
Deemed Dividend and Redeemable Convertible Preferred Stock
Dividends. Accreted redeemable convertible
preferred stock dividends of $1.3 million and
$1.4 million in 2005 and 2004, respectively, relate
primarily to our Series B and C redeemable convertible
preferred stock. In 2004, we also recorded a $0.2 million
beneficial conversion feature related to a warrant exercise.
Years
Ended December 31, 2004 and 2003
Revenues. We recorded $1.1 million in
revenue during the year ended December 31, 2004,
representing the recognized portion of the deferred revenue from
upfront licensing fees received from Adolor and Endo in 2003. In
July 2003, EpiCept entered into a license agreement with Adolor
relating to certain products, including LidoPAIN SP, which
resulted in our receipt of a $2.5 million payment upon
signing. This amount has been deferred and is being recognized
as revenue on a straight-line basis over the estimated
development period of LidoPAIN SP. In December 2003, we signed a
license agreement with Endo, which resulted in our receipt of a
$7.5 million payment upon signing. This payment has also
been deferred and is being recognized as revenue on the
proportional performance method.
Revenue in the year ended December 31, 2003 amounted to
$0.4 million representing the recognized portion of the
deferred revenue from the upfront licensing fee received from
Adolor in July 2003 and Endo in December 2003.
General and administrative expense. General
and administrative expense increased $1.0 million to
$4.4 million from $3.4 million for the years ended
December 31, 2004 and 2003, respectively. The increase in
general and administrative expense was primarily due to a
$1.1 million increase in audit and legal expense and
$0.2 million increase in consulting expense partially
offset by a $0.2 million decrease in stock-based
compensation, a $0.1 million decrease in depreciation and
amortization and other individually insignificant expense
reductions. We incurred higher legal and audit expenses during
2004 in preparation for its expected transition to becoming a
public company.
Research and development expense. Research and
development expense increased approximately $0.2 million in
the year ended December 31, 2004 to $1.8 million
compared to $1.6 million during the year ended
December 31, 2003. Primary research and development
activity during 2004 included preparations leading to the
commencement of the Phase III clinical trial of LidoPAIN SP
in Germany in November 2004, an End of Phase II meeting
with the FDA for EpiCept
NP-1,
ongoing work with respect to the design of pivotal clinical
trials for EpiCept
NP-1 and
LidoPAIN BP, and the selection of manufacturers for the
commercial
scale-up of
our product candidates. Included in 2004 research and
development expense was a $0.1 million maintenance fee
payment relating to our license agreement for EpiCept
NP-1.
Research and development expenses during 2003 consisted
primarily of salaries and benefits, payments to consultants and
clinical trial expenses related to EpiCept
NP-1 and
LidoPAIN SP. EpiCept completed two Phase II clinical trials
for EpiCept
NP-1 and one
Phase II clinical trial for LidoPAIN SP during 2003.
Other income (expense). Other expense, net,
decreased $2.6 million to $2.8 million for the year
ended December 31, 2004 from $5.4 million for the year
ended December 31 2003. Loan discount and beneficial
conversion feature related to the convertible bridge loan taken
in 2002 and early 2003 were fully accreted during the first half
of 2004. As a result, interest expense for the year ended
December 31, 2004 decreased to $2.7 million from
$4.6 million for the year ended December 31, 2003, a
decline of $1.9 million. Components of interest expense for
2004 were non-cash charges of $1.3 million related to the
accretion of the discount on the convertible bridge loan,
$1.1 million in coupon interest payable on loans,
$0.1 million increase in additional interest and
$0.2 million for the increase in contingent interest on
certain debt obligations. Other expense, net, was also affected
by net foreign exchange transaction losses related to
intercompany debt recognized in 2004 of $0.2 million
compared with net
42
foreign exchange transaction losses recognized in 2003 of
$0.8 million, a net improvement of $0.6 million. Since
a portion of our transactions is denominated in euros, foreign
exchange transaction gains and losses result from changes in the
exchange rate between the U.S. dollar and the euro during
the relevant period.
Benefit for Income Taxes. Income tax benefit
for the year ended December 31, 2004 was $0.3 million
compared to a benefit of $0.1 million for the year ended
December 31, 2003. The 2004 income tax benefit consists of
a New Jersey state income tax benefit resulting from the sale of
state NOLs. Income tax benefit for the year ended
December 31, 2003 consisted of a $0.1 million New
Jersey state income tax benefit reduced by a $31,000 federal
income tax expense. EpiCept did not recognize a federal income
tax expense for 2004.
The sales of cumulative state NOLs are a result of a New Jersey
law enacted January 1, 1999 allowing emerging technology
and biotechnology companies to transfer or “sell”
their unused New Jersey net operating loss carryforwards and New
Jersey research and development tax credits to any profitable
New Jersey company qualified to purchase them for cash. We
received approval from the State of New Jersey to sell NOLs in
November 2004 and 2003 and entered into a contract with a third
party to sell the NOLs for approximately $0.3 million and
$0.2 million in December 2004 and 2003, respectively.
Deemed Dividend and Redeemable Convertible Preferred Stock
Dividends. In addition to accreted redeemable
convertible preferred stock dividends of $1.3 million
relating to our Series B and C redeemable convertible
preferred stock in 2004 and 2003, EpiCept recorded a beneficial
conversion charge of $0.2 million in 2004 related to the
exercise of warrants into Series A convertible preferred
stock. A total of 74,259 warrants were exercised via a net share
issuance of 53,225 shares of Series A convertible
preferred stock.
License
Agreements
In December 2003, we entered into a license agreement with Endo
under which we granted Endo (and its affiliates) the exclusive
(including as to the Company and its affiliates) worldwide right
to commercialize LidoPAIN BP. we also granted Endo worldwide
rights to use certain of our patents for the development of
certain other non-sterile, topical lidocaine containing patches,
including Lidoderm, Endo’s topical lidocaine-containing
patch for the treatment of chronic lower back pain. Upon the
execution of the Endo agreement, we received a non-refundable
payment of $7.5 million, which has been deferred and is
being recognized as revenue on the proportional performance
method. For each of the nine months ended September 30,
2006 and the years ending December 31, 2005, 2004 and 2003,
the Company recorded revenue from Endo of approximately
$0.3 million, $0.4 million, $0.5 million and
$7,000, respectively. Since inception to date, we recorded
revenue of $1.2 million. The Company may receive payments
of up to $52.5 million upon the achievement of various
milestones relating to product development and regulatory
approval for both LidoPAIN BP product and licensed Endo
products, including Lidoderm, so long as, in the case of
Endo’s product candidate, our patents provide protection
thereof. We are also entitled to receive royalties from Endo
based on the net sales of LidoPAIN BP. These royalties are
payable until generic equivalents to the LidoPAIN BP product are
available or until expiration of the patents covering LidoPAIN
BP, whichever is sooner. We are also eligible to receive
milestone payments from Endo of up to approximately
$30.0 million upon the achievement of specified net sales
milestones for licensed Endo products, including Lidoderm, so
long as the Company’s patents provide protection thereof.
The future amount of milestone payments the Company is eligible
to receive under the Endo agreement is $82.5 million. There
is no certainty that any of these milestones will be achieved or
any royalty earned.
In November 2003, Maxim entered into an agreement with Myriad
under which it licensed the MX90745 series of caspase-inducer
anti-cancer compounds to Myriad. Under the terms of the
agreement, Maxim granted to Myriad a research license to perform
Myriad’s obligations during the Research Term (as defined
in the agreement) with a non-exclusive, worldwide, royalty-free
license, without the right to sublicense the technology. Myriad
is responsible for the worldwide development and
commercialization of any drug candidates from the series of
compounds. Maxim also granted to Myriad a worldwide royalty
bearing development and commercialization license with the right
to sublicense the technology. The agreement requires that Myriad
make licensing, research and milestone payments to Maxim
totaling up to $27 million, of which $3 million was
paid and recognized as revenue prior to the merger on
January 4, 2006, assuming the successful commercialization
of the compound for the treatment of cancer, as well as pay a
royalty on product sales. In September 2006, Myriad announced
positive
43
clinical trial results for Azixa or MPC6827 and expects to
initiate a Phase II clinical trial for the drug during the
fourth quarter of 2006, which will trigger a milestone payment
to us. Following the merger with Maxim, we assumed Maxim’s
rights and obligations under this license agreement.
Under a license agreement signed in July 2003, we granted Adolor
the exclusive right to commercialize a sterile topical patch
containing an analgesic alone or in combination, including
LidoPAIN SP, throughout North America. Since July 2003, we
received non-refundable payments of $3.0 million, which
were being deferred and recognized as revenue ratably over the
estimated product development period. For the nine months ended
September 30, 2006 and the years ended December 31,
2005, 2004 and 2003, the Company recorded revenue from Adolor of
approximately $0.4 million, $0.4 million,
$0.6 million and $0.4 million, respectively,
representing revenue recorded since inception. Recognition of
deferred revenue declined approximately $0.1 million in the
third quarter 2006 due to a change in management’s estimate
of the appropriate development period. On October 27, 2006,
we were informed of the decision by Adolor to discontinue its
licensing agreement with us for LidoPAIN SP, our sterile
prescription analgesic patch designed to provide sustained
topical delivery of lidocaine to a post-surgical or
post-traumatic sutured wound. As a result, we now have the full
worldwide development and commercialization rights to the
product candidate. We will recognize approximately
$1.2 million of deferred revenue in fourth quarter of 2006.
Liquidity
and Capital Resources
We have devoted substantially all of our cash resources to
research and development programs and general and administrative
expenses. To date, EpiCept has not generated any meaningful
revenues from the sale of products and we do not expect to
generate significant revenues for a number of years, if at all.
As a result, we have incurred an accumulated deficit of $137.2
and $67.7 million as of September 30, 2006 and
December 31, 2005, respectively, and expect to incur
significant operating losses for a number of years in the
future. Should we be unable to raise adequate financing or
generate revenue in the future, operations will need to be
scaled back or discontinued. Since our inception, we have
financed our operations through the proceeds from the sales of
common and preferred securities, debt instruments, revenue from
collaborative relationships, investment income earned on cash
balances and short-term investments and the sales of a portion
of our New Jersey net operating loss carryforwards.
The following table describes our liquidity and financial
position on September 30, 2006 and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Working capital deficit
|
|
$
|
(2,045,636
|
)
|
|
$
|
(19,734,540
|
)
|
Cash and cash equivalents
|
|
$
|
10,460,595
|
|
|
$
|
402,994
|
|
Marketable securities
|
|
$
|
995,000
|
|
|
$
|
—
|
|
Notes and loans payable, current
portion
|
|
$
|
3,783,830
|
|
|
$
|
11,547,200
|
|
Notes and loans payable, long term
portion
|
|
$
|
9,789,308
|
|
|
$
|
4,705,219
|
|
Working
Capital
At September 30, 2006, we had a working capital deficit of
$2.0 million consisting of current assets of
$12.2 million and current liabilities of
$14.2 million. This represents an decrease of approximately
$17.7 million from the working capital deficit of
$19.7 million at December 31, 2005, consisting of
current assets of $0.5 million and current liabilities of
$20.2 million. Upon the closing of the merger with Maxim,
approximately $12.3 million of our outstanding debt
instruments were repaid or converted into 2.7 million
shares of common stock. At the time of the merger, Maxim had
cash and cash equivalents and marketable securities
approximating $15.1 million. We used our existing working
capital and the proceeds from the August 2006 and February 2006
financings to fund the cash portion of the year to date
operating loss for 2006.
Cash,
Cash Equivalents and Marketable Securities
At September 30, 2006, cash and cash equivalents totaled
$10.5 million. At December 31, 2005, cash and cash
equivalents totaled $0.4 million. At the time of the
merger, Maxim had cash and cash equivalents and marketable
44
securities approximating $15.1 million. In August 2006, we
borrowed $10.0 million through a senior secured term loan
and issued common stock purchase warrants, which was offset by
transaction related payments of $0.2 million. In February
2006, we sold approximately 4.1 million shares of common
stock and warrants for gross proceeds of $11.6 million. The
proceeds were offset by transaction related payments of
$0.8 million, payments totaling $4.0 million of
deferred financing, initial public offering and acquisition
costs. Proceeds were also utilized to fund the cash portion of
the year to date operating loss for 2006.
Current
and Future Liquidity Position
As noted above, during 2006, we raised $21.6 million in
proceeds from the issuance of a senior secured term loan
together with the common stock purchase warrants and the sale of
common stock and warrants. The proceeds of these financings plus
existing cash resources, including cash from the merger with
Maxim, expected future payments from our strategic partners,
future sales of New Jersey net operating loss carry forwards and
interest earned on cash balances and investments are expected to
be sufficient to meet its projected operating requirements into
mid 2007. We may raise additional funds in the future through
public or private financings, strategic relationships or other
arrangements.
Our future capital uses and requirements depend on numerous
forward-looking factors. These factors include, but are not
limited to, the following:
|
|
|
|
•
|
progress in our research and development programs, as well as
the magnitude of these programs;
|
|
|
•
|
the timing, receipt and amount of milestone and other payments,
if any, from present and future collaborators, if any;
|
|
|
•
|
our ability to establish and maintain additional collaborative
arrangements;
|
|
|
•
|
the resources, time and costs required to successfully initiate
and complete our preclinical and clinical trials, obtain
regulatory approvals, protect our intellectual property;
|
|
|
•
|
the cost of preparing, filing, prosecuting, maintaining and
enforcing patent claims; and
|
|
|
•
|
the timing, receipt and amount of sales and royalties, if any,
from potential products.
|
If, at any time, our prospects for financing its clinical
development programs decline, we may decide to reduce research
and development expenses by delaying, discontinuing or reducing
its funding of development of one or more product candidates.
Alternatively, we might raise funds through public or private
financings, strategic relationships or other arrangements. There
can be no assurance that the funding, if needed, will be
available on attractive terms, or at all. Furthermore, any
additional equity financing may be dilutive to stockholders and
debt financing, if available, may involve restrictive covenants
and increased interest expense. Similarly, financing obtained
through future co-development arrangements may require us to
forego certain commercial rights to future drug candidates. our
failure to raise capital as and when needed could have a
negative impact on its financial condition and the ability to
pursue its business strategy.
Operating
Activities
Net cash used in operating activities for the first nine months
of 2006 was $19.8 million as compared to $4.1 million
in the first nine months of 2005. Net cash used in operating
activities for the first nine months of 2006 primarily relates
to our net loss, partially offset by $33.4 million of
in-process research and development expense related to the
merger with Maxim, $4.4 million of BCF charges related to
debt conversions in connection with the merger with Maxim,
$3.6 million of stock-based compensation incurred in
connection with our option grants during 2006 and
$1.0 million of depreciation and amortization expense.
Other accrued liabilities decreased by $1.1 million and
merger restructuring and litigation payments were
$1.0 million during the period ended September 30,
2006, reflecting payments made following the closing of the
merger. Deferred revenue deceased by $0.7 million to
account for the portion of the Adolor and Endo deferred revenue
recognized as revenue.
Net cash used in operating activities for 2005 was
$5.2 million as compared to $5.4 million in 2004. Net
cash used in operating activities for 2005 and 2004 primarily
relates to our net loss for the applicable year. Net cash flows
45
from operating activities were reduced by $0.8 million to
account for the portion of the Adolor and Endo deferred revenue
recognized as revenue. In September 2005, we received a
milestone payment of $0.5 million from Adolor. Foreign
exchange gains of $0.4 million were recorded due to changes
in the exchange rate between the U.S. dollar and the euro.
We wrote off $1.7 million in deferred initial public
offering costs in the second quarter 2005 upon the withdrawal of
our initial public offering.
Investing
Activities
Net cash provided by investing activities for the nine months of
2006 was $10.4 million compared to a use of $1,000 for the
nine months of 2005. The Company acquired cash in the merger
with Maxim of $3.5 million, which was offset by
$3.6 million in deferred acquisition costs paid in 2006.
$10.4 million of marketable securities acquired in the
merger with Maxim matured during 2006. During 2005 and 2004, net
cash used in investing activities totaled approximately $1,000
and $49,000, respectively primarily for the purchase of office
equipment.
Financing
Activities
Net cash provided by financing activities for the first nine
months of 2006 was $19.5 million compared to
$3.3 million for the first nine months of 2005. The
increase was primarily attributed to the issuance of a
$10.0 million senior secured term loan together with common
stock purchase warrants and the completion of the sale of common
stock and warrants with gross proceeds of $11.6 million,
less approximately $0.8 million transaction related costs,
and $1.5 million in loan repayments, capital lease
obligation payments and payments of deferred initial public
offering costs remaining from the withdrawal of our initial
public offering in May 2005. During the nine months ended
September 30, 2005, net cash provided by financing
activities consisted of $4.0 million in gross proceeds from
the Senior Notes offset by scheduled loan repayments and
payments of deferred initial public offering costs totaling
$0.7 million.
Net cash provided by financing activities for 2005 was
$4.3 million compared to a usage of $1.3 million for
2004. The increase was primarily attributed to the completion of
two separate debt private placements totaling $6.0 million
due in 2006 and warrants with a group of investors including
several of our existing stockholders, offset by costs paid
related to the withdrawal of our initial public offering and
scheduled repayments of our debt. During each of 2005 and 2004,
we repaid a portion of our existing debt in the amount of
$0.7 million. During 2005 and 2004, we paid deferred
initial public offering costs of $0.8 million and
$0.6 million, respectively. During 2005 and 2004, we
received proceeds of $18,000 and $0.1 million,
respectively, from the exercise of stock options.
Contractual
Obligations
As of December 31, 2005, the annual amounts of future
minimum payments under debt obligations, interest, lease
obligations and other long term liabilities consisting of
research, development, consulting and license agreements
(including maintenance fees) are as follows (in thousands of
U.S. dollars, using exchange rates where applicable in
effect as of December 31, 2005):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/08
|
|
|
12/31/09
|
|
|
12/31/10
|
|
|
Thereafter
|
|
|
Total
|
|
|
Long-term debt
|
|
$
|
11,981
|
|
|
$
|
4,705
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,686
|
|
Interest expense
|
|
|
359
|
|
|
|
1,233
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,591
|
|
Operating leases
|
|
|
252
|
|
|
|
39
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
291
|
|
Other obligations
|
|
|
1,326
|
|
|
|
925
|
|
|
|
275
|
|
|
|
575
|
|
|
|
450
|
|
|
|
700
|
|
|
|
4,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,918
|
|
|
$
|
6,902
|
|
|
$
|
275
|
|
|
$
|
575
|
|
|
$
|
450
|
|
|
$
|
700
|
|
|
$
|
22,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the merger with Maxim, approximately
$12.3 million of principal debt outstanding at
December 31, 2005 was converted into common stock on
January 4, 2006. Approximately $2.1 million of the
remaining debt matures during 2006 and the balance is due in
2007. Disposition of the debt upon the closing of the merger is
discussed below. Upon the closing of the merger with Maxim, we
have additional net lease obligations totaling
$1.8 million, $1.9 million, $1.8 million,
$1.3 million and $1.0 million for years 2006, 2007,
2008, 2009 and 2010, respectively.
46
As of September 30, 2006, the annual amounts of future
minimum payments under debt obligations, interest, lease
obligations and other long term liabilities consisting of
research, development, consulting and license agreements
(including maintenance fees) are as follows (in thousands of
U.S. dollars, using exchange rates where applicable in
effect as of September 30, 2006):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
|
|
|
1 Year
|
|
|
1 - 3 Years
|
|
|
3 - 5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
Long-term debt
|
|
$
|
3,853
|
|
|
$
|
10,433
|
|
|
$
|
256
|
|
|
$
|
96
|
|
|
$
|
14,638
|
|
Interest expense
|
|
|
1,345
|
|
|
|
2,253
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,598
|
|
Operating leases
|
|
|
1,389
|
|
|
|
2,427
|
|
|
|
754
|
|
|
|
—
|
|
|
|
4,570
|
|
Severance
|
|
|
450
|
|
|
|
113
|
|
|
|
—
|
|
|
|
—
|
|
|
|
563
|
|
Litigation settlements
|
|
|
2,517
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,517
|
|
Other obligations
|
|
|
2,654
|
|
|
|
1,275
|
|
|
|
1,025
|
|
|
|
700
|
|
|
|
5,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,208
|
|
|
$
|
16,501
|
|
|
$
|
2,035
|
|
|
$
|
796
|
|
|
$
|
31,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our current commitments of debt consist of the following:
€1.5 Million Due 2007. In August
1997, our subsidiary, EpiCept GmbH entered into a ten-year
non-amortizing
loan in the amount of €1.5 million with
Technologie-Beteiligungs Gesellschaft mbH der Deutschen
Ausgleichsbank, or “tbg.” This loan is referred to in
this Quarterly Report as the “tbg I” loan. The tbg I
loan bears interest at 6% per annum. Tbg is also entitled
to receive additional compensation equal to 9% of the annual
surplus (income before taxes, as defined in the debt agreement)
of EpiCept GmbH, reduced by any other compensation received from
EpiCept GmbH by virtue of other loans to or investments in
EpiCept GmbH provided that tbg is an equity investor in EpiCept
GmbH during that time period. To date, EpiCept GmbH has had no
annual surplus. We consider the additional compensation element
based on the surplus of EpiCept GmbH to be a derivative. We have
assigned no value to the derivative at each reporting period as
no surplus of EpiCept GmbH is anticipated over the term of the
agreement. At the demand of tbg, additional amounts may be due
at the end of the loan term up to 30% of the loan amount, plus
6% of the principal balance of the loan for each year after the
expiration of the fifth complete year of the loan period, such
payments to be offset by the cumulative amount of all payments
made to tbg from the annual surplus of EpiCept GmbH. We are
accruing these additional amounts as additional interest up to
the maximum amount due over the term of the loan. The effective
rate of interest of this loan is 9.7%.
€2.6 Million Due 2007. In March
1998, EpiCept GmbH entered into a term loan in the amount of
€2.6 million with IKB Private Equity GmbH, or
“IKB,” which we guaranteed. The interest rate on the
loan is 20% per year. The loan was amended in December 2002
to extend the maturity to December 31, 2006 and to
incorporate a principal repayment schedule, which commenced
April 30, 2004. Principal payments totaling
$0.7 million were made during the period April 2004 through
September 2004. Principal and interest payments were deferred
until December 31, 2005 and thereafter, principal and
interest payments recommenced in accordance with the original
repayment schedule. As a result of the deferral, the maturity
date has been extended until June 30, 2007. The loan
agreement provides for contingent interest of 4% per annum
of the principal balance, becoming due only upon our realization
of a profit and payable up to two years thereafter, as defined
in the agreement. We have not realized a profit through
September 30, 2006. We value the contingent interest as a
derivative using the fair value method in accordance with
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, as amended by
FAS No. 149, Amendment of Statement 133 on
“Derivative Instruments and Hedging
Activities.”. Changes in the fair value of the contingent
interest are recorded as an adjustment to interest expense.
During the quarter ended September 30, 2006, we determined
that we were unlikely to be profitable in 2007 as a result of
the LidoPAIN SP Phase III clinical trial in Europe.
Accordingly, we determined that the fair value of the contingent
interest should be valued at $0 as of September 30, 2006
and reversed contingent interest of $1.0 million for the
nine months ended September 30, 2006. The fair value of the
contingent interest was approximately $0.9 and $0.7 million
as of December 31, 2005 and 2004.
47
Senior Notes. On March 3, 2005, we
completed a private placement of $4.0 million aggregate
principal amount of 8% Senior Notes with a group of
investors including several of its existing stockholders. The
Senior Notes mature on October 30, 2006. On August 26,
2005, in connection with the merger, we amended the Senior Notes
with four of the six investors (cumulatively the “Non
Sanders Investors”). Upon the closing of the merger with
Maxim, the Non Sanders Investors converted their Senior Notes
and accrued interest into approximately 1.1 million shares
of common stock at a conversion price of $2.84 and forfeited
their stock purchase warrants. The amendment to the Senior Notes
resulted in a contingent BCF. Since the mandatory conversion of
the Senior Notes was contingent upon the closing of the merger
with Maxim, which was outside our control, the BCF was measured
as of the modification date at $2.4 million and was
recognized as interest expense upon the closing of the merger on
January 4, 2006. We also charged $0.3 million of
unamortized debt discount and debt issuance costs to interest
expense upon conversion of the Non Sanders Investors Senior
Notes.
The terms of the original Senior Notes for the other two the
investors which we refer to as the Sanders Senior Notes,
remained unchanged. The Sanders Senior Notes included an
embedded derivative under SFAS 133 “Accounting for
Derivatives and Hedging Activities” related to the
prepayment option. At the time of the financing, SFAS 133
required us to value the embedded derivative at fair market
value, which approximated $0.1 million. At
September 30, 2006 the embedded derivative had a nominal
value. The value of the derivative was marked to market each
reporting period as a derivative gain or loss until the
repayment of the Sanders Senior Notes. The Sanders Senior Notes
were repaid as scheduled on October 30, 2006.
$0.8 Million Due 2012. In July 2006,
Maxim, our wholly-owned subsidiary issued a six-year
non-interest bearing promissory note in the amount of
$0.8 million to Pharmaceutical Research Associates, Inc.
The note is payable in seventy-two equal installments of
approximately $11,000 per month. We terminated Maxim’s
lease of certain property in San Diego, CA as part of our
exit plan upon the completion of the merger with Maxim on
January 4, 2006 (see Note 12 to the consolidated
financial statements).
Senior Secured Term Loan. On August 30,
2006, we entered into a senior secured term loan in the amount
of $10.0 million with Hercules Technology Growth Capital,
Inc.. The interest rate on the loan is 11.7% per year. In
addition, five year common stock purchase warrants were issued
to Hercules granting them the right to purchase 0.5 million
shares of the our common stock at an exercise price of
$2.65 per share. The basic terms of the loan require
monthly payments of interest only through March 1, 2007,
with 30 equal monthly payments of principal and interest
commencing on April 1, 2007. Any outstanding balance of the
loan and accrued interest will be repaid on August 30,
2009. Upon meeting certain conditions as defined in the loan
agreement, we have the option to extend the interest only
and/or
repayment periods up to a maximum of one year. The effective
interest rate on this loan is 13.6%.
Other Commitments. Our long-term commitments
under operating leases shown above consist of payments relating
to our facility leases in Englewood Cliffs, New Jersey, which
expires November 2006, and Munich, Germany, which expires in
July 2009, but is cancelable at our option in July 2007.
Long-term commitments under operating leases for facilities
leased by Maxim and retained by us relate primarily to the
research and development site at 6650 Nancy Ridge Drive in
San Diego, which is leased through October 2008. In July
2006, we terminated our lease of certain other property in
San Diego, CA. In connection with the lease termination, we
issued a six year non-interest bearing note payable in the
amount of $0.8 million to the new tenant. These payments
are reflected in the long-term debt section of the above table.
During the third quarter of 2006, the Company entered into a new
five year lease to move its Englewood Cliffs, New Jersey office
to Tarrytown, New York.
We have a number of research, consulting and license agreements
that require it to make payments to the other party to the
agreement upon us attaining certain milestones as defined in the
agreements. As of September 30, 2006, we may be required to
make future milestone payments, totaling approximately
$5.7 million under these agreements, depending upon the
success and timing of future clinical trials and the attainment
of other milestones as defined in the respective agreement. Our
current estimate as to the timing of other research, development
and license payments, assuming all related research and
development work is successful, is listed in the table above in
“Other obligations.”
48
We are also obligated to make future royalty payments to two of
its collaborators under existing license agreements, one based
on net sales of EpiCept
NP-1 and the
other based on net sales of LidoPAIN SP, to the extent revenues
on such products are realized. We have not estimated the amount
or timing of such royalty payments.
Quantitative
and Qualitative Disclosures About Market Risk.
The financial currency of our German subsidiary is the euro. As
a result, we are exposed to various foreign currency risks.
First, our consolidated financial statements are in
U.S. dollars, but a portion of our consolidated assets and
liabilities is denominated in euros. Accordingly, changes in the
exchange rate between the euro and the U.S. dollar will
affect the translation of our German subsidiary’s financial
results into U.S. dollars for purposes of reporting
consolidated financial results. We also bear the risk that
interest on its euro-denominated debt, when translated from
euros to U.S. dollars, will exceed our current estimates
and that principal payments we make on those loans may be
greater than those amounts currently reflected on our
consolidated balance sheet. If the U.S. dollar depreciation
to the euro had been 10% greater throughout 2005, we estimate
that our interest expense and the fair value of our
euro-denominated debt would have increased by $0.1 and
$0.6 million, respectively. Historically, fluctuations in
exchange rates resulting in transaction gains or losses have had
a material effect on our consolidated financial results. We have
not engaged in any hedging activities to minimize this exposure,
although we may do so in the future.
Our exposure to interest rate risk is limited to interest income
sensitivity, which is affected by changes in the general level
of U.S. interest rates, particularly because the majority
of our investments are in short term debt securities and bank
deposits. The primary objective of our investment activities is
to preserve principal while at the same time maximizing the
income we receive without significantly increasing risk. To
minimize risk, we maintains its portfolio of cash and cash
equivalents and marketable securities in a variety of
interest-bearing instruments, primarily bank deposits and money
market funds, which may also include U.S. government and
agency securities, high-grade U.S. corporate bonds and
commercial paper. Due to the nature of our short-term and
restricted investments, we believe that it is not exposed to any
material interest rate risk. We do not have any relationships
with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we do not
engage in trading activities involving non-exchange traded
contracts. Therefore, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if
we had engaged in these relationships. We do not have
relationships or transactions with persons or entities that
derive benefits from their non-independent relationship with our
related parties or us.
49
BUSINESS
We are a specialty pharmaceutical company that focuses on the
development of pharmaceutical products for the treatment of pain
and cancer. We have a portfolio of nine product candidates in
various stages of development: an oncology product candidate
submitted for European registration, three pain product
candidates that are ready to enter, or have entered,
Phase IIb or Phase III clinical trials, three pain
product candidates that have completed initial Phase II
clinical trials and two oncology compounds, one of which is
completing a Phase I clinical trial and the second of which
is expected to enter clinical development in the next few
months. Our portfolio of pain management and oncology product
candidates allows us to be less reliant on the success of any
single product candidate.
Our lead oncology product candidate is Ceplene, which is
intended as remission maintenance therapy in the treatment of
acute myeloid leukemia, or AML specifically for patients who are
in their first complete remission (CR 1). Our late stage
pain product candidates are: EpiCept
NP-1, a
prescription topical analgesic cream designed to provide
effective long-term relief of peripheral neuropathies; LidoPAIN
SP, a sterile prescription analgesic patch designed to provide
sustained topical delivery of lidocaine to a post-surgical or
post-traumatic sutured wound while also providing a sterile
protective covering for the wound; and LidoPAIN BP, a
prescription analgesic non-sterile patch designed to provide
sustained topical delivery of lidocaine for the treatment of
acute or recurrent lower back pain. None of our product
candidates has been approved by the U.S. Food and Drug
Administration (“FDA”) or any comparable agency in
another country and we have yet to generate product revenues
from any of our product candidates in development.
Product
Portfolio
We have a broad range of topical pain therapies, a cancer
product in registration in Europe, and an early stage discovery
program for apoptosis inducers designed to address unmet medical
needs in oncology. The following chart illustrates the depth of
our product pipeline:
The clinical trials for our current portfolio of product
candidates have included over 3,100 patients in
23 clinical trials, including over 660 patients in six
clinical trials for EpiCept
NP-1; over
1,100 patients in five clinical trials for LidoPAIN SP;
over 720 patients in five clinical trials for LidoPAIN BP, and
over 350 patients in two AML clinical trials for Ceplene.
We are subject to a number of risks associated with companies in
the specialty pharmaceutical industry. Principal among these are
risks associated with our dependence on collaborative
arrangements, risks associated with product development by us or
our competitors of new technological innovations, dependence on
key
50
personnel, protection of proprietary technology, compliance with
the FDA and other governmental regulations and approval
requirements, as well as the ability to grow our business and
the need to obtain adequate financing to fund our product
development activities.
Cancer
Cancer develops when cells in a part of the body begin to grow
out of control. Although there are many kinds of cancer, they
all start because of
out-of-control
growth of abnormal cells. Normal body cells grow, divide, and
die in an orderly fashion. During the early years of a
person’s life, normal cells divide more rapidly until the
person becomes an adult. After that, cells in most parts of the
body divide only to replace worn-out or dying cells and to
repair injuries. Because cancer cells continue to grow and
divide, they are different from normal cells. Instead of dying,
they outlive normal cells and continue to form new abnormal
cells. Cancer cells develop because of damage to DNA. This
substance is in every cell and directs all activities. Most of
the time when DNA becomes damaged the body is able to repair it.
In cancer cells, the damaged DNA is not repaired. People can
inherit damaged DNA, which accounts for inherited cancers. More
often, though, a person’s DNA becomes damaged by exposure
to something in the environment, like smoking. Cancer usually
forms as a tumor. Some cancers, like leukemia, do not form
tumors. Instead, these cancer cells involve the blood and
blood-forming organs and circulate through other tissues where
they grow. Often, cancer cells travel to other parts of the body
where they begin to grow and replace normal tissue. This process
is called metastasis. Regardless of where a cancer may spread,
however, it is always named for the place it began. For
instance, breast cancer that spreads to the liver is still
called breast cancer, not liver cancer. Not all tumors are
cancerous. Benign (noncancerous) tumors do not spread
(metastasize) to other parts of the body and, with very rare
exceptions, are not life threatening. Different types of cancer
can behave very differently. For example, lung cancer and breast
cancer are very different diseases. They grow at different rates
and respond to different treatments. That is why people with
cancer need treatment that is aimed at their particular kind of
cancer. Cancer is the second leading cause of death in the
United States. Half of all men and one third of all women in the
United States will develop cancer during their lifetimes. Today,
millions of people are living with cancer or have had cancer.
The risk of developing most types of cancer can be reduced by
changes in a person’s lifestyle, for example, by quitting
smoking and eating a better diet. The sooner a cancer is found
and treatment begins, the better are the chances for living for
many years.
Ceplene
Oxidative Stress. Oxidation is essential to
nearly all cells in the body as it is involved with energy
production. Nearly all of the oxygen consumed by the body is
reduced to water during metabolic processes. However a small
fraction, between 2% and 5% of the oxygen, may be converted into
so-called reactive oxygen species or ROS. These ROS, also known
as free radicals, are extremely unstable molecules that interact
quickly and aggressively with other molecules in the body to
create abnormal cells. Under normal conditions the body’s
natural antioxidant defenses are sufficient to neutralize ROS
and prevent such damage. Oxidative stress occurs when the
generation of ROS exceeds the body’s ability to neutralize
and eliminate them.
ROS do have beneficial roles, one of which is fighting foreign
infections in the body to inactivate bacteria and viruses. This
is carried out primarily by some specialized cells in the blood
(e.g., monocytes and macrophages). However, these same cells can
create an undesired environment in tumors where the ROS can kill
beneficial tumor fighting cells (e.g., Natural Killer cells and
T cells). It is this type of oxidative stress that Ceplene has
shown to stop. Ceplene decreases the production of ROS by these
specialized infection fighting cells, thereby continuing the
survival and effectiveness of tumor fighting cells.
Mechanism of Action. Ceplene, based on the
naturally occurring molecule histamine, prevents the production
and release of oxygen free radicals, thereby reducing oxidative
stress. Research suggests that treatment with Ceplene has the
potential to protect critical cells and tissues, and prevent or
reverse the cellular damage induced by oxidative stress. This
body of research has demonstrated that the primary elements of
Ceplene’s proposed mechanism of action are as follows:
Two kinds of immune cells, Natural Killer, or NK, cells and
cytotoxic T cells, possess an ability to kill and support the
killing of cancer cells and virally infected cells. Natural
Killer/T cells, or NK/T cells, a form of NK
51
cells that are commonly found in the liver, also have
anti-cancer and anti-viral properties. Much of the current
practice of immunotherapy is based on treatment with cytokines
such as interferon, or IFN, and IL-2, proteins that stimulate
NK, T and NK/T cells.
Research has shown that phagocytic cells (including monocytes,
macrophages and neutrophils), a type of white blood cell
typically present in large quantities in virally infected liver
tissue and in sites of malignant cell growth, release reactive
oxygen free radicals and have been shown to inhibit the
cell-killing activity of human NK cells and T cells. In
preclinical studies, human NK, T, and liver-type NK/T cells have
been shown to be sensitive to oxygen free radical-induced
apoptosis when these immune cells were exposed to phagocytes.
The release of free radicals by phagocytes results in apoptosis,
or programmed cell death, of NK, T and NK/T cells, thereby
destroying their cytotoxic capability and rendering the immune
response against the tumor or virus largely ineffective.
Histamine, a natural molecule present in the body, and other
molecules in the class known as histamine type-2, or
H2,
receptor agonists, bind to the
H2
receptor on the phagocytes, temporarily preventing the
production and release of oxygen free radicals. By preventing
the production and release of oxygen free radicals, histamine
based therapeutics may protect NK, T, and liver-type NK/T cells.
This protection may allow immune-stimulating agents, such as
IL-2 and IFN-alpha, to activate NK cells, T cells and NK/T cells
more effectively, thus enhancing the killing of tumor cells or
virally infected cells.
Potential Benefits of Histamine Based
Therapy. The results from our clinical
development program and other research suggest that histamine
based therapeutics, such as Ceplene, may be integral in the
growing trend toward combination therapy for certain cancers and
may offer a number of important clinical and commercial
advantages relative to current therapies or approaches,
including:
|
|
|
|
•
|
Extending leukemia free survival in AML. Our
Phase 3 acute myeloid leukemia trial, or M0201 trial, of
Ceplene has provided potential evidence of improved therapeutic
benefit over the standard of care.
|
|
|
•
|
Outpatient administration. In clinical trials
conducted to date, Ceplene has been self-administered at home by
most patients, in contrast to the in-hospital administration
required for many other therapies.
|
|
|
•
|
Cost effectiveness. The delivery of
combination therapy with Ceplene on an outpatient basis may
eliminate the costs associated with in-hospital patient care.
These factors, combined with the potential improvements in
efficacy, may contribute favorably to the assessment of benefit
versus cost for this therapy.
|
RegulatoryStatus. On October 6, 2006, we
submitted a Market Authorization Application (MAA) to the
European Medicines Agency for the Evaluation of Medicinal
Products (EMEA) for
Ceplenetm
(histamine dihydrochloride), our lead oncology product
candidate, administered in conjunction with interleukin-2
(IL-2), for the maintenance of first remission in patients with
Acute Myeloid Leukemia (AML).
The pivotal efficacy and safety data for this MAA submission is
from a Phase III clinical trial for Ceplene in conjunction
with interleukin-2. This study met its primary endpoint of
preventing relapse as shown by increased leukemia-free survival
for AML patients in remission. The study was conducted in eleven
countries and included 320 randomized patients. The data
demonstrated that patients with AML in complete remission that
received 18 months of treatment with Ceplene plus low dose
interleukin-2 experienced a significantly improved leukemia-free
survival compared to the current standard of care, which is no
treatment after successful induction of remission. The
improvement in leukemia-free survival achieved by Ceplene/IL-2
was highly statistically significant (p=0.0096, analyzed
according to
Intent-to-Treat).
Even more striking was the benefit observed in patients in their
first remission (CR1). In this subgroup, the patients had a 55%
improvement in leukemia free survival. This represented an
absolute improvement of more than 22 weeks in terms of
delayed progression of the disease. This benefit was also highly
statistically significant, (p=0.0113) and is the intended
patient population (CR1) under consideration for this
application. [The results of this trial were published in Blood,
a leading scientific journal in hematology, (Blood; The Journal
of the American Society of Hematology, volume 108,
number 1, July 1, 2006)]. There is a distinctive need
for new treatment options to improve long-term leukemia free
survival among AML patients. The majority of AML patients in
complete remission will experience a relapse of leukemia with a
progressively poor prognosis. These study results indicate
52
that Ceplene, combined with low dose interleukin-2,
significantly improves long-term leukemia-free survival among
these patients.
Successful validation of the Marketing Authorization Application
(MAA) for
Ceplenetm
(histamine dihydrochloride) by the European Medicines Agency for
the Evaluation of Medicinal Products (EMEA) occurred on
October 25, 2006. This positive outcome of validation
signifies that the EU centralized evaluation procedure for this
MAA will start at the published date of October 25, 2006.
Validation of the application means that the EMEA has reviewed
the application for completeness, selected the reviewers for the
application and set a timetable for the review of the product
candidate.
The MAA submission for Ceplene will be reviewed under the EU
centralized procedure, and if approved, would provide a
marketing authorization valid in all EU member states, together
with Iceland, Liechtenstein and Norway. The European Commission
has previously granted orphan drug status to Ceplene for use in
the treatment of AML.
Estimated Incidence for AML in Europe. AML is
the most common form of acute leukemia in adults. Prospects for
long-term survival are poor for the majority of AML patients.
There are approximately 12,000 new cases of AML and 9,000 deaths
caused by this cancer each year in the United States. There are
approximately 47,000 AML patients in the EU, with 14,000
new cases occurring each year. Once diagnosed with AML, patients
are typically treated with chemotherapy, and the majority of
those patients reach complete remission. Approximately, 75-80%
of patients who achieve their first complete remission will
relapse, and the median time in remission before relapse with
current treatments is only 12 months. The prospects for
these relapsed patients is poor, and less than 5% survive long
term. There are currently no effective remission therapies for
AML patients. The objective of the Ceplene/IL-2 combination is
to treat AML patients in remission to prevent relapse and
prolong leukemia-free survival while maintaining a good quality
of life for patients during treatment. The FDA and the EMEA have
granted orphan drug status to Ceplene for the treatment of AML.
Phase III Clinical Trial. In September
2000, we completed enrollment of the MP-MA-0201 Phase 3 AML
clinical trial, or M0201 trial. This was an international,
multi-center, randomized, open-label, Phase 3 trial that
commenced in November 1997. The trial was designed to evaluate
whether Ceplene in conjunction with low dose interleukin-2, or
IL-2, given as a remission therapy can prolong leukemia-free
survival time and prevent relapse in AML patients in first or
subsequent remission compared to the current standard of care,
which is no therapy during remission. Accordingly, Ceplene is
intended to complement rather than supplant chemotherapy.
Prior to enrollment for remission therapy, patients were treated
with induction and consolidation therapy according to
institutional practices. Upon enrollment patients were
randomized to one of two treatment groups, either the Ceplene
plus IL-2 group or the control group (standard of care, no
treatment). Randomization was stratified by country and complete
remission status. Complete remission status was divided into two
groups; those in their first complete remission, or CR1, and
those in their second or later complete remission, or CR>1.
Altogether 320 patients were entered into this study; 160
were randomized to active treatment and 160 were randomized to
standard of care (no treatment).
Patients on the active treatment arm received Ceplene plus IL-2
during ten
3-week
treatment periods. After each of the first 3 treatment periods,
there was a
3-week rest
period, whereas each of the remaining cycles was followed by a
6-week rest
period. Treatment duration was approximately 18 months.
IL-2 was administered subcutaneously, or sc, 1 g/kg body weight
twice daily, or BID, during treatment periods. Ceplene was
administered sc 0.5 mg BID after IL-2. After the patient
became comfortable at self-injection under the
investigator’s supervision, both drugs could be
administered at home. Patients were followed for relapse and
survival until at least 3 years from randomization of the
last patient enrolled.
Safety was assessed throughout the study by clinical symptoms,
physical examinations, vital signs, and clinical laboratory
tests. In addition, patients were monitored for safety for
28 days following removal from treatment for any reason.
Additional assessments included bone marrow biopsies as
clinically indicated and quality of life.
The two treatment groups appear well balanced regarding baseline
characteristics and prognostic factors. With a minimum
follow-up of
3 years a stratified log-rank test (stratified by country
and first complete remission vs. second or later complete
remission) of the Kaplan-Meier, or KM, estimate of leukemia free
survival of all
53
randomized patients showed a statistically significant advantage
for the treatment group (p =0.0096). At three years after
randomization, 24% of control patients were alive and free of
leukemia, compared with 34% of patients treated with Ceplene
plus IL-2, stratified by log-rank.
Phase II Clinical Trial. A Phase II
investigator trial was conducted in Sweden in which 39 AML
patients in complete remission were treated with various
combinations of Ceplene and low-dose IL-2. The objective of the
study was to determine a Ceplene plus IL-2 treatment regimen
that would have the least negative impact on normal living for
patients in remission, and to determine the feasibility of using
that regimen in a larger study of AML patients in complete
remission in a long-term, at-home, self-administration clinical
trial. Some patients were treated with chemotherapy as well as
Ceplene and IL-2 therapy.
Results of the first 29 patients enrolled from this
investigator trial were encouraging: of the 18 patients in
their first complete remission 67% remained in complete
remission (median 23 months follow-up), and of the
11 patients in their second or later complete remission,
36% remained in complete remission (median 32 months
follow-up). The trial results also demonstrated that the regimen
of Ceplene 0.5 mg and IL-2 1 g/kg administered
subcutaneously at home was safe and well tolerated by most
subjects. The results of this study led to the development of
protocol M0201.
Novel
Cancer Drug Candidates
Small-Molecule Apoptosis Inducers. All cells
have dedicated molecular processes required for cell growth and
expansion, but also have programmed pathways specific for
inducing cell death. Cancer is a group of diseases characterized
by uncontrolled cellular growth (e.g., tumor formation) without
any differentiation of those cells. One reason for unchecked
growth in cancer cells is the disabling, or absence, of the
natural process of programmed cell death called apoptosis.
Apoptosis is normally activated to destroy a cell when it
outlives its purpose or it is seriously damaged. One of the most
promising approaches in the fight against cancer is to
selectively induce apoptosis in cancer cells, thereby checking,
and perhaps reversing, the improper cell growth. Using chemical
genetics and its proprietary high-throughput cell-based
screening technology, our researchers can effectively identify
new cancer drug candidates and molecular targets with the
potential to induce apoptosis selectively in cancer cells.
Chemical genetics is a research approach that investigates the
effect of small molecules on the cellular activity of a protein,
enabling researchers to determine protein function. By combining
chemical genetics with its proprietary live cell high-throughput
caspase screening technology, our researchers can specifically
investigate the cellular activity of a small molecule drug
candidate and its relationship to apoptosis. Screening for the
activity of caspases, a family of protein-degrading enzymes with
a central role in cleaving other important proteins necessary
for inducing apoptosis, is an effective method for researchers
to efficiently discover and rapidly test the effect of small
molecules on pathways and molecular targets crucial to apoptosis.
Our screening technology is particularly versatile, since it can
adapt its assays for use in a wide variety of primary cells or
cultured cancer cell lines. This platform technology we call
ASAP which is an acronym for apoptosis screening and anti-cancer
platform. The technology can monitor activation of caspases
inside living cells and is versatile enough to measure caspase
activity across multiple cell types including cancer cells,
primary immune cells, cell lines from different organ systems or
genetically engineered cells. This allows us to find potential
drug candidates that are selective for specific cancer types,
permitting the ability to focus on identifying potential
cancer-specific drugs that will have increased therapeutic
benefit and reduced toxicity or for immunosuppressive agents
selective for activated B/T cells. Our high-throughput screening
capabilities allow us to screen approximately 30,000 compounds
per day. To date, this program has identified more than 40
in vitro lead compounds with potentially novel mechanisms
that induce apoptosis in cancer cells. Four lead oncology
candidates, which vary from pre-clinical to Phase I/II
clinical programs, are being developed independently or through
strategic collaborations. The assays underlying the screening
technology are protected by multiple United States and
international patents and patent applications.
EPC2407. In November 2004, two publications
appeared in Molecular Cancer Therapeutics, a journal of the
American Association of Cancer Research ( “Discovery and
mechanism of action of a novel series of apoptosis inducers with
potential vascular targeting activity”, Kasibhatla, S.,
Gourdeau, H., Meerovitch, K., Drewe, J., Reddy, S., Qiu, L.,
Zhang, H., Bergeron, F., Bouffard, D., Yang, Q., Herich, J.,
Lamothe, S., Cai, S. X., Tseng, B., Mol.
54
Cancer Ther. 2004 vol. 3 pp.
1365-1374;
and “Antivascular and antitumor evaluation of
2-amino-4-(3-bromo-4,
5-dimethoxy-phenyl)-3-cyano-4H-chromenes,
a novel series of anticancer agents”, Henriette Gourdeau,
Lorraine Leblond, Bettina Hamelin, Clemence Desputeau, Kelly
Dong, Irenej Kianicka, Dominique Custeau, Chantal Boudreau,
Lilianne Geerts, Sui-Xiong Cai, John Drewe, Denis Labrecque,
Shailaja Kasibhatla, and Ben Tseng, Mol. Cancer Ther. 2004 vol.
3 pp.1375-1384) describing EPC2407 anticancer drug candidate as
part of a novel class of microtubule inhibitors were published.
The manuscripts characterize EPC2407 as a potent caspase
activator demonstrating vascular targeting activity and potent
antitumor activity in pre-clinical in vitro and in vivo
studies. EPC2407 appeared highly effective in mouse tumor
models, producing tumor necrosis at doses that correspond to
only 25% of the maximum tolerated dose. Moreover, in combination
treatment, EPC2407 significantly enhanced the antitumor activity
of cisplatin, resulting in tumor-free animals. EPC2407 will be
entering Phase 1 clinical trials within the next few months.
Azixatm
(MPC6827). Azixa is a compound discovered
from the ASAP drug discovery platform at EpiCept and licensed to
Myriad Genetics for clinical development. The antitumor activity
of Azixa demonstrated a broad range of activities against many
tumor types in various animal models as well as activity against
different types of multi-drug resistant cell lines. The
Phase 1 clinical testing is being conducted by Myriad, on
patients with solid tumors with a particular focus on brain
cancers or brain metastases due to its pharmacologic properties
in pre-clinical animal studies that indicated higher drug levels
in the brain than in the blood. Myriad reported in the third
quarter of 2006 that a maximum tolerated dose (MTD) had been
reached for Azixa and that they had seen evidence of tumor
regression at doses less than the MTD in some patients. Based on
these Phase I results, Azixa is expected to enter
Phase 2 clinical studies in the fourth quarter of 2006.
Pain and
Pain Management
Pain occurs as a result of surgery, trauma or disease. It is
generally provoked by a harmful stimulus to a pain receptor in
the skin or muscle. Pain can range in severity (mild, moderate
or severe) and duration (acute or chronic). Acute pain, such as
pain resulting from an injury or surgery, is of short duration,
generally less than a month, but may last up to three months.
Chronic pain is more persistent, extending long after an injury
has healed, and typically results from a chronic illness or
appears spontaneously and persists for undefined reasons.
Examples of chronic pain include chronic lower back pain and
pain resulting from bone cancer or advanced osteoarthritis. If
treated inadequately, unrelieved acute and chronic pain can slow
recovery and healing and adversely affect a person’s
quality of life.
According to Wolters Kluwer Health data, the total
U.S. market for prescription pain management
pharmaceuticals equaled $18.7 billion in 2005. The
represents an approximate 6% compound annual growth rate since
2001. In 2005, analgesics were the fourth most prescribed
medication in the United States with over 246 million
prescriptions written EpiCept believes that growth in this
market has been primarily attributable to:
|
|
|
|
•
|
increased physician recognition of the need for effective pain
management;
|
|
|
•
|
patient demand for more effective pain treatments;
|
|
|
•
|
an aging population, with an increased prevalence of chronic
pain conditions, such as cancer, arthritis, neuropathies and
lower back pain;
|
|
|
•
|
increased number of surgeries;
|
|
|
•
|
introduction of new and reformulated branded products; and
|
|
|
•
|
increased active and healthy lifestyles, resulting in additional
sports and fitness related injuries. Analgesics typically fall
into one of three categories:
|
|
|
•
|
opioid analgesics or narcotics, such as morphine, codeine,
oxycodone
(OxyContin®)
and tramadol
(Ultram®);
|
|
|
•
|
non-narcotic analgesics, primarily non-steroidal
anti-inflammatory drugs (“NSAID”s), including
prostaglandin inhibitors (such as aspirin, acetaminophen and
ibuprofen) and inhibitors of the enzyme cycloxygenase-2 (COX-2),
so-called COX-2 inhibitors (such as Celebrex); and
|
55
|
|
|
|
•
|
adjuvant therapeutics, such as anesthetics (lidocaine),
antidepressants (amitriptyline), anticonvulsives and
corticosteriods.
|
Limitations
of Current Therapies
Until recently, analgesics primarily have been delivered
systemically and absorbed into the bloodstream where they can
then alleviate the pain. Systemic delivery is achieved either
orally, via injection or through a transdermal patch. Systemic
delivery of analgesics can have significant adverse side effects
because the concentration of analgesics in the bloodstream can
impact other organs and systems throughout the body.
Adverse side effects of systemically-delivered analgesics are
well documented. Systemically-delivered opioid analgesics can
cause respiratory distress, nausea, vomiting, dizziness,
sedation, constipation, urinary retention and severe itching. In
addition, chronic use of opioid analgesics can lead to the need
for increased dosing and potential addiction. Concerns about
addiction and abuse often influence physicians to prescribe less
than adequate doses of opioids or to prescribe opioids less
frequently. Systemically-delivered NSAIDs and adjuvant
therapeutics can also have significant adverse side effects,
including kidney failure, liver dysfunction, gastric ulcers and
nausea. In the United States, there are approximately 16,500
NSAID-related deaths each year, and over 103,000 patients
are hospitalized annually due to NSAID complications. These
adverse side effects may lead doctors to prescribe analgesics
less often and at lower doses than may be necessary to alleviate
pain. Further, patients may take lower doses for shorter periods
of time and opt to suffer with the pain rather than risk the
adverse side effects. Systemic delivery of these drugs may also
result in significant interactions with other drugs, which is of
particular concern when treating elderly patients who typically
take multiple pharmaceutical therapies.
Recent
Scientific Developments
Almost every disease and every trauma is associated with pain.
Injury or inflammation stimulates the pain receptors, causing
electrical pain signals to be transmitted from the pain
receptors through nerve fibers into the spinal cord and
eventually to the brain. Pain receptors include central pain
receptors, such as those found in the brain and spinal cord, and
peripheral nerve receptors, also called “nociceptors,”
such as those located directly beneath the skin and in joints,
eyes and visceral organs. Within the spinal cord, the electrical
pain signals are received by a second set of nerve fibers that
continue the transmission of the signal up the spinal cord and
through the central nervous system into the brain. Within the
brain, additional nerve fibers transmit the electrical signals
to the “pain center” of the brain. The brain decodes
the messages being sent to the central nervous system from the
peripheral nervous system, and the signals are perceived as
“pain” and pain is “felt.” These messages
can be disrupted with pharmaceutical intervention either at the
source of the pain, such as the pain receptor, or at the point
of receipt of the pain message, in the brain. Topical delivery
of analgesics blocks the transmission of pain at the source of
the pain message, whereas systemic delivery of analgesics
primarily blocks the perception of pain within the brain.
Not until recently has the contribution of peripheral nerve
receptors to the perception of pain been well understood. Recent
studies have indicated that peripheral nerve receptors can play
an important role in both the sensory perception of pain and the
transmission of pain impulses. Specifically, certain types of
acute and chronic pain depend to some degree on the activation
of peripheral pain receptors located beneath the skin’s
surface. The topical administration of well-known analgesics can
localize drug concentrations at the point where the pain signals
originate, resulting in dramatically lower systemic blood
levels. We believe this results in a new treatment strategy that
provides significant pain relief, with fewer adverse side
effects, fewer drug to drug interactions and lower potential for
abuse.
Our
Solution
We are targeting peripheral nerve receptors using topical
analgesics as a novel mechanism to effectively treat both acute
and chronic pain, without the liabilities of traditional
systemically-delivered analgesics. We are developing innovative
topically-delivered analgesics using a combination of
internally-developed and in-licensed proprietary technologies
and know-how to address the unmet medical needs and adverse side
effects associated with systemically-delivered analgesics. Our
topical delivery technologies and formulations are designed to
deliver FDA-approved analgesics safely, effectively and
conveniently to the appropriate peripheral nerves while limiting
the
56
amount of drug that enters the bloodstream. We utilize patch,
cream and spray gel matrix delivery methods to topically deliver
the active ingredients to the pain site. In some instances, we
combine existing FDA-approved analgesics to create a new product
having a therapeutic profile superior to either one of the
standalone analgesics.
Peripheral
Neuropathy
Peripheral neuropathy is a medical condition caused by damage to
the nerves in the peripheral nervous system. The peripheral
nervous system includes nerves that run from the brain and
spinal cord to the rest of the body. According to
Datamonitor’s study “Stakeholder Insight: Neuropathic
Pain,” published in February 2004, peripheral neuropathy
affects over 15 million people in the United States and is
associated with conditions that injure peripheral nerves,
including herpes zoster, or shingles, diabetes, HIV and AIDS and
other diseases. It can also be caused by trauma or may result
from surgical procedures. Peripheral neuropathy is usually first
felt as tingling and numbness in the hands and feet. Symptoms
can be experienced in many ways, including burning, shooting
pain, throbbing or aching. Peripheral neuropathy can cause
intense chronic pain that, in many instances, is debilitating.
Post-herpetic neuralgia or PHN is one type of peripheral
neuropathic pain associated with herpes zoster, or shingles that
exists after the rash has healed. According to Datamonitor, PHN
affects over 100,000 people in the United States each year. PHN
causes pain on and around the area of skin that was affected by
the shingles rash. Most people with PHN describe their pain as
“mild” or “moderate.” However, the pain can
be severe in some cases. PHN pain is usually a constant, burning
or gnawing pain but can be an intermittent sharp or stabbing
pain. Current treatments for PHN have limited effectiveness,
particularly in severe cases and can cause significant adverse
side effects. The initial indication for our EpiCept
NP-1 product
candidate is for the treatment of peripheral neuropathy in PHN
patients.
There are currently three FDA-approved treatments for
post-herpetic neuralgia:
Neurontin®
(gabapentin),
Lidoderm®
(lidocaine patch 5%) and
Lyrica®
(pregabalin). Neurontin generated sales of approximately
$159 million in the United States in 2005, down from
$2.2 billion in 2004 due to the introduction of generic
gabapentin. Some patients also receive Tegretol (carbamazepine)
to manage the symptoms of peripheral neuropathy. However, these
drugs only work in some patients, and Neurontin may have
significant side adverse effects, such as drowsiness. Often the
use of these medications is combined with topical analgesics
such as the Lidoderm patch and
over-the-counter
topical analgesic creams that provide minimal relief with a
short duration of action. Lidoderm generated sales of
$419 million in the United States in 2005, much of which we
believe was attributable to patients with PHN. Lyrica was
approved for the treatment of neuralgia in December 2004 and
achieved worldwide sales of $291 million in 2005. For
diabetic peripheral neuropathic pain, there are currently two
FDA-approved therapies:
Lyrica®
and
Cymbalta®,
with the latter achieving worldwide sales of $698 million
in 2005. For chemotherapy-induced neuropathy, there are no
currently no drugs available to treat this condition.
The sales of the aforementioned drugs also include prescriptions
for indications other than neuropathic pain. According to
Datamonitor’s study “Commercial Insight: Neuropathic
Pain,” published in July 2006, the percentage of global
2005 sales attributed to neuropathic pain for each drug is as
follows:
Neurontin®
(42.5%),
Tegretol®
(9.0%),
Lidoderm®
(39.2%),
Lyrica®
(61.3%) and
Cymbalta®
(11.2%).
Cancer pain represents a large unmet market. This condition is
caused by the cancer tumor itself as well as the side effects of
cancer treatments, such as chemotherapy and radiotherapy.
According to Business Insight’s study, “Pain Market
Outlook for 2011”, published in June 2006, over
5 million patients in the United States experience
cancer-related pain. This pain can be placed in three main
areas: visceral, somatic and neuropathic. Visceral pain is
caused by tissue damage to organs and may be described as
gnawing, cramping, aching or sharp. Somatic pain refers to the
skin, muscle or bone and is described as stabbing, aching,
throbbing or pressure. Neuropathic pain is caused by injury to,
or compression of, the structures of the peripheral and central
nervous system. Chemotherapeutic agents, including vinca
alkaloids, cisplatin and paclitaxel, are associated with
peripheral neuropathies. Neuropathic pain is often described as
sharp, tingling, burning or shooting.
Painful diabetic peripheral neuropathy or DPN is common in
patients with long-standing Type 1(juvenile) and Type 2(adult
onset) diabetes mellitus. An estimated 18.2 million people
have diabetes mellitus in the United States. The prevalence of
neuropathy approaches 50% in those with diabetes mellitus for
greater than 25 years. Specifically, the lifetime incidence
of DPN is 11.6% and 32.1% for type 1 and 2 diabetes,
respectively. Common
57
sypmptoms of DPN are sharp, stabbing, burning pain,or allodynia
(pain to light touch) with numbness and tingling of the feet and
sometimes the hands.
Various agents have been evaluated in randomized controlled
clinical trials and are currently used in the treatment of DPN.
These include tricyclic antidepressants or TCA’s such as
amitriptyline, anticonvulsants such as gabapentin, serotin and
norepinephrine uptake inhibitors (e.g., duloxetine), and opioids
(e.g.,oxycodone). Unfortunately, the use of these agents is
often limited by the extent of the pain relief provided and the
occurence of significant central nervous system side effects
(CNS) such as dizziness, somnolence, and confusion. Because of
its limited system absorption into the blood, EpiCept
NP-1 topical
cream (amitriptyline 4%/ketamine 2%)potentially fulfills the
need for safe, better tolerated, effective agent for painful DPN.
EpiCept
NP-1. EpiCept
NP-1 is a
prescription topical analgesic cream containing a patented
formulation, the contents of which include two FDA-approved
drugs, amitriptyline (a widely-used antidepressant) and ketamine
(an NMDA antagonist that is used as an intravenous anesthetic).
EpiCept NP-1
is designed to provide effective, long-term relief from the pain
caused by peripheral neuropathies. We believe that EpiCept
NP-1 can be
used in conjunction with orally delivered analgesics, such as
Neurontin. The cream contains a 4% concentration of
amitriptyline and a 2% concentration of ketamine. Since each of
these ingredients has been shown to have significant analgesic
effects and because NMDA antagonists, such as ketamine, have
demonstrated the ability to enhance the analgesic effects of
amitriptyline, we believe the combination is a good candidate
for the development of a new class of analgesics.
EpiCept NP-1
is a white vanishing cream that is applied twice daily and is
quickly absorbed into the applied area. We believe the topical
delivery of its patented combination represents a fundamentally
new approach for the treatment of pain associated with
peripheral neuropathy. In addition, we believe that the topical
delivery of its product candidate will significantly reduce the
risk of adverse side effects and drug to drug interactions
associated with the systemic delivery of the active ingredients.
The results of our clinical trials to date have demonstrated the
safety of the cream for use for up to one year and a potent
analgesic effect in subjects with both post-herpetic neuralgia
and other types of peripheral neuropathy, such as those with
diabetic, traumatic and surgical causes.
We believe EpiCept
NP-1, if
approved, would offer the following favorable attributes:
|
|
|
|
•
|
analgesic effect comparable to levels provided when using
systemically-delivered analgesics;
|
|
|
•
|
additive therapy to systemically-delivered analgesics, such as
Neurontin;
|
|
|
•
|
minimal adverse side effects, including reduced drowsiness;
|
|
|
•
|
ease of application and suitability for self-administration;
|
|
|
•
|
low potential for abuse;
|
|
|
•
|
good patient compliance;
|
|
|
•
|
no drug to drug interactions; and,
|
|
|
•
|
potential to treat a broad range of peripheral neuropathic
conditions.
|
Clinical Development. We have completed two
Phase II clinical trials, one initiated in Canada in
October 2001 and one initiated in the United States in February
2002.
Placebo-controlled Factorial Trial. This four
center Canadian Phase II clinical trial in Ontario and Nova
Scotia (Dalhousie University) was a placebo-controlled factorial
trial, i.e., a trial that evaluates the individual components of
a drug product that contains more than one active ingredient as
compared to the effects of the combination, designed to
demonstrate that the use of the combination of amitriptyline and
ketamine was more effective than either drug alone. A factorial
trial is a clinical trial in which the active ingredients in
combination are compared with each drug used alone and by a
placebo control. The trial included 92 subjects with a history
of diabetic, post surgical or traumatic neuropathy or PHN. The
trial tested a low-dose formulation of EpiCept
NP-1,
consisting of a 2% concentration of amitriptyline and a 1%
concentration of ketamine, applied three times daily for three
weeks. Subjects were allowed to continue their current pain
medications (other than Lidoderm) as long as they
58
did not alter their dosage level or frequency. Subjects who
entered the trial had to have a score of at least 4 on the
11-point numerical pain scale. We completed the analysis of data
from this clinical trial in February 2004.
We assessed several end points in this clinical trial, including
mean daily pain severity as measured on the 11-point numerical
pain scale, pain relief, a responder analysis and changes in the
responses to the McGill Pain Questionnaire. While none of the
results was statistically significant, the results of the
responder analysis were the most compelling. In the responder
analysis, subjects were required to show at least a 30%
reduction in their pain as compared to placebo for the duration
of the study. The results indicated a desirable rank order of
the combination being more effective than either amitriptyline
or ketamine alone or placebo. The cream was well-tolerated by a
majority of the subjects, and no significant adverse reactions
were observed. Based on a review of our Phase II clinical
trial results, the FDA concurred in our End of Phase II
meeting that we design our Phase III clinical trial as a
responder analysis.
Dose-Response Clinical Trial. In the United
States, we conducted a Phase II placebo-controlled
dose-response clinical trial in subjects recruited from 21 pain
centers to determine an effective clinical dose of EpiCept
NP-1. The
trial included 251 subjects with post-herpetic neuralgia who had
been suffering significant pain for at least three months. We
tested two dosage formulations, one containing a 4%
concentration of amitriptyline and a 2% concentration of
ketamine, which we refer to as “high-dose” and one
containing a 2% concentration of amitriptyline and a 1%
concentration of ketamine, which we refer to as
“low-dose,” as compared to placebo. Subjects were
allowed to continue on their current pain medications as long as
they did not alter their dosage level or frequency. Subjects who
entered the trial had to have a score of at least 4 on the
11-point numerical pain scale. All subjects initially received
the high-dose formulation twice daily for seven days.
Responders, which were defined in the initial phase of this
clinical trial as those experiencing a one point or greater drop
on the 11-point numerical pain scale for three or more days,
were then randomized into one of three study arms (high-dose,
low-dose or placebo). Each study arm applied the applicable
formulation of EpiCept
NP-1 or
placebo twice daily for an additional 14 days. We completed
the analysis of the data from this clinical trial in August 2003.
The primary endpoint was the baseline average daily pain score
compared to the average daily pain score at day 21,
measured on the 11-point numerical pain scale. We measured the
score for a 14 day period beginning on the day the subjects
were randomized. The clinical trial’s primary objective was
to determine if the subjects in either the high-dose or low-dose
groups experienced better analgesia as reflected by lower pain
intensity scores over the length of the trial. Secondary
endpoints included pain relief, sleep quality and patient global
satisfaction, all measured on the 11-point numerical scale.
The clinical trial results indicated that the high-dose
formulation of EpiCept
NP-1 met the
primary endpoint for the trial and resulted in a statistically
significant reduction in pain intensity and increase in pain
relief as compared to placebo. We also observed a dose-related
effect, i.e. the subjects receiving the high-dose formulation
had more favorable results than the subjects receiving the
low-dose formulation. In addition, the subjects receiving the
high-dose formulation reported better sleep quality and greater
overall satisfaction than subjects receiving placebo. In
addition, we observed a greater number of
“responders,” which for purposes of the responder
analysis conducted during the
14-day
period were defined as subjects with a two or more point drop in
average daily pain scores on the 11-point numerical pain scale.
No significant adverse reactions were observed other than skin
irritation and rash, which were equivalent to placebo.
After the completion of the two Phase II trials, we
conducted open label trials in which participants in the
clinical trials could continue to use the low-dose formulation
for a period of up to one year. The low-dose formulation was
well-tolerated and detectable blood concentration levels of the
active ingredients were insignificant, which is indicative of
the safety and potential long term efficacy of the product.
The results of its Phase II clinical trials helped us
decide to use the high-dose formulation of EpiCept
NP-1 in its
Phase III clinical trials.
Current Clinical Initiatives. We held an End
of Phase II meeting with the FDA in April 2004 to discuss
the Phase II clinical trial results and the protocols for
its planned Phase III clinical trials. In that meeting, the
FDA accepted our stability data and manufacturing plans for the
combination product, as well as toxicology data on ketamine from
studies conducted by others and published literature. The FDA
also confirmed that the proposed
59
New Drug Application, (“NDA”) would qualify for a
Section 505(b)(2) submission (for details on this
submission process, see “Item 1. Business —
Government Regulation — United States —
Section 505(b)(2) Drug Applications” below). In
addition, the FDA approved our Phase III clinical trial
protocol and indicated that a second factorial Phase III
clinical trial would be required. The FDA also requested that we
conduct an additional pharmacokinetic trial to assess dermal
absorption of ketamine and outlined the parameters for long-term
safety studies for the high-dose formulation. The
pharmacokinetic clinical trial will involve applying the cream
twice daily and measuring blood concentration levels of
amitriptyline and ketamine over 48 hours.
We will work with the FDA to develop an appropriate toxicology
program for amitriptyline and ketamine where existing data is
not available. We initiated a supplemental toxicology study in
the third quarter of 2004 related to the application of EpiCept
NP-1 on the
skin. The duration of the study and the number and types of
animals to be tested will be determined during further
discussions with the FDA.
We are currently preparing Phase II, multi-center,
randomized, placebo controlled trial in approximately
200 patients evaluating the analgesic properties and safety
of EpiCept
NP-1
(ketamine 2% and amitriptyline 4%) cream in patients with
chronic lower extremity pain due to diabetic peripheral
neuropathy. Proof of concept of the utility of the
NP-1 cream
in this type of neuropathic pain and detection of efficacy
signals are key goals of this trial. This will be accomplished
by comparing the differences at baseline (at randomization) to
the last days of treatment between
NP-1 and
placebo creams in the mean daily intensity scores. In addition,
this trial will investigate the quality of life and disability
modification profiles of the
NP-1 cream.
This trial is scheduled to start in the first half of 2007.
In the second quarter 2007 EpiCept will begin a Phase III
multicenter, randomized, placebo controlled clinical trial in
approximately 400 patients evaluating the effects of
EpiCept NP-1
topical cream in treating patients suffering from
chemotherapeutic peripheral neuropathy, also known as CPN. CPN
may affect 50% of women undergoing surgical treatment for breast
cancer. A common therapeutic agent for the treatment of advanced
breast cancer is paclitaxel, and as many as 80% of the patients
with advanced breast cancer experience some signs and symptoms
of CPN, such as burning, tingling pain associated sometimes with
mild muscular weakness, after high dose paclitaxel
administration.
Surgical
Pain
According to Datamonitor’s study “Postoperative
Pain,” published in April 2004, there are over
53 million surgical procedures conducted annually in the
United States. Traditional post-surgical pain treatment usually
begins with the application of a local anesthetic at the
surgical incision site during the surgery. The pain relief
provided by the anesthetic applied during surgery typically
wears off within the first two hours. Pain relief is then
provided by a combination of oral or injectible narcotic
analgesics and NSAIDs, with accompanying adverse side effects
and drug to drug interactions.
LidoPAIN SP. LidoPAIN SP is a sterile
prescription analgesic patch designed to provide sustained
topical delivery of lidocaine to a post-surgical or
post-traumatic sutured wound while also providing a sterile
protective covering for the wound. The LidoPAIN SP patch
contains a 9.5%concentration of lidocaine and is intended to be
applied as a single administration over one to three days.
LidoPAIN SP can be targeted for use following both inpatient and
ambulatory surgical procedures, including among others: hernia
repair, plastic surgery, puncture wounds, biopsy, cardiac
catheterization and tumor removal.
Currently, there is no marketed product similar to LidoPAIN SP,
and we believe that we would be the first sterile prescription
analgesic patch on the market. If approved, we believe LidoPAIN
SP would offer the following favorable attributes:
|
|
|
|
•
|
safety and ease of use;
|
|
|
•
|
sterility on a sutured wound;
|
|
|
•
|
reduced need for systemically-delivered narcotic analgesics and
NSAIDs;
|
|
|
•
|
single administration for one to three days;
|
60
|
|
|
|
•
|
minimal adverse side effects, including no observed nausea or
vomiting;
|
|
|
•
|
additive therapy to systemically-delivered analgesics;
|
|
|
•
|
no drug to drug interactions; and
|
|
|
•
|
no wound healing interference.
|
Clinical Development. We completed enrollment
for a Phase III pivotal clinical trial in Europe during
August 2006. The trial was a randomized, double-blind, placebo
controlled trial in which 440 patients undergoing inguinal
hernia repaired received one LidoPAIN-SP patich or a placebo
patch 48 hours. Trial results indicated that the
LidoPAIN-SP patch did not achieve a statistically significant
effect relative to the placebo patch with respect to its primary
endpoint of self-assessed pain intensity between 4 and
24 hours. In addition, statistical significance was not
achieved in the trial’s co-primary endpoint of patient use
of “rescue” medication, i.e. systemically-delivered
analgesics used to alleviate pain. The initial analyses of the
trial data demonstrated that the total amount of pain from
4-24 hours as measured by the area under the curve had a p
value of approximately 0.4; and co-primary endpoint rescue
medication use also from 4-24 hours had a p value of
approximately 0.09. Both treatment groups showed an analgesic
effect with greater analgesic response in the active group. The
product was well tolerated in both treatment groups.
Current Clinical Initiatives. We pursued an
aggressive program of detailed statistical analyses to determine
the impact of the findings in conjunction with other data
generated from the trial in order to determine what changes in
the Phase III trial design could be made to improve the
likelihood of a positive result in a subsequent trial. This
trial allowed the subcutaneous infiltration of intra-operative
lidocaine by the surgeon just prior to the closure of the skin.
Such infiltration was not permitted in our earlier Phase II
clinical trial . The post hoc analysis of the data indicated
that the patient’s perceived pain intensity score was
directly influenced by the subcutaneous lidocaine infiltrated by
the surgeon making it more difficult to show an analgesic effect
with the LidoPAIN-SP patch. We also determined that the choice
of anesthetic technique affected the patients’ pain scores.
Patients given general anesthesia showed less of an analgesic
response than those given spinal anesthesia. In addition, the
endpoint of analgesic rescue reached statistical significance
for certain time points during the course of the study. Reduced
analgesic consumption is a primary clinical benefit sough for
this product.
A second pivotal trial with LidoPAIN-SP patch will be initiated
during the first half 2007. From the analyses of this
trial’s data a new Phase III pivotal protocol is
intended to be conducted in the United States and Europe. This
clinical trial in post-operative inguinal hernia repair patients
will use the same overall study design and methodology as in
previous LidoPAIN-SP patch trials. However, obese (Body Mass
Index >30 kg/m2) patients and subcutaneous lidocaine
infiltration at skin closure will not be allowed in this
upcoming trial.
Back
Pain
In the United States, 80% of the U.S. population will
experience significant back pain at some point. Back pain ranks
second only to headaches as the most frequent pain people
experience. It is the leading reason for visits to neurologists
and orthopedists and the second most frequent reason for
physician visits overall. Both acute and chronic back pain are
typically treated with NSAIDs, muscle relaxants or opioid
analgesics. All of these drugs can subject the patient to
systemic toxicity, significant adverse side effects and drug to
drug interactions.
LidoPAIN BP. LidoPAIN BP is a prescription
analgesic non-sterile patch designed to provide sustained
topical delivery of lidocaine for the treatment of acute or
recurrent lower back pain of moderate severity of less than
three months duration. The LidoPAIN BP patch contains
140 mg of lidocaine in a 19.0% concentration, is intended
to be applied once daily and can be worn for a continuous
24-hour
period. The patch’s adhesive is strong enough to permit a
patient to move and conduct normal daily activities but can be
removed easily.
If approved, we believe LidoPAIN BP would offer the following
favorable attributes:
|
|
|
|
•
|
safety and ease of use;
|
|
|
•
|
reduced need for treatment with NSAIDs, muscle relaxants and
narcotic analgesics;
|
|
|
•
|
once daily administration;
|
61
|
|
|
|
•
|
minimal adverse side effects; and
|
|
|
•
|
no drug to drug interactions.
|
LidoPAIN BP is designed to treat acute or recurrent lower back
pain. As part of our strategic alliance with Endo, we licensed
to Endo certain of our patents to enable Endo to develop a patch
for the treatment of chronic lower back pain. The significant
differences between LidoPAIN BP and Endo’s product,
Lidoderm, are as follows:
|
|
|
|
•
|
LidoPAIN BP is designed for
24-hour use
whereas Lidoderm is approved for
12-hour use;
|
|
|
•
|
LidoPAIN BP is made with a stronger adhesive;
|
|
|
•
|
LidoPAIN BP contains a higher concentration of lidocaine
(19.0% v. 5.0%); and
|
|
|
•
|
LidoPAIN BP is designed to provide earlier onset of action.
|
Clinical Development. In May 2001, we
initiated a placebo-controlled dose-response Phase IIa
clinical trial in the United States. In this clinical trial, we
tested two dosage formulations of LidoPAIN BP (70mg or 140mg
Lidocaine) compared to placebo. Each patch was applied once
daily for three days to 43 subjects with acute lower back pain
of at least moderate intensity. Subjects abstained from other
analgesics and other therapeutic regimens.
We completed the analysis of this clinical trial in August 2003.
The primary endpoint was pain intensity measured by a 5-point
numerical pain scale where 0 indicated no pain and 5 indicated
severe pain. Pain measurements were made at various times over
the three-day duration of the trial. We assessed a number of
secondary endpoints, including pain relief, muscle stiffness and
global satisfaction. The trial demonstrated a dose-related
statistically significant reduction in back pain intensity and
muscle stiffness as well as increase in pain relief from the
initiation of the trial.
In January 2002, we initiated a double-blind, placebo-controlled
Phase IIb clinical trial in three centers in the United
States. In this clinical trial, we tested a LidoPAIN BP patch
measuring 150 sq. cm. with a 19.0% concentration of lidocaine.
Each patch was applied once daily for three days to 198 subjects
with acute lower back pain of at least moderate intensity.
Subjects abstained from other analgesics and other therapeutic
regimens.
Although the results at two of the three centers in this study
did indicate that LidoPAIN BP had a greater analgesic effect as
compared to the placebo control, the results at a third center
were contradictory. At that center, the trial subjects who
received placebo reported an analgesic effect that exceeded the
analgesic effect reported by the subjects receiving LidoPAIN BP.
After the trial, our consultant concluded that the unusually
large placebo effect reported at this center most likely
resulted because many of the subjects may have been concerned
that a failure to report an analgesic effect would result in a
loss of the stipend offered as compensation for participation in
the trial. Due to the results reported at this center, this
clinical trial did not demonstrate a statistically significant
analgesic effect.
Current Clinical Initiatives. Based on the
results from the Phase I and Phase II clinical trials,
we are designing a new pivotal Phase III clinical trial in
acute musculoskeletal low back pain, which is expected to
commence in the second half of 2007. Our new trial will be
designed to address the issues raised in previous Phase IIb
clinical trial. The trial will be longer and will have more
stringent enrollment criteria. Under our strategic alliance with
Endo, we remain responsible for the development of LidoPAIN BP,
including all clinical trials and regulatory submissions. We are
requesting an End of Phase II meeting with the FDA for the
first half of 2007 to discuss non-clinical and clinical issues
involving the LidoPAIN-BP program.
Our
Strategic Alliances
During 2003, the Company entered into two strategic alliances,
the first in July 2003 with Adolor Corporation
(“Adolor”) for the development and commercialization
of certain products, including LidoPAIN SP in North America, and
the second in December 2003 with Endo Pharmaceuticals, Inc.
(“Endo”) for the worldwide commercialization of
LidoPAIN BP. On October 27, 2006, we were informed of the
decision by Adolor to discontinue its licensing agreement with
the Company for LidoPAIN SP. As a result, we now have the full
worldwide development and commercialization rights to the
product candidate. We have received a total of
$10.5 million in upfront nonrefundable license and
milestone fees in connection with these agreements. In
62
connection with the merger with Maxim Pharmaceuticals Inc.
(“Maxim”) on January 4, 2006, we acquired a
license agreement with Myriad Genetics, Inc.
(“Myriad”) under which we licensed our MX90745 series
of caspase-inducer anti-cancer compounds to Myriad. Myriad has
initiated clinical trials for MPC6827, or
Azixatm,
for the treatment of brain cancer and other solid tumors. Under
the terms of the agreement, Myriad is responsible for the
worldwide development and commercialization of any drug
candidates from the series of compounds. The agreement requires
that Myriad make licensing, research and milestone payments to
the EpiCept assuming the successful commercialization of a
compound for the treatment of cancer, as well as pay a royalty
on product sales. We are eligible to receive an additional
$106.5 million in milestone payments under the above
mentioned relationships and, upon receipt of appropriate
regulatory approvals, we are entitled to royalties based on net
sales of products. There is no assurance that any of these
additional milestones will be earned or any royalties paid. Our
ability to generate additional revenue in the future will depend
on our ability to meet development or regulatory milestones
under our existing license agreements that trigger additional
payments, to enter into new license agreements for other
products or territories, and to receive regulatory approvals
for, and successfully commercialize, our product candidates
either directly or through commercial partners.
Endo
In December 2003, we entered into a license agreement with Endo
under which we granted Endo (and its affiliates) the exclusive
(including as to us and our affiliates) worldwide right to
commercialize LidoPAIN BP. We also granted Endo worldwide rights
to use certain of our patents for the development of certain
other non-sterile, topical lidocaine patches, including
Lidoderm, Endo’s non-sterile topical lidocaine-containing
patch for the treatment of chronic lower back pain. Upon the
execution of the Endo agreement, we received a non-refundable
payment of $7.5 million, and we may receive payments of up
to $52.5 million upon the achievement of various milestones
relating to product development, regulatory approval and
commercial success for both our LidoPAIN BP product and
Endo’s own back pain product, so long as, in the case of
Endo’s product candidate, our patents provide protection
thereof. We will also receive royalties from Endo based on the
net sales of LidoPAIN BP. These royalties are payable until
generic equivalents to the LidoPAIN BP product are available or
until expiration of the patents covering LidoPAIN BP, whichever
is sooner. We are also eligible to receive milestone payments
from Endo of up to approximately $30.0 million upon the
achievement of specified regulatory and net sales milestones of
Lidoderm, Endo’s chronic lower back pain product candidate,
so long as our patents provide protection thereof. The future
amount of milestone payments we are eligible to receive under
the Endo agreement is $82.5 million. There is no certainty
that any of these milestones will be achieved or any royalty
earned.
We remain responsible for continuing and completing the
development of LidoPAIN BP, including conducting all clinical
trials (and supplying the clinical products necessary for those
trials) and the preparation and submission of the NDA in order
to obtain regulatory approval for LidoPAIN BP. We may
subcontract with third parties for the manufacture and supply of
LidoPAIN BP. Endo is conducting Phase II clinical trials
for its Lidoderm patch and remains responsible for continuing
and completing the development, including conducting all
clinical trials (and supplying the clinical products necessary
for those trials) in connection with that product candidate.
In the event that we have obtained regulatory approval of
LidoPAIN BP in a particular country and Endo fails to
commercialize LidoPAIN BP in that country within three years
from the date on which EpiCept receives final regulatory
approval in the United States, then the license granted to Endo
relating to the commercialization of LidoPAIN BP in that country
terminates, and we will have the right to commercialize or
license the product in that country. In that event, we will be
required to pay Endo a royalty on the net sales of LidoPAIN BP
in any such country.
At our option, within 30 days after our first filing of an
NDA (or foreign equivalent) for LidoPAIN BP, we have the right
to negotiate a co-promotion arrangement with Endo in any country
in which such filing has been made. However, neither we nor Endo
is under any obligation to enter into any such arrangement.
The license terminates upon the later of the conclusion of the
royalty term, on a
country-by-country
basis, and the expiration of the last applicable our patent
covering licensed Endo product candidates on a
country-by-country
basis. Either Endo or we may terminate the agreement upon an
uncured material breach by the other or, subject to the relevant
bankruptcy laws, upon a bankruptcy event of the other.
63
Myriad
In November 2003, Maxim entered into an agreement with Myriad
under which it licensed the MX90745 series of caspase-inducer
anti-cancer compounds to Myriad. Under the terms of the
agreement, Maxim granted to Myriad a research license to perform
Myriad’s obligations during the Research Term (as defined
in the agreement) with a non-exclusive, worldwide, royalty-free
license, without the right to sublicense the technology. Myriad
is responsible for the worldwide development and
commercialization of any drug candidates from the series of
compounds. Maxim also granted to Myriad a worldwide royalty
bearing development and commercialization license with the right
to sublicense the technology. The agreement requires that Myriad
make licensing, research and milestone payments to Maxim
totaling up to $27 million, of which $3 million was
paid and recognized as revenue prior to the merger on
January 4, 2006, assuming the successful commercialization
of the compound for the treatment of cancer, as well as pay a
royalty on product sales. In September 2006, Myriad announced
positive clinical trial results for Azixa (MPC6827) and expects
to initiate a Phase II clinical trial for the drug during
the fourth quarter of 2006, which will trigger a milestone
payment to us. Following the merger with Maxim, we assumed
Maxim’s rights and obligations under this license agreement.
Adolor
In July 2003, we entered into a license agreement with Adolor
under which we granted Adolor the exclusive right to
commercialize a sterile topical patch containing an analgesic
alone or in combination, including without limitation, LidoPAIN
SP, throughout North America. Upon the execution of the Adolor
agreement, we received a non-refundable payment of
$2.5 million, which has been deferred and is being
recognized as revenue ratably over the estimated product
development period. In September 2005, we received a milestone
payment of $0.5 million from Adolor in connection with
Adolor’s initiation of a U.S. Phase II trial of
LidoPAIN SP. On October 27, 2006, the Company was informed
of the decision by Adolor to discontinue its licensing agreement
with us for LidoPAIN SP, its sterile prescription analgesic
patch designed to provide sustained topical delivery of
lidocaine to a post-surgical or post-traumatic sutured wound. As
a result, we now have the full worldwide development and
commercialization rights to the product candidate.
Manufacturing
We have no in-house manufacturing capabilities. We intend to
outsource all of our manufacturing activities for the
foreseeable future. We believes that this strategy will enable
us to direct operational and financial resources to the
development of our product candidates rather than diverting
resources to establishing a manufacturing infrastructure.
We have entered into arrangements with qualified third parties
for the formulation and manufacture of our clinical supplies. We
intend to enter into additional written supply agreements in the
future and are currently in negotiations with several potential
suppliers. We generally purchase our supplies from current
suppliers pursuant to purchase orders. We plan to use a single,
separate third party manufacturer for each of its product
candidates for which it is responsible for manufacturing. In
some cases, the responsibility to manufacture product, or to
identify suitable third party manufacturers, may be assumed by
our licensees. We cannot assure you that its current
manufacturers can successfully increase their production to meet
full commercial demand. We believe that there are several
manufacturing sources available to it, including its current
manufacturers, which can meet our commercial supply requirements
on commercially reasonable terms. We will continue to look for
and secure the appropriate manufacturing capabilities and
capacity to ensure commercial supply at the appropriate time.
Sales and
Marketing
We do not currently have internal sales or marketing
capabilities. In order to commercially market our product
candidates if we obtain regulatory approval, we must either
develop an internal sales and marketing infrastructure or
collaborate with third parties with sales and marketing
expertise. We have retained full rights to commercialize
Ceplene, EpiCept
NP-1, and
LidoPAIN SP worldwide. In addition, we have granted Myriad
exclusive worldwide commercialization rights, with rights to
sublicense, for MPC 6827 We have also granted Endo exclusive
worldwide marketing and commercialization rights for LidoPAIN BP
but have also retained the right to negotiate with Endo
64
co-promotion rights for LidoPAIN BP worldwide. We will likely
market our products in international markets outside of North
America through collaborations with third parties. We intend to
make decisions regarding internal sales and marketing of our
product candidates on a
product-by-product
and
country-by-country
basis.
Intellectual
Property
Our commercial success will depend in part on obtaining and
maintaining patent protection and trade secret protection of our
technologies and drug candidates as well as successfully
defending these patents against third-party challenges. We have
various compositions of matter and use patents, which have
claims directed to our product candidates or methods of their
use. Our patent policy is to retain and secure patents for the
technology, inventions and improvements related to our core
portfolio of product candidates. We currently own eighty one
U.S. and international patents. EpiCept also relies on trade
secrets, technical know-how and continuing innovation to develop
and maintain our competitive position.
The following is a summary of the patent position relating to
our four late-stage product candidates:
Ceplene — The intellectual property protection
surrounding our histamine technology includes
26 United States patents issued or allowed, with
patents issued or pending in the international markets
concerning specific therapeutic areas or manufacturing. Claims
include the therapeutic administration of histamine or any
H2
receptor agonist in the treatment of cancer, infectious diseases
and other diseases, either alone or in combination therapies,
the novel synthetic method for the production of
pharmaceutical-grade histamine dihydrochloride, the mechanism of
action including the binding receptor and pathway, and the rate
and route of administration.
EpiCept
NP-1 —
We own a U.S. patent with claims directed to a formulation
containing a combination of amitriptyline and ketamine, which
can be used as a treatment for the topical relief of pain,
including neuropathic pain, that expires in August 2021. We also
have a license to additional patents, which expire in September
2015 and May 2018, and which have claims directed to topical
uses of tricyclic antidepressants, such as amitriptyline, and
NMDA antagonists, such as ketamine, as treatments for relieving
pain, including neuropathic pain. Additional foreign patent
applications are pending related to EpiCept
NP-1 in many
major pharmaceutical markets outside the United States.
LidoPAIN SP — We own two U.S. patents that
have claims directed to the topical use of a local anesthetic or
salt thereof, such as lidocaine, for the prevention or relief of
pain from surgically closed wounds, in a hydrogel patch, which
expire in October 2019. Additionally, we own a pending
U.S. patent application that is directed to a breathable,
sterile patch that can be used to treat pain caused by various
types of wounds, including surgically closed wounds. We have
foreign patent applications pending relating to LidoPAIN SP in
many major pharmaceutical markets outside the United States.
LidoPAIN BP — We own a U.S. patent that
has claims directed to the use and composition of a patch
containing a local anesthetic, such as lidocaine, to topically
treat back pain, myofascial pain and muscular tensions, which
expires in July 2016. Equivalent foreign patents have been
granted in many major European pharmaceutical markets.
We also seek to protect our proprietary information by requiring
our employees, consultants, contractors, outside partners and
other advisers to execute, as appropriate, nondisclosure and
assignment of invention agreements upon commencement of their
employment or engagement. We also require confidentiality or
material transfer agreements from third parties that receive our
confidential data or materials.
We also rely on trade secrets to protect our technology,
especially where we do not believe patent protection is
appropriate or obtainable. However, trade secrets are difficult
to protect. While we use reasonable efforts to protect our trade
secrets, our employees, consultants, contractors, partners and
other advisors may unintentionally or willfully disclose
information to competitors. Enforcing a claim that a third party
illegally obtained and is using trade secrets is expensive and
time consuming, and the outcome is unpredictable. In addition,
courts outside the United States are sometimes less willing to
protect trade secrets. Moreover, our competitors may
independently develop equivalent knowledge, methods and know-how.
65
The pharmaceutical, biotechnology and other life sciences
industries are characterized by the existence of a large number
of patents and frequent litigation based upon allegations of
patent infringement. While our drug candidates are in clinical
trials, and prior to commercialization, we believe our current
activities fall within the scope of the exemptions provided by
35 U.S.C. Section 271(e) in the United States and
Section 55.2(1) of the Canadian Patent Act, each of which
covers activities related to developing information for
submission to the FDA and its counterpart agency in Canada. As
our drug candidates progress toward commercialization, the
possibility of an infringement claim against us increases. While
we attempt to ensure that our drug candidates and the methods we
employ to manufacture them do not infringe other parties’
patents and other proprietary rights, competitors or other
parties may assert that we infringe on their proprietary rights.
For a discussion of the risks associated with our intellectual
property, see Item 1A. “Risk Factors — Risks
Relating to Intellectual Property.”
License
Agreements
We have in the past licensed and will continue to license
patents from collaborating research groups and individual
inventors.
Cassel
In October 1999, we acquired from Dr. R. Douglas Cassel
certain patent applications relating to technology for the
treatment of surgical incision pain. We will pay Dr. Cassel
royalties based on the net sales of any of our products for the
treatment of pain associated with surgically closed wounds,
after deducting the amount of consulting fees we paid him
pursuant to an amendment to the license agreement signed in
2003, which has since lapsed. The royalty obligations will
terminate upon the expiration of the last to expire acquired
patent. As part of the royalty arrangement, we have engaged
Dr. Cassel as a consultant, for which he is paid on a per
diem basis. Dr. Cassel provides us with general scientific
consulting services, particularly with respect to the
development and commercialization of LidoPAIN SP.
Dr. Cassel has also granted us an option to obtain, on
mutually agreeable terms, an exclusive, worldwide license to any
technology discovered by Dr. Cassel outside of his
performance of services for us.
Epitome
In August 1999, we entered into a sublicense agreement with
Epitome Pharmaceuticals Limited under which EpiCept has an
exclusive license to certain patents for the topical use of
tricyclic anti-depressants and NMDA antagonists as topical
analgesics for neuralgia. This technology has been incorporated
into EpiCept
NP-1. We
have been granted worldwide rights to make, use, develop, sell
and market products utilizing the licensed technology in
connection with passive dermal applications. We are obligated to
make payments to Epitome upon achievement of specified
milestones and to pay royalties based on annual net sales
derived from the products incorporating the licensed technology.
At the end of each year in which there has been no commercially
sold products, we will be obligated to pay to Epitome a
maintenance fee that is equal to twice the fee paid in the
previous year, or Epitome will have the option to terminate the
contract. The sublicense terminates upon the expiration of the
last to expire licensed patents. The sublicense may be
terminated earlier under specified circumstances, such as
breaches, lack of commercial feasibility and regulatory issues.
We paid a maintenance fee of $0.2 and $0.1 million in 2005
and 2004, respectively. Discussions to amend various terms of
the sublicense agreement are ongoing.
Government
Regulation
United
States
The FDA and comparable state and local regulatory agencies
impose substantial requirements upon the clinical development,
manufacture, marketing and distribution of drugs. These agencies
and other federal, state and local entities regulate research
and development activities and the testing, manufacture, quality
control, safety, effectiveness, labeling, storage, record
keeping, approval, advertising and promotion of our product
candidates. In the United States, the FDA regulates drugs under
the Federal Food, Drug, and Cosmetic Act, (“FFDCA”),
and
66
implementing regulations. The process required by the FDA before
our product candidates may be marketed in the United States
generally involves the following:
|
|
|
|
•
|
completion of extensive pre-clinical laboratory tests,
pre-clinical animal studies and formulation studies all
performed in accordance with the FDA’s good laboratory
practice (“GLP”), regulations;
|
|
|
•
|
submission to the FDA of an Investigational New Drug
(“IND”) application that must become effective before
clinical trials may begin;
|
|
|
•
|
performance of adequate and well-controlled clinical trials to
establish the safety and efficacy of the product candidate for
each proposed indication;
|
|
|
•
|
submission of an NDA to the FDA;
|
|
|
•
|
satisfactory completion of an FDA pre-approval inspection of the
manufacturing facilities at which the product is produced to
assess compliance with current GMP, or cGMP,
regulations; and
|
|
|
•
|
FDA review and approval of the NDA prior to any commercial
marketing, sale or shipment of the drug.
|
The testing and approval process requires substantial time,
effort and financial resources, and we cannot be certain that
any approvals for our product candidates will be granted on a
timely basis, if at all.
Pre-clinical Activities. Pre-clinical
activities include laboratory evaluation of product chemistry,
formulation and stability, as well as studies to evaluate
toxicity in animals. The results of pre-clinical tests, together
with manufacturing information and analytical data, are
submitted as part of an IND application to the FDA. The IND
automatically becomes effective 30 days after receipt by
the FDA, unless the FDA, within the
30-day time
period, raises concerns or questions about the conduct of the
clinical trial, including concerns that human research subjects
will be exposed to unreasonable health risks. In such a case,
the IND sponsor and the FDA must resolve any outstanding
concerns before the clinical trial can begin. Our submission of
an IND, or those of our collaborators, may not result in FDA
authorization to commence a clinical trial. A separate
submission to an existing IND must also be made for each
successive clinical trial conducted during product development,
and the FDA must grant permission before each clinical trial can
begin. Further, an independent institutional review board
(“IRB”), for each medical center proposing to conduct
the clinical trial must review and approve the plan for any
clinical trial before it commences at that center, and it must
monitor the study until completed. The FDA, the IRB or the
sponsor may suspend a clinical trial at any time on various
grounds, including a finding that the subjects or patients are
being exposed to an unacceptable health risk. Clinical testing
also must satisfy extensive Good Clinical Practice
(“GCP”), regulations and regulations for informed
consent of subjects.
Clinical Trials. For purposes of NDA
submission and approval, clinical trials are typically conducted
in the following three sequential phases, which may overlap:
|
|
|
|
•
|
Phase I: Studies are initially conducted in a
limited population to test the drug candidate for safety, dose
tolerance, absorption, metabolism, distribution and excretion in
healthy humans or, on occasion, in subjects. In some cases, a
sponsor may decide to run what is referred to as a
“Phase Ib” evaluation, which is a second
safety-focused Phase I clinical trial typically designed to
evaluate the impact of the drug candidate in combination with
currently approved drugs.
|
|
|
•
|
Phase II: Studies are generally conducted
in a limited patient population to identify possible adverse
effects and safety risks, to determine the efficacy of the drug
candidate for specific targeted indications and to determine
dose tolerance and optimal dosage. Multiple Phase II
clinical trials may be conducted by the sponsor to obtain
information prior to beginning larger and more expensive
Phase III clinical trials. In some instances, a sponsor may
decide to run what is referred to as a
“Phase IIa” clinical trial, which is designed to
provide dose-ranging and additional safety and pharmaceutical
data. In other cases, a sponsor may decide to run what is
referred to as a “Phase IIb” evaluation, which is
a second, confirmatory Phase II clinical trial that could,
if positive and accepted by the FDA, serve as a pivotal clinical
trial in the approval of a drug candidate.
|
|
|
•
|
Phase III: These are commonly referred to
as pivotal studies. When Phase II clinical trials
demonstrate that a dose range of the drug candidate is effective
and has an acceptable safety profile, Phase III clinical
trials are undertaken in large patient populations to further
evaluate dosage, to provide substantial evidence
|
67
|
|
|
|
|
of clinical efficacy and to further test for safety in an
expanded and diverse patient population at multiple,
geographically dispersed clinical trial sites.
|
In some cases, the FDA may give conditional approval of an NDA
for a drug candidate on the sponsor’s agreement to conduct
additional clinical trials to further assess the drug’s
safety and effectiveness after NDA approval. Such post-approval
trials are typically referred to as Phase IV clinical
trials.
New Drug Application (“NDA”). The
results of drug candidate development, pre-clinical testing,
chemistry and manufacturing controls and clinical trials are
submitted to the FDA as part of an NDA. The NDA also must
contain extensive manufacturing information. Once the submission
has been accepted for filing, by law the FDA has 180 days
to review the application and respond to the applicant. The
review process is often significantly extended by FDA requests
for additional information or clarification. The FDA may refer
the NDA to an advisory committee for review, evaluation and
recommendation as to whether the application should be approved.
The FDA is not bound by the recommendation of an advisory
committee, but it generally follows such recommendations. The
FDA may deny approval of an NDA if the applicable regulatory
criteria are not satisfied, or it may require additional
clinical data or an additional pivotal Phase III clinical
trial. Even if such data is submitted, the FDA may ultimately
decide that the NDA does not satisfy the criteria for approval.
Data from clinical trials are not always conclusive and the FDA
may interpret data differently than we do. Once issued, the FDA
may withdraw drug approval if ongoing regulatory requirements
are not met or if safety problems occur after the drug reaches
the market. In addition, the FDA may require testing, including
Phase IV clinical trials, and surveillance programs to
monitor the effect of approved products that have been
commercialized, and the FDA has the power to prevent or limit
further marketing of a drug based on the results of these
post-marketing programs. Drugs may be marketed only for the
approved indications and in accordance with the provisions of
the approved label. Further, if there are any modifications to
the drug, including changes in indications, labeling or
manufacturing processes or facilities, we may be required to
submit and obtain FDA approval of a new NDA or NDA supplement,
which may require us to develop additional data or conduct
additional pre-clinical studies and clinical trials.
Satisfaction of FDA regulations and requirements or similar
requirements of state, local and foreign regulatory agencies
typically takes several years, and the actual time required may
vary substantially based upon the type, complexity and novelty
of the product or disease. Government regulation may delay or
prevent marketing of drug candidates for a considerable period
of time and impose costly procedures upon our activities. The
FDA or any other regulatory agency may not grant approvals for
new indications for our drug candidates on a timely basis, if at
all. Even if a drug candidate receives regulatory approval, the
approval may be significantly limited to specific usages,
patient populations and dosages. Further, even after regulatory
approval is obtained, later discovery of previously unknown
problems with a drug may result in restrictions on the drug or
even complete withdrawal of the drug from the market. Delays in
obtaining, or failures to obtain, regulatory approvals for any
of our drug candidates would harm its business. In addition, we
cannot predict what additional governmental regulations may
arise from future U.S. governmental action.
Any drugs manufactured or distributed by us or its collaborators
pursuant to FDA approvals are subject to continuing regulation
by the FDA, including record keeping requirements and reporting
of adverse experiences associated with the drug. Drug
manufacturers and their subcontractors are required to register
their establishments with the FDA and certain state agencies and
are subject to periodic unannounced inspections by the FDA and
certain state agencies for compliance with ongoing regulatory
requirements, including cGMPs, which impose certain procedural
and documentation requirements upon us and our third-party
manufacturers. Failure to comply with the statutory and
regulatory requirements can subject a manufacturer to potential
legal or regulatory action, such as warning letters, suspension
of manufacturing, seizure of product, injunctive action or civil
penalties. We cannot be certain that we or our present or future
third-party manufacturers or suppliers, will be able to comply
with the cGMP regulations and other ongoing FDA regulatory
requirements. If our present or future third-party manufacturers
or suppliers are not able to comply with these requirements, the
FDA may halt EpiCept’s clinical trials, require EpiCept to
recall a drug from distribution, or withdraw approval of the NDA
for that drug.
The FDA closely regulates the post-approval marketing and
promotion of drugs, including standards and regulations for
direct-to-consumer
advertising, off-label promotion, industry-sponsored scientific
and educational activities and promotional activities involving
the Internet. A company can make only those claims relating to
68
safety and efficacy that are approved by the FDA. Failure to
comply with these requirements can result in adverse publicity,
warning letters, corrective advertising and potential civil and
criminal penalties. Physicians may prescribe legally available
drugs for uses that are not described in the drug’s
labeling and that differ from those tested by us and approved by
the FDA. Such off-label uses are common across medical
specialties. Physicians may believe that such off-label uses are
the best treatment for many patients in varied circumstances.
The FDA does not regulate the behavior of physicians in their
choice of treatments. The FDA does, however, impose stringent
restrictions on manufacturers’ communications regarding
off-label use.
Section 505(b)(2) Drug Applications. Once
an FDA-approved new drug is no longer patent-protected, another
company may sponsor a new indication, a new use or put the drug
in a new dosage form. Each new indication from a different
company requires an NDA filing. As an alternate path to FDA
approval for new or improved formulations of previously approved
products, a company may file a Section 505(b)(2) NDA.
Section 505(b)(2) permits the filing of an NDA where at
least some of the information required for approval comes from
studies not conducted by or for the applicant and for which the
applicant has not obtained a right of reference. However, this
NDA does not have to contain all of the information or data that
was submitted with the original NDA because of the FDA’s
prior experience with the drug product. An original NDA for an
FDA-approved new drug would have required numerous animal
toxicology studies that have been reviewed by the FDA. These can
be referenced in the 505(b)(2) NDA submitted by the new
applicant. Many studies in humans that support the safety of the
drug product may be in the published literature. The FDA allows
the new sponsor company to submit these publications to support
its 505(b)(2) NDA. By allowing the new sponsor company to use
this information, the time and cost required to obtain approval
for a drug product for the new indication can be greatly
reduced. The FDA may also require companies to perform
additional studies or measurements to support the change from
the approved product. The FDA may then approve the new product
candidate for all or some of the label indications for which the
referenced product has been approved, as well as for any new
indication sought by the Section 505(b)(2) applicant.
To the extent that the Section 505(b)(2) applicant is
relying on studies conducted for an already approved product,
the applicant is required to certify to the FDA concerning any
patents listed for the approved product in the FDA’s Orange
Book publication. Specifically, the applicant must certify that:
(i) the required patent information has not been filed;
(ii) the listed patent has expired; (iii) the listed
patent has not expired, but will expire on a particular date and
approval is sought after patent expiration; or (iv) the
listed patent is invalid or will not be infringed by the new
product. If the applicant does not challenge the listed patents,
the Section 505(b)(2) application will not be approved
until all the listed patents claiming the referenced product
have expired. The Section 505(b)(2) application also will
not be approved until any non-patent exclusivity, such as
exclusivity for obtaining approval of a new chemical entity,
listed in the Orange Book for the referenced product has expired.
Foreign
Regulation
Whether or not EpiCept obtains FDA approval for a product, we
must obtain approval of a product by the comparable regulatory
authorities of foreign countries before we can commence clinical
trials or marketing of the product in those countries. The
approval process varies from country to country, and the time
may be longer or shorter than that required for FDA approval.
The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement also vary greatly
from country to country. Although governed by the applicable
country, clinical trials conducted outside of the United States
typically are administered with the three-phase sequential
process that is discussed above under “Government
Regulation — United States.” However, the foreign
equivalent of an IND is not a prerequisite to performing pilot
studies or Phase I clinical trials.
Under European Union regulatory systems, we may submit marketing
authorization applications either under a centralized or
decentralized procedure. The centralized procedure, which is
available for medicines produced by biotechnology or which are
highly innovative, provides for the grant of a single marketing
authorization that is valid for all EU member states. This
authorization is a marketing authorization application
(“MAA”). The decentralized procedure provides for
mutual recognition of national approval decisions. Under this
procedure, the holder of a national marketing authorization may
submit an application to the remaining member states. Within
90 days of receiving the applications and assessment
report, each member state must decide whether to recognize
approval. This procedure is referred to as the mutual
recognition procedure (“MRP”).
69
In addition, regulatory approval of prices is required in most
countries other than the United States. We face the risk that
the resulting prices would be insufficient to generate an
acceptable return to us or our collaborators.
Legal
Proceedings
We are not currently involved in any material legal proceedings.
Facilities
Our facilities consist of approximately 12,700 square feet
of research and office space. We lease 9,600 square feet
located at 270 Sylvan Avenue in Englewood Cliffs, New Jersey
until December 2006. During the third quarter of 2006, we
entered into a new five year lease to move our Englewood Cliffs,
New Jersey office to Tarrytown, New York. We also lease
2,766 square feet in Munich, Germany until August 2007,
with an option to renew for up to an additional three years. We
currently lease approximately 25,000 rentable square feet
of laboratory and office space in San Diego, California.
Employees
As of November 16, 2006, EpiCept’s workforce consists
of 35 full-time employees, twelve of whom hold a Ph.D. or
M.D. degrees. We have no collective bargaining agreements with
our employees and has not experienced any work stoppages. We
believe that our relations with our employees are good.
70
MANAGEMENT
Management
and Board of Directors
EpiCept has a team of experienced business executives,
scientific professionals and medical specialists. EpiCept’s
executive officers and directors, their ages and positions as of
November 27, 2006 are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position/Affiliation
|
|
John V. Talley
|
|
|
51
|
|
|
President, Chief Executive Officer
and Director
|
Robert W. Cook
|
|
|
51
|
|
|
Chief Financial
Officer — Senior Vice President, Finance and
Administration
|
Ben Tseng, Ph.D.
|
|
|
62
|
|
|
Chief Scientific Officer
|
Dov Elefant
|
|
|
39
|
|
|
Controller — Vice
President, Finance and Administration
|
Oliver Wiedemann, M.D
|
|
|
47
|
|
|
Managing Director —
Medical Affairs, EpiCept GmbH
|
Dileep Bhagwat, Ph.D., M.B.A
|
|
|
54
|
|
|
Senior Vice President,
Pharmaceutical Development
|
Michael Damask
|
|
|
58
|
|
|
Chief Medical Officer, Vice
President of Medical Affairs
|
Michael Chen
|
|
|
57
|
|
|
Vice President, Global Business
Development
|
Robert G. Savage
|
|
|
53
|
|
|
Chairman of the Board
|
Gert Caspritz, Ph.D
|
|
|
56
|
|
|
Director
|
Guy C. Jackson
|
|
|
63
|
|
|
Director
|
Gerhard Waldheim
|
|
|
57
|
|
|
Director
|
John Bedard
|
|
|
56
|
|
|
Director
|
Wayne Yetter
|
|
|
61
|
|
|
Director
|
Executive
Officers and Key Employees
John V. Talley has been EpiCept’s President, Chief
Executive Officer and a Director since October 2001.
Mr. Talley has more than 27 years of experience in the
pharmaceutical industry. Prior to joining EpiCept,
Mr. Talley was the Chief Executive Officer of Consensus
Pharmaceuticals, a biotechnology drug discovery
start-up
company that developed a proprietary peptide-based combinatorial
library screening process. Prior to joining Consensus,
Mr. Talley led Penwest Ltd.’s efforts in its spin-off
of its subsidiary Penwest Pharmaceuticals Co. in 1998 and served
as President and Chief Operating Officer of Penwest
Pharmaceuticals. Mr. Talley started his career at Sterling
Drug Inc., where he was responsible for all U.S. marketing
activities for prescription drugs, helped launch various new
pharmaceutical products and participated in the 1988 acquisition
of Sterling Drug by Eastman Kodak Co. Mr. Talley received
his B.S. in Chemistry from the University of Connecticut and
completed coursework towards an M.B.A. in Marketing from New
York University, Graduate School of Business.
Robert W. Cook has been EpiCept’s Chief Financial
Officer and Senior Vice President, Finance and Administration
since April 2004. Prior to joining EpiCept, Mr. Cook was
Vice President, Finance and Chief Financial officer of Pharmos
Corporation since January 1998 and became Executive Vice
President of Pharmos in February 2001. From May 1995 until his
appointment as Pharmos’s Chief Financial Officer, he was a
vice president in GE Capital’s commercial finance
subsidiary, based in New York. From 1977 until 1995,
Mr. Cook held a variety of corporate finance and capital
markets positions at The Chase Manhattan Bank, both in the
United States and in several overseas locations. He was named a
managing director of Chase and several of its affiliates in
January 1986. Mr. Cook received his B.S. in International
Finance from The American University, Washington, D.C.
Ben Tseng, Ph.D., has been EpiCept’s Chief
Scientific Officer since January 2006. Prior to that he was Vice
President, Research, at Maxim. Mr. Tseng joined Maxim as
Senior Director, Research in 2000. Prior to its acquisition by
Maxim in 2000, Dr. Tseng served as Vice President, Biology
for Cytovia, Inc., which he joined in 1998. Dr. Tseng also
served in executive research positions at Chugai
Biopharmaceutical, Inc. from
1995-1998
and, Genta Inc. from 1989 to 1995. Prior to joining Genta,
Dr. Tseng was a tenured Associate Adjunct Professor in the
71
Department of Medicine, faculty member of the Physiology and
Pharmacology Program, and Associate Member of the Cancer Center
at the University of California, San Diego. Dr. Tseng
received a B.A. in Mathematics from Brandeis University and a
Ph.D in Molecular Biophysics and Biochemistry from Yale
University.
Dov S. Elefant has been EpiCept’s Controller and
Vice President of Finance and Administration since April 2004.
Prior to being named EpiCept’s Controller and Vice
President of Finance and Administration, Mr. Elefant was
EpiCept’s Controller from December 1999 through September
2000, EpiCept’s Chief Financial Officer from October 2000
through January 2001 and EpiCept’s Chief Financial Officer
and Vice President of Finance and Administration from January
2001 until April 2004. From October 1998 until December 1999,
Mr. Elefant was Assistant Controller of Alteon Inc., a
publicly traded biotechnology company. Prior to that, he served
as Director of Accounting and Finance of Innapharma, Inc., a
pharmaceutical contract research organization. Mr. Elefant
received his B.S. in Accounting from the Sy Syms School of
Business of Yeshiva University in New York.
Oliver Wiedemann, M.D., joined EpiCept’s
subsidiary EpiCept GmbH in October 1998 as Director of Medical
Affairs. Since July 1999, he has been the Managing Director at
EpiCept GmbH. From January 1992 until joining EpiCept GmbH, he
was the Department Head CNS/Muscle of the Medical Department of
Sanofi Winthrop, Munich. Prior to that, Dr. Wiedemann
worked as a surgeon at the Olympiapark-Klinik, Munich. He is the
author of several scientific publications in the pain area.
Dr. Wiedemann received his Medical Doctorate Degree from
the University of Munich.
Dileep Bhagwat, Ph.D., M.B.A., has been
EpiCept’s Senior Vice President of Pharmaceutical
Development since February 2004 and has more than 20 years
of pharmaceutical experience developing and commercializing
various dosage forms. Prior to joining EpiCept in 2004,
Dr. Bhagwat worked at Bradley Pharmaceuticals, as Vice
President, Research and Development and Chief Scientific
Officer. From November 1994 through September 1999,
Dr. Bhagwat was employed at Penwest Pharmaceuticals in
various capacities, including Vice President, Scientific
Development and Regulatory Affairs and at Purdue Frederick
Research Center as Assistant Director of Pharmaceutical
Development. Dr. Bhagwat holds many U.S. and foreign
patents and has presented and published on dosage form
development and drug delivery. Dr. Bhagwat holds a B.S. in
Pharmacy from Bombay University, an M.S. and Ph.D. in Industrial
Pharmacy from St. John’s University in New York and an
M.B.A. in International Business from Pace University in New
York.
Michael C. Damask, MD, joined EpiCept in July, 2006 as
Chief Medical Officer and Vice President of Medical Affairs.
Dr. Damask brings to EpiCept over 30 years of
experience in clinical research and drug development to this
position. Prior to this, Dr. Damask was a clinical
development and medical affairs consultant for Ferring
Pharmaceuticals, a biopharmaceutical company devoted to
identifying, developing and marketing innovative products in the
fields of urology, gynecology and obstetrics, gastroenterology,
endocrinology, and osteoarthritis. Before Ferring,
Dr. Damask was a Director, Risk Benefit Management (area of
pain management) at Johnson and Johnson Pharmaceutical Research
and Development, LLC, where he was the primary liaison between
risk benefit management and internal customers. Before that, he
served as president of Damask and Associates, pharmaceutical
consulting firm where he spent 5 years conducting clinical
research. Dr. Damask also served as Senior Medical Director
at Purdue Pharma in the Clinical Research Department directing
clinical research and development programs. He was also Senior
Director for the Clinical Research and Development, Medical
Affairs, and Medical Information department at Knoll
Pharmaceuticals where he was responsible for analgesic drug
development. Dr. Damask started his pharmaceutical career
at Ohmeda Pharmaceutical Products (BOC Health Care) where he
held led many clinical research and development programs in
anesthetics, analgesics, muscle relaxants, and critical care
products. In addition to his corporate positions,
Dr. Damask had a long career in academic medicine serving
as chief resident, fellow, attending physician, and assistant
professor in the Department of Anesthesiology, College of
Physicians and Surgeons, Columbia-Presbyterian Medical Center.
Dr. Damask received his M.D. from the Chicago Medical
School and this B.A from Case Western Reserve University,
Cleveland, Ohio. He was a past recipient of the Ohmeda’s
President Award and is a member of several professional
societies and has published in many journals.
Michael Chen joined EpiCept in May 2006 as Vice President
for Global Business Development. Prior to joining us,
Mr. Chen was the Executive Vice President for Sales and
Marketing with the SpyGlass Group, a healthcare consulting
firm. From 1995 to 2004, Mr. Chen was the Executive
Director, Worldwide Licensing and Acquisitions for
Johnson & Johnson. Prior to that position,
Mr. Chen was the Vice President for Business
72
Development with Synaptic Pharmaceutical Corporation from 1993
to 1995 and the Director — Business Development with
CIBA-Geigy from 1985 to 1993. Mr. Chen received his MBA
from Harvard Business School, an S.M. in chemical engineering
from the Massachusetts Institute of Technology and a B.S. in
chemical engineering (with distinction) from Cornell University.
Board of
Directors
Robert G. Savage has been a member of EpiCept’s
Board since December 2004 and serves as the Chairman of the
Board. Mr. Savage has been a senior pharmaceutical
executive for over twenty years. He held the position of
Worldwide Chairman of the Pharmaceuticals Group at
Johnson & Johnson and was both a company officer and a
member of the Executive Committee. He also served
Johnson & Johnson in the capacity of a Company Group
Chairman and President of Ortho-McNeil Pharmaceuticals. Most
recently, Mr. Savage was President of the Worldwide
Inflammation Group for Pharmacia Corporation. He has held
multiple positions leading marketing, business development and
strategic planning at Hoffmann-La Roche and Sterling Drug.
Mr. Savage is a director of The Medicines Company, a
specialty pharmaceutical company and Noven Pharmaceuticals, a
drug delivery company. Mr. Savage received a B.S. in
Biology from Upsala College and an M.B.A. from Rutgers
University.
Gert Caspritz, Ph.D., has been a member of
EpiCept’s board since 1999 and served as EpiCept’s
Chairman from July 2002 until December 2004. Dr. Caspritz
joined TVM Capital or “TVM,” in 1999 as an Investment
Manager in the healthcare and life sciences group and has been a
General Partner since 2000. Prior to that, Dr. Caspritz
held various positions with Hoechst AG. Most recently he was
Vice President, New Technologies Licensing at Hoechst Marion
Roussel, the pharmaceutical subsidiary of Hoechst, where he had
primary global responsibility for identifying business
opportunities in the areas of biotechnology, enabling
technologies and early-stage products in both the biotech
industry and academia. Additionally, he supervised HMR’s
various venture capital investments and was a member of their
strategy teams for oncology and bone diseases and the oncology
opportunity review team. Dr. Caspritz was previously
Assistant to the Head of Hoechst’s worldwide pharmaceutical
research and established or led a number of immuno and
neuropharmacology laboratories as well as a drug discovery
group. Dr. Caspritz received degrees in Biology and
Microbiology from the University of Mainz, Germany where he
wrote his doctoral thesis.
Guy C. Jackson has been a member of EpiCept’s Board
since December 2004. In June 2003, Mr. Jackson retired from
the Minneapolis office of the accounting firm of
Ernst & Young LLP after 35 years with the firm and
one of its predecessors, Arthur Young & Company. During
his career, he served as audit partner for numerous public
companies in Ernst & Young’s New York and
Minneapolis offices. Mr. Jackson also serves as a director
and member of the audit committee of Cyberonics, Inc. and
Urologix, Inc., both medical device companies; Digi
International Inc., a technology company and Life Time Fitness,
Inc., an operator of fitness centers. Mr. Jackson received
a B.S. in Business Administration from Penn State and a M.B.A.
from the Harvard Business School.
Gerhard Waldheim has been a member of EpiCept’s
board since July 2005. Since 2000, he has co-founded and built
Petersen, Waldheim & Cie. GmbH, Frankfurt, which
focuses on private equity and venture capital fund management,
investment banking and related financial advisory services.
Biotech and pharma delivery systems are among the focal points
of the funds managed by his firm. Prior to that,
Mr. Waldheim held senior executive and executive board
positions with Citibank, RZB Bank Austria, BfG Bank in Germany
and Credit Lyonnais in Switzerland; over the years, his banking
focus covered lending, technology, controlling, investment
banking and distressed equity. Prior to that, he worked for the
McKinsey banking practice. He received an MBA from Harvard
Business School in 1974 and a JD from the Vienna University
School of Law in 1972.
John F. Bedard has been a member of EpiCept’s board
since January 2006 and prior thereto served as a member of
Maxim’s board of directors since 2004. Mr. Bedard has
been engaged as a principal in a pharmaceutical consulting
practice since 2002. Prior to that, he served in senior
management positions during a
15-year
career at Bristol-Myers Squibb, a pharmaceutical company, most
recently as Vice President, FDA Liaison and Global Strategy. In
that position, Mr. Bedard was the liaison with the FDA for
new drug development, and he was also responsible for global
development plans and registration activities for new drugs.
Before his tenure at Bristol-
73
Myers Squibb, Mr. Bedard held senior regulatory affairs
positions at Smith Kline & French Laboratories and
Ayerst Laboratories.
Wayne P. Yetter has served as a member of EpiCept’s
board of directors since January 2006, and prior thereto served
as a member of Maxim’s board of directors. Mr. Yetter
has been the Chief Executive Officer of Verispan LLC (health
care information) since September 2005. From 2003 to 2005 he was
the founder of BioPharm Advisory LLC and served on the Advisory
Board of Alterity Partners (mergers and acquisition advisory
firm) which is now part of FTN Midwest Securities. Also, from
November 2004 to September 2005, Mr. Yetter served as the
interim Chief Executive Officer of Odyssey Pharmaceuticals,
Inc., the specialty pharmaceutical division of Pliva d.d. From
September 2000 to June 2003, Mr. Yetter served as Chairman
and Chief Executive Officer of Synavant Inc. (pharmaceutical
marketing/technology services). From 1999 to 2000, he served as
Chief Operating Officer at IMS Health, Inc. (information
services for the healthcare industry). He also served as
President and Chief Executive Officer of Novartis
Pharmaceuticals Corporation, the U.S. Division of the
global pharmaceutical company Novartis Pharma AG, and as
President and Chief Executive Officer of Astra Merck.
Mr. Yetter began his career with Pfizer and later joined
Merck & Co., holding a variety of marketing and
management positions including Vice President, Marketing
Operations, responsible for global marketing functions and Vice
President, Far East and Pacific. Mr. Yetter serves on the
board of directors of Matria Healthcare (disease management) and
Noven Pharmaceuticals (drug delivery).
Scientific
and Medical Advisory Board
Our Scientific and Medical Advisory Board is composed of
individuals with expertise in clinical pharmacology, clinical
medicine and regulatory matters. Advisory board members assist
us in identifying scientific and product development
opportunities, and in reviewing with management progress of the
our projects.
Dr. Gavril Pasternak, Chief Advisor, is a recognized
authority on opioid receptor mechanisms. He has published a
substantial body of literature on the subject and he is on the
editorial boards of numerous journals related to the subjects of
neuropharmacology and pain. Dr. Pasternak is a Member and
attending Neurologist at Memorial Sloan-Kettering Cancer Center
and is Professor of Neurology and Neuroscience, Pharmacology and
Psychiatry at Cornell University Medical College and Graduate
School of Medical Sciences.
Prof. Dr. Christoph Stein is a recognized authority
in experimental and clinical pain research. He has studied
mechanisms of peripherally mediated opioid analgesia for over
16 years and has published an extensive body of literature
on this topic. He is on editorial boards of several journals
related to pain, anesthesia and analgesia. Dr. Stein is
Professor and Chairman of the Department of Anesthesiology at
Charité — Campus Benjamin Franklin, Freie
Universität Berlin, Germany, and Adjunct Professor at Johns
Hopkins University.
Bruce F. Mackler, PhD, JD, MS. Dr. Mackler received
his JD from the South Texas College of Law of the Texas A&M
University, his PhD from the University of Oregon Medical
School, his MS from Pennsylvania State University, and his BA
from Temple University. He is a member of the District of
Columbia Bar, and admitted to practice before the Federal
District and Appeals Court, and before the Supreme Court. He has
published some 100 scientific articles, abstracts and books
during his tenure as a scientist and has been an attorney in the
food and drug area for 25 years.
Dr. Howard Maibach is a dermatologist whose research
area is dermatology, dermatopharmacology and dermatotoxicology.
Dr. Maibach has published over 1900 articles on various
dermatology-related subjects and is a frequent lecturer on
various subjects related to dermatology. Dr. Maibach is
currently professor in the Department of Dermatology, School of
Medicine, at the University of California in San Francisco.
Board
Composition
Our board of directors is divided into three classes, with each
director serving a three-year term and one class being elected
at each year’s annual meeting of stockholders. A majority
of the members of our board of directors will be
“independent” of EpiCept and its management. Directors
Waldheim and Bedard are in the class of directors whose initial
term expires at the 2007 annual meeting of the stockholders.
Directors Talley and Savage are in the class of directors whose
initial term expires at the 2008 annual meeting of stockholders.
Directors Jackson, Caspritz
74
and Yetter are in the class of directors whose term expires at
the 2009 annual meeting of stockholders. This classification of
our board of directors will make it more difficult for a third
party to acquire control of our company.
Committees
of the Board
Our board of directors has established three standing
committees: the audit committee, the compensation committee and
the corporate governance and nominating committee.
Audit Committee. Our audit committee is
responsible for preparing such reports, statements or charters
as may be required by the Nasdaq National Market or federal
securities laws, as well as, among other things:
|
|
|
|
•
|
overseeing and monitoring the integrity of its financial
statements, its compliance with legal and regulatory
requirements as they relate to financial statements or
accounting matters and its internal accounting and financial
controls;
|
|
|
•
|
preparing the report that SEC rules require be included in its
annual proxy statement;
|
|
|
•
|
overseeing and monitoring its independent registered public
accounting firm’s qualifications, independence and
performance;
|
|
|
•
|
providing the board with the results of its monitoring and
recommendations; and
|
|
|
•
|
providing to the board additional information and materials as
it deems necessary to make the board aware of significant
financial matters that require the attention of the board.
|
Messrs. Jackson, Savage and Waldheim are currently members
of the audit committee, each of whom is a non-employee member of
the board of directors. Mr. Jackson serves as Chairman of
the audit committee and also qualifies as an “audit
committee financial expert,” as that term is defined under
the SEC rules implementing Section 407 of the
Sarbanes-Oxley Act. The board has determined that each member of
EpiCept’s audit committee meets the current independence
and financial literacy requirements under the Sarbanes-Oxley
Act, the Nasdaq National Market and SEC rules and regulations.
We intend to comply with future requirements to the extent they
become applicable to EpiCept.
Compensation Committee. Our compensation
committee is composed of Messrs. Savage, Bedard and
Jackson, each of whom is a non-employee member of the board of
directors. Mr. Savage serves as Chairman of our
compensation committee. Each member of EpiCept’s
compensation committee is an “outside director” as
that term is defined in Section 162(m) of the Internal
Revenue Code of 1986 and a “non-employee” director
within the meaning of
Rule 16b-3
of the rules promulgated under the Securities Exchange Act of
1934 and the rules of the Nasdaq National Market. The
compensation committee is responsible for, among other things:
|
|
|
|
•
|
reviewing and approving for the chief executive officer and
other executive officers (a) the annual base salary,
(b) the annual incentive bonus, including the specific
goals and amount, (c) equity compensation,
(d) employment agreements, severance arrangements and
change in control arrangements, and (e) any other benefits,
compensations, compensation policies or arrangements;
|
|
|
•
|
reviewing and making recommendations to the board regarding the
compensation policy for such other officers as directed by the
board;
|
|
|
•
|
preparing a report to be included in the annual proxy statement
that describes: (a) the criteria on which compensation paid
to the chief executive officer for the last completed fiscal
year is based; (b) the relationship of such compensation to
our performance; and (c) the committee’s executive
compensation policies applicable to executive officers; and
|
|
|
•
|
acting as administrator of EpiCept’s current benefit plans
and making recommendations to the board with respect to
amendments to the plans, changes in the number of shares
reserved for issuance thereunder and regarding other benefit
plans proposed for adoption.
|
Corporate Governance and Nominating
Committee. Our corporate governance and
nominating committee is composed of Messrs. Savage,
Waldheim and Yetter, each of whom is a non-employee member of
the board of directors and independent in accordance with the
applicable rules of the Sarbanes-Oxley Act and the Nasdaq
75
National Market. Mr. Savage serves as chairman of the
corporate governance and nominating committee. The corporate
governance and nominating committee is responsible for, among
other things:
|
|
|
|
•
|
reviewing board structure, composition and practices, and making
recommendations on these matters to the board;
|
|
|
•
|
reviewing, soliciting and making recommendations to the board
and stockholders with respect to candidates for election to the
board;
|
|
|
•
|
overseeing compliance by the chief executive officer and senior
financial officers with the Code of Ethics for the Chief
Executive Officer and Senior Financial Officers; and
|
|
|
•
|
overseeing compliance by employees with the Code of Business
Conduct and Ethics.
|
Code of
Ethics
We have adopted a Code of Business Conduct and Ethics that
applies to all our employees, including our chief executive
officer and chief financial officer. This Code of Business
Conduct and Ethics is designed to comply with the Nasdaq
marketplace rules related to codes of conduct. A copy of our
Code of Business Conduct and Ethics Policy may be obtained on
our website at http://www.epicept.com. We intend to post on our
website any amendments to, or waiver from, our Code of Business
Conduct and Ethics for the benefit of our principal executive
officer, principal financial officer, principal accounting
officer or controller, or persons performing a similar function,
and other named executives.
Director
Compensation
Prior to January 4, 2006 as a private company, we
reimbursed our non-employee directors for their expenses
incurred in connection with attending board and committee
meetings. In addition, each non-employee director receives
$2,500 for their attendance at each board or committee meeting
and $250 for their participation in a telephonic board or
committee meeting.
We have in the past granted non-employee directors options to
purchase EpiCept’s common stock pursuant to the terms of
its 1995 Stock Option Plan, and our board continues to have the
discretion to grant options to new and continuing non-employee
directors. In August 2005, our stockholders approved the 2005
Equity Incentive Plan, the terms of which also include the grant
of stock options to directors who are not officers or employees
of EpiCept.
As of January 4, 2006, we reimburse our non-employee
directors for their expenses incurred in connection with
attending board and committee meetings. Each board member
receives an annual retainer of $25,000 and the Chairman of the
Board receives $50,000. In addition, each non-employee director
receives $1,500 for their attendance at each board meeting and
$750 for their participation in a telephonic board meeting.
Annually, the Audit Committee chair person receives a retainer
of $8,000 and each other committee chair receives a retainer of
$4,000. In addition, each non-employee director receives $750
for their attendance at each committee meeting and $500 for
their participation in a telephonic committee meeting. We have
in the past granted non-employee directors options to purchase
our common stock pursuant to the terms of our 2005 Equity
Incentive Plan. Upon joining the board, each member receives
35,000 options and the chairman receives 100,000 options each
vesting over three years. Annually thereafter, each director and
chairperson receives 10,000 and 25,000 options, respectively
vesting over two years.
76
The following table summarizes compensation paid to board
members for the years ended December 31, 2005, 2004 and
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Robert G. Savage
|
|
$
|
14,250
|
|
|
$
|
2,500
|
|
|
$
|
—
|
|
Ernst-Gunter
Afting, M.D., Ph.D.(1)
|
|
|
11,750
|
|
|
|
9,000
|
|
|
|
11,000
|
|
Gert Caspritz, Ph.D
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mark Docherty(2)
|
|
|
12,000
|
|
|
|
9,250
|
|
|
|
5,500
|
|
Guy C. Jackson
|
|
|
13,750
|
|
|
|
2,500
|
|
|
|
—
|
|
Thorlef Spickschen, Ph.D.(3)
|
|
|
9,500
|
|
|
|
9,250
|
|
|
|
11,000
|
|
Gerhard Waldheim
|
|
|
6,750
|
|
|
|
—
|
|
|
|
—
|
|
Erik Hornnaess(4)
|
|
|
—
|
|
|
|
9,250
|
|
|
|
4,500
|
|
Reiner Ponschab, Ph.D.(5)
|
|
|
5,500
|
|
|
|
8,750
|
|
|
|
11,000
|
|
John Bedard(6)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Wayne Yetter(6)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
(1) |
|
Professor Afting resigned from the board of directors on
January 4, 2006. |
|
(2) |
|
Mr. Docherty resigned from the board of directors on
January 4, 2006. |
|
(3) |
|
Dr. Spickschen resigned from the board of directors on
January 4, 2006. |
|
(4) |
|
Mr. Hornnaess resigned from the board of directors on
December 21, 2004. |
|
(5) |
|
Dr. Ponschab resigned from the board of directors on
July 18, 2005. |
|
(6) |
|
Mr. Bedard and Mr. Yetter joined the board of
directors on January 4, 2006. |
Compensation
Committee Interlocks and Insider Participation in Compensation
Decisions
All members of the compensation committee of the Board of
Directors during the fiscal year ended December 31, 2005
were independent directors and none of them were employees or
former employees of EpiCept. During the fiscal year ended
December 31, 2005, none of our executive officers served on
the compensation committee (or equivalent), or the board of
directors, of another entity whose executive officers served on
the compensation committee of our board of directors.
Section 16
Filings
Other then Ben Tseng, TVM III Limited Partnership and TVM
IV GmbH & Co. KG, no person who, during the fiscal year
ended December 31, 2005, was a “Reporting Person”
defined as a director, officer or beneficial owner of more than
ten percent of the our common stock which is the only class of
securities of the Company registered under Section 12 of
the Securities Exchange Act of 1934 (the “Act”),
failed to file on a timely basis, reports required by
Section 16 of the Act during the most recent fiscal year.
The foregoing is based solely upon a review by us of
Forms 3 and 4 during the most recent fiscal year as
furnished to us under
Rule 16a-3(d)
under the Act, and Forms 5 and amendments thereto furnished
to the Company with respect to its most recent fiscal year, and
any representation received by us from any reporting person that
no Form 5 is required.
77
Executive
Compensation
The following table sets forth the compensation earned for
services rendered to EpiCept in all capacities by our chief
executive officer and its executive officers whose total cash
compensation exceeded $100,000 for the year ended
December 31, 2005, collectively referred to in this report
as the “named executive officers.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
Stock Underlying
|
|
|
LTIP
|
|
|
All Other
|
|
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Other
|
|
|
Stock Awards
|
|
|
Options/SARs
|
|
|
Payouts
|
|
|
Compensation
|
|
Name/Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)(1)
|
|
|
($)
|
|
|
($)
|
|
|
Jack Talley
|
|
|
2005
|
|
|
|
283,876
|
|
|
|
243,750
|
|
|
|
27,202
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
President and
|
|
|
2004
|
|
|
|
285,078
|
|
|
|
—
|
|
|
|
27,974
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Chief Executive Officer
|
|
|
2003
|
|
|
|
250,270
|
|
|
|
200,000
|
|
|
|
29,815
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,000
|
|
Robert W. Cook
|
|
|
2005
|
|
|
|
232,337
|
|
|
|
90,625
|
|
|
|
18,192
|
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Chief Financial Officer,
|
|
|
2004
|
|
|
|
155,769
|
|
|
|
20,000
|
|
|
|
9,874
|
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Senior Vice President,
|
|
|
2003
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Finance & Administration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dileep Bhagwat
|
|
|
2005
|
|
|
|
196,206
|
|
|
|
—
|
|
|
|
17,995
|
(4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Senior Vice President,
|
|
|
2004
|
|
|
|
171,731
|
|
|
|
—
|
|
|
|
9,967
|
(4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Pharmaceutical Development
|
|
|
2003
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Dov Elefant
|
|
|
2005
|
|
|
|
180,547
|
|
|
|
25,000
|
|
|
|
18,389
|
(5)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Controller, Vice President,
|
|
|
2004
|
|
|
|
181,431
|
|
|
|
—
|
|
|
|
17,693
|
(5)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Finance and Administration
|
|
|
2003
|
|
|
|
160,162
|
|
|
|
—
|
|
|
|
15,981
|
(5)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,800
|
|
Oliver Wiedemann(6)
|
|
|
2005
|
|
|
|
165,442
|
|
|
|
10,000
|
|
|
|
3,895
|
(7)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Managing Director Medical
|
|
|
2004
|
|
|
|
185,448
|
|
|
|
—
|
|
|
|
4,575
|
(7)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Affairs, EpiCept GmbH
|
|
|
2003
|
|
|
|
162,287
|
|
|
|
—
|
|
|
|
4,081
|
(7)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
(1) |
|
Represents the number of shares of common stock on an as
converted basis. |
|
(2) |
|
Includes premiums for health benefits, life and disability
insurance and automobile allowance paid on behalf of
Mr. Talley. |
|
(3) |
|
Mr. Cook joined EpiCept in April 2004. Includes premiums
for health benefits and for life and disability insurance paid
on behalf of Mr. Cook. |
|
(4) |
|
Dr. Bhagwat joined EpiCept in February 2004. Includes
premiums for health benefits and for life and disability
insurance paid on behalf of Dr. Bhagwat. |
|
(5) |
|
Includes premiums for health benefits and for life and
disability insurance paid on behalf of Mr. Elefant. |
|
(6) |
|
Dr. Wiedemann’s compensation was translated from euros
to the U.S. dollar using the exchange rate as of
December 31, 2005, 2004 and 2003. |
|
(7) |
|
Includes premiums for health benefits and for life and
disability insurance paid on behalf of Dr. Wiedemann. |
Option
Grants in Last Fiscal Year (2005)
We did not grant any stock options to any of the named executive
officers during 2005.
Option
Grants in 2006
Through November 1, 2006, we granted 1.6 million stock
options to the named executive officers.
78
Aggregate
Option Exercises in Last Fiscal Year (2005) and Values at
December 31, 2005
The following table sets forth information concerning
exercisable and unexercisable stock options held by the named
executive officers at December 31, 2005. The value of
unexercised
in-the-money
options is based on a fair value at December 31, 2005 of
$5.39 per share less the actual exercise prices. All
options were granted under our 1995 Stock Option Plan, as
amended. Except as otherwise noted, these options vest over
three years and otherwise generally conform to the terms of the
1995 Stock Option Plan, as amended.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
Value of Unexercised
|
|
|
|
|
|
|
|
|
|
Underlying Unexercised
|
|
|
in-the-Money
|
|
|
|
|
|
|
|
|
|
Options at
|
|
|
Options at
|
|
|
|
Shares Acquired
|
|
|
Value
|
|
|
December 31, 2005 (#)
|
|
|
December 31, 2005 ($)(1)
|
|
Name
|
|
on Exercise
|
|
|
Realized ($)
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
John V. Talley
|
|
|
—
|
|
|
$
|
—
|
|
|
|
168,500
|
|
|
$
|
—
|
|
|
$
|
706,015
|
|
|
$
|
—
|
|
Robert Cook
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Dileep Bhagwat
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Dov Elefant
|
|
|
—
|
|
|
|
—
|
|
|
|
56,250
|
|
|
|
—
|
|
|
|
235,688
|
|
|
|
—
|
|
Oliver Wiedemann
|
|
|
—
|
|
|
|
—
|
|
|
|
45,000
|
|
|
|
—
|
|
|
|
170,550
|
|
|
|
—
|
|
|
|
|
(1) |
|
Value is determined by subtracting the exercise price of an
option from the fair value at December 31, 2005 of $5.39
(computed as the closing of Maxim common stock price on the
Nasdaq National Market as of December 31, 2005 of $1.10
divided by the exchange ratio of .203969). |
Employment
Agreements
We have entered into employment agreements with
Messrs. John V. Talley and Robert W. Cook, each dated as of
October 28, 2004. As of January 4, 2006, pursuant to
their employment agreements, Messrs. Talley and Cook
currently receive base salaries of $350,000 and $250,000,
respectively. In addition, the employment agreements provided
that we granted options to purchase 1,242,655 shares and
211,567 shares of common stock to Messrs. Talley and
Cook, respectively, upon the completion of the merger. The
exercise price for the options was $5.84 per share of
EpiCept’s common stock at the time of the grant.
Mr. Talley’s options will be fully vested in August
2008. Mr. Cook’s options will be fully vested
48 months after the date of the grant. Each employment
agreement also provides for discretionary bonuses and stock
option awards and reimbursement of reasonable expenses incurred
in connection with services performed under each officer’s
respective employment agreement. The discretionary bonuses and
stock options are based on performance standards determined by
our board. Individual performance is determined based on
quantitative and qualitative objectives, including
EpiCept’s operating performance relative to budget and the
achievement of certain milestones largely related to the
clinical development of its products and licensing activities.
The actual objectives will be established by our board in the
future. In addition, Mr. Talley’s employment agreement
provides for automobile benefits and term life and long-term
disability insurance coverage. Both employment agreements expire
on December 31, 2006 but are automatically extended for
unlimited additional one-year periods. Upon termination for any
reason and in addition to any other payments disbursed in
connection with termination, Mr. Talley and Mr. Cook
will receive payment of his applicable base salary through the
termination date, the balance of any annual, long-term or
incentive award earned in any period prior to the termination
date and a lump-sum payment for any accrued but unused vacation
days.
If Mr. Talley dies or becomes disabled, he is entitled to
(i) receive a lump-sum payment equal to (a) one-third
of his base salary times (b) a fraction, the numerator
being the number of days he was employed in the calendar year of
termination and the denominator being the number of days in that
year and (ii) have (a) 50% of outstanding stock
options that are not then vested or exercisable become vested
and exercisable as of the termination date; (b) the
remaining outstanding stock options that are not then vested or
exercisable become vested and exercisable ratably and quarterly
for two years following the termination date; and (c) each
outstanding stock option remain exercisable for all securities
for the later of (x) the 90th day following the date
that the option becomes fully vested and exercisable and
(y) the first anniversary of the termination date. If
Mr. Cook dies or becomes disabled, he is entitled to the
same benefits as Mr. Talley, except the equation for his
lump-sum payment is based on one-fourth of his base salary.
79
If Mr. Talley is terminated without cause or the term of
his agreement is not extended pursuant to the employment
agreement, he is entitled to the same benefits as if he were
terminated due to death or disability and to receive a lump-sum
payment equal to (a) one and one-third times (b) his
base salary times (c) the number of whole and partial
months remaining in the term of the agreement (but no more than
12 and no less than 6) divided by (d) 12. If
Mr. Cook is terminated without cause or the term of his
agreement is not extended pursuant to the employment agreement,
he is entitled to the same benefits as Mr. Talley, but the
equation for his lump-sum payment is based on one and one-fourth
times his base salary.
If Mr. Talley is terminated in anticipation of, or within
one year following, a change of control, he is entitled to:
(i) receive a lump-sum payment equal to (a) one and
one third times (b) his base salary times (c) the
number of whole and partial months remaining in the term of the
agreement (but not less than 24) divided by (d) 12 and
(ii) have (a) 50% of outstanding stock options that
are not then vested or exercisable become vested and exercisable
as of the termination date; (b) the remaining outstanding
stock options that are not then vested or exercisable become
vested and exercisable ratably and monthly for the first year
following the termination date; and (c) each outstanding
stock option remain exercisable for all securities for the later
of (x) the 90th day following the date that the option
becomes fully vested and exercisable and (y) the first
anniversary of the termination date. If Mr. Cook is
terminated in anticipation of, or within one year following, a
change of control, he is entitled to the same benefits as
Mr. Talley, except his lump sum is equal to (a) one
and one-fourth times (b) his base salary times (c) the
number of whole and partial months remaining in the term of the
agreement (but no more than 18 and no less than 12) divided
by (d) 12.
STOCK
OPTION PLANS
1995
Stock Option Plan
Our 1995 Stock Option Plan, as amended, was approved by our
board of directors in November 1995, and subsequently amended in
April 1997, March 1999, February 2002 and June 2002. A total of
797,080 shares of our common stock were authorized for
issuance under the 1995 Stock Option Plan. As of
December 31, 2005, 251,943 shares were available for
issuance under the 1995 Stock Option Plan. We do not plan to
grant any further options from this plan.
The purpose of the 1995 Stock Option Plan was to provide us and
our stockholders the benefits arising out of capital stock
ownership by its employees, officers, directors, consultants and
advisors and any of its subsidiaries, who are expected to
contribute to its future growth and success. Our 1995 Stock
Option Plan provides for the grant of non-statutory stock
options to its (and its majority-owned subsidiaries’)
employees, officers, directors, consultants or advisors, and for
the grant of incentive stock options meeting the requirements of
Section 422 of the Internal Revenue Code to its employees
and employees of its majority-controlled subsidiaries.
A committee duly appointed by our board of directors
administered the 1995 Stock Option Plan. The committee has the
authority to (a) construe the respective option agreements
and the terms of the plan; (b) prescribe, amend and rescind
rules and regulations relating to the plan; (c) determine
the terms and provisions of the respective option agreements,
which need not be identical; (d) make all other
determinations in the judgment of the committee necessary or
desirable for the administration of the plan. From and after the
registration of our common stock under the Securities Exchange
Act of 1934, the selection of a director or an officer who is a
“reporting person” under Section 16(a) of the
Exchange Act as a recipient of an option, the timing of the
option grant, the exercise price of the option and the number of
shares subject to the option shall be determined by (a) the
committee of the Board, each of which members shall be an
outside director or (b) by a committee consisting of two or
more directors having full authority to act in the matter, each
of whom shall be an outside director.
The committee shall determine the exercise price of stock
options granted under the 1995 Stock Option Plan, but with
respect to all incentive stock options, the exercise price must
be at least equal to the fair market value of our common stock
on the date of the grant or, in the case of grants of incentive
stock options to holders of more than 10% of the total combined
voting power of all classes of our stock (“10%
owners”), at least equal to 110% of the fair market value
of our common stock on the date of the grant.
80
The committee shall determine the term of stock options granted
under the 1995 Stock Option Plan, but such date shall not be
later than 10 years after the date of the grant, except in
the case of incentive stock options granted to 10% owners in
which case such date shall not be later than five years after
the date of the grant.
Each option granted under the 1995 Stock Option Plan is
exercisable in full or in installments at such time or times and
during such period as is set forth in the option agreement
evidencing such option, but no option granted to a
“reporting person” shall be exercisable during the
first six months after the grant.
No optionee may be granted an option to purchase more than
350,000 shares in any fiscal year. In addition, no
incentive stock option may be exercisable for the first time in
any one calendar year for shares of common stock with an
aggregate fair market value (as of the date of the grant) of
more than $100,000.
Our 1995 Stock Option Plan generally does not allow for the
transfer of options and only the optionee may exercise an option
during his or her lifetime.
An optionee may exercise an option at any time within three
months following the termination of the optionee’s
employment or other relationship with EpiCept or within one year
if such termination was due to the death or disability of the
optionee, but except in the case of the optionee’s death,
in no event later than the expiration date of the option. If the
termination of the optionee’s employment is for cause, the
option expires immediately upon termination.
Our 1995 Stock Option Plan terminated on November 14, 2005.
2005
Equity Incentive Plan
The 2005 Equity Incentive Plan was adopted on September 1,
2005 and approved by stockholders on September 5, 2005.
EpiCept’s Equity Incentive Plan provides for the grant of
incentive stock options, within the meaning of Section 422
of the Internal Revenue Code, to our employees and its parent
and subsidiary corporations’ employees, and for the grant
of nonstatutory stock options, restricted stock,
performance-based awards and cash awards to its employees,
directors and consultants and its parent and subsidiary
corporations’ employees and consultants.
A total of 4,000,000 shares of our common stock are
reserved for issuance pursuant to the Equity Incentive Plan.
During 2006, we granted approximately 2.5 million options
to employees, members of our Board of Directors and third
parties. No optionee may be granted an option to purchase more
than 1,500,000 shares in any fiscal year.
Our board of directors or a committee of its board administers
the Equity Incentive Plan. In the case of options intended to
qualify as “performance-based compensation” within the
meaning of Section 162(m) of the Internal Revenue Code, the
committee will consist of two or more “outside
directors” within the meaning of Section 162(m) of the
Code. The administrator has the power to determine the terms of
the awards, including the exercise price, the number of shares
subject to each such award, the exercisability of the awards and
the form of consideration, if any, payable upon exercise. The
administrator also has the authority to institute an exchange
program by which outstanding awards may be surrendered in
exchange for awards with a lower exercise price.
The administrator will determine the exercise price of options
granted under the Equity Incentive Plan, but with respect to
nonstatutory stock options intended to qualify as
“performance-based compensation” within the meaning of
Section 162(m) of the Code and all incentive stock options,
the exercise price must at least be equal to the fair market
value of our common stock on the date of grant. The term of an
incentive stock option may not exceed ten years, except that
with respect to any participant who owns 10% of the voting power
of all classes of our outstanding stock, the term must not
exceed five years and the exercise price must equal at least
110% of the fair market value on the grant date. The
administrator determines the term of all other options.
Restricted stock may be granted under the Equity Incentive Plan.
Restricted stock awards are shares of our common stock that vest
in accordance with terms and conditions established by the
administrator. The administrator will determine the number of
shares of restricted stock granted to any employee. The
administrator may impose whatever conditions to vesting it
determines to be appropriate. For example, the administrator may
set restrictions based on the achievement of specific
performance goals. Shares of restricted stock that do not vest
are subject to our right of repurchase or forfeiture.
81
Performance-based awards may be granted under the Equity
Incentive Plan. Performance-based awards are awards that will
result in a payment to a participant only if performance goals
established by the administrator are achieved or the awards
otherwise vest. The administrator will establish organizational
or individual performance goals in its discretion, which,
depending on the extent to which they are met, will determine
the number
and/or the
value of performance units and performance shares to be paid out
to participants.
The Equity Incentive Plan generally does not allow for the
transfer of awards and only the recipient of an award may
exercise an award during his or her lifetime.
The Equity Incentive Plan will provide that if our experiences a
Change of Control (as defined), the administrator may provide at
any time prior to the Change of Control that all then
outstanding stock options and unvested cash awards shall
immediately vest and become exercisable and any restrictions on
restricted stock awards shall immediately lapse. In addition,
the administrator may provide that all awards held by
participants who are at the time of the Change of Control in our
service or the service of one of its subsidiaries or affiliates
shall remain exercisable for the remainder of their terms
notwithstanding any subsequent termination of a
participant’s service. All awards will be subject to the
terms of any agreement effecting the Change of Control, which
agreement may provide, without limitation, that in lieu of
continuing the awards, each outstanding stock option shall
terminate within a specified number of days after notice to the
holder, and that such holder shall receive, with respect to each
share of common stock subject to such stock option, an amount
equal to the excess of the fair market value of such shares of
common stock immediately prior to the occurrence of such Change
of Control over the exercise price (or base price) per share
underlying such stock option with such amount payable in cash,
in one or more kinds of property (including the property, if
any, payable in the transaction) or in a combination thereof, as
the administrator, in its discretion, shall determine. A
provision like the one contained in the preceding sentence shall
be inapplicable to a stock option granted within six months
before the occurrence of a Change of Control if the holder of
such stock option is subject to the reporting requirements of
Section 16(a) of the Exchange Act and no exception from
liability under Section 16(b) of the Exchange Act is
otherwise available to such holder.
The Equity Incentive Plan will automatically terminate ten years
from the effective date, unless it is terminated sooner. In
addition, our board of directors has the authority to amend,
suspend or terminate the Equity Incentive Plan provided such
action does not impair the rights of any participant.
2005
Employee Stock Purchase Plan
The 2005 Employee Stock Purchase Plan was adopted on
September 1, 2005 and approved by the stockholders on
September 5, 2005. The Employee Stock Purchase Plan became
effective at the effective time of the merger with Maxim and a
total of 500,000 shares of our common stock have been
reserved for sale.
Our board of directors or a committee of the board will
administer the Employee Stock Purchase Plan. Our board of
directors or the committee will have full and exclusive
authority to interpret the terms of the Employee Stock Purchase
Plan and determine eligibility.
All of our employees are eligible to participate if they are
customarily employed by us or any participating subsidiary for
at least 20 hours per week and more than five months in any
calendar year. However, an employee may not be granted an option
to purchase stock if such employee:
|
|
|
|
•
|
immediately after the grant owns stock possessing 5% or more of
the total combined voting power or value of all classes of our
capital stock, or
|
|
|
•
|
whose rights to purchase stock under all of our employee stock
purchase plans accrues at a rate that exceeds $25,000 worth of
stock for each calendar year.
|
The Employee Stock Purchase Plan is intended to qualify under
Section 423 of the Internal Revenue Code and generally
provides for six-month offering periods beginning on January 1
and July 1 of each calendar year, commencing on
January 1, 2006 or such other date as may be determined by
the committee appointed by us to administer the Employee Stock
Purchase Plan.
82
The Employee Stock Purchase Plan permits participants to
purchase common stock through payroll deductions from their
eligible compensation, which includes a participant’s base
salary, wages, overtime pay, shift premium and recurring
commissions, but does not include payments for incentive
compensation or bonuses.
Amounts deducted and accumulated by the participant are used to
purchase shares of our common stock at the end of each six-month
purchase period. The price is 85% of the lower of the fair
market value of our common stock at the beginning of an offering
period or end of an offering period. Participants may end their
participation at any time during an offering period, and will be
paid their payroll deductions to date. Participation ends
automatically upon termination of employment with us.
A participant may not transfer rights granted under the Employee
Stock Purchase Plan other than by will, the laws of descent and
distribution or as otherwise provided under the Employee Stock
Purchase Plan.
Our board of directors has the authority to amend or terminate
the Employee Stock Purchase Plan, except that, subject to
certain exceptions described in the Employee Stock Purchase
Plan, no such action may adversely affect any outstanding rights
to purchase stock under the Employee Stock Purchase Plan.
401(k)
Plan
In 1998, we adopted a Retirement Savings and Investment Plan,
the 401(k) Plan, covering its full-time employees located in the
United States. The 401(k) Plan is intended to qualify under
Section 401(k) of the Internal Revenue Code, so that
contributions to the 401(k) Plan by employees or by us, and the
investment earnings thereon, are not taxable to the employees
until withdrawn. If the 401(k) Plan qualifies under
Section 401(k) of the Internal Revenue Code, our
contributions will be tax deductible by us when made. Our
employees may elect to reduce their current compensation by up
to the statutorily prescribed annual limit of $15,000 if under
50 years old and $20,000 if over 50 years old in 2006
and to have those funds contributed to the 401(k) Plan. The
401(k) Plan permits us, but does not require us, to make
additional matching contributions on behalf of all participants.
The following table provides certain information with respect to
all of the Company’s equity compensation plans in effect as
of December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of Securities
|
|
|
|
Securities to be
|
|
|
|
|
|
Remaining Available
|
|
|
|
Issued upon
|
|
|
Weighted-Average
|
|
|
for Issuance under
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Equity Compensation
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Plans (Excluding
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
Securities
|
|
|
|
and Rights
|
|
|
and Rights
|
|
|
Reflected in Column(a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved
by stockholders
|
|
|
439,501
|
|
|
$
|
1.45
|
|
|
|
251,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon closing of the merger with Maxim on January 4, 2006,
4 million shares of our common stock are reserved for
issuance under the 2005 Equity Incentive Plan. During 2006, we
granted approximately 2.5 million options to employees,
members of our Board of Directors and third parties.
83
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We have a policy requiring that any material transaction that we
enter into with our officers, directors or principal
stockholders and their affiliates be on terms no less favorable
to us than reasonably could have been obtained in an arms’
length transaction with independent third parties. Any other
matters involving potential conflicts of interests are to be
resolved on a
case-by-case
basis.
2002
Bridge Notes and Warrants
In November 2002, we entered into a convertible bridge loan in
an aggregate amount of up to $5,000,000. This convertible bridge
loan is referred to in this prospectus as the “2002
convertible bridge loan.” The lenders under the 2002
convertible bridge loan included Mr. John V. Talley, our
President and Chief Executive Officer, and certain holders of
our preferred stock, including TVM IV GmbH & Co. KG
(“TVM IV”), Private Equity Direct Finance
(“Private Equity”), The Merlin Biosciences
Fund L.P., The Merlin Biosciences Fund GbR
(collectively, the “Merlin Investors”) and Gold-Zack
Partners I B.V. The 2002 convertible bridge loan bears interest
at 8% per annum and was scheduled to mature on
October 30, 2006. In connection with the merger with Maxim,
the lenders agreed to convert their 2002 convertible bridge
loans into 593,121 shares of common stock at a conversion
price of $1.50. In connection with the purchase of the 2002
convertible bridge loans, each lender also received stock
purchase warrants entitling that lender to purchase a specified
amount of EpiCept’s preferred stock or common stock under
certain circumstances. In connection with the merger with Maxim,
the stock purchase warrants were amended to provide that they
expire at the effective time of the merger and that immediately
prior to the effective time the stock purchase warrants were
automatically exercised into 3,861,462 shares of common
stock at an exercise price of $0.628. Each lender used the
outstanding principal amount and accrued interest on their
respective 2002 convertible bridge loans to pay the exercise
price.
2006
Notes
In March 2005, we completed the private placement of
$4.0 million in aggregate principal amount of our
8% Senior Notes due 2006. These notes are referred to in
this prospectus as the “2006 Notes.” The purchasers of
the 2006 Notes included Sanders Opportunity Fund, L.P., Sanders
Opportunity Fund (Institutional), L.P. (collectively, the
“Sanders Investors”) and certain holders of our
preferred stock including TVM IV, Private Equity and the Merlin
Investors. The 2006 notes were scheduled to mature on
October 30, 2006. In connection with the merger with Maxim,
all investors other than the Sanders Investors converted their
2006 Notes, including interest, into 1,126,758 shares of
common stock at a conversion price of $2.84. In connection with
the purchase of the 2006 Notes, each investor also purchased
stock purchase warrants exercisable into our common stock. In
connection with the merger, all investors other than the Sanders
Investors, agreed to cancel their stock purchase warrants. The
stock purchase warrants held by the Sanders Investors were
amended to provide for their automatic expiration at the
effective time of the merger with Maxim. Immediately prior to
the effective time, the stock purchase warrants were
automatically exercised on a net issuance basis for
22,096 shares of EpiCept’s common stock at an exercise
price of $3.96.
November
2005 Senior Notes
In November 2005, we completed the private placement of
$2.0 million in aggregate principal amount of our
8% Senior Notes due 2006. These notes are referred to in
this prospectus as the “November 2005 Senior Notes.”
The purchasers of the November 2005 Senior Notes included
certain stockholders of our preferred stock including
TVM IV, Private Equity and the Merlin Investors. The
November 2005 Senior Notes were scheduled to mature on
October 30, 2006.. In connection with the merger with
Maxim, all investors agreed to convert all principal and accrued
interest on their November 2005 Senior Notes into
711,691 shares of common stock at a conversion price of
$2.84.
Amendment
to Series B Warrants
In August 2000, we issued two warrants (the “Series B
Warrants”) to purchase our Series B convertible
preferred stock to Alpinvest International B.V. and TVM III
Limited Partnership (“TVM III”). In connection
with
84
the merger with Maxim, the Series B Warrants were deemed
exercised on a net issuance basis for 58,229 shares of
EpiCept’s common stock based on an exercise price of $6.00.
Amendment
to Series C Warrant
In November 2000, we issued a warrant (the “Series C
Warrant”) to purchase our Series C convertible
preferred stock to Private Equity. In connection with the
merger, the Series C Warrant was deemed exercised on a net
issuance basis for 131,018 shares of EpiCept’s common
stock based on an exercise price of $6.00.
Amended
and Restated Registration Rights Agreement
We have entered into an agreement pursuant to which holders of
our former convertible preferred stock and certain other
individuals have registration rights with respect to their
shares of common stock following this offering. For a
description of these registration rights, see “Description
of Capital Stock.”
tbg
Loans
In August 1997 and February 1998, our German subsidiary entered
into two
10-year
non-amortizing
loans with tbg, one of our greater than 5% stockholders. For a
description of these loans, please see “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources.”
Employment
Agreements
As described under “Executive Compensation —
Employment Agreements,” we have employment agreements with
Mr. John V. Talley, our President and Chief Executive
Officer, and Mr. Robert Cook, our Chief Financial Officer.
85
PRINCIPAL
STOCKHOLDERS
Ownership
of Common Stock
The following table sets forth information as of
November 1, 2006 regarding the beneficial ownership of our
common stock by:
|
|
|
|
•
|
all persons known by us to own beneficially more than 5% of any
class of the common stock;
|
|
|
•
|
each of our current directors and nominees to serve as
director; and
|
|
|
•
|
all current directors and executive officers as a group.
|
Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table
have sole voting and investment power with respect to all shares
of common stock shown as beneficially owned by them. Unless
otherwise indicated, the principal address of each of the
stockholders below is in care of EpiCept Corporation, 270 Sylvan
Avenue, Englewood Cliffs, New Jersey 07632.
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Percent of Shares
|
|
Name and Address of Beneficial Owner
|
|
Beneficially Owned
|
|
|
Beneficially Owned(1)(2)
|
|
|
5% Stockholders
|
|
|
|
|
|
|
|
|
TVM Capital(3)
|
|
|
4,584,744
|
|
|
|
17.96
|
%
|
Merlin General Partner II
Limited(4)
|
|
|
2,461,928
|
|
|
|
9.65
|
|
Private Equity Direct Finance(5)
|
|
|
2,115,343
|
|
|
|
8.29
|
|
Executive Officers and
Directors
|
|
|
|
|
|
|
|
|
John V. Talley(6)
|
|
|
920,807
|
|
|
|
3.50
|
|
Robert W. Cook(7)
|
|
|
92,557
|
|
|
|
*
|
|
Ben Tseng(8)
|
|
|
23,613
|
|
|
|
*
|
|
Dov Elefant(9)
|
|
|
63,281
|
|
|
|
*
|
|
Dr. Oliver Wiedemann(10)
|
|
|
50,624
|
|
|
|
*
|
|
Dr. Dileep Bhagwat(11)
|
|
|
49,219
|
|
|
|
*
|
|
Robert G. Savage(12)
|
|
|
115,001
|
|
|
|
*
|
|
Dr. Gert Caspritz(3)
|
|
|
4,584,744
|
|
|
|
17.96
|
|
Guy C. Jackson(13)
|
|
|
51,670
|
|
|
|
*
|
|
Gerhard Waldheim(14)
|
|
|
106,638
|
|
|
|
*
|
|
John Bedard(15)
|
|
|
25,708
|
|
|
|
*
|
|
Wayne P. Yetter(16)
|
|
|
30,296
|
|
|
|
*
|
|
All directors and named executive
officers as a group (12 persons)(17)
|
|
|
6,114,158
|
|
|
|
22.74
|
|
|
|
|
* |
|
Represents beneficial ownership of less than one percent (1%) of
the outstanding shares of EpiCept common stock. |
|
(1) |
|
Beneficial ownership is determined with the rules of the
Securities and Exchange Commission and generally includes voting
or investment power with respect to securities. Shares of common
stock subject to stock options and warrants currently
exercisable or exercisable within 60 days are deemed to be
outstanding for computing the percentage ownership of the person
holding such options and the percentage ownership of any group
of which the holder is a member, but are not deemed outstanding
for computing the percentage of any other person. Except as
indicated by footnote, the persons named in the table have sole
voting and investment power with respect to all shares of common
stock shown beneficially owned by them. |
|
(2) |
|
Percentage ownership is based on 25,508,830 shares of
common stock outstanding on November 1, 2006. |
|
(3) |
|
Includes 1,144,822 shares of common stock held by
TVM III, and 3,408,464 shares held by TVM IV. Includes
6,042 shares of common stock and 13,334 shares
issuable upon the exercise of options that are exercisable
within 60 days held by Dr. Gert Caspritz, one of our
directors, who is a general partner of TVM, which is the general
partner of each of TVM III and TVM IV, and an aggregate of
12,082 shares of common stock held by Friedrich Bornikoel,
Christian Claussen, John J. DiBello, Alexandra Goll, Helmut
Schuhsler and Bernd Seibel who are individual Partners of TVM
(such entities collectively with TVM III and TVM IV,
“TVM”). TVM Techno Venture Management No. III,
L.P. (“TVM III Management”) is the General
Partner and the investment committee of TVM III. TVM IV
Management GmbH & Co. KG (“TVM IV
Management”) is the Managing Limited Partner and investment
committee of TVM IV. The investment committees, composed of
certain |
86
|
|
|
|
|
Managing Limited Partners of TVM, have voting and dispositive
authority over the shares held by each of these entities and
therefore beneficially owns such shares. Decisions of the
investment committees are made by a majority vote of their
members and, as a result, no single member of the investment
committees has voting or dispositive authority over the shares. |
|
|
|
Friedrich Bornikoel, John J. Di Bello, Alexandra Goll, Christian
Claussen, Bernd Seibel and Helmut Schühsler are the members
of the investment committee of TVM III Management. They,
along with Gert Caspritz, John Chapman and Hans G. Schreck are
the members of the investment committee of TVM IV Management.
Friedrich Bornikoel, John J. DiBello, Alexandra Goll, Christian
Claussen, Bernd Seibel and Helmut Schühsler each disclaim
beneficial ownership of the shares held by TVM III and TVM
IV except to the extent any individual has a pecuniary interest
therein. Gert Caspritz, John Chapman and Hans G. Schreck each
disclaim beneficial ownership of the shares held by TVM IV
except to the extent any individual has a pecuniary interest
therein. The address of TVM III Management and TVM IV
Management is 101 Arch Street, Suite 1950, Boston, MA 02110. |
|
(4) |
|
Includes 2,394,647 shares of common stock beneficially
owned by Merlin L.P. and Merlin GbR and held by Merlin and
includes 1,875 shares of common stock issuable upon the
exercise of stock options that are exercisable within
60 days held by Mr. Mark Docherty, one of our
directors, who is a director of Merlin, which is investment
advisor to the general partner of each of Merlin L.P. and Merlin
GbR. Includes 65,406 shares of common stock held by
Dr. Hellmut Kirchner, who is a director of Merlin. The
Merlin Biosciences Fund is comprised of two entities: Merlin
L.P. and Merlin GbR. Both are controlled by the board of
directors of Merlin General Partner II Limited, a
Jersey-based limited liability company, which is owned by
Merlin. Merlin has agreed not to exercise its voting rights to
change or replace the board of directors of Merlin General
Partner II Limited. The board of directors of Merlin
General Partner II Limited, effectively controls Merlin
L.P. and Merlin GbR because it is General Partner of Merlin L.P.
and Managing Partner of Merlin GbR. Investment decisions are
made with a majority of the board of directors of Merlin General
Partner II Limited, no single person has control. The directors
of Merlin General Partner II Limited are as follows: Dr Max
Link (Chairman), William Edge, Sir Christopher Evans OBE, Robin
Herbert CBE, Professor Trevor Jones, Dr. Hellmut Kirchner,
Mark Clement, Denzil Boschat, Alison Creed and Jeff Iliffe. Some
of the directors hold small limited partnership interests in the
Fund but none of these are individually or collectively able to
influence the Fund. The registered office is at La Motte
Chambers, St Helier, Jersey JE1 1BJ, UK. Mr. Docherty and
Dr. Kirchner each disclaim beneficial ownership of the
shares held by Merlin, Merlin L.P. and Merlin GbR except to the
extent any such individual has a pecuniary interest therein. The
address of Merlin, Merlin L.P. and Merlin GbR is c/o Merlin
Biosciences Limited, 33 King Street, St. James’s, London,
SW1Y 6RJ, United Kingdom. |
|
(5) |
|
Includes 2,115,343 shares of common stock held by Private
Equity Direct Finance. Private Equity Direct Finance is a Cayman
Islands exempted limited company and a wholly-owned subsidiary
of Private Equity Holding Cayman, itself a Cayman Islands
exempted limited company, and a wholly-owned subsidiary of
Private Equity Holding Ltd. Private Equity Holding Ltd. is a
Swiss corporation with registered office at Innere
Guterstrasse 4, 6300 Zug, Switzerland, and listed on the
SWX Swiss Exchange. The discretion for divestments by Private
Equity Direct Finance rests with ALPHA Associates (Cayman),
L.P., as investment manager. The members of the board of
directors of the general partner of ALPHA Associates (Cayman),
L.P. are the same persons as the members of the board of
directors of Private Equity Direct Finance: Rick Gorter,
Gwendolyn McLaughlin and Andrew Tyson. A meeting of the
directors at which a quorum is present is competent to exercise
all or any of the powers and discretions. The quorum necessary
for the transaction of business at a meeting of the directors
may be fixed by the directors and, unless so fixed at any other
number, is two. The address of Private Equity Direct Finance is
One Capital Place, P.O. Box 847, George Town, Grand Cayman,
Cayman Islands. |
|
(6) |
|
Includes 92,146 shares of common stock and includes
828,661 shares exercisable upon the exercise of options
that are exercisable within 60 days. |
|
(7) |
|
Includes 92,557 shares exercisable upon the exercise of
options that are exercisable within 60 days. |
|
(8) |
|
Includes 2,180 shares of common stock and includes
21,433 shares issuable upon the exercise of options that
are exercisable within 60 days. |
|
(9) |
|
Includes 63,281 shares issuable upon the exercise of
options that are exercisable within 60 days. |
87
|
|
|
(10) |
|
Includes 50,624 shares issuable upon the exercise of
options that are exercisable within 60 days. |
|
(11) |
|
Includes 49,219 shares issuable upon the exercise of
options that are exercisable within 60 days. |
|
(12) |
|
Includes 115,001 shares issuable upon the exercise of
options that are exercisable within 60 days. |
|
(13) |
|
Includes 51,670 shares issuable upon the exercise of
options that are exercisable within 60 days. |
|
(14) |
|
Includes 70,029 shares of common stock and includes
36,609 shares issuable upon the exercise of options that
are exercisable within 60 days. |
|
(15) |
|
Includes 25,708 shares issuable upon the exercise of
options that are exercisable within 60 days. |
|
(16) |
|
Includes 30,296 shares issuable upon the exercise of
options that are exercisable within 60 days. |
|
(17) |
|
Includes 1,378,393 shares isuable upon the exercise of
options that are exercisable within 60 days. |
SELLING
STOCKHOLDER
The selling stockholder may from time to time offer and sell any
or all of the shares of our common stock set forth below
pursuant to this prospectus. When we refer to “selling
stockholder” in this prospectus, we mean the company listed
in the table below, and the pledges, donees, permitted
transferees, assignees, successors and others who later come to
hold any of the selling stockholder’s interests in shares
of our common stock other than through a public sale.
The following table sets forth, as of the date of this
prospectus, the name of the selling stockholder for whom we are
registering shares for resale to the public, and the number of
shares of common stock that the selling stockholder may offer
pursuant to this prospectus. Unless otherwise noted, the common
stock being offered by the selling stockholder was acquired from
us in the private placement that was completed on
August 30, 2006. The shares of common stock offered by the
selling stockholder were issued pursuant to exemptions from the
registration requirements of the Securities Act. The selling
stockholder represented to us that it was an accredited investor
and was acquiring the warrants for investment and had no present
intention of distributing the common stock issuable upon
exercise of the warrants. Except as noted below, the selling
stockholder has not, or within the past three years has not had,
any material relationship with us or any of our predecessors or
affiliates and the selling stockholder is not or was not
affiliated with registered broker-dealers.
Based on the information provided to us by the selling
stockholder and as of the date the same was provided to us,
assuming that the selling stockholder sells all of the shares of
our common stock beneficially owned by it that have been
registered by us and do not acquire any additional shares during
the offering, the selling stockholder will not own any shares
other than those appearing in the column entitled “Number
of Shares of Common Stock Owned After the Offering.” We
cannot advise you as to whether the selling stockholder will in
fact sell any or all of such shares of common stock. In
addition, the selling stockholder may have sold, transferred or
otherwise disposed of, or may sell, transfer or otherwise
dispose of, at any time and from time to time, the shares of our
common stock in transactions exempt from the registration
requirements of the Securities Act after the date on which it
provided the information set forth on the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Shares of
|
|
|
Stock
|
|
|
Total Number
|
|
|
Total Number
|
|
|
Number of
|
|
|
Common
|
|
|
|
Common
|
|
|
Issuable
|
|
|
of Securities
|
|
|
of Securities
|
|
|
Shares of
|
|
|
Stock
|
|
|
|
Stock Owned
|
|
|
Upon the
|
|
|
Owned
|
|
|
Owned
|
|
|
Common
|
|
|
Owned
|
|
|
|
Prior to the
|
|
|
Exercise of
|
|
|
Prior to the
|
|
|
Being
|
|
|
Stock Owned After
|
|
|
After the
|
|
Name of Selling Stockholder
|
|
Offering
|
|
|
Warrants(1)
|
|
|
Offering
|
|
|
Registered
|
|
|
the Offering
|
|
|
Offering(2)
|
|
|
Hercules Technology Growth ,
Inc.
|
|
|
—
|
|
|
|
471,698
|
|
|
|
—
|
|
|
|
471,698
|
|
|
|
—
|
|
|
|
*
|
|
525 University Ave., Suite 700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Palo Alto, CA 94301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unless otherwise indicated, the warrants represented are
exerciseable at $2.65 per share of our common stock. |
|
(2) |
|
Unless otherwise indicated, assumes that the selling stockholder
will resell all of the shares of our common stock offered
hereunder. Applicable percentage of ownership is based on
25,508,830 shares of our common stock outstanding as of
November 1, 2006, together with securities exerciseable
for, or convertible into, shares of common stock within
60 days of November 1, 2006. |
88
DESCRIPTION
OF CAPITAL STOCK
General
Our restated certificate of incorporation authorizes
50,000,000 shares of common stock, $0.0001 par value,
and 5,000,000 shares of undesignated preferred stock,
$0.0001 par value. The foregoing and the following
description of capital stock give effect to the restated
certificate of incorporation and by the provisions of the
applicable Delaware law.
Common
Stock
As of November 1, 2006, EpiCept had 25,508,830 shares
of common stock outstanding that were held of record by
approximately 85 stockholders.
The holders of common stock are entitled to one vote per share
on all matters to be voted upon by the stockholders. Subject to
preferences that may be applicable to any outstanding preferred
stock, the holders of common stock are entitled to receive
ratably any dividends that may be declared from time to time by
the board of directors out of funds legally available for that
purpose. In the event of EpiCept’s liquidation, dissolution
or winding up, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock then
outstanding. The common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon
the closing of this offering will be fully paid and
nonassessable.
Preferred
Stock
Our board of directors has the authority, without action by its
stockholders, to designate and issue up to 5,000,000 shares
of preferred stock in one or more series. The board of directors
may also designate the rights, preferences and privileges of
each series of preferred stock; any or all of which may be
greater than the rights of the common stock. It is not possible
to state the actual effect of the issuance of any shares of
preferred stock upon the rights of holders of the common stock
until the board of directors determines the specific rights of
the holders of the preferred stock. However, these effects might
include:
|
|
|
|
•
|
restricting dividends on the common stock;
|
|
|
•
|
diluting the voting power of the common stock;
|
|
|
•
|
impairing the liquidation rights of the common stock; and
|
|
|
•
|
delaying or preventing a change in control of our company
without further action by the stockholders.
|
EpiCept has no present plans to issue any shares of preferred
stock.
Warrants
As of November 1, 2006, the following warrants were
outstanding:
|
|
|
|
•
|
Upon the closing of the merger with Maxim on January 4,
2006, we issued warrants to purchase approximately
0.3 million shares at an exercise price range of
$13.48 — $37.75 per share of our common stock in
exchange for Maxim’s warrants.
|
|
|
•
|
On February 9, 2006, we raised $11.6 million gross
proceeds through a private placement of common stock and common
stock purchase warrants. Five year common stock purchase
warrants were issued to the investors granting them the right to
purchase approximately 1 million of our common stock at a
price of $4.00 per share.
|
|
|
•
|
On August 30, 2006, we entered into a senior secured term
loan in the amount of $10.0 million with Hercules
Technology Growth Capital, Inc. Five year common stock purchase
warrants were issued to Hercules
|
89
|
|
|
|
|
granting them the right to purchase 0.5 million shares of
our common stock at an exercise price of $2.65 per share
|
Registration
Rights
In consideration for the termination of the existing
registration rights agreement and in anticipation of the merger,
we have entered into a new registration rights agreement
pursuant to which TVM III Limited Partnership, TVM IV
GmbH & Co. KG, Private Equity Direct Finance, The
Merlin Biosciences Fund L.P., The Merlin Biosciences
Fund GbR, the Sanders Investors and Mr. John V. Talley
have registration rights with respect to their shares of common
stock following the completion of the merger with Maxim. These
registration rights include customary demand, piggyback and
Form S-3
registration rights.
Demand Registration Rights. Demand
registration rights are rights that entitle holders to require
us to register some or all of their shares of our common stock
under the Securities Act at such holder’s election.
Generally, holders of 25% of the then outstanding registrable
securities may require us to register their shares pursuant to
these demand registration rights, subject to applicable minimum
thresholds to be included in the requested registration.
Collectively, there are a total of 9,177,518 shares of
common stock that are subject to these demand registration
rights. we will not be obligated to effect more than two
registrations on behalf of these holders pursuant to their
demand registration rights. We have the right, under various
circumstances, to delay the registration of the requesting
holders’ shares for a limited time period. We generally
must pay all expenses, except for underwriters’ discounts
and commissions, incurred in connection with the exercise of
these demand registration rights.
Piggyback Registration Rights. Piggyback
registration rights are rights that entitle holders to require
us to register some or all of their shares of our common stock
under the Securities Act if we register any securities for
public sale, subject to specified exceptions. The underwriters
of any underwritten offering may have the right to limit the
number of shares registered by these holders due to marketing
conditions. There are a total of 9,177,518 shares of common
stock that are subject to these piggyback registration rights.
We generally must pay all expenses, except for
underwriters’ discounts and commissions, incurred in
connection with the exercise of these piggyback registration
rights.
Anti-Takeover
Provisions
Provisions of Delaware law and the amended and restated
certificate of incorporation and amended bylaws to be in effect
upon the closing of the merger could make the acquisition of
EpiCept through a tender offer, a proxy contest or other means
more difficult and could make the removal of incumbent officers
and directors more difficult. We expect these provisions to
discourage coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of us
to first negotiate with our board of directors. We believe that
the benefits provided its ability to negotiate with the
proponent of an unfriendly or unsolicited proposal outweigh the
disadvantages of discouraging these proposals. EpiCept believes
the negotiation of an unfriendly or unsolicited proposal
could result in an improvement of its terms.
Effects of Some Provisions of Delaware
Law. Upon the closing of the merger, we will be
subject to Section 203 of the Delaware General Corporation
Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in
a “business combination” with an “interested
stockholder” for a period of three years following the date
the person became an interested stockholder, unless:
|
|
|
|
•
|
prior to the date of the transaction, the board of directors of
the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an
interested stockholder;
|
|
|
•
|
the stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding (a) shares owned by persons who are directors
and also officers, and (b) shares owned by employee stock
plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
|
90
|
|
|
|
•
|
on or subsequent to the date of the transaction, the business
combination is approved by the board and authorized at an annual
or special meeting of stockholders, and not by written consent,
by the affirmative vote of at least 66% of the outstanding
voting stock which is not owned by the interested stockholder.
|
Generally, a “business combination” for these purposes
includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder.
An “interested stockholder” for these purposes is a
person who, together with affiliates and associates, owns or,
within three years prior to the determination of interested
stockholder status, did own 15% or more of a corporation’s
outstanding voting securities. we expect the existence of this
provision to have an anti-takeover effect with respect to
transactions its board of directors does not approve in advance.
We also anticipate that Section 203 may also discourage
attempts that might result in a premium over the market price
for the shares of common stock held by stockholders.
Anti-Takeover Effects of Provisions of the Charter
Documents. The amended and restated certificate
of incorporation to be in effect upon the closing of the merger
provides for our board of directors to be divided into three
classes serving staggered terms. Approximately one-third of the
board of directors will be elected each year. The provision for
a classified board could prevent a party who acquires control of
a majority of the outstanding voting stock from obtaining
control of the board of directors until the second annual
stockholders meeting following the date the acquiring party
obtains the controlling stock interest. The classified board
provision could discourage a potential acquiror from making a
tender offer or otherwise attempting to obtain control of us and
could increase the likelihood that incumbent directors will
retain their positions. The amended and restated certificate of
incorporation to be in effect upon the closing of the merger
also provides that directors may be removed with cause by the
affirmative vote of the holders of 75% of the outstanding shares
of common stock.
The amended and restated bylaws to be in effect upon the closing
of the merger establish an advance notice procedure for
stockholder proposals to be brought before an annual meeting of
our stockholders, including proposed nominations of persons for
election to the board of directors. At an annual meeting,
stockholders may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting
by or at the direction of the board of directors. Stockholders
may also consider a proposal or nomination by a person who was a
stockholder of record on the record date for the meeting, who is
entitled to vote at the meeting and who has given to the
Secretary timely written notice, in proper form, of his or her
intention to bring that business before the meeting. The amended
bylaws do not give the board of directors the power to approve
or disapprove stockholder nominations of candidates or proposals
regarding other business to be conducted at a special or annual
meeting of the stockholders. However, the amended and restated
bylaws may have the effect of precluding the conduct of business
at a meeting if the proper procedures are not followed. These
provisions may also discourage or deter a potential acquiror
from conducting a solicitation of proxies to elect the
acquiror’s own slate of directors or otherwise attempting
to obtain control of our company.
Under Delaware law, a special meeting of stockholders may be
called by the board of directors or by any other person
authorized to do so in the amended and restated certificate of
incorporation or the amended and restated bylaws. The amended
and restated bylaws authorize a majority of our board of
directors, the chairman of the board or the chief executive
officer to call a special meeting of stockholders. Because our
stockholders do not have the right to call a special meeting, a
stockholder could not force stockholder consideration of a
proposal over the opposition of the board of directors by
calling a special meeting of stockholders prior to such time as
a majority of the board of directors believed or the chief
executive officer believed the matter should be considered or
until the next annual meeting provided that the requestor met
the notice requirements. The restriction on the ability of
stockholders to call a special meeting means that a proposal to
replace the board also could be delayed until the next annual
meeting.
Delaware law provides that stockholders may execute an action by
written consent in lieu of a stockholder meeting. However,
Delaware law also allows us to eliminate stockholder actions by
written consent. Elimination of written consents of stockholders
may lengthen the amount of time required to take stockholder
actions since actions by written consent are not subject to the
minimum notice requirement of a stockholder’s meeting.
However, we believe that the elimination of stockholders’
written consents may deter hostile takeover attempts. Without
the availability of stockholders’ actions by written
consent, a holder controlling a majority of our capital stock
would not be able to amend its bylaws or remove directors
without holding a stockholders meeting. The holder would have
91
to obtain the consent of a majority of the board of directors,
the chairman of the board or the chief executive officer to call
a stockholders meeting and satisfy the notice periods determined
by the board of directors. The amended and restated certificate
of incorporation to be in effect upon the closing of the merger
provides for the elimination of actions by written consent of
stockholders upon the closing of the merger.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
American Stock Transfer and Trust Company, located at 59 Maiden
Lane, Plaza Level, New York, NY 10038.
92
PLAN OF
DISTRIBUTION
The Selling Stockholder (the “Selling Stockholder”) of
the common stock and any of its pledgees, assignees and
successors-in-interest
may, from time to time, sell any or all of its shares of common
stock on the Nasdaq National Market or any other stock exchange,
market or trading facility on which the shares are traded or in
private transactions. These sales may be at fixed or negotiated
prices. The Selling Stockholder may use any one or more of the
following methods when selling shares:
|
|
|
|
•
|
ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchases;
|
|
|
•
|
block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
|
|
|
•
|
purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
|
|
|
•
|
an exchange distribution in accordance with the rules of the
applicable exchange;
|
|
|
•
|
privately negotiated transactions;
|
|
|
•
|
settlement of short sales entered into after the effective date
of the registration statement of which this prospectus is a part;
|
|
|
•
|
broker-dealers may agree with the Selling Stockholder to sell a
specified number of such shares at a stipulated price per share;
|
|
|
•
|
through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise;
|
|
|
•
|
a combination of any such methods of sale; or
|
|
|
•
|
any other method permitted pursuant to applicable law.
|
The Selling Stockholder may also sell shares under Rule 144
under the Securities Act of 1933, as amended (the
“Securities Act”), if available, rather than under
this prospectus.
Broker-dealers engaged by the Selling Stockholder may arrange
for other brokers-dealers to participate in sales.
Broker-dealers may receive commissions or discounts from the
Selling Stockholder (or, if any broker-dealer acts as agent for
the purchaser of shares, from the purchaser) in amounts to be
negotiated, but, except as set forth in a supplement to this
Prospectus, in the case of an agency transaction not in excess
of a customary brokerage commission in compliance with NASDR
Rule 2440; and in the case of a principal transaction a
markup or markdown in compliance with NASDR IM-2440.
In connection with the sale of the common stock or interests
therein, the Selling Stockholder may enter into hedging
transactions with broker-dealers or other financial
institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume.
The Selling Stockholder may also sell shares of the common stock
short and deliver these securities to close out their short
positions, or loan or pledge the common stock to broker-dealers
that in turn may sell these securities. The Selling Stockholder
may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation
of one or more derivative securities which require the delivery
to such broker-dealer or other financial institution of shares
offered by this prospectus, which shares such broker-dealer or
other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The Selling Stockholder and any broker-dealers or agents that
are involved in selling the shares may be deemed to be
“underwriters” within the meaning of the Securities
Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the
Securities Act. The Selling Stockholder has informed the Company
that it does not have any written or oral agreement or
understanding, directly or indirectly, with any person to
distribute the common stock. In no event shall any broker-dealer
receive fees, commissions and markups that, in the aggregate,
would exceed eight percent (8%).
93
The Company is required to pay certain fees and expenses
incurred by the Company incidental to the registration of the
shares. The Company has agreed to indemnify the Selling
Stockholder against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because the Selling Stockholder may be deemed to be an
“underwriter” within the meaning of the Securities
Act, it will be subject to the prospectus delivery requirements
of the Securities Act including Rule 172 thereunder. In
addition, any securities covered by this prospectus which
qualify for sale pursuant to Rule 144 under the Securities
Act may be sold under Rule 144 rather than under this
prospectus. There is no underwriter or coordinating broker
acting in connection with the proposed sale of the resale shares
by the Selling Stockholder.
We agreed to keep this prospectus effective until the earlier of
(i) the date on which the shares may be resold by the
Selling Stockholder without registration and without regard to
any volume limitations by reason of Rule 144(k) under the
Securities Act or any other rule of similar effect or
(ii) all of the shares have been sold pursuant to this
prospectus or Rule 144 under the Securities Act or any
other rule of similar effect. The resale shares will be sold
only through registered or licensed brokers or dealers if
required under applicable state securities laws. In addition, in
certain states, the resale shares may not be sold unless they
have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification
requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act,
any person engaged in the distribution of the resale shares may
not simultaneously engage in market making activities with
respect to the common stock for the applicable restricted
period, as defined in Regulation M, prior to the
commencement of the distribution. In addition, the Selling
Stockholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including
Regulation M, which may limit the timing of purchases and
sales of shares of the common stock by the Selling Stockholders
or any other person. We will make copies of this prospectus
available to the Selling Stockholders and have informed them of
the need to deliver a copy of this prospectus to each purchaser
at or prior to the time of the sale.
LEGAL
MATTERS
Weil, Gotshal & Manges LLP has passed upon the validity
of the common stock offered hereby on behalf of EpiCept
Corporation.
EXPERTS
The consolidated financial statements as of December 31,
2005 and 2004, and for each of three years in the period ended
December 31, 2005, included in this prospectus have been
audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report
appearing herein (which report expresses an unqualified opinion
and includes an explanatory paragraph referring to the
Company’s ability to continue as a going concern as
referred to in Note 1), and have been so included in
reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
94
EPICEPT
CORPORATION AND SUBSIDIARIES
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
Consolidated Balance Sheet
|
|
|
F-2
|
|
Consolidated Statements of
Operations for the Three and Nine Months Ended
September 30, 2006 and 2005
|
|
|
F-3
|
|
Consolidated Statements of
Preferred Stock and Stockholders’ Deficit for the Nine
Months Ended September 30, 2006
|
|
|
F-4
|
|
Consolidated Statements of Cash
Flows for the Nine Months Ended September 30, 2006 and 2005
|
|
|
F-5
|
|
Notes to Consolidated Financial
Statements
|
|
|
F-6
|
|
Report of Independent Registered
Public Accounting Firm dated March 16, 2006
|
|
|
F-27
|
|
Consolidated Balance Sheets as of
December 31, 2005 and 2004
|
|
|
F-28
|
|
Consolidated Statements of
Operations for the Years Ended December 31, 2005, 2004 and
2003
|
|
|
F-29
|
|
Consolidated Statements of
Preferred Stock and Stockholders’ Deficit for the Years
Ended December 31, 2005, 2004 and 2003
|
|
|
F-30
|
|
Consolidated Statements of Cash
Flows for the Years Ended December 31, 2005, 2004 and 2003
|
|
|
F-31
|
|
Notes to Consolidated Financial
Statements
|
|
|
F-32
|
|
F-1
Part I.
Financial Information
|
|
Item 1.
|
Financial
Statements.
|
EpiCept
Corporation and Subsidiaries
Condensed
Consolidated Balance Sheet
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,460,595
|
|
Marketable securities
|
|
|
995,000
|
|
Prepaid expenses and other current
assets
|
|
|
730,627
|
|
|
|
|
|
|
Total current assets
|
|
|
12,186,222
|
|
Restricted cash
|
|
|
343,925
|
|
Property and equipment, net
|
|
|
847,014
|
|
Deferred financing and acquisition
costs
|
|
|
709,228
|
|
Identifiable intangible assets, net
|
|
|
477,750
|
|
Other assets
|
|
|
94,756
|
|
|
|
|
|
|
Total assets
|
|
$
|
14,658,895
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ DEFICIT
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
2,255,228
|
|
Accrued research contract costs
|
|
|
608,181
|
|
Accrued interest
|
|
|
231,013
|
|
Other accrued liabilities
|
|
|
1,518,247
|
|
Merger restructuring and litigation
accrued liabilities, current portion
|
|
|
2,966,700
|
|
Warrant liability
|
|
|
524,328
|
|
Notes and loans payable, current
portion
|
|
|
3,783,830
|
|
Deferred revenue, current portion
|
|
|
2,344,331
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
14,231,858
|
|
|
|
|
|
|
Notes and loans payable
|
|
|
9,789,308
|
|
Deferred revenue
|
|
|
5,138,485
|
|
Merger restructuring and litigation
accrued liabilities
|
|
|
112,500
|
|
Accrued interest
|
|
|
536,795
|
|
Deferred rent and other noncurrent
liabilities
|
|
|
503,776
|
|
|
|
|
|
|
Total long term
liabilities
|
|
|
16,080,864
|
|
|
|
|
|
|
Total liabilities
|
|
|
30,312,722
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’
Deficit:
|
|
|
|
|
Common stock, $.0001 par
value; authorized 50,000,000 shares; issued 24,537,526 at
September 30, 2006
|
|
|
2,456
|
|
Additional paid-in capital
|
|
|
121,133,508
|
|
Warrants
|
|
|
1,400,287
|
|
Accumulated deficit
|
|
|
(137,154,278
|
)
|
Accumulated other comprehensive loss
|
|
|
(960,800
|
)
|
Treasury stock, at cost
(12,500 shares)
|
|
|
(75,000
|
)
|
|
|
|
|
|
Total stockholders’
deficit
|
|
|
(15,653,827
|
)
|
|
|
|
|
|
Total liabilities and
stockholders’ deficit
|
|
$
|
14,658,895
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-2
EpiCept
Corporation and Subsidiaries
Condensed
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
|
$
|
220,273
|
|
|
$
|
584,971
|
|
|
$
|
733,463
|
|
|
$
|
1,134,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
2,496,786
|
|
|
|
835,171
|
|
|
|
11,776,151
|
|
|
|
4,589,525
|
|
Research and development
|
|
|
4,364,807
|
|
|
|
445,108
|
|
|
|
12,267,453
|
|
|
|
1,386,638
|
|
Acquired in-process research and
development
|
|
|
(86,545
|
)
|
|
|
—
|
|
|
|
33,361,667
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,775,048
|
|
|
|
1,280,279
|
|
|
|
57,405,271
|
|
|
|
5,976,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(6,554,775
|
)
|
|
|
(695,308
|
)
|
|
|
(56,671,808
|
)
|
|
|
(4,842,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
66,581
|
|
|
|
1,909
|
|
|
|
270,142
|
|
|
|
14,906
|
|
Miscellaneous income
|
|
|
50,000
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
—
|
|
Foreign exchange (loss) gain
|
|
|
(10,015
|
)
|
|
|
3,307
|
|
|
|
84,469
|
|
|
|
325,508
|
|
Interest expense
|
|
|
(420,354
|
)
|
|
|
(498,863
|
)
|
|
|
(5,591,663
|
)
|
|
|
(1,369,011
|
)
|
Reversal of contingent interest
expense
|
|
|
994,105
|
|
|
|
—
|
|
|
|
994,105
|
|
|
|
—
|
|
Change in value of warrants and
derivatives
|
|
|
370,457
|
|
|
|
739,522
|
|
|
|
363,270
|
|
|
|
724,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
1,050,774
|
|
|
|
245,875
|
|
|
|
(3,779,677
|
)
|
|
|
(304,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(5,504,001
|
)
|
|
|
(449,433
|
)
|
|
|
(60,451,485
|
)
|
|
|
(5,146,615
|
)
|
Deemed dividends and redeemable
convertible preferred stock dividends
|
|
|
—
|
|
|
|
(313,590
|
)
|
|
|
(8,963,282
|
)
|
|
|
(940,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to common
stockholders
|
|
$
|
(5,504,001
|
)
|
|
$
|
(763,023
|
)
|
|
$
|
(69,414,767
|
)
|
|
$
|
(6,087,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common
share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(2.94
|
)
|
|
$
|
(3.56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
|
24,525,026
|
|
|
|
1,711,746
|
|
|
|
23,633,883
|
|
|
|
1,709,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-3
EpiCept
Corporation and Subsidiaries
Condensed
Consolidated Statement of Preferred Stock and Stockholders’
Deficit
For the
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B
|
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
Redeemable
|
|
|
|
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
Convertible
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Stockholders’
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Warrants
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Warrants
|
|
|
Deficit
|
|
|
Loss
|
|
|
Stock
|
|
|
Deficit
|
|
|
Loss
|
|
|
|
(Unaudited)
|
|
Balance at December 31,
2005
|
|
|
3,106,736
|
|
|
$
|
7,074,259
|
|
|
|
8,839,573
|
|
|
$
|
19,533,917
|
|
|
$
|
4,583,974
|
|
|
|
|
3,368,385
|
|
|
$
|
8,225,806
|
|
|
|
1,711,745
|
|
|
$
|
171
|
|
|
$
|
150,514
|
|
|
$
|
—
|
|
|
$
|
(67,739,511
|
)
|
|
$
|
(684,430
|
)
|
|
$
|
(75,000
|
)
|
|
$
|
(60,122,450
|
)
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,250
|
|
|
|
10
|
|
|
|
184,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184,500
|
|
|
|
|
|
Exercise of Series B
Convertible Preferred stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
58,229
|
|
|
|
6
|
|
|
|
300,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,484
|
|
|
|
|
|
Exercise of Series C
Convertible Preferred stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(649,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
131,018
|
|
|
|
13
|
|
|
|
649,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
649,473
|
|
|
|
|
|
Exercise of March 2005 Senior Note
warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,096
|
|
|
|
2
|
|
|
|
42,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,248
|
|
|
|
|
|
Accretion of preferred stock
dividends
|
|
|
|
|
|
|
3,508
|
|
|
|
|
|
|
|
9,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,488
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,488
|
)
|
|
|
|
|
Conversion of Series A, B, C
Convertible Preferred Stock
|
|
|
(3,106,736
|
)
|
|
|
(7,077,767
|
)
|
|
|
(8,839,573
|
)
|
|
|
(19,543,897
|
)
|
|
|
|
|
|
|
|
(3,368,385
|
)
|
|
|
(8,225,806
|
)
|
|
|
6,063,317
|
|
|
|
607
|
|
|
|
34,846,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,621,664
|
|
|
|
|
|
Beneficial conversion feature
related to Series A, B, C Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,568,783
|
|
|
|
|
|
|
|
(8,568,783
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Beneficial conversion feature
related to Series B & C Preferred Stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
381,011
|
|
|
|
|
|
|
|
(381,011
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Beneficial conversion feature
related to March 2005 Senior Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,361,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,361,900
|
|
|
|
|
|
Beneficial conversion feature
related to November 2005 Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
Issuance of common stock and
warrants, net of fees of $0.8 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,080,837
|
|
|
|
408
|
|
|
|
9,388,226
|
|
|
|
1,400,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,788,921
|
|
|
|
|
|
Issuance of common stock in
connection with conversion of tbg II loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282,885
|
|
|
|
28
|
|
|
|
2,438,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,438,598
|
|
|
|
|
|
Issuance of common stock in
connection with conversion of 2002 bridge loan and accrued
interest and exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,634,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
4,454,583
|
|
|
|
445
|
|
|
|
9,617,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,617,731
|
|
|
|
|
|
Issuance of common stock in
connection with conversion of March 2005 Senior Notes and
accrued interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,126,758
|
|
|
|
113
|
|
|
|
3,199,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,200,000
|
|
|
|
|
|
Issuance of common stock in
connection with conversion of November 2005 Notes and accrued
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
711,691
|
|
|
|
71
|
|
|
|
2,021,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,021,209
|
|
|
|
|
|
Issuance of common stock, options
and warrants related to the merger with Maxim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,793,117
|
|
|
|
582
|
|
|
|
41,387,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,387,812
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,543,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,543,432
|
|
|
|
|
|
Stock-based compensation expense
issued to third party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,994
|
|
|
|
|
|
Foreign currency translation
adjustment and unrealized gains on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(276,370
|
)
|
|
|
|
|
|
|
(276,370
|
)
|
|
|
(276,370
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,451,485
|
)
|
|
|
|
|
|
|
|
|
|
|
(60,451,485
|
)
|
|
|
(60,451,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30,
2006
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
24,537,526
|
|
|
$
|
2,456
|
|
|
$
|
121,133,508
|
|
|
$
|
1,400,287
|
|
|
$
|
(137,154,278
|
)
|
|
$
|
(960,800
|
)
|
|
$
|
(75,000
|
)
|
|
$
|
(15,653,827
|
)
|
|
$
|
(60,727,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-4
EpiCept
Corporation and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(60,451,485
|
)
|
|
$
|
(5,146,615
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
999,964
|
|
|
|
42,301
|
|
Loss on disposal of assets, net
|
|
|
62,675
|
|
|
|
—
|
|
Foreign exchange gain
|
|
|
(84,469
|
)
|
|
|
(325,508
|
)
|
Acquired in-process research and
development
|
|
|
33,361,667
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
3,595,426
|
|
|
|
28,399
|
|
Amortization of deferred financing
costs and discount on loans
|
|
|
641,150
|
|
|
|
335,924
|
|
Write off of deferred initial
public offering costs
|
|
|
—
|
|
|
|
1,740,918
|
|
Beneficial conversion feature
expense
|
|
|
4,361,900
|
|
|
|
—
|
|
Change in value of warrants and
derivatives
|
|
|
(363,270
|
)
|
|
|
(724,073
|
)
|
Changes in operating assets and
liabilities, net of merger assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in prepaid
expenses and other current assets
|
|
|
857,871
|
|
|
|
(23,331
|
)
|
Decrease in other assets
|
|
|
112,904
|
|
|
|
2,163
|
|
Increase (decrease) in accounts
payable
|
|
|
52,258
|
|
|
|
(36,649
|
)
|
Increase (decrease) in accrued
research contract costs
|
|
|
594,292
|
|
|
|
(149,683
|
)
|
Increase in accrued
interest — current
|
|
|
147,126
|
|
|
|
408,420
|
|
(Decrease) increase in other
accrued liabilities
|
|
|
(1,114,435
|
)
|
|
|
202,189
|
|
Merger restructuring and litigation
payments
|
|
|
(1,047,721
|
)
|
|
|
—
|
|
Increase in deferred revenue
|
|
|
—
|
|
|
|
500,000
|
|
Recognition of deferred revenue
|
|
|
(697,017
|
)
|
|
|
(1,134,072
|
)
|
Increase in accrued interest
|
|
|
52,852
|
|
|
|
53,616
|
|
Increase in contingent interest
|
|
|
123,969
|
|
|
|
115,825
|
|
Reversal of contingent interest
expense
|
|
|
(994,105
|
)
|
|
|
—
|
|
Decrease in other liabilities
|
|
|
(8,101
|
)
|
|
|
(13,534
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(19,796,549
|
)
|
|
|
(4,123,710
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Cash acquired in merger
|
|
|
3,536,620
|
|
|
|
—
|
|
Maturities of marketable securities
|
|
|
10,379,249
|
|
|
|
—
|
|
Establishment of restricted cash
|
|
|
(80,244
|
)
|
|
|
—
|
|
Purchases of property and equipment
|
|
|
(10,797
|
)
|
|
|
(2,985
|
)
|
Payment of acquisition related costs
|
|
|
(3,639,985
|
)
|
|
|
—
|
|
Proceeds from sale of web site
|
|
|
100,000
|
|
|
|
—
|
|
Proceeds from sale of property and
equipment
|
|
|
126,585
|
|
|
|
2,104
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in
investing activities
|
|
|
10,411,428
|
|
|
|
(881
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of stock
options
|
|
|
184,500
|
|
|
|
17,550
|
|
Proceeds from issuance of common
stock and warrants, net
|
|
|
10,801,521
|
|
|
|
—
|
|
Proceeds from loans and warrants
|
|
|
10,000,000
|
|
|
|
4,000,010
|
|
Repayment of loan
|
|
|
(770,769
|
)
|
|
|
—
|
|
Deferred financing costs
|
|
|
(257,432
|
)
|
|
|
(56,454
|
)
|
Payments on capital lease
obligations
|
|
|
(136,757
|
)
|
|
|
—
|
|
Payment of failed initial public
offering costs
|
|
|
(363,096
|
)
|
|
|
(693,217
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
19,457,967
|
|
|
|
3,267,889
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
(15,245
|
)
|
|
|
42,122
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
10,057,601
|
|
|
|
(814,580
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
402,994
|
|
|
|
1,253,507
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
10,460,595
|
|
|
$
|
438,927
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
459,928
|
|
|
$
|
217,502
|
|
Cash paid for income taxes
|
|
$
|
3,256
|
|
|
$
|
425
|
|
Supplemental disclosure of
non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred
stock dividends
|
|
$
|
13,488
|
|
|
$
|
940,770
|
|
Beneficial conversion features in
connection with conversion of preferred stock and warrant
exercise
|
|
$
|
8,949,794
|
|
|
$
|
—
|
|
Beneficial conversion features in
connection with conversion of convertible notes
|
|
$
|
4,361,900
|
|
|
$
|
—
|
|
Conversion of convertible preferred
stock into common stock
|
|
$
|
34,847,470
|
|
|
$
|
—
|
|
Conversion of convertible loans and
accrued interest and exercise of bridge warrants into common
stock
|
|
$
|
17,319,786
|
|
|
$
|
—
|
|
Exercise of preferred stock
warrants into common stock
|
|
$
|
949,957
|
|
|
$
|
—
|
|
Unpaid costs associated with
issuance of common stock
|
|
$
|
12,600
|
|
|
$
|
—
|
|
Unpaid financing, initial public
offering costs and acquisition costs
|
|
$
|
593,569
|
|
|
$
|
1,393,775
|
|
Merger with Maxim:
|
|
|
|
|
|
|
|
|
Assets acquired
|
|
$
|
19,494,000
|
|
|
$
|
—
|
|
Liabilities assumed
|
|
$
|
3,047,000
|
|
|
$
|
—
|
|
In-process technology
|
|
$
|
33,362,000
|
|
|
$
|
—
|
|
Merger liabilities
|
|
$
|
4,684,000
|
|
|
$
|
—
|
|
Common stock, options and warrants
related to the merger with Maxim
|
|
$
|
41,387,812
|
|
|
$
|
—
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-5
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial Statements
EpiCept Corporation (“EpiCept” or the
“Company”) is a specialty pharmaceutical company that
focuses on the development of pharmaceutical products for the
treatment of pain and cancer. The Company has a portfolio of
nine product candidates in various stages of development: an
oncology product candidate submitted for European registration,
three pain product candidates that are ready to enter, or have
entered, Phase IIb or Phase III clinical trials, three
pain product candidates that have completed initial
Phase II clinical trials and two oncology compounds, one of
which is completing a Phase I clinical trial and the second
of which is expected to enter clinical development in the next
few months. EpiCept’s portfolio of pain management and
oncology product candidates allows it to be less reliant on the
success of any one product candidate.
The Company’s oncology product candidate is Ceplene, which
is intended as remission maintenance therapy in the treatment of
acute myeloid leukemia, or AML. The Companys late stage pain
product candidates are: EpiCept
NP-1, a
prescription topical analgesic cream designed to provide
effective long-term relief of peripheral neuropathies; LidoPAIN
SP, a sterile prescription analgesic patch designed to provide
sustained topical delivery of lidocaine to a post-surgical or
post-traumatic sutured wound while also providing a sterile
protective covering for the wound; and LidoPAIN BP, a
prescription analgesic non-sterile patch designed to provide
sustained topical delivery of lidocaine for the treatment of
acute or recurrent lower back pain. None of the Company’s
product candidates has been approved by the U.S. Food and
Drug Administration (“FDA”) or any comparable agency
in another country.
The Company has yet to generate product revenues from any of its
product candidates in development. During 2003, the Company
entered into two strategic alliances, the first in July 2003
with Adolor Corporation (“Adolor”) for the development
and commercialization of certain products, including LidoPAIN SP
in North America, and the second in December 2003 with Endo
Pharmaceuticals, Inc. (“Endo”) for the worldwide
commercialization of LidoPAIN BP. On October 27, 2006, the
Company was informed of the decision by Adolor to discontinue
its licensing agreement with the Company for LidoPAIN SP. As a
result, the Company now has the full worldwide development and
commercialization rights to the product candidate. EpiCept has
received a total of $10.5 million in upfront nonrefundable
license and milestone fees in connection with these agreements.
In connection with the merger with Maxim Pharmaceuticals Inc.
(“Maxim”) on January 4, 2006, the Company
acquired a license agreement with Myriad Genetics, Inc.
(“Myriad”) under which the Company licensed its
MX90745 series of caspase-inducer anti-cancer compounds to
Myriad. Myriad has initiated clinical trials for Azixa (MPC6827)
for the treatment of brain cancer and other solid tumors. Under
the terms of the agreement, Myriad is responsible for the
worldwide development and commercialization of any drug
candidates from the series of compounds. The agreement requires
that Myriad make licensing, research and milestone payments to
the Company assuming the successful commercialization of a
compound for the treatment of cancer, as well as pay a royalty
on product sales. The Company is eligible to receive an
additional $106.5 million in milestone payments under the
above mentioned relationships and, upon receipt of appropriate
regulatory approvals, the Company will be entitled to royalties
based on net sales of products. There is no assurance that any
of these additional milestones will be earned or any royalties
paid. The Company’s ability to generate additional revenue
in the future will depend on its ability to meet development or
regulatory milestones under its existing license agreements that
trigger additional payments, to enter into new license
agreements for other products or territories, and to receive
regulatory approvals for, and successfully commercialize, its
product candidates either directly or through commercial
partners.
The Company is subject to a number of risks associated with
companies in the specialty pharmaceutical industry. Principal
among these are risks associated with the Company’s
dependence on collaborative arrangements, risks associated with
product development by the Company or its competitors of new
technological innovations, dependence on key personnel,
protection of proprietary technology, compliance with the FDA
and other governmental regulations and approval requirements, as
well as the ability to grow the Company’s business and the
need to obtain adequate financing to fund its product
development activities.
F-6
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
Recent
Events
On September 20, 2006, the Company was notified by the
Nasdaq Listings Qualification Department that it did not comply
with the continued listing requirements of the Nasdaq Global
Market because the market value of the Company’s listed
securities had fallen below $50.0 million for ten
consecutive days (pursuant to Rule 4450(b)(1)(A) of the
Nasdaq Marketplace Rules). Nasdaq also informed the Company that
it was not in compliance with Marketplace
Rule 4450(b)(1)(B), which requires total assets and total
revenue of $50.0 million each for the most recently
completed fiscal year or two of the last three most recently
completed fiscal years. The Company had until October 20,
2006 to comply with the listing requirements. As of
October 20, 2006, the Company did not regain compliance
with the listing requirements and an appeal was requested. The
Company’s securities on the Nasdaq Global Market remain
listed pending a final decision of this appeal process.
Merger
with Maxim Pharmaceuticals Inc.
On January 4, 2006, Magazine Acquisition Corp.
(“Magazine”), a wholly owned subsidiary of EpiCept,
completed its merger with Maxim pursuant to the terms of the
Agreement and Plan of Merger (the “Merger Agreement”),
among EpiCept, Magazine and Maxim, dated as of September 6,
2005. Under the terms of the Merger Agreement, Magazine merged
with and into Maxim, with Maxim continuing as the surviving
corporation as a wholly-owned subsidiary of EpiCept. EpiCept
issued approximately 5.8 million shares of its common stock
to Maxim stockholders in exchange for all of the outstanding
shares of Maxim, with Maxim stockholders receiving 0.203969 of a
share of EpiCept common stock for each share of Maxim common
stock. EpiCept stockholders retained approximately 72%, and the
former Maxim stockholders received approximately 28%, of the
outstanding shares of EpiCept’s common stock. EpiCept
accounted for the merger as an asset acquisition as Maxim was a
development stage company. The transaction valued Maxim at
approximately $45.1 million.
In connection with the merger with Maxim, all of EpiCept’s
outstanding preferred stock and convertible debt was
automatically converted into EpiCept common stock, and all of
the then outstanding stock purchase warrants were exercised or
cancelled (see Notes 7 through 9). The conversion of the
outstanding preferred stock and convertible debt and the
exercise of the stock purchase warrants resulted in beneficial
conversion feature (“BCF”) charges of
$13.3 million representing the differences between the fair
value of the Company’s common stock and the price at which
certain instruments were converted or exercised.
The Company has prepared its financial statements under the
assumption that it is a going concern. The Company has devoted
substantially all of its cash resources to research and
development programs and general and administrative expenses,
and to date it has not generated any meaningful revenues from
the sale of products and does not expect to generate any such
revenues for a number of years, if at all. As a result, the
Company has incurred an accumulated deficit of
$137.2 million as of September 30, 2006 and expects to
incur operating losses, potentially greater than losses in prior
years, for a number of years. The Company’s recurring
losses from operations and the accumulated deficit raise
substantial doubt about its ability to continue as a going
concern. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
The Company has financed its operations through the proceeds
from the sales of common and preferred equity securities, debt,
proceeds from collaborative relationships, investment income
earned on cash balances and short-term investments and the sales
of a portion of its New Jersey net operating loss carryforwards.
In August 2006, the Company entered into a $10.0 million
senior secured term loan due August 2009 and issued warrants to
purchase common stock at $2.65 per share for gross proceeds
of $10.0 million. In February 2006, the Company sold
approximately 4.1 million shares of common stock at
$2.85 per share and issued warrants to purchase common
stock at $4.00 per share for gross proceeds of
$11.6 million.
F-7
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
The Company expects to utilize its cash and cash equivalents to
fund its operations, including research and development of its
product candidates, primarily for clinical trials. Based upon
the projected spending levels for the Company, the Company does
not currently have adequate cash and cash equivalents to
complete the clinical trials and therefore will require
additional funding. As a result, the Company intends to monitor
its liquidity position and the status of its clinical trials and
to continue to actively pursue fund-raising possibilities
through the sale of its equity securities or via other
alternative sources of cash. If the Company is unsuccessful in
its efforts to raise additional funds through the sale of its
equity securities or achievement of development milestones, it
may be required to significantly reduce or curtail its research
and development activities and other operations if its level of
cash and cash equivalents falls below pre-determined levels. The
Company believes that its existing cash and cash equivalents
will be sufficient to fund its operations into the second
quarter of 2007.
The Company will require substantial new funding to pursue
development and commercialization of its product candidates and
continue its operations. The Company believes that satisfying
these capital requirements will require successful development
and commercialization of its product candidates. However, it is
uncertain whether any product candidates will be approved or
will be commercially successful. The amount of the
Company’s future capital requirements will depend on
numerous factors, including the progress of its research and
development programs, the conduct of pre-clinical tests and
clinical trials, the development of regulatory submissions, the
costs associated with protecting patents and other proprietary
rights, the development of marketing and sales capabilities and
the availability of third-party funding. There can be no
assurance that such funding will be available at all or on terms
acceptable to the Company. If the Company obtains funds through
arrangements with collaborative partners or others, the Company
may be required to relinquish rights to certain of its
technologies or product candidates.
The condensed consolidated balance sheet as of
September 30, 2006, the condensed consolidated statements
of operations for the three and nine months ended
September 30, 2006 and 2005, the condensed consolidated
statement of preferred stock and stockholders’ deficit for
the nine months ended September 30, 2006 and the condensed
consolidated statements of cash flows for the nine months ended
September 30, 2006 and 2005 and related disclosures
contained in the accompanying notes are unaudited. The condensed
consolidated financial statements are presented on the basis of
accounting principles that are generally accepted in the United
States for interim financial information and in accordance with
the instructions of the Securities and Exchange Commission (the
“SEC”) on
Form 10-Q
and
Rule 10-01
of
Regulation S-X.
Accordingly, they do not include all the information and
footnotes required by accounting principles generally accepted
in the United States for a complete set of financial statements.
In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly
the condensed consolidated balance sheet as of
September 30, 2006 and the results of operations and cash
flows for the periods ended September 30, 2006 and 2005
have been made. The results for the three and nine months ended
September 30, 2006 are not necessarily indicative of the
results to be expected for the year ending December 31,
2006 or for any other year. The condensed consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements and the accompanying notes for
the year ended December 31, 2005, included in the
Company’s Annual Report on
Form 10-K
filed with the SEC.
|
|
3.
|
Summary
of Significant Accounting Policies
|
Consolidation
The accompanying condensed consolidated financial statements
include the accounts of the Company and its direct and indirect
wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
F-8
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements. Estimates also affect the
reported amounts of revenues and expenses during the reporting
period, the allocation of the preliminary purchase price of
Maxim on January 4, 2006, and the costs of the exit plan
related to the merger with Maxim. Actual results could differ
from those estimates (see Notes 11 and 12).
Revenue
Recognition
The Company recognizes revenue relating to its collaboration
agreements in accordance with the SEC’s Staff Accounting
Bulletin No. 104, “Revenue Recognition,” and
Emerging Issues Task Force (“EITF”) Issue
No. 00-21,
“Revenue Arrangements with Multiple Deliverables”
(“EITF 00-21”).
Revenue under collaborative arrangements may result from license
fees, milestone payments, research and development payments and
royalty payments.
The Company’s application of these standards requires
subjective determinations and requires management to make
judgments about value of the individual elements and whether
they are separable from the other aspects of the contractual
relationship. The Company evaluates its collaboration agreements
to determine units of accounting for revenue recognition
purposes. To date, the Company has determined that its upfront
non-refundable license fees cannot be separated from its ongoing
collaborative research and development activities and,
accordingly, do not treat them as a separate element. The
Company recognizes revenue from non-refundable, upfront licenses
and related payments, not specifically tied to a separate
earnings process, either on the proportional performance method
or ratably over the development period in which the Company is
obligated to participate on a continuing and substantial basis
in the research and development activities outlined in the
contract. Ratable revenue recognition is only utilized if the
research and development services are performed systematically
over the development period. Proportional performance is
measured based on costs incurred compared to total estimated
costs to be incurred over the development period which
approximates the proportion of the value of the services
provided compared to the total estimated value over the
development period. The Company periodically reviews its
estimates of cost and the length of the development period and,
to the extent such estimates change, the impact of the change is
recorded at that time.
The Company recognizes milestone payments as revenue upon
achievement of the milestone only if (1) it represents a
separate unit of accounting as defined in
EITF 00-21;
(2) the milestone payment is nonrefundable;
(3) substantive effort is involved in achieving the
milestone; and (4) the amount of the milestone is
reasonable in relation to the effort expended or the risk
associated with the achievement of the milestone. If any of
these conditions is not met, the Company recognizes milestones
as revenue in accordance with the accounting policy in effect
for the respective contract. At the time of a milestone payment
receipt, the Company would recognize revenue based upon the
portion of the development services that are completed to date
and defer the remaining portion and recognize it over the
remainder of the development services on the proportional or
ratable method, whichever is applicable. When payments are
specifically tied to a separate earnings process, revenue will
be recognized when the specific performance obligation
associated with the payment has been satisfied. Deferred revenue
represents the excess of cash received compared to revenue
recognized to date under licensing agreements.
Stock-Based
Compensation
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“FAS”) FAS 123R,
“Share-Based Payment”
(“FAS 123R”). FAS 123R is a revision of FASB
Statement 123, “Accounting for Stock-Based
Compensation” and supersedes Accounting Principles
Board (“APB”) APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and its
related implementation guidance. FAS 123 focused primarily
on accounting for transactions in which an entity obtains
employee services in share-based payment transactions.
FAS 123R requires a public entity to measure the cost of
employee services
F-9
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
received in exchange for an award of equity instruments based on
the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during
which an employee is required to provide service in exchange for
the award. FAS 123R is effective as of the beginning of the
first annual reporting period that begins after June 15,
2005. The Company adopted FAS 123R on January 1, 2006
using the modified prospective application as permitted by
FAS 123R. Accordingly, prior period amounts have not been
restated. As of the adoption of FAS 123R, there was no
effect on the condensed consolidated financial statements
because there was no compensation expense to be recognized. The
Company had no unvested granted awards on January 1, 2006.
The Company is now required to record compensation expense at
fair value for all awards granted after the date of adoption and
for the unvested portion of previously granted awards at their
respective vesting dates.
Upon the completion of the merger with Maxim on January 4,
2006, Maxim option holders with a Maxim exercise price of
$20.00 per share or less received a total of
0.4 million options to purchase shares of EpiCept common
stock in exchange for the options to purchase Maxim common stock
they held at the Maxim exercise price divided by the exchange
ratio of 0.203969. During 2006, the Company issued approximately
2.5 million stock options with varying vesting provisions
to its employees and board of directors. Based on the
Black-Scholes valuation method (volatility —
69% — 83%, risk free rate —
4.28% — 5.10%, dividends — zero, weighted
average life — 5 years; forfeiture —
10%), the Company estimated $8.1 million of share-based
compensation will be recognized as compensation expense over the
vesting periods. During the three and nine months ended
September 30, 2006, EpiCept recognized total employee
share-based compensation of approximately $0.6 and
$3.5 million, respectively, related to the options granted
during 2006 ($1.7 million related to those which vested
upon grant during the quarter ended March 31,
2006) and the unvested outstanding Maxim options as of
January 4, 2006 that were converted into EpiCept options.
The weighted average volatility for 2006 was 81%. During 2006,
the Company did not grant stock options that contained either a
market or a performance condition.
Had compensation cost for the Company’s stock based
compensation plan been determined using the fair value of the
options at the grant date prior to January 1, 2006, the
Company’s net loss for the comparable three and nine months
ended September 30, 2005 would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
Net loss
|
|
$
|
(449,433
|
)
|
|
$
|
(5,146,615
|
)
|
Add back: Total stock-based
employee compensation expense under the APB 25 intrinsic
value method
|
|
|
—
|
|
|
|
22,222
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value based method
|
|
|
—
|
|
|
|
(26,244
|
)
|
|
|
|
|
|
|
|
|
|
Net loss — pro forma
|
|
|
(449,433
|
)
|
|
|
(5,150,637
|
)
|
Deemed dividend and redeemable
convertible preferred stock dividends
|
|
|
(313,590
|
)
|
|
|
(940,770
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma loss attributable to
common stockholders
|
|
$
|
(763,023
|
)
|
|
$
|
(6,091,407
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common
share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(0.45
|
)
|
|
$
|
(3.56
|
)
|
Pro forma
|
|
$
|
(0.45
|
)
|
|
$
|
(3.56
|
)
|
The fair value of each option grant is estimated on the date of
the grant using the Black-Scholes option-pricing model. No
options were granted in 2005.
F-10
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
The following table presents the total employee and third party
stock-based compensation expense resulting from stock options
included in the condensed consolidated statement of operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
General and administrative costs
|
|
$
|
521,300
|
|
|
$
|
3,246,158
|
|
Research and development costs
|
|
|
82,376
|
|
|
|
349,268
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation costs
before income taxes
|
|
|
603,677
|
|
|
|
3,595,426
|
|
Benefit for income taxes(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net compensation expense
|
|
$
|
603,677
|
|
|
$
|
3,595,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The stock-based compensation expense has not been tax-effected
due to the recording of a full valuation allowance against net
deferred tax assets. |
Summarized information for stock option grants for the nine
months ended September 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
Balance at January 1, 2006
|
|
|
439,501
|
|
|
$
|
1.34
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,528,597
|
|
|
|
5.40
|
|
|
|
|
|
|
|
|
|
Issued in connection with
acquisition of Maxim
|
|
|
374,308
|
|
|
|
24.25
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(101,250
|
)
|
|
|
1.82
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(61,042
|
)
|
|
|
5.59
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(38,962
|
)
|
|
|
17.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
3,141,152
|
|
|
|
7.13
|
|
|
|
8.50
|
|
|
$
|
186,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
September 30, 2006
|
|
|
1,659,151
|
|
|
|
8.62
|
|
|
|
7.74
|
|
|
$
|
186,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company received $0.2 million from the exercise of
101,250 stock options during the nine months ended
September 30, 2006. The total intrinsic value of options
exercised during the nine months ended September 30, 2006
was $0.2 million. Intrinsic value is measured using the
fair market value at the date of exercise (for shares exercised)
or at September 30, 2006 (for outstanding options), less
the applicable exercise price. The weighted average grant-date
fair value of options granted during the nine months ended
September 30, 2006 was $3.70. The Company received $17,550
from the exercise of 12,125 stock options during the nine months
ended September 30, 2005.
On January 4, 2006 the Company granted approximately
2.2 million stock options to its employees and board of
directors. During the three and nine months ended
September 30, 2006, the Company granted stock options of
approximately 0.1 and 2.5 million, respectively, to its
employees and board of directors. As of September 30, 2006,
the total remaining unrecognized compensation cost related to
the stock option plans amounted to $4.6 million, which will
be amortized over the weighted-average remaining requisite
service period of 2.48 years. Summarized
F-11
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
Black Scholes valuation method assumptions for stock option
grants to employees and directors for the three and nine months
ended September 30, 2006 is as follows:
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2006
|
|
2006
|
|
Volatility
|
|
69%
|
|
69% - 83%
|
Risk free rate
|
|
4.68% - 5.05%
|
|
4.28% - 5.05%
|
Dividends
|
|
—
|
|
—
|
Weighted average life
|
|
5 Yrs
|
|
5 Yrs
|
Options issued to non-employees are valued using the fair value
method (Black-Scholes option pricing model) under FAS 123R
and EITF Issue 96-18, “Accounting for Equity Investments
that are Issued to Other than Employees for Acquiring or in
Conjunction with Selling Goods or Services”
(“EITF 96-18”). The value of such options is
periodically remeasured and income or expense is recognized
during the vesting terms. Compensation expense will be adjusted
at each reporting date based on the then fair value of the grant
until fully vested. Summarized information for stock option
grants to former directors for the three and nine months ended
September 30, 2006 is as follows:
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2006
|
|
2006
|
|
Granted
|
|
20,000
|
|
40,000
|
Volatility
|
|
69% - 82%
|
|
69% - 82%
|
Risk free rate
|
|
4.59% - 4.91%
|
|
4.59% - 5.21%
|
Dividends
|
|
—
|
|
—
|
Weighted average life
|
|
5 Yrs
|
|
5 Yrs
|
Compensation expense
|
|
$26,000
|
|
$52,000
|
Expected Volatility. Due to limited Company
specific historical volatility data, the Company has based its
estimate of expected volatility of stock awards upon historical
volatility rates of comparable public companies to the extent it
was not materially lower than its actual volatility. In the
third quarter of 2006, the Company’s actual stock
volatility rate was higher than the volatility rates of
comparable public companies. Therefore, the Company used its
historical volatility rate of 82% for the third quarter of 2006
as management believes that this rate is a better estimate of
future volatility.
Expected Term. The expected term is based on
historical observations of employee exercise patterns during the
Company’s history.
Risk-Free Interest Rate. The risk-free rate is
based on U.S. Treasury yields in effect at the time of
grant corresponding with the expected term of the options.
Dividend Yield. The Company has never paid
cash dividends, and does not currently intend to pay cash
dividends, and thus has assumed a 0% dividend yield.
Pre-vesting forfeitures. Estimates of
pre-vesting option forfeitures are based on the Company’s
experience. The Company will adjust its estimate of forfeitures
over the requisite service period based on the extent to which
actual forfeitures differ, or are expected to differ, from such
estimates. Changes in estimated forfeitures will be recognized
through a cumulative
catch-up
adjustment in the period of change and will also impact the
amount of compensation expense to be recognized in future
periods.
Under the terms of the 2005 Equity Incentive Plan (the
“2005 Plan”), 4 million of the Company’s
50 million authorized shares of the Company’s common
stock may be granted as stock options to employees and directors
of the Company from authorized shares not currently issued. The
2005 Plan became effective at the effective time of
F-12
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
the merger with Maxim on January 4, 2006. Options issued
pursuant to the 2005 Plan have a maximum maturity of
10 years and generally vest over 4 years from the date
of grant. As of September 30, 2006, 1.7 million stock
options remain available for future year grants under the 2005
Plan. All stock options granted in 2006 were from the 2005 Plan.
Under the terms of the 1995 Stock Option Plan, which terminated
on November 14, 2005, 0.3 million options remain
vested and outstanding as of September 30, 2006.
Under the terms of the 2005 Employee Stock Purchase Plan,
0.5 million shares of the Company’s common stock have
been reserved for sale. The Employee Stock Purchase Plan became
effective at the effective time of the merger with Maxim on
January 4, 2006. As of September 30, 2006, no shares
have been issued.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of 90 days or less when purchased to be cash
equivalents.
Marketable
Securities
The Company has determined that all its marketable securities
should be classified as
available-for-sale.
Available-for-sale
securities are carried at estimated fair value, with the
unrealized gains and losses reported in Stockholders’
Deficit under the caption “Accumulated Other Comprehensive
Loss.” The amortized cost of debt securities is adjusted
for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be
other-than-temporary
on
available-for-sale
securities are included in other income and expense. The cost of
securities sold is based on the specific identification method.
Interest and dividends on securities classified as
available-for-sale
are included in interest income. At September 30, 2006,
marketable securities included $1.0 million of corporate
debt securities.
The following is a summary of the Company’s marketable
securities at September 30, 2006. Determination of
estimated fair value is based upon quoted market prices.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Losses
|
|
|
Value
|
|
|
Corporate debt securities
|
|
$
|
1,001,117
|
|
|
$
|
(6,117
|
)
|
|
$
|
995,000
|
|
The above
available-for-sale
marketable securities by contractual maturities are all due
within one year.
Investments in a net unrealized loss position at
September 30, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months of
|
|
|
Greater than 12 Months
|
|
|
Total Temporary
|
|
|
|
|
|
|
Temporary Impairment
|
|
|
of Temporary Impairment
|
|
|
Impairment
|
|
|
|
Number of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Investments
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Corporate debt securities
|
|
|
1
|
|
|
$
|
995,000
|
|
|
$
|
(6,117
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
995,000
|
|
|
$
|
(6,117
|
)
|
Restricted
Cash
The Company has lease agreements for the premises it occupies.
Letters of credit in lieu of lease deposits for leased
facilities totaling $0.3 million are secured by restricted
cash in the same amount at September 30, 2006.
F-13
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
Intangible
Asset
Intangible asset consists of the assembled workforce acquired in
the merger with Maxim (see Note 11). The assembled
workforce is being amortized on a straight-line basis over six
years. The Company will record amortization of $0.1 million
each year beginning in 2006. Assembled workforce amortization is
recorded in research and development expense.
Reverse
Stock Split
On September 5, 2005, EpiCept’s stockholders approved
a
one-for-four
reverse stock split of its common stock, which was contingent on
the merger with Maxim. The reverse stock split occurred
immediately prior to the completion of the merger on
January 4, 2006. As a result of the reverse stock split,
every four shares of EpiCept common stock were combined into one
share of common stock and any fractional shares created by the
reverse stock split were rounded down to whole shares. The
reverse stock split affected all of EpiCept’s common stock,
stock options and warrants outstanding immediately prior to the
effective time of the reverse stock split. All common stock and
per common share amounts for all periods presented have been
retroactively restated to reflect this reverse split.
|
|
4.
|
Supplemental
Financial Information
|
Loss
per Share
Basic and diluted loss per share is computed by dividing loss
attributable to common stockholders by the weighted average
number of shares of common stock outstanding during the period.
Diluted weighted average shares outstanding excludes shares
underlying the Company’s Series A convertible
preferred stock, Series B redeemable convertible preferred
stock and Series C redeemable convertible preferred stock
(collectively the “Preferred Stock”), stock options
and warrants, since the effects would be anti-dilutive.
Accordingly, basic and diluted loss per share is the same. Such
excluded shares as of September 30, 2006 and 2005 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Common stock options
|
|
|
3,141,152
|
|
|
|
445,000
|
|
Warrants
|
|
|
1,750,403
|
|
|
|
6,374,999
|
|
Series A convertible
preferred stock
|
|
|
—
|
|
|
|
1,148,571
|
|
Series B redeemable preferred
stock
|
|
|
—
|
|
|
|
896,173
|
|
Series C redeemable preferred
stock
|
|
|
—
|
|
|
|
2,549,876
|
|
|
|
|
|
|
|
|
|
|
Total shares excluded from
calculation
|
|
|
4,891,555
|
|
|
|
11,414,619
|
|
|
|
|
|
|
|
|
|
|
Upon the closing of the merger with Maxim on January 4,
2006, all of EpiCept’s then outstanding warrants, Preferred
Stock and convertible debt was converted into or exercised for
common stock or cancelled. The Company issued options to
purchase approximately 0.4 million shares at an exercise
price of $3.24 - $77.22 per share of EpiCept common stock
in exchange for Maxim’s outstanding options upon the
closing of the merger. In addition, the Company issued warrants
to purchase approximately 0.3 million shares at an exercise
price range of $13.48 - $37.75 per share of
EpiCept common stock in exchange for Maxim’s warrants.
F-14
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
Prepaid
Expenses and Other Current Assets:
Prepaid expenses and other current assets consist of the
following:
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
Prepaid expenses
|
|
$
|
323,882
|
|
Prepaid insurance
|
|
|
315,805
|
|
Prepaid taxes
|
|
|
22,145
|
|
Miscellaneous receivable
|
|
|
50,866
|
|
Accrued interest on marketable
securities
|
|
|
17,929
|
|
|
|
|
|
|
Total
|
|
$
|
730,627
|
|
|
|
|
|
|
Certain prepaid expenses and other current assets were assumed
as a result of the merger with Maxim on January 4, 2006
(see Note 11).
Deferred
Financing and Acquisition Costs:
The Company incurred deferred acquisition costs related to the
merger with Maxim in the amount of $3.7 million, of which
only a nominal amount was unpaid at September 30, 2006.
Deferred financing costs represent legal and other costs and
fees incurred to negotiate and obtain financing. Deferred
financing costs are capitalized and amortized using the
effective interest method over the life of the applicable
financing. The Company incurred deferred financing costs related
to the August 2006 senior secured term loan (See
Note 7) in the amount of $0.8 million, of which
$0.6 million was unpaid at September 30, 2006.
Deferred financing and acquisition costs are summarized below:
|
|
|
|
|
|
|
September. 30,
|
|
|
|
2006
|
|
|
Deferred acquisition costs
|
|
$
|
—
|
|
Deferred financing costs
|
|
|
709,228
|
|
|
|
|
|
|
Total
|
|
$
|
709,228
|
|
|
|
|
|
|
Property
and Equipment:
Property and equipment consist of the following:
|
|
|
|
|
|
|
September. 30,
|
|
|
|
2006
|
|
|
Furniture, office and laboratory
equipment
|
|
$
|
1,795,984
|
|
Leasehold improvements
|
|
|
473,066
|
|
|
|
|
|
|
|
|
|
2,269,050
|
|
Less accumulated depreciation
|
|
|
(1,422,036
|
)
|
|
|
|
|
|
|
|
$
|
847,014
|
|
|
|
|
|
|
Depreciation expense was approximately $0.9 million and
$42,000 for the nine months ended September 30, 2006 and
2005, respectively. The net leasehold improvements acquired in
the merger with Maxim totaled approximately $0.4 million,
of which $0.2 million relates to a lease the Company
terminated on July 1, 2006. In accordance with
EITF 05-6
“Determining the Amortization Period for Leasehold
Improvements Purchased after Lease Inception or Acquired in a
Business Combination,” the Company amortized the leasehold
improvements
F-15
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
over six months with respect to the terminated leased premise.
The remaining net property and equipment acquired in the merger
with Maxim totaled approximately $1.6 million (see
Note 11). The Company is depreciating the remaining Maxim
property and equipment over two years.
The Company sold excess equipment during the nine months ended
September 30, 2006, resulting in a loss of
$0.2 million. The Company sold one of its web site
addresses in 2006 resulting in a gain of $0.1 million.
Other
Comprehensive Loss
Total other comprehensive loss for the nine months ended
September 30, 2006 was $0.3 million, consisting of a
foreign currency translation loss of approximately
$0.4 million and net unrealized gain on
available — for-sale securities of $0.1 million.
For the nine months ended September 30, 2005, the
Company’s only element of comprehensive loss other than net
loss was foreign currency translation gain of $0.6 million.
Recent
Accounting Pronouncements
In September 2006, FASB issued FAS 157, “Fair Value
Measurements” (“FAS 157”). FAS 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands
disclosures about fair value measurements. FAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years with earlier application encouraged.
The Company is evaluating the impact of adopting FAS 157 on
its financial statements.
In September 2006, the SEC issued Staff Accounting
Bulletin No. 108, “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”
(“SAB 108”), to address diversity in practice in
quantifying financial statement misstatements. SAB 108
requires that we quantify misstatements based on their impact on
each of our financial statements and related disclosures.
SAB 108 is effective as of the end of our 2006 fiscal year,
allowing a one-time transitional cumulative effect adjustment to
retained earnings as of January 1, 2006 for errors that
were not previously deemed material, but are material under the
guidance in SAB 108. SAB 108 will not have an impact
on the Company’s financial statements.
Adolor
Corporation
Under a license agreement signed in July 2003, the Company
granted Adolor the exclusive right to commercialize a sterile
topical patch containing an analgesic alone or in combination,
including LidoPAIN SP, throughout North America. Since July
2003, the Company received non-refundable payments of
$3.0 million, which were being deferred and recognized as
revenue ratably over the estimated product development period.
For the three months ended September 30, 2006 and 2005, the
Company recorded revenue from Adolor of approximately
$0.1 million and $0.5 million, respectively. For the
nine months ended September 30, 2006 and 2005, the Company
recorded revenue from Adolor of approximately $0.4 million
and $0.8 million, respectively. Recognition of deferred
revenue declined approximately $0.1 million in the third
quarter 2006 due to a change in management’s estimate of
the appropriate development period. Since inception to date, the
Company recorded revenue of $1.8 million (See
Note 15). On October 27, 2006, the Company was
informed of the decision by Adolor to discontinue its licensing
agreement with the Company for LidoPAIN SP, its sterile
prescription analgesic patch designed to provide sustained
topical delivery of lidocaine to a post-surgical or
post-traumatic sutured wound. As a result, the Company now has
the full worldwide development and commercialization rights to
the product candidate.
Endo
Pharmaceuticals Inc.
In December 2003, the Company entered into a license agreement
with Endo under which it granted Endo (and its affiliates) the
exclusive (including as to the Company and its affiliates)
worldwide right to commercialize
F-16
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
LidoPAIN BP. The Company also granted Endo worldwide rights to
use certain of its patents for the development of certain other
non-sterile, topical lidocaine containing patches, including
Lidoderm, Endo’s topical lidocaine-containing patch for the
treatment of chronic lower back pain. Upon the execution of the
Endo agreement, the Company received a non-refundable payment of
$7.5 million, which has been deferred and is being
recognized as revenue on the proportional performance method.
For each of the three months ended September 30, 2006 and
2005, the Company recorded revenue from Endo of approximately
$0.1 million. For each of the nine months ended
September 30, 2006 and 2005, the Company recorded revenue
from Endo of approximately $0.3 million. Since inception to
date, the Company recorded revenue of $1.2 million. The
Company may receive payments of up to $52.5 million upon
the achievement of various milestones relating to product
development and regulatory approval for both the Company’s
LidoPAIN BP product and licensed Endo products, including
Lidoderm, so long as, in the case of Endo’s product
candidate, the Company’s patents provide protection
thereof. The Company is also entitled to receive royalties from
Endo based on the net sales of LidoPAIN BP. These royalties are
payable until generic equivalents to the LidoPAIN BP product are
available or until expiration of the patents covering LidoPAIN
BP, whichever is sooner. The Company is also eligible to receive
milestone payments from Endo of up to approximately
$30.0 million upon the achievement of specified net sales
milestones for licensed Endo products, including Lidoderm, so
long as the Company’s patents provide protection thereof.
The future amount of milestone payments the Company is eligible
to receive under the Endo agreement is $82.5 million. There
is no certainty that any of these milestones will be achieved or
any royalty earned.
The Company is responsible for continuing and completing the
development of LidoPAIN BP, including the conduct of all
clinical trials and the supply of the clinical products
necessary for those trials and the preparation and submission of
the NDA in order to obtain regulatory approval for LidoPAIN BP.
It may subcontract with third parties for the manufacture and
supply of LidoPAIN BP. Endo remains responsible for continuing
and completing the development of Lidoderm for the treatment of
chronic lower back pain, including the conduct of all clinical
trials and the supply of the clinical products necessary for
those trials.
The Company has the option to negotiate a co-promotion
arrangement with Endo for LidoPAIN BP or similar product in any
country in which an NDA (or foreign equivalent) filing has been
made within thirty days of such filing. The Company also has the
right to terminate its license to Endo with respect to any
territory in which Endo has failed to commercialize LidoPAIN BP
within three years of the receipt of regulatory approval
permitting such commercialization.
Myriad
Genetics, Inc.
In November 2003, Maxim entered into an agreement with Myriad
under which it licensed the MX90745 series of caspase-inducer
anti-cancer compounds to Myriad. Under the terms of the
agreement, Maxim granted to Myriad a research license to perform
Myriad’s obligations during the Research Term (as defined
in the agreement) with a non-exclusive, worldwide, royalty-free
license, without the right to sublicense the technology. Myriad
is responsible for the worldwide development and
commercialization of any drug candidates from the series of
compounds. Maxim also granted to Myriad a worldwide royalty
bearing development and commercialization license with the right
to sublicense the technology. The agreement requires that Myriad
make licensing, research and milestone payments to Maxim
totaling up to $27 million, of which $3 million was
paid and recognized as revenue prior to the merger on
January 4, 2006, assuming the successful commercialization
of the compound for the treatment of cancer, as well as pay a
royalty on product sales. In September 2006, Myriad announced
positive clinical trial results for Azixa (MPC6827) and expects
to initiate a Phase II clinical trial for the drug during
the fourth quarter of 2006, which will trigger a milestone
payment to EpiCept. Following the merger with Maxim, the Company
assumed Maxim’s rights and obligations under this license
agreement.
F-17
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
|
|
6.
|
Other
Accrued Liabilities
|
Other accrued liabilities consist of the following:
|
|
|
|
|
|
|
September 30
|
|
|
|
2006
|
|
|
Accrued professional fees
|
|
$
|
662,194
|
|
Other accrued liabilities
|
|
|
856,053
|
|
|
|
|
|
|
Total other accrued liabilities
|
|
$
|
1,518,247
|
|
|
|
|
|
|
Certain other accrued liabilities were assumed as a result of
the merger with Maxim on January 4, 2006 (see Notes 11
and 12).
7. Notes,
Loans and Financing
The Company is a party to several loan agreements in the
following amounts:
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
Ten-year,
non-amortizing
loan due December 31, 2007(A)
|
|
$
|
1,943,574
|
|
Ten-year,
non-amortizing
convertible loan due December 31, 2007(B)
|
|
|
—
|
|
Term loan due June 30, 2007(C)
|
|
|
958,510
|
|
Convertible bridge loans due
October 30, 2006(D)
|
|
|
—
|
|
March 2005 senior notes due
October 30, 2006(E)
|
|
|
1,000,000
|
|
November 2005 senior notes due
October 30, 2006(F)
|
|
|
—
|
|
July 2006 note payable due
July 1, 2012(G)
|
|
|
535,121
|
|
August 2006 senior secured term
loan due August 30, 2009(H)
|
|
|
10,000,000
|
|
|
|
|
|
|
Total notes and loans payable,
before debt discount
|
|
|
14,437,205
|
|
Less: Debt discount
|
|
|
864,067
|
|
|
|
|
|
|
Total notes and loans payable
|
|
|
13,573,138
|
|
Less: Notes and loans payable,
current
|
|
|
3,783,830
|
|
|
|
|
|
|
Notes and loans payable, long-term
|
|
$
|
9,789,308
|
|
|
|
|
|
|
|
|
|
(A) |
|
In August 1997, EpiCept GmbH, a wholly-owned subsidiary of
EpiCept, entered into a ten-year
non-amortizing
loan in the amount of €1.5 million with
Technologie-Beteiligungs Gesellschaft mbH der Deutschen
Ausgleichsbank (“tbg”). The loan bears interest at
6% per annum. tbg also receives additional compensation
equal to 9% of the annual surplus (income before taxes, as
defined in the agreement) of EpiCept GmbH, reduced by any other
compensation received from EpiCept GmbH by virtue of other loans
to or investments in EpiCept GmbH provided that tbg is an equity
investor in EpiCept GmbH during that time period. To date,
EpiCept GmbH has had no annual surplus. The Company considers
the additional compensation element based on the surplus of
EpiCept GmbH to be a derivative. The Company has assigned no
value to the derivative at each reporting period as no surplus
of EpiCept GmbH is anticipated over the term of the agreement. |
|
|
|
At the demand of tbg, additional amounts may be due at the end
of the loan term up to 30% of the loan amount, plus 6% of the
principal balance of the note for each year after the expiration
of the fifth complete year of the loan period, such payments to
be offset by the cumulative amount of all payments made to the
lender from the annual surplus of EpiCept GmbH. The Company is
accruing these additional amounts as additional interest up to
the maximum amount due over the term of the loan. Accrued
interest attributable to these additional |
F-18
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
|
|
|
|
|
amounts totaled $0.5 million each at September 30,
2006 and December 31, 2005, respectively. The effective
rate of interest of this loan is 9.7%. |
|
(B) |
|
In February 1998, EpiCept GmbH entered into a ten-year
non-amortizing
convertible term loan in the amount of €2.0 million
with tbg. The loan was non-interest bearing; however, the loan
agreement provided for potential future annual payments from
surplus of EpiCept GmbH up to 6% of the outstanding loan
principal balance, not to exceed 9% of all payments made from
surplus of EpiCept GmbH and limited to 7% of the total financing
from tbg. Upon the closing of the merger with Maxim, on
January 4, 2006 this loan was converted into
282,885 shares of the Company’s common stock at
$8.08 per share. |
|
(C) |
|
In March 1998, EpiCept GmbH entered into a term loan in the
amount of €2.6 million with IKB Private Equity GmbH
(“IKB”), guaranteed by the Company. The interest rate
on the loan is currently 20% per year. Quarterly principal
payments are €0.2 million (approximately
$0.3 million as of September 30, 2006) except for
the payment due December 31, 2006, which will be
approximately €0.4 million (approximately
$0.5 million as of September 30, 2006). The repayment
schedule in effect December 31, 2004 was amended in
February 2005 in which payments due December 31, 2004 and
March 31, 2005 were deferred until March 31, 2007 and
June 30, 2007. As a result of the deferral, the maturity
date has been extended until June 30, 2007. |
|
|
|
The loan agreement provides for contingent interest of
4% per annum of the principal balance, becoming due only
upon the Company’s realization of a profit, as defined in
the agreement. The Company has not realized a profit through
September 30, 2006. The Company values the contingent
interest as a derivative using the fair value method in
accordance with SFAS 133. Changes in the fair value of the
contingent interest are recorded as an adjustment to interest
expense. During the quarter ended September 30, 2006, the
Company determined that it was unlikely to be profitable in 2007
as a result of the LidoPAIN SP Phase III clinical trial in
Europe. Accordingly, the Company determined that the fair value
of the contingent interest should be valued at $0 as of
September 30, 2006 and accordingly reversed contingent
interest of $1.0 million for the three and nine months
ended September 30, 2006. |
|
(D) |
|
In November 2002, the Company entered into convertible bridge
loans with several of its stockholders, in an aggregate amount
of up to $5.0 million. At December 31, 2005, the
Company had borrowings outstanding of $4.8 million. Upon
the closing of the merger with Maxim on January 4, 2006,
the convertible bridge loans (net of $2.4 million used to
exercise accompanying stock purchase warrants) converted into
593,121 shares of the Company’s common stock at a
conversion price of $6.00 per share. |
|
(E) |
|
On March 3, 2005, the Company completed a private placement
of $4.0 million aggregate principal amount of
8% Senior Notes (the “Senior Notes”) with a group
of investors including several of its existing stockholders. The
Senior Notes mature on October 30, 2006. On August 26,
2005, in connection with the merger with Maxim, the Company
amended the Senior Notes with four of the six investors
(cumulatively, the “Non Sanders Investors”). Upon the
closing of the merger with Maxim, the Non Sanders Investors
converted their Senior Notes totaling $3.0 million and
accrued interest into approximately 1.1 million shares of
common stock at a conversion price of $2.84 and forfeited their
stock purchase warrants. The amendment to the Senior Notes
resulted in a contingent BCF. Since the mandatory conversion of
the Senior Notes was contingent upon the closing of the merger
with Maxim, which was outside of the Company’s control, the
BCF was measured as of the modification date at
$2.4 million and was recognized as interest expense upon
the closing of the merger on January 4, 2006. The Company
also charged $0.3 million of unamortized debt discount and
debt issuance costs to interest expense upon conversion of the
Non Sanders Investors Senior Notes. |
|
|
|
The terms of the original Senior Notes for the other two
investors (the “Sanders Senior Notes”) were unchanged
as a result of the merger. The Sanders Senior Notes included an
embedded derivative under FAS 133 “Accounting for
Derivatives and Hedging Activities”
(“FAS 133”) related to the prepayment option. At
the time of the issuance of the Sanders Senior Notes,
FAS 133 required the Company to value the embedded
derivative at fair market value, which approximated
$0.1 million. At September 30, 2006, the embedded
derivative had a nominal value. The value of the derivative is
marked to market each reporting period as a derivative gain or
loss until the Sanders Senior Notes are repaid. |
F-19
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
|
|
|
|
|
The stock purchase warrants held by the remaining two investors
(the “Sanders Investors”) were amended on
August 26, 2005 to provide that immediately prior to the
effective time of the merger, the stock purchase warrants would
be automatically exercised for 22,096 shares of common
stock at an exercise price of $3.96. |
|
(F) |
|
In November 2005, the Company completed a private placement of
$2.0 million aggregate principal amount of 8% Senior
Notes due October 30, 2006 (the “November Senior
Notes”). Upon the closing of the merger with Maxim on
January 4, 2006, the November Senior Notes were converted
into 711,691 shares of common stock. Since the conversion
of the November Senior Notes was contingent upon the closing of
the merger with Maxim, no accounting was required at the
issuance date per EITF 98-5 “Accounting for
Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratio.”
(“EITF 98-5”) On January 4, 2006, upon the
closing of the merger with Maxim, a BCF of $2.0 million was
recorded as interest expense. |
|
(G) |
|
In July 2006, Maxim, a wholly-owned subsidiary of EpiCept,
issued a six-year non-interest bearing promissory note to
Pharmaceutical Research Associates, Inc. in the amount of
$0.8 million in connection with the termination of its
lease of certain property in San Diego. The fair value of
the note (assuming an imputed 11.6% interest rate) and broker
fees was approximately at $0.8 million at issuance. The
note is payable in seventy-two equal installments of
approximately $11,000 per month. The Company terminated the
lease as part of its exit plan upon the completion of the merger
with Maxim on January 4, 2006 (see Note 12). |
|
(H) |
|
In August 2006, the Company entered into a senior secured term
loan in the amount of $10.0 million with Hercules
Technology Growth Capital, Inc., (“Hercules”). The
interest rate on the loan is 11.7% per year. In addition,
five year common stock purchase warrants were issued to Hercules
granting them the right to purchase 0.5 million shares of
the Company’s common stock at an exercise price of
$2.65 per share. The basic terms of the loan require
monthly payments of interest only through March 1, 2007,
with 30 equal monthly payments of principal and interest
commencing April 1, 2007. Any outstanding balance of the
loan and accrued interest will be repaid on August 30,
2009. Upon meeting certain conditions as defined in the term
loan, the Company has the option to extend the interest only
and/or
repayment periods up to a maximum of 1 year. The effective
interest rate of this loan is 13.6%. Total issuance costs of
$0.8 million are being deferred and amortized to interest
expense over the life of the term loan. The Company amortized
issuance costs of $0.1 million for the three months ended
September 30, 2006. |
|
|
|
The warrants issued to Hercules meet the requirements of and are
being accounted for as a liability in accordance with Emerging
Issue Task Force 00-19 “Accounting for Derivative Financial
Instruments Indexed to or Potentially Settled in a
Company’s Own Stock”
(“EITF 00-19”).
The Company calculated the fair value of the warrants at the
date of the transaction at approximately $0.9 million with
a corresponding amount recorded as a discount. The debt discount
is being accreted over the life of the outstanding term loan
using the effective interest method. For the three months ended
September 30, 2006 the Company recognized approximately
$42,000 of non-cash interest expense related to the accretion of
the debt discount. At the date of the transaction, the fair
value of the warrants of $0.9 million was determined
utilizing the Black-Scholes option-pricing model utilizing the
following assumptions: dividend yield of 0%, risk free interest
rate of 4.72%, volatility of 69% and an expected life of five
years. The value of the warrant shares is being marked to market
each reporting period as a derivative gain or loss until
exercised or expiration. At September 30, 2006, fair value
of the warrants was $0.5 million. For the each of the three
and nine months ended September 30, 2006, the Company
recognized the change in the value of warrants and derivatives
of approximately $0.4 million, as a gain on the condensed
consolidated statement of operations. |
|
|
|
In connection with the terms of the loan agreement, the Company
granted Hercules a security interest in substantially all of the
Company’s personal property including its intellectual
property. The security interest in the intellectual property
will be released under certain circumstances upon reaching
certain milestones. |
F-20
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
On January 4, 2006, immediately prior to the completion of
the merger with Maxim, the Company issued common stock to
certain stockholders upon the conversion or exercise of all
outstanding preferred stock. The following tables illustrate the
carrying value and the amount of shares issued for Preferred
Stock converted or exercised into the Company’s common
stock on January 4, 2006:
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Common
|
|
Series of Preferred Stock
|
|
Value
|
|
|
Shares Issued
|
|
|
A
|
|
$
|
8,225,806
|
|
|
|
1,501,349
|
|
B
|
|
|
7,077,767
|
|
|
|
1,186,374
|
|
C
|
|
|
19,543,897
|
|
|
|
3,375,594
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,847,470
|
|
|
|
6,063,317
|
|
|
|
|
|
|
|
|
|
|
The outstanding amount of Series B redeemable convertible
preferred stock and Series C redeemable convertible
preferred stock includes accreted dividends through
January 4, 2006. Upon the closing of the merger with Maxim,
the Company recorded a BCF relating to the anti-dilution rights
of each of the series of Preferred Stock of approximately
$2.1 million, $1.7 million, and $4.8 million,
respectively, related to the conversion of the Preferred Stock.
In accordance with EITF 98-5, and EITF
No. 00-27,
“Application of EITF Issue
No. 98-5
To Certain Convertible Instruments”
(“EITF 00-27”),
the BCF was calculated as the difference between the number of
shares of common stock each holder of each series of Preferred
Stock would have received under anti-dilution provisions prior
to the merger and the number of shares of common stock received
at the time of the merger multiplied by the implied stock value
of EpiCept on January 4, 2006 of $5.84 and charged to
deemed dividends in the consolidated statement of operations for
the nine months ended September 30, 2006.
On January 4, 2006, immediately prior to the completion of
the merger with Maxim, the Company issued common stock to
certain stockholders upon the conversion or exercise of all
outstanding warrants. The following tables illustrate the
carrying values and the amount of shares issued for warrants
converted or exercised into the Company’s common stock on
January 4, 2006:
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Common
|
|
|
|
Value
|
|
|
Shares Issued
|
|
|
Series B Preferred Warrants
|
|
$
|
300,484
|
|
|
|
58,229
|
|
Series C Preferred Warrants
|
|
|
649,473
|
|
|
|
131,018
|
|
2002 Bridge Warrants
|
|
|
3,634,017
|
|
|
|
3,861,462
|
|
March 2005 Senior
Note Warrants
|
|
|
42,248
|
|
|
|
22,096
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,626,222
|
|
|
|
4,072,805
|
|
|
|
|
|
|
|
|
|
|
Upon the closing of the merger with Maxim, the Company recorded
a BCF relating to the anti-dilution rights of each of the
Series B convertible preferred stock warrants and the
Series C redeemable convertible preferred stock warrants
(collectively “Preferred Warrants”) of approximately
$0.1 million and $0.3 million, respectively related to
the conversion of the Preferred Warrants into common shares. In
accordance with EITF 98-5 and
EITF 00-27,
the BCF was calculated as the difference between the number of
shares of common stock each holder of each series of Preferred
Warrants would have received under anti-dilution provisions
prior to the merger and the number of shares of common stock
received at the time of the merger multiplied by the implied
stock value of EpiCept on January 4, 2006 of $5.84 and
charged to deemed dividends in the consolidated statement of
operations for the nine months ended September 30, 2006.
F-21
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
Upon the closing of the merger with Maxim on January 4,
2006, the Company issued warrants to purchase approximately
0.3 million shares at an exercise price range of $13.48 -
$37.75 per share of EpiCept common stock in exchange for
Maxim’s warrants.
On February 9, 2006, the Company raised $11.6 million
gross proceeds through a private placement of common stock and
common stock purchase warrants. Five year common stock purchase
warrants were issued to the investors granting them the right to
purchase approximately 1 million of the Company’s
common stock at a price of $4.00 per share. The Company
allocated the $11.6 million in gross proceeds between the
common stock and the warrants based on their fair values.
$1.4 million of this amount was allocated to the warrants.
The warrants meet the requirements of and are being accounted
for as equity in accordance with
EITF 00-19.
On August 30, 2006, the Company entered into a senior
secured term loan in the amount of $10.0 million with
Hercules. Five year common stock purchase warrants were issued
to Hercules granting them the right to purchase 0.5 million
shares of the Company’s common stock at an exercise price
of $2.65 per share. The warrants meet the requirements of
and are being accounted for as a liability in accordance with
EITF 00-19.
The Company calculated the value of the warrants at the date of
the transaction at approximately $0.9 million. The fair
value of the warrants was determined utilizing the Black-Scholes
option-pricing model utilizing the following assumptions:
dividend yield of 0%, risk free interest rate of 4.72%,
volatility of 69% and an expected life of five years. The value
of the warrant shares is being marked to market each reporting
period as a derivative gain or loss until exercised or
expiration. At September 30, 2006, the fair value of the
warrants was $0.5 million.
On February 9, 2006, the Company raised $11.6 million
gross proceeds through a private placement of common stock and
common stock purchase warrants. Approximately 4.1 million
shares were sold at a price of $2.85 per share. In
addition, five year common stock purchase warrants were issued
to the investors granting them the right to purchase
approximately 1 million of the Company’s common stock
at a price of $4.00 per share. The Company allocated the
$11.6 million in gross proceeds between the common stock
and the warrants based on their fair values.
During the nine months ended September 30, 2006,
101,250 shares of common stock were issued from the
exercise of stock options resulting in proceeds of
$0.2 million. During the nine months ended
September 30, 2005, 12,125 shares of common stock were
issued upon the exercise of stock options resulting in proceeds
of approximately $18,000.
On January 4, 2006, a wholly-owned subsidiary of EpiCept
completed its merger with Maxim pursuant to the terms of the
Merger Agreement. EpiCept accounted for the merger as an asset
acquisition as Maxim is a development stage company. The Company
issued a total of 5.8 million shares of EpiCept’s
common stock, options and warrants valued at $41.4 million
in exchange for all the outstanding shares and certain warrants
and options of Maxim. The purchase price was based on the
implied value of EpiCept stock price of $7.33 per share.
The fair value of the EpiCept shares used in determining the
purchase price was based on the average closing price of Maxim
common stock on the two full trading days immediately preceding
the public announcement of the merger, the trading day the
merger was announced and the two full trading days immediately
following such public announcement divided by the exchange
ratio. The merger provided EpiCept’s stockholders with
shares in a publicly traded company, which provides liquidity to
existing EpiCept stockholders.
In connection with the merger, Maxim option holders holding
options granted under Maxim’s stock option plans, with a
Maxim exercise price of $20.00 per share or less, received
options to purchase shares of EpiCept common stock in exchange
for the options to purchase Maxim common stock they held at the
Maxim exercise price divided by the exchange ratio of 0.203969.
Maxim obtained the agreement of each holder of options granted
with a Maxim exercise price above $20.00 per share to the
termination of those options immediately prior to the completion
of the merger. The Company issued stock options to purchase
approximately 0.4 million of EpiCept’s shares of
common stock in exchange for Maxim’s outstanding options.
In addition, the Company issued warrants to purchase
approximately 0.3 million shares of EpiCept’s common
stock in exchange for Maxim’s warrants.
F-22
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
The transaction purchase price totaled approximately
$45.1 million, including merger costs of $3.7 million,
and has been allocated based on a preliminary valuation of
Maxim’s tangible and intangible assets and liabilities
(table in thousands), as follows:
|
|
|
|
|
Cash, cash equivalents and
marketable securities
|
|
$
|
15,135
|
|
Prepaid expenses
|
|
|
1,323
|
|
Property and equipment
|
|
|
2,034
|
|
Other assets
|
|
|
456
|
|
In-process technology
|
|
|
33,362
|
|
Intangible assets (assembled
workforce)
|
|
|
546
|
|
Total current liabilities
|
|
|
(7,731
|
)
|
|
|
|
|
|
Total
|
|
$
|
45,125
|
|
|
|
|
|
|
The assets acquired included development of innovative cancer
therapeutics which includes Ceplene (histamine dihydrochloride).
The purchase price was allocated to the assets acquired based on
their fair values as of the date of the acquisition. Of the
$45.1 million purchase price, $33.7 million was
originally assigned to in-process research and development and
immediately expensed to research and development during the
three month period ending March 31, 2006. Total in-process
research and development expense amounted to $33.4 million
for the nine months ended September 30, 2006. During the
three months ended September 30, 2006, a reduction of
approximately $0.1 million was assigned to in-process
research and development based on a revised estimate of purchase
price allocation. Of the remaining amount of the total purchase
price, approximately $0.5 million was allocated to
intangible assets and will be amortized over six years.
Maxim’s results of operations were included in
EpiCept’s consolidated statement of operations beginning on
January 5, 2006. The Company committed to and approved an
exit plan for consolidation of certain Maxim facilities, and
assumed the liability for ongoing Maxim litigation and severance
associated with personnel reductions. In connection with the
exit plan (see Note 12), the Company originally recognized
merger restructuring and litigation accrued liabilities of
$4.6 million which were included in the allocated purchase
price of Maxim and subsequently increased to $4.7 million
as of September 30, 2006.
The value assigned to the acquired in-process research and
development was determined by identifying the acquired
in-process research projects for which: (a) there is
exclusive control by the acquirer; (b) significant progress
has been made towards the project’s completion;
(c) technological feasibility has not been established,
(d) there is no alternative future use, and (e) the
fair value is estimable based on reasonable assumptions. The
total acquired in-process research and development is valued at
$33.4 million, assigned entirely to one qualifying program,
the use of Ceplene as remission maintenance therapy for the
treatment of AML in Europe, and expensed on the closing date of
the merger. The value of in-process research and development was
based on the income approach that focuses on the
income-producing capability of the asset. The underlying premise
of the approach is that the value of an asset can be measured by
the present worth of the net economic benefit (cash receipts
less cash outlays) to be received over the life of the asset. In
determining the value of in-process research and development,
the assumed commercialization date for the product was 2007.
Given the risks associated with the development of new drugs,
the revenue and expense forecast was probability-adjusted to
reflect the risk of advancement through the approval process.
The risk adjustment was applied based on Ceplene’s stage of
development at the time of the assessment and the historical
probability of successful advancement for compounds at that
stage. The modeled cash flow was discounted back to the net
present value. The projected net cash flows for the project were
based on management’s estimates of revenues and operating
profits related to such project. Significant assumptions used in
the valuation of in-process research and development included:
the stage of development of the project; future revenues; growth
rates; product sales cycles; the estimated life of a
product’s underlying technology; future operating expenses;
probability adjustments to reflect the risk of developing the
acquired technology into commercially viable products; and a
discount rate of 30% to reflect present value, which
approximates the implied rate of return on the merger.
F-23
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
The following unaudited pro forma information for the three and
nine months ended September 30, 2005 presents a summary of
the Company’s consolidated results of operations as if the
merger with Maxim had taken place January 1, 2005 (in
thousands except per share information):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
Total revenue
|
|
$
|
682
|
|
|
$
|
2,451
|
|
Net loss
|
|
|
(6,462
|
)
|
|
|
(24,012
|
)
|
Pro forma basic and diluted
earnings per share
|
|
$
|
(0.44
|
)
|
|
$
|
(1.24
|
)
|
|
|
12.
|
Merger
Restructuring and Litigation Accrued Liabilities
|
Merger restructuring and litigation accrued liabilities consist
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Reclassified
|
|
|
Balance at
|
|
|
|
January 4,
|
|
|
|
|
|
Change in
|
|
|
as Note
|
|
|
September 30,
|
|
|
|
2006
|
|
|
Payments
|
|
|
Estimates
|
|
|
Payable
|
|
|
2006
|
|
|
Severance
|
|
$
|
1,159,919
|
|
|
$
|
(597,419
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
562,500
|
|
Lease
|
|
|
1,099,636
|
|
|
|
(200,302
|
)
|
|
|
(342,963
|
)
|
|
|
(556,371
|
)
|
|
|
—
|
|
Litigation
|
|
|
2,350,000
|
|
|
|
(250,000
|
)
|
|
|
416,700
|
|
|
|
—
|
|
|
|
2,516,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total merger restructuring and
litigation accrued liabilities
|
|
$
|
4,609,555
|
|
|
$
|
(1,047,721
|
)
|
|
$
|
73,737
|
|
|
$
|
(556,371
|
)
|
|
|
3,079,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts due within one year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,966,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger restructuring and
litigation accrued liabilities — long term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
112,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the merger with Maxim on January 4,
2006, the Company originally recorded estimated merger-related
liabilities for severance, lease termination, and legal
settlements of $1.2 million, $1.1 million and
$2.3 million, respectively. During the second quarter of
2006, the gross amounts of merger-related liabilities for lease
termination and legal settlements were revised to
$0.8 million and $2.8 million, respectively. In July
2006, the Company issued a six year non-interest bearing note in
the amount of $0.8 million for the lease termination. Total
future payments including broker fees amount to
$1.0 million. The fair value of the note (assuming an
imputed 11.6% interest rate) and broker fees was estimated at
$0.8 million at issuance. This amount is now being
classified as a note payable on the condensed consolidated
balance sheet. The note is payable in seventy-two equal
installments of approximately $11,000 per month. In
addition, the Company increased its legal accrual by
approximately $0.4 million during the second quarter of
2006 to $2.8 million, of which approximately
$0.3 million was paid in cash as of September 30,
2006, for the settlement of certain Maxim outstanding lawsuits.
In October 2006, the Court gave final approval to a settlement
in which the Company made a payment of approximately
$0.7 million and issued approximately 0.2 million
shares of EpiCept common stock with a fair market value of
$0.4 million. Maxim’s insurer also made a payment in
the amount of approximately $1.1 million (See Note 13).
The
following legal proceedings relate to Maxim and were assumed
upon the completion of the merger on January 4,
2006:
On October 7, 2004 plaintiff Jesus Putnam, purportedly on
behalf of Maxim, filed a derivative complaint in the Superior
Court for the State of California, County of San Diego,
against one officer of Maxim, two former officers
F-24
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
of Maxim and Maxim’s entire Board of Directors, alleging
breach of fiduciary duty, abuse of control, gross mismanagement,
waste of corporate assets, unjust enrichment and violations of
the California Corporations Code, all of which arise from
allowing purported violations of federal securities laws related
to declines in Maxim’s stock price in connection with
various statements and alleged omissions to the public and to
the securities markets, and seeking damages therefore. In
October 2005, plaintiff attempted to file an amended complaint
to include class action allegations that defendants breached
their fiduciary duties by approving the merger. In addition, the
plaintiff requested that the court enjoin Maxim’s directors
from completing the merger of EpiCept and Maxim. The amended
complaint was rejected by the court, pending the lifting of the
stay. The complaint was tendered to Maxim’s insurance
carrier, which has denied coverage. Maxim disputed the position
taken by the insurance carrier and EpiCept fully intends to
enforce its rights under the policy. On March 7, 2006, the
Company entered into a settlement agreement with the plaintiff
whereby EpiCept will pay $0.1 million in EpiCept common
stock to cover the plaintiff’s legal expenses. The
settlement is subject to customary conditions such as the
execution of settlement documents, the final court approval of
the settlement and dismissal of the Putnam claims with
prejudice. The Company accrued a $0.1 million liability in
the purchase price allocation (see Notes 11 and 12). On
September 21, 2004, plaintiff Dr. Richard Bassin, on
behalf of himself and purportedly on behalf of a class of other
stockholders similarly situated, filed a complaint in the United
States District Court for the Southern District of California
against Maxim, one officer of Maxim and one former officer of
Maxim, alleging violations of federal securities laws related to
declines in Maxim’s stock price in connection with various
statements and alleged omissions to the public and to the
securities markets during the class period from
November 11, 2002 to September 17, 2004, and seeking
damages therefor. Thereafter, two similar complaints were filed
in the Southern District of California. These three actions were
consolidated and in March 2005, plaintiffs filed a consolidated
amended complaint. No discovery was conducted. In October 2005,
the United States District Court of the Southern District of
California granted Maxim’s motion to dismiss the
consolidated amended complaint, but granted plaintiffs leave to
amend. The cases were tendered to Maxim’s insurance
carrier, Carolina Casualty Insurance Company (“Carolina
Casualty”), which denied coverage. On June 22, 2006,
the parties entered into a stipulation of settlement, for
$1.0 million in cash and $1.3 million in EpiCept
common stock, and Maxim’s insurance carrier agreed to
contribute approximately $0.8 million towards that
settlement. Final approval of this settlement occurred on
September 27, 2006. The Company accrued a $1.3 million
liability in the purchase price allocation (see Notes 11
and 12). The Company paid approximately $0.3 million in
cash in July 2006 and in October 2006 issued approximately
0.7 million shares of common stock in settlement of this
suit. On May 3, 2005, plaintiff Carolina Casualty filed a
complaint in the United States District Court for the Southern
District of California against one officer of Maxim, two former
officers of Maxim and Maxim’s entire Board of Directors,
seeking a declaratory judgment from the court that Maxim’s
D&O insurance policy did not cover losses arising from the
state and federal shareholder suits that were filed in 2004.
Maxim answered the complaint and filed counterclaims against
Carolina Casualty. No discovery was conducted and the court
issued a stay of the entire proceedings, pending events in the
federal suit filed by Richard Bassin. On July 12, 2006 the
parties entered into a formal settlement and release, in which
Carolina Casualty paid $0.8 million towards settling the
Bassin matter. This lawsuit has been dismissed with prejudice.
In October 2001 and May 2002, certain former shareholders of
Cytovia filed complaints in California Superior Court in
San Diego, against Maxim and two of its officers, alleging
fraud and negligent misrepresentation in connection with
Maxim’s acquisition of Cytovia. A binding arbitration
proceeding with the American Arbitration Association was held in
May 2003. The three-member arbitration panel rejected all of the
plaintiffs’ claims, determined that Maxim has no liability
for such claims and awarded recovery of Maxim’s reasonable
attorneys’ fees and costs of approximately
$0.9 million as prevailing party in the proceedings. In
December 2003, the decision was confirmed by the Superior Court,
which entered a judgment to this effect, and in June 2004, the
plaintiffs filed an appeal. In December 2004, the Court of
Appeal reversed the judgment of the Superior Court on the
grounds that the claims were not arbitrable under the terms of
the Merger Agreement and remanded the lawsuit to the trial court
for further proceedings. In September 2005, plaintiffs filed an
amended complaint adding state law securities claims against the
defendants. The defendants denied all material allegations in
the amended complaint and undertook a vigorous defense of the
litigation. After extensive document discovery, the parties
agreed to mediate
F-25
EpiCept
Corporation and Subsidiaries
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
the dispute, and the trial date was continued to
November 10, 2006. On May 8, 2006, the parties
commenced mediation. On July 14, 2006, the parties agreed
in principle to settle all claims. The settlement was
consummated on October 2, 2006, and the case finally
dismissed with prejudice by the Superior Court for the State of
California, County of San Diego, on October 12, 2006.
Under the terms of the settlement agreement, the Company made a
payment of approximately $0.7 million and issued
approximately 0.2 million shares of EpiCept common stock to
the plaintiffs. Maxim’s insurer also made a payment in the
amount of approximately $1.1 million. The Company accrued a
$1.2 million liability in the purchase price allocation
(see Notes 11 and 12).
The Company operates as one business segment: the development
and commercialization of pharmaceutical products. The Company
maintains development operations in the United States and
Germany.
Geographic information for the three and nine months ending
September 30, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
176,553
|
|
|
$
|
329,914
|
|
|
$
|
519,032
|
|
|
$
|
681,415
|
|
Germany
|
|
|
43,720
|
|
|
|
255,057
|
|
|
|
214,431
|
|
|
|
452,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
220,273
|
|
|
$
|
584,971
|
|
|
$
|
733,463
|
|
|
$
|
1,134,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(6,105,288
|
)
|
|
$
|
(349,332
|
)
|
|
$
|
(60,293,785
|
)
|
|
$
|
(4,464,872
|
)
|
Germany
|
|
|
601,287
|
|
|
|
(100,101
|
)
|
|
|
(157,700
|
)
|
|
|
(681,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,504,001
|
)
|
|
$
|
(449,433
|
)
|
|
$
|
(60,451,485
|
)
|
|
$
|
(5,146,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic information as of September 30, 2006 are as
follows:
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
Total Assets
|
|
|
|
|
United States
|
|
$
|
14,540,881
|
|
Germany
|
|
|
118,014
|
|
|
|
|
|
|
|
|
$
|
14,658,895
|
|
|
|
|
|
|
Long Lived Assets,
net
|
|
|
|
|
United States
|
|
$
|
840,643
|
|
Germany
|
|
|
6,371
|
|
|
|
|
|
|
|
|
$
|
847,014
|
|
|
|
|
|
|
On October 27, 2006, the Company was informed of the
decision by Adolor to discontinue its licensing agreement with
the Company for LidoPAIN SP, its sterile prescription analgesic
patch designed to provide sustained topical delivery of
lidocaine to a post-surgical or post-traumatic sutured wound. As
a result, the Company now owns the full worldwide development
and commercialization rights to the product candidate.
F-26
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
EpiCept Corporation and subsidiaries:
We have audited the accompanying consolidated balance sheets of
EpiCept Corporation and subsidiaries (the “Company”)
as of December 31, 2005 and 2004, and the related
consolidated statements of operations, preferred stock and
stockholders’ deficit, and cash flows for each of the three
years in the period ended December 31, 2005. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
EpiCept Corporation and subsidiaries as of December 31,
2005 and 2004, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated
financial statements, the Company’s recurring losses from
operations and stockholders’ deficit raise substantial
doubt about its ability to continue as a going concern.
Management’s plans concerning these matters are also
described in Note 1. The consolidated financial statements
do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ DELOITTE &
TOUCHE LLP
Parsippany, New Jersey
March 16, 2006
F-27
EpiCept
Corporation and Subsidiaries
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
402,994
|
|
|
$
|
1,253,507
|
|
Prepaid expenses and other current
assets
|
|
|
64,114
|
|
|
|
47,616
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
467,108
|
|
|
|
1,301,123
|
|
Property and equipment, net
|
|
|
58,227
|
|
|
|
109,033
|
|
Deferred financing, initial public
offering and acquisition costs
|
|
|
2,204,975
|
|
|
|
1,197,888
|
|
Other assets
|
|
|
16,460
|
|
|
|
18,748
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,746,770
|
|
|
$
|
2,626,792
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,191,782
|
|
|
$
|
1,622,382
|
|
Accrued research contract costs
|
|
|
13,889
|
|
|
|
162,183
|
|
Accrued interest
|
|
|
1,438,832
|
|
|
|
806,714
|
|
Other accrued liabilities
|
|
|
1,211,174
|
|
|
|
445,714
|
|
Warrant liability
|
|
|
35,062
|
|
|
|
—
|
|
Notes and loans payable, current
portion
|
|
|
11,547,200
|
|
|
|
817,260
|
|
Deferred revenue, current portion
|
|
|
2,763,709
|
|
|
|
2,399,679
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
20,201,648
|
|
|
|
6,253,932
|
|
|
|
|
|
|
|
|
|
|
Notes and loans payable
|
|
|
4,705,219
|
|
|
|
11,572,628
|
|
Deferred revenue
|
|
|
5,416,124
|
|
|
|
6,108,657
|
|
Accrued interest
|
|
|
483,943
|
|
|
|
413,467
|
|
Contingent interest
|
|
|
870,136
|
|
|
|
706,065
|
|
Deferred rent and other noncurrent
liabilities
|
|
|
—
|
|
|
|
13,534
|
|
|
|
|
|
|
|
|
|
|
Total long term liabilities
|
|
|
11,475,422
|
|
|
|
18,814,351
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
31,677,070
|
|
|
|
25,068,283
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
Series B Redeemable
Convertible Preferred Stock, $.0001 par value; authorized
3,440,069 shares; issued and outstanding
3,106,736 shares at December 31, 2005 and 2004
($9,320,208 liquidation preference plus accreted dividends of
$1,932,287 and $1,606,080 at December 31, 2005 and 2004,
respectively)
|
|
|
7,074,259
|
|
|
|
6,748,052
|
|
|
|
|
|
|
|
|
|
|
Series C Redeemable
Convertible Preferred Stock, $.0001 par value; authorized
12,769,573 shares; issued and outstanding
8,839,573 shares at December 31, 2005 and 2004
($26,518,719 liquidation preference plus accreted dividends of
$4,650,947 and $3,722,792 at December 31, 2005 and 2004,
respectively)
|
|
|
19,533,917
|
|
|
|
18,605,762
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
4,583,974
|
|
|
|
4,583,974
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit:
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred
Stock, $.0001 par value; authorized 3,422,620 shares;
issued and outstanding 3,368,385 shares at
December 31, 2005 and 2004, respectively (liquidation
preference of $6,804,138 at December 31, 2005 and 2004)
|
|
|
8,225,806
|
|
|
|
8,225,806
|
|
Common stock, $.0001 par
value; authorized 50,000,000 shares; issued and outstanding
1,711,745 and 1,699,620 at December 31, 2005 and 2004,
respectively
|
|
|
171
|
|
|
|
170
|
|
Additional paid-in capital
|
|
|
150,514
|
|
|
|
150,010
|
|
Deferred stock compensation
|
|
|
—
|
|
|
|
(24,444
|
)
|
Accumulated deficit
|
|
|
(67,739,511
|
)
|
|
|
(59,291,948
|
)
|
Accumulated other comprehensive loss
|
|
|
(684,430
|
)
|
|
|
(1,364,373
|
)
|
Treasury stock, at cost
(12,500 shares)
|
|
|
(75,000
|
)
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ deficit
|
|
|
(60,122,450
|
)
|
|
|
(52,379,279
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders’ deficit
|
|
$
|
2,746,770
|
|
|
$
|
2,626,792
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-28
EpiCept
Corporation and Subsidiaries
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Revenue
|
|
$
|
828,502
|
|
|
$
|
1,115,089
|
|
|
$
|
376,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
5,783,185
|
|
|
|
4,407,702
|
|
|
|
3,406,648
|
|
Research and development
|
|
|
1,845,801
|
|
|
|
1,784,451
|
|
|
|
1,640,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,628,986
|
|
|
|
6,192,153
|
|
|
|
5,047,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(6,800,484
|
)
|
|
|
(5,077,064
|
)
|
|
|
(4,671,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
18,536
|
|
|
|
39,828
|
|
|
|
—
|
|
Foreign exchange gain (loss)
|
|
|
357,264
|
|
|
|
(175,693
|
)
|
|
|
(770,777
|
)
|
Interest expense
|
|
|
(1,906,077
|
)
|
|
|
(2,670,364
|
)
|
|
|
(4,593,180
|
)
|
Change in value of warrants and
derivatives
|
|
|
832,201
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(698,076
|
)
|
|
|
(2,806,229
|
)
|
|
|
(5,363,957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit for income
taxes
|
|
|
(7,498,560
|
)
|
|
|
(7,883,293
|
)
|
|
|
(10,034,985
|
)
|
Benefit for income taxes
|
|
|
283,859
|
|
|
|
274,886
|
|
|
|
74,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(7,214,701
|
)
|
|
|
(7,608,407
|
)
|
|
|
(9,960,531
|
)
|
Deemed dividend and redeemable
convertible preferred stock dividends
|
|
|
(1,254,362
|
)
|
|
|
(1,404,362
|
)
|
|
|
(1,254,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to common
stockholders
|
|
$
|
(8,469,063
|
)
|
|
$
|
(9,012,769
|
)
|
|
$
|
(11,214,893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common
share
|
|
$
|
(4.95
|
)
|
|
$
|
(5.35
|
)
|
|
$
|
(6.79
|
)
|
Weighted average common shares
outstanding
|
|
|
1,710,306
|
|
|
|
1,683,199
|
|
|
|
1,650,717
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-29
EpiCept
Corporation and Subsidiaries
Consolidated
Statements of Preferred Stock and Stockholders’ Deficit
For the
Years Ended December 31, 2003, 2004 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Redeemable
|
|
|
Series C Redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred
|
|
|
Convertible Preferred
|
|
|
|
|
|
|
Series A Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Stock
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Stockholders’
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Warrants
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
(Loss) Income
|
|
|
Stock
|
|
|
Deficit
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
3,106,736
|
|
|
$
|
5,474,291
|
|
|
|
8,839,573
|
|
|
$
|
14,981,538
|
|
|
$
|
2,627,337
|
|
|
|
|
3,315,160
|
|
|
$
|
7,274,762
|
|
|
|
1,650,339
|
|
|
$
|
165
|
|
|
$
|
2,494,427
|
|
|
$
|
(1,065,806
|
)
|
|
$
|
(39,664,321
|
)
|
|
$
|
(394,156
|
)
|
|
$
|
(75,000
|
)
|
|
$
|
(31,429,929
|
)
|
|
$
|
(9,916,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600
|
|
|
|
|
|
Accretion of preferred stock
dividends
|
|
|
|
|
|
|
326,207
|
|
|
|
|
|
|
|
928,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(771,960
|
)
|
|
|
|
|
|
|
(482,402
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,254,362
|
)
|
|
|
|
|
Beneficial conversion feature
related to preferred stock
|
|
|
|
|
|
|
621,347
|
|
|
|
|
|
|
|
1,767,914
|
|
|
|
|
|
|
|
|
|
|
|
|
917,078
|
|
|
|
|
|
|
|
|
|
|
|
(3,081,595
|
)
|
|
|
|
|
|
|
(224,744
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,389,261
|
)
|
|
|
|
|
Deferred stock compensation related
to employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,552
|
)
|
|
|
80,516
|
|
|
|
(78,964
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
590,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
590,318
|
|
|
|
|
|
Stock-based compensation to third
parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178,558
|
|
|
|
|
|
Sale of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,956,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Beneficial conversion feature
related to convertible bridge loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,215,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,215,983
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(603,559
|
)
|
|
|
|
|
|
|
(603,559
|
)
|
|
$
|
(603,559
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,960,531
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,960,531
|
)
|
|
|
(9,960,531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
3,106,736
|
|
|
|
6,421,845
|
|
|
|
8,839,573
|
|
|
|
17,677,607
|
|
|
|
4,583,974
|
|
|
|
|
3,315,160
|
|
|
|
8,191,840
|
|
|
|
1,650,839
|
|
|
|
165
|
|
|
|
34,461
|
|
|
|
(394,972
|
)
|
|
|
(50,410,962
|
)
|
|
|
(997,715
|
)
|
|
|
(75,000
|
)
|
|
|
(43,652,183
|
)
|
|
$
|
(10,564,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,781
|
|
|
|
5
|
|
|
|
69,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,038
|
|
|
|
|
|
Exercise of Series A
Convertible Preferred Stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,225
|
|
|
|
33,966
|
|
|
|
|
|
|
|
|
|
|
|
(33,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Beneficial conversion feature
related to Series A Convertible Preferred Stock warrant
exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
(150,000
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Accretion of preferred stock
dividends
|
|
|
|
|
|
|
326,207
|
|
|
|
|
|
|
|
928,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131,783
|
)
|
|
|
|
|
|
|
(1,122,579
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,254,362
|
)
|
|
|
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370,528
|
|
|
|
|
|
Stock-based compensation to third
parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,765
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(366,658
|
)
|
|
|
|
|
|
|
(366,658
|
)
|
|
$
|
(366,658
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,608,407
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,608,407
|
)
|
|
|
(7,608,407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
3,106,736
|
|
|
|
6,748,052
|
|
|
|
8,839,573
|
|
|
|
18,605,762
|
|
|
|
4,583,974
|
|
|
|
|
3,368,385
|
|
|
|
8,225,806
|
|
|
|
1,699,620
|
|
|
|
170
|
|
|
|
150,510
|
|
|
|
(24,444
|
)
|
|
|
(59,291,948
|
)
|
|
|
(1,364,373
|
)
|
|
|
(75,000
|
)
|
|
|
(52,379,279
|
)
|
|
$
|
(7,975,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,125
|
|
|
|
1
|
|
|
|
17,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,550
|
|
|
|
|
|
Accretion of preferred stock
dividends
|
|
|
|
|
|
|
326,207
|
|
|
|
|
|
|
|
928,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,500
|
)
|
|
|
|
|
|
|
(1,232,862
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,254,362
|
)
|
|
|
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,222
|
)
|
|
|
24,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,222
|
|
|
|
|
|
Stock-based compensation to third
parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,177
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
679,943
|
|
|
|
|
|
|
|
679,943
|
|
|
$
|
679,943
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,214,701
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,214,701
|
)
|
|
|
(7,214,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
3,106,736
|
|
|
$
|
7,074,259
|
|
|
|
8,839,573
|
|
|
$
|
19,533,917
|
|
|
$
|
4,583,974
|
|
|
|
|
3,368,385
|
|
|
$
|
8,225,806
|
|
|
|
1,711,745
|
|
|
$
|
171
|
|
|
$
|
150,514
|
|
|
$
|
—
|
|
|
$
|
(67,739,511
|
)
|
|
$
|
(684,430
|
)
|
|
$
|
(75,000
|
)
|
|
$
|
(60,122,450
|
)
|
|
$
|
(6,534,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-30
EpiCept
Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,214,701
|
)
|
|
$
|
(7,608,407
|
)
|
|
$
|
(9,960,531
|
)
|
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
53,791
|
|
|
|
57,627
|
|
|
|
78,424
|
|
Gain on disposal of assets
|
|
|
—
|
|
|
|
(1,895
|
)
|
|
|
—
|
|
Foreign exchange (gain) loss
|
|
|
(357,264
|
)
|
|
|
175,693
|
|
|
|
770,777
|
|
Stock-based compensation expense
|
|
|
28,399
|
|
|
|
433,293
|
|
|
|
768,876
|
|
Amortization of deferred financing
costs
|
|
|
52,959
|
|
|
|
28,552
|
|
|
|
85,657
|
|
Write off of deferred initial
public offering costs
|
|
|
1,740,918
|
|
|
|
—
|
|
|
|
—
|
|
Amortization of debt discount on
loans
|
|
|
433,459
|
|
|
|
1,316,563
|
|
|
|
3,356,400
|
|
Change in value of warrants and
derivatives
|
|
|
(832,201
|
)
|
|
|
—
|
|
|
|
—
|
|
Change in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in prepaid
expenses and other current assets
|
|
|
(16,498
|
)
|
|
|
(11,331
|
)
|
|
|
453
|
|
(Increase) decrease in other assets
|
|
|
2,288
|
|
|
|
(5,403
|
)
|
|
|
(2,513
|
)
|
Increase (decrease) in accounts
payable
|
|
|
79,216
|
|
|
|
874,892
|
|
|
|
(155,725
|
)
|
Increase (decrease) in accrued
research contract costs
|
|
|
(148,294
|
)
|
|
|
47,646
|
|
|
|
(469,806
|
)
|
Increase in accrued interest-current
|
|
|
632,118
|
|
|
|
387,117
|
|
|
|
377,268
|
|
Increase (decrease) in other
accrued liabilities
|
|
|
421,991
|
|
|
|
(275,276
|
)
|
|
|
58,594
|
|
Increase in deferred revenue
|
|
|
500,000
|
|
|
|
—
|
|
|
|
10,000,000
|
|
Recognition of deferred revenue
|
|
|
(828,502
|
)
|
|
|
(1,115,089
|
)
|
|
|
(376,575
|
)
|
Increase in accrued interest
|
|
|
70,476
|
|
|
|
69,813
|
|
|
|
64,093
|
|
Increase in contingent interest
|
|
|
164,071
|
|
|
|
222,892
|
|
|
|
183,246
|
|
Decrease in other liabilities
|
|
|
(13,534
|
)
|
|
|
(18,044
|
)
|
|
|
(11,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
|
(5,231,308
|
)
|
|
|
(5,421,357
|
)
|
|
|
4,767,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,985
|
)
|
|
|
(50,054
|
)
|
|
|
(17,357
|
)
|
Proceeds from sale of property and
equipment
|
|
|
2,104
|
|
|
|
999
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(881
|
)
|
|
|
(49,055
|
)
|
|
|
(17,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
17,550
|
|
|
|
69,038
|
|
|
|
600
|
|
Proceeds from bridge loans and
warrants
|
|
|
6,000,010
|
|
|
|
—
|
|
|
|
2,654,546
|
|
Repayment of loan
|
|
|
(709,500
|
)
|
|
|
(729,340
|
)
|
|
|
—
|
|
Deferred financing costs
|
|
|
(89,550
|
)
|
|
|
—
|
|
|
|
—
|
|
Deferred initial public offering
costs
|
|
|
(782,694
|
)
|
|
|
(595,128
|
)
|
|
|
—
|
|
Deferred acquisition costs
|
|
|
(95,068
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
4,340,748
|
|
|
|
(1,255,430
|
)
|
|
|
2,655,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and
cash equivalents
|
|
|
(891,441
|
)
|
|
|
(6,725,842
|
)
|
|
|
7,404,790
|
|
Effect of exchange rate changes on
cash
|
|
|
40,928
|
|
|
|
(27,838
|
)
|
|
|
(17,155
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
1,253,507
|
|
|
|
8,007,187
|
|
|
|
619,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
|
402,994
|
|
|
|
1,253,507
|
|
|
|
8,007,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
473,001
|
|
|
$
|
709,493
|
|
|
$
|
493,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
425
|
|
|
$
|
122,903
|
|
|
$
|
943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of
non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend and redeemable
convertible preferred stock dividends
|
|
$
|
1,254,362
|
|
|
$
|
1,254,362
|
|
|
$
|
1,254,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature
related to preferred stock or warrant exercise
|
|
$
|
—
|
|
|
$
|
150,000
|
|
|
$
|
3,306,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature
related to convertible term notes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,215,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred financing, initial public
offering and acquisition costs
|
|
$
|
2,436,412
|
|
|
$
|
602,760
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-31
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial Statements
|
|
1.
|
Organization
and Description of Business
|
EpiCept Corporation (“EpiCept” or the
“Company”) is a specialty pharmaceutical company
focused on the development and commercialization of topically
delivered prescription pain management therapeutics. The Company
has six product candidates in clinical development, three of
which are in late-stage clinical development and ready to enter,
or which have entered, Phase IIb or Phase III clinical
trials. EpiCept’s product candidates target
moderate-to-severe
pain that is influenced, or mediated, by nerve receptors located
just beneath the skin’s surface. The Company’s product
candidates utilize several proprietary formulations and topical
delivery technologies to administer established, FDA-approved
pain management therapeutics, or analgesics.
The Company’s late stage product candidates are EpiCept
NP-1, a
prescription topical analgesic cream designed to provide
effective long-term relief of peripheral neuropathies; LidoPAIN
SP, a sterile prescription analgesic patch designed to provide
sustained topical delivery of lidocaine to a post-surgical or
post-traumatic sutured wound while also providing a sterile
protective covering for the wound; and LidoPAIN BP, a
prescription analgesic non-sterile patch designed to provide
sustained topical delivery of lidocaine for the treatment of
acute or recurrent lower back pain.
The Company has yet to generate product revenues from any of its
product candidates in development. During 2003, the Company
entered into two strategic alliances, the first in July 2003
with Adolor Corporation (“Adolor”) for the development
and commercialization of certain products, including LidoPAIN SP
in North America, and the second in December 2003 with Endo
Pharmaceuticals, Inc. (“Endo”) for the worldwide
commercialization of LidoPAIN BP. The Company received a total
of $10.0 million in upfront non-refundable license fees
upon the closing of these license agreements. In September 2005,
the Company received a milestone payment of $0.5 million
from Adolor in connection with Adolor’s initiation of a
U.S. Phase II trial of LidoPAIN SP. Under these
relationships, the Company is eligible to receive an additional
$102.0 million in milestone payments and, upon receipt of
appropriate regulatory approvals, the Company will earn
royalties based on net sales of products. There is no assurance
that any of these milestones will be earned or any royalties
paid. The Company’s ability to generate additional revenue
in the future will depend on its ability to meet development or
regulatory milestones under its existing license agreements that
trigger additional payments, to enter into new license
agreements for other products or territories, and to receive
regulatory approvals for, and successfully commercialize, its
product candidates either directly or through commercial
partners.
The Company is subject to a number of risks associated with
companies in the specialty pharmaceutical industry. Principal
among these are risks associated with the Company’s
dependence on collaborative arrangements, development by the
Company or its competitors of new technological innovations,
dependence on key personnel, protection of proprietary
technology, compliance with the U.S. Food and Drug
Administration and other governmental regulations and approval
requirements, as well as the ability to grow the Company’s
business and to obtain adequate financing to fund this growth.
The Company has prepared its financial statements under the
assumption that it is a going concern. The Company has devoted
substantially all of its cash resources to research and
development programs and general and administrative expenses,
and to date it has not generated any meaningful revenues from
the sale of products and does not expect to generate any such
revenues for a number of years, if at all. As a result, the
Company has incurred an accumulated deficit of
$67.7 million as of December 31, 2005 and may incur
operating losses for a number of years. The Company’s
recurring losses from operations and the accumulated deficit
raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty. The
Company has financed its operations through the proceeds from
the sales of common and preferred equity securities, debt,
proceeds from collaborative relationships, investment income
earned on cash balances and short-term investments and the sales
of a portion of its New Jersey net operating loss carryforwards.
In February 2006, the Company raised $11.6 million gross
proceeds from the sale common stock and common stock purchase
warrants (See Note 13).
F-32
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
The Company expects to utilize its cash and cash equivalents to
fund its operations, including research and development of its
product candidates, primarily for clinical trials. Based upon
the projected spending levels for the Company, the Company does
not currently have adequate cash and cash equivalents to
complete the trials and therefore will require additional
funding. As a result, the Company intends to monitor its
liquidity position and the status of its clinical trials and to
continue to actively pursue fund-raising possibilities through
the sale of its equity securities. If the Company is
unsuccessful in its efforts to raise additional funds through
the sale of its equity securities or achievement of development
milestones, it may be required to significantly reduce or
curtail its research and development activities and other
operations if its level of cash and cash equivalents falls below
pre-determined levels. The Company believes that its existing
cash and cash equivalents combined with the proceeds of its
recent financing will be sufficient to fund its operations into
the first quarter 2007.
The Company will require, over the long-term, substantial new
funding to pursue development and commercialization of its
product candidates and continue its operations. The Company
believes that satisfying these capital requirements over the
long-term will require successful commercialization of its
product candidates. However, it is uncertain whether any
products will be approved or will be commercially successful.
The amount of the Company’s future capital requirements
will depend on numerous factors, including the progress of its
research and development programs, the conduct of pre-clinical
tests and clinical trials, the development of regulatory
submissions, the costs associated with protecting patents and
other proprietary rights, the development of marketing and sales
capabilities and the availability of third-party funding.
There can be no assurance that such funding will be available at
all or on terms acceptable to the Company. If the Company
obtains funds through arrangements with collaborative partners
or others, the Company may be required to relinquish rights to
certain of its technologies or product candidates.
The Company was incorporated in Delaware in March 1993. A
100%-owned subsidiary, EpiCept GmbH, organized in Munich,
Germany, is engaged in research and development activities on
behalf of the Company.
On January 4, 2006, the Company completed its merger with
Maxim Pharmaceuticals, Inc. (“Maxim”). All of the
Company’s preferred stock and certain of its outstanding
debt obligations were converted into shares of the
Company’s common stock, and outstanding warrants to
purchase the Company’s common stock were either exercised
or canceled. Certain of the transactions resulted in beneficial
conversion feature charges being recorded at the time of the
merger (See Note 13).
|
|
2.
|
Significant
Accounting Policies
|
Consolidation
The accompanying consolidated financial statements include the
accounts of EpiCept Corporation and the Company’s
100%-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reverse
Stock Split
On September 5, 2005, the Company’s stockholders
approved a
one-for-four
reverse stock split of its common stock, which occurred
immediately prior to the completion of the merger with Maxim on
January 4, 2006. On
F-33
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
January 4, 2006, EpiCept Corporation filed a Certificate of
Change with the Delaware Secretary of State which served to
effect, a
one-for-four
reverse split of EpiCept’s common stock. As a result of the
reverse stock split, every four shares of EpiCept common stock
were combined into one share of common stock; any fractional
shares created by the reverse stock split were rounded down to
whole shares. The reverse stock split affected all of
EpiCept’s common stock, stock options and warrants
outstanding immediately prior to the effective date of the
reverse stock split. The number of authorized shares of common
stock was fixed at 50 million upon closing of the merger
with Maxim. All common share and per common share amounts for
all periods presented have been retroactively restated to
reflect this reverse split.
Revenue
Recognition
The Company recognizes revenue relating to its collaboration
agreements in accordance with the Securities and Exchange
Commission’s Staff Accounting Bulletin No. 104,
Revenue Recognition, and Emerging Issues Task Force
(“EITF”) Issue
No. 00-21,
“Revenue Arrangements with Multiple Deliverables.”
Revenue under collaborative arrangements may result from license
fees, milestone payments, research and development payments and
royalty payments.
The Company’s application of these standards requires
subjective determinations and requires management to make
judgments about value of the individual elements and whether
they are separable from the other aspects of the contractual
relationship. The Company evaluates its collaboration agreements
to determine units of accounting for revenue recognition
purposes. To date, the Company has determined that its upfront
non-refundable license fees cannot be separated from its ongoing
collaborative research and development activities and,
accordingly, do not treat them as a separate element. The
Company recognizes revenue from non-refundable, upfront licenses
and related payments, not specifically tied to a separate
earnings process, either on the proportional performance method
or ratably over the development period in which the Company is
obligated to participate on a continuing and substantial basis
in the research and development activities outlined in the
contract. Ratable revenue recognition is only utilized if the
research and development services are performed systematically
over the development period. Proportional performance is
measured based on costs incurred compared to total estimated
costs to be incurred over the development period which
approximates the proportion of the value of the services
provided compared to the total estimated value over the
development period. The Company periodically reviews its
estimates of cost and the length of the development period and,
to the extent such estimates change, the impact of the change is
recorded at that time.
EpiCept recognizes milestone payments as revenue upon
achievement of the milestone only if (1) it represents a
separate unit of accounting as defined in EITF Issue
No. 00-21;
(2) the milestone payments are nonrefundable;
(3) substantive effort is involved in achieving the
milestone; and (4) the amount of the milestone is
reasonable in relation to the effort expended or the risk
associated with the achievement of the milestone. If any of
these conditions is not met, EpiCept will recognize milestones
as revenue in accordance with its accounting policy in effect
for the respective contract. At the time of a milestone payment
receipt, EpiCept will recognize revenue based upon the portion
of the development services that are completed to date and defer
the remaining portion and recognize it over the remainder of the
development services on the proportional or ratable method,
whichever is applicable. Through December 31, 2005, EpiCept
recognized revenue of $0.2 million from a milestone payment
of $0.5 million received from Adolor during September 2005.
The remaining amount of $0.3 million has been deferred and
will be recognized as revenue ratably over the estimated
development period of LidoPAIN SP. When payments are
specifically tied to a separate earnings process, revenue will
be recognized when the specific performance obligation
associated with the payment has been satisfied. Deferred revenue
represents the excess of cash received compared to revenue
recognized to date under licensing agreement. Based on an
updated development plan received from Adolor, the Company
increased the length of the estimated development period of
LidoPAIN SP by fifteen months in the fourth quarter of 2005. As
a result of this change in estimate, revenue was adjusted
downward by $0.6 million. Future changes in the estimated
development period of LidoPAIN SP could increase or decrease
revenue recognized to date.
F-34
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
Deferred revenue represents the excess of cash received compared
to revenue recognized to date under licensing agreements.
Foreign
Currency Translation
The financial statements of the Company’s foreign
subsidiary are translated into U.S. dollars using the
period-end exchange rate for all balance sheet accounts and the
average exchange rates for expenses. Adjustments resulting from
translation have been reported in other comprehensive loss.
Gains or losses from foreign currency transactions relating to
intercompany debt are recorded in the consolidated statements of
operations in other income (expense).
Stock-Based
Compensation
As permitted by Statement of Financial Accounting Standards
(“SFAS”) No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”), the
Company accounts for employee stock-based compensation in
accordance with Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”), using intrinsic
values with appropriate disclosures using the fair value based
method. In December 2004, the FASB issued
SFAS No. 123R, “Share-Based Payment.”
SFAS No. 123R is a revision of FASB
Statement 123, “Accounting for Stock-Based
Compensation” and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and its
related implementation guidance. The Statement focuses primarily
on accounting for transactions in which an entity obtains
employee services in share-based payment transactions.
SFAS No. 123R requires a public entity to measure the
cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide
service in exchange for the award. This statement is effective
as of the beginning of the first annual reporting period that
begins after June 15, 2005. The Company adopted
SFAS 123R on January 1, 2006 using the modified
prospective application as permitted by FAS 123R.
Accordingly, prior period amounts will not be restated. Under
this application, the Company is required to record compensation
expense at fair value for all awards granted after the date of
adoption and for the unvested portion of previously granted
awards. The Company had no unvested granted awards as of
January 1, 2006. However, on January 4, 2006 the
Company issued approximately 2.2 million stock options to
its employees and board of directors. Based on the Black-Scholes
fair value method (volatility — 83%, risk free
rate — 4.28%, dividends — zero, weighted
average life — 5 years), the Company estimates
that approximately $8.8 million of share-based compensation
will be recognized as compensation expense during the vesting
period, of which approximately $4.4 million will be
expensed in 2006.
Pro forma information regarding net loss is required by
SFAS 123, as amended by SFAS No. 148
“Accounting for Stock-Based Compensation, Transition and
Disclosure” (“SFAS 148”), and has been
determined as if the Company had accounted for its employee
stock options under the fair value method. As allowed by
SFAS 123 and SFAS 148 and until the adoption of
SFAS 123R, the Company has elected to continue to apply the
intrinsic-value-based
method of accounting for employee stock options described above,
and has adopted only the disclosure
F-35
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
requirements of SFAS 123. The following table illustrates
the effect on net loss as if the Company applied the fair value
method of accounting for stock-based employee compensation under
SFAS 123:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net loss
|
|
$
|
(7,214,701
|
)
|
|
$
|
(7,608,407
|
)
|
|
$
|
(9,960,531
|
)
|
Add back: Total stock-based
employee compensation expense under the APB 25 intrinsic
value method
|
|
|
22,222
|
|
|
|
370,528
|
|
|
|
590,318
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value based method
|
|
|
(26,244
|
)
|
|
|
(378,569
|
)
|
|
|
(634,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss — pro forma
|
|
|
(7,218,723
|
)
|
|
|
(7,616,448
|
)
|
|
|
(10,004,361
|
)
|
Deemed dividend and redeemable
convertible preferred stock dividends
|
|
|
(1,254,362
|
)
|
|
|
(1,404,362
|
)
|
|
|
(1,254,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma loss attributable to
common stockholders
|
|
$
|
(8,473,085
|
)
|
|
$
|
(9,020,810
|
)
|
|
$
|
(11,258,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common
share
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(4.95
|
)
|
|
$
|
(5.35
|
)
|
|
$
|
(6.79
|
)
|
Pro forma
|
|
$
|
(4.95
|
)
|
|
$
|
(5.36
|
)
|
|
$
|
(6.82
|
)
|
The pro forma net loss may not be representative of pro forma
net loss in future years because the pro forma results include
the impact of previous grants and related vesting, while
subsequent years will include additional grants and vesting.
The fair value of each option grant is estimated on the date of
the grant using the Black-Scholes option-pricing model. No
options were granted in 2005 and 2004.
Options issued to non-employees are valued using the fair value
method (Black-Scholes option pricing model) under SFAS 123
and Emerging Issues Task Force “EITF” Issue 96-18,
“Accounting for Equity Investments that are Issued to Other
than Employees for Acquiring or in Conjunction with Selling
Goods or Services” (“EITF 96-18”).
The value of such options is periodically remeasured and income
or expense is recognized during the vesting terms. All options
issued to non-employees are fully vested.
Income
Taxes
The Company accounts for its income taxes under the asset and
liability method. Under the asset and liability method, deferred
tax assets and liabilities are recognized based upon the
differences arising from carrying amounts of the Company’s
assets and liabilities for tax and financial reporting purposes
using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect on the deferred
tax assets and liabilities of a change in tax rates is
recognized in the period when the change in tax rates is
enacted. A valuation allowance is established when it is
determined that it is more likely than not that some portion or
all of the deferred tax assets will not be realized. As of
December 31, 2005 and 2004, a full valuation allowance has
been applied against the Company’s deferred tax assets
based on historical operating results (See Note 10).
Loss
Per Share
Basic and diluted loss per share is computed by dividing loss
attributable to common stockholders by the weighted average
number of shares of common stock outstanding during the period.
Diluted weighted average shares outstanding excludes shares
underlying the Series A convertible preferred stock, the
Series B redeemable convertible preferred stock and the
Series C redeemable convertible preferred stock
(collectively the “Preferred
F-36
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
Stock”), stock options and warrants, since the effects
would be anti-dilutive. Accordingly, basic and diluted loss per
share is the same. Such excluded shares are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Common stock options
|
|
|
439,501
|
|
|
|
466,624
|
|
|
|
515,406
|
|
Warrants
|
|
|
6,374,999
|
|
|
|
6,374,999
|
|
|
|
6,400,321
|
|
Series A Convertible
Preferred Stock
|
|
|
1,148,571
|
|
|
|
1,148,571
|
|
|
|
1,130,422
|
|
Series B Redeemable
Convertible Preferred Stock
|
|
|
896,173
|
|
|
|
896,173
|
|
|
|
896,173
|
|
Series C Redeemable
Convertible Preferred Stock
|
|
|
2,549,876
|
|
|
|
2,549,876
|
|
|
|
2,549,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares excluded from
calculation
|
|
|
11,409,120
|
|
|
|
11,436,243
|
|
|
|
11,492,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Equivalents
Cash equivalents consist of money market mutual funds, which
invest in U.S. government securities and bank deposits. The
Company considers all highly liquid instruments which have a
maturity of three months or less when acquired to be cash
equivalents.
Prepaid
Expenses and Other Current Assets
As of December 31, 2005 and 2004, prepaid expenses and
other current assets are summarized below:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Prepaid taxes
|
|
$
|
26,505
|
|
|
$
|
16,699
|
|
Prepaid insurance
|
|
|
26,305
|
|
|
|
12,280
|
|
Other
|
|
|
11,304
|
|
|
|
18,637
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses and other
current assets
|
|
$
|
64,114
|
|
|
$
|
47,616
|
|
|
|
|
|
|
|
|
|
|
Deferred
Financing, Initial Public Offering and Acquisition
Costs
The Company has deferred acquisition costs related to the
proposed merger with Maxim (See Note 13). Deferred
acquisition costs represent legal and other costs and fees
incurred to acquire Maxim. Deferred financing costs represent
legal and other costs and fees incurred to negotiate and obtain
financing. These costs are capitalized and amortized on a
straight-line basis (which approximates the effective interest
method) over the life of the applicable financing. Deferred
initial public offering costs of $1.7 million were expensed
during the second quarter of 2005 following the withdrawal of
the Company’s initial public offering in May 2005. As of
December 31, 2005 and 2004, deferred financing, initial
public offering and acquisition costs are summarized below:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Acquisition costs
|
|
$
|
2,127,952
|
|
|
$
|
—
|
|
Financing costs
|
|
|
77,023
|
|
|
|
—
|
|
Deferred initial public offering
costs
|
|
|
—
|
|
|
|
1,197,888
|
|
|
|
|
|
|
|
|
|
|
Total deferred financing, initial
public offering and acquisition costs
|
|
$
|
2,204,975
|
|
|
$
|
1,197,888
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
Property and equipment consists of office furniture and
equipment, laboratory equipment, and leasehold improvements
stated at cost. Furniture and equipment are depreciated on a
straight-line basis over their estimated useful lives ranging
from five to seven years. Leasehold improvements are amortized
on a straight-line basis over
F-37
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
the shorter of the lease term or the estimated useful life of
the asset. Maintenance and repairs are charged to expense as
incurred.
Impairment
of Long-Lived Assets
The Company performs impairment tests on its long-lived assets
when circumstances indicate that their carrying amounts may not
be recoverable. If required, recoverability is tested by
comparing the estimated future undiscounted cash flows of the
asset or asset group to its carrying value. If the carrying
value is not recoverable, the asset or asset group is written
down to fair value. No such impairments have been identified
with respect to the Company’s long-lived assets, which
consist primarily of property and equipment.
Derivatives
The Company accounts for its derivative instruments in
accordance with SFAS No. 133 “Accounting for
Derivative Instruments and Hedging Activities,” as amended
by SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
(“SFAS 133”). SFAS 133 establishes
accounting and reporting standards requiring that derivative
instruments, including derivative instruments embedded in other
contracts, be recorded on the balance sheet as either an asset
or liability measured at its fair value. SFAS 133 also
requires that changes in the fair value of derivative
instruments be recognized currently in results of operations
unless specific hedge accounting criteria are met. The Company
had not entered into hedging activities to date. As a result of
certain financings (see Note 6), derivative instruments
were created that are measured at fair value and marked to
market at each reporting period. Changes in the derivative value
are recorded as change in the value of the warrants and
derivatives on the Consolidated Statement of Operations.
Beneficial
Conversion Feature of Certain Instruments
The convertible feature of certain financial instruments provide
for a rate of conversion that is below market value at the
commitment date. Such feature is normally characterized as a
beneficial conversion feature (“BCF”). Pursuant to
EITF Issue
No. 98-5,
“Accounting For Convertible Securities With Beneficial
Conversion Features Or Contingently Adjustable Conversion
Ratio” and EITF
No. 00-27,
“Application of EITF Issue
No. 98-5
to Certain Convertible Instruments,” the estimated fair
value of the BCF is recorded as interest expense if it is
related to debt or a dividend if it is related to preferred
stock. If the conversion feature is contingent, then the BCF is
measured but not recorded until the contingency is resolved.
Comprehensive
Loss
The Company’s only element of comprehensive loss, other
than net loss, is foreign currency translation adjustments.
Fair
Value of Financial Instruments
The estimated fair values of the Company’s financial
instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(In millions)
|
|
|
Cash and cash equivalents
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
|
$
|
1.3
|
|
|
$
|
1.3
|
|
Non-convertible loans
|
|
|
9.4
|
|
|
|
9.9
|
|
|
|
4.8
|
|
|
|
5.4
|
|
Convertible bridge loans
|
|
|
7.3
|
|
|
|
5.1
|
|
|
|
7.6
|
|
|
|
31.5
|
|
Redeemable convertible preferred
stock
|
|
|
26.6
|
|
|
|
24.6
|
|
|
|
25.4
|
|
|
|
55.1
|
|
F-38
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it
is practicable to estimate that value:
Cash and Cash Equivalents. The estimated fair
value of cash and cash equivalents approximates its carrying
value due to the short-term nature of these instruments.
Non-Convertible Loans. The estimated fair
value of non-convertible loans is based on the present value of
their cash flows discounted at a rate that approximates current
market returns for issues of similar risk.
Convertible Loans and Redeemable Convertible Preferred
Stock. The fair value of the convertible loan,
the convertible bridge loans, and the two series of redeemable
convertible preferred stock is estimated based on the
Company’s estimated fair value of its common stock of $5.39
and $16.00 at December 31, 2005 and 2004, respectively,
into which such instruments are convertible.
Recent
Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board
(“FASB”) issued SFAS 154, “Accounting
Changes and Error Corrections, a replacement of APB 20 and
SFAS 3.” SFAS 154 requires retrospective
application to prior periods’ financial statements of a
voluntary change in accounting principle unless it is
impracticable. SFAS 154 improves financial reporting
because its requirements enhance the consistency of financial
information between periods. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005 and is required to
be adopted by the Company’s first quarter of fiscal 2006.
The Company does not believe that the adoption of SFAS 154
will have a material impact on its consolidated financial
statements.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Nonmonetary Assets”
(“SFAS 153”). SFAS 153 amends Accounting
Principles Board (“APB”) Opinion No. 29
(“APB 29”), “Accounting for Nonmonetary
Transactions,” which requires that exchanges of nonmonetary
assets be measured based on the fair value of the assets
exchanged, but which includes certain exceptions to that
principle. SFAS 153 eliminates the exception in APB 29
for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of
nonmonetary assets that do not have a commercial substance.
SFAS 153 is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005.
The adoption of SFAS 153 did not have a material impact on
the Company’s consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payment.” SFAS No. 123R is a
revision of FASB Statement 123, “Accounting for
Stock-Based Compensation” and supersedes APB Opinion
No. 25, “Accounting for Stock Issued to
Employees,” and its related implementation guidance. The
Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment
transactions. SFAS No. 123R requires a public entity
to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair
value of the award (with limited exceptions). That cost will be
recognized over the period during which an employee is required
to provide service in exchange for the award. This statement is
effective as of the beginning of the first annual reporting
period that begins after June 15, 2005. Had the Company
adopted SFAS No. 123R in prior periods, the impact of
the standard would have approximated the pro forma impact of
FASB Statement 123 as described above under the heading
“Stock-Based Compensation”. The Company adopted
SFAS 123R on January 1, 2006 and this adoption will
have a significant impact on the Company’s consolidated
financial statements in the future. On January 4, 2006 the
Company issued approximately 2.2 million stock options to
its employees and board of directors. Based on the Black-Scholes
fair value method (volatility — 83%, risk free
rate — 4.28%, dividends — zero), the Company
estimates approximately $8.8 million of share-based
compensation will be recognized as compensation expense during
the vesting period of which approximately $4.4 million will
be expensed in 2006.
F-39
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
Adolor
Corporation
In July 2003, the Company entered into a license agreement with
Adolor under which it granted Adolor the exclusive right to
commercialize a sterile topical patch containing an analgesic
alone or, in combination, including without limitation, LidoPAIN
SP throughout North America. Upon the execution of the Adolor
agreement, the Company received a non-refundable payment of
$2.5 million, which has been deferred and is being
recognized as revenue ratably over the estimated product
development period. In 2005, 2004 and 2003, the Company recorded
revenue from Adolor of approximately $0.4 million,
$0.7 million and $0.4 million, respectively. In
September 2005, the Company received a milestone payment of
$0.5 million from Adolor in connection with Adolor’s
initiation of a U.S. Phase II trial of LidoPAIN SP.
Under the Adolor agreement, Adolor is obligated to pay the
Company additional non-refundable amounts of up to
$14.5 million upon the achievement of various milestones
relating to product development and regulatory approval, and is
also obligated to pay royalties to the Company based on the net
sales of licensed products in North America on a
country-by-country
basis until the last patent covering the licensed product
expires or the tenth anniversary of the first commercial sale of
licensed product, whichever is later. Adolor is also obligated
to pay the Company a one-time bonus payment of up to
$5.0 million upon the achievement of specified net sales
milestones of licensed product. The total amount of future
milestone payments the Company is eligible to receive from
Adolor is $19.5 million. There is no certainty that any of
these milestones will be achieved or any royalty earned.
Under the terms of the agreement, Adolor is responsible for
conducting further clinical trials and completing the approval
process in North America. At Adolor’s option, the Company
may be required to supply or to obtain supply of the clinical
products necessary to complete clinical trials. Alternatively,
Adolor may choose to subcontract these responsibilities to a
third party. In North America, Adolor is responsible for the
supply and manufacture of LidoPAIN SP for commercial use or, at
its option, may subcontract these responsibilities to third
parties.
The Company has the option to negotiate a co-promotion
arrangement with Adolor for LidoPAIN SP or similar product in
any country in which an NDA (or foreign equivalent) filing has
been made within thirty days of such filing. However, neither
EpiCept nor Adolor is under any obligation to enter into any
such agreement.
Endo
Pharmaceuticals Inc.
In December 2003, the Company entered into a license agreement
with Endo under which it granted Endo (and its affiliates) the
exclusive (including as to the Company and its affiliates)
worldwide right to commercialize LidoPAIN BP. The Company also
granted Endo worldwide rights to use certain of its patents for
the development of certain other non-sterile, topical lidocaine
containing patches, including Lidoderm, Endo’s topical
lidocaine-containing patch for the treatment of chronic lower
back pain. Upon the execution of the Endo agreement, the Company
received a non-refundable payment of $7.5 million, which
has been deferred and is being recognized as revenue on the
proportional performance method. In 2005, 2004 and 2003, the
Company recorded revenue from Endo of approximately
$0.4 million, $0.4 million and $7,000, respectively.
The Company may receive payments of up to $52.5 million
upon the achievement of various milestones relating to product
development and regulatory approval for both the Company’s
LidoPAIN BP product and licensed Endo products, including
Lidoderm, so long as, in the case of Endo’s product
candidate, the Company’s patents provide protection
thereof. The Company is also entitled to receive royalties from
Endo based on the net sales of LidoPAIN BP. These royalties are
payable until generic equivalents to the LidoPAIN BP product are
available or until expiration of the patents covering LidoPAIN
BP, whichever is sooner. The Company is also eligible to receive
milestone payments from Endo of up to approximately
$30.0 million upon the achievement of specified net sales
milestones for licensed Endo products, including Lidoderm, so
long as the Company’s patents provide protection thereof.
The future amount of milestone payments the Company is eligible
to receive under the Endo agreement is $82.5 million. There
is no certainty that any of these milestones will be achieved or
any royalty earned.
F-40
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
The Company is responsible for continuing and completing the
development of LidoPAIN BP, including the conduct of all
clinical trials and the supply of the clinical products
necessary for those trials and the preparation and submission of
the NDA in order to obtain regulatory approval for LidoPAIN BP.
It may subcontract with third parties for the manufacture and
supply of LidoPAIN BP. Endo remains responsible for continuing
and completing the development of Lidoderm for the treatment of
chronic lower back pain, including the conduct of all clinical
trials and the supply of the clinical products necessary for
those trials.
The Company has the option to negotiate a co-promotion
arrangement with Endo for LidoPAIN BP or similar product in any
country in which an NDA (or foreign equivalent) filing has been
made within thirty days of such filing. The Company also has the
right to terminate its license to Endo with respect to any
territory in which Endo has failed to commercialize LidoPAIN BP
within three years of the receipt of regulatory approval
permitting such commercialization.
Cassel
In October 1999, the Company acquired from Dr. R. Douglas
Cassel certain patent applications relating to technology for
the treatment of surgical incision pain. On July 16, 2003,
this agreement was amended. Pursuant to the agreement, as
amended, the Company is obligated to pay Dr. Cassel a
consultant fee of $4,000 per month until July 2006 and is
also obligated to pay Dr. Cassel royalties based on the net
sales of any of the licensed products for the treatment of pain
associated with surgically closed wounds. The $4,000 per
month fee will be credited towards these royalty payments. The
royalty obligations will terminate upon the expiration of the
last to expire acquired patent.
Epitome
In August 1999, the Company entered into a sublicense agreement
with Epitome Pharmaceuticals Limited under which the Company was
granted an exclusive license to certain patents for the topical
use of tricyclic anti-depressants and NMDA antagonists as
topical analgesics for neuralgia. This technology has been
incorporated into EpiCept
NP-1. The
Company has been granted worldwide rights to make, use, develop,
sell and market products utilizing the licensed technology in
connection with passive dermal applications. The Company is
obligated to make payments to Epitome upon achievement of
specified milestones and to pay royalties based on annual net
sales derived from the products incorporating the licensed
technology. At the end of each year in which there has been no
commercially sold products, the Company is obligated to pay
Epitome a maintenance fee that is equal to twice the fee paid in
the previous year, or Epitome will have the option to terminate
the contract. The sublicense terminates upon the expiration of
the last to expire licensed patent. During 2005 and 2004, the
Company paid Epitome $0.2 and $0.1 million, respectively.
The sublicense may be terminated earlier under specified
circumstances, such as breaches, lack of commercial feasibility
and regulatory issues.
|
|
4.
|
Property
and Equipment
|
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Furniture, office and laboratory
equipment
|
|
$
|
499,897
|
|
|
$
|
501,356
|
|
Leasehold improvements
|
|
|
125,645
|
|
|
|
125,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
625,542
|
|
|
|
627,190
|
|
Less accumulated depreciation
|
|
|
(567,315
|
)
|
|
|
(518,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,227
|
|
|
$
|
109,033
|
|
|
|
|
|
|
|
|
|
|
F-41
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
Depreciation expense was approximately $0.1 million for
each of the years ended December 31, 2005, 2004 and 2003.
|
|
5.
|
Other
Accrued Liabilities
|
Other accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
Accrued professional fees
|
|
$
|
811,647
|
|
|
$
|
314,941
|
|
Income taxes
|
|
|
—
|
|
|
|
34,679
|
|
Other
|
|
|
399,527
|
|
|
|
96,094
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,211,174
|
|
|
$
|
445,714
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Notes,
Loans and Financing
|
The Company is a party to several loan agreements, the amounts,
terms and descriptions of which are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
Ten-year,
non-amortizing
loan due December 31, 2007(A)
|
|
$
|
1,813,808
|
|
|
$
|
2,089,292
|
|
Ten-year,
non-amortizing
convertible loan due December 31, 2007(B)
|
|
|
2,418,411
|
|
|
|
2,785,723
|
|
Term loan due June 30, 2007(C)
|
|
|
1,604,014
|
|
|
|
2,664,873
|
|
Convertible bridge loans due
October 30, 2006(D)
|
|
|
4,850,000
|
|
|
|
4,850,000
|
|
Senior Notes due October 30,
2006(E)
|
|
|
4,000,000
|
|
|
|
—
|
|
November 2005 Senior Notes due
October 30, 2006(F)
|
|
|
2,000,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total notes and loans payable,
before debt discount
|
|
|
16,686,233
|
|
|
|
12,389,888
|
|
Less: Debt discount(E)
|
|
|
433,814
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total notes and loans payable
|
|
|
16,252,419
|
|
|
|
12,389,888
|
|
Less: Notes and loans payable,
current portion
|
|
|
11,547,200
|
|
|
|
817,260
|
|
|
|
|
|
|
|
|
|
|
Notes and loans payable, long-term
|
|
$
|
4,705,219
|
|
|
$
|
11,572,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
In August 1997, EpiCept GmbH entered into a ten-year
non-amortizing
loan in the amount of €1.5 million with
Technologie-Beteiligungs Gesellschaft mbH der Deutschen
Ausgleichsbank (“tbg”). Proceeds must be directed
toward research, development, production and distribution of
pharmaceutical products. The loan bears interest at 6% per
annum. The lender also receives additional compensation equal to
9% of the annual surplus (income before taxes, as defined in the
agreement) of EpiCept GmbH, reduced by any other compensation
received from EpiCept GmbH by virtue of other loans to or
investments in EpiCept GmbH provided that tbg is an equity
investor in EpiCept GmbH during that time period. To date,
EpiCept GmbH has had no annual surplus. The Company considers
the additional compensation element based on the surplus of
EpiCept GmbH to be a derivative. The Company has assigned no
value to the derivative at each reporting period as no surplus
of EpiCept GmbH is anticipated over the term of the agreement. |
|
|
|
At the demand of tbg, additional amounts may be due at the end
of the loan term up to 30% of the loan amount, plus 6% of the
principal balance of the note for each year after the expiration
of the fifth complete year of the loan period, such payments to
be offset by the cumulative amount of all payments made to the
lender from the annual surplus of EpiCept GmbH. The Company is
accruing these additional amounts as additional interest up |
F-42
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
|
|
|
|
|
to the maximum amount due over the term of the loan. Accrued
interest attributable to these additional amounts totaled $0.5
and $0.4 million at December 31, 2005 and 2004,
respectively. The effective rate of interest of this loan is
9.7%. |
|
(B) |
|
In February 1998, EpiCept GmbH entered into a ten-year
non-amortizing
convertible term loan in the amount of €2.0 million
with tbg. The loan is non-interest bearing; however, the loan
agreement provides for potential future annual payments from
surplus of EpiCept GmbH up to 6% of the outstanding loan
principal balance, not to exceed 9% of all payments made from
surplus of EpiCept GmbH and limited to 7% of the total financing
from tbg. To date, EpiCept GmbH has had no annual surplus. The
Company considers the additional compensation element based on
the surplus of EpiCept GmbH to be a derivative. The Company has
assigned no value to the derivative at each reporting period as
no surplus of EpiCept GmbH is anticipated over the term of the
agreement. |
|
|
|
The loan is convertible into shares of the Company’s common
stock at any time by the holder at a conversion price of
$28.28 per share. The Company can require conversion upon a
defined triggering event (such as a sale of substantially all
assets of the Company, a public offering of the Company’s
securities, a sale of more than 50% in voting power of
outstanding equity securities of the Company, a merger, etc.) at
a calculated conversion price ranging between $8.08 and $28.28
based on provisions pertaining to the applicable triggering
event. On January 4, 2006 the loan was converted into
282,885 shares of the Company’s common stock at
$8.08 per share (See Note 13). |
|
(C) |
|
In March 1998, EpiCept GmbH entered into a term loan in the
amount of €2.6 million with IKB Private Equity GmbH
(“IKB”), guaranteed by the Company. The interest rate
on the loan varies and was 10.5% per annum from
August 1, 2000 through March 31, 2001, 15% per
annum through June 30, 2003 and 20% per annum
thereafter. The loan was amended in November 2002 by extending
the maturity to December 31, 2006 and incorporating a
principal repayment schedule, which commenced April 30,
2004. Quarterly principal payments are €0.2 million
(approximately $0.2 million as of December 31,
2005) except for the payment due December 31, 2006,
which will be approximately €0.4 million
(approximately $0.4 million as of December 31, 2005).
The repayment schedule in effect December 31, 2004 was
amended in February 2005 in which payments due December 31,
2004 and March 31, 2005 were deferred until March 31,
2007 and June 30, 2007. As a result of the deferral, the
maturity date has been extended until June 30, 2007.
Payment of accrued interest during the period of October 1,
2004 through March 31, 2005 was deferred and paid on
July 31, 2005. |
|
|
|
The loan agreement provides for contingent interest of
4% per annum of the principal balance, becoming due only
upon the Company’s realization of a profit, as defined in
the agreement. The Company has not realized a profit through
December 31, 2005. The Company values the contingent
interest as a derivative using the fair value method in
accordance with SFAS 133. Changes in the fair value of the
contingent interest are recorded as an adjustment to interest
expense. The fair value of the contingent interest was
approximately $0.9 and $0.7 million as of December 31,
2005 and 2004, respectively. |
|
(D) |
|
In November 2002, the Company entered into convertible bridge
loans with several of its stockholders, in an aggregate amount
of up to $5.0 million. At December 31, 2005 and 2004,
the Company had borrowings outstanding of $4.8 million. The
convertible bridge loans bear interest at 8% per annum. The
convertible bridge loans are convertible into the next round of
preferred stock financing, and also have provisions for optional
conversion into preferred stock or common stock. The conversion
rate is equal to the lowest price per share paid by any
purchaser in a financing of the next round of preferred stock,
or at anti-dilutive conversion rates for optional conversion
into preferred stock or common stock based upon the achievement
of certain milestones. In addition, warrants to purchase
preferred stock were issued to the lenders in connection with
the convertible bridge loans (see Note 9). In accordance
with APB Opinion No. 14 “Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants” the
Company allocated the net proceeds between the convertible notes
and the preferred stock purchase warrants based on estimated
fair value. Such warrants were valued utilizing the
Black-Scholes options pricing model and resulted in recording
warrants at $3.6 million and a discount of
$3.6 million to the convertible bridge loan. The discount
was accreted over the term of the |
F-43
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
|
|
|
|
|
loan. During the years ended December 31, 2005, 2004 and
2003, the Company recognized approximately $0.0, $0.9 and
$2.5,million, respectively, of non-cash interest expense related
to the accretion of the debt discount. The maturity date of the
convertible bridge loan had been extended from April 2004 until
October 2006. On January 4, 2006, the convertible bridge
loans were converted into 593,121 shares of the
Company’s common stock (See Note 13). |
|
|
|
Emerging Issues Task Force Issue
No. 98-5,
“Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion
Ratios,” as supplemented by
EITF 00-27,
“Application of Issue
No. 98-5
to Certain Convertible Instruments,” requires the Company
to compute the beneficial conversion feature (“BCF”).
The Company computed the BCF of the convertible bridge loan as
of the commitment date and accounted for it when certain
clinical trial results became available in 2003 that determined
the appropriate conversion rate. The BCF is being amortized as
additional interest expense through the debt’s redemption
date. For these convertible bridge loans, the BCF was recorded
in April 2003 at approximately $1.2 million. For the year
ended December 31, 2005, 2004 and 2003, approximately $0.0,
$0.4 and $0.8 million of the BCF was amortized and included
as interest expense, respectively. |
|
(E) |
|
In March 2005, the Company completed a private placement of
$4.0 million aggregate principal amount of 8% Senior
Notes due 2006 and warrants with a group of investors including
several existing stockholders. The Senior Notes mature on
October 30, 2006. The Company is required to repurchase the
Senior Notes upon the completion of either an initial public
offering or a Qualifying Financing (as defined in the terms of
the Note). Each of the purchasers also purchased stock purchase
warrants exercisable into an amount of shares of preferred stock
or common stock equal to 35% of the principal amount of such
purchaser’s Senior Notes divided by the amount per share
the Senior Notes are converted into preferred stock or the
initial public offering price of the Company’s common stock. |
|
|
|
The Company allocated the $4.0 million in proceeds between
the Senior Notes and the warrants based on their fair value (See
Note 9). The Company recorded approximately
$0.8 million of debt discount and through December 31,
2005 has recorded approximately $0.4 million of expense
related to the accretion of the debt discount. The Senior Notes
created an embedded derivative under FAS 133
“Accounting for Derivatives and Hedging Activities.”
At the time of the financing, in accordance with FAS 133,
the Company valued the embedded derivative at fair market value
of approximately $0.1 million. At December 31, 2005,
the embedded derivative had a nominal value. The value of the
derivative is being marked to market each reporting period as a
derivative gain or loss until the Senior Notes are repaid. |
|
|
|
On August 26, 2005, the Company amended the Senior Notes
with four of the six investors (cumulatively the “Non
Sanders Investors”). Upon the completion of the merger with
Maxim (See Note 13), the Non Sanders Investors agreed to
convert their Senior Notes into approximately 1.1 million
shares of the Company’s common stock at a conversion price
of $2.84. In addition, accrued interest on the convertible loan
will also be converted into the Company’s common stock at
$2.84 per share. The amendment to the Senior Notes resulted
in a BCF. Since the mandatory conversion of the Senior Notes is
contingent upon the closing of the proposed merger with Maxim
(See Note 13) and the merger was dependent on an
affirmative vote of Maxim’s shareholders, no accounting is
required at the modification date per EITF 98-5
“Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion
Ratio.” On January 4, 2006, upon closing of the merger
with Maxim (See Note 13), the BCF approximated
$2.4 million and will be recorded as an expense in 2006. |
|
|
|
The stock purchase warrants held by the remaining two investors
(“Sanders Investors”) were amended to provide for
their automatic expiration at the effective time of the merger
with Maxim (See Note 13). Immediately prior to the
effective time, the stock purchase warrants were automatically
exercised for 22,096 shares of the Company’s common
stock at an exercise price $3.96 per share. |
|
(F) |
|
In November 2005, the Company completed a private placement of
$2.0 million aggregate principal amount of 8% Senior
Notes due 2006 with a group of investors including several
existing stockholders. The November 2005 Senior Notes mature on
October 30, 2006. The holders of the notes have agreed to
convert their notes |
F-44
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
|
|
|
|
|
into approximately 711,691 shares of common stock upon
completion of the merger with Maxim (See Note 13). Since
the conversion of the November 2005 Senior Notes is contingent
upon the closing of the proposed merger with Maxim (See Note
13), no accounting is required at the issuance date per
EITF 98-5 “Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable
Conversion Ratio.” On January 4, 2006, upon closing of
the merger with Maxim (See Note 13), the BCF approximated
$2.0 million and will be recorded as an expense in 2006. |
Investors in the Company’s common stock and preferred stock
outstanding at December 31, 2005 hold substantially all of
the Company’s notes, loans and financings. For the years
ended December 31, 2005, 2004 and 2003, the interest
expense related to these notes, loans and financings was $1.5,
$1.4 and $1.2 million, respectively. The above loans are
unsecured. Accretion of the discount of the loans approximated
$0.4, $1.3 and $3.4 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Such
amounts are included in interest expense in the accompanying
consolidated statements of operations.
At December 31, 2005, principal payments due on long-term
debt are as follows (See Note 13):
|
|
|
|
|
|
|
As of December 31,
|
|
Year Ending
|
|
2005
|
|
|
2006
|
|
$
|
11,981,014
|
|
2007
|
|
|
4,705,219
|
|
|
|
|
|
|
Total
|
|
$
|
16,686,233
|
|
|
|
|
|
|
The Company leases facilities and certain equipment under
agreements through 2007 accounted for as operating leases. The
leases generally contain renewal options and require the Company
to pay all executory costs such as maintenance and insurance.
Rent expense approximated $0.3 million for each of the
years ended December 31, 2005, 2004, and 2003, respectively.
Future minimum rental payments under non-cancelable operating
leases as of December 31, 2005 are as follows:
|
|
|
|
|
|
|
As of December 31,
|
|
Year Ending
|
|
2005
|
|
|
2006
|
|
$
|
252,000
|
|
2007
|
|
|
39,000
|
|
|
|
|
|
|
|
|
$
|
291,000
|
|
|
|
|
|
|
The Company maintains a 401(k) plan covering substantially all
employees. The Company is not obligated to make matching
contributions to the plan. In 2003, the Company made a
contribution of approximately $35,000 to employees participating
in the 401(k) plan for plan year 2002 in order to comply with
the top-heavy provisions of Section 416 of the Internal
Revenue Code. No contributions were made in 2005 and 2004.
The Company is a party to a number of research, consulting, and
license agreements, which require the Company to make payments
to the other party to the agreement upon the other party
attaining certain milestones as defined in the agreements. As of
December 31, 2005, the Company may be required to make
future milestone payments, totaling approximately
$4.3 million, under these agreements, of which
approximately $1.3 million is payable during 2006 and
approximately $0.9, $0.3, $0.6, $0.5 and $0.7 million is
payable from 2007 through 2011. In 2004, the Company entered
into a clinical research agreement for approximately
$1.2 million with a contract research organization to
conduct a clinical trial of LidoPAIN SP in Europe. The terms of
the agreement require payment upon reaching certain milestones,
including patient recruitment. If the contract is cancelled for
any reason, the Company is subject to a 15% penalty for any
offered but unperformed services. The Company has paid the
F-45
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
contract research organization approximately $0.1 million
in 2004 and $0.5 million for the year ended
December 31, 2005. The Company is also obligated to make
future royalty payments to two of its collaborators under
existing license agreements, one based on net sales of EpiCept
NP-1 and the
other based on net sales of LidoPAIN SP, to the extent revenues
on such products are realized. Under its agreement with Epitome
Pharmaceuticals, the Company is obligated to pay a maintenance
fee annually that is equal to twice the fee paid in the previous
year so long as no commercial product sales have occurred and
the Company desires to maintain its rights under the license
agreement. A maintenance fee payment of $0.2 million and
$0.1 million was paid in 2005 and 2004, respectively.
The Company’s Board of Directors ratified the employment
agreements between the Company and its chief executive officer
and chief financial officer dated as of October 28, 2004.
The employment agreements cover an initial term through
December 31, 2006, but may be extended for unlimited
additional one-year periods, and provide for base salary,
discretionary compensation, stock option awards, and
reimbursement of reasonable expenses in connection with services
performed under the employment agreements. The agreements also
compensate such officers in the event of their death or
disability, termination without cause, or termination within one
year of an initial public offering or a change of control, as
defined in the respective employment agreements.
A compensation plan for directors was approved by the Board of
Directors. This plan contemplates the payment of annual
retainers, meeting fees and the granting of stock options and
commenced upon the closing of the merger with Maxim (See
Note 13).
|
|
8.
|
Preferred
Stock and Stockholders’ Deficit
|
The Company is currently authorized to issue two classes of
stock: common stock and preferred stock. Pursuant to the
Company’s Amended Restated Certificate of Incorporation
(the “Certificate”), preferred stockholders and common
stockholders vote together as a class on all matters presented
to the stockholders. Preferred stockholders have the right to
the number of votes equal to the number of shares of common
stock into which each such share of preferred stock held by such
holder could be converted on the date for determination of
stockholders entitled to vote. Pursuant to the terms of a voting
agreement, the preferred stockholders also have the right,
separately from the common stockholders, to elect three
directors to the Company’s Board of Directors. The voting
agreement also fixes the number of directors to be at least
seven but no more than eight directors.
Preferred
Stock
A summary of the rights, preferences, and privileges of the
Preferred Stock is as follows:
Liquidation
Preference
In the event of any liquidation, dissolution or winding up of
the affairs of the Company, whether voluntary or involuntary,
the holders of Series C redeemable convertible preferred
stock (“Series C Preferred”) are entitled to be
ratably paid first out of the assets of the Company available
for distribution an amount equal to $3.00 per share, plus
all dividends accrued or declared thereon but unpaid. The
holders of Series B redeemable convertible preferred stock
(“Series B Preferred”) are entitled to be ratably
paid next in an amount equal to $3.00 per share, plus all
dividends accrued or declared thereon but unpaid. The holders of
Series A convertible preferred stock (“Series A
Preferred”) are entitled then to be ratably paid in an
amount equal to $2.02 per share, plus all dividends accrued
or declared thereon but unpaid. No payment shall be made with
respect to any series of preferred stock unless and until full
payment has been made to the holders of the series of
convertible preferred stock with preferential rights of the
amounts that they are entitled to receive. After the payment in
full of the Series A Preferred, the remaining assets and
funds of the Company legally available for distribution, if any,
are distributable ratably among the holders of common stock and
the Preferred Stock in proportion to the number of shares of
common stock then held by them or issuable to them upon
conversion of the Preferred Stock then held by them.
F-46
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
Conversion
Rights
Each share of Preferred Stock is convertible, without the
payment of any additional consideration by the holder thereof,
at the option of the holder, subject to future adjustments for
stock splits, stock dividends, recapitalizations or other
similar events, as well as future dilutive issuances of common
stock.
Each share of Preferred Stock will automatically be converted
into shares of common stock upon the closing of a firm
commitment for an underwritten public offering pursuant to an
effective registration statement covering the offer and the sale
of the common stock at an offering price per share of not less
than $1.00 and with gross proceeds to the Company of not less
than $15 million. The holders of Preferred Stock have
registration rights, under an amended and restated registration
rights agreement, which requires the Company, upon request, to
register 25% of the “Registrable Securities” as
defined in the registration rights agreement at any time after
the earlier of April 28, 2002 or the date that is six
months after the closing of the Company’s first public
offering of securities. In addition, the holders of the
Preferred Stock are entitled to “piggy back”
registration rights in conjunction with a public offering of the
Company’s common stock.
All Preferred Stock was converted into the Company’s common
stock on January 4, 2006 upon closing of the merger with
Maxim (See Note 13).
Dividends
The holders of Series B Preferred and Series C
Preferred are entitled to receive, when and as declared by the
Board of Directors, preferential cumulative dividends in cash at
the rate of 7% per annum of the preferred stock’s
stated value of $1.50 per share, subject to adjustment as
defined in the Certificate. Such dividends accrue from the
original issue date, as defined, of each of the Series B
Preferred and Series C Preferred. Dividends are payable to
the holders of Series B Preferred only to the extent that
holders of Series C Preferred first receive the dividend
payment to which they are entitled. The Company’s Board of
Directors has not declared any dividend payment on any class of
preferred stock or common stock. However, dividends are being
recorded as an addition to the preferred stock carrying value.
The total amount of accreted dividends was approximately $6.6,
$5.3 and $4.1 million as of December 31, 2005, 2004
and 2003, respectively. Such accreted dividends were converted
into the Company’s common stock upon completion of the
merger with Maxim (See Note 13).
Redemption
Each holder of Series B Preferred and Series C
Preferred may request the Company to redeem for cash such
holder’s preferred stock, ratably on each of
December 31, 2006, 2007 and 2008, or in any amount
thereafter at $1.50 per share plus all dividends accrued
but unpaid, and any and all other amounts owing with respect to
the holder’s shares of such preferred stock. The redemption
price for each share of Series B Preferred or Series C
Preferred is subject to adjustment to take account of any stock
splits, stock dividend, combination of shares, or other similar
event.
Other
In connection with the convertible bridge loans (see
Note 6), the Company recorded BCF’s related to
adjustments made to the conversion ratios of the Preferred
Stock. The adjustments to the conversion ratios entitled the
Preferred Stockholders to additional shares of common stock upon
conversion. The BCF approximated $3.3 million, increasing
the carrying value of the Preferred Stock with a related charge
to additional paid-in capital, to the extent available, and to
accumulated deficit in 2003.
Common
Stock
During 2005, 12,125 shares of common stock were issued for
the exercise of stock options resulting in proceeds of $17,550.
F-47
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
During 2004, 48,781 shares of common stock were issued for
the exercise of stock options resulting in proceeds of $69,038.
|
|
9.
|
Stock
Options and Warrants
|
Stock
Options
The EpiCept Corporation 1995 Stock Option Plan as amended in
1997 and 1999 (the “1995 Plan”) provides for the
granting of incentive stock options and non-qualified stock
options to purchase the Company’s stock through the year
2005. A total of 0.8 million shares of the Company’s
common stock are authorized under the Plan. As of
December 31, 2005, 0.3 million shares were available
under the 1995 Plan. Options are granted and vest as determined
by the Board of Directors, generally over a three-year period.
Stock option activity under the Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
Under
|
|
|
Weighted Average
|
|
|
|
Option
|
|
|
Exercise Price
|
|
|
Options outstanding at
December 31, 2002
|
|
|
643,660
|
|
|
$
|
1.52
|
|
Options granted
|
|
|
11,250
|
|
|
$
|
2.00
|
|
Options canceled/expired
|
|
|
(139,003
|
)
|
|
$
|
1.84
|
|
Options exercised
|
|
|
(500
|
)
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
December 31, 2003
|
|
|
515,407
|
|
|
$
|
1.44
|
|
Options exercised
|
|
|
(48,781
|
)
|
|
$
|
1.40
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
December 31, 2004
|
|
|
466,626
|
|
|
$
|
1.48
|
|
Options canceled/expired
|
|
|
(15,000
|
)
|
|
$
|
1.73
|
|
Options exercised
|
|
|
(12,125
|
)
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
December 31, 2005
|
|
|
439,501
|
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31, 2003
|
|
|
416,463
|
|
|
$
|
1.44
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31, 2004
|
|
|
459,793
|
|
|
$
|
1.44
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31, 2005
|
|
|
439,501
|
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options
outstanding at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
Options
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
Shares
|
|
|
Weighted-
|
|
|
|
Outstanding at
|
|
|
Average
|
|
|
Average
|
|
|
Exercisable at
|
|
|
Average
|
|
|
|
December 31,
|
|
|
Remaining
|
|
|
Exercise
|
|
|
December 31,
|
|
|
Exercise
|
|
Range of Exercise Price
|
|
2005
|
|
|
Contractual Life
|
|
|
Price
|
|
|
2005
|
|
|
Price
|
|
|
$1.20
|
|
|
345,126
|
|
|
|
5.3 years
|
|
|
|
1.20
|
|
|
|
345,126
|
|
|
|
1.20
|
|
2.00
|
|
|
58,125
|
|
|
|
6.4 years
|
|
|
|
2.00
|
|
|
|
58,125
|
|
|
|
2.00
|
|
3.00
|
|
|
36,250
|
|
|
|
3.5 years
|
|
|
|
3.00
|
|
|
|
36,250
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
439,501
|
|
|
|
|
|
|
|
1.45
|
|
|
|
439,501
|
|
|
|
1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon the effectiveness of the 2005 Equity Incentive Plan, as
discussed below, no further granting of options under the 1995
Plan are anticipated.
During 2005 and 2004, the Company granted no options to
employees.
F-48
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
During 2003, the Company granted options to employees to
purchase an aggregate of 11,250 shares of common stock at
exercise prices that were considered to be below the deemed fair
value at the date of grant for financial reporting purposes
resulting in deferred stock compensation of $45,000. Such amount
is being amortized over the option vesting period. The Company
adjusted the deferred stock compensation by $0.1 million
for stock option forfeitures during 2003.
Amortization of deferred stock compensation approximated
$24,000, $0.4 million and $0.6 million, for the years
ended December 31, 2005, 2004 and 2003, respectively.
The fair value of the Company’s common stock for options
granted during 2003 was determined contemporaneously at the time
of the grant by the board of directors, with input from
management. Prior to the completion of the Adolor license
agreement in July 2003, the Company utilized the value paid for
each of its series of preferred stock as an estimate of the fair
value of its common stock. The majority of the Company’s
historical stock option grants contained exercise prices below
the estimated fair value of the underlying shares at the time of
grant.
2005
Equity Incentive Plan
The 2005 Equity Incentive Plan (the “2005 Plan”) was
adopted on September 1, 2005, and approved by stockholders
on September 5, 2005. The 2005 Plan provides for the grant
of incentive stock options, within the meaning of
Section 422 of the Internal Revenue Code, to EpiCept’s
employees and its parent and subsidiary corporations’
employees, and for the grant of nonstatutory stock options,
restricted stock, performance-based awards and cash awards to
its employees, directors and consultants and its parent and
subsidiary corporations’ employees and consultants.
A total of 4,000,000 shares of EpiCept’s common stock
are reserved for issuance pursuant to the 2005 Plan, of which no
options were issued and outstanding at December 31, 2005.
The 2005 Plan became effective at the effective time of the
merger with Maxim (See Note 13). No optionee may be granted
an option to purchase more than 1,500,000 shares in any
fiscal year. On January 4, 2006, EpiCept’s board of
directors granted options to purchase approximately
2.2 million shares of the Company’s common stock at a
fair market value exercise price of $5.84 per share.
2005
Employee Stock Purchase Plan
The 2005 Employee Stock Purchase Plan (the “Stock Purchase
Plan”) was adopted on September 1, 2005 and approved
by the stockholders on September 5, 2005. The Employee
Stock Purchase Plan became effective upon the completion of the
merger and a total of 500,000 shares of common stock have
been reserved for sale. No shares have been issued under the
Stock Purchase Plan.
Warrants
In connection with the issuance of the convertible bridge loans
discussed in Note 6, the Company issued warrants in 2002
and 2003 entitling the lenders, subject to adjustments as
defined, to purchase a number of shares equal to 50% of the
greatest principal amount outstanding under the loan divided by
the applicable exercise price as described in the warrant. The
warrants are exercisable into the next round of preferred stock
or common stock financing, at any time through November 2012 and
possess certain anti-dilutive rights, as defined in the warrant.
The fair value ascribed to the warrants was $1.9 million in
2003 and $1.7 million in 2002 and was determined utilizing
the Black-Scholes option pricing model. The following
assumptions were used: dividend yield of zero (0%) percent; risk
free interest rate of 4.53%; volatility of 101%; and expected
life of 4 years. The value of these warrants of
$3.6 million was recorded as temporary equity as the
warrants were potentially exercisable into redeemable preferred
stock.
F-49
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
The following table summarizes shares issuable upon exercise of
warrants outstanding at December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Shares
|
|
|
|
|
|
|
|
Exercise
|
|
|
Shares
|
|
|
Issuable
|
|
Issuance Date
|
|
Expiration Date
|
|
Shares Issuable Upon Exercise
|
|
Price
|
|
|
Issuable
|
|
|
Upon Merger
|
|
|
August 2000
|
|
August 2010
|
|
333,333 Series B Preferred
|
|
$
|
1.30
|
|
|
|
96,153
|
|
|
|
58,229
|
|
November 2000
|
|
November 2012
|
|
750,000 Series C Preferred
|
|
$
|
1.30
|
|
|
|
216,346
|
|
|
|
131,018
|
|
November 2002
|
|
November 2012
|
|
6,062,500 Common
|
|
$
|
0.40
|
|
|
|
6,062,500
|
|
|
|
3,861,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
6,374,999
|
|
|
|
4,050,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the merger with Maxim, the above warrants
were exercised (See Note 13).
The number of shares issuable upon the exercise of the warrants
is subject to adjustment to take account of any stock splits,
stock dividend, combination of shares, or other similar event.
In April 2002, warrants to purchase 24,753 shares of
Series A Preferred expired unexercised. In April 2004,
warrants to purchase 74,259 shares of Series A
Preferred were exercised via a net share issuance of
53,225 shares of Series A Preferred. A BCF charge of
$0.2 million was recorded to reflect a dividend deemed to
be paid at the exercise date.
In March 2005, the Company issued $4.0 million of Senior
Notes (see Note 6). Each of the purchasers also purchased
stock purchase warrants exercisable into an amount of shares of
preferred stock or common stock equal to 35% of the principal
amount of such purchaser’s Senior Notes divided by the
amount per share the Senior Notes are converted into preferred
stock or the price per share at which the Senior Notes are
converted into the Company’s common stock. The exercise
price for the warrants was initially set at the amount per share
the Senior Notes are converted into preferred stock or 75% of
the initial public offering price. The warrants were exercisable
by the purchaser at any time before the earlier to occur of
(a) March 3, 2008 or (b) a merger, consolidation,
share exchange sale of the company, certain change of control
events, and events of liquidation. If an initial public offering
has not been consummated by March 3, 2006, the expiration
date of the warrants would be extended until March 3, 2009.
The warrants meet the requirements of and are accounted for as a
liability in accordance with
EITF 00-19
as the number and price of the warrant shares were unknown at
the time of financing. The Company calculated the value of the
warrants at the date of the issuance of the Senior Notes at
approximately $0.9 million. The fair value of the warrants
at issuance of $0.9 million was determined utilizing the
Black-Scholes option-pricing model utilizing the following
assumptions: dividend yield of 0%, risk free interest rate of
3.76% volatility of 90% and an expected life of three years. The
value of the warrant shares was marked to market each reporting
period resulting in a derivative gain of $0.9 million for
the year ended December 31, 2005. The warrants were valued
at $35,000 at December 31, 2005.
Third
Party Stock-Based Compensation
During 2002 and 2001, the Company granted options to purchase
the Company’s common stock to third party consultants in
connection with service agreements. Compensation expense
relating to third party stock-based compensation was
approximately $6,200, $0.1 million, and $0.2 million
for the years ended December 31, 2005, 2004 and 2003,
respectively. The Company values these options utilizing the
Black-Scholes option pricing model and remeasures them during
the vesting period.
The Company has deferred tax assets of $21.9, $19.5 and
$16.9 million as of December 31, 2005, 2004 and 2003,
respectively, for items including: net operating loss
carryforwards (“NOLs”), stock-based compensation,
deferred revenue, patent costs and accrued liabilities. As of
December 31, 2005, 2004 and 2003, the Company has federal,
state, and foreign NOLs of approximately $69.1, $60.4 and
$44.6 million, respectively, available to reduce
F-50
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
future taxable income. The Company’s federal and state NOLs
expire in various intervals through 2025. In the event of
certain ownership changes, the Company’s ability to utilize
the tax benefits from NOLs could be substantially limited. In
accordance with SFAS 109, “Accounting for Income
Taxes,” the Company has provided a valuation allowance for
the full amount of its net deferred tax assets because it is not
more likely than not that the Company will realize future
benefits associated with deductible temporary differences and
NOLs at December 31, 2005, 2004 and 2003.
The valuation allowance at December 31, 2005, 2004 and 2003
was approximately $21.9, $19.5 and $16.9 million,
respectively. For the years ended December 31, 2005, 2004,
2003, the valuation allowance increased by $2.3, $2.6 and
$3.4 million, respectively.
A reconciliation of the federal statutory tax rate and the
effective tax rates for the years ended December 31, 2005,
2004 and 2003 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Statutory tax rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State income taxes, net of federal
benefit
|
|
|
(3.8
|
)
|
|
|
(3.4
|
)
|
|
|
(0.6
|
)
|
Nondeductible expenses
|
|
|
0.0
|
|
|
|
1.8
|
|
|
|
2.8
|
|
Change in valuation allowance
|
|
|
34.0
|
|
|
|
32.2
|
|
|
|
31.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(3.8
|
)%
|
|
|
(3.4
|
)%
|
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The principal differences between the U.S. statutory tax
benefit rate of 34% and the Company’s effective tax rates
of (3.8)%, (3.4)% and (0.6)% for the years ended
December 31, 2005, 2004 and 2003, respectively, are
primarily due to the state income tax benefit from the sale of
state NOLs and the Company not recognizing the benefit of its
NOLs incurred during the year.
Federal income tax expense for the years ended December 31,
2005, 2004 and 2003 was $0, $0 and $31,000, respectively.
Federal income tax expense for 2003 was comprised of current
alternative minimum tax.
The 2005 and 2004 state income tax benefit resulted from
the sale of state NOLs of $0.2 million and
$0.3 million, respectively. The 2003 state income tax
benefit was comprised of state income tax expense of
$0.1 million offset by the state income tax benefit
resulting from the sale of the state NOLs of $0.2 million.
The sales of cumulative NOLs are a result of a New Jersey state
law enacted January 1, 1999 allowing emerging technology
and biotechnology companies to transfer or “sell”
their unused New Jersey NOLs and New Jersey research and
development tax credits to any profitable New Jersey company
qualified to purchase them for cash. The Company received
approval from the State of New Jersey to sell NOLs in November
of each year and entered into a contract with a third party to
sell the NOLs at a discount for approximately $0.2, $0.3 and
$0.2 million in December of each year. Accordingly, the
valuation allowance was reduced by the gross amount of
$0.3 million each as of December 31, 2005, 2004 and
2003.
F-51
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
The principal components of deferred tax assets, liabilities and
the valuation allowance are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Patent costs
|
|
$
|
465,000
|
|
|
$
|
544,000
|
|
Stock-based compensation
|
|
|
1,506,000
|
|
|
|
1,495,000
|
|
Accrued liabilities
|
|
|
235,000
|
|
|
|
590,000
|
|
Amortization of discount
|
|
|
173,000
|
|
|
|
—
|
|
Deferred revenue
|
|
|
2,702,000
|
|
|
|
2,828,000
|
|
Other assets
|
|
|
44,000
|
|
|
|
53,000
|
|
Net operating loss carryforwards
|
|
|
16,736,000
|
|
|
|
14,014,000
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
21,861,000
|
|
|
|
19,524,000
|
|
Valuation allowance
|
|
|
(21,861,000
|
)
|
|
|
(19,524,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Segment
and Geographic Information
|
The Company operates as one business segment. The Company
maintains development operations in the United States and
Germany.
Geographic information for the years ended December 31,
2005, 2004 and 2003 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
564,508
|
|
|
$
|
739,485
|
|
|
$
|
190,972
|
|
Germany
|
|
|
263,994
|
|
|
|
375,604
|
|
|
|
185,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
828,502
|
|
|
$
|
1,115,089
|
|
|
$
|
376,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
5,926,537
|
|
|
$
|
6,037,616
|
|
|
$
|
7,929,181
|
|
Germany
|
|
|
1,288,164
|
|
|
|
1,570,791
|
|
|
|
2,031,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,214,701
|
|
|
$
|
7,608,407
|
|
|
$
|
9,960,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,547,497
|
|
|
$
|
2,537,193
|
|
|
$
|
7,928,321
|
|
Germany
|
|
|
199,273
|
|
|
|
89,599
|
|
|
|
267,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,746,770
|
|
|
$
|
2,626,792
|
|
|
$
|
8,195,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Lived Assets,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
49,724
|
|
|
$
|
93,852
|
|
|
$
|
104,484
|
|
Germany
|
|
|
8,503
|
|
|
|
15,181
|
|
|
|
5,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,227
|
|
|
$
|
109,033
|
|
|
$
|
110,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-52
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
|
|
12.
|
Quarterly
Results (Unaudited)
|
Summarized quarterly results of operations for the years ended
December 31, 2005 and 2004 are as follows (in thousands
except per share and share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Revenue
|
|
$
|
285
|
|
|
$
|
264
|
|
|
$
|
585
|
|
|
$
|
(306
|
)(2)
|
Operating expenses
|
|
|
1,486
|
|
|
|
3,210
|
|
|
|
1,280
|
|
|
|
1,653
|
|
Net loss
|
|
|
(1,441
|
)
|
|
|
(3,256
|
)
|
|
|
(449
|
)
|
|
|
(2,069
|
)
|
Redeemable convertible preferred
stock dividends
|
|
|
(314
|
)
|
|
|
(313
|
)
|
|
|
(314
|
)
|
|
|
(313
|
)
|
Loss attributable to common
stockholders
|
|
|
(1,755
|
)
|
|
|
(3,569
|
)
|
|
|
(763
|
)
|
|
|
(2,382
|
)
|
Basic and diluted loss per common
share(1)
|
|
|
(1.03
|
)
|
|
|
(2.09
|
)
|
|
|
(0.45
|
)
|
|
|
(1.39
|
)
|
Weighted average shares outstanding
|
|
|
1,706,218
|
|
|
|
1,711,570
|
|
|
|
1,711,746
|
|
|
|
1,711,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Revenue
|
|
$
|
308
|
|
|
$
|
311
|
|
|
$
|
362
|
|
|
$
|
134
|
|
Operating expenses
|
|
|
922
|
|
|
|
1,523
|
|
|
|
1,975
|
|
|
|
1,772
|
|
Net loss
|
|
|
(1,768
|
)
|
|
|
(1,839
|
)
|
|
|
(1,955
|
)
|
|
|
(2,046
|
)
|
Redeemable convertible preferred
stock dividends
|
|
|
(312
|
)
|
|
|
(462
|
)
|
|
|
(317
|
)
|
|
|
(313
|
)
|
Loss attributable to common
stockholders
|
|
|
(2,080
|
)
|
|
|
(2,301
|
)
|
|
|
(2,272
|
)
|
|
|
(2,360
|
)
|
Basic and diluted loss per common
share(1)
|
|
|
(1.25
|
)
|
|
|
(1.37
|
)
|
|
|
(1.34
|
)
|
|
|
(1.39
|
)
|
Weighted average shares outstanding
|
|
|
1,657,735
|
|
|
|
1,678,964
|
|
|
|
1,696,152
|
|
|
|
1,699,621
|
|
|
|
|
(1) |
|
The addition of loss per common share by quarter may not equal
the total loss per common share for the year or year to date due
to rounding. |
|
(2) |
|
Refer to Note 2 in the notes to consolidated financials
statements. |
On September 6, 2005, the Company entered into an Agreement
and Plan of Merger (the “Merger Agreement”) with
Maxim, a Delaware corporation and Magazine Acquisition Corp.
(“Magazine”), a wholly-owned subsidiary of EpiCept. On
January 4, 2006, the Company completed the merger. As a
result, EpiCept will report the consolidated financial
statements beginning with the quarter ending March 31,
2006. EpiCept will account for the merger as an asset
acquisition as Maxim is a development stage company. Under the
terms of the Merger Agreement, Magazine merged with and into
Maxim, with Maxim continuing as the surviving the corporation
and as a wholly-owned subsidiary of the Company. Maxim
stockholders received approximately 5.8 million shares of
EpiCept common stock in exchange for the shares of Maxim stock
they own, and Maxim warrant holders received approximately
0.3 million warrants to purchase shares of EpiCept common
stock in exchange for the warrants to purchase Maxim stock they
hold. Maxim option holders holding options granted under
Maxim’s Amended and Restated 1993 Long Term Incentive Plan
(“1993 Plan”), and holding options granted under the
other Maxim stock option plans, with an exercise price of
$20.00 per share or less, received options to purchase
approximately 0.4 million shares of EpiCept common stock in
exchange for the options to purchase Maxim common stock they
hold at the Maxim exercise price divided by the exchange ratio.
EpiCept issued approximately 5.8 million shares of its
common stock to Maxim stockholders in exchange for all of the
outstanding shares of Maxim. Upon completion of the merger,
EpiCept stockholders retained
F-53
EpiCept
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
approximately 72%, and the former Maxim stockholders received
28% of outstanding shares of EpiCept’s common stock. Based
upon the average closing price of Maxim common stock on the two
full trading days immediately preceding the public announcement
of the merger, the trading day the merger was announced and the
two full trading days immediately following such public
announcement and the original exchange ratio, the transaction
valued Maxim at approximately $41.4 million. The merger is
intended to qualify for income tax purposes as a reorganization
within the meaning of Section 368(a) of the Internal
Revenue Code.
The merger created a specialty pharmaceutical company with a
balanced portfolio of pain management and oncology product
candidates that allows EpiCept to be less reliant on the success
of any one product candidate. In addition the merger provided
EpiCept’s stockholders with shares in a publicly traded
company, which provides liquidity to existing EpiCept
stockholders.
The purchase price has been allocated based on a preliminary
valuation of Maxim’s tangible and intangible assets and
liabilities based on their fair values (table in
thousands — unaudited):
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,135
|
|
Other assets
|
|
|
984
|
|
Property and equipment
|
|
|
3,716
|
|
Other assets
|
|
|
393
|
|
In-process technology
|
|
|
26,754
|
|
Intangible assets (assembled
workforce)
|
|
|
643
|
|
Total current liabilities
|
|
|
(2,437
|
)
|
|
|
|
|
|
Total
|
|
$
|
45,188
|
|
|
|
|
|
|
The transaction valued Maxim at approximately
$41.4 million. Including capitalized costs of
$3.8 million to complete the transaction, the total
purchase price amounted to approximately $45.2 million. The
Company acquired in-process research and development assets of
approximately $26.7 million, which were immediately
expensed to research and development. The Company acquired
assembled workforce of approximately $0.6 million, which
was capitalized and will be amortized over its useful life of
6 years. The Company also acquired fixed assets of
approximately $3.7 million, which will be amortized over
their remaining useful life.
Upon closing of the merger, the Company filed an Amended and
Restated Certificate of Incorporation in which the
Company’s authorized share capital was set a
50 million common shares and 5 million undesignated
preferred shares.
Upon the closing of the merger, the Company issued
4.5 million shares of common stock for the conversion of
the Series A, B and C Preferred Stock. The Company recorded
BCF’s for the difference between the fair value of the
Company’s common stock on the closing date and the
conversion rate, which approximated $8.6 million. The
Company also issued 2.7 million shares of common stock for
the conversion of approximately $12.3 million of notes and
loans and accrued interest (See Note 6). Upon the closing
of the merger, the Company recorded BCF’s related to the
difference between the fair value of the Company’s common
stock on the closing date and the conversion rate. BCF’s
amounting to $4.4 million were expensed for the conversion
of March 2005 Senior Notes and the November 2005 Senior Notes.
On February 9, 2006, the Company raised $11.6 million
gross proceeds through a private placement of common stock and
common stock purchase warrants. Approximately 4.1 million
shares were sold at a price of $2.85 per share. In
addition, approximately 1 million five year common stock
purchase warrants were issued to the investors granting them the
right to purchase approximately 1 million of the
Company’s common stock at a price of $4.00 per share.
The warrants prohibit any exercise for the first six months from
the closing date of the transaction. In connection with the
issuance of stock and warrants, the Company agreed to file a
registration statement on
Form S-3
to permit the resale of the common stock issued in connection
with the transaction and issuable upon exercise of the warrants.
F-54
Shares of Common
Stock
PROSPECTUS
,
2006
PART II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
|
|
ITEM 14.
|
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
|
Expenses payable in connection with the registration and
distribution of the securities being registered hereunder, all
of which will be borne by the Registrant, are as follows. All
amounts are estimates, except the SEC registration fee.
|
|
|
|
|
Securities and Exchange Commission
registration fee
|
|
$
|
1,000.00
|
|
Printer expenses
|
|
$
|
5,000.00
|
|
Legal fees and expenses
|
|
$
|
75,000.00
|
|
Accounting fees and expenses
|
|
$
|
45,000.00
|
|
|
|
|
|
|
Total
|
|
$
|
126,000.00
|
|
|
|
|
|
|
|
|
ITEM 15.
|
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
|
Section 145 of the Delaware General Corporation Law
(“Section 145”) permits indemnification of
officers and directors of a corporation under certain conditions
and subject to certain limitations. Section 145 also
provides that a corporation has the power to maintain insurance
on behalf of its officers and directors against any liability
asserted against such person and incurred by him or her in such
capacity, or arising out of his or her status as such, whether
or not the corporation would have the power to indemnify him or
her against such liability under the provisions of
Section 145.
Article 6, Section 1, of EpiCept’s Amended and
Restated Certificate of Incorporation provides for mandatory
indemnification of its directors and officers and permissible
indemnification of employees and other agents to the maximum
extent not prohibited by the Delaware General Corporation Law.
The rights to indemnity thereunder continue as to a person who
has ceased to be a director, officer, employee or agent and
inure to the benefit of the heirs, executors and administrators
of the person. In addition, expenses incurred by a director or
executive officer in defending any civil, criminal,
administrative or investigative action, suit or proceeding by
reason of the fact that he or she is or was a director or
officer of EpiCept (or was serving at EpiCept’s request as
a director or officer of another corporation) shall be paid by
EpiCept in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of
such director or officer to repay such amount if it shall
ultimately be determined that he or she is not entitled to be
indemnified by EpiCept as authorized by the relevant section of
the Delaware General Corporation Law.
As permitted by Section 102(b)(7) of the Delaware General
Corporation Law, EpiCept’s Certificate of Incorporation
provides that, pursuant to Delaware law, its directors shall not
be personally liable for monetary damages for breach of the
directors’ fiduciary duty as directors to EpiCept and its
stockholders. This provision in the Certificate of Incorporation
does not eliminate the directors’ fiduciary duty, and in
appropriate circumstances equitable remedies such as injunctive
or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to
be subject to liability for breach of the director’s duty
of loyalty to EpiCept for acts or omission not in good faith or
involving international misconduct, for knowing violations of
law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of Stock
repurchases or redemptions that are unlawful under
Section 174 of the Delaware General Corporation Law. The
provision also does not affect a director’s
responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
EpiCept intends to enter into indemnification agreements with
each of its directors and executive officers and to purchase
directors’ and officers’ liability insurance.
Generally, the indemnification agreements attempt to provide the
maximum protection permitted by Delaware law as it may be
amended from time to time. Moreover, the indemnification
agreements provide for certain additional indemnification. Under
such additional indemnification provisions, an individual will
receive indemnification for expenses, judgments, fines and
amounts paid in settlement if he or she is found to have acted
in good faith and in a manner reasonably believed to be in, or
II-1
not opposed to, the best interests of EpiCept, and, with respect
to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. Notwithstanding
anything to the contrary in the indemnification agreement,
EpiCept shall not indemnify any such director or executive
officer seeking indemnification in connection with any action,
suit, proceeding, claim or counterclaim, or part thereof,
initiated by such person unless the initiation thereof was
authorized in the specific case by the Board of Directors of
EpiCept. The indemnification agreements provide for EpiCept to
advance to the individual any and all expenses (including
attorneys’ fees) incurred in defending any proceeding in
advance of the final disposition thereof. In order to receive an
advance of expenses, the individual must submit to EpiCept
copies of invoices presented to him or her for such expenses.
Also, the individual must repay such advances upon a final
judicial decision that he or she is not entitled to
indemnification.
At present, there is no pending litigation or proceeding
involving a director, officer, employee or other agent of
EpiCept in which indemnification is being sought, nor is EpiCept
aware of any threatened litigation that may result in a claim
for indemnification by any director, officer, employee or other
agent of EpiCept.
The following exhibits are filed herewith or incorporated by
reference herein:
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
4
|
.1
|
|
Securities Purchase Agreement,
dated as of August 30, 2006, among EpiCept Corporation and
Hercules Technology Growth Capital, Inc., therein (incorporated
by reference to Exhibit 10.1 of the Current Report on
Form 8-K,
as filed with the SEC on September 5, 2006).
|
|
4
|
.2
|
|
Form of Common Stock Purchase
Warrant (incorporated by reference to Exhibit 10.1 of the
Current Report on
Form 8-K,
as filed with the SEC on September 5, 2006).
|
|
**5
|
.1
|
|
Opinion of Weil,
Gotshal & Manges LLP as to the legality of shares of
Common Stock being registered.
|
|
*23
|
.1
|
|
Consent of Deloitte &
Touche LLP.
|
|
**23
|
.3
|
|
Consent of Weil,
Gotshal & Manges LLP (included in Exhibit 5.1).
|
|
24
|
.1
|
|
Power of Attorney of certain
directors and officers of the Registrant (included in signature
page of this Registration Statement).
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
To be filed by amendment. |
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in this Registration Statement.
Notwithstanding the foregoing, any increase or decrease in the
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20-percent change in the maximum
aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration
statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in this
Registration Statement or any material change to such
information in this Registration Statement; provided,
however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the information
II-2
required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or
furnished to the Commission by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in this
Registration Statement, or is contained in the form of a
prospectus filed pursuant to Rule 424(b) that is part of
this Registration Statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under
the Securities Act of 1993 to any purchaser:
(i) If the registrant is relying on Rule 430B:
(A) Each prospectus filed by the registrant pursuant to
Rule 424 (b)(3) shall be deemed to be part of this
Registration Statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
(B) Each prospectus required to be filed pursuant to
Rule 424 (b)(2), or (b)(5), or (b)(7) as part of a
registration statement in reliance on Rule 430B relating to
an offering made pursuant to Rule 415(a)(1)(i), (vii),or
(x) for the purpose of providing the information required
by section 10(a) of the Securities Act of 1933 shall be
deemed to be part of and included in the registration statement
as of the earlier of the date such form of prospectus is first
used after effectiveness or the date of the first contract of
sale of securities in the offering described in the prospectus.
As provided in Rule 430B, for liability purposes of the
issuer and any person that is at that date an underwriter, such
date shall be deemed to be a new effective date of the
registration statement relating to the securities in the
registration statement to which that prospectus relates, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof. Provided, however, that
no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement that was made in the registration
statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such
effective date; or
(ii) If the registrant is subject to Rule 430C, each
prospectus filed pursuant to Rule 424 (b) as part of a
registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than
prospectuses filed in reliance on rule 430A, shall be
deemed to be part of and included in the registration statement
as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in
a document incorporated or deemed incorporated by reference into
the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or
prospectus that was part of the registration statement or made
in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the
registrant under the Securities Act of 1993 to any purchaser in
the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering
of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the
II-3
following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell
such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities to the
purchaser; and
(iv) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
(b) The undersigned Registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act,
each filing of the Registrant’s annual report pursuant to
Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan’s annual report pursuant to
Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant pursuant to
the foregoing provisions, or otherwise, the Registrant has been
advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
EpiCept Corporation has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Englewood Cliffs, State of New
Jersey, on November 30, 2006.
EPICEPT CORPORATION
John V. Talley
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John V. Talley, Robert W.
Cook or either of them, his or her true and lawful
attorney-in-fact
and agents, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and
to sign any related Registration Statement filed pursuant to
Rule 462(b) under the Security Act of 1933, and to file the
same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange
Commission, granted unto said
attorney-in-fact
and agents, full power and authority to do and to perform each
and every act and thing required and necessary to be done in and
about the premises, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and
confirming all that said
attorney-in-fact
and agents, or any of them or their substitutes or substitutes,
could lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons
in the capacities indicated on November 30, 2006.
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ John
V. Talley
John
V. Talley
|
|
Director, President and Chief
Executive Officer
(Principal Executive Officer)
|
|
|
|
/s/ Robert
W. Cook
Robert
W. Cook
|
|
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
/s/ Robert
G. Savage
Robert
G. Savage
|
|
Director
|
|
|
|
/s/ Gert
Caspritz
Gert
Caspritz
|
|
Director
|
|
|
|
/s/ Guy
C. Jackson
Guy
C. Jackson
|
|
Director
|
|
|
|
/s/ John
Bedard
John
Bedard
|
|
Director
|
|
|
|
/s/ Wayne
Yetter
Wayne
Yetter
|
|
Director
|
|
|
|
/s/ Gerhard
Waldheim
Gerhard
Waldheim
|
|
Director
|
II-5
EXHIBIT INDEX
EXHIBITS
The following exhibits are filed herewith or incorporated by
reference herein:
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
4
|
.2
|
|
Securities Purchase Agreement,
dated as of August 30, 2006, among EpiCept Corporation and
Hercules Technology Growth Capital, Inc., therein (incorporated
by reference to Exhibit 10.1 of the Current Report on
Form 8-K,
as filed with the SEC on September 5, 2006).
|
|
4
|
.3
|
|
Form of Common Stock Purchase
Warrant (incorporated by reference to Exhibit 10.1 of the
Current Report on
Form 8-K,
as filed with the SEC on September 5, 2006).
|
|
**5
|
.1
|
|
Opinion of Weil,
Gotshal & Manges LLP as to the legality of shares of
Common Stock being registered.
|
|
*23
|
.1
|
|
Consent of Deloitte &
Touche LLP.
|
|
**23
|
.3
|
|
Consent of Weil,
Gotshal & Manges LLP (included in Exhibit 5.1).
|
|
24
|
.1
|
|
Power of Attorney of certain
directors and officers of the Registrant (included in signature
page of this Registration Statement).
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
To be filed by amendment. |
II-6