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EX-31.2 - EXHIBIT 31.2 - IMMUNE PHARMACEUTICALS INC | c00422exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - IMMUNE PHARMACEUTICALS INC | c00422exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - IMMUNE PHARMACEUTICALS INC | c00422exv32w2.htm |
EX-10.1 - EXHIBIT 10.1 - IMMUNE PHARMACEUTICALS INC | c00422exv10w1.htm |
EX-32.1 - EXHIBIT 32.1 - IMMUNE PHARMACEUTICALS INC | c00422exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 000-51290
EpiCept
Corporation
(Exact name of registrant as specified in its charter)
Delaware | 52-1841431 | |
(State or other jurisdiction of | (IRS Employer Id. No.) | |
incorporation or organization) |
777 Old Saw Mill River Road
Tarrytown, NY 10591
(Address of principal executive offices)
Tarrytown, NY 10591
(Address of principal executive offices)
Registrants telephone number, including area code: (914) 606-3500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of May 7, 2010 the Registrant had outstanding 44,208,660 shares of its $.0001 par value Common
Stock.
TABLE OF CONTENTS
3 | ||||||||
21 | ||||||||
32 | ||||||||
32 | ||||||||
33 | ||||||||
33 | ||||||||
34 | ||||||||
34 | ||||||||
34 | ||||||||
35 | ||||||||
36 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
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Part I. Financial Information
Item 1. | Financial Statements. |
EpiCept Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
(Unaudited)
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 3,579 | $ | 5,142 | ||||
Inventory |
1,632 | 1,315 | ||||||
Prepaid expenses and other current assets |
382 | 414 | ||||||
Total current assets |
5,593 | 6,871 | ||||||
Restricted cash |
227 | 227 | ||||||
Property and equipment, net |
323 | 360 | ||||||
Deferred financing costs |
133 | 28 | ||||||
Identifiable intangible asset, net |
24 | 28 | ||||||
Total assets |
$ | 6,300 | $ | 7,514 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 1,566 | $ | 1,808 | ||||
Accrued research contract costs |
1,383 | 1,174 | ||||||
Accrued interest |
25 | 3 | ||||||
Other accrued liabilities |
843 | 1,069 | ||||||
Notes and loans payable, current portion |
931 | 985 | ||||||
Deferred revenue, current portion |
691 | 425 | ||||||
Total current liabilities |
5,439 | 5,464 | ||||||
Notes and loans payable |
562 | 618 | ||||||
7.5556% Convertible Subordinated Notes Due 2014 |
358 | 349 | ||||||
Deferred revenue |
11,764 | 9,197 | ||||||
Deferred rent and other noncurrent liabilities |
919 | 965 | ||||||
Total long term liabilities |
13,603 | 11,129 | ||||||
Total liabilities |
19,042 | 16,593 | ||||||
Commitments and contingencies |
||||||||
Stockholders deficit: |
||||||||
Common stock, $.0001 par value; authorized
225,000,000 shares; issued 44,181,579 and
44,051,782 shares at March 31, 2010 and
December 31, 2009, respectively. |
4 | 4 | ||||||
Additional paid-in capital |
204,143 | 203,445 | ||||||
Warrants |
24,047 | 24,503 | ||||||
Accumulated deficit |
(239,553 | ) | (235,045 | ) | ||||
Accumulated other comprehensive loss |
(1,308 | ) | (1,911 | ) | ||||
Treasury stock, at cost (4,167 shares) |
(75 | ) | (75 | ) | ||||
Total stockholders deficit |
(12,742 | ) | (9,079 | ) | ||||
Total liabilities and stockholders deficit |
$ | 6,300 | $ | 7,514 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of Contents
EpiCept Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Revenue |
$ | 167 | $ | 115 | ||||
Operating expenses: |
||||||||
Selling, general and administrative |
2,057 | 2,027 | ||||||
Research and development |
2,039 | 2,170 | ||||||
Total operating expenses |
4,096 | 4,197 | ||||||
Loss from operations |
(3,929 | ) | (4,082 | ) | ||||
Other income (expense): |
||||||||
Interest income |
3 | 6 | ||||||
Foreign exchange loss |
(516 | ) | (289 | ) | ||||
Interest expense (see Note 5) |
(61 | ) | (18,119 | ) | ||||
Other expense, net |
(574 | ) | (18,402 | ) | ||||
Net loss before income taxes |
(4,503 | ) | (22,484 | ) | ||||
Income taxes |
(5 | ) | (3 | ) | ||||
Net loss |
(4,508 | ) | (22,487 | ) | ||||
Basic and diluted loss per common share |
$ | (0.10 | ) | $ | (0.68 | ) | ||
Weighted average common shares outstanding |
44,160,266 | 32,894,822 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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EpiCept Corporation and Subsidiaries
Condensed Consolidated Statement of Stockholders Deficit
(In thousands, except share amounts)
(Unaudited)
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | Treasury | Stockholders | |||||||||||||||||||||||||||
Shares | Amount | Capital | Warrants | Deficit | Loss | Stock | Deficit | |||||||||||||||||||||||||
Balance at December 31, 2009 |
44,051,782 | $ | 4 | $ | 203,445 | $ | 24,503 | $ | (235,045 | ) | $ | (1,911 | ) | $ | (75 | ) | $ | (9,079 | ) | |||||||||||||
Exercise of warrants |
123,725 | | 495 | (456 | ) | | | | 39 | |||||||||||||||||||||||
Issuance of common
stock resulting from
reverse split |
3,828 | | | | | | | | ||||||||||||||||||||||||
Issuance of restricted
common stock and restricted
stock units, net |
2,244 | | 4 | | | | | 4 | ||||||||||||||||||||||||
Amortization of
deferred stock compensation |
| | 199 | | | | | 199 | ||||||||||||||||||||||||
Foreign currency
translation adjustment |
| | | | | 603 | | 603 | ||||||||||||||||||||||||
Net loss |
| | | | (4,508 | ) | | | (4,508 | ) | ||||||||||||||||||||||
Balance at March 31, 2010 |
44,181,579 | $ | 4 | $ | 204,143 | $ | 24,047 | $ | (239,553 | ) | $ | (1,308 | ) | $ | (75 | ) | $ | (12,742 | ) | |||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial
statements.
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Table of Contents
EpiCept Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
(Unaudited)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (4,508 | ) | $ | (22,487 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
40 | 102 | ||||||
Gain on disposal of assets |
(27 | ) | | |||||
Foreign exchange loss |
516 | 289 | ||||||
Stock-based compensation expense |
209 | 393 | ||||||
Amortization of deferred financing costs and discount on loans |
11 | 9,572 | ||||||
Changes in operating assets and liabilities, net of merger assets and liabilities: |
||||||||
Increase in inventory |
(317 | ) | (282 | ) | ||||
Decrease (increase) in prepaid expenses and other current assets |
32 | (114 | ) | |||||
Decrease in other assets |
| 26 | ||||||
Decrease in accounts payable |
(266 | ) | (930 | ) | ||||
Increase (decrease) in accrued research contract costs |
209 | (263 | ) | |||||
Increase in accrued interest |
22 | 32 | ||||||
Decrease in other accrued liabilities |
(226 | ) | (1,257 | ) | ||||
Increase in deferred revenue |
3,000 | | ||||||
Recognition of deferred revenue |
(167 | ) | (96 | ) | ||||
Decrease in other liabilities |
(46 | ) | (165 | ) | ||||
Net cash used in operating activities |
(1,518 | ) | (15,180 | ) | ||||
Cash flows from investing activities: |
||||||||
Restricted cash from issuance of 7.5556% convertible subordinated notes |
| (9,444 | ) | |||||
Release of restricted cash in connection with conversion of 7.5556% convertible
subordinated notes |
| 8,500 | ||||||
Proceeds from sale of property and equipment |
27 | | ||||||
Purchases of property and equipment |
| (4 | ) | |||||
Net cash provided by (used in) investing activities |
27 | (948 | ) | |||||
Cash flows from financing activities: |
||||||||
Proceeds from exercise of stock options and warrants |
34 | 2,887 | ||||||
Proceeds from issuance of common stock and warrants, net of issuance costs |
| (124 | ) | |||||
Proceeds from issuance of 7.5556% convertible subordinated notes |
| 25,000 | ||||||
Deferred financing costs |
(84 | ) | | |||||
Debt issuance costs |
| (1,490 | ) | |||||
Repayment of loans |
(24 | ) | (786 | ) | ||||
Net cash (used in) provided by financing activities |
(74 | ) | 25,487 | |||||
Effect of exchange rate changes on cash and cash equivalents |
2 | (6 | ) | |||||
Net (decrease) increase in cash and cash equivalents |
(1,563 | ) | 9,353 | |||||
Cash and cash equivalents at beginning of year |
5,142 | 790 | ||||||
Cash and cash equivalents at end of period |
$ | 3,579 | $ | 10,143 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 8 | $ | 8,516 | ||||
Cash paid for income taxes |
5 | 3 | ||||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
Conversion of 7.5556% convertible subordinated notes into common stock |
| 22,500 | ||||||
Unpaid financing costs |
24 | 232 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Table of Contents
EpiCept Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
1. Reverse Split of Common Stock
On January 14, 2010, EpiCept Corporation (EpiCept or the Company) effected a previously
authorized 1-for-3 reverse stock split of its common stock. The reverse stock split took effect at
the start of trading on January 15, 2010 on a 1-for-3 split-adjusted basis. All prior periods have
been retroactively adjusted to reflect the reverse stock split.
2. Organization and Description of Business
EpiCept is a specialty pharmaceutical company focused on the development and commercialization
of pharmaceutical products for the treatment of cancer and pain. The Companys strategy is to focus
its development efforts on innovative cancer therapies and topically delivered analgesics targeting
peripheral nerve receptors. The Companys lead product is Ceplene®, which when used
concomitantly with low dose interleukin-2 is intended as remission maintenance therapy in the
treatment of acute myeloid leukemia, or AML, for adult patients who are in their first complete
remission. On October 8, 2008, the European Commission issued a formal marketing authorization for
Ceplene® in the European Union. In November 2009, Health Canada screened and
accepted for review a New Drug Submission (NDS) for Ceplene® for the treatment of AML
in Canada and the Company continues its preparation of a New Drug Application (NDA) filing with
the United States Food and Drug Administration (FDA). On January 7, 2010 EpiCept completed an
agreement with Meda AB of Sweden to market and sell Ceplene® in Europe and certain Pacific Rim
countries. The commercial launch of Ceplene® occurred in the United Kingdom on April
20, 2010. In addition to Ceplene®, the Company has two oncology compounds and a pain
product candidate for the treatment of peripheral neuropathies in clinical development. The
Company believes this portfolio of oncology and pain management product candidates lessens its
reliance on the success of any single product or product candidate.
The Companys cancer portfolio includes crolibulinTM (previously know as
crinobulin), a novel small molecule vascular disruption agent (VDA), and apoptosis inducer for
the treatment of patients with solid tumors and lymphomas. The Company has completed its first
Phase I clinical trial for crolibulinTM. Although the prior name was approved by the
United States Adoptive Names Council in 2009, the compounds name was recently modified to
crolibulinTM at the request of the International Nonproprietary Names Expert Committee
of the World Health Organization to avoid potential confusion with another product.
AzixaTM, an apoptosis inducer with VDA activity licensed by the Company to Myriad
Genetics, Inc., or Myriad, as part of an exclusive, worldwide development and commercialization
agreement, is currently in Phase II clinical trials in patients with primary glioblastoma and
cancer that has metastasized to the brain.
The Companys late-stage pain product candidate, EpiCeptTM NP-1 Cream,
(NP-1), is a prescription topical analgesic cream designed to provide effective long-term relief
of pain associated with peripheral neuropathies. In January 2009, the Company concluded a Phase II
clinical trial of NP-1 in which the Company studied its safety and efficacy in patients suffering
from post-herpetic neuralgia, or PHN, compared to gabapentin and placebo. This trial met its
primary endpoints. In February 2008, the Company concluded a Phase II clinical study of NP-1 in
patients suffering from diabetic peripheral neuropathy, or DPN. Both studies support the
advancement of NP-1 into a registration-sized trial. NP-1 utilizes a proprietary formulation to
administer FDA approved pain management therapeutics, or analgesics, directly on the skins surface
at or near the site of the pain, targeting pain that is influenced, or mediated, by nerve receptors
located just beneath the skins surface. Peripheral neuropathy affects over 15 million people in
the United States of America.
Ceplene® has been granted full marketing authorization by the European
Commission for remission maintenance and prevention of relapse in adult patients with Acute Myeloid
Leukemia in first remission. None of the Companys other 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 the Companys clinical data and that of its collaborators
establish the safety and efficacy of its drug candidates. Furthermore, the Companys strategy
includes entering into collaborative arrangements with third parties to participate in the clinical
development and commercialization of its 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 the Companys
control. The Company cannot forecast with any degree of certainty which of its drug candidates will
be subject to future collaborations or how such arrangements would affect the Companys development
plan or capital requirements.
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 Companys ability to
obtain regulatory approval for its product candidates, its ability to
adequately fund its operations, dependence on collaborative arrangements, the development by
the Company or its competitors of new technological innovations, the dependence on key personnel,
the protection of proprietary technology, the compliance with the FDA and other governmental
regulations. The Company has yet to generate significant product revenues from any of its product
candidates. The Company has financed its operations primarily through the proceeds from the sales
of common stock, warrants, debt instruments, cash proceeds from collaborative relationships and
investment income earned on cash balances and short-term investments.
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Table of Contents
3. Basis of Presentation
The Company has prepared its consolidated 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. Since inception, the Company has incurred
significant net losses each year. As a result, the Company has an accumulated deficit of $239.6
million as of March 31, 2010. The Companys 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 Companys losses have resulted principally from costs incurred in connection with
its development activities and from general and administrative expenses. Even if the Company
succeeds in developing and commercializing one or more of its product candidates, the Company may
never become profitable. The Company expects to continue to incur significant expenses over the
next several years as it:
| commences pre-marketing activities related to the anticipated launch of
Ceplene® in North America; |
| applies for marketing approval of Ceplene® in the U.S., Canada, and other
countries; |
| continues to conduct clinical trials for its product candidates; |
| seeks regulatory approvals for its product candidates; |
| develops, formulates, and commercializes its product candidates; |
| implements additional internal systems and develops new infrastructure; |
| acquires or in-licenses additional products or technologies or expand the use of its
technologies; |
| maintains, defends and expands the scope of its intellectual property; and |
| hires additional personnel. |
The Company believes that its existing cash and cash equivalents plus the $2 million milestone
payment that is due in the second quarter of
2010 under the
Companys license and supply agreement with Meda AB will be sufficient to fund its operations into
the third quarter 2010. Future funding is anticipated to be derived from sales of Ceplene®
in Europe; fees from the Companys strategic partners, or funding through public or private
financings, strategic relationships or other arrangements. If necessary to conserve cash, the
Company may delay or cancel some of its planned development activities during 2010 such as the
initiation of our planned Phase Ib clinical trial for crolibulinTM.
The condensed consolidated balance sheets as of March 31, 2010, the condensed consolidated
statements of operations for the three months ended March 31, 2010 and 2009, the condensed
consolidated statement of stockholders deficit for the three months ended March 31, 2010 and the
condensed consolidated statements of cash flows for the three months ended March 31, 2010 and 2009
and related disclosures contained in the accompanying notes are unaudited. The condensed
consolidated balance sheet as of December 31, 2009 is derived from the audited consolidated
financial statements included in the annual report filed on Form 10-K with the U.S. Securities and
Exchange Commission (the SEC). The condensed consolidated financial statements are presented on
the basis of accounting principles that are generally accepted in the United States of America for
interim financial information and in accordance with the instructions of 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
March 31, 2010 and the results of operations and cash flows for the periods ended March 31, 2010
and 2009 have been made. The results for the three months ended March 31, 2010 are not necessarily
indicative of the results to be expected for the year ending December 31, 2010 or for any other
period. 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, 2009 included in the Companys Annual Report on Form 10-K filed with the SEC.
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Table of Contents
4. Summary of Significant Accounting Policies
Consolidation
The accompanying condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All 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 condensed consolidated 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
The Company recognizes revenue relating to its collaboration agreements in accordance with the
Securities and Exchange Commissions Staff Accounting Bulletin No. 104, Revenue Recognition, and
FASB Accounting Standards Codification (ASC) 605-25, Revenue Recognition Multiple Element
Arrangements (ASC 605-25). Revenue under collaborative arrangements may result from license
fees, milestone payments, research and development payments and royalty payments.
The Companys 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
commercial or collaborative research and development activities and, accordingly, does 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 either 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, or the later of 1) the conclusion of the royalty term on a
jurisdiction by jurisdiction basis or 2) the expiration of the last EpiCept licensed patent.
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 ASC 605-25; (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. For current research and development agreements, EpiCept recognizes revenue
for milestone payments based upon the portion of the development services that are completed to
date and defers the remaining portion and recognizes it over the remainder of the development
services on the proportional or ratable method, whichever is applicable. Deferred revenue
represents the excess of cash received compared to revenue recognized to date under licensing
agreements.
EpiCept has chosen early adoption of the Milestone Method of Revenue Recognition (previously
referred to as EITF 08-9) on a prospective basis as of January 1, 2010. Under this method of
revenue recognition, the Company will recognize into revenue research-related milestone payments
for which there is substantial uncertainty at the date the arrangement is entered into that the
event will be achieved, when that event can only be achieved based in whole or in part on EpiCepts
performance or a specific outcome resulting from EpiCepts performance and, if achieved, would
result in additional payments being due to EpiCept. This accounting will be applicable to a
research milestone under the license agreement entered into with Meda AB this quarter.
Royalty revenue is recognized in the period the sales occur, provided that the royalty amounts
are fixed or determinable, collection of the related receivable is reasonably assured and the
Company has no remaining performance obligations under the arrangement providing for the royalty.
If royalties are received when the Company has remaining performance obligations, they would
be attributed to the services being provided under the arrangement and, therefore, recognized
as such obligations are performed under either the proportionate performance or straight-line
methods, as applicable.
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Foreign Currency Translation
The financial statements of the Companys 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 inter-company debt are recorded
in the consolidated statements of operations in other income (expense).
Stock Based Compensation
The Company has various stock-based compensation plans for employees and outside directors,
which are described more fully in Note 10 Shares-Based Payments.
Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. The Companys income tax returns for tax years after 2005 are still subject
to review. The Company does not believe there will be any material changes in its unrecognized tax
positions over the next 12 months.
The Companys policy is to recognize interest and penalties accrued on any unrecognized tax
benefits as a component of operating expense. The Company did not have any accrued interest or
penalties associated with any unrecognized tax benefits, nor was any interest expense recognized
during the quarter. The tax expense is primarily due to minimal state and local income taxes.
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.
Restricted Cash
The Company has lease agreements for the premises it occupies. Letters of credit in lieu of
lease deposits for leased facilities totaling $0.1 million are secured by restricted cash in the
same amount at March 31, 2010. During 2008, the Company failed to make certain payments on its
lease agreement for the premises located in San Diego, California. As a result, the landlord
exercised their right to draw down the full letter of credit, amounting to approximately $0.3
million, and applied approximately $0.2 million to unpaid rent. The remaining balance of $0.1
million is classified as prepaid expense.
On February 4, 2009, the Company issued $25.0 million in principal aggregate amount of 7.5556%
convertible subordinated notes due 2014. In connection with the issuance of these notes, the
Company was required to deposit approximately $9.4 million in escrow for twenty-four months for the
purposes of paying the interest on the notes and the make-whole payments upon conversion or
redemption. As the result of the conversion of $24.5 million of these notes, approximately $9.3
million was released from restricted cash to fund the make-whole interest payment and $0.2 million
remained in escrow for payment of the interest on the remaining notes not converted and was
accordingly classified as restricted cash at March 31, 2010.
Inventory
Inventories are valued at the lower of cost (first-in, first-out) or market. The Company
periodically evaluates its inventories and will reduce inventory to its net realizable value
depending on certain factors, such as product demand, remaining shelf life, future marketing
plans, obsolescence and slow-moving inventories.
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Deferred Financing Cost
Deferred financing costs represent legal and other costs and fees incurred to negotiate and
obtain debt financing. Deferred financing costs are capitalized and amortized using the effective
interest method over the life of the applicable financing. During the
first quarter of 2009, the Company incurred approximately $1.6 million in deferred financing
costs from the issuance of $25.0 million in principal aggregate amount of 7.5556% convertible
subordinated notes due 2014. As a result of the conversion of $24.5 million of these notes,
amortization of the deferred financing costs was accelerated and amortization expense of $1.6
million was recorded in 2009. As of March 31, 2010 and December 31, 2009, deferred financing costs
were approximately $0.1 million and $28,000, respectively. Amortization of deferred financing costs
and discounts on loans was $11,000 and $1.6 million for the three months ended March 31, 2010 and
2009, respectively.
Identifiable Intangible Asset
Identifiable intangible asset consists of the assembled workforce acquired in the merger with
Maxim Pharmaceuticals Inc. in January 2006. The assembled workforce is being amortized on the
greater of the straight-line basis or actual assembled workforce turnover over six years. The gross
carrying amount of the assembled workforce is $0.5 million and approximately $0.5 million of
accumulated amortization has been recorded as of March 31, 2010. Approximately $0.2 million of
amortization was recorded in 2009 due to the layoff of most of the Companys employees at its
facility in San Diego, California in the first half of 2009. Assembled workforce amortization is
recorded in research and development expense. During the three months ended March 31, 2010 and
2009, the Company recorded amortization expense of $3,000 and $0.1 million, respectively.
5. 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 stock options,
restrictive stock 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:
March 31, | ||||||||
2010 | 2009 | |||||||
Common stock options |
2,966,757 | 2,474,870 | ||||||
Restricted stock and restricted stock units |
95,551 | 118,199 | ||||||
Shares issuable upon conversion of convertible debt |
185,185 | 925,925 | ||||||
Warrants |
12,495,541 | 11,929,521 | ||||||
Total shares excluded from calculation |
15,743,034 | 15,448,515 | ||||||
Interest and Amortization of Debt Discount and Expense:
Interest and amortization of debt discount and expense consisted of the following for the
three months ended March 31, 2010 and 2009:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(in $000s) | ||||||||
Interest expense |
$ | (50 | ) | $ | (8,547 | ) | ||
Amortization of debt issuance costs and discount |
(11 | ) | (9,572 | ) | ||||
Interest and amortization of debt discount and expense |
$ | (61 | ) | $ | (18,119 | ) | ||
Interest and amortization of debt discount and expense for the three months ended March 31,
2009 included $9.4 million in amortization of debt issuance costs and discount and $8.5 million in
interest expense, which was paid from escrowed cash, as a result of the conversion of $22.5 million
of the Companys 7.5556% convertible subordinated notes due 2014 into approximately 25.0 million
shares of the Companys common stock.
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Inventory:
As of March 31, 2010 and December 31, 2009, inventory consists of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(in $000s) | ||||||||
Raw materials |
$ | 130 | $ | 131 | ||||
Work-in-process |
1,467 | 1,147 | ||||||
Finished goods |
35 | 37 | ||||||
Total inventory |
$ | 1,632 | $ | 1,315 | ||||
Prepaid Expenses and Other Current Assets:
Prepaid expenses and other current assets consist of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(in $000s) | ||||||||
Prepaid expenses |
$ | 143 | $ | 167 | ||||
Prepaid insurance |
204 | 209 | ||||||
Other |
35 | 38 | ||||||
Total prepaid expenses and other current assets |
$ | 382 | $ | 414 | ||||
Property and Equipment:
Property and equipment consist of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(in $000s) | ||||||||
Furniture, office and laboratory equipment |
$ | 976 | $ | 980 | ||||
Leasehold improvements |
764 | 764 | ||||||
1,740 | 1,744 | |||||||
Less accumulated depreciation |
(1,417 | ) | (1,384 | ) | ||||
$ | 323 | $ | 360 | |||||
Depreciation expense was approximately $36,000 and $38,000 for the three months ended March
31, 2010 and 2009, respectively.
Other Comprehensive Loss
For the three months ended March 31, 2010 and 2009, the Companys only element of
other comprehensive loss was foreign currency translation gain of $0.6 million and
$0.4 million, respectively.
Recent Accounting Pronouncements
In March 2010, the FASB ratified the EITF final consensus on Issue No. 08-9, Milestone Method
of Revenue Recognition. The guidance in this consensus allows milestone method as an acceptable
revenue recognition methodology when an arrangement includes substantive milestones. The guidance
provides a definition of substantive milestone and should be applied regardless of whether the
arrangement includes single or multiple deliverables or units of accounting. The scope of this
consensus is limited to the transactions involving milestones relating to research and development
deliverables. The guidance includes enhanced disclosure requirements about each arrangement,
individual milestones and related contingent consideration, information about substantive
milestones and factors considered in the determination. The consensus is effective prospectively to
milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010.
Early application and retrospective application are permitted. The
Company has chosen early adoption of this pronouncement effective January 1, 2010 on a
prospective basis. The early adoption did not have a material effect on the Companys financial
statements.
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Table of Contents
In February 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-09,
Subsequent Events (ASC Topic 855) Amendments to Certain Recognition and Disclosure
Requirements. ASU 2010-09 removes the requirement for an SEC filer to disclose a date in both
issued and revised financial statements. The adoption of this pronouncement did not have a
material effect on the Companys consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13,
Multiple-Delivery Revenue Arrangements (ASU 2009-13) (currently within the scope of FASB
Accounting Standards Codification (ASC) Subtopic 605-25). This statement provides principles for
allocation of consideration among its multiple-elements, allowing more flexibility in identifying
and accounting for separate deliverables under an arrangement. The EITF introduces an estimated
selling price method for valuing the elements of a bundled arrangement if vendor-specific objective
evidence or third-party evidence of selling price is not available, and significantly expands
related disclosure requirements. This standard is effective on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted.
The Company is currently evaluating the impact of adopting this pronouncement.
6. License Agreements
Meda AB
In January 2010, the Company entered into an exclusive commercialization agreement for
Ceplene® with Meda AB (Meda), a leading international specialty pharmaceutical company
based in Stockholm, Sweden. Under the terms of the agreement, the Company granted Meda the right
to market Ceplene® in Europe and several other countries including Japan, China, and
Australia. The Company received a $3 million fee on signing, which has been deferred and is being
recognized as revenue ratably over the life of the commercialization agreement with Meda. An additional $2 million milestone payment was achieved in the
second quarter of 2010 upon the first commercial sale of Ceplene® in a major
European market. The Company will also receive other milestone payments and a double digit percent
royalty on net sales in the covered territories. Additionally, the Company is responsible for
Ceplenes commercial supply. For the three months ended March 31, 2010, the Company recorded
revenue from Meda of approximately $0.1 million. No revenue was recognized from Meda prior to
January 2010.
Myriad Genetics, Inc. (Myriad)
In connection with its merger with Maxim Pharmaceuticals on January 4, 2006, EpiCept acquired
a license agreement with Myriad Genetics Inc. (Myriad) under which the Company 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 develop and commercialize any drug
candidates from the series of compounds 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 the Company totaling up to $27
million, of which $3 million was paid and recognized as revenue by Maxim 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 March 2008, the Company received a
milestone payment of $1.0 million following dosing of the first patient in a Phase II registration
sized clinical trial, which has been deferred and is being recognized as revenue ratably over the
life of the last to expire patent that expires in July 2024. For each of the three months ended
March 31, 2010 and 2009, the Company recorded revenue from Myriad of approximately $15,000.
DURECT Corporation (DURECT)
On December 20, 2006, the Company entered into a license agreement with DURECT Corporation,
pursuant to which it granted DURECT the exclusive worldwide rights to certain of its intellectual
property for a transdermal patch containing bupivacaine for the treatment of back pain. Under the
terms of the agreement, EpiCept received a $1.0 million payment which has been deferred and is
being recognized as revenue ratably over the life of the last to expire patent that expires in
March 2020. In September 2008, the Company amended its license agreement with DURECT. Under the
terms of the amended agreement, the Company granted DURECT royalty-free, fully paid up, perpetual
and irrevocable rights to the intellectual property licensed as part of the original agreement in
exchange for a cash payment of $2.25 million from DURECT, which has also been deferred and is
being recognized as revenue ratably over the last patent life. For each of the three months ended
March 31, 2010 and 2009, the Company recorded revenue from DURECT of approximately $0.1 million.
13
Table of Contents
Endo Pharmaceuticals Inc. (Endo)
In December 2003, the Company entered into a license agreement with Endo Pharmaceuticals Inc.
(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®, Endos 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 the three
months ended March 31, 2010 and 2009, the Company recorded revenue from Endo of approximately
$5,000 and $9,000, 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 Companys LidoPAIN BP product and licensed Endo products, including Lidoderm®, so
long as, in the case of Endos product candidate, the Companys 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 Companys patents provide protection thereof. The future
amount of milestone payments the Company is eligible to receive under the Endo agreement is $82.5
million.
Under the terms of the license agreement, 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. 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. No progress in the development of LidoPAIN BP or Lidoderm
with respect to back pain has been reported. Accordingly, the Company does not expect to receive
any further cash compensation pursuant to this license agreement.
7. Other Accrued Liabilities
Other accrued liabilities consist of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(in $000s) | ||||||||
Accrued professional fees |
$ | 275 | $ | 96 | ||||
Accrued salaries and employee benefits |
456 | 709 | ||||||
Other accrued liabilities |
112 | 264 | ||||||
Total other accrued liabilities |
$ | 843 | $ | 1,069 | ||||
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Table of Contents
8. Notes, Loans and Financing
The Company is a party to several loan agreements in the following amounts:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(in $000s) | ||||||||
7.38% amortizing loan due June 30, 2011 (1) |
$ | 1,240 | $ | 1,326 | ||||
7.5556% convertible subordinated notes due February 9, 2014 (2)) |
500 | 500 | ||||||
July 2006 note payable due July 1, 2012 (3) |
253 | 277 | ||||||
Total notes and loans payable, before debt discount |
1,993 | 2,103 | ||||||
Less: Debt discount |
142 | 151 | ||||||
Total notes and loans payable |
1,851 | 1,952 | ||||||
Less: Notes and loans payable, current portion |
931 | 985 | ||||||
Notes and loans payable, long-term |
$ | 920 | $ | 967 | ||||
(1) | 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 initially bore interest at 6%
per annum. Tbg was also entitled to receive 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.
The Company considered the additional compensation element based on the surplus of EpiCept
GmbH to be a derivative. The Company assigned no value to the derivative at each reporting
period as no surplus of EpiCept GmbH was anticipated over the term of the agreement. In
addition, any additional compensation as a result of surplus would be reduced by the
additional interest noted below. |
|
At the demand of tbg, additional amounts could have been 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 was accruing these additional amounts as additional interest
up to the maximum amount due over the term of the loan. |
||
On December 20, 2007, Epicept GmbH entered into a repayment agreement with tbg, whereby
Epicept GmbH paid tbg approximately 0.2 million ($0.2 million) in January 2008,
representing all interest payable to tbg as of December 31, 2007. The loan balance of
1.5 million ($2.0 million), plus accrued interest at a rate of 7.38% per annum
beginning January 1, 2008 was to be repaid to tbg no later than June 30, 2008. Tbg waived
any additional interest payments of approximately 0.5 million ($0.7 million). Epicept
GmbH considered this a substantial modification to the original debt agreement and has
recorded the new debt at its fair value in accordance with ASC 470-50, Modifications and
Extinguishments (ASC 470-50). As a result of the modification to the original debt
agreement, EpiCept GmbH recorded a gain on the extinguishment of debt of $0.5 million in
December 2007. |
||
On May 14, 2008, Epicept GmbH entered into a prolongation of the repayment agreement with
tbg, whereby the loan balance of 1.5 million ($2.0 million) was required to be repaid
to tbg no later than December 31, 2008. Interest continued to accrue at a rate of 7.38%
per annum and all the provisions of the repayment agreement dated December 20, 2007
continued to apply without change. |
||
On November 26, 2008, EpiCept GmbH entered into a second amendment to the repayment
agreement with tbg, whereby the loan balance of 1.5 million ($2.1 million) was required
to be repaid to tbg no later than June 30, 2009. Interest continued to accrue at a rate of
7.38% per annum and all the provisions of the repayment agreement dated December 20, 2007
continued to apply without change. |
||
On June 25, 2009, EpiCept GmbH entered into a third amendment to the repayment agreement with
tbg, whereby 0.3 million of the loan balance of 1.5 million ($2.1 million) plus accrued
interest of 56,000 ($0.1 million) was repaid to tbg on June 30, 2009. The remaining loan
balance of 1.2 million ($1.7 million) at June 30, 2009 plus accrued interest is being paid
in four semi-annual installments of 0.3 million ($0.4 million) beginning December 31, 2009.
Interest continues to accrue at a
rate of 7.38% per annum and all the provisions of the repayment agreement dated December 20,
2007 continues to apply without change. |
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(2) | On February 4, 2009, the Company issued $25.0 million in principal aggregate amount of
7.5556% convertible subordinated notes due February 2014 and five and-a-half year warrants to
purchase approximately 4.2 million shares of common stock at an exercise price of $3.105 per
share. Each $1,000 in principal aggregate amount of the notes is initially convertible into
approximately 371 shares of Common Stock, at the option of the holders or upon specified
events, including a change of control, and if the Companys common stock trades at or greater
than $5.10 a share for 20 out of 30 days, beginning February 9, 2010. Upon any conversion or
redemption of the notes, the holders will receive a make-whole payment in an amount equal to
the interest payable through the scheduled maturity of the converted or redeemed notes, less
any interest paid before such conversion or redemption. Interest is due and payable on the
notes semi-annually in arrears on June 30 and December 31, beginning on June 30, 2009. |
|
The Company allocated the $25.0 million in proceeds between the convertible subordinated
notes and the warrants based on their relative fair values. The Company calculated the fair
value of the warrants at the date of the transaction at approximately $8.8 million with a
corresponding amount recorded as a debt discount. The debt discount is being accreted over
the life of the outstanding convertible subordinated notes using the effective interest
method. At the date of the transaction, the fair value of the warrants of $8.8 million was
determined utilizing the Black-Scholes option pricing model under the following
assumptions: dividend yield of 0%, risk free interest rate of 1.99%, volatility of 118% and
an expected life of five years. During 2009, the Company recognized approximately $8.6
million of non-cash interest expense related to the accelerated accretion of the debt
discount as a result of the conversion of $24.5 million of the convertible subordinated
notes into approximately 9.1 million shares of the Companys common stock. |
||
As of March 31,2010, after giving effect to the conversions into common stock, the remaining
principal aggregate amount of the notes due 2014 outstanding is $0.5 million. |
||
(3) | In July 2006, the Company entered into a six-year non-interest bearing promissory note in the
amount of $0.8 million with Pharmaceutical Research Associates, Inc., (PRA) as compensation
for PRA assuming liability on a lease of premises in San Diego, CA. The fair value of the note
(assuming an imputed 11.6% interest rate) was $0.6 million and broker fees amounted to $0.2
million at issuance. The note is payable in seventy-two equal installments of $11,000 per
month. The Company terminated its lease of certain property in San Diego, CA as part of its
exit plan upon the completion of the merger with Maxim on January 4, 2006. The loan balance
at March 31, 2010 was $0.3 million. |
9. Common Stock and Common Stock Warrants
In July 2009, upon receipt of the approval of stockholders, the Company amended its
certificate of incorporation to increase the number of authorized shares of common stock from
175,000,000 to 225,000,000 shares.
On June 23, 2009, the Company raised $9.6 million in gross proceeds, $8.9 million net of $0.7
million in transaction costs, through a public offering of common stock and common stock purchase
warrants registered pursuant to a shelf registration statement on Form S-3 registering the issuance
and sale of up to $50.0 million of the Companys common stock, preferred stock, debt securities,
convertible debt securities and/or warrants to purchase the Companys securities. Approximately
4.0 million shares of the Companys common stock were sold at a price of $2.40 per share. Two and
one-half year common stock purchase warrants were issued to investors granting them the right to
purchase approximately 1.4 million shares of the Companys common stock at an exercise price of
$2.70 per share. The Company allocated the $9.6 million in gross proceeds between the common stock
and the warrants based on their relative fair values. $2.0 million of this amount was allocated to
the warrants. The warrants did not meet the requirements of being accounted for as equity in
accordance with ASC 815-40 since the Company did not have an adequate number of authorized shares
to reserve for the exercise of the warrants. Therefore, the value of the warrant shares were
classified as a liability and were marked to market at June 30, 2009 resulting in a loss of $0.3
million in the statement of operations. On July 2, 2009, the warrants were reclassified from
liability to equity in accordance with ASC 815-40 as a result of stockholders approving an increase
in the number of authorized shares of the Companys common stock.
16
Table of Contents
The following table summarizes information about warrants outstanding at March 31, 2010:
Expiration | Common Shares | |||||||||||
Issued in Connection With | Date | Issuable | Exercise Price | |||||||||
Acquisition of Maxim January 2006 |
2011 | 595 | $ | 111.93 | ||||||||
February 2006 stock issuance |
2011 | 340,069 | 12.00 | |||||||||
December 2006 stock issuance |
2011 | 1,284,933 | 4.41 | |||||||||
June 2007 stock issuance |
2012 | 889,576 | 8.79 | |||||||||
Termination of sublicense agreement |
2012 | 83,333 | 5.88 | |||||||||
October 2007 stock issuance |
2013 | 709,745 | 5.64 | |||||||||
December 2007 stock issuance |
2013 | 555,555 | 4.50 | |||||||||
March 2008 stock issuance |
2013 | 1,011,744 | 2.58 | |||||||||
Senior Secured Term Loan |
2013 | 27,968 | 1.17 | |||||||||
Senior Secured Term Loan |
2013 | 325,203 | 1.23 | |||||||||
June 2008 stock issuance |
2013 | 766,667 | 1.17 | |||||||||
July 2008 stock issuance |
2013 | 33,333 | 1.17 | |||||||||
August 1, 2008 stock issuance |
2013 | 92,166 | 2.04 | |||||||||
August 11, 2008 stock issuance |
2013 | 60,409 | 1.89 | |||||||||
August 11, 2008 stock issuance |
2013 | 460,830 | 2.08 | |||||||||
August 11, 2008 stock issuance |
2013 | 86,748 | 2.85 | |||||||||
February 2009 convertible debt (See Note 8) |
2014 | 3,703,704 | 3.11 | |||||||||
February 2009 convertible debt (See Note 8) |
2013 | 462,963 | 3.87 | |||||||||
June 2009 stock issuance (See Note 9) |
2013 | 1,400,000 | 2.70 | |||||||||
June 2009 stock issuance (See Note 9) |
2013 | 200,000 | 3.00 | |||||||||
Total |
12,495,541 | $ | 3.81 | |||||||||
10. Share-Based Payments
The Company records stock-based compensation expense at fair value in accordance with ASC
718-10, Compensation Stock Compensation (ASC 718-10). The Company utilizes the Black-Scholes
valuation method for determination of share-based compensation expense. Certain assumptions need to
be made with respect to utilizing the Black-Scholes valuation model, including the expected life,
volatility, risk-free interest rate and anticipated forfeiture of the stock options. The expected
life of the stock options was calculated using the method allowed by the provisions of ASC 718-10.
In accordance with ASC 718-10, the simplified method for plain vanilla options may be used where
the expected term is equal to the vesting term plus the original contract term divided by two. The
risk-free interest rate is based on the rates paid on securities issued by the U.S. Treasury with a
term approximating the expected life of the options. Estimates of pre-vesting option forfeitures
are based on our 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.
The Company accounts 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 ASC 718-10 and ASC 505-50, Equity-Based Payments to Non-Employees. 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 remeasured and income or expense is recognized during the
vesting terms.
2005 Equity Incentive Plan
The 2005 Equity Incentive Plan (the 2005 Plan) was adopted on September 1, 2005, approved by
stockholders on September 5, 2005 and became effective on January 4, 2006. The 2005 Plan provides
for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue
Code, to EpiCepts employees and its parent and subsidiary corporations employees, and for the
grant of nonstatutory stock options, restricted stock, restricted stock units, performance-based
awards and cash awards to its employees, directors and consultants and its parent and subsidiary
corporations employees and consultants. Options are granted and vest as determined by the Board of
Directors. A total of 13,000,000 shares of EpiCepts common stock are reserved for issuance
pursuant to the 2005 Plan. No optionee may be granted an option to purchase more than 1,500,000
shares in any fiscal year. 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. The Company records stock-based
compensation expense at fair value. During the three months ended March 31, 2010, the Companys
Board of Directors granted certain employees options to purchase approximately 0.6 million
shares of the Companys common stock at a fair market value exercise price of $2.11 per share. The
Company estimates that $0.9 million of stock based compensation related to 2010 options granted
will be recognized as compensation expense over the vesting period.
17
Table of Contents
Following the departure of a former director, the Company agreed to extend the period during
which he would be entitled to exercise certain vested stock options to purchase the Companys
common stock from three months following the effective date of his resignation, February 3, 2009,
to six months following such effective date. The Company recorded compensation expense related to
the modification of the exercise period of $3,000 in the first quarter of 2009.
The following table presents the total employee, former employee, board of directors and third
party stock-based compensation expense resulting from stock options, restricted stock and
restricted stock units included in the consolidated statement of operations for the three months
ended March 31, 2010 and 2009:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(in $000s) | ||||||||
General and administrative |
$ | 125 | $ | 244 | ||||
Research and development |
68 | 127 | ||||||
Stock-based compensation costs before income taxes |
193 | 371 | ||||||
Benefit for income taxes (1) |
| | ||||||
Net compensation expense |
$ | 193 | $ | 371 | ||||
(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 three months ended March 31, 2010 is as
follows:
Weighted Average | ||||||||||||||||
Weighted Average | Remaining Contractual | Aggregate Intrinsic | ||||||||||||||
Options | Exercise Price | Term (years) | Value | |||||||||||||
Options outstanding at December 31, 2009 |
2,412,780 | $ | 8.60 | 7.44 | $ | 271,771 | ||||||||||
Granted |
597,500 | 2.11 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(40,123 | ) | 2.84 | |||||||||||||
Expired |
(3,400 | ) | 26.04 | |||||||||||||
Options outstanding at March 31, 2010 |
2,966,757 | $ | 7.35 | 7.73 | $ | 562,821 | ||||||||||
Vested or expected to vest at March 31, 2010 |
2,850,648 | $ | 7.56 | 6.77 | $ | 549,603 | ||||||||||
Options exercisable at March 31, 2010 |
1,805,667 | $ | 10.61 | 6.77 | $ | 430,638 | ||||||||||
There were no stock option exercises during each of the three months ended March 31, 2010 and
March 31, 2009. Intrinsic value is measured using the fair market value at the date of exercise
(for shares exercised) or at March 31, 2010 (for outstanding options), less the applicable
exercise price. The weighted average grant-date fair value of options granted for the three months
ended March 31, 2010 and 2009 was $1.67 and $1.47, respectively.
As of March 31, 2010, the total remaining unrecognized compensation cost related to the
non-vested stock options amounted to $1.8 million, which will be amortized over the
weighted-average remaining requisite service period of 2.74 years. Summarized Black-Scholes option
pricing model assumptions for stock option grants to employees and directors for the three months
ended March 31, 2010 and 2009 are as follows:
Three Months Ended | ||||||||
March 31, 2010 | March 31, 2009 | |||||||
Expected volatility |
109 | % | 118 | % | ||||
Risk free interest rate |
2.39 | % | 1.67 1.81 | % | ||||
Dividend yield |
| | ||||||
Expected life |
5 Yrs | 5 Yrs |
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Restricted Stock
Restricted stock was issued to certain employees in January 2007, which entitle the holder to
receive a specified number of shares of the Companys common stock over a four year, monthly
vesting term. This restricted stock grant is accounted for at fair value at the date of grant and
an expense is recognized during the vesting term. There were no restricted stock grants prior to
2007. Summarized information for restricted stock grants for the three months ended March 31, 2010
is as follows:
Weighted Average | ||||||||
Restricted Stock | Grant Date Value Per Share | |||||||
Nonvested at December 31, 2009 |
9,956 | $ | 4.38 | |||||
Granted |
| | ||||||
Vested |
(2,244 | ) | 4.38 | |||||
Forfeited |
(998 | ) | 4.38 | |||||
Nonvested at March 31, 2010 |
6,714 | $ | 4.38 | |||||
Restricted Stock Units
Restricted stock units were not issued to employees and non-employee members of the Companys
Board of Directors for the three months ended March 31, 2010 and March 31, 2009. Typically
restricted stock units entitle the holder to receive a specified number of shares of the Companys
common stock at the end of the two year or four year vesting term. This restricted stock unit
grant is accounted for at fair value at the date of grant and an expense is recognized during the
vesting term. Summarized information for restricted stock unit grants for the three months ended
March 31, 2010 is as follows:
Restricted Stock | Weighted Average | |||||||
Units | Grant Date Value Per Share | |||||||
Nonvested at December 31, 2009 |
92,999 | $ | 3.45 | |||||
Granted |
| | ||||||
Vested |
| | ||||||
Forfeited |
(4,164 | ) | 4.02 | |||||
Nonvested at March 31, 2010 |
88,835 | $ | 3.36 | |||||
Following the departure of a former director, the Company agreed to accelerate the vesting of
certain restricted stock units. The Company issued 4,167 shares of the Companys common stock as a
result of accelerating the vesting period and recorded compensation expense related to the
modification of the vesting period of $5,000 in the first quarter of 2009.
1995 Stock Options
Under the terms of the 1995 Stock Option Plan, which terminated on November 14, 2005, 0.1
million options remain vested and outstanding as of March 31, 2010 with a weighted average exercise
price of $3.73.
2009 Employee Stock Purchase Plan
The 2009 Employee Stock Purchase Plan (the 2009 ESPP) was adopted by the Board of Directors
on December 19, 2008, subject to stockholder approval, and was approved by the stockholders at the
Companys 2009 Annual Meeting held on June 2, 2009. The 2009 ESPP was effective on January 1, 2009
and a total of 1,000,000 shares of common stock have been reserved for sale. The 2009 ESPP is
implemented by offerings of rights to all eligible employees from time to time. Unless otherwise
determined by the Companys Board of Directors, common stock is purchased for accounts of employees
participating in the 2009 ESPP at a price per share equal to the lower of (i) 85% of the fair
market value of a share of the Companys common stock on the first day the offering or (ii) 85% of
the fair market value of a share of the Companys common stock on the last trading day of the
purchase period. The initial period commenced January 1, 2009 and ended on June 30, 2009. Each
subsequent offering period will have a six-month duration.
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2005 Employee Stock Purchase Plan
The 2005 Employee Stock Purchase Plan (the 2005 ESPP) was adopted on September 1, 2005 and
approved by the stockholders on September 5, 2005. The Employee Stock Purchase Plan became
effective on January 4, 2006 and a total of 500,000 shares of common stock were reserved for sale.
The Company commenced the administration of the 2005 ESPP in November 2007.
The 2005 ESPP is implemented by offerings of rights to all eligible employees from time to
time. Unless otherwise determined by the Companys Board of Directors, common stock is purchased
for accounts of employees participating in the 2005 ESPP at a price per share equal to the lower of
(i) 85% of the fair market value of a share of the Companys common stock on the first day the
offering or (ii) 85% of the fair market value of a share of the Companys common stock on the last
trading day of the purchase period. The initial period commenced November 16, 2007 and ended June
30, 2008.
The number of shares to be purchased at each balance sheet date is estimated based on the
current amount of employee withholdings and the remaining purchase dates within the offering
period. The fair value of share options expected to vest is estimated using the Black-Scholes
option-pricing model. Share options for employees entering the ESPP were estimated using the
Black-Scholes option-pricing model and the assumptions noted on the table below.
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Expected life |
.50 years | .50 years | ||||||
Expected volatility |
110.0 | % | 118.0 | % | ||||
Risk-free interest rate |
0.20 | % | 0.25 | % | ||||
Dividend yield |
0 | % | 0 | % |
As of March 31, 2010, 500,000 shares were issued under the 2005 ESPP, therefore there are
currently no shares available for issuance. For the three months ended March 31, 2010 and 2009,
the Company recorded an expense of $16,000 and $22,000 respectively, based on the estimated number
of shares to be purchased.
11. Legal Proceedings
There are no legal proceedings pending against the Company as of March 31, 2010.
12. Segment Information
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 months ended March 31, 2010 and 2009 are as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(in $000s) | ||||||||
Revenue |
||||||||
United States |
$ | 166 | $ | 114 | ||||
Germany |
1 | 1 | ||||||
$ | 167 | $ | 115 | |||||
Net loss |
||||||||
United States |
$ | 3,737 | $ | 21,974 | ||||
Germany |
771 | 513 | ||||||
$ | 4,508 | $ | 22,487 | |||||
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(in $000s) | ||||||||
Total Assets |
||||||||
United States |
$ | 6,222 | $ | 7,417 | ||||
Germany |
78 | 97 | ||||||
$ | 6,300 | $ | 7,514 | |||||
Long Lived Assets, net |
||||||||
United States |
$ | 312 | $ | 348 | ||||
Germany |
11 | 12 | ||||||
$ | 323 | $ | 360 | |||||
13. Subsequent Events
In April 2010, the first commercial shipment of Ceplene® to a major country in the
European Union triggered a $2 million milestone payment from Meda, as defined in the agreement,
which the Company expects to receive in the second quarter of 2010.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
This discussion and analysis of EpiCepts condensed consolidated financial condition and
results of operations contains forward-looking statements that involve risks and uncertainties. The
Company has based these forward-looking statements on its current expectations and projections of
future events. Such statements reflect the Companys current views with respect to future events
and are subject to unknown risks, uncertainties and other factors that may cause results to differ
materially from those contemplated in such forward looking statements. Statements made in this
document related to the development, commercialization and market expectations of the Companys
drug candidates, to the establishment of corporate collaborations, and to the Companys operational
projections are forward-looking and are made pursuant to the safe harbor provisions of the
Securities Litigation Reform Act of 1995. Among the factors that could result in a materially
different outcome are the inherent uncertainties accompanying new product development, action of
regulatory authorities and the results of further trials. Additional economic, competitive,
governmental, technological, marketing and other factors identified in EpiCepts filings with the
SEC could affect such results. This report refers to trademarks of the Company as well as
trademarks of third parties. All trademarks referenced herein are property of their respective
owners. Azixa is a registered trademark of Myriad Genetics, Inc.
Overview
We are a specialty pharmaceutical company focused on the clinical development and
commercialization of pharmaceutical products for the treatment of cancer and pain. We focus our
clinical development efforts on innovative cancer therapies and topically delivered analgesics
targeting peripheral nerve receptors. Our lead product is Ceplene®, which when used
concomitantly with low-dose interleukin-2 is intended as remission maintenance therapy in the
treatment of acute myeloid leukemia, or AML, for adult patients who are in their first complete
remission. In October 2008, the European Commission issued a formal marketing authorization for
Ceplene® in the European Union, or EU. In November 2009, Health Canada
accepted for review a New Drug Submission, or NDS, for Ceplene® for the treatment of AML
in Canada. We are continuing our preparation of a New Drug Application, or NDA, filing with the
United States Food and Drug Administration, or FDA for Ceplene® in the same indication.
On January 7, 2010 we completed an agreement with Meda AB of Sweden to market and sell Ceplene® in
Europe and certain Pacific Rim countries. The commercial launch of Ceplene® occurred in
the United Kingdom on April 20, 2010. In addition to Ceplene®, we have two oncology
compounds and a pain product candidate for the treatment of peripheral neuropathies in clinical
development. We believe this portfolio of oncology and pain management product candidates lessens
our reliance on the success of any single product or product candidate.
Our cancer portfolio includes crolibulinTM (previously know as crinobulin), a novel
small molecule vascular disruption agent, or VDA, and apoptosis inducer for the treatment of
patients with solid tumors. We have completed our first Phase I clinical trial for
crolibulinTM. Although the prior name was approved by the United States Adoptive Names
Council in 2009, the compounds name was recently modified to crolibulinTM at the
request of the International Nonproprietary Names Expert Committee of the World Health Organization
to avoid potential confusion with another product. AzixaTM, or MPC-6827, an apoptosis
inducer with VDA activity licensed by us to Myriad Pharmaceuticals, Inc., or Myriad, as part of an
exclusive, worldwide development and commercialization agreement, is currently in Phase II clinical
trials in patients with primary glioblastoma, melanoma that has metastasized to the brain and
non-small-cell lung cancer that has spread to the brain.
Our late-stage pain product candidate, EpiCeptTM NP-1 cream, which we refer to
as NP-1, is a prescription topical analgesic cream designed to provide effective long-term relief
of pain associated with peripheral neuropathies. In January 2009, we concluded a Phase II clinical
trial of NP-1 in which we studied its safety and efficacy in patients suffering from post-herpetic
neuralgia, or PHN, compared to gabapentin and placebo. This trial met its primary endpoints. In
February 2008, we concluded a Phase II clinical study of NP-1 in patients suffering from diabetic
peripheral neuropathy, or DPN. Both studies support the advancement of NP-1 into a
registration-sized trial. NP-1 utilizes a proprietary formulation to administer FDA approved pain
management therapeutics, or analgesics, directly on the skins surface at or near the site of the
pain, targeting pain that is influenced, or mediated, by nerve receptors located just beneath the
skins surface. Peripheral neuropathy affects over 15 million people in the United States of
America.
Ceplene® has been granted full marketing authorization by the European Commission
for the remission maintenance and prevention of relapse in adult patients with Acute Myeloid
Leukemia in first remission. None of our other 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 our clinical data and that of our collaborators establish the safety
and efficacy of our drug candidates. Furthermore, our strategy includes entering into collaborative
arrangements with third parties to participate in the clinical 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 our drug candidates will be subject
to future collaborations or how such arrangements would affect our development plan or capital
requirements.
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We are subject to a number of risks associated with companies in the specialty pharmaceutical
industry. Principal among these are risks associated with our ability to obtain regulatory approval
for our product candidates, our ability to adequately fund our operations, dependence on
collaborative arrangements, the development by us or our competitors of new technological
innovations, dependence on key personnel, protection of proprietary technology and compliance with
the FDA and other governmental regulations. We have yet to generate meaningful product revenues
from any of our product candidates. We have financed our operations primarily through the proceeds
from the sale of common stock, warrants, debt instruments, cash proceeds from collaborative
relationships and investment income earned on cash balances and short-term investments.
We have prepared our consolidated financial statements under the assumption that we are a
going concern. We have devoted substantially all of our cash resources to research and development
programs and general and administrative expenses, and to date we have not generated any meaningful
revenues from the sale of products. Since inception, we have incurred significant net losses each
year. As a result, we have an accumulated deficit of $239.6 million as of March 31, 2010. Our
recurring losses from operations and the accumulated deficit raise substantial doubt about our
ability to continue as a going concern. The 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 our development activities and from general and administrative
expenses. Even if we succeed in developing and commercializing one or more of our product
candidates, we may never become profitable. We expect to continue to incur significant expenses
over the next several years as we:
| commence pre-marketing activities related to the anticipated launch of
Ceplene® in North America; |
| apply for marketing approval of Ceplene® in the U.S., Canada, and other
countries; |
| 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-licenses 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 believe that our existing cash and cash equivalents plus the $2 million milestone payment
that is due from Meda in the second quarter of 2010 will be sufficient to fund our operations into the third quarter 2010.
Future funding is anticipated to be derived from sales of Ceplene® in Europe, fees from
our strategic partners, or funding through public or private financings, strategic relationships or
other arrangements. If necessary to conserve cash, we may delay or cancel some of our planned
development activities during 2010 such as the initiation of our planned Phase Ib clinical trial
for crolibulinTM.
Reverse Split of Common Stock
On January 14, 2010, we effected a previously authorized 1-for-3 reverse stock split of our
common stock. The reverse stock split took effect at the start of trading on January 15, 2010 on a
1-for-3 split-adjusted basis. All prior periods have been retroactively adjusted to reflect the
reverse stock split.
The Nasdaq Capital Market Listing
On February 2, 2010, Nasdaq Listing Qualifications Department notified us that we have
regained compliance with the minimum bid price requirement in Listing Rule 5550(a)(2) and met the
requirements of the Nasdaq Listing Qualification Panel (the Panel) decision dated November 2,
2009. Accordingly, the Panel has determined to continue the listing of our common stock on The
Nasdaq Stock Market. The Panel had previously determined to continue our listing subject to the
condition that, on or before February 1, 2010, we evidence a closing bid price of $1.00 per share
or more for at least the ten prior consecutive trading days. On January 29, 2010, our closing bid
price was $2.37 per share, the tenth consecutive day it had exceeded the $1.00 per share threshold.
Accordingly, we satisfied the Panels condition and the delisting proceeding is now closed.
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Recent Events
In April 2010, the first commercial shipment of Ceplene® to a major country in the
European Union triggered a $2 million milestone payment from Meda AB, as defined in the agreement,
which we expect to receive in the second quarter of 2010.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based on
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires that we 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 consolidated financial statements
included in our Annual Report filed on Form 10-K, we believe the following accounting policies to
be critical to the judgments and estimates used in the preparation of its 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, stock-based compensation and warrant liability.
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 FASB Accounting Standards Codification
(ASC) 605-25, Revenue Recognition Multiple Element Arrangements (ASC 605-25). Revenue
under collaborative arrangements may result from license fees, milestone payments, research and
development payments and royalties.
Our application of these standards involves 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. For collaborations containing a
single unit of accounting, we recognize revenue when the fee is fixed or determinable,
collectibility is assured and the contractual obligations have occurred or been rendered. For
collaborations involving multiple elements, our application requires management to make judgments
about value of the individual elements and whether they are separable from the other aspects of the
contractual relationship. To date, we have determined that our upfront non-refundable license fees
cannot be separated from our ongoing commercial or collaborative research and development
activities to the extent such activities are required under the agreement 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 with respect to our license with Endo, or ratably over either the development
period or the later of (1) the conclusion of the royalty term on a jurisdiction by jurisdiction
basis; and (2) the expiration of the last EpiCept licensed patent as we do with respect to our
license with DURECT, Myriad and GNI, Ltd., or GNI.
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. During each of the years 2009 and 2008
we increased the estimated development period by an additional twelve months to reflect additional
time required to obtain clinical data from our partner.
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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 ASC 605-25; (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 our
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 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.
We have chosen early adoption of the Milestone Method of Revenue Recognition (previously
referred to as EITF 08-9) on a prospective basis as of January 1, 2010. Under this method of
revenue recognition, we will recognize into revenue research-related milestone payments for which
there is substantial uncertainty at the date the arrangement is entered into that the event will be
achieved, when that event can only be achieved based in whole or in part on our performance or a
specific outcome resulting from our performance and, if achieved, would result in additional
payments being due to us. This accounting will be applicable to a research milestone under the
license agreement entered into with Meda AB this quarter.
The Meda AB agreement also entitles us to a $3 million upfront payment, a $2 million payment
upon launch of Ceplene® to a major country in the European Union, sales milestone
payments and royalties on sales of Ceplene®. The $3 million upfront payment received in
the first quarter of 2010 has been deferred and is being recognized as revenue ratably over the
life of the commercialization agreement with Meda AB.
Royalty revenue is recognized in the period the sales occur, provided that the royalty amounts
are fixed or determinable, collection of the related receivable is reasonably assured and we have
no remaining performance obligations under the arrangement providing for the royalty. If royalties
are received when we have remaining performance obligations, they would be attributed to the
services being provided under the arrangement and, therefore, recognized as such obligations are
performed under either the proportionate performance or straight-line methods, as applicable.
Royalty Expense
Upon receipt of marketing approval and commencement of commercial sales, some of which may not
occur for several years, we will owe royalties to licensors of certain patents generally based upon
net sales of the respective products. Under a license agreement with respect to NP-1, we are
obligated to pay royalties based on annual net sales derived from the products incorporating the
licensed technology. Under a license agreement with respect to crolibulinTM, we are
required to provide a portion of any sublicensing payments we receive if we relicense the series of
compounds or make milestone payments, assuming the successful commercialization of the compound by
us for the treatment of a cancer indication, as well as pay a royalty on product sales. Under a
royalty agreement with respect to Ceplene®, we are obligated to pay royalties based on
annual net sales derived from the products incorporating the licensed technology. In each case, our
royalty obligation ends the later of (1) the conclusion of the royalty term on a jurisdiction by
jurisdiction basis; and (2) the expiration of the last EpiCept licensed patent.
Stock-Based Compensation
We record stock-based compensation expense at fair value in accordance with the Financial
Accounting Standards Board, or FASB, issued ASC 718-10, Compensation Stock Compensation (ASC
718-10). We utilize the Black-Scholes valuation method to recognize compensation expense over the
vesting period. Certain assumptions need to be made with respect to utilizing the Black-Scholes
valuation model, including the expected life, volatility, risk-free interest rate and anticipated
forfeiture of the stock options. The expected life of the stock options was calculated using the
method allowed by the provisions of ASC 718-10. In accordance with ASC 718-10, the simplified
method for plain vanilla options may be used where the expected term is equal to the vesting term
plus the original contract term divided by two. The risk-free interest rate is based on the rates
paid on securities issued by the U.S. Treasury with a term approximating the expected life of the
options. Estimates of pre-vesting option forfeitures are based on our experience. We will adjust
our 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.
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 ASC 718-10 and ASC 505-50, Equity-Based Payments to Non-Employees. 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 remeasured and income or expense is recognized during the vesting terms.
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Accounting for stock-based compensation granted by us requires fair value estimates of the
equity instrument granted or sold. If our estimate of the fair value of stock-based compensation is
too high or too low, it will have the effect of overstating or understating expenses. When
stock-based grants are granted in exchange for the receipt of goods or services, we estimate the
value of the stock-based compensation based upon the value of our common stock.
During each of the three months ended March 31, 2010 and 2009, we issued approximately 0.6
million stock options with varying vesting provisions to certain of our employees. Based on the
Black-Scholes valuation method (volatility 109%, risk free rate 2.39%, dividends zero,
weighted average life 5 years; forfeiture 10%), for the grants issued in 2010, we estimated
$0.9 million of share-based compensation will be recognized as compensation expense over the
vesting period, which will be amortized over the weighted average remaining requisite service
period of 3.75 years. During the three months ended March 31, 2010 and 2009, we recognized total
share-based compensation of approximately $0.2 million and $0.4 million, related to the options
granted during 2010, 2009, 2008, 2007 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 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.
Following the departure of a former director, we agreed to extend the period during which he
would be entitled to exercise certain vested stock options to purchase our common stock from three
months following the effective date of his resignation, February 3, 2009, to six months following
such effective date. We recorded compensation expense related to the modification of the exercise
period of $3,000 in the first quarter of 2009. We also agreed to accelerate the vesting of certain
restricted stock units. We issued 4,167 shares of our common stock as a result of accelerating the
vesting period and recorded compensation expense related to the modification of the vesting period
of $5,000 in the first quarter of 2009.
Deferred Financing Costs
Deferred financing costs represent legal and other costs and fees incurred to negotiate and
obtain debt financing. These costs are capitalized and amortized using the effective interest rate
method over the life of the applicable financing.
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 record any changes in the statement of operations.
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 GmbHs 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 GmbHs U.S. dollar balance
sheet and is necessary to keep the foreign balance sheet stated in U.S. dollars in balance.
Certain 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. These changes are recognized by us as a foreign currency
transaction gain or loss, as applicable, and are reported in other expense or income in our
consolidated statements of operations.
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Research and Development Expenses
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 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 candidates 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 our 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.
Ceplene® has been granted full marketing authorization by the European Commission
for the remission maintenance and prevention of relapse in adult patients with Acute Myeloid
Leukemia in first remission. None of our other 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 our clinical data and that of our collaborators establish 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 our drug candidates will be subject to future collaborations or how such arrangements
would affect our development plan or capital requirements.
Recent Accounting Pronouncements
In March 2010, the FASB ratified the EITF final consensus on Issue No. 08-9, Milestone Method
of Revenue Recognition. The guidance in this consensus allows milestone method as an acceptable
revenue recognition methodology when an arrangement includes substantive milestones. The guidance
provides a definition of substantive milestone and should be applied regardless of whether the
arrangement includes single or multiple deliverables or units of accounting. The scope of this
consensus is limited to the transactions involving milestones relating to research and development
deliverables. The guidance includes enhanced disclosure requirements about each arrangement,
individual milestones and related contingent consideration, information about substantive
milestones and factors considered in the determination. The consensus is effective prospectively to
milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010.
Early application and retrospective application are permitted. We have chosen early adoption of
this pronouncement effective January 1, 2010 on a prospective basis. The early adoption did not
have a material effect on the Companys financial statements.
In February 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-09,
Subsequent Events (ASC Topic 855) Amendments to Certain Recognition and Disclosure
Requirements. ASU 2010-09 removes the requirement for an SEC filer to disclose a date in both
issued and revised financial statements. The adoption of this pronouncement did not have a
material effect on our consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13,
Multiple-Delivery Revenue Arrangements (ASU 2009-13) (currently within the scope of FASB
Accounting Standards Codification (ASC) Subtopic 605-25). This statement provides principles for
allocation of consideration among its multiple-elements, allowing more flexibility in identifying
and accounting for separate deliverables under an arrangement. This guidance introduces an
estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific
objective evidence or third-party evidence of selling price is not available, and significantly
expands related disclosure requirements. This standard is effective on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years beginning on or after
June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is
permitted. We are currently evaluating the impact of adopting this pronouncement.
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Results of Operations
Three months ended March 31, 2010 and 2009
Revenues. During the three months ended March 31, 2010, we recognized revenue of approximately
$0.2 million, from the upfront licensing fees and milestone payments received from Meda, Myriad,
Endo, DURECT, and GNI, and royalties with respect to acquired Maxim technology. During the three
months ended March 31, 2009, we recognized revenue of approximately $0.1 million, from the upfront
licensing fees and milestone payments received from Myriad, Endo, DURECT, and GNI, and royalties
with respect to acquired Maxim technology. We recognize revenue from our agreement with Endo using
the proportional performance method with respect to LidoPAIN BP, from our agreement with Meda using
the Milestone Method and the straight line method over the life of the last to expire patent with
Myriad, DURECT and GNI. We recognized revenue of $16,000 and $20,000 for the three months ended
March 31, 2010 and 2009, respectively, from royalties with respect to acquired Maxim technology.
The current portion of deferred revenue as of March 31, 2010 of $0.7 million represents our
estimate of revenue to be recognized over the next twelve months primarily related to the upfront
payments from Meda, Myriad, Endo, DURECT and GNI.
Selling, general and administrative expense. Selling, general and administrative expense was
$2.0 million for each of the three months ended March 31, 2010 and March 31, 2009. We expect an
increase in selling, general and administrative expenses as we prepare to market Ceplene® in the
U.S. upon receipt of marketing approval.
Research and development expense. Research and development expense decreased by 6%, or $0.1
million, to $2.1 million for the three months ended March 31, 2010 from $2.2 million for the three
months ended March 31, 2009. The decrease was primarily attributable to lower salary and salary
related expenses and facility costs related to closing our research facility in San Diego in 2009,
partially offset by higher regulatory fees and clinical trial expenses for Ceplene®. During the
first quarter of 2010, our clinical efforts were focused on our open label trial of Ceplene® that
will meet our post-approval requirements with the EMEA. During the first quarter of 2009, our
clinical efforts were focused on the initiation of a post-approval clinical trial for Ceplene® and
a Phase Ib clinical trial for crolibulinTM, as well as, preparations for the commercial
launch of Ceplene® in Europe.
Other income (expense). Our other income (expense) consisted of the following for the three
months ended March 31, 2010 and 2009:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(in $000s) | ||||||||
Other income (expense) consists of: |
||||||||
Interest income |
3 | 6 | ||||||
Foreign exchange loss |
(516 | ) | (289 | ) | ||||
Interest and amortization of debt discount and expense |
(61 | ) | (18,119 | ) | ||||
Other expense, net |
$ | (574 | ) | $ | (18,402 | ) | ||
For the three months ended March 31, 2010, we recorded other expense, net of $0.6 million as
compared to other expense, net of $18.4 million for the three months ended March 31, 2009. The
$17.8 million decrease in other expense, net was primarily related to $9.4 million in amortization
of debt issuance costs and discount and $8.5 million in interest expense, which was paid from
restricted cash, as a result of the conversion of $22.5 million of our 7.5556% convertible
subordinated notes due 2014 into approximately 25.0 million shares of our common stock. We also
had an increase in foreign exchange loss of $0.2 million.
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, we have not generated any meaningful revenues
from the sale of products and may not generate any such revenues for a number of years, if at all.
As a result, we have incurred an accumulated deficit of $239.6 million as of March 31, 2010, and we
anticipate that we will continue to incur operating losses in the future. Our recurring losses from
operations and our stockholders deficit raise substantial doubt about our ability to continue as a
going concern. Should we be unable to generate sufficient revenue from the sale of Ceplene®
or raise adequate financing in the future, operations will need to be scaled back or
discontinued. Since our inception, we have financed our operations primarily through the proceeds
from the sales of common and preferred securities, debt, 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.
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The following table describes our liquidity and financial position on March 31, 2010 and December
31, 2009.
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(in $000s) | ||||||||
Working capital |
$ | 154 | $ | 1,407 | ||||
Cash and cash equivalents |
3,579 | 5,142 | ||||||
Notes and loans payable, current portion |
931 | 985 | ||||||
Notes and loans payable, long term portion |
920 | 967 |
Working Capital
At March 31, 2010, we had working capital of $0.2 million consisting of current assets of $5.6
million and current liabilities of $5.4 million. This represents a decrease of approximately $1.2
million from working capital of $1.4 million at December 31, 2009, which consisted of current
assets of $6.9 million and current liabilities of $5.5 million. We funded our working capital and
the cash portion of our 2010 operating loss with the cash proceeds from our June 2009 financing and
a $3 million upfront payment in connection with the signing of the Ceplene® European marketing and
distribution agreement with Meda. We believe that our existing cash resources plus the $2 million
milestone payment that is due from Meda in the second quarter of 2010 will be sufficient to meet our projected operating and
debt service requirements into the third quarter of 2010.
Cash, Cash Equivalents and Marketable Securities
At March 31, 2010, our cash and cash equivalents totaled $3.6 million. At December 31, 2009,
cash and cash equivalents totaled $5.1 million. Our cash and cash equivalents consist primarily of
an interest bearing money market account. In January 2010, we received $3 million from Meda in
connection with the signing of the Ceplene® European marketing and distribution agreement.
In February 2009, we received net proceeds of approximately $14.0 million from the issuance of
$25.0 million principal aggregate amount of 7.5556% convertible senior subordinated notes due
February 2014 and five and one-half year warrants to purchase approximately 12.5 million shares of
the Companys common stock at an exercise price of $1.035 per share.
Current and Future Liquidity Position
In January 2010 we received $3 million in connection with the signing of the
Ceplene® European marketing and distribution agreement with Meda. Meda is also required
to pay us an additional $2 million milestone payment in the second quarter of 2010 for achieving the first commercial sale of Ceplene® and a royalty on net sales. During 2009, we
issued $25.0 million principal aggregate amount of 7.5556% convertible senior subordinated notes
due February 2014 and five and one-half year warrants to purchase approximately 4.2 million shares
of our common stock at an exercise price of $3.105 per share, netting us $14.0 million after $1.6
million in transaction costs and the restriction of $9.4 million to establish an escrow account to
make interest payments. For the three months ended March 31, 2009, a total of 8.5 million shares
of our common stock were issued upon the exercise of common stock purchase warrants, resulting in
proceeds to the Company of approximately $2.9 million. As of March 31, 2010 we had approximately
$3.6 million in cash and cash equivalents. Our anticipated average monthly cash operating expenses
in 2010 is approximately $1.6 million. In addition, we are required to make interest and principal
payments to our lender tbg on each of June 30, 2010 and December 31, 2010 in the amount of
approximately $0.5 million. We believe that our cash is sufficient to fund operations into the
third quarter 2010. We may receive cash from certain of our licensing partners during 2010 for
achievement of clinical milestones, and we may raise additional funds through the issuance of debt
and/or equity to meet our cash needs. To conserve cash, we may delay or cancel some of our planned
development activities during 2010 such as the initiation of our planned Phase Ib clinical trial
for crolibulinTM.
We plan to out license our NP-1 compound to a third party who will agree to complete clinical
development and commercialize the product upon receipt of necessary regulatory approvals.
Discussions with prospective partners are continuing, however at this time we are unable to
determine whether or when such an agreement might be concluded or the amount of any fees that may
be paid to us in 2010 in connection with the agreement.
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In February 2010, we established an At-the-Market offering program through which we may,
from time to time, offer and sell shares of our common stock having an aggregate offering price of
up to $15.0 million through our sales agent. Sales of the shares, if any, will be made by means of
ordinary brokers transactions on The Nasdaq Capital Market or, to the extent allowable by law, the
Nasdaq OMX Stockholm Exchange, at market prices. Additionally, under the terms of the sales
agreement, we may also sell shares of our common stock through the sales agent on The Nasdaq
Capital Market or, to the extent allowable by law, the Nasdaq OMX Stockholm Exchange, or otherwise,
at negotiated prices or at prices related to the prevailing market price. We will designate the
maximum amount of shares of common stock to be sold on a daily basis as we and our sales agent may
agree. We plan to utilize this program at such times and in such amounts so as to minimize
disruption to the trading of our stock, and therefore in times of low trading volume we may
severely limit or refrain from using the program. If we are unable to meet our liquidity needs
through this program, we may seek alternative sources of financing, such as issuing additional
equity and/or debt. No sales were undertaken through the At-the-Market program through March 31,
2010.
If additional funds are raised by issuing equity, substantial dilution to existing
shareholders may result. If we fail to obtain capital when required, we may be forced to delay,
scale back, or eliminate some or all of our commercialization efforts for Ceplene and our research
and development programs or to cease operations entirely.
Our future capital uses and requirements depend on numerous forward-looking factors. These
factors include, but are not limited to, the following:
| revenues generated from the
sale of Ceplene® in Europe, including payments
from our marketing partner; |
| manufacturing costs of Ceplene® |
| the timing, receipt and amount of front-end fees and milestone payments that may
become payable through an NP-1 license; |
| 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; |
| the 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 our potential
products. |
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. Our sales of equity have generally included the issuance of warrants, and if
these warrants are exercised in the future, stockholders may experience significant additional
dilution. We may not be able to raise additional capital through the sale of our securities which
would severely limit our ability to fund our operations. Debt financing, if available, may subject
us to restrictive covenants that could limit our flexibility in conducting future business
activities. Given our available cash resources, existing indebtedness and results of operations,
obtaining debt financing may not be possible. 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.
Operating Activities
Net cash used in operating activities for the first three months of 2010 was $1.5 million as
compared to $15.2 million in the first three months of 2009. Cash was primarily used to fund our
net loss for the applicable period resulting from research and development, selling, general and
administrative and other expenses related to our convertible debt financing. Accounts payable and
accrued expenses decreased by approximately $0.3 million as a result of paying vendors and
inventory increased by $0.3 million as we continue to manufacture and store Ceplene® in
preparation for Medas European launch. The 2010 net loss was partially offset by a non-cash
charge of $0.2 million of stock-based compensation, $0.5 million in foreign exchange loss and a $3
million increase in deferred revenue in connection with the signing of the Ceplene®
European marketing and distribution agreement with Meda. Deferred revenue decreased by $0.2
million to account for the portion of the Meda, Myriad, Endo, DURECT and GNI deferred revenue
recognized as revenue.
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Investing Activities
Net cash provided by investing activities for the first three months of 2010 was $27,000
compared with net cash used in investing activities $0.9 million for the first three months of
2009. During the first quarter of 2010, cash was provided by the sale of equipment.
Financing Activities
Net cash used in financing activities for the first three months of 2010 was $0.1 million
compared to net cash provided by financing activities $25.5 million for the first three months of
2009. During the first quarter of 2010, we incurred transaction costs of $0.1 million in
establishing an At-the-Market offering program through which we may, from time to time, offer and
sell shares of our common stock. We also received proceeds of $33,000 related to the exercise of
approximately 0.1 million warrants in the first three months of 2010.
In February 2009, we issued $25.0 million principal aggregate amount of 7.5556% convertible
senior subordinated notes, netting us $14.0 million after $1.6 million in transaction costs and
establishing a restricted cash account of $9.4 million for make-whole interest. We also received
proceeds of $2.9 million related to the exercise of approximately 2.8 million warrants in the first
three months of 2009. We repaid the outstanding loan balance with Hercules of approximately $8,000
and deferred financing costs of $0.2 million, resulting in our having no further obligations under
this loan agreement. We also repaid $0.8 million of the subordinated convertible notes due April
10, 2009.
Contractual Obligations
As of March 31, 2010, the annual amounts of future minimum payments under debt obligations,
interest, lease obligations and other long term obligations 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 March 31, 2010):
Less than | More than | |||||||||||||||||||
1 Year | 1 3 Years | 3 5 Years | 5 Years | Total | ||||||||||||||||
Long-term debt |
$ | 931 | $ | 562 | $ | 500 | $ | | $ | 1,993 | ||||||||||
Interest expense |
141 | 103 | 38 | | 282 | |||||||||||||||
Operating leases |
1,051 | 1,601 | 661 | | 3,313 | |||||||||||||||
Other obligations |
2,611 | 2,208 | 456 | | 5,275 | |||||||||||||||
Total |
$ | 4,734 | $ | 4,474 | $ | 1,655 | $ | | $ | 10,863 | ||||||||||
Our current commitments of debt consist of the following:
1.5 Million Due 2011. 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. The loan initially bore interest at 6% per annum. Tbg was
also entitled to receive 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. We considered the additional
compensation element based on the surplus of EpiCept GmbH to be a derivative. We assigned no value
to the derivative at each reporting period as no surplus of EpiCept GmbH was anticipated over the
term of the agreement. In addition, any additional compensation as a result of surplus would be
reduced by the additional interest noted below.
At the demand of tbg, additional amounts could have been 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 were
accruing these additional amounts as additional interest up to the maximum amount due over the term
of the loan.
On December 20, 2007, EpiCept GmbH entered into a repayment agreement with tbg, whereby
EpiCept GmbH paid tbg approximately 0.2 million ($0.2 million) in January 2008, representing
all interest payable to tbg as of December 31, 2007. The loan balance of 1.5 million ($2.0
million), plus accrued interest at a rate of 7.38% per annum beginning January 1, 2008 was required
to be repaid to tbg no later than June 30, 2008. Tbg waived any additional interest payments of
approximately 0.5 million ($0.7 million). EpiCept GmbH considered this a substantial
modification to the original debt agreement and has recorded the new debt at its fair value in
accordance with ASC 470-50, Modifications and Extinguishments (ASC 470-50). As a result of the
modification to the original debt agreement, EpiCept GmbH recorded a gain on the
extinguishment of debt of $0.5 million in December 2007. Accrued interest attributable to the
additional interest payments totaled $0 at December 31, 2009 and 2008.
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On May 14, 2008, EpiCept GmbH entered into a prolongation of the repayment agreement with tbg,
whereby the loan balance of 1.5 million ($2.0 million) was required to be repaid to tbg no
later than December 31, 2008. Interest continued to accrue at a rate of 7.38% per annum and all
the provisions of the repayment agreement dated December 20, 2007 continued to apply without
change.
On November 26, 2008, EpiCept GmbH entered into a second amendment to the repayment agreement
with tbg, whereby the loan balance of 1.5 million ($2.0 million) was required to be repaid to
tbg no later than June 30, 2009. Interest will continue to accrue at a rate of 7.38% per annum and
all the provisions of the repayment agreement dated December 20, 2007 will continue to apply
without change.
On June 25, 2009, EpiCept GmbH entered into a third amendment to the repayment agreement with
tbg, whereby 0.3 million of the loan balance of 1.5 million ($2.1 million) plus accrued
interest of 56,000 ($0.1 million) was repaid to tbg on June 30, 2009. The remaining loan
balance of 1.2 million ($1.7 million) plus accrued interest will be paid in four semi-annual
installments of 0.3 million ($0.4 million) beginning December 31, 2009. Interest will continue
to accrue at a rate of 7.38% per annum and all the provisions of the repayment agreement dated
December 20, 2007 will continue to apply without change.
$25.0 million 7.5556% Convertible Notes Due 2014. On February 4, 2009, we issued $25.0 million
principal aggregate amount of 7.5556% convertible subordinated notes due February 2014 and five
and-a-half year warrants to purchase approximately 4.2 million shares of common stock at an
exercise price of $3.105 per share. Each $1,000 in principal aggregate amount of the notes is
initially convertible into approximately 371 shares of Common Stock, at the option of the holders
or upon specified events, including a change of control, and if the Companys common stock trades
at or greater than $5.10 a share for 20 out of 30 days, beginning February 9, 2010. Upon any
conversion or redemption of the notes, the holders will receive a make-whole payment in an amount
equal to the interest payable through the scheduled maturity of the converted or redeemed notes,
less any interest paid before such conversion or redemption. Interest is due and payable on the
notes semi-annually in arrears on June 30 and December 31, beginning on June 30, 2009.
The Company allocated the $25.0 million in proceeds between the convertible subordinated notes
and the warrants based on their relative fair values. The Company calculated the fair value of the
warrants at the date of the transaction at approximately $8.8 million with a corresponding amount
recorded as a debt discount. The debt discount is being accreted over the life of the outstanding
convertible subordinated notes using the effective interest method. At the date of the transaction,
the fair value of the warrants of $8.8 million was determined utilizing the Black-Scholes option
pricing model under the following assumptions: dividend yield of 0%, risk free interest rate of
1.99%, volatility of 118% and an expected life of five years. During 2009, the Company recognized
approximately $8.6 million of non-cash interest expense related to the accretion of the debt
discount as a result of the conversion of $24.5 million of the convertible subordinated notes into
approximately 9.1 million shares of the Companys common stock.
As of March 31, 2010, after giving effect to the conversions into common stock, the remaining
aggregate principal amount of the Notes outstanding is $0.5 million.
$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., or PRA, as compensation for PRA assuming the liability on a lease in San Diego,
CA. 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. Our loan balance at March 31, 2010 is $0.3
million.
Other Commitments. Our long-term commitments under operating leases shown above consist of
payments relating to our facility lease in Tarrytown, New York, which expires in February 2012, and
Munich, Germany, which expires in July 2010. Long-term commitments under operating leases for
facilities leased by Maxim Pharmaceuticals, Inc. and retained by us after our acquisition relate
primarily to the research and development site at 6650 Nancy Ridge Drive in San Diego, which is
leased through October 2013. In June 2008, we defaulted on our lease agreement for the premises
located in San Diego, California by failing to make the monthly rent payment. As a result, the
landlord exercised their right to draw down the full letter of credit, amounting to approximately
$0.3 million, and applied approximately $0.2 million to unpaid rent. The remaining balance of $0.1
million is classified as prepaid rent. At March 31, 2010, we are current with our lease payments
on this facility. We discontinued our drug discovery activities at this location and are currently
looking to sublease the premises located in San Diego, California. In July 2006, we terminated our
lease of certain
other property in San Diego, California. 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.
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We have a number of research, consulting and license agreements that require us to make
payments to the other party to the agreement upon us attaining certain milestones as defined in the
agreements. As of March 31, 2010, we may be required to make future milestone payments, totaling
approximately $5.3 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.
We are also obligated to make future royalty payments to three of our collaborators under
existing license agreements, based on net sales of Ceplene®, NP-1 and
crolibulinTM, to the extent revenues on such products are realized. We cannot reasonably
determine the amount and timing of such royalty payments and they are not included in the table
above.
Item 3. | 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 subsidiarys financial results into U.S. dollars for purposes of reporting consolidated
financial results. We also bear the risk that interest on our 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. 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 maintain our 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 we are 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. All of
our debt arrangements have a fixed interest rate, so we are not exposed to interest rate risk on
our debt instruments. We do not have relationships or transactions with persons or entities that
derive benefits from their non-independent relationship with us or related parties.
Item 4. | Controls and Procedures. |
Our Chief Executive Officer and Chief Financial Officer, with the assistance of other members
of our management, have evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of March 31, 2010, our disclosure
controls and procedures were effective to ensure that all information required to be disclosed in
reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the United States and Exchange
Commission rules and forms.
There have not been any changes our internal control over financial reporting (as defined in
Rule 13a-15(f)) during the fiscal quarter ended March 31, 2010 that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over financial
reporting.
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Part II. Other Information
Item 1. | Legal Proceedings. |
None.
Item 1A. | Risk Factors. |
In addition to the other information set forth in this report, you should carefully consider
the risk factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for
the year ended December 31, 2009, which could materially affect our business, financial condition
or future results. To the extent that the risk factors set forth below appear in our Annual Report
on Form 10-K, the risk factors set forth below amend and supplement those risk factors with the
same titles contained in such previously filed reports.
Risks Related to our Financial Condition and Business
We have limited liquidity and, as a result, may not be able to meet our obligations.
As of March 31, 2010 we had approximately $3.6 million in cash and cash equivalents. In
January 2010 we received $3 million from Meda AB in connection with the signing of the
Ceplene® European marketing and distribution agreement with Meda. Meda is also required
to pay us an additional $2 million milestone payment for the second quarter of 2010 and a royalty on net sales. Our anticipated average monthly cash operating expense in 2010 is
approximately $1.6 million per month. In addition, we are required to make interest and principal
payments to our lender tbg on each of June 30, 2010 and December 31, 2010 in the amount of
approximately $0.5 million. We believe that our cash is sufficient to fund operations into the
third quarter 2010. We may receive cash from certain of our licensing partners during 2010 for
achievement of clinical milestones, and we may raise additional funds through the issuance of debt
and/or equity to meet our cash needs. To conserve cash, we may delay or cancel some of our planned
development activities that are not related to Ceplene® during 2010.
We plan to out license our NP-1 compound to a third party who will agree to complete clinical
development and commercialize the product upon receipt of necessary regulatory approvals.
Discussions with prospective partners are continuing, however at this time we are unable to
determine whether or when such an agreement might be concluded or the amount of any fees that may
be paid to us in 2010 in connection with the agreement.
In February 2010, we established an At-the-Market offering program through which we may,
from time to time, offer and sell shares of our common stock having an aggregate offering price of
up to $15.0 million through our sales agent. Sales of the shares, if any, will be made by means of
ordinary brokers transactions on The Nasdaq Capital Market or, to the extent allowable by law, the
Nasdaq OMX Stockholm Exchange, at market prices. Additionally, under the terms of the sales
agreement, we may also sell shares of our common stock through the sales agent on The Nasdaq
Capital Market or, to the extent allowable by law, the Nasdaq OMX Stockholm Exchange, or otherwise,
at negotiated prices or at prices related to the prevailing market price. We will designate the
maximum amount of shares of common stock to be sold on a daily basis as we and our sales agent may
agree. We plan to utilize this program at such times and in such amounts so as to minimize
disruption to the trading of our stock, and therefore in times of low trading volume we may
severely limit or refrain from using the program. If we are unable to meet our liquidity needs
through this program, we may seek alternative sources of financing such as issuing additional
equity and/or debt.
If additional funds are raised by issuing equity, substantial dilution to existing
shareholders may result. If we fail to obtain capital when required, we may be forced to delay,
scale back, or eliminate some or all of our commercialization efforts for Ceplene® and
our research and development programs or to cease operations entirely.
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We may not be able to continue as a going concern.
Our recurring losses from operations and our stockholders deficit raise substantial doubt
about our ability to continue as a going concern and, as a result, our independent registered
public accounting firm included an explanatory paragraph in its report on our consolidated
financial statements for the year ended December 31, 2009, which is incorporated herein by
reference, with respect to this uncertainty. We will need to generate significant revenue from the
sale of Ceplene® or raise additional capital to continue to operate as a going concern.
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 and may
adversely affect our ability to raise additional capital.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults upon Senior Securities. |
None.
Item 4. | (removed and reserved). |
Item 5. | Other Information |
None.
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Item 6. | Exhibits |
Number | Exhibit | |||
3.1 | Third Amended and Restated Certificate of Incorporation of
EpiCept Corporation (incorporated by reference to Exhibit 3.1
to EpiCept Corporations Current Report on Form 8-K filed
May 21, 2008). |
|||
3.2 | Amendment to the Third Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.1 to
EpiCept Corporations Current Report on Form 8-K filed July 9,
2009). |
|||
3.3 | Certificate of Amendment to the Third Amended and Restated
Certificate of Incorporation, filed with the Secretary of State
of the State of Delaware on January 14, 2010 (incorporated by
reference to Exhibit 3.1 to EpiCept Corporations Current
Report on Form 8-K filed January 14, 2010). |
|||
3.4 | Amended and Restated Bylaws of EpiCept Corporation
(incorporated by reference to Exhibit 3.1 to EpiCept
Corporations Current Report on Form 8-K filed February 18,
2010). |
|||
10.1 | License and Supply Agreement, dated as of January 8, 2010,
between EpiCept Corporation, EpiCept GmbH and Meda AB. |
|||
10.2 | Equity Distribution Agreement, dated February 5, 2010
(incorporated by reference to Exhibit 10.1 to EpiCept
Corporations Current Report on Form 8-K filed February 11,
2010). |
|||
31.1 | Certification of Chief Executive Officer pursuant to
Exchange Act Rules 13a- 14(a) and 15(d)-14(a), adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|||
31.2 | Certification of Chief Financial Officer pursuant to
Exchange Act Rules 13a- 14(a) and 15(d)-14(a), adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|||
32.1 | Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
|||
32.2 | Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
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SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
EpiCept Corporation |
||||
May 7, 2010 | By: | /s/ Robert W. Cook | ||
Robert W. Cook | ||||
Senior Vice President and Chief Financial Officer |
36