Attached files
file | filename |
---|---|
EX-4.1 - Cellectar Biosciences, Inc. | v189973_ex4-1.htm |
EX-23.2 - Cellectar Biosciences, Inc. | v189973_ex23-2.htm |
EX-10.53 - Cellectar Biosciences, Inc. | v189973_ex10-53.htm |
EX-10.51 - Cellectar Biosciences, Inc. | v189973_ex10-51.htm |
EX-10.52 - Cellectar Biosciences, Inc. | v189973_ex10-52.htm |
As
filed with the Securities and Exchange Commission on July 7,
2010
Registration
No. 333-166744
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Amendment
No. 2 to
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
NOVELOS
THERAPEUTICS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
2834
|
04-3321804
|
||
(State
or other jurisdiction
of
incorporation or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
Number)
|
One
Gateway Center
Suite
504
Newton,
Massachusetts 02458
(617)
244-1616
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Harry
S. Palmin
President
and Chief Executive Officer
Novelos
Therapeutics, Inc.
One
Gateway Center, Suite 504
Newton,
Massachusetts 02458
(617)
244-1616
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
Paul
Bork, Esq.
Foley
Hoag LLP
155
Seaport Boulevard
Boston,
Massachusetts 02210
(617)
832-1000
Approximate date of commencement of
proposed sale to the public: As soon as practicable after this
Registration Statement is declared effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. ¨
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
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.
(Check
one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
(Do not
check if a smaller reporting company)
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of
Securities
to be
Registered
|
Amount
being
registered
|
Proposed
Maximum
Offering
Price Per
Security
|
Proposed
Maximum
Aggregate
Offering
Price
|
Amount
of
Registration
Fee
|
||||||||||||
Common
Stock, par value $0.00001 per share
|
$ | $ | $ | |||||||||||||
Warrants
to purchase Common Stock
|
$ | $ | $ | |||||||||||||
Common
Stock issuable upon exercise of Warrants
|
$ | $ | $ | |||||||||||||
Total
|
60,000,000 | (1) | $ | 0.19 | $ | 11,400,000 | $ | 813 | * |
(1)
|
Pursuant
to Rule 416, the securities being registered hereunder include such
indeterminate number of additional shares of common stock as may be issued
after the date hereof as a result of stock splits, stock dividends or
similar transactions.
|
*
|
Previously paid. |
The
registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and may be
changed. The aggregate number of shares of common stock to be issued
and sold, or to be issuable upon exercise of the warrants to be issued and sold,
in the offering will be up to 60,000,000 shares. We may not sell
these securities until the registration statement filed with the Securities and
Exchange Commission is effective. This preliminary prospectus is not
an offer to sell these securities and it is not soliciting offers to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
SUBJECT
TO COMPLETION, DATED July 7, 2010
PRELIMINARY
PROSPECTUS
NOVELOS
THERAPEUTICS, INC.
34,285,714
Units, each consisting of
One Share
of Common Stock and
a
Warrant to purchase 0.75 shares of common stock
We are offering up to 34,285,714
units, each consisting of one share of our common stock and a warrant to
purchase 0.75 shares of our common stock at an exercise price equal to 100% of
the unit price, subject to adjustment. The warrants will be
exercisable on or after the applicable closing date of this offering through and
including the close of business on the fifth anniversary of the date of
issuance. The units will not be certificated and the common stock and
warrants will be immediately separable and will be separately transferable
immediately upon issuance.
Our
common stock is quoted on the OTC Electronic Bulletin Board of the Financial
Institutions Regulatory Authority (“FINRA”) under the symbol “NVLT.OB.” On July
6, 2010, the last reported sale price of our common stock on the OTC Electronic
Bulletin Board was $0.11 per share.
Investing in the offered securities
involves a high degree of risk. See “Risk Factors” beginning on page 10
of this prospectus for a
discussion of information that you should consider before investing in our
securities.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Per Unit
|
Total
|
|||||||
Public
offering price
|
$ | $ | ||||||
Placement
Agent’s Fees (1)
|
$ | $ | ||||||
Proceeds,
before expenses, to us
|
$ | $ |
(1)
|
We
will also reimburse the placement agent’s accountable expenses in an
amount equal to 1% of gross offering proceeds, subject to a cap of
$35,000.
|
2
Rodman
& Renshaw, LLC has agreed to act as our placement agent in connection with
this offering. In addition, Rodman & Renshaw, LLC may engage one or more
sub-placement agents or selected dealers. The placement agent is not purchasing
the securities offered by us, and is not required to sell any specific number or
dollar amount of securities, but will assist us in this offering on a
“reasonable best efforts” basis. We have agreed to pay the placement agent a
cash fee equal to 8% of the gross proceeds of the offering of securities by us.
We estimate the total expenses of this offering, excluding the placement agent
fees, will be approximately
$ . Because
there is no minimum offering amount required as a condition to closing in this
offering, the actual public offering amount, placement agent fees, and proceeds
to us, if any, are not presently determinable and may be substantially less than
the total maximum offering amounts set forth above. See “Plan of Distribution”
beginning on page 52 of this prospectus for more information on this offering
and the placement agent arrangement.
This
offering will terminate on July 28, 2010, unless the offering is fully
subscribed before that date or we decide to terminate the offering prior to that
date. In either event, the offering may be closed without further notice to
you.
The date
of this prospectus
is ,
2010.
3
NOVELOS
THERAPEUTICS, INC.
TABLE OF CONTENTS
Page
|
||
PROSPECTUS
SUMMARY
|
6
|
|
RISK
FACTORS
|
10
|
|
FORWARD-LOOKING
STATEMENTS
|
22
|
|
USE
OF PROCEEDS
|
24
|
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|
25
|
|
DILUTION
|
25
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
26
|
|
BUSINESS
|
32
|
|
LITIGATION
|
40
|
|
PROPERTIES
|
40
|
|
MANAGEMENT
|
41
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
48
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
52
|
|
PLAN
OF DISTRIBUTION
|
52
|
|
DESCRIPTION
OF SECURITIES
|
53
|
|
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
|
58
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
58
|
|
LEGAL
MATTERS
|
58
|
|
EXPERTS
|
58
|
|
FINANCIAL
STATEMENTS
|
F-1
|
4
No
dealer, salesperson or other person has been authorized to give any information
or to make any representations other than those contained in this prospectus in
connection with the offer contained in this prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by us.
Neither
the delivery of this prospectus nor any sale made hereunder shall under any
circumstances create an implication that there has been no change in our affairs
since the date hereof. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy securities other than those specifically offered
hereby or of any securities offered hereby in any jurisdiction where, or to any
person to whom, it is unlawful to make such offer or solicitation. The
information contained in this prospectus speaks only as of the date of this
prospectus unless the information specifically indicates that another date
applies.
This
prospectus has been prepared based on information provided by us and by other
sources that we believe are reliable. This prospectus summarizes certain
documents and other information in a manner we believe to be accurate, but we
refer you to the actual documents, if any, for a more complete understanding of
what we discuss in this prospectus. In making a decision to invest in the common
stock, you must rely on your own examination of us and the terms of the offering
and the common stock, including the merits and risks involved.
We are
not making any representation to you regarding the legality of an investment in
our common stock under any legal investment or similar laws or regulations. You
should not consider any information in this prospectus to be legal, business,
tax or other advice. You should consult your own attorney, business advisor and
tax advisor for legal, business and tax advice regarding an investment in our
common stock.
5
You
may only rely on the information contained in this prospectus or that we
have referred you to. We have not authorized anyone to provide you with
different information. This prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
securities offered by this prospectus. This prospectus does not constitute
an offer to sell or a solicitation of an offer to buy any securities in
any circumstances in which such offer or solicitation is unlawful or in
any state or to any person within any state to whom such offer would be
unlawful under the laws or securities regulations of such state. Neither
the delivery of this prospectus nor any sale made in connection with this
prospectus shall, under any circumstances, create any implication that
there has been no change in our affairs since the date of this prospectus
or that the information contained by reference to this prospectus is
correct as of any time after its date. In this prospectus, references to
“Novelos Therapeutics, Inc.,” “the Company,” “we,” “us,” and “our,” refer
to Novelos Therapeutics, Inc.
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus and
does not contain all of the information that you should consider in making
your investment decision. Before investing in our securities, you should
carefully read this entire prospectus, including our financial
statements and the related notes and the information set forth under the
headings “Risk Factors” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” in each case included
elsewhere in this prospectus.
Business
of Novelos
We
are a biopharmaceutical company focused on developing oxidized
glutathione-based compounds for the treatment of cancer and hepatitis. We
are seeking to build a pipeline through licensing or acquiring clinical
stage compounds or technologies for oncology indications.
NOV-002,
our lead compound, is a small-molecule compound based on a proprietary
formulation of oxidized glutathione that has been administered to
approximately 1,000 cancer patients in clinical trials and is in Phase 2
development for solid tumors in combination with chemotherapy. According
to Cancer Market Trends (2008-2012, URCH Publishing), Datamonitor (July 3,
2006) and PharmaLive (October 9, 2009), the global market for cancer
pharmaceuticals reached an estimated $66 billion in 2007, nearly doubling
from $35 billion in 2005 and is expected to grow to $80 billion by
2012.
From
November 2006 through January 2010, we conducted a Phase 3 trial of
NOV-002 plus first-line chemotherapy in advanced non-small cell lung
cancer (“NSCLC”) following three Phase 2 trials (two conducted in Russia
and one conducted by us in the U.S.) that had demonstrated clinical
activity and safety. The Phase 3 trial enrolled 903 patients, 452 of whom
received NOV-002. In February 2010, we announced that the primary endpoint
of improvement in overall survival compared to first-line chemotherapy
alone was not met in this pivotal Phase 3 trial. Following evaluation of
the detailed trial data, we announced in March 2010 that the secondary
endpoints also were not met in the trial and that adding NOV-002 to
paclitaxel and carboplatin chemotherapy was not statistically or
meaningfully different in terms of efficacy-related endpoints or recovery
from chemotherapy toxicity versus chemotherapy alone. However, NOV-002 was
safe and did not add to the overall toxicity of chemotherapy. Based on the
results from the Phase 3 trial, we have determined to discontinue
development of NOV-002 for NSCLC in combination with first-line paclitaxel
and carboplatin chemotherapy.
NOV-002
is being developed to treat early-stage breast cancer. In June 2007 we
commenced enrollment in a U.S. Phase 2 neoadjuvant breast cancer trial,
which is ongoing at The University of Miami to evaluate the ability of
NOV-002 to enhance the effectiveness of chemotherapy in HER-2 negative
patients. An interim analysis of the trial was presented at the San
Antonio Breast Cancer Symposium in December 2008. Six pathologic complete
responses (“pCR”) occurred in the first 15 women (40%) who completed
chemotherapy and underwent surgery, which is a much higher rate than the
historical control of less than 20% pCR in this patient population.
Patients experienced decreased hematologic toxicities. We expect to
present results from this trial in the third quarter of
2010.
|
6
NOV-002
is also being developed to treat chemotherapy-resistant ovarian cancer. In
a U.S. Phase 2 chemotherapy-resistant ovarian cancer trial at
Massachusetts General Hospital and Dana-Farber Cancer Institute from July
2006 through May 2008, NOV-002, in combination with carboplatin, slowed
progression of the disease in 60% of evaluable patients (nine out of 15
women). The median progression-free survival was 15.4 weeks, almost double
the historical control of eight weeks. Furthermore, patients experienced
decreased hematologic toxicities. These results were presented at the
American Society of Clinical Oncology in May 2008.
NOV-205,
our second glutathione-based compound, acts as a hepatoprotective agent
with immunomodulating and anti-inflammatory properties. NOV-205
has been administered to approximately 200 hepatitis patients in clinical
trials and is in Phase 2 development for chronic hepatitis C
non-responders. An Investigational New Drug Application (“IND”)
for NOV-205 as a monotherapy for chronic hepatitis C was accepted by the
FDA in 2006. A U.S. Phase 1b clinical trial with NOV-205 in
patients who previously failed treatment with pegylated interferon plus
ribavirin was completed in December 2007. Based on favorable
safety results of that trial, in March 2010 we initiated a multi-center
U.S. Phase 2 trial evaluating NOV-205 as monotherapy in up to 40 chronic
hepatitis C genotype 1 patients who previously failed treatment with
pegylated interferon plus ribavirin. We expect to have
preliminary results from this longer duration, proof-of-concept trial in
the third quarter of 2010.
As
evidenced by our Phase 3 trial in NSCLC, although promising Phase 2
results may advance the clinical development of compounds, such results
are not necessarily determinative that the efficacy and safety of the
compounds will be successfully demonstrated in a Phase 3 clinical
trial.
Both
compounds have completed clinical trials in humans and have been approved
for use in Russia, where they were originally developed. We own
all intellectual property rights worldwide (excluding Russia and other
states of the former Soviet Union (the “Russian Territory”), but including
Estonia, Latvia and Lithuania) related to compounds based on oxidized
glutathione, including NOV-002 and NOV-205. Our patent
portfolio includes six U.S. issued patents, two European issued patents
and one Japanese issued patent.
We
entered into a collaboration agreement with Mundipharma International
Corporation Limited (“Mundipharma”) to develop, manufacture and
commercialize NOV-002 in Europe excluding the Russian Territory, most of
Asia (other than China, Hong Kong, Taiwan and Macau, the “Chinese
Territory”) and Australia. We have a collaboration agreement
with Lee’s Pharmaceutical (HK) Ltd. (“Lee’s Pharm”) to develop,
manufacture and commercialize NOV-002 and NOV-205 in the Chinese
Territory. We expect that the negative results of our Phase 3
trial in advanced NSCLC will adversely affect development and
commercialization of NOV-002 under the collaboration
agreements.
Our
principal executive offices are located at One Gateway Center, Suite 504,
Newton, Massachusetts 02458 and our telephone number is (617)
244-1616.
|
The
Offering
|
Securities
offered by us:
|
|
Up
to 34,285,714 units. Each unit will consist of one share of our
common stock and a warrant to purchase 0.75 shares of our common
stock.
|
Offering
Price:
|
|
$ per
unit.
|
Description
of Warrants:
|
|
The
warrants will be exercisable on or after the applicable closing date of
this offering through and including close of business on the fifth
anniversary of the date of issuance at an exercise price equal to 100% of
the unit price. The warrants will be exercisable exclusively on
a cashless basis unless, at the time of exercise, the issuance of the
shares underlying the warrants is covered by an effective registration
statement under the Securities Act of 1933, as
amended.
|
7
Securities
Purchase Agreement:
|
The
securities to be offered by us in this offering will be issued and sold
pursuant to a securities purchase agreement between us and each
investor.
|
|
Common
Stock to be outstanding after this offering:
|
|
124,788,320
shares.
|
Consent
of preferred stockholders:
|
Our
preferred stockholders have certain consent rights for issuances of our
common stock and common stock equivalents at effective prices below $0.66
per share. As consideration for our preferred stockholders
consenting to the offering, we have agreed to issue warrants to them that
will likely result in substantial dilution to our common
stockholders. Please see the risk factor entitled “We have
secured the consent of our preferred stockholders to complete the
offering, and the terms of this consent will likely result in significant
dilution to our common stockholders and may result in liquidated damages”
on page 22 of this prospectus.
|
|
Use
of Proceeds:
|
|
We
expect to use the net proceeds received from this offering to fund our
research and development activities, including furthering development of
NOV-002 in breast cancer and other solid tumors and for general corporate
purposes, including capital expenditures, working capital, and,
potentially, acquisition activities. For a more complete
description of our anticipated use of proceeds from this offering, see
“Use of Proceeds.”
|
Risk
Factors:
|
|
See
“Risk Factors” beginning on page 4 and the other information included
in this prospectus for a discussion of factors you should carefully
consider before deciding whether to purchase our securities.
|
Dividend
Policy:
|
We
do not intend to pay cash dividends on our common stock for the
foreseeable future.
|
|
OTC
Bulletin Board Symbol:
|
“NVLT”.
|
|
The
number of shares of our common stock to be outstanding after this offering
is based on 90,502,606 shares of common stock outstanding as of July
6, 2010, and excludes, as of that date:
|
||
•
|
an
aggregate of 8,153,158 shares of common stock issuable upon the
exercise of outstanding stock options issued to employees, directors and
consultants, including under our 2000 Stock Option and Incentive Plan and
our 2006 Stock Incentive Plan;
|
|
•
|
an
aggregate of 3,290,000 additional shares of common stock reserved for
future issuance under our 2006 Stock Incentive Plan;
|
|
•
|
an
aggregate of 35,171,073 additional shares of common stock reserved for
issuance upon conversion of our outstanding shares of Series C and Series
E preferred stock, excluding conversion of accumulated but unpaid
dividends;
|
|
•
|
an
aggregate of 21,788,526 additional shares of common stock
reserved for issuance under various outstanding warrant agreements, with
expiration dates between August 9, 2010 and December 31, 2015,
at exercise prices ranging from $0.65 to $1.72; and
|
|
•
|
shares of common stock issuable upon exercise of
the warrants included in the offered units.
|
|
Unless
we specifically state otherwise, the share information in this prospectus
is as of July 6, 2010 and reflects or assumes no exercise of outstanding
options or warrants to purchase shares of our common
stock.
|
8
Summary
Financial Information
The
following table summarizes our financial data. We have
derived the following summary of our statements of operations data
for the three months ended March 31, 2010 and 2009 from our
unaudited financial statements appearing elsewhere in this
prospectus. We have derived the following summary of our statements
of operations data for the fiscal years ended December 31, 2009 and 2008
from our audited financial statements appearing elsewhere in this
prospectus. The following summary of our financial data
set forth below should be read together with our financial statements
and the related notes to those statements, as well as the section titled
“Management’s Discussion and Analysis of Financial Condition and Results
of Operations,” appearing elsewhere in this prospectus.
|
Statement of Operations Data:
|
Three Months Ended
March 31,
|
Year Ended
December 31,
|
||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||
Revenues
|
$
|
8,333
|
$
|
30,968
|
$
|
96,314
|
$
|
125,968
|
||||||
Costs
and expenses
|
2,555,652
|
2,260,029
|
10,262,495
|
16,716,985
|
||||||||||
Other
income (expense)
|
7,897,441
|
415,616
|
(12,107,125
|
)
|
139,611
|
|||||||||
Net
income (loss)
|
5,350,122
|
(1,813,445
|
)
|
(22,273,306
|
)
|
(16,451,406
|
)
|
|||||||
Net
income (loss) attributable to common stockholders
|
4,693,487
|
(3,295,659
|
)
|
(26,283,626
|
)
|
(22,960,823
|
)
|
|||||||
Balance
Sheet Data:
|
||||||||||||||
Current
assets
|
5,762,229
|
7,062,907
|
8,872,452
|
1,392,237
|
||||||||||
Current
liabilities
|
5,865,908
|
4,942,289
|
16,967,818
|
6,617,206
|
||||||||||
Total
assets
|
5,794,386
|
7,130,477
|
8,931,899
|
1,466,038
|
||||||||||
9
RISK
FACTORS
Investing
in our securities involves a high degree of risk. Before you invest in our
securities, you should be aware that our business faces numerous financial and
market risks, including those described below, as well as general economic and
business risks. The following discussion provides information concerning the
material risks and uncertainties that we have identified and believe may
adversely affect our business, financial condition and results of operations.
Before you decide whether to invest in our securities, you should carefully
consider these risks and uncertainties, together with all of the other
information included in this prospectus.
Risks
Related to Our Business and Industry
We
will require additional capital to continue operations beyond January
2011.
We are
currently continuing development of NOV-002 in cancer indications other than
NSCLC, continuing development of NOV-205 in hepatitis and are seeking to expand
our product pipeline by acquiring or licensing clinical stage compounds or
technologies for oncology indications. We expect that these
activities, together with general and administrative costs, will result in
continuing operating losses for the foreseeable future. We believe
that we have adequate cash to fund these ongoing activities into January
2011. Our ability to execute our operating plan beyond January 2011
is dependent on our ability to obtain additional capital, during 2010,
principally through the sale of equity and debt securities, to fund our
development activities. On February 24, 2010, we announced that our
Phase 3 clinical trial for NOV-002 in non-small cell lung cancer (the “Phase 3
Trial”) did not meet its primary endpoint of a statistically significant
increase in median overall survival. On March 18, 2010, we announced
that the secondary endpoints had not been met in the Phase 3 Trial and that we
had discontinued development of NOV-002 for NSCLC in combination with first-line
paclitaxel and carboplatin chemotherapy. The negative outcome of the
Phase 3 Trial, as well as continuing difficult conditions in the capital markets
globally, may adversely affect our ability to obtain funding in a timely
manner. If we are unable to obtain additional funding, we will be
required, beginning in September 2010, to scale back our administrative and
clinical development activities and may be required to cease our operations
entirely. Even if we do obtain additional funding (including through
this offering) we will need to obtain further funding in the future in order to
continue to operate our business. We plan to continue to actively
pursue financing alternatives during 2010, but there can be no assurance that we
will obtain the capital we require to continue our operations. If the
offering contemplated in this prospectus is fully subscribed, we believe the
proceeds would be sufficient for us to continue our operations only through late
2011, although there can be no assurance the offering will be fully
subscribed. In the interim, we are continuously evaluating measures
to reduce our costs to preserve existing capital.
Our
Phase 3 Trial for NOV-002 in advanced non-small cell lung cancer did not meet
its primary and secondary endpoints. This could negatively impact our ability to
successfully develop NOV-002 for other cancer indications.
On
February 24, 2010, we announced that our Phase 3 Trial did not meet its primary
endpoint of a statistically significant increase in median overall
survival. Following evaluation of the detailed trial data, we
announced on March 18, 2010 that the secondary endpoints also were not met in
the trial and that adding NOV-002 to paclitaxel and carboplatin chemotherapy was
not statistically or meaningfully different in terms of efficacy-related
endpoints or recovery from chemotherapy toxicity versus chemotherapy alone. The
secondary endpoints included progression-free survival, response rate and
duration of response, recovery from chemotherapy-induced myelosuppression,
determination of immunomodulation, quality of life and safety. While
these results are not necessarily predictive of the results that we may
experience in clinical trials for NOV-002 in other cancer indications, the
results could negatively impact our ability to obtain funding or regulatory
approval to pursue further clinical development in NOV-002. If we are
unable to pursue further clinical development in NOV-002, our development
efforts will be limited to our other drug compound, NOV-205 and other compounds
that we are able to acquire or license. There can be no assurance
that we will be successful in our efforts to develop NOV-205 or in our efforts
to acquire or license new compounds. If we are unsuccessful in
developing our drug compounds or acquiring or licensing new compounds, we may be
required to cease our operations.
10
A
class action lawsuit has been filed against the Company which could divert
management’s attention and harm our business.
A
purported class action complaint was filed on March 5, 2010 in the United States
District Court for the District of Massachusetts by an alleged shareholder on
behalf of himself and all others who purchased or otherwise acquired our common
stock in the period between December 14, 2009 and February 24, 2010, against
Novelos and our President and Chief Executive Officer, Harry S.
Palmin. The complaint claims that we violated Section 10(b) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder in connection with alleged disclosures related to the Phase 3
Trial. We believe the allegations are without merit and intend to
defend vigorously against the allegations. However, this type of
litigation often is expensive and diverts management’s attention and resources,
whether or not the claims are ultimately successful, and this could adversely
affect our business.
We
may have difficulty raising additional capital for our future operations in the
longer term.
We
currently generate insignificant revenue from our proposed products or
otherwise. We do not know when this will change. We have
expended and will continue to expend substantial funds on the research,
development and clinical and pre-clinical testing of our drug
compounds. We will require additional funds to conduct research and
development, establish and conduct clinical and pre-clinical trials, establish
commercial-scale manufacturing arrangements and provide for the marketing and
distribution of our products. Additional funds may not be available
on acceptable terms, if at all. If adequate funding is not available
to us, we may have to delay, reduce the scope of or eliminate one or more of our
research or development programs or product launches or marketing efforts, which
may materially harm our business, financial condition and results of
operations.
Our
capital requirements and our ability to meet them depend on many factors,
including:
·
|
the
number of potential products and technologies in
development;
|
|
·
|
continued
progress and cost of our research and development
programs;
|
|
·
|
progress
with pre-clinical studies and clinical trials;
|
|
·
|
the
time and costs involved in obtaining regulatory
clearance;
|
|
·
|
costs
involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims;
|
|
·
|
costs
of developing sales, marketing and distribution channels and our ability
to sell our drugs;
|
|
·
|
costs
involved in establishing manufacturing capabilities for clinical trial and
commercial quantities of our drugs;
|
|
·
|
competing
technological and market developments;
|
|
·
|
market
acceptance of our products;
|
|
·
|
costs
for recruiting and retaining management, employees and
consultants;
|
|
·
|
costs
for educating physicians;
|
|
·
|
our
status as a Bulletin Board-listed company and the prospects for our stock
being listed on a national exchange;
|
|
·
|
uncertainty
and economic instability resulting from terrorist acts and other acts of
violence or war; and
|
|
·
|
the
condition of capital markets and the economy generally, both in the U.S.
and globally.
|
We may
consume available resources more rapidly than currently anticipated, resulting
in the need for additional funding sooner than expected. We may seek
to raise any necessary additional funds through the issuance of warrants, equity
or debt financings or executing collaborative arrangements with corporate
partners or other sources, which may be dilutive to existing stockholders or
otherwise have a material effect on our current or future business
prospects. In addition, in the event that additional funds are
obtained through arrangements with collaborative partners or other sources, we
may have to relinquish economic and/or proprietary rights to some of our
technologies or products under development that we would otherwise seek to
develop or commercialize by ourselves. If adequate funds are not
available, we may be required to significantly reduce or refocus our development
efforts with regard to our drug compounds.
11
Our
independent registered public accounting firm has expressed doubt about our
ability to continue as a going concern, which may hinder our ability to obtain
future financing.
Our financial
statements as of December 31, 2009 were prepared under the assumption that
we will continue as a going concern for the next twelve months. Our independent
registered public accounting firm has issued a report that included an
explanatory paragraph referring to our recurring losses from operations and net
capital deficiency and expressing substantial doubt in our ability to continue
as a going concern without additional capital becoming available. Our ability to
continue as a going concern is dependent upon our ability to obtain additional
equity or debt financing, attain further operating efficiencies, reduce
expenditures, and, ultimately, to generate revenue. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
The
failure to complete development of our therapeutic technology, to obtain
government approvals, including required FDA approvals, or to comply with
ongoing governmental regulations could prevent, delay or limit introduction or
sale of proposed products and result in failure to achieve revenues or maintain
our ongoing business.
Our
research and development activities and the manufacture and marketing of our
intended products are subject to extensive regulation for safety, efficacy and
quality by numerous government authorities in the United States and
abroad. Before receiving FDA clearance to market our proposed
products, we will have to demonstrate that our products are safe and effective
for the patient population for the diseases that are to be
treated. Clinical trials, manufacturing and marketing of drugs are
subject to the rigorous testing and approval process of the FDA and equivalent
foreign regulatory authorities. The Federal Food, Drug and Cosmetic
Act and other federal, state and foreign statutes and regulations govern and
influence the testing, manufacturing, labeling, advertising, distribution and
promotion of drugs and medical devices. As a result, clinical trials
and regulatory approval can take many years to accomplish and require the
expenditure of substantial financial, managerial and other
resources.
In order
to be commercially viable, we must successfully research, develop, obtain
regulatory approval for, manufacture, introduce, market and distribute our
technologies. For each drug using oxidized glutathione-based
compounds, including NOV-002 and NOV-205, we must successfully meet a number of
critical developmental milestones including:
·
|
demonstrating
benefit from delivery of each specific drug for specific medical
indications;
|
|
·
|
demonstrating
through pre-clinical and clinical trials that each drug is safe and
effective; and
|
|
·
|
demonstrating
that we have established viable Good Manufacturing Practices capable of
potential scale-up.
|
The
timeframe necessary to achieve these developmental milestones may be long and
uncertain, and we may not successfully complete these milestones for any of our
intended products in development.
In
addition to the risks previously discussed, our technology is subject to
developmental risks that include the following:
·
|
uncertainties
arising from the rapidly growing scientific aspects of drug therapies and
potential treatments;
|
|
·
|
uncertainties
arising as a result of the broad array of alternative potential treatments
related to cancer, hepatitis and other diseases; and
|
|
·
|
anticipated
expense and time believed to be associated with the development and
regulatory approval of treatments for cancer, hepatitis and other
diseases.
|
12
In order
to conduct the clinical trials that are necessary to obtain approval by the FDA
to market a product, it is necessary to receive clearance from the FDA to
conduct such clinical trials. The FDA can halt clinical trials at any
time for safety reasons or because we or our clinical investigators do not
follow the FDA’s requirements for conducting clinical trials. If we
are unable to receive clearance to conduct clinical trials for a product, or the
trials are halted by the FDA, we will not be able to achieve any revenue from
such product in the U.S, as it is illegal to sell any drug for use in humans in
the U.S. without FDA approval.
Data
obtained from clinical trials are susceptible to varying interpretations, which
could delay, limit or prevent regulatory clearances.
Data
already obtained, or obtained in the future, from pre-clinical studies and
clinical trials do not necessarily predict the results that will be obtained
from later pre-clinical studies and clinical trials. Moreover,
pre-clinical and clinical data are susceptible to varying interpretations, which
could delay, limit or prevent regulatory approval. A number of
companies in the pharmaceutical industry have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier
trials. The failure to adequately demonstrate the safety and
effectiveness of an intended product under development could delay or prevent
regulatory clearance of the potential drug, which would result in delays to
commercialization and could materially harm our business. Our
clinical trials may not demonstrate sufficient levels of safety and efficacy
necessary to obtain the requisite regulatory approvals for our drugs, and our
proposed drugs may not be approved for marketing.
We may
encounter delays or rejections based on additional government regulation from
future legislation or administrative action or changes in FDA policy during the
period of development, clinical trials and FDA regulatory review. We
may encounter similar delays in foreign countries. Sales of our
products outside the U.S. would be subject to foreign regulatory approvals that
vary from country to country. The time required to obtain approvals
from foreign countries may be shorter or longer than that required for FDA
approval, and requirements for foreign licensing may differ from FDA
requirements. We may be unable to obtain requisite approvals from the
FDA or foreign regulatory authorities, and even if obtained, such approvals may
not be on a timely basis, or they may not cover the uses that we
request.
Even if
we do ultimately receive FDA approval for any of our products, these products
will be subject to extensive ongoing regulation, including regulations governing
manufacturing, labeling, packaging, testing, dispensing, prescription and
procurement quotas, record keeping, reporting, handling, shipment and disposal
of any such drug. Failure to obtain and maintain required
registrations or to comply with any applicable regulations could further delay
or preclude development and commercialization of our drugs and subject us to
enforcement action.
Our
drugs or technology may not gain FDA approval in clinical trials or be effective
as a therapeutic agent, which could adversely affect our business and
prospects.
In order
to obtain regulatory approvals, we must demonstrate that each drug is safe and
effective for use in humans and functions as a therapeutic against the effects
of a disease or other physiological response. While we have experienced positive
preliminary results in the earlier stage trials for certain indications in the
U.S., in February 2010, we announced that our Phase 3 Trial did not meet its
primary endpoint of a statistically significant increase in median overall
survival and in March 2010 we announced that the secondary endpoints were not
met. There can be no assurance that we can demonstrate that these products are
safe or effective in additional advanced clinical trials for other indications.
We are also not able to give assurances that the positive results of certain of
the tests already conducted can be repeated or that further testing will support
our applications for regulatory approval. As a result, our drug and technology
research program may be curtailed, redirected or eliminated at any time. If this
occurs, we may have to cease our operations entirely.
13
There
is no guarantee that we will ever generate substantial revenue or become
profitable even if one or more of our drugs are approved for
commercialization.
We expect
to incur operating losses over the next several years as we continue to incur
costs for research and development and clinical trials. Our ability to generate
revenue and achieve profitability depends on our ability, alone or with others,
to complete the development of, obtain required regulatory approvals for and
manufacture, market and sell our proposed products. Development is costly and
requires significant investment. In addition, if we choose to license or obtain
the assignment of rights to additional drugs, the license fees for such drugs
may increase our costs.
To date,
we have not generated any revenue from the commercial sale of our proposed
products or any drugs and do not expect to receive any such revenue in the near
future. Our primary activity to date has been research and development. A
substantial portion of the research results and observations on which we rely
were performed by third parties at those parties’ sole or shared cost and
expense. We cannot be certain as to when or whether commercialization and
marketing our proposed products in development will occur, and we do not expect
to generate sufficient revenues, from proposed product sales or otherwise, to
cover our expenses or achieve profitability in the near future.
We
rely solely on research and manufacturing facilities at various universities,
hospitals, contract research organizations and contract manufacturers for all of
our research, development, and manufacturing, which, in the event we lose access
to those facilities, our ability to gain FDA approval and commercialization of
our drug delivery technology and products could be delayed or
impaired.
At the
present time, we have no research, development or manufacturing facilities of
our own. We are entirely dependent on contracting with third parties to use
their facilities to conduct research, development and manufacturing. The lack of
facilities of our own in which to conduct research, development and
manufacturing may delay or impair our ability to gain FDA approval and
commercialization of our drug delivery technology and products.
We
believe that we have a good working relationship with our contractors. However,
should the situation change, we may be required to relocate these activities on
short notice, and we do not currently have access to alternate facilities to
which we could relocate our research, development and/or manufacturing
activities. The cost and time to establish or locate an alternate research,
development and/or manufacturing facility to develop our technology would be
substantial and would delay obtaining FDA approval and commercializing our
products.
We
are dependent on our collaborative arrangements for the development of our
technologies and business development, exposing us to the risk of reliance on
the viability of third parties.
In
conducting our research, development and manufacturing activities, we rely and
expect to continue to rely on numerous collaborative arrangements with
universities, hospitals, governmental agencies, charitable foundations,
manufacturers and others. The loss of any of these arrangements, or failure to
perform under any of these arrangements, by any of these entities, may
substantially disrupt or delay our research, development and manufacturing
activities, including our anticipated clinical trials.
We may
rely on third-party contract research organizations, service providers and
suppliers to support development and clinical testing of our products. Failure
of any of these contractors to provide the required services in a timely manner
or on commercially reasonable terms could materially delay the development and
approval of our products, increase our expenses and materially harm our
business, financial condition and results of operations.
As a
result of our collaboration agreements with Mundipharma and Lee’s Pharm for the
development, manufacture and commercialization of NOV-002 in Europe, Asia and
Australia (and NOV-205 in the Chinese Territory), the commercial value of our
products in those territories will largely be dependent on the ability of these
collaborators to perform.
14
Purdue
Pharma, L.P. (“Purdue”) has obtained certain rights that may discourage
third parties from entering into discussions with us to acquire rights to
NOV-002 for the United States.
Purdue
has been granted a right of first refusal on bona fide offers to obtain NOV-002
Rights in the United States received from third parties and approved by our
board of directors. Under Purdue’s right of first refusal, Purdue would have 30
days to enter into a definitive agreement with Novelos on terms representing the
same economic benefit for Novelos as in the third-party offer. The right of
first refusal terminates only upon specified business combinations. Novelos has
separately entered into letter agreements with Mundipharma and an independent
associated company providing for a conditional exclusive right to negotiate for,
and a conditional right of first refusal with respect to, third party offers to
obtain NOV-002 Rights (i) for Mexico, Central America, South America and the
Caribbean and (ii) for Canada, respectively. The existence of these rights may
discourage other possible strategic partners from entering into discussions with
us to obtain NOV-002 Rights in North and South America.
We
are exposed to product, clinical and preclinical liability risks that could
create a substantial financial burden should we be sued.
Our
business exposes us to potential product liability and other liability risks
that are inherent in the testing, manufacturing and marketing of pharmaceutical
products. In addition, the use in our clinical trials of pharmaceutical products
that we or our current or potential collaborators may develop and then
subsequently sell may cause us to bear a portion of or all product liability
risks. While we carry an insurance policy covering up to $5,000,000 per
occurrence and $5,000,000 in the aggregate of liability incurred in connection
with such claims should they arise, there can be no assurance that our insurance
will be adequate to cover all situations. Moreover, there can be no assurance
that such insurance, or additional insurance, if required, will be available in
the future or, if available, will be available on commercially reasonable terms.
Furthermore, our current and potential partners with whom we have collaborative
agreements or our future licensees may not be willing to indemnify us against
these types of liabilities and may not themselves be sufficiently insured or
have a net worth sufficient to satisfy any product liability claims. A
successful product liability claim or series of claims brought against us could
have a material adverse effect on our business, financial condition and results
of operations.
Acceptance
of our products in the marketplace is uncertain and failure to achieve market
acceptance will prevent or delay our ability to generate revenues.
Our
future financial performance will depend, at least in part, on the introduction
and customer acceptance of our proposed products. Even if approved for marketing
by the necessary regulatory authorities, our products may not achieve market
acceptance. The degree of market acceptance will depend on a number of factors
including:
·
|
the
receipt of regulatory clearance of marketing claims for the uses that we
are developing;
|
|
·
|
the
establishment and demonstration of the advantages, safety and efficacy of
our technologies;
|
|
·
|
pricing
and reimbursement policies of government and third-party payers such as
insurance companies, health maintenance organizations and other health
plan administrators;
|
|
·
|
our
ability to attract corporate partners, including pharmaceutical companies,
to assist in commercializing our intended products; and
|
|
·
|
our
ability to market our products.
|
Physicians,
patients, payers or the medical community in general may be unwilling to accept,
use or recommend any of our products. If we are unable to obtain regulatory
approval or commercialize and market our proposed products as planned, we may
not achieve any market acceptance or generate revenue.
We
may face litigation from third parties who claim that our products infringe on
their intellectual property rights, particularly because there is often
substantial uncertainty about the validity and breadth of medical
patents.
We may be
exposed to future litigation by third parties based on claims that our
technologies, products or activities infringe on the intellectual property
rights of others or that we have misappropriated the trade secrets of others.
This risk is exacerbated by the fact that the validity and breadth of claims
covered in medical technology patents and the breadth and scope of trade-secret
protection involve complex legal and factual questions for which important legal
principles are unresolved. Any litigation or claims against us, whether or not
valid, could result in substantial costs, could place a significant strain on
our financial and managerial resources and could harm our reputation. Most of
our license agreements would likely require that we pay the costs associated
with defending this type of litigation. In addition, intellectual property
litigation or claims could force us to do one or more of the
following:
15
·
|
cease
selling, incorporating or using any of our technologies and/or products
that incorporate the challenged intellectual property, which would
adversely affect our ability to generate revenue;
|
|
·
|
obtain
a license from the holder of the infringed intellectual property right,
which license may be costly or may not be available on reasonable terms,
if at all; or
|
|
·
|
redesign
our products, which would be costly and
time-consuming.
|
If
we are unable to protect or enforce our rights to intellectual property
adequately or to secure rights to third-party patents, we may lose valuable
rights, experience reduced market share, assuming any, or incur costly
litigation to protect our intellectual property rights.
Our
ability to obtain licenses to patents, maintain trade secret protection and
operate without infringing the proprietary rights of others will be important to
our commercializing any products under development. Therefore, any disruption in
access to the technology could substantially delay the development of our
technology.
The
patent positions of biotechnology and pharmaceutical companies that involve
licensing agreements, including ours, are frequently uncertain and involve
complex legal and factual questions. In addition, the coverage claimed in a
patent application can be significantly reduced before the patent is issued or
in subsequent legal proceedings. Consequently, our patent applications and any
issued and licensed patents may not provide protection against competitive
technologies or may be held invalid if challenged or circumvented. Our
competitors may also independently develop products similar to ours or design
around or otherwise circumvent patents issued or licensed to us. In addition,
the laws of some foreign countries may not protect our proprietary rights to the
same extent as U.S. law.
We also
rely on trade secrets, technical know-how and continuing technological
innovation to develop and maintain our competitive position. Although we
generally require our employees, consultants, advisors and collaborators to
execute appropriate confidentiality and assignment-of-inventions agreements, our
competitors may independently develop substantially equivalent proprietary
information and techniques, reverse engineer our information and techniques, or
otherwise gain access to our proprietary technology. We may be unable to
meaningfully protect our rights in trade secrets, technical know-how and other
non-patented technology.
We may
have to resort to litigation to protect our rights for certain intellectual
property, or to determine their scope, validity or enforceability. Enforcing or
defending our rights is expensive, could cause diversion of our resources and
may not prove successful. Any failure to enforce or protect our rights could
cause us to lose the ability to exclude others from using our technology to
develop or sell competing products.
We
have limited manufacturing experience. Even if our products are approved for
manufacture and sale by applicable regulatory authorities, we may not be able to
manufacture sufficient quantities at an acceptable cost, and our contract
manufacturers could experience shut-downs or delays.
We remain
in the research and development and clinical and pre-clinical trial phase of
product commercialization. Accordingly, if our products are approved for
commercial sale, we will need to establish the capability to commercially
manufacture our products in accordance with FDA and other regulatory
requirements. We have limited experience in establishing, supervising and
conducting commercial manufacturing. If we fail to adequately establish,
supervise and conduct all aspects of the manufacturing processes, we may not be
able to commercialize our products.
We
presently plan to rely on third-party contractors to manufacture our products.
This may expose us to the risks of not being able to directly oversee the
production and quality of the manufacturing process. Furthermore, these
contractors, whether foreign or domestic, may experience regulatory compliance
difficulties, mechanical shutdowns, employee strikes or other unforeseeable acts
that may delay production.
16
Due
to our limited marketing, sales and distribution experience, we may be
unsuccessful in our efforts to sell our products, enter into relationships with
third parties or develop a direct sales organization.
We have
not established marketing, sales or distribution capabilities for our proposed
products. Until such time as our products are further along in the regulatory
process, we will not devote any meaningful time and resources to this effort. At
the appropriate time, we intend to develop our own sales and marketing
capabilities or enter into agreements with third parties to sell our
products.
We have
limited experience in developing, training or managing a sales force. If we
choose to establish a direct sales force, we may incur substantial additional
expenses in developing, training and managing such an organization. We may be
unable to build a sales force on a cost-effective basis or at all. Any such
direct marketing and sales efforts may prove to be unsuccessful. In addition, we
will compete with many other companies that currently have extensive marketing
and sales operations. Our marketing and sales efforts may be unable to compete
against these other companies. We may be unable to establish a sufficient sales
and marketing organization on a timely basis, if at all.
If we
choose to enter into agreements with third parties to sell our products, we may
be unable to establish or maintain third-party relationships on a commercially
reasonable basis, if at all. In addition, these third parties may
have similar or more established relationships with our
competitors.
We may be
unable to engage qualified distributors. Even if engaged, these
distributors may:
·
|
fail
to adequately market our products;
|
|
·
|
fail
to satisfy financial or contractual obligations to us;
|
|
·
|
offer,
design, manufacture or promote competing products; or
|
|
·
|
cease
operations with little or no
notice.
|
If we
fail to develop sales, marketing and distribution channels, we would experience
delays in product sales and incur increased costs, which would harm our
financial results.
If
we are unable to convince physicians of the benefits of our intended products,
we may incur delays or additional expense in our attempt to establish market
acceptance.
Achieving
broad use of our products may require physicians to be informed regarding these
products and their intended benefits. The time and cost of such an educational
process may be substantial. Inability to successfully carry out this physician
education process may adversely affect market acceptance of our products. We may
be unable to timely educate physicians regarding our intended products in
sufficient numbers to achieve our marketing plans or to achieve product
acceptance. Any delay in physician education may materially delay or reduce
demand for our products. In addition, we may expend significant funds towards
physician education before any acceptance or demand for our products is created,
if at all.
17
The
market for our products is rapidly changing and competitive, and new
therapeutics, new drugs and new treatments that may be developed by others could
impair our ability to maintain and grow our business and remain
competitive.
The
pharmaceutical and biotechnology industries are subject to rapid and substantial
technological change. Developments by others may render our technologies and
intended products noncompetitive or obsolete, or we may be unable to keep pace
with technological developments or other market factors. Technological
competition from pharmaceutical and biotechnology companies, universities,
governmental entities and others diversifying into the field is intense and is
expected to increase. Most of these entities have significantly greater research
and development capabilities and budgets than we do, as well as substantially
more marketing, manufacturing, financial and managerial resources. These
entities represent significant competition for us. Acquisitions of, or
investments in, competing pharmaceutical or biotechnology companies by large
corporations could increase our competitors’ financial, marketing, manufacturing
and other resources.
We
operate with limited day-to-day business management, serve as a vehicle to hold
certain technology for possible future exploration, and have been and will
continue to be engaged in the development of new drugs and therapeutic
technologies. As a result, our resources are limited and we may experience
management, operational or technical challenges inherent in such activities and
novel technologies. Competitors have developed or are in the process of
developing technologies that are, or in the future may be, the basis for
competition. Some of these technologies may accomplish therapeutic effects
similar to those of our technology, but through different means. Our competitors
may develop drugs and drug delivery technologies that are more effective than
our intended products and, therefore, present a serious competitive threat to
us.
The
potential widespread acceptance of therapies that are alternatives to ours may
limit market acceptance of our products even if they are commercialized. Many of
our targeted diseases and conditions can also be treated by other medication or
drug delivery technologies. These treatments may be widely accepted in medical
communities and have a longer history of use. The established use of these
competitive drugs may limit the potential for our technologies and products to
receive widespread acceptance if commercialized.
If
users of our products are unable to obtain adequate reimbursement from
third-party payers, or if new healthcare reform measures are adopted, it could
hinder or prevent our product candidates’ commercial success.
The
continuing efforts of government and insurance companies, health maintenance
organizations and other payers of healthcare costs to contain or reduce costs of
health care may adversely affect our ability to generate future revenues and
achieve profitability, including by limiting the future revenues and
profitability of our potential customers, suppliers and collaborative partners.
For example, in certain foreign markets, pricing or profitability of
prescription pharmaceuticals is subject to government control. The U.S.
government and other governments have shown significant interest in pursuing
healthcare reform. Any government-adopted reform measures could adversely affect
the pricing of healthcare products and services in the U.S. or internationally
and the amount of reimbursement available from governmental agencies or other
third party payers. The continuing efforts of the U.S. and foreign governments,
insurance companies, managed care organizations and other payers of health care
services to contain or reduce health care costs may adversely affect our ability
to set prices for our products, should we be successful in commercializing them,
and this would negatively affect our ability to generate revenues and achieve
and maintain profitability.
New laws,
regulations and judicial decisions, or new interpretations of existing laws,
regulations and decisions, that relate to healthcare availability, methods of
delivery or payment for healthcare products and services, or sales, marketing or
pricing of healthcare products and services, also may limit our potential
revenue and may require us to revise our research and development programs. The
pricing and reimbursement environment may change in the future and become more
challenging for several reasons, including policies advanced by the current or
future executive administrations in the U.S., new healthcare legislation or
fiscal challenges faced by government health administration authorities.
Specifically, in both the U.S. and some foreign jurisdictions, there have been a
number of legislative and regulatory proposals to change the health care system
in ways that could affect our ability to sell our products profitably. In the
U.S., changes in federal health care policy are being considered by Congress
this year. Some of these proposed reforms could result in reduced reimbursement
rates for our product candidates, which would adversely affect our business
strategy, operations and financial results.
18
Our
ability to commercialize our products will depend in part on the extent to which
appropriate reimbursement levels for the cost of our products and related
treatment are obtained by governmental authorities, private health insurers and
other organizations, such as health maintenance organizations (HMOs).
Third-party payers are increasingly challenging the prices charged for medical
drugs and services. Also, the trend toward managed health care in the United
States and the concurrent growth of organizations such as HMOs that could
control or significantly influence the purchase of healthcare services and
drugs, as well as legislative proposals to reform health care or change
government insurance programs, may all result in lower prices for or rejection
of our drugs. The cost containment measures that healthcare payers and providers
are instituting and the effect of any healthcare reform could materially harm
our ability to operate profitably.
We
depend on key personnel who may terminate their employment with us at any time,
and our success will depend on our ability to hire additional qualified
personnel.
Our
success will depend to a significant degree on the continued services of our key
management and advisors. There can be no assurance that these individuals will
continue to provide service to us. Furthermore, as a result of the decline in
stock price following the announcement of the negative results of our Phase 3
Trial, many of the stock options held by key employees and advisors have
exercise prices in excess of current market prices, thus significantly
diminishing their incentive effect. We may be required to restructure stock
compensation arrangements in order to retain key management and advisors. In
addition, our success may depend on our ability to attract and retain other
highly skilled personnel. We may be unable to recruit such personnel on a timely
basis, if at all. Our management and other employees may voluntarily terminate
their employment with us at any time. The loss of services of key personnel, or
the inability to attract and retain additional qualified personnel, could result
in delays in development or approval of our products, loss of sales and
diversion of management resources.
Compliance
with changing corporate governance and public disclosure regulations may result
in additional expense.
Keeping
abreast of, and in compliance with, changing laws, regulations and standards
relating to corporate governance, public disclosure and internal controls,
including the Sarbanes-Oxley Act of 2002, new SEC regulations and, in the event
we seek and are approved for listing on a registered national securities
exchange, the stock exchange rules, will require an increased amount of
management attention and external resources. We intend to continue to invest all
resources reasonably necessary to comply with evolving standards, which may
result in increased general and administrative expense and a diversion of
management time and attention from revenue-generating activities to compliance
activities. In our annual report for the fiscal year ending December 31, 2010 we
may be required to include an attestation report of our independent registered
public accounting firm on internal control over financial reporting which may
result in additional costs.
Risks
Related to our Common Stock
In
the time that our common stock has traded, our stock price has experienced price
fluctuations.
There can
be no assurance that the market price for our common stock will remain at its
current level and a decrease in the market price could result in substantial
losses for investors. The market price of our common stock may be significantly
affected by one or more of the following factors:
·
|
announcements
or press releases relating to the biopharmaceutical sector or to our own
business or prospects;
|
|
·
|
regulatory,
legislative, or other developments affecting us or the healthcare industry
generally;
|
|
·
|
the
dilutive effect of conversion of our Series E or Series C preferred stock
into common stock or the exercise of options and
warrants;
|
|
·
|
sales
by those financing our company through convertible securities and warrants
of the underlying common stock, when it is registered with the SEC and may
be sold into the public market, immediately upon conversion or exercise;
and
|
|
·
|
market
conditions specific to biopharmaceutical companies, the healthcare
industry and the stock market
generally.
|
19
There
may be a limited public market for our securities; we presently fail to qualify
for listing on any national securities exchanges.
Our
common stock currently does not meet the requirements for initial listing on a
registered stock exchange. Trading in our common stock continues to be conducted
on the electronic bulletin board in the over-the-counter market and in what are
commonly referred to as “pink sheets.” As a result, an investor may find it
difficult to dispose of or to obtain accurate quotations as to the market value
of our common stock, and our common stock may be less attractive for margin
loans, for investment by financial institutions, as consideration in future
capital raising transactions or other purposes.
Our
common stock constitutes a “penny stock” under SEC rules, which may make it more
difficult to resell shares of our common stock.
Our
common stock constitutes a “penny stock” under applicable SEC rules. These rules
impose additional sales practice requirements on broker-dealers that recommend
the purchase or sale of penny stocks to persons other than those who qualify as
“established customers” or “accredited investors.” For example, broker-dealers
must determine the appropriateness for non-qualifying persons of investments in
penny stocks and make special disclosures concerning the risks of investments in
penny stocks.
Many
brokerage firms will discourage or refrain from recommending investments in
penny stocks. Most institutional investors will not invest in penny stocks. In
addition, many individual investors will not invest in penny stocks due, among
other reasons, to the increased financial risk generally associated with these
investments. For these reasons, the fact that our common stock is a penny stock
may limit the market for our common stock and, consequently, the liquidity of an
investment in our common stock. We can give no assurance at what time, if ever,
our common stock will cease to be a “penny stock.”
Our
executive officers, directors and principal stockholders have substantial
holdings, which could delay or prevent a change in corporate control favored by
our other stockholders.
Holders
of our Series E preferred stock beneficially own, in the aggregate,
approximately 45% of our outstanding voting shares on an as-converted basis
(subject, in some cases, to certain blocking provisions that may be waived with
61 days’ notice). In addition, our executive officers, directors and other
principal stockholders own in excess of 2% of our outstanding voting shares
calculated on the same basis. The interests of our current officers, directors
and Series E investors may differ from the interests of other stockholders.
Further, our current officers, directors and Series E investors may have the
ability to significantly affect the outcome of all corporate actions requiring
stockholder approval, including the following actions:
·
|
the
election of directors;
|
|
·
|
the
amendment of charter documents;
|
|
·
|
issuance
of blank-check preferred or convertible stock, notes or instruments of
indebtedness which may have conversion, liquidation and similar features,
or completion of other financing arrangements including certain issuances
of common stock; or
|
|
·
|
the
approval of certain mergers and other significant corporate transactions,
including a sale of substantially all of our assets (and in the case of
licensing, any material intellectual property), or merger with a
publicly-traded shell or other
company.
|
20
Our
common stock could be further diluted as the result of the issuance of
additional shares of common stock, convertible securities, warrants or
options.
In the
past, we have issued common stock, convertible securities, such as convertible
preferred stock, and warrants in order to raise money. We have also issued
options and warrants as compensation for services and incentive compensation for
our employees and directors. We have shares of common stock reserved for
issuance upon the conversion and exercise of these securities and may increase
the shares reserved for these purposes in the future. Our issuance of additional
common stock, convertible securities, options and warrants could affect the
rights of our stockholders, could reduce the market price of our common stock or
could result in adjustments to conversion or exercise prices of outstanding
preferred stock and warrants (resulting in these securities becoming convertible
into or exercisable for, as the case may be, a greater number of shares of our
common stock), or could obligate us to issue additional shares of common stock
to certain of our stockholders.
We
are prohibited from taking certain actions and entering into certain
transactions without the consent of holders of our Series E preferred
stock.
For as
long as any shares of Series E preferred stock remain outstanding we are
prohibited from taking certain actions or entering into certain transactions
without the prior consent of specific holders of outstanding shares of Series E
preferred stock (currently consisting of Xmark Opportunity Fund, L.P., Xmark
Opportunity Fund, Ltd., and Xmark JV Investment Partners, LLC (collectively, the
“Xmark Funds”), and Purdue). We are prohibited from paying dividends to common
stockholders, amending our certificate of incorporation or by-laws, issuing any
equity security or any security convertible into or exercisable for any equity
security at a price of $0.65 or less or with rights senior to the Series E
preferred stock (except for certain exempted issuances), increasing the number
of shares of Series E preferred stock or issuing any additional shares of Series
E preferred stock other than the 735 shares designated in the Series E
Certificate of Designations, or changing the number of our directors. We are
also prohibited from entering into certain transactions such as:
·
|
selling
or otherwise granting any rights with respect to all or substantially all
of our assets (and in the case of licensing, any material intellectual
property) or the Company's business and we shall not enter into a merger
or consolidation with another company unless we are the surviving
corporation, the Series E preferred stock remains outstanding, there are
no changes to the rights and preferences of the Series E preferred stock
and there is not created any new class of capital stock senior to the
Series E preferred stock;
|
|
·
|
redeeming
or repurchasing any capital stock other than Series E preferred stock or
the related warrants; or
|
|
·
|
incurring
any new debt for borrowed money in excess of
$500,000.
|
Even
though our board of directors may determine that any of these actions are in the
best interest of the Company or our shareholders, we may be unable to complete
them if we do not get the approval of specific holders of the outstanding shares
of Series E preferred stock. The interests of the holders of Series E preferred
stock may differ from those of stockholders generally. Moreover, the right of
first refusal granted to Purdue and its independent associated companies under
the August 2009 Purchase Agreement and the collaboration agreement with
Mundipharma (our collaborator on most non-U.S. development, manufacturing and
commercialization of NOV-002) have the potential of creating situations where
the interests of the Company and those of Purdue may conflict. If we are unable
to obtain consent from each of the holders identified above, we may be unable to
complete actions or transactions that our board of directors has determined are
in the best interest of the Company and its shareholders.
We
have not paid dividends to preferred stockholders totaling $2,925,000 as of
March 31, 2010 and we may be unable to pay dividends to preferred stockholders
when due in future periods.
Our
ability to pay cash dividends on stated future dividend payment dates will be
dependent on a number of factors including the timing of future financings and
the amount of net losses in future periods. We anticipate that future dividends
on Series E preferred stock will be paid by issuing shares of common stock or
additional shares of Series E preferred stock, which will result in additional
dilution to existing shareholders. We anticipate that the accrued unpaid
dividend on our Series C preferred stock ($832,000 at March 31, 2010) will
continue to accumulate. During 2009 and in the first quarter of 2010, an
aggregate of approximately $1,121,000 in accumulated dividends were converted
into shares of common stock in connection with the conversion of the associated
shares of preferred stock.
21
Risks
Related to this Offering
Our
management team will have immediate and broad discretion over the use of the net
proceeds from this offering.
There is
no minimum offering amount required as a condition to closing this offering and
therefore net proceeds from this offering will be immediately available to our
management to use at their discretion. The decisions made by our management may
not result in positive returns on your investment and you will not have an
opportunity to evaluate the economic, financial or other information upon which
our management bases its decisions.
You will experience immediate and
substantial dilution as a result of this offering and may experience additional
dilution in the
future.
You
will incur immediate and substantial dilution as a result of this offering.
After giving effect to the sale by us of up to 34,285,714 units offered in this
offering at a public offering price of $ per unit,
and after deducting the placement agent fees and estimated offering expenses
payable by us, investors in this offering can expect an immediate dilution of
$ per share,
or %, at the public offering price, assuming
no exercise of the warrants. In addition, in the past, we issued options and
warrants to acquire shares of common stock. To the extent these options are
ultimately exercised, you will sustain future dilution. We may also acquire or
license other technologies or finance strategic alliances by issuing equity,
which may result in additional dilution to our stockholders.
We
have secured the consent of our preferred stockholders to complete the offering,
and the terms of this consent will likely result in significant dilution to our
common stockholders and may result in liquidated damages.
We
anticipate that the offering price of our common stock, and the exercise price
of the warrants, we are proposing to issue and sell in the offering contemplated
in this prospectus will be below $0.66 per share, which would require the
consent of the holders of Series E preferred stock, and result in an adjustment
to the conversion price of the Series C preferred stock unless the Series C
holders consent otherwise. We have received the consent of these
holders in connection with the offering and the consent provides that if the
offering is consummated, as consideration for their granting consent, we will
issue them warrants to purchase shares of our common stock at a nominal exercise
price. The terms of the consent entitle these holders to warrants
exercisable for a number of shares equivalent to the number of additional shares
of common stock for which their shares of preferred stock would be convertible
if the conversion price of the preferred stock were to be reduced from $0.65 to
two times the volume weighted average price per share of our common stock during
the 20 trading day period following the closing of the offering. No
adjustment to the conversion price of the preferred stock itself will be
made.
Based
on the last reported sale price of our common stock on the OTC Electronic
Bulletin Board on July 6, 2010, we would be required to issue to these holders
warrants to purchase an aggregate of approximately 79,300,000 shares of our
common stock (representing 26% of our fully diluted outstanding common stock
were the offering contemplated under this prospectus to be fully
subscribed). However, there can be no assurance that the market price
of our common stock will remain at current levels, and issuance of additional
shares of common stock in this offering, which shares will be freely tradable
upon issuance, could adversely affect the market price of our common stock
during the post-offering period. This would result in the warrants to
be issued to our preferred stockholders being exercisable for a greater number
of shares, which could depress the market price of our common stock even
further.
In
addition, because we will not have adequate authorized but unissued and
unreserved shares of common stock to cover the exercise of these warrants, the
consent requires that we seek the approval of our stockholders, not later than
January 1, 2011, of an amendment to our certificate of incorporation to
authorize a sufficient number of additional shares of common stock to cover the
full exercise of these warrants. In the event we are unable to secure
this approval by January 1, 2011, the consent provides for liquidated damages
immediately payable to each preferred stockholder in an amount equal to 12% of
the liquidation preference applicable to the shares of preferred stock they then
hold, and additional liquidated damages of 2% of such liquidation preference for
each month after such date until the requisite stockholder approval is
obtained. There can be no assurance we will be able to obtain the
requisite stockholder approval to increase our authorized shares of common
stock, and whether or not we do so is ultimately out of our
control. If these liquidated damages become payable, it would result
in a substantial and adverse effect on the value of our outstanding common
stock, and could make it more difficult for us to raise the funds we will
require to continue operating our business.
Furthermore,
if, after one year after the issuance of these warrants, a holder is unable to
immediately sell all of the common stock underlying its warrants pursuant to
Rule 144 promulgated under the Securities Act of 1933, as amended (“Rule 144”)
without time, volume or other limitations under Rule 144, then we are required
to use our reasonable best efforts to register such shares of common stock
underlying such warrants with the SEC and use our reasonable best efforts to
have the SEC declare such registration statement effective.
There
is no public market for the warrants to purchase common stock in this
offering.
There is
no established public trading market for the warrants being offered in this
offering, and we do not expect a market to develop. In addition, we do not
intend to apply for listing the warrants on any securities exchange. Without an
active market, the liquidity of the warrants will be limited.
The
offering may not be fully subscribed, and, even if the offering is fully
subscribed, we will need additional capital in the future. If additional capital
is not available, we may not be able to continue to operate our business
pursuant to our business plan or we may have to discontinue our operations
entirely.
The
placement agent in this offering will offer the securities on a “reasonable best
efforts” basis, meaning that we may raise substantially less than the total
maximum offering amounts. We will not provide any refund to investors if less
than all of the units are sold. Therefore, in evaluating the offering, you
should not assume that we will receive all of the proceeds from this offering
that we would receive if all the units are sold. If the offering is not fully
subscribed, the length of time we will be able to fund our operations with the
proceeds will be shortened, as we do not generate positive cash flow. In order
to continue to fund our operations, we would likely have to raise additional
proceeds through debt or equity financing activities. Any equity financings will
likely be dilutive to existing stockholders, and any debt financings will likely
involve covenants restricting our business activities. Additional financing may
not be available on acceptable terms, or at all.
FORWARD-LOOKING
STATEMENTS
Except
for historical facts, the statements in this prospectus are forward-looking
statements. Forward-looking statements are merely our current predictions of
future events. These statements are inherently uncertain, and actual events
could differ materially from our predictions. Important factors that could cause
actual events to vary from our predictions include those discussed under the
headings “Risk Factors,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Business.” We assume no obligation to
update our forward-looking statements to reflect new information or
developments. We urge readers to review carefully the risk factors described in
this prospectus and the other documents that we file with the Securities and
Exchange Commission. You can read these documents at www.sec.gov.
22
WE
UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, NEW EVENTS OR ANY OTHER
REASON, OR REFLECT ANY EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS PROSPECTUS
OR THE DATE OF ANY APPLICABLE PROSPECTUS SUPPLEMENT THAT INCLUDES
FORWARD-LOOKING STATEMENTS.
23
USE
OF PROCEEDS
We
estimate that the net proceeds to us from the sale of the securities that we are
offering, assuming gross proceeds of $ million
(which is the amount of gross proceeds received if the offering is fully
subscribed), will be approximately $ million,
after deducting the placement agent fees and estimated offering expenses. In
addition, if all of the warrants included in the units offered pursuant to this
prospectus are exercised in full for cash, we will receive approximately an
additional
$ million in
cash. However, the warrants contain a cashless exercise provision
that permit exercise of warrants only on a cashless basis at any time where
there is no effective registration statement under the Securities Act of 1933,
as amended, covering the issuance of the underlying shares. We do not
intend to maintain any such registration.
We may
not be successful in selling any or all of the securities offered hereby.
Because there is no minimum offering amount required as a condition to closing
in this offering, we may sell less than all of the securities offered hereby,
which may significantly reduce the amount of proceeds received by
us.
We expect
to use any proceeds received from this offering as follows:
•
|
to
fund our research and development activities, including the further
development of NOV-002 in breast cancer and other solid tumors;
and
|
|
•
|
for
general corporate purposes, such as general and administrative expenses,
capital expenditures, working capital, prosecution and maintenance of our
intellectual property and the potential investment in technologies or
products that complement our
business.
|
We have
no current understandings, commitments or agreements with respect to any
acquisition of or investment in any technologies or products.
Even if
we sell all of the securities subject to this offering on favorable terms, of
which there can be no assurance, we will still need to obtain additional
financing in the future in order to fully fund these product candidates through
the regulatory approval process. We may seek such additional financing through
public or private equity or debt offerings or other sources, including
collaborative or other arrangements with corporate partners, and through
government grants and contracts. There can be no assurance we will be able to
obtain such additional financing.
Although
we currently anticipate that we will use the net proceeds of this offering as
described above, there may be circumstances where a reallocation of funds may be
necessary. The amounts and timing of our actual expenditures will depend upon
numerous factors, including the progress of our development and
commercialization efforts, the progress of our clinical studies, whether or not
we enter into strategic collaborations or partnerships and our operating costs
and expenditures. Accordingly, our management will have significant flexibility
in applying the net proceeds of this offering.
The costs
and timing of drug development and regulatory approval, particularly conducting
clinical studies, are highly uncertain, are subject to substantial risks and can
often change. Accordingly, we may change the allocation of use of these proceeds
as a result of contingencies such as the progress and results of our clinical
studies and other development activities, the establishment of collaborations,
our manufacturing requirements and regulatory or competitive
developments.
Pending
the application of the net proceeds as described above or otherwise, we may
invest the proceeds in short-term, investment-grade, interest-bearing securities
or guaranteed obligations of the U.S. government or other
securities.
24
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock has been quoted on the OTC Bulletin Board under the symbol “NVLT”
since June 14, 2005. The following table provides, for the periods indicated,
the high and low bid prices for our common stock. These over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
Fiscal
Year 2008
|
High
|
Low
|
||||||
First
Quarter
|
$
|
0.82
|
$
|
0.43
|
||||
Second
Quarter
|
0.64
|
0.44
|
||||||
Third
Quarter
|
0.54
|
0.35
|
||||||
Fourth
Quarter
|
0.49
|
0.19
|
Fiscal
Year 2009
|
High
|
Low
|
||||||
First
Quarter
|
$
|
0.60
|
$
|
0.30
|
||||
Second
Quarter
|
0.90
|
0.34
|
||||||
Third
Quarter
|
0.98
|
0.57
|
||||||
Fourth
Quarter
|
2.90
|
0.65
|
Fiscal
Year 2010
|
High
|
Low
|
||||||
First
Quarter
|
$
|
3.05
|
$
|
0.17
|
||||
Second
Quarter
|
0.28
|
0.10
|
||||||
Third Quarter (through July 6, 2010) | 0.12 | 0.09 |
On
July 6, 2010, there were 90 holders of record of our common
stock. This number does not include stockholders for whom shares were
held in a “nominee” or “street” name.
We have
not declared or paid any cash dividends on our common stock and do not
anticipate declaring or paying any cash dividends in the foreseeable
future. We are prohibited from paying any dividends on common stock
as long as any shares of our Series E preferred stock are outstanding or as long
as there are accumulated but unpaid dividends on our Series C preferred
stock. We currently expect to retain future earnings, if any, for the
development of our business. As of March 31, 2010, accumulated
undeclared dividends totaled approximately $2,925,000.
Our
transfer agent and registrar is American Stock Transfer and Trust Company, 59
Maiden Lane, New York, NY 10038.
DILUTION
Our
reported net tangible book value as of March 31, 2010 was $(33,433), or $0.00
per share of common stock, based upon 90,502,606 shares outstanding as of that
date. Net tangible book value per share is determined by dividing such number of
outstanding shares of common stock into our net tangible book value, which is
our total tangible assets less total liabilities. After giving effect to the
sale of the securities offered in this offering at the offering price of
$ per unit, at March 31, 2010, after deducting
placement agent fees and other estimated offering expenses payable by us, our
net tangible book value at March 31, 2010 would have been
approximately , or
$ per share. This
represents an immediate increase in net tangible book value of approximately
$ per share to our
existing stockholders, and an immediate dilution of
$ per share to
investors purchasing securities in the offering.
25
The
following table illustrates the per share dilution to investors purchasing
securities in the offering:
Public
offering price per unit
|
$ | |||
Net
tangible book value per share as of March 31, 2010
|
$ | |||
Increase
per share attributable to sale of securities to investors
|
$ | |||
As
adjusted net tangible book value per share after the
offering
|
$ | |||
Dilution
per share to investors
|
$ | |||
Dilution
as a percentage of the offering price
|
|
%
|
The
foregoing illustration does not reflect potential dilution from the exercise of
outstanding options or warrants to purchase shares of our common stock, or from
conversions of our preferred stock. The
foregoing illustration also does not reflect the dilution that would result from
the warrants contemplated to be issued to our preferred stockholders in
connection with obtaining their consent to the proposed
offering. This additional dilution may be
substantial. Please see the risk factor entitled “The consent of our
preferred stockholders is required to complete the offering, and the terms of
this consent will likely result in significant dilution to our common
stockholders and may result in liquidated damages” on page 22 of this
prospectus.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis should be read together with our financial
statements and the related notes appearing elsewhere in this prospectus. This
discussion contains forward-looking statements reflecting our current
expectations that involve risks and uncertainties. See “Special Note Regarding
Forward-Looking Statements” for a discussion of the uncertainties, risks and
assumptions associated with these statements. Actual results and the timing of
events could differ materially from those discussed in our forward-looking
statements as a result of many factors, including those set forth under “Risk
Factors” and elsewhere in this prospectus.
Overview
We are a
biopharmaceutical company developing oxidized glutathione-based compounds for
the treatment of cancer and hepatitis. We are also seeking to expand
our product pipeline by licensing or acquiring clinical stage compounds or
technologies for oncology indications.
NOV-002,
our lead compound, is a small-molecule compound based on a proprietary
formulation of oxidized glutathione that has been administered to approximately
1,000 cancer patients in clinical trials and is in Phase 2 development for solid
tumors in combination with chemotherapy. According to Cancer Market
Trends (2008-2012, URCH Publishing), Datamonitor (July 3, 2006) and PharmaLive
(October 9, 2009), the global market for cancer pharmaceuticals reached an
estimated $66 billion in 2007, nearly doubling from $35 billion in 2005, and is
expected to grow to $80 billion by 2012.
From
November 2006 through January 2010, we conducted a Phase 3 trial of NOV-002 plus
first-line chemotherapy in advanced non-small cell lung cancer
(“NSCLC”). The Phase 3 trial enrolled 903 patients, 452 of whom
received NOV-002. On February 24, 2010, we announced that the primary
endpoint of improvement in overall survival compared to first-line chemotherapy
alone was not met in this pivotal Phase 3 trial of NOV-002 plus first-line
chemotherapy in advanced NSCLC. Following evaluation of the detailed
trial data, we announced on March 18, 2010 that the secondary endpoints also
were not met in the trial and that adding NOV-002 to paclitaxel and carboplatin
chemotherapy was not statistically or meaningfully different in terms of
efficacy-related endpoints or recovery from chemotherapy toxicity versus
chemotherapy alone. However, NOV-002 was safe and did not add to the overall
toxicity of chemotherapy. Based on the results from the Phase 3
trial, we have determined to discontinue development of NOV-002 for NSCLC in
combination with first-line paclitaxel and carboplatin
chemotherapy.
NOV-002
is being developed to treat early-stage breast cancer. In June 2007
we commenced enrollment in a U.S. Phase 2 neoadjuvant breast cancer trial, which
is ongoing at The University of Miami to evaluate the ability of NOV-002 to
enhance the effectiveness of chemotherapy in HER-2 negative
patients. An interim analysis of the trial was presented at the San
Antonio Breast Cancer Symposium in December 2008. Six pathologic
complete responses (“pCR”) occurred in the first 15 women (40%) who completed
chemotherapy and underwent surgery, which is a much higher rate than the
historical control of less than 20% pCR in this patient
population. Furthermore, patients experienced decreased hematologic
toxicities. We expect to present results from this trial in the third
quarter of 2010.
26
NOV-002
is also being developed to treat chemotherapy-resistant ovarian
cancer. In a U.S. Phase 2 chemotherapy-resistant ovarian cancer trial
at Massachusetts General Hospital and Dana-Farber Cancer Institute from July
2006 through May 2008, NOV-002, in combination with carboplatin, slowed
progression of the disease in 60% of evaluable patients (nine out of 15
women). The median progression-free survival was 15.4 weeks, almost
double the historical control of eight weeks. Furthermore, patients
experienced decreased hematologic toxicities. These results were
presented at the American Society of Clinical Oncology in May 2008.
NOV-205,
our second glutathione-based compound, acts as a hepatoprotective agent with
immunomodulating and anti-inflammatory properties. NOV-205 has been
administered to approximately 200 hepatitis patients in clinical trials and is
in Phase 2 development for chronic hepatitis C non-responders. An
Investigational New Drug Application (“IND”) for NOV-205 as a monotherapy for
chronic hepatitis C was accepted by the FDA in 2006. A U.S. Phase 1b
clinical trial with NOV-205 in patients who previously failed treatment with
pegylated interferon plus ribavirin was completed in December
2007. Based on favorable safety results of that trial, in March 2010
we initiated a multi-center U.S. Phase 2 trial evaluating NOV-205 as monotherapy
in up to 40 chronic hepatitis C genotype 1 patients who previously failed
treatment with pegylated interferon plus ribavirin. We expect to have
preliminary results from this longer duration, proof-of-concept trial in the
third quarter of 2010.
As
evidenced by our Phase 3 trial in NSCLC, although promising Phase 2 results may
advance the clinical development of compounds, such results are not necessarily
determinative that the efficacy and safety of the compounds will be successfully
demonstrated in a Phase 3 clinical trial.
Both
compounds have completed clinical trials in humans and have been approved for
use in Russia, where they were originally developed. We own all
intellectual property rights worldwide (excluding Russia and other states of the
former Soviet Union (the “Russian Territory”), but including Estonia, Latvia and
Lithuania) related to compounds based on oxidized glutathione, including NOV-002
and NOV-205. Our patent portfolio includes six U.S. issued patents,
two European issued patents and one Japanese issued patent.
We
entered into a collaboration agreement with Mundipharma International
Corporation Limited (“Mundipharma”) to develop, manufacture and commercialize
NOV-002 in Europe, excluding the Russian Territory, most of Asia (other than
China, Hong Kong, Taiwan and Macau, the “Chinese Territory”) and
Australia. We have a collaboration agreement with Lee’s
Pharmaceutical (HK) Ltd. (“Lee’s Pharm”) to develop, manufacture and
commercialize NOV-002 and NOV-205 in the Chinese Territory. We expect
that the negative results of our Phase 3 trial in advanced NSCLC will adversely
affect development and commercialization of NOV-002 under the collaboration
agreements.
Results
of Operations
Revenue.
Revenue consists of amortization of license fees received in connection with
partner agreements and income received from a grant from the U.S. Department of
Health and Human Services.
Research
and development
expense. Research and development expense consists of costs incurred in
identifying, developing and testing product candidates, which primarily consist
of salaries and related expenses for personnel, fees paid to professional
service providers for independent monitoring and analysis of our clinical
trials, costs of contract research and manufacturing and costs to secure
intellectual property. We are currently developing two proprietary compounds,
NOV-002 and NOV-205. To date, most of our research and development costs have
been associated with our NOV-002 compound.
General and
administrative expense. General and administrative expense consists
primarily of salaries and other related costs for personnel in executive,
finance and administrative functions. Other costs include facility costs,
insurance, costs for public and investor relations, directors’ fees and
professional fees for legal and accounting services.
27
Quarters
Ended March 31, 2010 and 2009
Revenue. During
the three months ended March 31, 2010 and 2009, we recognized $8,000 in license
fees in each of the three-month periods in connection with our collaboration
agreement with Lee’s Pharm. During the three months ended March 31,
2009, we also recognized $23,000 in grant revenue related to a grant received
from the U.S. Department of Health and Human Services. The related
costs are included as a component of research and development expense in that
period.
Research and
Development. Research and development expense for the three
months ended March 31, 2010 was $1,911,000, compared to $1,784,000 for the same
period in 2009. The $127,000, or 7%, increase in research and
development expense was due to a combination of factors. In
anticipation of the results of our Phase 3 clinical trial of NOV-002 in advanced
NSCLC, announced in February 2010, we increased certain preclinical research and
manufacturing activities in preparation of a possible filing of a new drug
application later in 2010. As a result, consulting costs related to preclinical
and manufacturing work increased by $922,000. In addition, clinical
development costs for NOV-205 increased by $107,000 as a result of the
commencement, in March 2010, of a Phase 2 trial evaluating NOV-205 in chronic
hepatitis patients. These increased costs were partially offset by a
$687,000 decrease in clinical development costs for NOV-002 as a result of the
completion of the Phase 3 trial in February 2010. Stock based compensation
decreased $193,000 as a result of the decline in our stock price following the
Phase 3 trial results. Salaries and overhead costs declined by $22,000 as a
result of efforts to contain costs.
General and
Administrative. General and administrative expense for the
three months ended March 31, 2010 was $645,000 compared to $476,000 in the same
period in 2009. The $169,000, or 36%, increase is due to a number of
factors. First, professional fees increased by $135,000 principally due to
increased corporate legal costs relating to the resale and registration of our
securities. Overhead costs increased by $64,000 principally resulting
from an increase in liability insurance premium costs. These
increases were offset in part by a $30,000 decrease in stock compensation
following a decline in our stock price in the first quarter of
2010.
Gain on Derivative
Warrants. Effective January 1, 2009, we adopted the guidance
of Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC), Topic 815-40, Derivatives and Hedging and,
as a result, we recorded a gain on derivative warrants of $7,897,000 and
$412,000 during the three months ended March 31, 2010 and 2009,
respectively. This amount represents the decrease in fair value,
during the respective periods, of outstanding warrants which contain
“down-round” anti-dilution provisions whereby the number of shares for which the
options are exercisable and/or the exercise price of the warrants is subject to
change in the event of certain issuances of stock at prices below the
then-effective exercise prices of the warrants. The large decrease in
value of the liability during the three months ended March 31, 2010 is a result
of the significant drop in our stock price following the announcement of
negative Phase 3 Trial results on February 24, 2010. This gain is not taxable;
accordingly, no tax provision has been recorded.
Preferred Stock
Dividends. During the three months ended March 31, 2010, we
accrued $657,000 in dividends with respect to our Series C and E preferred
stock. During the three months ended March 31, 2009, we accrued
$768,000 in dividends with respect to our Series C, D and E preferred
stock. On February 11, 2009, all shares of Series D preferred stock
and accrued dividends thereon totaling $1,597,000 (including $202,000 that
accrued during 2009 prior to the exchange) were exchanged for approximately
445.5 shares of Series E preferred stock. During the three months
ended March 31, 2009, we also recorded deemed dividends on preferred stock
totaling $714,000. This amount was recorded in connection with the
financing that occurred in February 2009 and represents the value attributed to
the modification of certain warrants less the net adjustment required to record
the newly issued shares of Series E preferred stock at fair value.
Years
Ended December 31, 2009 and 2008
Revenue. During the years
ended December 31, 2009 and 2008, we recognized $33,000 in license fees in each
year in connection with our collaboration agreement with Lee’s Pharm. During the
years ended December 31, 2009 and 2008, we also recognized $63,000 and $93,000,
respectively, in grant revenue related to a grant received from the U.S.
Department of Health and Human Services. The related costs are included as a
component of research and development expense.
28
Research and Development.
Research and development expense for the year ended December 31, 2009 was
$8,080,000, compared to $14,527,000 for the same period in 2008. The $6,447,000,
or 44%, decrease in research and development expense was due to a combination of
factors. In March 2008, we reached the enrollment target for our Phase 3
clinical trial of NOV-002, and an increasing number of patients completed their
treatment regimen throughout 2008. In February 2010 the trial concluded. As a
result, certain clinical costs have leveled off or declined. Contract research
services such as those related to clinical research organizations, consultants
and central laboratory services decreased by $3,370,000. Clinical investigator
expenses, which are affected by the number of patients that remain on treatment,
decreased by $2,134,000. The cost of chemotherapy drug to be provided to
patients in Europe decreased by $1,717,000. Salaries and overhead costs
decreased by $199,000 resulting from actions taken to reduce discretionary
spending in order to conserve cash. These decreases were offset by a $680,000
increase in drug manufacturing and related costs as we undertook manufacturing
activities in preparation for the possible filing of a new drug application in
2010. Stock compensation expense also increased by $293,000.
General and Administrative.
General and administrative expense for the year ended December 31, 2009 was
$2,182,000. We recorded general and administrative expense of $2,190,000 for the
same period in 2008. However, during the year ended December 31, 2008 we
recorded a $404,000 credit to account for a waiver of potential liquidated
damages associated with registration rights agreements. We had previously
accrued an estimate for such damages in 2007. Without this $404,000 credit,
general and administrative expense during the year ended December 31, 2008 would
have been $2,594,000, representing a decrease of $412,000, or 16%, during the
year ended December 31, 2009 compared to the same period in the prior year. This
decrease is due principally to a $256,000 decrease in professional fees and a
$274,000 decrease in salaries and overhead costs, resulting from actions taken
to reduce discretionary spending in order to conserve cash. The decrease was
partially offset by an increase in stock-based compensation of
$118,000.
Interest Income. Interest
income for the year ended December 31, 2009 was $1,000 compared to $131,000 for
the same period in 2008. Beginning in March 2009, our cash was on deposit in a
non-interest bearing account that is fully insured by the FDIC.
Loss on Derivative Warrants.
Effective January 1, 2009, we adopted the guidance of Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC), Topic 815-40,
Derivatives and Hedging
and, as a result, we recorded a loss on derivative warrants of $12,114,000
during the year ended December 31, 2009. This amount represents the increase in
fair value, during the year ended December 31, 2009, of outstanding warrants
which contain “down-round” anti-dilution provisions whereby the number of shares
for which the options are exercisable and/or the exercise price of the warrants
is subject to change in the event of certain issuances of stock at prices below
the then-effective exercise prices of the warrants. During the year ended
December 31, 2009, an aggregate of 2,084,308 shares of our common stock with a
fair value of $1,626,000 was issued in exchange for the tender of certain of
these warrants. The difference of $517,000 between the fair value of the
warrants at the date of exchange and the fair value of the common stock issued
to settle the derivative liability has been included as a component of the loss
on derivatives in the year ended December 31, 2009.
Preferred Stock Dividends.
During the year ended December 31, 2009, we accrued $3,296,000 in dividends with
respect to our Series C, D and E preferred stock. On February 11, 2009, all
shares of Series D preferred stock and accrued dividends thereon totaling
$1,597,000 (including $202,000 that accrued during 2009 prior to the exchange)
were exchanged for approximately 445.5 shares of Series E preferred stock. The
remaining accrued dividends have not been paid. During the year ended December
31, 2009, we also recorded deemed dividends on preferred stock totaling
$714,000. This amount was recorded in connection with the financing that
occurred in February 2009 and represents the value attributed to the
modification of certain warrants less the net adjustment required to record the
newly issued shares of Series E preferred stock at fair value, as described in
Note 6 to the financial statements.
29
During
the year ended December 31, 2008 we paid cash dividends to Series B and C
preferred stockholders of $740,000 and accrued $1,689,000 of dividends due to
our Series C and D preferred stockholders. The accrued dividends were not paid
because we did not have legally available funds for the payment of dividends
under Delaware corporate law. In February 2009, all outstanding shares of Series
D preferred stock and associated rights, including accrued dividends totaling
$1,597,000 ($1,396,000 of which had accrued at December 31, 2008) were exchanged
for 445.5 shares of Series E preferred stock. During the year ended December 31,
2008 we also recorded deemed dividends to preferred stockholders totaling
$4,417,000. This amount represents the value attributed to the reduction in
exercise and conversion prices of the warrants and preferred stock issued in May
2007 in connection with the financing that occurred in April 2008, as described
in Note 6 to the financial statements.
The
deemed dividends, cash dividends and accrued dividends have been included in the
calculation of net loss attributable to common stockholders of $26,284,000, or
$0.53 per share, for the year ended December 31, 2009 and $22,961,000, or $0.56
per share, for the year ended December 31, 2008. The deemed dividends and cash
dividends are excluded from our net loss (from operating activities) of
$22,273,000, or $0.45 per share, for the year ended December 31, 2009 and
$16,451,000, or $0.40 per share, for the year ended December 31,
2008.
Liquidity
and Capital Resources
We have
financed our operations since inception through the sale of securities and the
issuance of debt (which was subsequently paid off or converted into equity). As
of March 31, 2010, we had $5,612,000 in cash and equivalents.
During
the three months ended March 31, 2010, approximately $3,315,000 in cash was used
in operations. We reported $5,350,000 in net income, which included the
following non-cash items: a $7,897,000 gain on derivative warrants; a $97,000
credit recorded for stock-based compensation; and $27,000 in depreciation and
amortization expense. After adjustment for these non-cash items, we used
$642,000 in cash for payment of accounts payable and accrued liabilities. Other
changes in working capital used cash of $56,000.
During
the three months ended March 31, 2010, we received $157,000 upon the exercise of
stock options.
On
February 24, 2010, we announced that our Phase 3 clinical trial for NOV-002 in
NSCLC (the “Phase 3 Trial”) did not meet its primary endpoint of a statistically
significant increase in median overall survival. On March 18, 2010, we announced
that the secondary endpoints had also not been met in the Phase 3 Trial and that
we had discontinued development of NOV-002 for NSCLC in combination with
first-line paclitaxel and carboplatin chemotherapy.
We are
continuing development of NOV-002 in cancer indications other than NSCLC,
continuing development of NOV-205 in hepatitis and are seeking to expand our
product pipeline by acquiring or licensing clinical stage compounds or
technologies for oncology indications. We expect that these activities, together
with general and administrative costs, will result in continuing operating
losses for the foreseeable future. We believe that we have adequate cash to fund
these ongoing activities into January 2011. Our ability to execute our operating
plan beyond January 2011 is dependent on our ability to obtain additional
capital, during 2010, principally through the sale of equity and/or debt
securities. The negative outcome of the Phase 3 Trial, as well as continuing
difficult conditions in the capital markets globally, may adversely affect our
ability to obtain funding in a timely manner. If we are unable to obtain
additional funding, we will be required, beginning in September 2010, to scale
back our administrative and clinical development activities and may be required
to cease our operations entirely. Even if we do obtain additional funding
(including through this offering) we will need to obtain further funding in the
future in order to operate our business. We plan to continue to actively pursue
financing alternatives, but there can be no assurance that we will obtain the
capital we require to continue our operations. If the offering contemplated in
this prospectus is fully subscribed, we believe the proceeds would be sufficient
for us to continue our operations only through late 2011, although there can be
no assurance the offering will be fully subscribed. In the interim, we are
continuously evaluating measures to reduce our costs to preserve existing
capital.
30
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States, or GAAP, requires
management to make certain estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities as of the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
periods presented. Actual results could differ from those estimates. We review
these estimates and assumptions periodically and reflect the effects of
revisions in the period that they are determined to be necessary.
We
believe that the following accounting policies reflect our more significant
judgments and estimates used in the preparation of our financial
statements.
Accrued Liabilities. As part
of the process of preparing financial statements, we are required to estimate
accrued liabilities. This process involves identifying services that have been
performed on our behalf, and estimating the level of service performed and the
associated cost incurred for such service as of each balance sheet date in our
financial statements. Examples of estimated expenses for which we accrue
include: contract service fees such as amounts paid to clinical research
organizations and investigators in conjunction with clinical trials; fees paid
to contract manufacturers in conjunction with the production of clinical
materials; and professional service fees, such as for lawyers and accountants.
In connection with such service fees, our estimates are most affected by our
understanding of the status and timing of services provided relative to the
actual levels of services incurred by such service providers. The majority of
our service providers invoice us monthly in arrears for services performed. In
the event that we do not identify certain costs that have begun to be incurred,
or we over- or underestimate the level of services performed or the costs of
such services, our reported expenses for such period would be too high or too
low. The date on which certain services commence, the level of services
performed on or before a given date and the cost of such services are often
determined based on subjective judgments. We make these judgments based on the
facts and circumstances known to us in accordance with GAAP.
Stock-based Compensation. We
account for stock-based compensation in accordance with FASB ASC Topic 740,
Compensation, Stock
Compensation which requires measurement of the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. That cost is recognized over the period during which an
employee is required to provide service in exchange for the award, the requisite
service period (usually the vesting period). We account for transactions in
which services are received from non-employees in exchange for equity
instruments based on the fair value of such services received or of the equity
instruments issued, whichever is more reliably measured, in accordance with the
guidance of FASB ASC Topic 740 and FASB ASC Topic 505, Equity.
Accounting
for equity instruments granted or sold by us under accounting guidance requires
fair-value estimates of the equity instrument granted or sold. If our estimates
of the fair value of these equity instruments are too high or too low, our
expenses may be over- or understated. For equity instruments granted or sold in
exchange for the receipt of goods or services, we estimate the fair value of the
equity instruments based on consideration of factors that we deem to be relevant
at that time.
Derivative Warrants. Starting
January 1, 2009, certain warrants to purchase common stock that do not meet the
requirements for classification as equity, in accordance with the Derivatives
and Hedging Topic of the FASB ASC, are now classified as liabilities on our
balance sheet. In such instances, net-cash settlement is assumed for financial
reporting purposes, even when the terms of the underlying contracts do not
provide for a net-cash settlement. These warrants are considered derivative
instruments as the agreements contain “down-round” provisions whereby the number
of shares for which the warrants are exercisable and/or the exercise price of
the warrants is subject to change in the event of certain issuances of stock at
prices below the then-effective exercise price of the warrants. The primary
underlying risk exposure pertaining to the warrants is the change in fair value
of the underlying common stock. Such financial instruments are initially
recorded at fair value, or relative fair value when issued with other
instruments, with subsequent changes in fair value recorded as a component of
gain or loss on derivatives in each reporting period.
The fair
value of the outstanding derivative warrants is estimated as of a reporting date
using a Black-Scholes pricing model. The significant assumptions used to
estimate the fair value include the market price of our common stock at the
reporting date, an estimated volatility rate, the remaining term of the warrant
and a risk-free interest rate that corresponds to the remaining term. We
estimate volatility based on an average of our historical volatility and
volatility estimates of publicly held drug development companies with similar
market capitalizations. If our estimates of the fair value of these derivative
warrants are too high or too low, our expenses may be over- or
understated.
31
BUSINESS
Overview
We are a
biopharmaceutical company developing oxidized glutathione-based compounds for
the treatment of cancer and hepatitis. We are also seeking to expand our product
pipeline by licensing or acquiring clinical stage compounds or technologies for
oncology indications.
NOV-002,
our lead compound, is a small-molecule compound based on a proprietary
formulation of oxidized glutathione that has been administered to approximately
1,000 cancer patients in clinical trials and is in Phase 2 development for solid
tumors in combination with chemotherapy. According to Cancer Market Trends
(2008-2012, URCH Publishing), Datamonitor (July 3, 2006) and PharmaLive (October
9, 2009), the global market for cancer pharmaceuticals reached an estimated $66
billion in 2007, nearly doubling from $35 billion in 2005 and is expected to
grow to $80 billion by 2012.
From
November 2006 through January 2010, we conducted a Phase 3 trial of NOV-002 plus
first-line chemotherapy in advanced non-small cell lung cancer (“NSCLC”)
following three Phase 2 trials (two conducted in Russia and one conducted by us
in the U.S.) that had demonstrated clinical activity and safety. The Phase 3
trial enrolled 903 patients, 452 of whom received NOV-002. In February 2010, we
announced that the primary endpoint of improvement in overall survival compared
to first-line chemotherapy alone was not met in this pivotal Phase 3 trial.
Following evaluation of the detailed trial data, we announced in March 2010 that
the secondary endpoints also were not met in the trial and that adding NOV-002
to paclitaxel and carboplatin chemotherapy was not statistically or meaningfully
different in terms of efficacy-related endpoints or recovery from chemotherapy
toxicity versus chemotherapy alone. However, NOV-002 was safe and did not add to
the overall toxicity of chemotherapy. Based on the results from the Phase 3
trial, we have determined to discontinue development of NOV-002 for NSCLC in
combination with first-line paclitaxel and carboplatin chemotherapy. These
results were presented at the annual meeting of the American Society of Clinical
Oncology in June 2010.
NOV-002
is being developed to treat early-stage breast cancer. In June 2007 we commenced
enrollment in a U.S. Phase 2 neoadjuvant breast cancer trial, which is ongoing
at The University of Miami to evaluate the ability of NOV-002 to enhance the
effectiveness of chemotherapy in HER-2 negative patients. An interim analysis of
the trial was presented at the San Antonio Breast Cancer Symposium in December
2008. Six pathologic complete responses (“pCR”) occurred in the first 15 women
(40%) who completed chemotherapy and underwent surgery, which is a much higher
rate than the historical control of less than 20% pCR in this patient
population. Patients experienced decreased hematologic toxicities. We expect to
present results from this trial in the third quarter of 2010.
NOV-002
is also being developed to treat chemotherapy-resistant ovarian cancer. In a
U.S. Phase 2 chemotherapy-resistant ovarian cancer trial at Massachusetts
General Hospital and Dana-Farber Cancer Institute from July 2006 through May
2008, NOV-002, in combination with carboplatin, slowed progression of the
disease in 60% of evaluable patients (nine out of 15 women). The median
progression-free survival was 15.4 weeks, almost double the historical control
of eight weeks. Furthermore, patients experienced decreased hematologic
toxicities. These results were presented at the American Society of Clinical
Oncology in May 2008.
NOV-205,
our second glutathione-based compound, acts as a hepatoprotective agent with
immunomodulating and anti-inflammatory properties. NOV-205 has been administered
to approximately 200 hepatitis patients in clinical trials and is in Phase 2
development for chronic hepatitis C non-responders. An Investigational New Drug
Application (“IND”) for NOV-205 as a monotherapy for chronic hepatitis C was
accepted by the FDA in 2006. A U.S. Phase 1b clinical trial with NOV-205 in
patients who previously failed treatment with pegylated interferon plus
ribavirin was completed in December 2007. Based on favorable safety results of
that trial, in March 2010 we initiated a multi-center U.S. Phase 2 trial
evaluating NOV-205 as monotherapy in up to 40 chronic hepatitis C genotype 1
patients who previously failed treatment with pegylated interferon plus
ribavirin. We expect to have preliminary results from this longer duration,
proof-of-concept trial in the third quarter of 2010.
32
As
evidenced by our Phase 3 trial in NSCLC, although promising Phase 2 results may
advance the clinical development of compounds, such results are not necessarily
determinative that the efficacy and safety of the compounds will be successfully
demonstrated in a Phase 3 clinical trial.
Both
compounds have completed clinical trials in humans and have been approved for
use in Russia, where they were originally developed. We own all intellectual
property rights worldwide (excluding Russia and other states of the former
Soviet Union (the “Russian Territory”), but including Estonia, Latvia and
Lithuania) related to compounds based on oxidized glutathione, including NOV-002
and NOV-205. Our patent portfolio includes six U.S. issued patents, two European
issued patents and one Japanese issued patent.
We
entered into a collaboration agreement with Mundipharma International
Corporation Limited (“Mundipharma”) to develop, manufacture and commercialize
NOV-002 in Europe excluding the Russian Territory, most of Asia (other than
China, Hong Kong, Taiwan and Macau, the “Chinese Territory”) and Australia. We
have a collaboration agreement with Lee’s Pharmaceutical (HK) Ltd. (“Lee’s
Pharm”) to develop, manufacture and commercialize NOV-002 and NOV-205 in the
Chinese Territory. We expect that the negative results of our Phase 3 trial in
advanced NSCLC will adversely affect development and commercialization of
NOV-002 under the collaboration agreements.
Corporate
History
We were
incorporated in June 1996 as AVAM International, Inc. In October 1998, Novelos
Therapeutics, Inc., a newly incorporated entity, merged into AVAM, and the name
of AVAM was changed to Novelos Therapeutics, Inc. In 2005, we completed a
two-step reverse merger with Common Horizons, Inc., and its wholly-owned
subsidiary Nove Acquisition, Inc. Following the merger, the surviving
corporation was Novelos Therapeutics, Inc.
Business
Strategy
Our
current objective is to develop pharmaceuticals for the treatment of cancer and
other life-threatening diseases, such as hepatitis. To date, we have exploited
our intellectual property portfolio based on oxidized glutathione, resulting in
the development of our lead compound, NOV-002, for cancers and our second
product candidate, NOV-205, for hepatitis. Although we experienced negative
results with NOV-002 in our Phase 3 trial in NSCLC, we are continuing NOV-002
Phase 2 development in other cancer indications. In addition, we are seeking to
build a pipeline through licensing or acquiring clinical stage compounds or
technologies for oncology indications.
Technology
Overview
NOV-002
and NOV-205 are both proprietary formulations of oxidized glutathione (GSSG).
NOV-002 is a formulation of GSSG in a 1000:1 molar ratio with cisplatin, which
increases the bioavailability of GSSG in vivo. NOV-205 is a
formulation of GSSG in a 1:1 molar ratio with inosine, a known anti-inflammatory
agent.
In some
clinical trials conducted to date, relative to standard chemotherapy alone,
administration of NOV-002 in combination with standard chemotherapy has resulted
in both increased efficacy (longer survival or improved anti-tumor response) and
mitigation of chemotherapy-induced toxicity (e.g., hematological toxicity).
Non-clinical studies suggest that this clinical profile may be due to multiple
effects exerted on both tumor cells and normal cells resulting from the
modulation of the cellular oxidation/reduction redox state. These results were
not demonstrated in our Phase 3 trial in advanced NSCLC in combination with
paclitaxel and carboplatin.
33
Studies
published between 2005 and 2009 (Free Radical Research, June 2005; Current
Opinion on Pharmacology, 2007; Free Radical Biology and Medicine, 2007; and
Trends in Biochemical Sciences, 2009) have demonstrated that the glutathione
system is not only involved in cell detoxification (via reduced glutathione) but
is also an important regulator of protein and cell function (via GSSG). An
increasing number of cell processes and proteins have been shown to be regulated
by their redox environment. Specifically, under oxidative conditions, or simply
in the presence of GSSG, they undergo a structural change termed
glutathionylation whereby a molecule of glutathione is covalently attached to
reactive thiol groups in the protein. Glutathionylation modulates protein
function, either increasing or decreasing it, and as a reversible modification
serves as a regulatory mechanism analogous to protein
phosphorylation/dephosphorylation.
In vitro and in vivo experiments have
shown:
|
·
|
When added to cells, NOV-002
results in generation of a mild and transient oxidative signal at the cell
surface and intracellularly, glutathionylation of redox-sensitive proteins
and a range of biochemical/molecular effects that are dependent on cell
type and status, leading to alteration of cell
functions.
|
|
·
|
In tumor cells, redox modulation
by NOV-002 has been shown to decrease the rate of tumor cell
proliferation. For example, in a human ovarian tumor cell line (SKOV3),
NOV-002 induced an intracellular oxidative signal (as evidenced by
generation of reactive oxygen species), increased levels of active (i.e.
phosphorylated) c-Jun N-terminal kinases (a component of cell signaling
pathways regulating proliferation) and decreased the rate of tumor cell
proliferation. This was also accompanied by increased tumor cell
apoptosis.
|
|
·
|
Also in tumor cells, NOV-002
decreased signaling through a redox-regulated pathway known to control
cell migration, invasiveness and metastasis and inhibited invasiveness of
a variety of human tumor cell
types.
|
|
·
|
In animal tumor models, NOV-002
has been shown to increase anti-tumor immune responsiveness and to inhibit
tumor growth and enhance survival when combined with
chemotherapy.
|
|
In a mouse model of colon cancer,
NOV-002 significantly increased anti-tumor response and survival when
combined with chemotherapy
(cyclophosphamide).
|
|
o
|
In a mouse model of melanoma
where animals were treated with a form of immunotherapy (adoptive T cell
transfer) together with chemotherapy (cyclophosphamide) the addition of
NOV-002 significantly reduced the rate of tumor growth and increased
survival.
|
|
o
|
In a mouse ovarian cancer model,
animals treated with NOV-002 alone showed a significantly increased
tumor-specific cellular immune response (interferon gamma production)
compared to control mice treated with a saline
vehicle.
|
|
·
|
In contrast to these suppressive
effects on tumors, similar redox modulation, protein glutathionylation and
cell signaling pathway effects from NOV-002 treatment resulted in
increased proliferation in myeloid lineage cells such as HL-60 cells.
Furthermore, in
vivo, NOV-002
treatment of chemosuppressed mice (using cyclophosphamide) led to
increased total bone marrow cell number and proliferation of multi-lineage
bone marrow progenitor cells (i.e., progenitor cells for white cells, red
cells and platelets).
|
NOV-205
and NOV-002 have in common GSSG as an active pharmaceutical ingredient. Clinical
and non-clinical results indicate that NOV-205 also possesses immunomodulatory
activity, and in animal models of chemical- and viral-induced hepatic injury,
NOV-205 increased survival. In addition, based on literature reports, the
inosine component of NOV-205 is believed to contribute anti-inflammatory
activity to its pharmacological profile.
Although
these pre-clinical findings with NOV-002 and NOV-205 demonstrated favorable
biological signals in cell and animal models, there can be no assurance that
pre-clinical findings are predictive of clinical trial results. While some
promising pre-clinical findings may have been supported in Phase 2 trials
conducted to date, they were not supported in our recently concluded Phase 3
clinical trial with NOV-002.
34
Products
in Development
NOV-002
NOV-002
is an injectable small-molecule compound based on a proprietary formulation of
oxidized glutathione, or “GSSG” in a 1000:1 ratio of GSSG with cisplatin, which
improves the bioavailability of NOV-002 in vivo. NOV-002 is believed
to act as a chemopotentiator and a chemoprotectant by regulating redox-sensitive
cell signaling pathways. NOV-002 has been administered to approximately 1,000
cancer patients in clinical trials. NOV-002 has an extensive safety database and
has been shown to be well-tolerated. Moreover, NOV-002 can be distinguished from
other pharmaceuticals on the market or in development because, in several
clinical trials, NOV-002 displayed a unique profile of safety, potentiation of
chemotherapy (increased survival rates and/or better anti-tumor effects) and
improved recovery from chemotherapy toxicity. This profile was not observed in
the recently concluded Phase 3 trial in NSCLC. Based on the totality of
available clinical trial results, NOV-002 does not appear to be chemotherapy or
tumor specific, though it may prove to be more effective in some solid tumor
indications than others and/or in combination with certain chemotherapies across
these indications.
NOV-002
is currently being developed for use in combination with standard of care
chemotherapies for the treatment of solid tumors.
NOV-002
in NSCLC
We
announced in February 2010 that the primary endpoint of improvement in overall
survival was not met in our pivotal Phase 3 trial of NOV-002 in advanced NSCLC.
Following evaluation of the detailed trial data, we announced in March 2010 that
the secondary endpoints also were not met in the trial. Adding NOV-002 to
paclitaxel and carboplatin chemotherapy was not statistically or meaningfully
different in terms of efficacy-related endpoints or recovery from chemotherapy
toxicity versus chemotherapy alone. NOV-002 was safe, as it did not add to the
overall toxicity of chemotherapy. Detailed results of this Phase 3 trial were
presented at the 2010 annual meeting of the American Society of Clinical
Oncology in June 2010.
This
randomized, controlled, open-label Phase 3 trial was conducted under a Special
Protocol Assessment and Fast Track designation, enrolled 903 patients with stage
IIIb/IV NSCLC, and included all histological subtypes. The trial, conducted
across approximately 100 clinical sites in 12 countries, evaluated NOV-002 in
combination with first-line paclitaxel and carboplatin chemotherapy (in 452
patients) versus paclitaxel and carboplatin alone. The primary efficacy endpoint
of the trial was improvement in overall survival. The secondary endpoints
included progression-free survival, response rate and duration of response,
recovery from chemotherapy-induced myelosuppression, determination of
immunomodulation, quality of life and safety. Based on the results from the
Phase 3 trial, we have determined to discontinue development of NOV-002 for
NSCLC in combination with first-line paclitaxel and carboplatin
chemotherapy.
We
commenced the Phase 3 trial in November 2006 following three previously
conducted Phase 2 trials (two conducted in Russia and one conducted by us in the
U.S.) that had demonstrated clinical activity and safety of NOV-002 in
combination with first-line chemotherapy in advanced NSCLC.
Advanced
NSCLC is an indication which is very difficult to treat. Platinum-based
chemotherapy regimens are standard first-line treatment for advanced NSCLC
patients who are subject to serious chemotherapy-induced adverse effects.
According to results of 12 Phase 3 clinical trials published from 2001-2008, the
one-year survival rate for patients receiving paclitaxel and carboplatin
first-line therapy was approximately 40%, the weighted average for median
survival was 9.7 months and the objective tumor response (defined as greater
than 30% tumor shrinkage) rate was about 27%. Overall, fewer than 5% of advanced
NSCLC patients survive five years following diagnosis. Improving on the standard
of care in unselected advanced NSCLC remains challenging and elusive.
Approximately 20 Phase 3 first-line trials have failed in NSCLC, including some
drugs that are on the market for other cancer indications. The compounds that
went into these Phase 3 trials had promising Phase 2 results. Furthermore, the
two compounds that did demonstrate a statistically significant improvement in
survival in advanced NSCLC when added to first-line chemotherapy, did not
succeed when combined with other first-line chemotherapy
agents.
35
NOV-002
in Neoadjuvant Treatment of Breast Cancer
We are
developing NOV-002 to treat early-stage breast cancer in combination with
chemotherapy. Breast cancer remains a serious public health concern throughout
the world. According to the American Cancer Society, approximately 192,000 women
in the U.S. were expected to be diagnosed with breast cancer in 2009, and
approximately 41,000 were expected to die from the disease. Neoadjuvant or
preoperative systemic chemotherapy is commonly employed in patients with locally
advanced stage-III breast cancer and in some patients with stage-II tumors.
Administration of neoadjuvant chemotherapy reduces tumor size, thus enabling
breast conservation surgery in patients who otherwise would require a
mastectomy. Furthermore, several studies have shown that pathologic complete
response (pCR) following neoadjuvant chemotherapy is associated with a
significantly higher probability of long-term survival. However, only a small
fraction of patients with HER-2 negative breast cancer achieve a pCR with
standard chemotherapy.
A U.S.
Phase 2 trial to evaluate the ability of NOV-002 to enhance the effectiveness of
such chemotherapy while diminishing side-effects commenced in June 2007 at the
Medical University of South Carolina (MUSC) Hollings Cancer Center. The trial is
currently ongoing at the Braman Family Breast Cancer Institute at the Sylvester
Comprehensive Care Center University of Miami Miller School of Medicine
(Sylvester). Alberto Montero, MD, Assistant Professor of Medicine at Sylvester,
is the Principal Investigator. The primary objective of this open-label,
single-arm trial is to determine if preoperative administration of NOV-002 in
combination with eight cycles of chemotherapy (four of doxorubicin and
cyclophosphamide followed by four of docetaxel) results in an appreciably higher
pCR rate than expected with this same chemotherapeutic regimen alone. According
to the Simon two-stage trial design, if four or more pCRs were observed in the
first stage of the trial (19 women), enrollment would continue into the second
stage, for a total of 46 women.
As of
December 2008, 19 women had been enrolled, with six pCRs already demonstrated in
the first 15 women (40%) who completed chemotherapy and underwent surgery, which
is much greater than the less than 20% historical expectation in HER-2 negative
patients. Furthermore, NOV-002 was associated with decreased hematologic
toxicities and with decreased use of growth factors, such as
Ethropoiesis-Stimulating Agents, which are potentially harmful, relative to
historical experience. Details of these interim results were presented at the
San Antonio Breast Cancer Symposium in December 2008. Having achieved its
interim efficacy target even earlier than targeted, the trial has advanced into
the second stage. Overall, the trial objective is to achieve twelve pCRs out of
46 patients. We expect data from the trial to be available in the third quarter
of 2010.
NOV-002
in Chemotherapy (Platinum)-Resistant Ovarian Cancer
We are
also developing NOV-002 to treat platinum-resistant ovarian cancer. According to
the American Cancer Society, approximately 22,000 U.S. women were expected to be
diagnosed with ovarian cancer in 2009 and 15,000 women are expected to die from
it. There is a lack of effective treatment, particularly in the case of patients
who are chemotherapy refractory (those who do not respond to chemotherapy) or
resistant (those who relapse shortly after receiving chemotherapy).
First-line
chemotherapy treatment is typically the same in ovarian cancer as in NSCLC,
i.e., carboplatin and paclitaxel chemotherapy in combination. Doxorubicin and
topotecan alternate as second- and third-line chemotherapy
treatments.
Refractory/resistant
ovarian cancer patients have a very poor prognosis because they face inadequate
therapeutic options. Once a woman’s ovarian cancer is defined as platinum
resistant, the chance of having a partial or complete response to further
platinum therapy is typically less than 10%, according to an article by A.
Berkenblit in the June 2005 issue of the Journal of Reproductive
Medicine.
In a
single-arm, U.S. Phase 2 chemotherapy-resistant ovarian cancer trial at the
Massachusetts General Hospital and Dana-Farber Cancer Institute from July 2006
through May 2008, NOV-002 (plus carboplatin) slowed progression of the disease
in 60% of evaluable patients (9 out of 15 women). The median progression-free
survival was 15.4 weeks, almost double the historical control of 8 weeks. These
results were presented at the American Society of Clinical Oncology in May
2008.
36
NOV-002
- Summary of Clinical Experience in Russia
Glutoxim®
(the tradename for NOV-002 in Russia) is approved in Russia for general
medicinal usage as an immunostimulant in combination with chemotherapy and
antimicrobial therapy, and specifically for indications such as tuberculosis and
psoriasis. Efficacy and excellent safety have been demonstrated in trials with
390 patients in Russia across numerous types of cancer including NSCLC, breast
cancer, ovarian cancer, colorectal cancer and pancreatic cancer. Since the
Russian Ministry of Health approval in 1998, it is estimated that Glutoxim® has
been administered to over 10,000 patients. The Russian non-clinical and clinical
data set, which includes clinical safety and efficacy data, extensive animal
toxicology studies and a comprehensive chemistry and manufacturing package, was
accepted by the FDA as the basis of an IND in 2000.
NOV-205
NOV-205
in Chronic Hepatitis C
NOV-205
is a unique, injectable, small-molecule proprietary formulation of oxidized
glutathione in a 1:1 molar ratio with inosine. NOV-205 has been administered to
approximately 200 hepatitis patients in clinical trials. We are currently
developing NOV-205 for the treatment of chronic hepatitis C
non-responders.
The World
Health Organization estimates that chronic hepatitis C affects 170 million
people worldwide and in the U.S., according to the Centers for Disease Control
and Prevention (“CDC”), an estimated 4.1 million persons are affected. Chronic
infection can progress to cirrhosis, end-stage liver disease and hepatocellular
carcinoma. While there are varying estimates about the size of the global market
for hepatitis C drugs, the current global market is believed to be in excess of
$3 billion per year. Currently about 8,000-10,000 hepatitis C-related deaths
occur annually in the U.S. and this could double over the next 10 to 20 years.
The current standard-of-care drugs for chronic hepatitis C – the combination of
pegylated interferon and ribavirin – are expensive, have significant toxicities,
are difficult to tolerate for many patients and have limited long-term efficacy
in genotype 1 patients (the most common HCV genotype seen in the U.S. and much
of the world). Approximately 50% of the genotype 1 patients do not benefit from
treatment with pegylated interferon plus ribavirin, and currently there is no
approved standard of care to treat these non-responding chronic hepatitis C
patients.
NOV-205
acts as a hepatoprotective agent with immunomodulating and anti-inflammatory
properties. The therapeutic profile of NOV-205 contrasts with those of currently
approved therapies in the U.S., which have limited effectiveness, are expensive
and have severe side effects, particularly in the case of chronic hepatitis C.
For example, pegylated interferon and ribavirin combinations have limitations of
safety and tolerability (40-65% of treated patients experience fatigue,
depression, fever, headaches, muscle pain or anemia). Furthermore, these
pharmaceuticals are effective in only a fraction of the patient population and
are very expensive.
NOV-205
was approved in Russia by the Ministry of Health in 2001 as a monotherapy for
the treatment of hepatitis B and C. Previously, NOV-205 demonstrated clinical
activity (reduced viral load and improved liver function) and safety as
monotherapy for treatment of hepatitis B and C in a total of 178 patients from
Russia.
On the
basis of the clinical and pre-clinical data package underlying Russian approval
of NOV-205, in combination with U.S. chemistry and manufacturing information, we
filed an IND with the FDA for NOV-205 as a monotherapy in chronic hepatitis C in
March 2006. The FDA accepted our IND in April 2006, and a U.S. Phase 1b trial in
patients who previously failed treatment with pegylated interferon plus
ribavirin commenced in September 2006 and was completed in December 2007. Based
on favorable safety results of that trial, in March 2010 we initiated a
multi-center U.S. Phase 2 trial evaluating NOV-205 as monotherapy in up to 40
chronic hepatitis C genotype 1 patients who previously failed treatment with
pegylated interferon plus ribavirin. The ongoing U.S. Phase 2 trial aims to
expand the safety database for NOV-205 and assess its effects on the same
efficacy related endpoints using a comparable dosing regimen as in prior Russian
studies, although this trial is being conducted in patients that have not
responded to interferon/ribavarin, which is a more difficult-to-treat patient
population. We expect to have preliminary results from this longer duration,
proof-of-concept trial in the third quarter of 2010.
37
Non-Clinical
Research Programs
Our
non-clinical research programs are aimed at gaining a better understanding of
the mechanism(s) of action of our oxidized glutathione-based pharmaceutical
compounds to inform and guide ongoing and future clinical studies. This research
is being performed via a network of academic and commercial (i.e., contract
research organizations) laboratories.
We are
engaged in a funded research collaboration with the laboratory of Kenneth Tew,
Ph.D., D.Sc., Chairman of the Department of Cell and Molecular Pharmacology and
Experimental Therapeutics at the Medical University of South Carolina. Dr. Tew
is also chairman of our Scientific Advisory Board and a stockholder. The general
objectives of this research program are to add to the understanding of NOV-002
and NOV-205 as pharmaceutical products, particularly with respect to their
molecular and cellular mechanisms of action. Funded research collaborations have
been conducted or are underway at other academic/scientific institutions
including Harvard/Massachusetts General Hospital, the Wistar Institute, the
University of Massachusetts Medical Center and the University of Miami to
further elaborate in
vitro and in
vivo mechanisms of action that may underlie the clinical therapeutic
profiles of NOV-002 and NOV-205 and to suggest future clinical
directions.
Manufacturing
Our
proprietary manufacturing process is well-established, simple and scalable. We
have used U.S. and Canadian contract manufacturing facilities that are
registered with the FDA to support our U.S. development efforts. We do not plan
to build manufacturing capability over the next several years. Rather, we plan
to continue to employ contract manufacturers.
The
active pharmaceutical ingredient of NOV-002 was manufactured in the U.S. in
compliance with current Good Manufacturing Practices in a single, synthetic step
and then filled, finished and packaged most recently at Hyaluron (Burlington,
MA) as a sterile, filtered, aseptically-processed solution for intravenous and
subcutaneous use. NOV-002 clinical trial material (vials and syringes containing
the active pharmaceutical ingredient and solution) has successfully completed
36-month stability studies.
We have
most recently manufactured NOV-205 clinical trial material at Lyophilization
Services of New England (Manchester, NH) in compliance with current Good
Manufacturing Practices in a single, synthetic step and then filled, finished
and packaged into glass vials as a sterile, filtered, aseptically-processed
solution for subcutaneous use.
Sales
and Marketing
Outside
of the U.S., we sought to commercialize NOV-002 through partnerships with
pharmaceutical companies that have development capabilities along with
commercial expertise and infrastructure. In February 2009, we entered into a
collaboration with Mundipharma under which we granted Mundipharma exclusive
rights to develop, manufacture and commercialize NOV-002 in Europe (other than
the Russian Territory), Asia (other than the Chinese Territory) and Australia.
In December 2007 we entered into a collaboration agreement with Lee’s Pharm
under which we granted Lee’s Pharm exclusive rights to develop, manufacture and
commercialize NOV-002 for cancer and NOV-205 for hepatitis in the Chinese
Territory.
Should we
obtain regulatory approval for NOV-002 in the U.S., we plan to pursue and
evaluate all available options to launch and commercialize NOV-002. These
options presently include, but are not limited to, building our own salesforce,
utilizing a contract sales organization or entering into a partnering
arrangement with a pharmaceutical company with strong commercial expertise and
infrastructure in the U.S.
38
Intellectual
Property
We own
all intellectual property rights worldwide (excluding the Russian Territory)
related to both of our clinical-stage compounds, i.e., NOV-002 and NOV-205, and
other pre-clinical compounds based on oxidized glutathione. We have six issued
patents in the U.S. We also have two issued patents in Europe and one in Japan.
Overall, we have filed more than 30 patent applications worldwide.
Issued
composition of matter patents cover proprietary formulations of oxidized
glutathione that do not expire until 2019, and these patents include methods of
manufacture for oxidized glutathione formulated with various metals. Claims
further include treatment of cancer, hematologic, immunologic and infectious
diseases and other medical conditions. Furthermore, issued patents that are
valid until 2016 cover methods of use for oxidized glutathione (+/- formulation
enhancers) for simulation of cytokine and hematopoietic factors, and for
treatment of cancer, hematologic, immunologic and infectious
diseases.
We intend
to pursue extensions of the patent term and/or of the data exclusivity term in
the countries where such extensions are available. We also plan to file patent
applications that reflect new uses, applications and compositions of our
oxidized glutathione platform technology.
We
believe that our breadth of intellectual property may allow us to expand our
pipeline by claiming and commercializing additional compounds that are based on
oxidized glutathione.
Licenses
/ Collaborations
Novelos
has entered into a collaboration agreement granting Mundipharma exclusive rights
to develop, manufacture and commercialize NOV-002 in Europe (other than the
Russian Territory), Asia (other than the Chinese Territory) and Australia. Both
of our clinical-stage compounds, NOV-002 and NOV-205, have been licensed to
Lee’s Pharm for exclusive development, manufacture and commercialization in the
Chinese Territory.
Under a
securities purchase agreement dated August 25, 2009 (the “August 2009 Purchase
Agreement”), we granted Purdue Pharma, L.P. (“Purdue”) a right of first refusal
with respect to bona fide offers received from third parties to obtain NOV-002
Rights (as defined in the August 2009 Purchase Agreement) in the United States.
The right of first refusal terminates upon business combinations, as defined in
the August 2009 Purchase Agreement.
We expect
that the negative results of our Phase 3 trial in advanced NSCLC will adversely
affect development and commercialization of NOV-002 under the collaboration
agreements.
Employees
As of
July 6, 2010 we had eight full-time employees. We believe our relationships with
our employees are good.
Regulation
The
manufacturing and marketing of NOV-002 and NOV-205 and our related research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the U.S. and other countries. We
anticipate that these regulations will apply separately to each of our
compounds.
In the
U.S., pharmaceuticals are subject to rigorous federal regulation and, to a
lesser extent, state regulation. The Federal Food, Drug and Cosmetic Act and
other federal and state statutes and regulations govern, among other things, the
testing, manufacture, safety, efficacy, labeling, storage, recordkeeping,
approval, advertising and promotion of our pharmaceuticals.
39
The steps
required before a pharmaceutical agent may be marketed in the U.S.
include:
•
Pre-clinical laboratory tests, in vivo pre-clinical studies,
and formulation studies;
•
The submission to the FDA of an IND for human clinical testing, which must
become effective before human clinical trials can commence;
•
Adequate and well-controlled human clinical trials to establish the safety and
efficacy of the product;
•
The submission of a New Drug Application (“NDA”) or Biologic Drug License
Application to the FDA; and
In
addition to obtaining FDA approval for each product, each product manufacturing
facility must be registered with and approved by the FDA. Manufacturing
facilities are subject to biennial inspections by the FDA and must comply with
the FDA’s Good Manufacturing Practices for products, drugs and
devices.
Whether
or not FDA approval has been obtained, approval of a product by regulatory
authorities in foreign countries must be obtained prior to the commencement of
commercial sales of the pharmaceutical in such countries. The requirements
governing the conduct of clinical trials and drug approvals vary widely from
country to country, and the time required for approval may be longer or shorter
than that required for FDA approval.
LITIGATION
A
purported class action complaint was filed on March 5, 2010 in the United States
District Court for the District of Massachusetts by an alleged shareholder on
behalf of himself and all others who purchased or otherwise acquired our common
stock in the period between December 14, 2009 and February 24, 2010, against
Novelos and our President and Chief Executive Officer, Harry S. Palmin. On April
7, 2010, Novelos and Mr. Palmin filed a motion for an order to establish that
their response to the complaint will not be due until some time after the court
appoints a lead plaintiff and affords the lead plaintiff an opportunity to file
a consolidated and amended complaint. On May 4, 2010, motions were filed on
behalf of three different individuals or groups, each seeking to be appointed
lead plaintiff, although two of the three motions were withdrawn on May 18,
2010. The court has not yet appointed a lead plaintiff. The complaint claims
that we violated Section 10(b) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated thereunder in connection with alleged
disclosures related to the Phase 3 Trial. We believe the allegations are without
merit and intend to defend vigorously against the allegations.
On
June 28, 2010, we received a letter from counsel to ZAO BAM and ZAO BAM Research
Laboratories (collectively, “BAM”) alleging that we modified the chemical
composition of NOV-002 without prior notice to or approval from BAM,
constituting a material breach of a technology and assignment agreement we had
entered into with BAM on June 20, 2000. The letter references an
amendment, submitted to the FDA on August 30, 2005, to our investigational new
drug application dated August 1999 as the basis for BAM’s claims and demands the
transfer of all intellectual property rights concerning NOV-002 to
BAM. Mark Balazovsky, a director of Novelos from June 1996 until
November 2006 and a shareholder of Novelos through at least June 25, 2010, is,
to our knowledge, still the general director and principal shareholder of ZAO
BAM. We believe the allegations are without merit and we intend to
defend vigorously against any proceedings that BAM may initiate as to these
allegations.
PROPERTIES
We lease
our executive office in Newton, Massachusetts. Our office consists of
approximately 2,000 square feet and is rented for approximately $5,300 per
month. This lease expires in August 2010 and we anticipate that an extension on
the lease will be available on terms that are acceptable to us. We believe that
our present facilities are adequate to meet our current needs. If new or
additional space is required, we believe that adequate facilities are available
at competitive prices.
40
MANAGEMENT
As of
July 6, 2010, our current directors and executive officers are:
Name
|
Age
|
Position
|
||
Stephen
A. Hill, B.M. B.Ch., M.A., F.R.C.S.
|
51
|
Chairman
of the Board
|
||
Harry
S. Palmin
|
40
|
President,
Chief Executive Officer and Director
|
||
Elias
B. Nyberg, DVM, BVSc, MACVS, MRCVS, MBA
|
55
|
Vice
President of Regulatory, Quality and Compliance
|
||
Christopher
J. Pazoles, Ph.D.
|
60
|
Vice
President of Research and Development
|
||
Joanne
M. Protano
|
41
|
Vice
President, Chief Financial Officer and Treasurer
|
||
Kristin
C. Schuhwerk
|
39
|
Vice
President of Clinical Development and Operations
|
||
Michael
J. Doyle (1) (2) (3)
|
51
|
Director
|
||
Sim
Fass, Ph.D. (1) (2) (3)
|
68
|
Director
|
||
James
S. Manuso, Ph.D.
|
61
|
Director
|
||
David
B. McWilliams (2) (3)
|
66
|
Director
|
||
Howard
M. Schneider (1) (3)
|
66
|
Director
|
(1) Member
of the audit committee.
(2) Member
of the compensation committee.
(3) Member
of the nominating and corporate governance committee.
Our
executive officers are appointed by, and serve at the discretion of, our board
of directors.
Stephen A. Hill. Dr. Hill was
elected our chairman of the board of directors in September 2007. Dr. Hill has
served as the President and Chief Executive Officer of Solvay Pharmaceuticals,
Inc. since April 2008. Prior to joining Solvay, Dr. Hill had served as ArQule's
President and Chief Executive Officer since April 1999. Prior to his tenure at
ArQule, Dr. Hill was the Head of Global Drug Development at F. Hoffmann-La Roche
Ltd. from 1997 to 1999. Dr. Hill joined Roche in 1989 as Medical Adviser to
Roche Products in the United Kingdom. He held several senior positions at Roche,
including Medical Director where he was responsible for clinical trials of
compounds across a broad range of therapeutic areas, including CNS, HIV,
cardiovascular, metabolic and oncology products. Subsequently, he served as Head
of International Drug Regulatory Affairs at Roche headquarters in Basel,
Switzerland, where he led the regulatory submissions for seven major new
chemical entities. Dr. Hill also was a member of Roche's Portfolio Management,
Research, Development and Pharmaceutical Division Executive Boards. Prior to
Roche, Dr. Hill served seven years with the National Health Service in the
United Kingdom in General and Orthopedic Surgery. Dr. Hill is a Fellow of the
Royal College of Surgeons of England and holds his scientific and medical
degrees from St. Catherine's College at Oxford University. Dr. Hill’s extensive
experience in a broad range of senior management positions with companies in the
life sciences sector make him a highly qualified member of our board of
directors.
Harry S. Palmin. Mr. Palmin
has served as our president and a director since 1998 and our chief executive
officer since January 2005. From 1998 to September 2005, he served as our acting
chief financial officer. From 1996 to 1998, he was a vice president at Lehman
Brothers and from 1993 to 1996, he was an associate at Morgan Stanley & Co.
Mr. Palmin earned a B.A. in economics and business and a M.A. in international
economics and finance from the International Business School at Brandeis
University. He has also studied at the London School of Economics and the
Copenhagen Business School. Mr. Palmin’s experience managing the funding and
development of our product candidates for 12 years and his knowledge of capital
markets are strong qualifications to serve on our board of
directors.
41
Elias B. Nyberg. Dr. Nyberg
has served as our vice president of regulatory, quality and compliance since May
2008. From September 2006 to April 2008, Dr. Nyberg was a regulatory advisor to
several companies including Labopharm and Novartis Pharmaceuticals, Inc. From
February 2004 to September 2006 he was the Vice President Regulatory Affairs for
CombinatoRx. From April 2001 to January 2004 he served as the Senior Director
International Regulatory Affairs for Biogen. Dr. Nyberg has also held senior
regulatory positions with INC Research/PRA International Inc., Astra Arcus AB,
Pfizer Pharmaceuticals and Ciba-Geigy. Prior to his tenure in the biotechnology
industry, Dr. Nyberg practiced as a veterinarian for 12 years, specializing in
exotic animals. He undertook his primary veterinary training in the Philippines
followed by post-doctorate work in South Africa and Australia. Dr. Nyberg earned
an MBA in England and his specialty (diplomate) boards in Exotic Animal (Avian)
Medicine (MACVS) in Australia. He is also a member of the Royal College of
Veterinary Surgeons (MRCVS) in London.
Christopher J. Pazoles. Dr.
Pazoles has served as our vice president of research and development since July
2005. From May 2004 to June 2005, he held a senior research and development
position at the Abbott Bioresearch Center, a division of Abbott Laboratories.
From October 2002 to January 2004, he served as chief operating officer and head
of research and development at ALS Therapy Development Foundation. From 1994 to
October 2002, Dr. Pazoles served as vice president of research for Phytera, Inc.
From 1981 to 1994, he served as a researcher and senior manager with Pfizer. Dr.
Pazoles holds a Ph.D. in microbiology from the University of Notre
Dame.
Joanne M. Protano. Ms. Protano
was appointed our vice president, chief financial and accounting officer, and
treasurer in December 2007. She previously held the position of Senior Director
of Finance and Controller of the Company from June 2006 to December 2007. From
1996 to 2006, she held various management and senior management positions with
Ascential Software, Inc. and predecessor companies including Assistant
Controller, Reporting for Ascential Software, Vice President and Chief Financial
Officer for the Ascential Software Division of Informix Software, Inc. and
Corporate Controller of Ardent Software, Inc. Prior to her tenure in the
technology industry, from 1990 to 1996 she was employed by Deloitte and Touche
LLP as an audit manager, serving technology and healthcare clients. Ms. Protano
received a B.S. in business administration from Bryant College.
Kristin C. Schuhwerk. Ms.
Schuhwerk was appointed our vice president of clinical development and
operations in December 2007. She previously served as our Director/Senior
Director of Operations from July 2005 to December 2007. Prior to her employment
at Novelos, she worked in the biopharmaceutical industry managing and overseeing
business operations for multiple global Phase 2 and 3 clinical studies. From
2002 to 2005 she held the positions of Senior Project Manager and Director of
Planning and Business Operations in Clinical Development at Antigenics, Inc., a
cancer biotechnology company. From 1993 to 2002, she held research, project
management and management positions at Boston University Medical Center, Parexel
International, AstraZeneca and Brigham & Women’s Hospital. Ms. Schuhwerk
earned a B.S. degree in Chemistry from the University of New
Hampshire.
Michael J. Doyle. Mr. Doyle
has served as one of our directors since October 2005. Since October 2007 he has
served as the chief executive officer of Medsphere Systems Corporation. From
April 2006 to June 2007, he served as chief executive officer of Advantedge
Healthcare Solutions. From January 2005 to March 2006, he served as chief
executive officer of Windward Advisors. From March 2000 to December 2004, Mr.
Doyle served as chairman and chief executive officer of Salesnet. From 1989 to
1997, he served as chairman and chief executive officer of Standish
Care/Carematrix, a company he founded. He received a B.S. in biology from Tufts
University and a M.B.A. with a concentration in finance and health care from the
University of Chicago. Mr. Doyle’s extensive experience leading emerging
companies make him a highly qualified member of our board of
directors.
Sim Fass. Dr. Fass has served
as one of our directors since February 2005. Dr. Fass, now retired, served as
chief executive officer and chairman of Savient Pharmaceuticals from 1997 to
2004, its president and chief executive officer from 1984 to 1997, and its chief
operating officer from 1983 to 1984. From 1980 to 1983, Dr. Fass served as vice
president and general manager of Wampole Laboratories. From 1969 to 1980, he
held a number of marketing, sales and senior management positions at Pfizer, Inc
in both pharmaceuticals and diagnostics. Dr. Fass has served as a director of
Nanovibronix since 2005. He received a B.S. in biology and chemistry from
Yeshiva College and a doctoral degree in developmental biology/biochemistry from
the Massachusetts Institute of Technology. Dr. Fass’ qualifications to serve on
our board of directors include his extensive senior management experience with
pharmaceutical companies.
42
James S. Manuso. Dr. Manuso
was elected as one of our directors in August 2007. Since January 2005, Dr.
Manuso has served as Chairman, President and Chief Executive Officer of
SuperGen, Inc. and has served as a director of SuperGen since February 2001. Dr.
Manuso is co-founder and former president and chief executive officer of
Galenica Pharmaceuticals, Inc. Dr. Manuso co-founded and was general partner of
PrimeTech Partners, a biotechnology venture management partnership, from 1998 to
2002, and Managing General Partner of The Channel Group LLC, an international
life sciences corporate advisory firm. He was also president of Manuso,
Alexander & Associates, Inc., management consultants and financial advisors
to pharmaceutical and biotechnology companies. Dr. Manuso was a vice president
and Director of Health Care Planning and Development for The Equitable Companies
(now Group Axa), where he also served as Acting Medical Director. He currently
serves on the board of privately-held KineMed, Inc. and Merrion Pharmaceuticals
Ltd. (Dublin, Ireland). Dr. Manuso earned a B.A. in economics and chemistry from
New York University, a Ph.D. in experimental psychophysiology from the Graduate
Faculty of The New School University, a certificate in health systems management
from Harvard Business School, and an executive M.B.A. from Columbia Business
School. Dr. Manuso’s experience founding, leading and serving as a director for
pharmaceutical companies makes him a highly qualified member of our board of
directors.
David B. McWilliams. Mr.
McWilliams has served as one of our directors since March 2004. From February
2004 to December 2004, Mr. McWilliams performed chief executive officer services
for us. Mr. McWilliams is currently retired. From August 2004 to July 2008, Mr.
McWilliams served as chief executive officer of Opexa Therapeutics, Inc.
(formerly PharmaFrontiers Corp.). From 1992 to March 2002, he served as
president, chief executive officer and a director of Encysive Pharmaceuticals
(formerly Texas Biotech). From 1989 to 1992, Mr. McWilliams served as president,
chief executive officer and director of Zonagen. From 1984 to 1988, he served as
president and chief executive officer of Kallestad Diagnostics. From 1980 to
1984, he served as president of Harleco Diagnostics Division. From 1972 to 1980,
he was an executive at Abbott Laboratories, rising to general manager for South
Africa. From 1969 to 1972, he was a management consultant at McKinsey & Co.
Mr. McWilliams is also a director of ApoCell Biosciences, Houston Technology
Center and Opexa Therapeutics. Mr. McWilliams received a M.B.A. in finance from
the University of Chicago and a B.A. in chemistry from Washington and Jefferson
College. Mr. McWilliams’ qualifications to serve on our board of directors
include his extensive experience in a broad range of senior management positions
with companies in the life sciences sector.
Howard M. Schneider. Mr.
Schneider has served as one of our directors since February 2005. Mr. Schneider
is currently retired. From January to December 2003, he served as chief
executive officer of Metrosoft, Inc., and had been an advisor to such company
from July to December 2002. From May 2000 to May 2001, he served as president of
Wofex Brokerage, Inc. and from 1965 to 1999, he served as an executive at
Bankers Trust Company holding a variety of positions in the commercial banking
and investment banking businesses. Mr. Schneider received a B.A. in economics
from Harvard College and a M.B.A. from New York University. Mr. Schneider’s
extensive senior management experience in the financial sector make him a highly
qualified member of our board of directors.
Code
of Ethics
The board
of directors has adopted a Code of Ethics applicable to all of our directors,
officers and employees, including our principal executive officer, principal
financial officer and principal accounting officer. A copy of the Code of Ethics
is available at our website www.novelos.com.
43
Executive
Officer Compensation
Summary Compensation: The
following table sets forth certain information about the compensation we paid or
accrued with respect to our principal executive officer and our two most highly
compensated executive officers (other than our chief executive officer) who
served as executive officers during the year ended December 31, 2009 and whose
annual compensation exceeded $100,000 for that year.
Other
annual compensation in the form of perquisites and other personal benefits has
been omitted as the aggregate amount of those perquisites and other personal
benefits was less than $10,000 for each person listed.
Name and Principal Position
|
Year
|
Salary
($)
|
Bonus
($) (3)
|
Option
Awards ($)
(4)
|
All other
compensation
($)
|
Total ($)
|
||||||||||||||||
Harry
S. Palmin (1)
|
2009
|
$ | 270,000 | $ | 40,500 | $ | 131,650 | $ | 0 | $ | 442,150 | |||||||||||
President,
Chief Executive Officer
|
2008
|
$ | 270,000 | $ | 40,500 | $ | 110,560 | $ | 0 | $ | 421,060 | |||||||||||
Christopher
J. Pazoles (1)
|
2009
|
$ | 235,000 | $ | 35,250 | $ | 105,320 | $ | 0 | $ | 375,570 | |||||||||||
Vice
President of Research and Development
|
2008
|
$ | 235,000 | $ | 35,250 | $ | 55,280 | $ | 0 | $ | 325,530 | |||||||||||
Elias
B. Nyberg (1) (2)
|
2009
|
$ | 225,000 | $ | 33,750 | $ | 78,990 | $ | 0 | $ | 337,740 | |||||||||||
Vice
President of Regulatory, Quality and Compliance
|
2008
|
$ | 168,750 | $ | 25,313 | $ | 93,160 | $ | 0 | $ | 287,223 |
(1)
|
There
has been no increase to executive base salaries for
2010.
|
(2)
|
Dr.
Nyberg’s employment with the Company commenced on April 1,
2008.
|
(3)
|
Bonus
amounts for 2009 were paid in 2010. Bonus amounts for 2008 were paid
in 2009.
|
(4)
|
The
fair value of each stock award was estimated on the grant date using the
Black-Scholes option-pricing model. See Note 7 to the financial statements
for a description of the assumptions used in estimating the fair value of
stock options.
|
On
January 31, 2006, we entered into an employment agreement with Harry Palmin
effective January 1, 2006, whereby he agreed to serve as our president and chief
executive officer for an initial term of two years at an annual salary of
$225,000. The agreement is automatically renewed for successive one-year terms
unless notice of termination is provided by either party at least 90 days prior
to the end of such term. The agreement was renewed for an additional one-year
term on January 1, 2010 in accordance with its terms. On December 17, 2007, the
Board of Directors approved an increase in Mr. Palmin’s annual salary to
$270,000 effective January 1, 2008. He is eligible to receive an annual cash
bonus at the discretion of the compensation committee and he is entitled to
participate in our employee fringe benefit plans or programs generally available
to our senior executives. The agreement provides that in the event that we
terminate Mr. Palmin without cause or he resigns for good reason (as defined
below), we will (i) pay Mr. Palmin his pro rata share of the average of his
annual bonus paid during the two fiscal years preceding his termination; (ii)
pay Mr. Palmin his base salary for 11 months after the date of termination;
(iii) continue to provide him benefits for 11 months after the date of
termination; and (iv) fifty percent of his unvested stock options will vest. The
agreement also contains a non-compete provision, which prohibits Mr. Palmin from
competing with us for one year after termination of his employment with us. At
December 31, 2009, if Mr. Palmin had been terminated without cause, he would
have received a cash payment of $305,250 and unvested options to purchase shares
of our common stock at prices ranging from $0.43 to $0.75 would have been
immediately vested.
44
“Cause”
means (i) gross neglect of duties for which employed; (ii) committing fraud,
misappropriation or embezzlement in the performance of duties as our employee;
(iii) conviction or guilty or nolo plea of a felony or misdemeanor involving
moral turpitude; or (iv) willfully engaging in conduct materially injurious to
us or violating a covenant contained in the employment agreement.
On July
15, 2005, we entered into an employment agreement with Christopher J. Pazoles
whereby he agreed to serve as our vice president of research and development for
an initial term of two years. The agreement is automatically renewed for
successive one-year terms unless notice of termination is provided by either
party at least 60 days prior to the end of such term. The agreement was
renewed for an additional one-year term on July 15, 2009 in accordance with its
terms. The agreement provides for minimum salary and bonus amounts during
the first two years of his employment. These minimum amounts have been
satisfied. Dr. Pazoles’ agreement provides that he is entitled to
participate in our employee fringe benefit plans or programs generally available
to our senior executives. The agreement further provides that in the event
that we terminate Dr. Pazoles without cause or he resigns for good reason (as
defined below), we will (i) pay Dr. Pazoles his base salary through the
remainder of the term of his employment agreement in monthly installments; (ii)
continue to provide him benefits for 12 months after the date of termination;
and (iii) pay, on a prorated basis, any minimum bonus or other payments
earned. At December 31, 2009, if Dr. Pazoles had been terminated without
cause, he would have received a cash payment of approximately
$127,000.
Dr.
Pazoles also entered into a nondisclosure and development agreement with us,
which prohibits him from competing with us and soliciting our employees or
customers during the term of his employment and for two years thereafter.
If we terminate his employment without cause, this prohibition will only extend
for six months after his termination.
“Cause”
means Dr. Pazoles (i) has willfully failed, neglected, or refused to perform his
duties under the employment agreement; (ii) has been convicted of or pled guilty
or no contest to a crime involving a felony; or (iii) has committed any act of
dishonesty resulting in material harm to us. “Good Reason” means that Dr.
Pazoles has resigned due to our failure to meet any of our material obligations
to him under the employment agreement.
On May
14, 2010, we entered into retention agreements with each of our four
vice-president executive officers. The agreements provide for the lump-sum
payment of six months’ base salary and benefits to each officer following a
termination without cause or a resignation with good reason occurring on or
before November 14, 2011. The agreements further provide that if the executives
remain employed with us as of October 1, 2010, they will receive a payment of
two months’ base salary as a retention bonus on that date. The amount paid as a
retention bonus will be deducted from the severance amounts that may become
payable upon a subsequent involuntary termination. The agreements expire
November 14, 2011. The total amounts that may become payable to the named
executive officers pursuant to the retention agreements are approximately
$132,000 to Christopher Pazoles and $129,000 to Elias Nyberg. Concurrently with
the execution of the retention agreements, the employment agreement between us
and Christopher Pazoles dated July 15, 2005 was terminated. The employment
agreement between us and Harry S. Palmin, the Company’s chief executive officer,
remains unchanged.
On May
14, 2010, we entered into retention agreements with each of our three
non-executive employees. The agreements provide for the lump-sum payment of six
months’ base salary and benefits to each employee following a termination
without cause or a resignation with good reason occurring on or before November
14, 2011. The agreements expire November 14, 2011.
Phase
3 Clinical Trial Bonus Plan
On
December 8, 2009, our board of directors approved a special bonus plan for all
employees of the Company, including our named executive officers. The bonus plan
provided for the payment of contingent cash bonuses in three equal installments
in aggregate amounts ranging from 80% to 150% of annual 2009 salaries for each
employee. All payments under the bonus plan were conditioned upon the
achievement of favorable results for our Phase 3 Trial. As a result of the
negative results of the Phase 3 Trial, as announced on February 24, 2010, no
amounts will become payable under the special bonus plan.
Outstanding
Equity Awards at Fiscal Year-End
The
following table sets forth certain information regarding stock options held as
of December 31, 2009 by the executive officers named in the summary compensation
table.
45
Individual Grants
|
||||||||||||||||
Name
|
Year
of Grant
|
Number of
securities
underlying
unexercised
options
(#)
exercisable
|
Number of
securities
underlying
unexercised
options
(#)
unexercisable
|
Exercise or
base price
($/share)
|
Expiration
date
|
|||||||||||
Harry
S. Palmin
|
2009 | (1) | — | 250,000 | $ | 0.75 |
12/8/2019
|
|||||||||
2008 | (2) | 133,333 | 266,667 | 0.43 |
12/15/2018
|
|||||||||||
2007 | (2) | 133,333 | 66,667 | 0.45 |
12/17/2017
|
|||||||||||
2006 | (2) | 150,000 | — | 0.91 |
12/11/2016
|
|||||||||||
2005 | (3) | 250,000 | — | 0.01 |
1/31/2015
|
|||||||||||
2005 | (3) | 150,000 | — | 0.01 |
3/31/2015
|
|||||||||||
2004 | (4) | 330,000 | — | 0.01 |
4/1/2014
|
|||||||||||
2003 | (5) | 7,130 | — | 0.70 |
8/1/2013
|
|||||||||||
Christopher
J. Pazoles
|
2009 | (1) | — | 200,000 | $ | 0.75 |
12/8/2019
|
|||||||||
2008 | (2) | 66,666 | 133,334 | 0.43 |
12/15/2018
|
|||||||||||
2007 | (2) | 83,333 | 41,667 | 0.45 |
12/17/2017
|
|||||||||||
2006 | (2) | 100,000 | — | 0.91 |
12/11/2016
|
|||||||||||
2005 | (6) | 200,000 | — | 0.01 |
4/8/2015
|
|||||||||||
2004 | (7) | 16,667 | — | 0.01 |
4/1/2014
|
|||||||||||
Elias
B. Nyberg
|
2009 | (1) | — | 150,000 | $ | 0.75 |
12/8/2019
|
|||||||||
2008 | (2) | 33,333 | 66,667 | 0.43 |
12/15/2018
|
|||||||||||
2008 | (8) | 100,000 | — | 0.58 |
4/1/2018
|
(1)
|
These
shares vest quarterly in increments of one-twelfth over three years from
the date of grant. The exercise price equals the closing price on the date
of grant.
|
(2)
|
These
shares vest annually in increments of one-third over three years from the
date of grant. The exercise price equals the closing price on the date of
grant.
|
(3)
|
These
shares initially vested over a two-year period. Pursuant to their terms,
the shares fully vested upon the completion of a non-bridge loan
financing, which occurred in the second quarter of 2005. The exercise
price equals the fair market value of our common stock on the date of
grant as determined by our board of
directors.
|
(4)
|
These
shares initially vested one-third upon grant and one-third annually over
the following two years. Pursuant to their terms, one additional year of
vesting occurred upon the completion of a non-bridge loan financing, which
occurred in the second quarter of 2005. The exercise price equals the fair
market value of our common stock on the date of grant as determined by our
board of directors.
|
(5)
|
These
shares vest annually in increments of one-third over three years from the
date of grant. The exercise price equals the fair market value of our
common stock on the date of grant as determined by our board of
directors.
|
(6)
|
These
shares vested in increments of one-fourth every six months over two years
from the date of grant. The exercise price equals the fair market value of
our common stock on the date of grant as determined by our board of
directors.
|
(7)
|
These
shares represent the fully vested portion of an option grant made to Mr.
Pazoles in consideration of consulting services delivered during 2004.
Pursuant to their terms, the shares vested at the completion of the
consulting engagement and expire ten years from the date of
grant.
|
(8)
|
These
shares were fully vested upon grant. The exercise price equals the closing
price on the date of
grant.
|
Options
granted pursuant to the 2006 Stock Incentive Plan will become fully vested upon
a termination event within one year following a change in control, as defined. A
termination event is defined as either termination of employment other than for
cause or constructive termination resulting from a significant reduction in
either the nature or scope of duties and responsibilities, a reduction in
compensation or a required relocation.
46
Director
Compensation
Summary Compensation: The
following table sets forth certain information about the compensation we paid or
accrued with respect to our directors who served during the year ended December
31, 2009.
Name and Principal Position
|
Year
|
Director
Fees
($) (2)
|
Option
Awards
($) (3)
|
All other
compensation
($)
|
Total ($)
|
|||||||||||||
Stephen
A. Hill, Chairman (1)
|
2009
|
$ | 39,500 | $ | 42,128 | $ | — | $ | 81,628 | |||||||||
Michael
J. Doyle, Director (1)
|
2009
|
32,500 | 42,128 | — | 74,628 | |||||||||||||
Sim
Fass, Director (1)
|
2009
|
33,250 | 42,128 | — | 75,378 | |||||||||||||
James
S. Manuso, Director (1)
|
2009
|
25,250 | 42,128 | — | 67,378 | |||||||||||||
David
B. McWilliams, Director (1)
|
2009
|
26,000 | 42,128 | — | 68,128 | |||||||||||||
Howard
M. Schneider, Director (1)
|
2009
|
38,250 | 42,128 | — | 80,378 |
|
(1)
|
As of December 31, 2009,
outstanding options to purchase common stock held by directors were as
follows: Dr. Hill 350,000; Mr. Doyle 350,000; Dr. Fass 350,000; Dr.
Manuso 300,000; Mr. McWilliams 402,778; Mr. Schneider
250,000.
|
|
(2)
|
Director fees include all fees
earned for director services including quarterly fees, meeting fees and
committee chairman fees.
|
|
(3)
|
The fair value of each stock
award was estimated on the grant date using the Black-Scholes
option-pricing model. See Note 7 to the financial statements for a
description of the assumptions used in estimating the fair value of stock
options.
|
During
2009, we paid our non-employee directors a cash fee of $5,000 per quarter. The
non-employee directors also received a fee of $1,500 for any board or committee
meeting attended and $750 for each telephonic board or committee meeting in
which the director participated. We also paid our chairman an additional annual
fee in the amount of $15,000, our non-employee director who serves as the chair
of the audit committee an additional annual fee of $10,000 and our non-employee
director who serves as the chairman of the compensation and nominating and
corporate governance committees an additional annual fee of $5,000. We
reimbursed directors for reasonable out-of-pocket expenses incurred in attending
board and committee meetings and undertaking certain matters on our behalf.
Directors who are our employees do not receive separate fees for their services
as directors. There has been no change to cash fees payable to non-employee
directors for 2010.
On
December 8, 2009, options to purchase 80,000 shares of our common stock were
granted to each of our non-employee directors at the closing price of our common
stock on that day. These grants vest on a quarterly basis over a two-year
period.
47
BENEFICIAL
OWNERS AND MANAGEMENT
At the
close of business on June 24, 2010, there were issued and outstanding 90,502,606
shares of our common stock. The following table provides information regarding
beneficial ownership of our common stock as of June 24, 2010 for:
|
·
|
Each person known by us to be the
beneficial owner of more than five percent of our common
stock;
|
|
·
|
Each of our
directors;
|
|
·
|
Each executive officer named in
the summary compensation table;
and
|
|
·
|
All of our current directors and
executive officers as a
group.
|
The
address of each executive officer and director is c/o Novelos Therapeutics,
Inc., One Gateway Center, Suite 504, Newton, Massachusetts 02458. The persons
named in this table have sole voting and investment power with respect to the
shares listed, except as otherwise indicated. The inclusion of shares listed as
beneficially owned does not constitute an admission of beneficial ownership.
Shares included in the “Right to Acquire” column consist of shares that may be
purchased through the exercise of options that vest within 60 days of June 24,
2010 .
Shares Beneficially Owned (4)
|
||||||||||||||||
Name and Address of Beneficial
Owner
|
Outstanding
|
Right to Acquire
|
Total
|
Percentage
|
||||||||||||
Purdue
Pharma, L.P. (1)
One
Stamford Forum
201
Tresser Blvd.
Stamford,
CT 06901-3431
|
13,636,364 | 0 | 13,636,364 | 15.1 | ||||||||||||
Knoll
Capital Management (2)
1114
Avenue of the Americas
45th
Floor
New
York, NY 10036
|
4,462,234 | 9,247,776 | 13,710,010 | 13.7 | ||||||||||||
Harry
S. Palmin (3)
|
641,118 | 1,195,462 | 1,836,580 | 2.0 | ||||||||||||
Christopher
J. Pazoles
|
0 | 383,332 | 383,332 | * | ||||||||||||
Elias
B. Nyberg
|
0 | 158,332 | 158,332 | * | ||||||||||||
Stephen
A. Hill
|
0 | 270,000 | 270,000 | * | ||||||||||||
Michael
J. Doyle
|
0 | 270,000 | 270,000 | * | ||||||||||||
Sim
Fass
|
0 | 270,000 | 270,000 | * | ||||||||||||
James
S. Manuso
|
0 | 220,000 | 270,000 | * | ||||||||||||
David
B. McWilliams
|
0 | 322,778 | 322,778 | * | ||||||||||||
Howard
M. Schneider
|
100,000 | 170,000 | 270,000 | * | ||||||||||||
All
directors and officers as a group (11 persons)
|
741,118 | 3,884,901 | 4,626,019 | 4.9 |
|
*
|
Less than one
percent.
|
(1)
Following the financing transactions completed on August 25, 2009 and November
10, 2009 Purdue transferred its shares of common stock and warrants to purchase
common stock to Beacon Company (c/o Whitely Chambers, Don Street, St. Helier,
Jersey JE49WG, Channel Islands) and Rosebay Medical Company L.P. (c/o Northbay
Associates, 14000 Quail Springs Parkway #2200, Oklahoma City, OK 73134),
which are independent associated companies of Purdue. The “Right to
Acquire” column excludes shares issuable on conversion of Series E preferred
stock and upon exercise of warrants issued in February, August and November 2009
as described in the table below.
48
(2) Includes
holdings of Knoll Special Opportunities II Master Fund Limited and Europa
International, Inc. (the “Knoll-affiliated Funds”). Shares in the “Right to
Acquire” column include shares of common stock issuable upon conversion of
Series E preferred stock, excluding accumulated unpaid dividends. On
February 26, 2010, the Knoll-affiliated Funds provided to the Company notice of
waiver of the conversion limitations on the Series E preferred stock held by
them. Such limitations are described in footnote 4 to this table.
(3)
Shares owned by H. Palmin include 94,000 shares owned by his wife, Deanna
Palmin.
Pro
Forma Holdings Upon Automatic
Conversion
of Series E Preferred Stock
The
following table illustrates the pro forma beneficial ownership of our common
stock that would result in the event of an automatic conversion of all of the
outstanding shares of our Series E preferred stock into common stock. All
outstanding shares of Series E preferred stock automatically convert in the
event the volume weighted average price of our common stock, calculated in
accordance with the terms of the Series E preferred stock, exceeds $2.00 for 20
consecutive trading days, provided there is an effective registration statement
covering the resale of the shares of common stock so issuable. At the current
conversion price of $0.65, the automatic conversion of all shares of Series E
preferred stock outstanding as of June 24, 2010, excluding any accumulated
dividends, would result in the issuance of 121,907,526 shares of common stock.
In the table below, share holdings have been presented in total for groups of
associated funds or companies. Such presentation is not intended to represent
that such funds or companies are under common control.
Name and Address of Beneficial
Owner
|
Outstanding
Shares of
Common Stock
|
Shares of common
stock issuable upon
automatic
conversion of Series
E Preferred Stock
|
Total pro
forma
ownership
(1)
|
Pro forma
ownership
percentage
(2)
|
||||||||||||
Xmark
Funds (3)
|
||||||||||||||||
90
Grove Street, Suite 201
|
||||||||||||||||
Ridgefield,
CT 06877
|
1,902,096 | 3,652,152 | 5,554,248 | 4.6 | % | |||||||||||
OrbiMed
affiliated funds (4)
|
||||||||||||||||
767
Third Avenue, 30th
Floor
|
||||||||||||||||
New
York, NY 10017
|
2,284,960 | 3,120,378 | 5,405,338 | 4.4 | % | |||||||||||
Knoll
affiliated funds (5)
|
||||||||||||||||
666
Fifth Avenue, Suite 3702
|
||||||||||||||||
New
York, NY 10103
|
4,462,234 | 9,247,776 | 13,710,010 | 11.2 | % | |||||||||||
Purdue
Pharma, L.P. (6)
|
||||||||||||||||
One
Stamford Forum
|
||||||||||||||||
201
Tresser Blvd.
|
||||||||||||||||
Stamford,
CT 06901-3431
|
13,636,364 | 15,384,614 | 29,020,978 | 23.8 | % |
49
|
Pro forma ownership does not
include accumulated undeclared dividends totaling approximately $2,092,000
at March 31, 2010 that had not yet been converted as of June 24, 2010.
These accumulated undeclared dividends may be converted into approximately
3,219,000 shares of common stock in connection with the conversion of the
associated remaining shares of Series E preferred
stock.
|
|
(2)
|
Based on 121,907,526 shares of
common stock outstanding, which reflects the number of shares of common
stock outstanding as of June 24, 2010 plus the total number of shares
issuable upon conversion of all of the outstanding shares of Series E
preferred stock (excluding shares issuable upon conversion of accumulated
undeclared dividends).
|
|
Includes Xmark Opportunity
Partners, LLC, Xmark Opportunity Fund, Ltd., Xmark Opportunity Fund, L.P.,
and Xmark JV Investment Partners,
LLC.
|
|
(4)
|
Includes OrbiMed Advisors LLC,
Caduceus Capital Master Fund Limited, Caduceus Capital II, LP, UBS
Eucalyptus Fund, L.L.C., PW Eucalyptus Fund, Ltd., and Summer Street Life
Sciences Investors LLC.
|
|
(5)
|
Includes Knoll Capital, Knoll
Special Opportunities Fund II Master Fund, Ltd., and Europa International,
Inc. As described in footnote 2 to the preceding table, on February 26,
2010, the Knoll-affiliated Funds provided to the Company notice of waiver
of the conversion limitations on the Series E preferred stock held by
them.
|
|
(6)
|
Following the financing
transactions completed on February 11, 2009, August 25, 2009 and November
10, 2009, Purdue transferred its shares of Series E preferred stock,
shares of common stock and warrants to purchase common stock of Novelos to
Beacon Company and Rosebay Medical Company L.P., which are independent
associated companies of Purdue. Pro forma ownership of Purdue excludes
14,003,499 shares of common stock issuable upon exercise of warrants
issued to Purdue in February, August and November 2009 as a result of the
blocker provisions described in footnote 4 to the preceding
table.
|
Equity
compensation plans
The
following table provides information as of December 31, 2009 regarding shares
authorized for issuance under our equity compensation plans, including
individual compensation arrangements.
We have
two equity compensation plans approved by our stockholders: the 2000 Stock
Option and Incentive Plan and the 2006 Stock Incentive Plan. We have also issued
options to our directors and consultants that were not approved by our
stockholders. These options are exercisable within a ten-year period from the
date of the grant and vest at various intervals with all options being fully
vested within three years of the date of grant. The option price per share is
not less than the fair market value of our common stock on the date of
grant.
50
Equity
compensation plan information
Plan category
|
Number of shares to
be issued upon
exercise of outstanding
options, warrants and
rights (#)
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
($)
|
Number of shares
remaining available for
future issuance under
equity compensation plans
(excluding shares reflected
in column (a)) (#)
|
|||||||||
(a)
|
(b)
|
(c)
|
||||||||||
Equity
compensation plans approved by stockholders
|
6,766,047 | $ | 0.65 | 3,290,000 | ||||||||
Equity
compensation plans not approved by stockholders
|
2,453,778 | $ | 0.57 | 0 | ||||||||
Total
|
9,219,825 | $ | 0.63 | 3,290,000 |
51
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
If a
royalty is not being paid to ZAO BAM on net sales of oxidized glutathione
products, then we are required to pay ZAO BAM 3% of all license revenues. If
license revenues exceed our cumulative expenditures including, but not limited
to, preclinical and clinical studies, testing, FDA and other regulatory agency
submission and approval costs, general and administrative costs, and patent
expenses, then the Company would be required to pay ZAO BAM an additional 9% of
the amount by which license revenues exceed the Company’s cumulative
expenditures. During 2008, we paid ZAO BAM $15,000, which was 3% of license
payments received under the collaboration agreement with Lee’s Pharm, described
in Note 5 to the financial statements.
On
June 28, 2010, we received a letter from counsel to ZAO BAM and ZAO BAM Research
Laboratories (collectively, “BAM”) alleging that we modified the chemical
composition of NOV-002 without prior notice to or approval from BAM,
constituting a material breach of a technology and assignment agreement we had
entered into with BAM on June 20, 2000. The letter references an
amendment, submitted to the FDA on August 30, 2005, to our investigational new
drug application dated August 1999 as the basis for BAM’s claims and demands the
transfer of all intellectual property rights concerning NOV-002 to
BAM. Mark Balazovsky, a director of Novelos from June 1996 until
November 2006 and a shareholder of Novelos through at least June 25, 2010, is,
to our knowledge, still the general director and principal shareholder of ZAO
BAM. We believe the allegations are without merit and we intend to
defend vigorously against any proceedings that BAM may initiate as to these
allegations.
As a
result of the assignment to Novelos of the exclusive worldwide intellectual
property and marketing rights of oxidized glutathione (excluding the Russian
Territory), Novelos is obligated to the Oxford Group, Ltd., or its assignees,
for future royalties. Simyon Palmin, a founder of Novelos, a director until
August 15, 2008 and the father of the Company’s president and chief executive
officer, is president of Oxford Group, Ltd. Mr. Palmin was also an employee of
the Company until September 2008 and performed consulting services to the
Company through December 2009. Pursuant to the agreement, as revised May 26,
2005, Novelos is required to pay Oxford Group, Ltd., or its assignees, a royalty
in the amount of 0.8% of the Company’s net sales of oxidized glutathione-based
products.
Director
Independence
Each
member of the Audit Committee, the Compensation Committee and the Nominating and
Corporate Governance Committee meets the independence requirements of the Nasdaq
Stock Market for membership on the committees on which he serves. The board of directors considered the information
included in transactions with related parties as outlined above along with other
information the board considered relevant, when considering the independence of
each director. Harry S. Palmin is not an independent director.
PLAN
OF DISTRIBUTION
Rodman
& Renshaw, LLC, which we refer to as the placement agent, has entered into a
placement agency agreement with us in connection with this offering. The
placement agent may engage one or more sub-placement agents or selected dealers.
Among other things, the placement agent will assist us in identifying and
evaluating prospective investors and approach prospective investors regarding
the offering. The placement agent will assist us on a “reasonable best efforts”
basis. The placement agent will have no obligation to buy any of the securities
from us, nor is it required to arrange the purchase or sale of any specific
number or dollar amount of securities. We will enter into a securities purchase
agreement directly with each investor in connection with this offering, which
will set forth the terms of the offering, as described in this prospectus, will
include customary representations and warranties regarding the offering, the
units to be issued and sold, and our business, and will contain customary
conditions to closing and other customary terms.
This
offering will be made only to persons who qualify as “institutional investors”
under the securities laws of the state of their residence, or for entities, of
their domicile, or to legal entities to whom offers and sales may be made
without qualification or registration of this offering under the securities laws
of their state of domicile.
52
The
placement agency agreement provides that the obligations of the placement agent
are subject to certain conditions precedent, including the absence of any
material adverse change in our business and the receipt of certain certificates,
opinions and letters from us, our officers, our counsel, and our independent
registered public accounting firm. If the closing conditions are not satisfied
by , 2010, we will return your
subscription amount to you without interest and without any other offset or
deduction within two days.
There may
be one or more closings of the offering. On each closing date, we will issue the
securities for which subscriptions have been received and accepted to the
subscribers and we will receive funds in the amount of the aggregate purchase
price for those securities. We currently anticipate a first closing of a sale of
the securities
on ,
2010.
On each
closing date, the following will occur:
|
●
|
we will receive funds in the
amount of the aggregate purchase price of the securities being sold by us
on such closing date, less the amount of fees we are paying to the
placement agent;
|
|
●
|
we will cause common stock sold
on such closing date to be delivered in book-entry form through the
facilities of the Depository Trust Company;
and
|
|
●
|
we
will cause an executed warrant exercisable for the applicable number of
shares to be delivered to each purchaser of common stock on such closing
date.
|
We have
agreed to pay the placement agent a cash fee equal to 8% of the gross proceeds
of this offering, plus an accountable expense allowance of 1% of the gross
proceeds of this offering, subject to a cap of $35,000.
The
following table shows the per unit and total placement agent fee to be paid by
us to the placement agent. This amount is shown assuming all of the securities
offered pursuant to this prospectus are sold and issued by us.
Total
|
||||||
$ | $ |
We are
offering pursuant to this prospectus up to 34,285,714 of our units, but there
can be no assurance that the offering will be fully subscribed. Accordingly, we
may sell substantially less than 34,285,714 of our units, in which case our net
proceeds would be substantially reduced and the total placement agent fees may
be substantially less than the maximum total set forth above. We have agreed to
indemnify the placement agent against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, and liabilities related to the
performance by the placement agent of the services contemplated by the placement
agency agreement. We have also agreed to contribute to payments the placement
agent may be required to make in respect of such liabilities.
The form
of placement agency agreement is filed as an exhibit to the registration
statement of which this prospectus is a part.
The
placement agent has informed us that it will not engage in over-allotment,
stabilizing transactions or syndicate covering transactions in connection with
this offering.
Under our
amended and restated certificate of incorporation, our authorized capital stock
consists of 225,000,000 shares of common stock, $0.00001 par value per share and
7,000 shares of preferred stock, $0.00001 par value per share.
53
Our
amended and restated certificate of incorporation authorizes us to issue shares
of our preferred stock from time to time in one or more series without
stockholder approval. As of July 2, 2010, we had designated 272 shares of Series
C cumulative convertible preferred stock, 204 of which were issued and
outstanding as of that date and 735 shares of Series E preferred stock,
408.264045 of which were issued and outstanding as of that
date.
All
outstanding shares of our common stock and preferred stock are duly authorized,
validly issued, fully-paid and non-assessable.
Common
Stock
Voting. Holders of our common
stock are entitled to one vote per share held of record on all matters to be
voted upon by our stockholders. Our common stock does not have cumulative voting
rights. Persons who hold a majority of the outstanding common stock entitled to
vote on the election of directors can elect all of the directors who are
eligible for election.
Dividends. Subject to
preferences that may be applicable to the holders of any outstanding shares of
our preferred stock, the holders of our common stock are entitled to receive
such lawful dividends as may be declared by our board of directors.
Liquidation and Dissolution.
In the event of our liquidation, dissolution or winding up, and subject to the
rights of the holders of any outstanding shares of our preferred stock, the
holders of shares of our common stock will be entitled to receive pro rata all
of our remaining assets available for distribution to our
stockholders.
Other Rights and
Restrictions. Our charter prohibits us from granting preemptive rights to
any of our stockholders. All outstanding shares are fully paid and
nonassessable.
Listing. Our common stock is
traded on the over-the-counter bulletin board under the trading symbol
“NVLT.OB”.
Warrants
to be Issued as Part of this Offering
The
Warrants offered in this offering will be issued in a form filed as an
exhibit to the registration statement of which this prospectus is a part. You
should review a copy of the form of warrant for a complete description of the
terms and conditions applicable to the Warrants. The following is a brief
summary of the Warrants and is subject in all respects to the provisions
contained in the form of warrant.
Each
Warrant represents the right to purchase 0.75 shares of common stock at an
exercise price equal to 100% of the unit issue price, subject to adjustment as
described below. Each Warrant may be exercised on or after the applicable
closing date of this offering through and including the close of business on the
fifth anniversary of the date of issuance. Each Warrant will have a cashless
exercise right in the event that the shares of common stock underlying such
Warrants are not covered by an effective registration statement at the time of
such exercise.
The
exercise price and the number of shares underlying the Warrants are subject to
appropriate adjustment in the event of stock splits, stock dividends on our
common stock, stock combinations or similar events affecting our common stock.
In addition, in the event we consummate any merger, consolidation, sale or other
reorganization event in which our common stock is converted into or exchanged
for securities, cash or other property or we consummate a sale of substantially
all of our assets, then following such event, the holders of the Warrants will
be entitled to receive upon exercise of the Warrants the kind and amount of
securities, cash or other property which the holders would have received had
they exercised the Warrants immediately prior to such reorganization event. In
addition, subject to certain exceptions, in the event we issue additional shares
of common stock, or securities convertible into or exercisable for shares of
common stock, at a price per share less than the exercise price of the
warrants then in effect, the exercise price will be reduced to that lower price
per share.
No
fractional shares of common stock will be issued in connection with the exercise
of a Warrant. In lieu of fractional shares, we will pay the holder an amount in
cash equal to the fractional amount multiplied by the market value of a share of
common stock. A Warrant may be transferred by a holder, upon surrender of the
Warrant, properly endorsed (by the holder executing an assignment in the form
attached to the Warrant). The Warrants will not be listed on any securities
exchange or automated quotation system and we do not intend to arrange for any
exchange or quotation system to list or quote the Warrants.
54
Series
C Cumulative Convertible Preferred Stock
Stated Value: The Series C
preferred stock has a stated value of $12,000 per share.
Voting Rights: The Series C
preferred stockholders do not have voting rights.
Dividends: The Series C
preferred stock had an annual dividend rate of 8% until October 1, 2008 and
thereafter has an annual dividend rate of 20%. The dividends are payable
quarterly commencing on June 30, 2007. Such dividends shall only be paid after
all outstanding dividends on the Series E preferred stock (with respect to the
current fiscal year and all prior fiscal years) shall have been paid to the
holders of the Series E preferred stock. Such dividends shall be paid in
cash.
Antidilution: Upon the
occurrence of a stock split, stock dividend, combination of our common stock
into a smaller number of shares, issuance of any of our shares or other
securities by reclassification of our common stock, or merger or sale of
substantially all of our assets, the conversion rate shall be adjusted so that
the conversion rights of the Series C preferred stock stockholders will be
equivalent to the conversion rights of the Series C preferred stock stockholders
prior to such event.
Redemption: The Series C
preferred stock is not redeemable at the option of the holder. However, we may
redeem the Series C preferred stock by paying to the holder a sum of money equal
to one hundred twenty percent (120%) of the stated value per share plus any
accrued but unpaid dividends upon 30 days’ (during which time the Series C
preferred stock may be converted) prior written notice if a registration
statement has been filed with and declared effective by the Securities and
Exchange Commission covering the shares of our common stock issuable upon
conversion of the Series C preferred stock.
Dissolution: In the event of
any voluntary or involuntary liquidation, dissolution or winding up of our
affairs, the Series C preferred stock will be treated as senior to our common
stock. After all required payments are made to holders of Series E preferred
stock, the Series C preferred stockholders will be entitled to receive first,
$12,000 per share and all accrued and unpaid dividends. If, upon any winding up
of our affairs, our remaining assets available to pay the holders of Series C
preferred stock are not sufficient to permit the payment in full, then all our
assets will be distributed to the holders of our Series C preferred stock (and
any remaining holders of Series E preferred stock as may be required) on a pro
rata basis.
Series
E Convertible Preferred Stock
Stated Value: The Series E
preferred stock has a stated value of $50,000 per share.
Voting and Board Rights: The
Series E preferred stockholders are entitled to vote on all matters on which the
holders of common stock are entitled to vote. The number of votes to which each
holder of Series E preferred stock is entitled is equal to the number of shares
of common stock that would be issued to such holder if the Series E Preferred
Stock had been converted at the record date for the meeting of stockholders,
subject to the limitations described under the subcaption “Conversion”
below.
55
Pursuant
to the securities purchase agreement dated March 26, 2008, the Xmark Funds have
the right to designate one member to our Board. This right shall last until such
time as the Xmark Funds no longer hold at least one-third of the preferred stock
issued to them at closing. In addition, the Xmark Funds and the OrbiMed
affiliated funds (together with the Xmark Funds, the “Lead Investors”) have the
right to designate one observer to attend all meetings of our Board, committees
thereof and access to all information made available to members of the Board.
This right lasts until such time as the Lead Investors no longer hold at least
one-third of the preferred stock issued to them. Pursuant to the August 2009
Purchase Agreement, Purdue has the right to either designate one member of our
Board or designate an observer to attend all meetings of our Board, committees
thereof and access to all information made available to members of the Board.
This right lasts until the later of such time as Purdue or its assignees no
longer hold at least one-half of the common stock and preferred stock issued to
them.
Dividends: The Series E
preferred stock has a dividend rate of 9% per annum, payable semi-annually. Such
dividends may be paid in cash, in shares of Series E preferred stock or in
registered shares of common stock. While any shares of Series E preferred stock
remain outstanding, we are prohibited from paying dividends to common
stockholders or any other class of preferred stock other than Series C preferred
stock without the prior consent of the Series E holders. If consent is given,
the holders of outstanding shares of Series E preferred stock are also entitled
to participate in any dividends paid to common stockholders.
Conversion: Each share of
Series E preferred stock is convertible at a price of $0.65 per common share at
any time after issuance. The Series E preferred stock can be converted only to
the extent that the Series E stockholder will not, as a result of the
conversion, beneficially hold in excess of 4.99% or 9.99%, as applicable, of the
total outstanding shares of our common stock, provided however that this
limitation may be revoked by the stockholder upon 61 days’ prior notice to us.
If there is an effective registration statement covering the shares of common
stock underlying the outstanding shares of Series E preferred stock and the
daily volume weighted average price (“VWAP”), as defined in the Series E
Certificate of Designations, of our common stock exceeds $2.00 for 20
consecutive trading days, then the outstanding Series E preferred stock will
automatically convert, together with accrued dividends, into common stock at the
conversion price then in effect.
Liquidation: The Series E
preferred stock ranks senior to all other outstanding series of preferred stock
and common stock as to the payment of dividends and the distribution of assets
upon voluntary or involuntary liquidation, dissolution or winding up of our
affairs. The Series E preferred stockholders will be entitled to receive first,
prior to any distribution of any assets or surplus funds of the Company to the
holders of common stock or any other class of capital stock, an amount equal to
$50,000 per share and all accrued and unpaid dividends. They are then entitled
to participate with the holders of the remaining classes of common stock in the
distribution of remaining assets on a pro rata basis. If, upon any winding up of
our affairs, our assets available to pay the holders of Series E preferred stock
are not sufficient to permit the payment in full, or the amounts described
above, then all our assets will be distributed to the holders of our Series E
preferred stock on a pro rata basis.
If we
sell, lease or otherwise transfer substantially all of our assets, consummate a
business combination in which we are not the surviving corporation or, if we are
the surviving corporation, if the holders of a majority of our common stock
immediately before the transaction do not hold a majority of our common stock
immediately after the transaction, in one or a series of events, change the
majority of the members of our board of directors, or if any person or entity
(other than the holders of Series E preferred stock) acquires more than 50% of
our outstanding stock, then the holders of Series E preferred stock are entitled
to receive the same liquidation preference as described above, except that after
receiving $50,000 per preferred share and any accrued but unpaid dividends, they
are not entitled to participate with other classes or common stock in a
distribution of the remaining assets.
56
Other restrictions: For as
long as any shares of Series E preferred stock remain outstanding, without the
prior consent of the requisite holders of Series E preferred stock (currently
the Xmark Funds and Purdue), the Company is prohibited from (i) paying dividends
to common stockholders; (ii) amending the Company’s certificate of
incorporation; (iii) issuing any equity security or any security convertible
into or exercisable for any equity security at a price of $0.65 or less or with
rights senior to the Series E preferred stock (except for certain exempted
issuances); (iv) increasing the number of shares of Series E preferred stock or
issuing any additional shares of Series E preferred stock other than the shares
designated in the Series E Certificate of Designations; (v) selling, licensing
or otherwise granting any rights with respect to all or substantially all of the
Company’s assets (and in the case of licensing, any material intellectual
property) or the Company's business and shall not enter into a merger or
consolidation with another company unless Novelos is the surviving corporation,
the Series E preferred stock remains outstanding, there are no changes to the
rights and preferences of the Series E preferred stock and there is not created
any new class of capital stock senior to the Series E preferred stock; (vi)
redeeming or repurchasing any capital stock other than Series E preferred stock;
(vii) incurring any new debt for borrowed money in excess of $500,000 and (viii)
changing the number of the Company’s directors.
Anti-Takeover
Effect of Certain Charter and By-Law Provisions
Provisions
of our charter and our by-laws could make it more difficult to acquire us
by means of a merger, tender offer, proxy contest, open market purchases,
removal of incumbent directors and otherwise. These provisions, which are
summarized below, are expected to discourage types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of us to first negotiate with us. We believe that the benefits
of increased protection of our potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure us outweigh
the disadvantages of discouraging takeover or acquisition proposals because
negotiation of these proposals could result in an improvement of their
terms.
Authorized but Unissued
Stock. We have shares of common stock and preferred stock available for
future issuance, in some cases, without stockholder approval. We may issue these
additional shares for a variety of corporate purposes, including public
offerings to raise additional capital, corporate acquisitions, stock dividends
on our capital stock or equity compensation plans.
The
existence of unissued and unreserved common stock and preferred stock may enable
our board of directors to issue shares to persons friendly to current management
or to issue preferred stock with terms that could render more difficult or
discourage a third-party attempt to obtain control of us, thereby protecting the
continuity of our management. In addition, if we issue preferred stock, the
issuance could adversely affect the voting power of holders of common stock and
the likelihood that such holders will receive dividend payments and payments
upon liquidation.
57
Special Meeting of
Stockholders. Our by-laws provide that any action required or permitted
to be taken by our stockholders at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before the
meeting.
DISCLOSURE
OF COMMISSION POSITION ON
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our
charter contains provisions to indemnify our directors and officers to the
maximum extent permitted by Delaware law. We believe that indemnification under
our charter covers at least negligence on the part of an indemnified person. Our
charter permits us to advance expenses incurred by an indemnified person in
connection with the defense of any action or proceeding arising out of the
person’s status or service as our director, officer, employee or other agent
upon an undertaking by the person to repay those advances if it is ultimately
determined that the person is not entitled to indemnification.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
WHERE
YOU CAN FIND MORE INFORMATION
We are a
reporting company and file annual, quarterly and special reports, and other
information with the Securities and Exchange Commission. Copies of the reports
and other information may be read and copied at the SEC’s Public Reference Room
at 100 F Street NE, Washington, D.C. 20549. You can request copies of such
documents by writing to the SEC and paying a fee for the copying cost. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC.
This
prospectus is part of a registration statement on Form S-1 that we filed with
the SEC. Certain information in the registration statement has been omitted from
this prospectus in accordance with the rules and regulations of the SEC. We have
also filed exhibits and schedules with the registration statement that are
excluded from this prospectus. For further information you may:
|
·
|
read a copy of the registration
statement, including the exhibits and schedules, without charge at the
SEC’s Public Reference Room;
or
|
|
·
|
obtain a copy from the SEC upon
payment of the fees prescribed by the
SEC.
|
The
validity of the securities being offered by this prospectus has been passed upon
for us by Foley Hoag LLP, Boston, Massachusetts.
EXPERTS
Stowe
& Degon LLC have audited our financial statements as of December 31, 2009
and 2008 and for the years then ended. The financial statements referred to
above are included in this prospectus with reliance upon the independent
registered public accounting firm’s opinion based on its expertise in accounting
and auditing.
58
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Balance
Sheets at March 31, 2010, December 31, 2009 and 2008
|
F-3
|
Statements
of Operations for the Three Months Ended March 31, 2010 and 2009 and the
Years Ended December 31, 2009 and 2008
|
F-4
|
Statements
of Redeemable Preferred Stock and Stockholders’ Deficiency for the Three
Months Ended March 31, 2010 and the Years Ended December 31, 2009 and
2008
|
F-5
|
Statements
of Cash Flows for the Three Months Ended March 31, 2010 and 2009 and the
Years Ended December 31, 2009 and 2008
|
F-6
|
Notes
to Financial Statements
|
F-7
|
F-1
To the
Stockholders and Board of Directors
Novelos
Therapeutics, Inc.
Newton,
Massachusetts
We have
audited the accompanying balance sheets of Novelos Therapeutics, Inc. as of
December 31, 2009 and 2008 and the related statements of operations, redeemable
preferred stock and stockholders’ deficiency, and cash flows for the years then
ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Novelos Therapeutics, Inc. as of
December 31, 2009 and 2008 and the results of its operations, changes in
redeemable preferred stock and stockholders’ deficiency, and cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred continuing losses in the
development of its products and has a stockholders’ deficiency at December 31,
2009. These factors raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in this regard
are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As
described in Note 2 to the financial statements, the Company adopted Emerging
Issues Task Force Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock (Accounting
Standards Codification Topic 815, Derivatives and Hedging)
effective as of January 1, 2009.
/s/ Stowe
& Degon LLC
Westborough,
Massachusetts
March 23,
2010
F-2
BALANCE
SHEETS
March 31,
2010 |
December
31,
2009 |
December 31,
2008 |
||||||||||
(unaudited)
|
(audited)
|
(audited)
|
||||||||||
ASSETS
|
||||||||||||
CURRENT
ASSETS:
|
||||||||||||
Cash
and equivalents
|
$ | 5,611,732 | $ | 8,769,529 | $ | 1,262,452 | ||||||
Prepaid
expenses and other current assets
|
150,497 | 102,923 | 129,785 | |||||||||
Total
current assets
|
5,762,229 | 8,872,452 | 1,392,237 | |||||||||
FIXED
ASSETS, NET
|
16,807 | 44,097 | 58,451 | |||||||||
DEPOSITS
|
15,350 | 15,350 | 15,350 | |||||||||
TOTAL
ASSETS
|
$ | 5,794,386 | $ | 8,931,899 | $ | 1,466,038 | ||||||
CURRENT
LIABILITIES:
|
||||||||||||
Accounts
payable and accrued liabilities
|
$ | 2,895,457 | $ | 3,299,217 | $ | 4,653,912 | ||||||
Accrued
compensation
|
7,689 | 245,711 | 240,639 | |||||||||
Accrued
dividends
|
2,924,673 | 2,902,963 | 1,689,322 | |||||||||
Derivative
liability (see Note 2)
|
4,756 | 10,486,594 | — | |||||||||
Deferred
revenue – current
|
33,333 | 33,333 | 33,333 | |||||||||
Total
current liabilities
|
5,865,908 | 16,967,818 | 6,617,206 | |||||||||
DEFERRED
REVENUE – NONCURRENT
|
391,667 | 400,000 | 433,333 | |||||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||||||
REDEEMABLE
PREFERRED STOCK:
|
||||||||||||
Series
D convertible preferred stock, $0.00001 par value; no shares designated or
outstanding at March 31, 2010 and December 31, 2009; 420 shares designated
and 413.5 shares issued and outstanding at December 31,
2008
|
— | — | 13,904,100 | |||||||||
Series
E convertible preferred stock, $0.00001 par value; 735 shares designated;
408.264045 and 548.26078125 shares issued and outstanding at March 31,
2010 and December 31, 2009, respectively; no shares designated or
outstanding at December 31, 2008 (liquidation preference $22,505,555 at
March 31, 2010 and $29,606,082 at December 31, 2009) (see Note
6)
|
13,770,026 | 18,459,619 | — | |||||||||
Total
redeemable preferred stock
|
13,770,026 | 18,459,619 | 13,904,100 | |||||||||
STOCKHOLDERS’
DEFICIENCY:
|
||||||||||||
Preferred
Stock, $0.00001 par value; 7,000 shares authorized: Series C 8% cumulative
convertible preferred stock; 272 shares designated; 204, 204 and 272
shares issued and outstanding at March 31, 2010, December 31, 2009 and
December 31, 2008, respectively (liquidation preference $3,280,320 at
March 31, 2010 and $3,157,920 at December 31, 2009)
|
— | — | — | |||||||||
Common
stock, $0.00001 par value; 225,000,000 shares
authorized; 90,385,939, 69,658,002 and 43,975,656 shares issued
and outstanding at March 31, 2010, December 31, 2009 and December 31,
2008, respectively
|
904 | 697 | 440 | |||||||||
Additional
paid-in capital
|
56,487,847 | 49,175,853 | 40,204,112 | |||||||||
Accumulated
deficit
|
(70,721,966 | ) | (76,072,088 | ) | (59,693,153 | ) | ||||||
Total
stockholders’ deficiency
|
(14,233,215 | ) | (26,895,538 | ) | (19,488,601 | ) | ||||||
TOTAL
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’
DEFICIENCY
|
$ | 5,794,386 | $ | 8,931,899 | $ | 1,466,038 |
See
report of independent registered public accounting firm and notes to financial
statements.
F-3
NOVELOS
THERAPEUTICS, INC.
STATEMENTS
OF OPERATIONS
Three Months Ended March
31,
|
Year Ended December 31,
|
|||||||||||||||
2010
(unaudited)
|
2009
(unaudited)
|
2009
(audited)
|
2008
(audited)
|
|||||||||||||
REVENUES
|
$ | 8,333 | $ | 30,968 | $ | 96,314 | $ | 125,968 | ||||||||
COSTS
AND EXPENSES:
|
||||||||||||||||
Research
and development
|
1,910,899 | 1,783,832 | 8,080,242 | 14,526,619 | ||||||||||||
General
and administrative
|
644,763 | 476,197 | 2,182,253 | 2,190,366 | ||||||||||||
Total
costs and expenses
|
2,555,652 | 2,260,029 | 10,262,495 | 16,716,985 | ||||||||||||
LOSS
FROM OPERATIONS
|
(2,547,319 | ) | (2,229,061 | ) | (10,166,181 | ) | (16,591,017 | ) | ||||||||
OTHER
INCOME (EXPENSE):
|
||||||||||||||||
Interest
income
|
— | 1,013 | 1,013 | 130,611 | ||||||||||||
Gain
(loss) on derivative warrants (see Note 2)
|
7,897,441 | 412,120 | (12,114,371 | ) | — | |||||||||||
Miscellaneous
|
— | 2,483 | 6,233 | 9,000 | ||||||||||||
Total
other income (expense)
|
7,897,441 | 415,616 | (12,107,125 | ) | 139,611 | |||||||||||
NET
INCOME (LOSS)
|
5,350,122 | (1,813,445 | ) | (22,273,306 | ) | (16,451,406 | ) | |||||||||
PREFERRED
STOCK DIVIDENDS
|
(656,635 | ) | (768,183 | ) | (3,296,289 | ) | (2,092,102 | ) | ||||||||
PREFERRED
STOCK DEEMED DIVIDENDS
|
— | (714,031 | ) | (714,031 | ) | (4,417,315 | ) | |||||||||
NET
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$ | 4,693,487 | $ | (3,295,659 | ) | $ | (26,283,626 | ) | $ | (22,960,823 | ) | |||||
BASIC
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON
SHARE
|
$ | 0.06 | $ | (0.07 | ) | $ | (0.53 | ) | $ | (0.56 | ) | |||||
SHARES
USED IN COMPUTING BASIC NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS PER COMMON SHARE
|
79,919,670 | 43,975,656 | 49,910,010 | 41,100,883 | ||||||||||||
DILUTED
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON
SHARE
|
$ | 0.02 | $ | (0.07 | ) | $ | (0.53 | ) | $ | (0.56 | ) | |||||
SHARES
USED IN COMPUTING DILUTED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS PER COMMON SHARE
|
134,925,138 | 43,975,656 | 49,910,010 | 41,100,883 |
See
report of independent registered public accounting firm and notes to financial
statements.
F-4
STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS’ DEFICIENCY
REDEEMABLE
PREFERRED STOCK
Series B,
D and E
Convertible
Preferred Stock
|
Common Stock
|
Series C Cumulative
Convertible
Preferred Stock
|
Additional
Paid-in
Capital
|
Accumulated
Deficit
|
Total
Stockholders’
Deficiency
|
|||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Par
Amount
|
Shares
|
Par
Amount
|
|||||||||||||||||||||||||||||||
BALANCE
AT JANUARY 1, 2008 (audited)
|
300 | $ | 9,918,666 | 39,260,272 | $ | 392 | 272 | $ | — | $ | 37,370,959 | $ | (43,241,747 | ) | $ | (5,870,396 | ) | |||||||||||||||||||
Exercise
of stock options
|
— | — | 100,000 | 1 | — | — | 999 | — | 1,000 | |||||||||||||||||||||||||||
Compensation
expense associated with options issued to employees
|
— | — | — | — | — | — | 395,194 | — | 395,194 | |||||||||||||||||||||||||||
Compensation
expense associated with options issued to non-employees
|
— | — | — | — | — | — | 58,133 | — | 58,133 | |||||||||||||||||||||||||||
Issuance
of common stock in a private placement
|
— | — | 4,615,384 | 47 | — | — | 2,986,691 | — | 2,986,738 | |||||||||||||||||||||||||||
Issuance
of Series D redeemable convertible preferred stock and warrants, net of
issuance costs of $205,328
|
113.5 | 4,167,080 | — | — | — | — | 1,302,592 | — | 1,302,592 | |||||||||||||||||||||||||||
Adjustment
to record the carrying value of Series D redeemable convertible preferred
stock at market value on the date of sale
|
— | (181,646 | ) | — | — | — | — | 181,646 | — | 181,646 | ||||||||||||||||||||||||||
Fair
value of reduction in conversion and exercise price of Series B redeemable
convertible preferred stock and warrants
|
— | 3,876,912 | — | — | — | — | 722,049 | — | 722,049 | |||||||||||||||||||||||||||
Accretion
of deemed dividend associated with the reduction of conversion and
exercise prices on Series B redeemable convertible preferred stock and
warrants
|
— | (3,876,912 | ) | — | — | — | — | (722,049 | ) | — | (722,049 | ) | ||||||||||||||||||||||||
Dividends
paid on preferred stock
|
— | — | — | — | — | — | (402,780 | ) | — | (402,780 | ) | |||||||||||||||||||||||||
Dividends
accrued on preferred stock
|
— | — | — | — | — | — | (1,689,322 | ) | — | (1,689,322 | ) | |||||||||||||||||||||||||
Net
loss
|
— | — | — | — | — | — | — | (16,451,406 | ) | (16,451,406 | ) | |||||||||||||||||||||||||
BALANCE
AT DECEMBER 31, 2008 (audited)
|
413.5 | 13,904,100 | 43,975,656 | 440 | 272 | — | 40,204,112 | (59,693,153 | ) | (19,488,601 | ) | |||||||||||||||||||||||||
Reclassification
of warrants to derivative liability (see Note 2)
|
— | — | — | — | — | — | (6,893,316 | ) | 5,894,371 | (998,945 | ) | |||||||||||||||||||||||||
Conversion
of Series C convertible preferred stock and accumulated dividends into
common stock
|
— | — | 1,538,837 | 15 | (68 | ) | — | 184,231 | — | 184,246 | ||||||||||||||||||||||||||
Conversion
of Series E convertible preferred stock and accumulated dividends into
common stock
|
(97.18209375 | )) | (3,213,056 | ) | 7,939,008 | 79 | — | — | 3,514,235 | — | 3,514,314 | |||||||||||||||||||||||||
Cashless
exercise of warrants
|
— | — | 483,829 | 5 | — | — | 1,000,957 | — | 1,000,962 | |||||||||||||||||||||||||||
Issuance
of common stock in exchange for warrants
|
— | — | 2,084,308 | 21 | — | — | 1,625,739 | — | 1,625,760 | |||||||||||||||||||||||||||
Issuance
of common stock and warrants in a private placement, net of issuance costs
of $61,116
|
— | — | 13,636,364 | 137 | — | — | 8,938,747 | — | 8,938,884 | |||||||||||||||||||||||||||
Compensation
expense associated with options issued to employees
|
— | — | — | — | — | — | 437,066 | — | 437,066 | |||||||||||||||||||||||||||
Compensation
expense associated with options issued to non-employees
|
— | — | — | — | — | — | 427,271 | — | 427,271 | |||||||||||||||||||||||||||
Issuance
of Series E redeemable convertible preferred stock and warrants, net of
issuance costs of $795,469
|
200 | 6,297,323 | — | — | — | — | 2,907,208 | — | 2,907,208 | |||||||||||||||||||||||||||
Issuance
of Series E redeemable convertible preferred stock in payment of
accumulated dividends
|
31.942875 | 1,597,144 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Adjustment
to record the carrying value of Series E redeemable convertible preferred
stock at fair value on the date of sale
|
— | (125,892 | ) | — | — | — | — | 125,892 | — | 125,892 | ||||||||||||||||||||||||||
Fair
value of the extension of expiration date of warrants
|
— | — | — | — | — | — | 839,923 | — | 839,923 | |||||||||||||||||||||||||||
Accretion
of deemed dividend associated with the extension of expiration date of
warrants
|
— | — | — | — | — | — | (839,923 | ) | — | (839,923 | ) | |||||||||||||||||||||||||
Dividends
accrued on preferred stock
|
— | — | — | — | — | — | (3,296,289 | ) | — | (3,296,289 | ) | |||||||||||||||||||||||||
Net
loss
|
— | — | — | — | — | — | — | (22,273,306 | ) | (22,273,306 | ) | |||||||||||||||||||||||||
BALANCE
AT DECEMBER 31, 2009 (audited)
|
548.26078125 | 18,459,619 | 69,658,002 | 697 | 204 | — | 49,175,853 | (76,072,088 | ) | (26,895,538 | ) | |||||||||||||||||||||||||
Exercise
of stock options
|
— | — | 800,000 | 8 | — | — | 157,392 | — | 157,400 | |||||||||||||||||||||||||||
Conversion
of Series E convertible preferred stock and accumulated dividends into
common stock
|
(139.99673625 | ) | (4,689,593 | ) | 11,745,779 | 117 | — | — | 5,324,401 | — | 5,324,518 | |||||||||||||||||||||||||
Cashless
exercise of warrants
|
— | — | 8,182,158 | 82 | — | — | 2,584,315 | — | 2,584,397 | |||||||||||||||||||||||||||
Compensation
expense associated with options issued to employees
|
— | — | — | — | — | — | 140,041 | — | 140,041 | |||||||||||||||||||||||||||
Compensation
expense associated with options issued to non-employees
|
— | — | — | — | — | — | (237,520 | ) | — | (237,520 | ) | |||||||||||||||||||||||||
Dividends
accrued on preferred stock
|
— | — | — | — | — | — | (656,635 | ) | — | (656,635 | ) | |||||||||||||||||||||||||
Net
income
|
— | — | — | — | — | — | — | 5,350,122 | 5,350,122 | |||||||||||||||||||||||||||
BALANCE
AT MARCH 31, 2010 (unaudited)
|
408.264045 | $ | 13,770,026 | 90,385,939 | $ | 904 | 204 | $ | — | $ | 56,487,847 | $ | (70,721,966 | ) | $ | (14,233,215 | ) |
See report of independent
registered public accounting firm and notes to financial
statements.
F-5
STATEMENTS
OF CASH FLOWS
Three Months Ended
March 31,
|
Year Ended
December 31,
|
|||||||||||||||
2010
(unaudited)
|
2009
(unaudited)
|
2009
(audited)
|
2008
(audited)
|
|||||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||
Net
income (loss)
|
$ | 5,350,122 | $ | (1,813,445 | ) | $ | (22,273,306 | ) | $ | (16,451,406 | ) | |||||
Adjustments
to reconcile net income (loss) to cash used in operating
activities:
|
||||||||||||||||
Depreciation
and amortization
|
27,290 | 6,231 | 32,354 | 16,889 | ||||||||||||
Loss
on disposal of fixed assets
|
— | — | — | 6,472 | ||||||||||||
Stock-based
compensation
|
(97,479 | ) | 126,587 | 864,337 | 453,327 | |||||||||||
(Gain)
loss on derivative warrants
|
(7,897,441 | ) | (412,120 | ) | 12,114,371 | — | ||||||||||
Changes
in:
|
||||||||||||||||
Prepaid
expenses and other current assets
|
(47,574 | ) | 41,290 | 26,862 | 3,496 | |||||||||||
Accounts
payable and accrued liabilities
|
(403,760 | ) | (1,260,400 | ) | (1,354,695 | ) | (1,718,566 | ) | ||||||||
Accrued
compensation
|
(238,022 | ) | (172,381 | ) | 5,072 | (108,773 | ) | |||||||||
Deferred
revenue
|
(8,333 | ) | (8,333 | ) | (33,333 | ) | 466,666 | |||||||||
Cash
used in operating activities
|
(3,315,197 | ) | (3,492,571 | ) | (10,618,338 | ) | (17,331,895 | ) | ||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||
Purchases
of fixed assets
|
— | — | (18,000 | ) | (49,003 | ) | ||||||||||
Change
in restricted cash
|
— | — | — | 1,184,702 | ||||||||||||
Cash
provided by (used in) investing activities
|
— | — | (18,000 | ) | 1,135,699 | |||||||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||
Proceeds
from issuance of common stock, net
|
— | 9,204,531 | 8,938,884 | 2,986,738 | ||||||||||||
Proceeds
from issuance of Series D convertible preferred stock and warrants,
net
|
— | — | — | 5,469,672 | ||||||||||||
Proceeds
from issuance of Series E convertible preferred stock and warrants,
net
|
— | — | 9,204,531 | — | ||||||||||||
Dividends
paid to preferred stockholders
|
— | — | — | (740,280 | ) | |||||||||||
Proceeds
from exercise of stock options
|
157,400 | — | — | 1,000 | ||||||||||||
Cash
provided by financing activities
|
157,400 | 9,204,531 | 18,143,415 | 7,717,130 | ||||||||||||
INCREASE
(DECREASE) IN CASH AND EQUIVALENTS
|
(3,157,797 | ) | 5,711,960 | 7,507,077 | (8,479,066 | ) | ||||||||||
CASH
AND EQUIVALENTS AT BEGINNING OF PERIOD
|
8,769,529 | 1,262,452 | 1,262,452 | 9,741,518 | ||||||||||||
CASH
AND EQUIVALENTS AT END OF PERIOD
|
$ | 5,611,732 | $ | 6,974,412 | $ | 8,769,529 | $ | 1,262,452 | ||||||||
SUPPLEMENTAL
DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
|
||||||||||||||||
Dividends
accumulated on shares of Series E preferred stock exchanged or converted
into shares of common stock
|
$ | 634,925 | $ | 1,597,144 | $ | 1,898,402 | $ | — | ||||||||
Dividends
accumulated on shares of Series C preferred stock converted into shares of
common stock
|
$ | — | $ | — | $ | 184,246 | $ | — | ||||||||
Fair
value of derivative warrants upon adoption of new accounting
principle
|
$ | — | $ | 998,945 | $ | 998,945 | $ | — | ||||||||
Fair
value of common stock issued in exchange for tender of derivative
warrants
|
$ | — | $ | — | $ | 1,625,760 | $ | — | ||||||||
Fair
value of derivative warrants reclassified to additional paid-in capital
upon cashless exercise
|
$ | 2,584,397 | $ | — | $ | 1,000,962 | $ | — | ||||||||
Carrying
value of redeemable preferred stock converted into common
stock
|
$ | 4,689,593 | $ | — | $ | 3,213,056 | $ | — | ||||||||
Exchange
of Series B for Series D preferred stock
|
$ | — | $ | — | $ | — | $ | 9,918,666 | ||||||||
Exchange
of Series D for Series E preferred stock
|
$ | — | $ | 13,904,100 | $ | 13,904,100 | $ | — | ||||||||
Relative
fair value of warrants issued to stockholders
|
$ | — | $ | 2,907,208 | $ | 4,835,727 | $ | 1,302,592 |
See
report of independent registered public accounting firm and notes to financial
statements.
F-6
NOTES
TO FINANCIAL STATEMENTS
(ALL
INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND
2009,
AND
SUBSEQUENT TO MARCH 31, 2010, IS UNAUDITED)
1.
NATURE OF BUSINESS, ORGANIZATION AND GOING CONCERN
Novelos
Therapeutics, Inc. (‘‘Novelos’’ or the ‘‘Company’’) is a biopharmaceutical
company focused on developing oxidized glutathione-based compounds for the
treatment of cancer and hepatitis. Novelos is also seeking to expand its product
pipeline by licensing or acquiring clinical stage compounds or technologies for
oncology indications. Novelos owns exclusive worldwide intellectual property
rights (excluding Russia and other states of the former Soviet Union (the
“Russian Territory”), but including Estonia, Latvia and Lithuania) related to
certain clinical compounds and other pre-clinical compounds based on oxidized
glutathione.
The
Company is subject to a number of risks similar to those of other small
biopharmaceutical companies. Principal among these risks are dependence on key
individuals, competition from substitute products and larger companies, the
successful development and marketing of its products in a highly regulated
environment and the need to obtain additional financing necessary to fund future
operations.
On
February 24, 2010, the Company announced that its Phase 3 clinical trial for
NOV-002 in non-small cell lung cancer (the “Phase 3 Trial”) did not meet its
primary endpoint of a statistically significant increase in median overall
survival. Following evaluation of the detailed trial data, on March 18, 2010,
the Company announced that the secondary endpoints had also not been met in the
Phase 3 Trial and that it had discontinued development of NOV-002 for NSCLC in
combination with first-line paclitaxel and carboplatin chemotherapy, although
development for other indications is continuing.
These
financial statements have been prepared on the basis that the Company will
continue as a going concern. The Company has incurred operating losses since
inception in devoting substantially all of its efforts toward the research and
development. The process of developing products will continue to require
significant research and development, non-clinical testing, clinical trials and
regulatory approval. The Company expects that these activities, together with
general and administrative costs, will result in continuing operating losses for
the foreseeable future. The Company believes that it has adequate cash to fund
these activities into January 2011. The Company’s ability to execute its
operating plan beyond January 2011 is dependent on its ability to obtain
additional capital, during 2010, principally through the sale of equity and debt
securities. The negative outcome of the Phase 3 Trial, as well as continuing
difficult conditions in the capital markets globally, may adversely affect the
ability of the Company to obtain funding in a timely manner. If the Company is
unable to obtain additional funding, it will be required, beginning in September
2010, to scale back its administrative and clinical development activities and
may be required to cease its operations entirely. Even if the Company does
obtain additional funding, it is likely it will need to obtain further funding
in the future in order to operate its business. The Company plans to continue to
actively pursue financing alternatives during 2010, but there can be no
assurance that it will obtain the capital required to continue its operations.
In the interim, the Company is continuously evaluating measures to reduce costs
to preserve existing capital.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying financial statements reflect the application of certain accounting
policies, as described in this note and elsewhere in the accompanying notes to
the financial statements.
F-7
Use of
Estimates — The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires the
Company’s management to make estimates and judgments that may affect the
reported amounts of assets, liabilities, revenue and expenses and disclosure of
contingent assets and liabilities. On an on-going basis, the Company’s
management evaluates its estimates including those related to unbilled research
and development costs, valuation of derivatives and share-based compensation.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from those estimates under different assumptions or
conditions. Changes in estimates are reflected in reported results in the period
in which they become known.
Cash
Equivalents — The Company considers all short-term investments purchased
with original maturities of three months or less to be cash
equivalents.
Fixed
Assets — Property and equipment are stated at cost. Depreciation on
property and equipment is provided using the straight-line method over the
estimated useful lives of the assets, which range from three to five years.
Leasehold improvements are depreciated over the lesser of the estimated useful
lives of the assets or the remaining lease term.
Impairment of
Long-Lived
Assets — Whenever events or circumstances change, the Company assesses
whether there has been an impairment in the value of long-lived assets by
determining whether projected undiscounted cash flows generated by the
applicable asset exceed its net book value as of the assessment
date. There were no impairments of the Company’s assets at the end of
each period presented.
Stock-Based
Compensation — The Company accounts for employee stock-based compensation
in accordance with the guidance of FASB ASC Topic 718, Compensation – Stock Compensation
which requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. The Company accounts for non-employee stock-based
compensation in accordance with the guidance of FASB ASC Topic 505, Equity which requires that
companies recognize compensation expense based on the estimated fair value of
options granted to non-employees over their vesting period, which is generally
the period during which services are rendered by such
non-employees.
Revenue
Recognition — Revenue is recognized when persuasive evidence of an
arrangement exists, the price is fixed and determinable, delivery has occurred,
and there is reasonable assurance of collection. Upfront payments
received in connection with technology license or collaboration agreements are
recognized over the estimated term of the related agreement. The
Company has not yet received milestone or royalty payments in connection with
license or collaboration agreements.
Research and
Development — Research and development costs are expensed as
incurred.
Income
Taxes — The Company uses the liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are
determined based on temporary differences between the financial statement and
tax basis of assets and liabilities and net operating loss and credit
carryforwards using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Valuation allowances are
established when it is more likely than not that some portion of the deferred
tax assets will not be realized. Tax positions taken or expected to
be taken in the course of preparing the Company’s tax returns are required to be
evaluated to determine whether the tax positions are “more-likely-than-not” of
being sustained by the applicable tax authority. Tax positions deemed
not to meet a more-likely-than-not threshold would be recorded as tax expense in
the current year. There were no uncertain tax positions that require
accrual or disclosure to the financial statements as of March 31, 2010 and
December 31, 2009.
Comprehensive
Income (Loss) — The Company had no components of comprehensive income
other than net income (loss) in all of the periods presented.
F-8
Fair Value of
Financial Instruments — The guidance under FASB ASC Topic 825, Financial Instruments,
requires disclosure of the fair value of certain financial instruments. The
Company’s financial instruments consist of cash equivalents, accounts payable,
accrued expenses and redeemable preferred stock. The estimated fair value of the
redeemable preferred stock, determined on an as-converted basis including
conversion of accumulated unpaid dividends, was $6,232,000, $114,780,000 and
$15,959,000 at March 31, 2010, December 31, 2009 and December 31, 2008,
respectively. The estimated fair value of the remaining financial instruments
approximates their carrying value due to their short-term nature.
Concentration of
Credit Risk — Financial instruments that subject the Company to credit
risk consist of cash and equivalents on deposit with financial institutions. The
Company’s excess cash is on deposit in a non-interest-bearing transaction
account that is fully covered by FDIC deposit insurance until June 30,
2010.
Derivative
Instruments — The Company generally does not use derivative instruments
to hedge exposures to cash flow or market risks; however, starting January 1,
2009, certain warrants to purchase common stock that do not meet the
requirements for classification as equity, in accordance with the Derivatives
and Hedging Topic of the FASB ASC, are classified as liabilities. In such
instances, net-cash settlement is assumed for financial reporting purposes, even
when the terms of the underlying contracts do not provide for a net-cash
settlement. These warrants are considered derivative instruments as the
agreements contain “down-round” provisions whereby the number of shares for
which the warrants are exercisable and/or the exercise price of the warrants is
subject to change in the event of certain issuances of stock at prices below the
then-effective exercise price of the warrants. The number of such warrants was
14,003,319 at January 1, 2009, 7,418,893 at December 31, 2009 and 5,710,027 at
March 31, 2010. The primary underlying risk exposure pertaining to the warrants
is the change in fair value of the underlying common stock. Such financial
instruments are initially recorded at fair value, or relative fair value when
issued with other instruments, with subsequent changes in fair value recorded as
a component of gain or loss on derivatives in each reporting period. If these
instruments subsequently meet the requirements for equity classification, the
Company reclassifies the fair value to equity. At December 31, 2009 and March
31, 2010, these warrants represent the only outstanding derivative instruments
issued or held by the Company. As a result of the significant decline in the
Company’s stock price following the announcement of the results of the Phase 3
Trial, the Company recorded a gain of approximately $7,897,000 during the three
months ended March 31, 2010 in connection of revaluation of the derivative
liability balance at March 31, 2010.
New Accounting
Pronouncements — In June 2009, the FASB issued FASB ASC 105, Generally Accepted Accounting
Principles, which establishes the FASB Accounting Standards Codification
(“ASC”) as the sole source of authoritative generally accepted accounting
principles (“GAAP”). Pursuant to the provisions of FASB ASC 105, the
Company has updated references to GAAP in the accompanying financial
statements. The adoption of FASB ASC 105 did not impact the Company’s
financial position or results of operations.
In May
2009, the FASB issued authoritative guidance now codified as FASB ASC Topic
855 related to subsequent events, which establishes general standards of
accounting for and disclosures of subsequent events that occur after the balance
sheet date but prior to the issuance of financial statements.
In
December 2007, the FASB issued new authoritative guidance now codified as FASB
ASC Topic 808, Collaborative
Arrangements. The new guidance defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties. The new guidance became effective for
fiscal years beginning after December 15, 2008 and had no effect on the
Company’s reported financial position or results of operations in the year ended
December 31, 2009.
F-9
Adoption of New
Accounting Principle — Effective January 1, 2009, the Company adopted the
guidance of FASB ASC 815-40-15, Derivatives and Hedging,
which establishes a framework for determining whether certain freestanding and
embedded instruments are indexed to a company’s own stock for purposes of
evaluation of the accounting for such instruments under existing accounting
literature. As a result of this adoption, certain warrants that were previously
determined to be indexed to the Company’s common stock upon issuance were
determined not to be indexed to the Company’s common stock because they include
“down-round” anti-dilution provisions whereby the number of shares for which the
warrants are exercisable and/or the exercise price of the warrants is subject to
change in the event of certain issuances of stock at prices below the
then-effective exercise price of the warrants. The fair value of the warrants at
the dates of issuance totaling $6,893,000 was initially recorded as a component
of additional paid-in capital. Upon adoption of this guidance on January 1,
2009, the Company recorded a derivative liability of $999,000, a decrease to the
opening balance of additional paid-in capital of approximately $6,893,000 and
recorded a decrease to accumulated deficit totaling approximately $5,894,000,
representing the decrease in the fair value of the warrants from the date of
issuance to December 31, 2008. The increase in fair value of the warrants of
approximately $12,114,000 during the year ended December 31, 2009 and the
decrease in fair value of the warrants of $7,897,000 during the three months
ended March 31, 2010 have been included as a component of other income (expense)
in the accompanying statement of operations. Certain of the warrants that had
been recorded as a derivative liability were exchanged or exercised for shares
of the Company’s common stock during the three months ended March 31, 2010 and
the year ended December 31, 2009. See Note 6 for a description of those
transactions. The fair value of the warrants of $4,756 and $10,487,000 at March
31, 2010 and December 31, 2009 is included as a current liability in the
accompanying balance sheet as of that date.
3. FIXED
ASSETS
Fixed
assets consisted of the following at December 31:
2009
|
2008
|
|||||||
Office
and computer equipment
|
$
|
73,261
|
$
|
73,261
|
||||
Computer
software
|
43,896
|
25,896
|
||||||
Leasehold
improvements
|
4,095
|
4,095
|
||||||
Total
fixed assets
|
121,252
|
103,252
|
||||||
Less
accumulated depreciation and amortization
|
(77,155
|
)
|
(44,801
|
)
|
||||
Fixed
assets, net
|
$
|
44,097
|
$
|
58,451
|
4. FAIR
VALUES OF ASSETS AND LIABILITIES
In
accordance with Fair Value Measurements and Disclosures Topic of the FASB ASC,
the Company groups its financial assets and financial liabilities generally
measured at fair value in three levels, based on the markets in which the assets
and liabilities are traded and the reliability of the assumptions used to
determine fair value.
·
|
Level
1: Input prices quoted in an active market for identical financial assets
or liabilities.
|
|
·
|
Level
2: Inputs other than prices quoted in Level 1, such as prices quoted for
similar financial assets and liabilities in active markets, prices for
identical assets and liabilities in markets that are not active or other
inputs that are observable or can be corroborated by observable market
data.
|
|
·
|
Level
3: Input prices that are significant to the fair value of the financial
assets or liabilities which are not observable or supported by an active
market.
|
March 31, 2010
|
||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
|||||||||||||
Liabilities:
|
||||||||||||||||
Warrants
|
$
|
-
|
$
|
4,756
|
$
|
-
|
$
|
4,756
|
F-10
December 31, 2009
|
||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
|||||||||||||
Liabilities:
|
||||||||||||||||
Warrants
|
$
|
-
|
$
|
10,487,000
|
$
|
-
|
$
|
10,487,000
|
The fair value of warrants has been
estimated using the Black-Scholes option pricing model based on the closing
price of the common stock at the valuation date, estimated volatility of 90%,
terms ranging from four to eleven months at March 31, 2010 and three to fourteen
months at December 31, 2009 and risk-free interest rates ranging from 0.02% to
0.47% at March 31, 2010 and 0.04% to 0.47% at December 31, 2009.
5.
|
COLLABORATION
AGREEMENTS
|
2007
Collaboration Agreement with Lee’s Pharmaceutical (HK) Ltd.
In
December 2007 the Company entered into a Collaboration Agreement with Lee’s
Pharmaceutical (HK) Ltd. (“Lee’s Pharm”). Pursuant to this agreement, Lee’s
Pharm obtained an exclusive license to develop, manufacture and commercialize
NOV-002 and NOV-205 in China, Hong Kong, Taiwan and Macau (the “Chinese
Territory”). Under the terms of the agreement the Company received a license fee
of $500,000 in March 2008 and is entitled to receive up to $1,700,000 in future
milestone payments upon the completion of development and marketing milestones
by Lee’s Pharm. This initial $500,000 payment received is being amortized over
the estimated term of this agreement, 15 years. Accordingly, $8,000 of license
revenue was recognized in each of the three month periods ended March 31, 2010
and 2009 and $33,000 of license revenue was recognized in each of the years
ended December 31, 2009 and 2008.
The Lee’s
Pharm agreement provides that the Company receive royalty payments of 20-25% of
net sales of NOV-002 in the Chinese Territory and receive royalty payments of
12-15% of net sales of NOV-205 in the Chinese Territory. Lee’s Pharm is
obligated to reimburse the Company for the manufacturing cost of pharmaceutical
products provided to Lee’s Pharm in connection with the agreement. Lee’s Pharm
has committed to spend a minimum amount on development in the first four years
of the agreement. The agreement expires upon the expiration of the last patent
covering any of the licensed products, or twelve years from the date of the
first commercial sale in China, whichever occurs later.
2009
Collaboration Agreement with Mundipharma
On
February 11, 2009, Novelos entered into a collaboration agreement (the
“Collaboration Agreement”) with Mundipharma International Corporation Limited
(“Mundipharma”) to develop, manufacture and commercialize, on an exclusive
basis, Licensed Products (as defined in the Collaboration Agreement), which
includes the Company’s lead compound, NOV-002, in Europe (other than the Russian
Territory), Asia (other than the Chinese Territory) and Australia (collectively
referred to as the “Mundipharma Territory”). Mundipharma is an independent
associated company of Purdue Pharma, L.P. (“Purdue”). Following is a summary of
the terms of the Collaboration Agreement, however, the Company anticipates that
the negative results of its Phase 3 Trial (see Note 1) will substantially reduce
the likelihood that any payments will be received by the Company under the
Collaboration Agreement.
Under the
Collaboration Agreement, Mundipharma received an exclusive license to develop,
manufacture, market, sell or otherwise distribute the Licensed Products and
improvements thereon in the Mundipharma Territory. Novelos is responsible for
the cost and execution of development, regulatory submissions and
commercialization of NOV-002 outside the Mundipharma Territory, and Mundipharma
is responsible for the cost and execution of certain development activities, all
regulatory submissions and all commercialization within the Mundipharma
Territory. In the event that Mundipharma is required to conduct an additional
Phase 3 clinical trial in first-line advanced-stage non-small cell lung cancer
in order to gain regulatory approval in Europe, Mundipharma will be entitled to
recover the full cost of such trial by reducing milestone, fixed sales-based
payments and royalty payments to Novelos by up to 50% of the payments owed until
Mundipharma recovers the full costs of such trial. In order for Mundipharma or
Novelos to access the other party’s data or intellectual property related to
Independent Trials (as defined in the Collaboration Agreement), the accessing
party must pay the sponsoring party 50% of the cost of such trial.
F-11
The
launch of Licensed Products, including initiation of regulatory and pricing
approvals, and subsequent commercial efforts to market and sell Licensed
Products in each country in the Mundipharma Territory, will be determined by
Mundipharma based on its assessment of the commercial viability of the Licensed
Products, the regulatory environment and other factors. Novelos has no assurance
that it will receive any amount of the launch payments, fixed sales-based
payments or royalties described below.
For
countries in which patents are held, the Collaboration Agreement expires on a
country-by-country basis within the Mundipharma Territory on the earlier of (1)
expiration of the last applicable Novelos patent within the country or (2) the
determination that any patents within the country are invalid, obvious or
otherwise unenforceable. For countries in which no patents are held,
the Collaboration Agreement expires the earlier of 15 years from its effective
date or upon generic product competition in the country resulting in a 20% drop
in Mundipharma’s market share. Novelos may terminate the
Collaboration Agreement upon breach or default by Mundipharma. Mundipharma
may terminate the Collaboration Agreement upon breach or default, filing of
voluntary or involuntary bankruptcy by Novelos, the termination of certain
agreements with companies associated with the originators of the licensed
technology, or 30-day notice for no reason. If any regulatory
approval within the Mundipharma Territory is suspended as a result of issues
related to the safety of the Licensed Products, then Mundipharma’s obligations
under the Collaboration Agreement will be suspended until the regulatory
approval is reinstated. If that reinstatement does not occur within
12 months of the suspension, then Mundipharma may terminate the Collaboration
Agreement.
Concurrent
with the execution of the Collaboration Agreement, Novelos completed a private
placement of preferred stock and warrants to Purdue, an independent associated
company of Mundipharma. See “Series E Preferred Stock Private
Placement” below.
The
Company expects that the negative results of its Phase 3 trial in advanced NSCLC
will adversely affect development and commercialization of NOV-002 under the
collaboration agreements with Lee’s Pharm and Mundipharma.
F-12
6.
STOCKHOLDERS’ DEFICIENCY
Issuance of Series B Preferred
Stock –
On May 2,
2007, pursuant to a securities purchase agreement with accredited investors
dated April 12, 2007 (the “Purchase Agreement”), as amended May 2, 2007, the
Company sold 300 shares of a newly created series of preferred stock, designated
“Series B Convertible Preferred Stock,” with a stated value of $50,000 per share
(the “Series B Preferred Stock”), and issued warrants (the “Series B Warrants”)
to purchase 7,500,000 shares of common stock for an aggregate purchase price of
$15,000,000. The Series B Preferred Stock was initially convertible into
15,000,000 shares of common stock at $1.00 per share. During 2008, the Company
declared and paid $675,000 in dividends to Series B stockholders ($2,250 per
share). See “Issuance of Series D Preferred Stock” below for a description of
the exchange of Series B Preferred Stock that occurred on April 11,
2008.
The
common stock purchase warrants issued to these purchasers were initially
exercisable for an aggregate of 7,500,000 shares of the Company’s common stock
at an exercise price of $1.25 per share and had an initial expiration date of
May 2, 2012. The terms of the warrant provide for adjustment to the exercise
price and/or number of warrants only for stock dividends, stock splits or
similar capital reorganizations so that the rights of the warrant holders after
such event would be equivalent to the rights of warrant holders prior to such
event. The Series B Warrants were amended on April 11, 2008 to reduce the
exercise price to $0.65 per share and were further amended on February 11, 2009
to extend their expiration date to December 31, 2015. The holders completed
cashless exercises of all Series B Warrants in February 2010.
Upon the
closing of the Series B Preferred Stock financing, the Company issued to
placement agents warrants to purchase a total of 900,000 shares of common stock
with the same terms as the warrants issued to the investors.
As a
condition to closing of the sale of Series B Preferred Stock described above,
the Company entered into an agreement to exchange and consent with the holders
of the Company’s Series A preferred stock providing for the exchange of all
3,264 shares of Series A preferred stock for 272 shares of a new Series C
convertible preferred stock (the “Series C Preferred Stock”), junior to the
Series B Preferred Stock as set forth in the Series C Preferred Stock
Certificate of Designations. The Series C Preferred Stock was
initially convertible at $1.00 per share into 3,264,000 shares of common
stock. As part of the exchange, the Company issued to the holders of
the Series A preferred stock warrants to purchase 1,333,333 shares of common
stock expiring on May 2, 2012 at a price of $1.25 per share; paid them a cash
allowance to defray expenses totaling $40,000; and paid them an amount of cash
equal to unpaid dividends accumulated through the date of the
exchange. In connection with the sale of Series D Preferred Stock
described below, the conversion price of the Series C Preferred Stock was
reduced to $0.65 per share.
Terms
of the Series C Preferred Stock
The
Series C Preferred Stock had an annual dividend rate of 8% until October 1, 2008
and thereafter has an annual dividend rate of 20%. The dividends are
payable quarterly. Such dividends shall be paid only after all
outstanding dividends on the Series D Preferred Stock (with respect to the
current fiscal year and all prior fiscal years) have been paid to the holders of
the Series D Preferred Stock. During 2008, the Company paid $65,280
in dividends on Series C Preferred Stock ($240 per share). No
dividends were paid on Series C Preferred Stock during 2009. During
2009, a total of $184,246 in dividends accumulated on Series C Preferred Stock
were converted into shares of the Company’s common stock in connection with the
conversion of shares of Series C Preferred Stock. As of December 31,
2009, there were accumulated unpaid dividends of $709,920 ($3,480 per share) on
Series C Preferred Stock. The conversion price is subject to
adjustment for stock dividends, stock splits or similar capital reorganizations
and upon the occurrence of certain dilutive issuances of
securities. The Series C Preferred Stock does not have voting rights
and is redeemable only at the option of the Company upon 30 days’ notice at a
20% premium plus any accrued but unpaid dividends. In the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
Company’s affairs, the Series C Preferred Stock will be treated as senior to
Novelos common stock. After all required payments are made to holders
of Series E Preferred Stock, the holders of Series C Preferred Stock will be
entitled to receive first, $12,000 per share and all accrued and unpaid
dividends. If, upon any winding up of the Company’s affairs, the
Company’s remaining assets available to pay the holders of Series C Preferred
Stock are not sufficient to permit the payment in full, then all of the
Company’s assets will be distributed to the holders of Series C Preferred Stock
(and any remaining holders of Series E Preferred Stock as may be required) on a
pro rata basis.
F-13
Conversions
of Series C Preferred Stock
During
the year ended December 31, 2009, 68 shares of the Company’s Series C Preferred
Stock, having an aggregate stated value of $816,000, and accumulated dividends
thereon of $184,000 were converted into shares of the Company’s common stock,
leaving 204 shares of Series C Preferred Stock outstanding which are convertible
into 3,766,153 shares of common stock.
Issuance of Series D
Preferred Stock
–
On April
11, 2008, pursuant to a securities purchase agreement with accredited investors
dated March 26, 2008, as amended on April 9, 2008, the Company sold 113.5 shares
of Series D Convertible Preferred Stock, par value $0.00001 per share (the
“Series D Preferred Stock”) and issued warrants (the “Series D Warrants”) to
purchase 4,365,381 shares of its common stock for an aggregate purchase price of
$5,675,000 (the “Series D Financing”).
Exchange
of Series B Preferred Stock for Series D Preferred Stock
In
connection with the closing of the Series D Financing, the holders of the
Company’s Series B Preferred Stock exchanged all 300 of their shares of Series B
Preferred Stock for 300 shares of Series D Preferred Stock. Following the
exchange, no shares of Series B Preferred Stock were outstanding. The rights and
preferences of the Series D Preferred Stock were substantially the same as the
Series B Preferred Stock. However, the conversion price of the Series D
Preferred Stock was $0.65. In addition, the holders of Series B Preferred Stock
waived liquidated damages that had accrued from December 7, 2007 through the
closing date of the Series D Financing as a result of the Company’s failure to
register for resale 100% of the shares of common stock underlying the Series B
Preferred Stock and Series B Warrants. As a result, during 2008, the Company
recorded a reduction of general and administrative expenses of $395,000 relating
to the reversal of estimated liquidated damages that had been accrued through
the date of the closing. The purchase agreement covering the issuance and sale
of the Series D Preferred Stock provided that the dividends that accrued on the
shares of Series B Preferred Stock from April 1, 2008 through the date of
exchange were to be paid, out of legally available funds, on June 30, 2008. As
of June 30, 2008 and through December 31, 2008 the Company did not have legally
available funds for the payment of dividends under Delaware corporate law and
therefore was not able to pay any dividends accrued in respect of the preferred
stock totaling $1,396,000 ($3,375 per share) as of December 31, 2008. These
dividends were subsequently exchanged for shares of Series E preferred stock.
See “Exchange of Series D Preferred Stock for Series E Preferred Stock”
below.
Board
and Observer Rights
Pursuant
to the Series D Preferred Stock purchase agreement, from and after the closing,
Xmark Opportunity Fund, L.P., Xmark Opportunity Fund, Ltd. and Xmark JV
Investment Partners, LLC (collectively, the “Xmark Funds”), retained the right
to designate one member to the Company’s Board of Directors. This
right lasts until such time as the Xmark Funds no longer hold at least
one-third of the Series D Preferred Stock issued to them at the closing of the
Series D Financing. In addition, the Xmark Funds, Caduceus Master Fund
Limited, Caduceus Capital II, L.P., Summer Street Life Sciences Hedge Fund
Investors, LLC, UBS Eucalyptus Fund, LLC and PW Eucalyptus Fund, Ltd.
(collectively, the “Series D Lead Investors”) have the right to designate one
observer to attend all meetings of the Company’s Board of Directors (the
“Board”), committees thereof and access to all information made available to
members of the Board. This right lasts until such time as the Series
D Lead Investors no longer hold at least one-third of the Series D Preferred
Stock issued to them at closing. The rights to designate a Board
member and Board observer have not been exercised.
F-14
Common
Stock Purchase Warrants
The
Series D Warrants, as amended, are exercisable for an aggregate of 4,365,381
shares of the Company’s common stock at an exercise price of $0.65 per share and
expire on December 31, 2015. See “Series E Preferred Stock Private Placement”
below for a description of the amendment to the Series D Warrants. If there is
no effective registration statement registering, or no current prospectus
available for, the resale of the shares issuable upon the exercise of the
warrants, the holder may conduct a cashless exercise whereby the holder may
elect to pay the exercise price by having the Company withhold, upon exercise,
shares having a fair market value equal to the applicable aggregate exercise
price. In the event of such a cashless exercise, the Company would receive no
proceeds from the sale of common stock in connection with such exercise. The
warrant exercise price and/or number of warrants is subject to adjustment only
for stock dividends, stock splits or similar capital reorganizations so that the
rights of the warrant holders after such event will be equivalent to the rights
of warrant holders prior to such event. The holders completed cashless exercises
of all Series D Warrants in February 2010.
Placement
Agent Fee and Other Costs
Following
the closing of the Series D Financing, the Company paid Rodman & Renshaw LLC
a cash fee of $100,000 and paid other closing costs of approximately
$105,000.
Amendments
to Prior Warrants and Registration Rights Agreement
At the
closing on April 11, 2008, the Company entered into an amendment to the
registration rights agreement dated May 2, 2007 with the holders of its Series B
Preferred Stock to revise the definition of registrable securities under the
agreement to include only the 12,000,000 shares of common stock that were
included on a prior registration statement and to extend the registration
obligations under the agreement by one year.
In
addition, in connection with the closing on April 11, 2008, the warrants to
purchase common stock issued in connection with the sale of Series B Preferred
Stock were amended to conform the terms of those warrants to the terms of the
warrants issued in the Series D Financing.
Exchange
of Series D Preferred Stock for Series E Preferred Stock
On
February 11, 2009, all outstanding shares of Series D Preferred Stock and
accumulated dividends thereon were exchanged for shares of Series E Preferred
Stock. See “Series E Preferred Stock Private Placement” below.
2008 Issuance of Common Stock
–
On August
15, 2008, the Company sold 4,615,384 shares of its common stock to two related
accredited investors for gross proceeds of approximately $3,000,000, pursuant to
a securities purchase agreement dated August 14, 2008.
Sale
of Series E Preferred Stock to Purdue
Concurrently
with the execution of the Collaboration Agreement on February 11, 2009, Novelos
sold to Purdue 200 shares of a newly created series of the Company’s preferred
stock, designated “Series E Convertible Preferred Stock,” par value $0.00001 per
share (the “Series E Preferred Stock”), and a warrant (the “Series E Warrant”)
to purchase 9,230,769 shares of Novelos common stock for an aggregate purchase
price of $10,000,000 (the “Series E Financing”). Pursuant to the
August 25, 2009 securities purchase agreement with Purdue (the “August 2009
Purchase Agreement”), Purdue has the right either to designate one member to the
Board or to designate one observer to attend all meetings of the Board and
committees thereof and to have access to all information made available to
members of the Board. This right lasts until such time as Purdue or
its independent associated companies no longer hold at least one half of the
common stock purchased pursuant to the August 2009 Purchase Agreement and no
longer hold at least one-half of the Series E Preferred Stock issued to them on
February 11, 2009. See “August 2009 Common Stock Private Placement”
below. Purdue has the right to participate in future equity
financings in proportion to their pro rata ownership of common and preferred
stock.
F-15
The
Series E Warrant is exercisable for an aggregate of 9,230,769 shares of Novelos
common stock at an exercise price of $0.65 per share. The warrant expires on
December 31, 2015. The warrant exercise price and/or the common stock issuable
pursuant to such warrant are subject to adjustment for stock dividends, stock
splits or similar capital reorganizations so that the rights of the warrant
holder after such event will be equivalent to the rights of the warrant holder
prior to such event.
Exchange
of Series D Preferred Stock for Series E Preferred Stock
The
Company also entered into an exchange agreement with the holders (the “Series D
Investors”) of the Company’s Series D Preferred Stock under which all 413.5
outstanding shares of Series D Preferred Stock and accumulated but unpaid
dividends thereon totaling $1,597,144 were exchanged for 445.442875 shares of
Series E Preferred Stock. The rights and preferences of the Series E Preferred
Stock are substantially the same as the Series D Preferred Stock. In addition,
the holders of Series D Preferred Stock waived liquidated damages through the
date of the exchange as a result of the Company’s failure to file a registration
statement covering the shares of common stock underlying the Series D Preferred
Stock and warrants not otherwise registered. In connection with the execution of
this exchange agreement, warrants held by the Series D Investors to purchase a
total of 11,865,381 shares of the Company’s common stock were amended to extend
the expiration of the warrants to December 31, 2015 (from April 11, 2013) and to
remove a forced exercise provision.
Terms
of Series E Preferred Stock
The
shares of Series E Preferred Stock have a stated value of $50,000 per share and
are convertible into shares of common stock at any time after issuance at the
option of the holder at $0.65 per share of common. If there is an effective
registration statement covering the shares of common stock underlying the Series
E Preferred Stock and the VWAP, as defined in the Series E Certificate of
Designations, of Novelos common stock exceeds $2.00 for 20 consecutive trading
days, then the outstanding shares of Series E Preferred Stock will automatically
convert into common stock at the conversion price then in effect. The conversion
price will be subject to adjustment for stock dividends, stock splits or similar
capital reorganizations.
The
Series E Preferred Stock has an annual dividend rate of 9%, payable
semi-annually on June 30 and December 31. Such dividends may be paid in cash, in
shares of Series E Preferred Stock or in registered shares of Novelos common
stock at the Company’s option, subject to certain conditions. The Company has
not paid any dividends on Series E Preferred Stock. During 2009, a total of
$301,258 in dividends accumulated on Series E Preferred Stock was converted into
shares of the Company’s common stock in connection with the conversion of shares
of Series E Preferred Stock. As of December 31, 2009, there were accumulated
unpaid dividends of $2,193,043 ($4,000 per share) on shares of Series E
Preferred Stock.
For as
long as any shares of Series E Preferred Stock remain outstanding, Novelos is
prohibited without the prior consent of holders of a majority of the outstanding
shares of Series E preferred stock (which majority must include the Xmark Funds
and Purdue) from (i) paying dividends to its common stockholders, (ii) amending
its certificate of incorporation or by-laws, (iii) issuing any equity security
or any security convertible into or exercisable for any equity security at a
price of $0.65 or less or with rights senior to the Series E Preferred Stock
(except for certain exempted issuances), (iv) increasing the number of shares of
Series E Preferred Stock or issuing any additional shares of Series E Preferred
Stock, (v) selling or otherwise granting rights with respect to all or
substantially all of its assets (or in the case of licensing, any material
intellectual property) or the Company's business and shall not enter into a
merger or consolidation with another company unless Novelos is the surviving
corporation, the Series E Preferred Stock remains outstanding, there are no
changes to the rights and preferences of the Series E Preferred Stock and there
is not created any new class of capital stock senior to the Series E Preferred
Stock, (vi) redeeming or repurchasing any capital stock other than the Series E
Preferred Stock, (vii) incurring any new debt for borrowed money in excess of
$500,000 and (viii) changing the number of the Company’s directors.
F-16
Ferghana
Partners, Inc. (“Ferghana”), a New York consulting firm, received a cash fee for
their services in connection with the negotiation and execution of the
Collaboration Agreement equal to $700,000 (or seven percent (7%) of the gross
proceeds to the Company resulting from the sale of Series E Preferred Stock and
common stock purchase warrants to Purdue in connection with the Collaboration
Agreement). Ferghana will also receive cash fees equal to six percent
(6%) of all payments to Novelos by Mundipharma under the Collaboration Agreement
other than royalties on net sales.
Accounting
Treatment of Series E Financing
The terms
of the Series E Preferred Stock contain provisions that may require redemption
in circumstances that are beyond the Company’s control, such as the acquisition
of more than 50% of our outstanding stock by any person or
entity. Therefore, the shares have been recorded as redeemable
preferred stock outside of permanent equity in the balance sheet as of December
31, 2009. The gross proceeds of $10,000,000 received in conjunction
with the Series E Financing were allocated on a relative fair value basis
between the Series E Preferred Stock and the warrants. The relative
fair value of the warrants issued to investors of $2,907,000 (determined using
the Black-Scholes option pricing model, estimated volatility of 80%, a risk-free
interest rate of 2.17% and a term equal to the term of the warrant) was recorded
as additional paid-in capital while the relative fair value of the Series E
Preferred Stock of $7,093,000 was recorded as temporary equity. The
carrying value of the Series E Preferred Stock was immediately adjusted to its
fair value of $7,385,000 based on the fair value of the as-converted common
stock. The difference of $292,000 represents a beneficial conversion
feature and was recorded as a deemed dividend to preferred
stockholders. Issuance costs related to the Series E Financing of
$795,000 were netted against temporary equity. The Series E Preferred
Stock that was issued in payment of dividends was initially recorded in
temporary equity at the value of the dividends that had accrued totaling
$1,597,000. This amount was then adjusted to the fair value of
$1,179,000 based on the fair value of the as-converted common
stock. The difference of $418,000 was recorded as an offset to the
deemed dividends recorded. The Series E Preferred Stock that was
issued in exchange for outstanding shares of Series D Preferred Stock was
recorded at $13,904,000, the carrying value of the shares of Series D Preferred
Stock as of the date of the exchange.
As a
result of the modification to the warrants to extend their expiration by
approximately 32 months that occurred in connection with the exchange of all
outstanding shares of Series D Preferred Stock for shares of Series E Preferred
Stock, in the year ended December 31, 2009, a deemed dividend of $840,000 was
recorded. This amount represents the incremental fair value of the
warrants immediately before and after modification using the Black-Scholes
option pricing model, volatility of 80%, discount rates of 1.54% and 2.17% and
the remaining warrant term.
Since the
Company has concluded it is not probable that an event will occur which would
allow the holders of Series E Preferred Stock to elect to receive a liquidation
payment, the carrying value will not be adjusted until the time that such event
becomes probable. The liquidation preference (redemption value) is
$29,606,000 at December 31, 2009 and $22,506,000 at March 31, 2010.
Conversions
of Series E Preferred Stock
During
the year ended December 31, 2009, 97.18209375 shares of the Company’s Series E
Preferred Stock, having an aggregate stated value of $4,859,000 and accumulated
dividends thereon of $301,000, were converted into 7,939,008 shares of common
stock. The associated carrying value of the converted shares totaling
approximately $3,213,000 was reclassified to permanent equity from temporary
equity. During the three months ended March 31, 2010, 140 shares of
the Company’s Series E Preferred Stock, having an aggregate stated value of
$7,000,000, and accumulated dividends thereon, were converted into 11,745,779
shares of common stock. The associated carrying value of the
converted shares totaling approximately $4,690,000 was reclassified to permanent
equity from temporary equity.
F-17
August
2009 Common Stock Private Placement
Securities
Purchase Agreement
On August
25, 2009, the Company entered into the August 2009 Purchase Agreement with
Purdue to sell 13,636,364 shares of its common stock, $0.00001 par value and
warrants to purchase 4,772,728 shares of its common stock at an exercise price
of $0.66 per share, expiring December 31, 2015, for an aggregate purchase price
of $9,000,000 (the “August 2009 Private Placement”). Concurrent with the
execution and delivery of the August 2009 Purchase Agreement, the Company sold
Purdue 5,303,030 shares of its common stock and a warrant to purchase 1,856,062
shares of its common stock at $0.66 per share for approximately $3,500,000 (the
“Initial Closing”). On November 10, 2009, the Company completed the final
closing under the August 2009 Purchase Agreement and sold Purdue 8,333,334
shares of Novelos common stock and warrants to purchase 2,916,668 shares of
Novelos common stock for gross proceeds of $5,500,000. Issuance costs associated
with the transactions totaled $61,000 and such amount was recorded as a
reduction of additional paid-in capital.
Pursuant
to the August 2009 Purchase Agreement, Purdue is entitled to a right of
first refusal (the “Right of First Refusal”) with respect to bona fide offers
for the license or other acquisition of NOV-002 Rights (as defined in the August
2009 Purchase Agreement) in the United States (the “U.S. License”) received from
third parties and approved by the Company’s board of directors. Under
the Right of First Refusal, Novelos will be required to communicate to Purdue
the terms of any such third-party offers received and Purdue will have 30 days
to enter into a definitive agreement with Novelos on substantially similar terms
that provide no lesser economic benefit to Novelos as provided in the
third-party offer. The Right of First Refusal terminates upon
business combinations, as defined in the August 2009 Purchase Agreement. Novelos
has separately entered into letter agreements with Mundipharma and its
independent associated company providing for a conditional exclusive right to
negotiate for, and a conditional right of first refusal with respect to, NOV-002
Rights for Latin America, Mexico and Canada.
Pursuant
to the August 2009 Purchase Agreement, Purdue has the right to either designate
one member to Novelos’ Board or designate an observer to attend all meetings of
the Board and committees thereof and to have access to all information made
available to members of the Board. This right lasts until the later
of such time as Purdue or its independent associated companies no longer hold at
least one-half of the common stock purchased pursuant to the August 2009
Purchase Agreement and no longer hold at least one-half of the Series E
Preferred Stock issued to them on February 11, 2009. The right to
designate a Board observer had previously been granted in connection with the
financing that occurred on February 11, 2009 and Purdue appointed such an
observer in February 2009. Purdue also has the right to participate
in future equity financings in proportion to their pro rata ownership of common
and preferred stock.
Common
Stock Purchase Warrant
The
common stock purchase warrants have an exercise price of $0.66 per share and
expire on December 31, 2015. The warrant exercise price and/or the
number of shares of common stock issuable pursuant to such warrant will be
subject to adjustment for stock dividends, stock splits or similar capital
reorganizations so that the rights of the warrant holders after such event will
be equivalent to the rights of warrant holders prior to such
event. The relative fair value of the warrants issued to Purdue
totaled $1,929,000 and was recorded as a component of additional paid-in
capital. The fair value of the warrants was determined based on the
market value of the Company’s common stock on the dates of issuance using the
Black-Scholes method of valuation, estimated volatility of 90%, risk-free
interest rates ranging from 2.02% to 2.7% and a term equal to the term of the
warrant.
Registration
Rights Agreements
The
Company and the purchasers of Series B Preferred Stock entered into a
registration rights agreement (the “Series B Registration Agreement”) in
connection with the closing of the sale of the Series B Preferred
Stock. The Series B Registration Agreement was subsequently amended
on April 11, 2008 and on February 11, 2009. The agreement, as
amended, requires the Company to use its best efforts to keep a registration
statement covering 12,000,000 shares of common stock issuable upon conversion of
Series E Preferred Stock continuously effective under the Securities Act until
the earlier of the date when all securities covered by the registration
statement have been sold or the second anniversary of the closing. In
the event the Company does not fulfill the requirements of the registration
rights agreement, the Company is required to pay to the investors liquidated
damages equal to 1.5% per month of the aggregate purchase price of the preferred
stock and warrants until the requirements have been met. The
12,000,000 shares of common stock were included on a registration statement that
became effective on April 28, 2008. The second post-effective
amendment was declared effective on April 27, 2009. As of December
31, 2009, and through the date of this filing, the Company has not concluded
that it is probable that damages will become due; therefore, no accrual for
damages has been recorded. On April 11, 2010, our obligations under
the Series B Registration Agreement expired.
F-18
Simultaneous
with the execution of the Series E purchase agreement, the Company entered into
a registration rights agreement (the “Series E Registration Agreement”) with
Purdue and the Series D Investors. The Series E Registration Agreement replaces
a prior agreement dated April 11, 2008 between Novelos and the Series D
Investors. The Series E Registration Agreement required Novelos to file with the
Securities and Exchange Commission no later than 5 business days following the
six-month anniversary of the execution of the Series E purchase agreement (the
“Filing Deadline”), a registration statement covering the resale of (i) a number
of shares of common stock equal to 100% of the shares issuable upon conversion
of the Series E Preferred Stock (excluding 12,000,000 shares of common stock
issuable upon conversion of the Series E Preferred Stock issued in exchange for
shares of outstanding Series D Preferred Stock as described above that are
included on a prior registration statement) and (ii) an aggregate of 21,096,150
shares of common stock issuable upon exercise of the Series B Warrants, the
Series D Warrants and the Series E Warrant. Novelos was required to use its best
efforts to have the registration statement declared effective and to keep the
registration statement continuously effective under the Securities Act until the
earlier of the date when all the registrable securities covered by the
registration statement have been sold or the second anniversary of the closing
of the Series E purchase agreement. Purdue and the Series D Investors consented
to extend the Filing Deadline to September 15, 2009. The registration statement
was filed on that date. The Series E Registration Agreement was amended on
January 21, 2010, principally to consent to a reduction in the number of shares
offered. The registration statement covering the resale of a total of 19,000,000
shares of the Company’s common stock was declared effective on February 12, 2010
and a post-effective amendment was declared effective on May 3, 2010. The use of
the registration statement may be suspended for not more than 15 consecutive
days or for a total of not more than 30 days in any 12-month period. The Company
will use its reasonable best efforts to register the shares excluded from the
registration statement as may be permitted by the SEC until such time as all of
these shares either have been registered or may be sold without restriction in
reliance on Rule 144 under the Securities Act.
Common Stock
Warrants — the following table summarizes information with
regard to outstanding warrants as of December 31, 2009, issued in connection
with equity and debt financings since 2005.
F-19
Offering
|
Outstanding
(as adjusted)
|
Exercise
Price
(as adjusted)
|
Expiration Date
|
||||||
2005
Bridge Financing
|
400,000
|
$
|
0.625
|
April
1, 2010
|
|||||
2005
Issuance of Common Stock
|
560,826
|
$
|
0.65
|
August
9, 2010
|
|||||
Series
A Preferred Stock (1)
|
909,090
|
$
|
0.65
|
September
30, 2010
|
|||||
2006
Issuance of Common Stock
|
5,548,977
|
$
|
1.72
|
March
7, 2011
|
|||||
Series
B Preferred Stock (2):
|
|||||||||
Purchasers
|
7,500,000
|
$
|
0.65
|
December
31, 2015
|
|||||
Placement
agents
|
900,000
|
$
|
1.25
|
May
2, 2012
|
|||||
Series
C Exchange
|
1,333,333
|
$
|
1.25
|
May
2, 2012
|
|||||
Series
D Preferred Stock (3)
|
4,365,381
|
$
|
0.65
|
December
31, 2015
|
|||||
Series
E Preferred Stock
|
9,230,769
|
$
|
0.65
|
December
31, 2015
|
|||||
August
2009 Private Placement
|
4,772,730
|
$
|
0.66
|
December
31, 2015
|
|||||
Total
|
35,521,106
|
(1)
|
Concurrent with the closing of
the sale of Series B Preferred Stock in 2007, all shares of Series A
Preferred Stock were exchanged for shares of Series C Preferred
Stock.
|
(2)
|
Concurrent
with the closing of the sale of Series D Preferred Stock in 2008, all
shares of Series B Preferred Stock were exchanged for shares of Series D
Preferred Stock.
|
(3)
|
Concurrent
with the closing of the sale of Series E Preferred Stock in 2009, all
shares of Series D Preferred Stock and accumulated unpaid dividends
thereon were exchanged for shares of Series E Preferred
Stock.
|
The
following table summarizes information with regard to outstanding warrants
issued in connection with equity and debt financings as of March 31,
2010:
Offering
|
Outstanding
(as adjusted)
|
Exercise
Price
(as adjusted)
|
Expiration Date
|
||||||
2005
Issuance of Common Stock – placement agents
|
243,476
|
$
|
0.65
|
August
9, 2010
|
|||||
Series
A Preferred Stock
|
909,090
|
$
|
0.65
|
September
30, 2010
|
|||||
2006
Issuance of Common Stock
|
4,557,461
|
$
|
1.72
|
March
7, 2011
|
|||||
Series
B Preferred Stock – placement agents
|
825,000
|
$
|
1.25
|
May
2, 2012
|
|||||
Series
C Exchange
|
1,250,000
|
$
|
1.25
|
May
2, 2012
|
|||||
Series
E Preferred Stock
|
9,230,769
|
$
|
0.65
|
December
31, 2015
|
|||||
August
2009 Private Placement
|
4,772,730
|
$
|
0.66
|
December
31, 2015
|
|||||
Total
|
21,788,526
|
On August
11, 2008, warrants to purchase 6,923,028 shares of common stock expired
unexercised.
On August
21, 2009, the Company entered into exchange agreements with certain accredited
investors who held warrants, issued in the 2006 private placement, to purchase
6,947,728 shares of its common stock. Pursuant to the exchange
agreements, an aggregate of 2,084,308 shares of the Company’s common stock with
a fair value of $1,626,000 were issued in exchange for these
warrants. The holders agreed not to transfer or dispose of the shares
of common stock before February 18, 2010. The warrants had been
recorded as a derivative liability on the Company’s balance sheet at their
estimated fair value of $1,109,000 at the date of exchange. The
difference of $517,000 between the estimated fair value of the warrants at the
date of exchange and the common stock issued to settle the derivative liability
has been included as a component of the loss on derivative warrants for the year
ended December 31, 2009. Following the exchange, warrants expiring on
March 7, 2011 to purchase a total of 5,432,120 shares of common stock at $1.82
per share remained outstanding. Following the final closing of the
August 2009 Private Placement, described above, the number of these outstanding
warrants was increased to 5,750,439 and the exercise price was reduced to $1.72,
as a result of anti-dilution provisions in the warrants.
F-20
Original private placement
|
Shares of
Common Stock
Issued
|
Warrants
Exercised
|
Exercise
Price
|
Expiration Date
|
|||||||||
2005
Bridge Financing
|
218,648 | 320,000 | $ | 0.625 |
April
1, 2010
|
||||||||
2005
Common Stock
|
200,504 | 485,317 | $ | 0.65 |
August
9, 2010
|
||||||||
Series
A Preferred Stock
|
38,223 | 60,606 | $ | 0.65 |
October
3, 2010
|
||||||||
2006
Issuance of Common Stock
|
26,454 | 201,462 | $ | 1.72 |
March
7, 2011
|
||||||||
Total
|
483,829 | 1,067,385 |
During
the three months ended March 31, 2010, a total of 8,182,158 shares of the
Company’s common stock were issued upon the cashless exercise of warrants to
purchase 13,732,580 shares of the Company’s common stock. The Company
reclassified a total of $2,584,000 from derivative liability to additional
paid-in capital upon the exercise of warrants. The following is a
summary of the exercises:
Original private placement
|
Shares of
Common Stock
Issued
|
Warrants
Exercised
|
Exercise
Price
|
|||||||||
2005
Bridge Financing
|
314,982 | 400,000 | $ | 0.625 | ||||||||
2005
Issuance of Common Stock – placement agents
|
226,544 | 317,350 | $ | 0.65 | ||||||||
2006
Issuance of Common Stock
|
366,492 | 991,516 | $ | 1.72 | ||||||||
Series
B Preferred Stock – purchasers
|
4,545,447 | 7,500,000 | $ | 0.65 | ||||||||
Series
B Preferred Stock – placement agents
|
35,106 | 75,000 | $ | 1.25 | ||||||||
Series
D Preferred Stock
|
2,645,685 | 4,365,381 | $ | 0.65 | ||||||||
Series
C Exchange
|
47,902 | 83,333 | $ | 1.25 | ||||||||
Total
|
8,182,158 | 13,732,580 |
Other
than those described above, there have been no warrant exercises through March
31, 2010.
Authorized and Reserved Shares
— On November 3, 2009, the Company’s stockholders approved an amendment to the
certificate of incorporation to increase the total number of authorized shares
of the Company’s common stock from 150,000,000 to 225,000,000.
F-21
The
following shares were reserved for future issuance upon exercise of stock
options or warrants or conversion of preferred stock as of the dates
indicated:
March 31,
|
December 31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
2000
Stock Option Plan
|
46,047 | 56,047 | 56,047 | |||||||||
2006
Stock Incentive Plan
|
6,490,000 | 6,710,000 | 4,770,000 | |||||||||
Options
issued outside of formalized plans
|
1,733,778 | 2,453,778 | 2,453,778 | |||||||||
Warrants
|
21,788,526 | 35,521,106 | 28,102,033 | |||||||||
Preferred
stock
|
39,670,569 | 50,406,149 | 36,829,192 | |||||||||
Total
shares reserved for future issuance
|
69,728,920 | 95,147,080 | 72,211,050 |
7. STOCK-BASED
COMPENSATION
The
Company’s stock-based compensation plans are summarized below:
2000 Stock Option
Plan. As of December 31, 2009, there are options to purchase
56,047 shares of the Company’s common stock outstanding under a stock option
plan established in August 2000 (the “2000 Plan”). There will be no
further grants made under the 2000 Plan. Options generally vested annually over
three years and expire on the tenth anniversary of the grant date. No
options were granted or exercised under the 2000 Plan during 2009 or
2008. During 2008, options to purchase 17,826 shares of common stock
under the 2000 Plan were canceled. During the three months ended March 31, 2010,
options to purchase 10,000 shares of common stock under the 2000 Plan were
exercised.
2006 Stock Incentive
Plan. On May 1, 2006, the Company’s board of directors
adopted, and on July 21, 2006 the Company’s stockholders approved, the 2006
Stock Incentive Plan (the “2006 Plan”). A total of 10,000,000 shares
of common stock are reserved for issuance under the 2006 Plan for grants of
incentive or nonqualified stock options, rights to purchase restricted and
unrestricted shares of common stock, stock appreciation rights and performance
share grants. A committee of the board of directors determines
exercise prices, vesting periods and any performance requirements on the date of
grant, subject to the provisions of the 2006 Plan. Options are
granted at or above the fair market value of the common stock at the grant date
and expire on the tenth anniversary of the grant date. Vesting
periods are generally two to three years. In the years ended December
31, 2009 and 2008, stock options for the purchase of 1,940,000 and 2,560,000
shares of common stock, respectively, were granted under the 2006
Plan. During 2008, options to purchase 10,000 shares of common stock
under the 2006 Plan were canceled. Through December 31, 2009, there have been no
exercises under the 2006 Plan. In the three months ended March 31,
2010, options to purchase 220,000 shares of common stock under the 2006 Plan
were exercised. As of March 31, 2010 and December 31, 2009, 3,290,000
shares remain available for grant under the 2006 Plan. Options granted pursuant
to the 2006 Plan generally will become fully vested upon a termination event
occurring within one year following a change in control, as
defined. A termination event is defined as either termination of
employment or services other than for cause or constructive termination of
employees or consultants resulting from a significant reduction in either the
nature or scope of duties and responsibilities, a reduction in compensation or a
required relocation.
Other Stock Option
Activity. During 2005 and 2004, the Company issued a total of
2,653,778 stock options to employees, directors and consultants outside of any
formalized plan. These options are exercisable within a ten-year
period from the date of grant, and vest at various intervals with all options
being fully vested within two to three years of the grant date. The
options are not transferable except by will or domestic relations
order. The option price per share is not less than the fair market
value of the shares on the date of the grant. During the year ended
December 31, 2008 options to purchase 100,000 shares of common stock were
exercised. No options were exercised during the year ended December
31, 2009. During the three months ended March 31, 2010, options to
purchase 570,000 shares of common stock were exercised and options to purchase
150,000 shares of common stock were canceled.
F-22
Accounting
for Stock-Based Compensation
The
Company accounts for employee stock-based compensation in accordance with the
guidance of FASB ASC Topic 718, Compensation – Stock Compensation
which requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. The Company accounts for non-employee stock-based
compensation in accordance with the guidance of FASB ASC Topic 505, Equity which requires that
companies recognize compensation expense based on the estimated fair value of
options granted to non-employees over their vesting period, which is generally
the period during which services are rendered by such
non-employees.
The
following table summarizes amounts charged to expense for stock-based
compensation related to employee and director stock option grants and
stock-based compensation recorded in connection with stock options and
restricted stock awards granted to non-employee consultants:
Three Months Ended March
31,
|
Year Ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
Employee
and director stock option grants:
|
||||||||||||||||
Research
and development
|
$ | 57,113 | $ | 36,260 | $ | 148,030 | $ | 159,519 | ||||||||
General
and administrative
|
82,928 | 82,015 | 289,036 | 235,675 | ||||||||||||
140,041 | 118,275 | 437,066 | 395,194 | |||||||||||||
Non-employee
consultant stock option grants and restricted stock
awards:
|
||||||||||||||||
Research
and development
|
(210,825 | ) | 3,329 | 328,614 | 24,131 | |||||||||||
General
and administrative
|
(26,695 | ) | 4,983 | 98,657 | 34,002 | |||||||||||
(237,520 | ) | 8,312 | 427,271 | 58,133 | ||||||||||||
Total
stock-based compensation
|
$ | (97,479 | ) | $ | 126,587 | $ | 864,337 | $ | 453,327 |
During
2008, the Company entered into a separation agreement with a former officer of
the Company that provided, among other terms, for the immediate vesting of
166,667 unvested options to purchase the Company’s common stock and provided for
an extension, until December 31, 2009, of the expiration of the total of 350,000
options held by the former officer. The 2008 stock-based compensation
for research and development employees included in the table above includes
incremental stock-based compensation expense of $23,700 that was recorded in
connection with the modification of the option terms. On December 31,
2009, the expiration of the options was extended until January 31, 2010 and
incremental stock-based compensation expense for non-employees of $15,000 was
recorded in connection with the one-month extension.
In
January 2009, the Company modified the terms of options to purchase 40,000
shares of common stock held by two employees to vest all unvested options and to
extend the expiration dates of the options. The modification was made
in connection with the termination of the two employees to reduce
costs. During the year ended December 31, 2009, incremental
stock-based compensation expense of $8,000 was recorded in connection with the
modification of the option terms.
F-23
Determining
Fair Value
Valuation and amortization
method. The fair value of each stock award is estimated on the grant date
using the Black-Scholes option-pricing model. The estimated fair
value of employee stock options is amortized to expense using the straight-line
method over the vesting period.
Volatility. The Company
estimates volatility based on an average of (1) the Company’s historical
volatility since its common stock has been publicly traded and (2) review of
volatility estimates of publicly held drug development companies with similar
market capitalizations.
Risk-free interest rate. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at
the time of grant commensurate with the expected term assumption.
Expected term. The expected
term of stock options granted is based on the Company’s estimate of when options
will be exercised in the future as there have been limited stock option
exercises to date. The expected term is generally applied to one
group as a whole as the Company does not expect substantially different exercise
or post-vesting termination behavior within its population of option
holders.
Forfeitures. The
Company records stock-based compensation expense only for those awards that are
expected to vest. FASB ASC Topic 718 requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. The term
“forfeitures” is distinct from “cancellations” or “expirations” and represents
only the unvested portion of the surrendered option. The Company has
applied an annual forfeiture rate of 0% to all unvested options as of December
31, 2009 as the Company has experienced very few forfeitures to date and
believes that there is insufficient history to develop an accurate estimate of
future forfeitures. This analysis will be re-evaluated semi-annually
and the forfeiture rate will be adjusted as necessary. Ultimately,
the actual expense recognized over the vesting period will be for only those
shares that vest.
The
following table summarizes weighted average values and assumptions used for
options granted to employees, directors and consultants in the periods
indicated:
Year Ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
Volatility
|
90
|
%
|
80
|
%
|
||||
Weighted-average
volatility
|
90
|
%
|
80
|
%
|
||||
Risk-free
interest rate
|
2.12
|
%
|
1.50%-3.28
|
%
|
||||
Expected
life (years)
|
5
|
5
|
||||||
Dividend
|
0
|
%
|
0
|
%
|
||||
Weighted-average
exercise price
|
$
|
0.75
|
$
|
0.46
|
||||
Weighted-average
grant-date fair value
|
$
|
0.53
|
$
|
0.30
|
There
were no stock option grants during the three months ended March 31, 2010 or
2009.
A summary
of stock option activity under the 2000 Plan, the 2006 Plan and outside of any
formalized plan is as follows:
F-24
Options
Outstanding
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining
Contracted
Term in
Years
|
Aggregate
Intrinsic
Value
|
|||||||||||||
Outstanding
at January 1, 2008
|
4,847,651
|
$
|
0.67
|
8.1
|
$
|
1,308,961
|
||||||||||
Options
granted
|
2,560,000
|
$
|
0.46
|
|||||||||||||
Options
exercised
|
(100,000
|
)
|
$
|
0.01
|
||||||||||||
Options
canceled
|
(27,826
|
)
|
$
|
2.23
|
||||||||||||
Outstanding
at December 31, 2008
|
7,279,825
|
$
|
0.60
|
7.9
|
$
|
989,718
|
||||||||||
Options
granted
|
1,940,000
|
$
|
0.75
|
|||||||||||||
Outstanding
at December 31, 2009
|
9,219,825
|
$
|
0.63
|
7.5
|
$
|
17,650,255
|
||||||||||
Options
exercised
|
(800,000
|
)
|
$
|
0.20
|
||||||||||||
Options
canceled
|
(150,000
|
)
|
$
|
2.20
|
||||||||||||
Outstanding
at March 31, 2010
|
8,269,825
|
$
|
0.64
|
7.6
|
$
|
230.992
|
||||||||||
Exercisable
at December 31, 2009
|
5,753,149
|
$
|
0.64
|
6.3
|
$
|
11,031,302
|
||||||||||
Exercisable
at March 31, 2010
|
5,044,805
|
$
|
0.67
|
6.7
|
$
|
230,992
|
The
aggregate intrinsic value of options outstanding is calculated based on the
positive difference between the closing market price of the Company’s common
stock at the end of the respective period and the exercise price of the
underlying options. During the year ended December 31, 2008, the
total intrinsic value of options exercised was $74,000 and the total amount of
cash received from exercise of these options was $1,000. During the
three months ended March 31, 2010, the total intrinsic value of options
exercised was $636,000 and the total amount of cash received from exercise of
these options was $157,000. Shares of common stock issued upon the
exercise of options are from authorized but unissued shares.
As of
December 31, 2009, there was approximately $1,972,000 of total unrecognized
compensation cost related to unvested stock-based compensation
arrangements. Of this total amount, 45%, 36% and 19% are expected to
be recognized during 2010, 2011 and 2012, respectively. The Company
expects 3,466,676 in unvested options to vest in the future. The
weighted-average grant-date fair value of vested and unvested options
outstanding at December 31, 2009 was $0.39 and $0.42, respectively.
As of
March 31, 2010, there was approximately $1,115,000 of total unrecognized
compensation cost related to unvested stock-based compensation arrangements. Of
this total amount, 41%, 41% and 18% is expected to be recognized during 2010,
2011 and 2012, respectively. The Company expects 3,225,020 in
unvested options to vest in the future. The weighted-average
grant-date fair value of both vested and unvested options outstanding at March
31, 2010 was $0.41.
In April
2010, options to purchase 116,667 shares of common stock at an exercise price of
$0.01 per share were exercised. These options had an intrinsic value of $26,000
on the date of exercise.
8.
INCOME TAXES
The
Company’s deferred tax assets consisted of the following at December
31:
2009
|
2008
|
|||||||
Net
operating loss carryforwards
|
$
|
9,543,000
|
$
|
7,128,000
|
||||
Research
and development
expenses
|
14,906,000
|
13,681,000
|
||||||
Tax
credits
|
1,563,000
|
1,311,000
|
||||||
Capital
loss carryforward
|
340,000
|
340,000
|
||||||
Stock-based
compensation
|
650,000
|
449,000
|
||||||
Gross
deferred tax asset
|
27,002,000
|
22,909,000
|
||||||
Valuation
allowance
|
(27,002,000
|
)
|
(22,909,000
|
)
|
||||
Net
deferred tax asset
|
$
|
—
|
$
|
—
|
F-25
As of
December 31, 2009, the Company had federal and state net operating loss
carryforwards of approximately $25,140,000 and $18,073,000 respectively, which
expire through 2029. In addition, the Company has federal and state
research and development and investment tax credits of approximately $1,276,000
and $434,000, respectively which expire through 2029. The amount of
net operating loss carryforwards which may be utilized annually in future
periods may be limited pursuant to Section 382 of the Internal Revenue Code as a
result of substantial changes in the Company’s ownership that have occurred or
that may occur in the future.
The
capital loss carryforward relates to the loss recorded in prior years for
Novelos’ investment in an unrelated company.
Because
of the Company’s limited operating history, continuing losses and uncertainty
associated with the utilization of the net operating loss carryforwards in the
future, management has provided a 100% allowance against the Company’s gross
deferred tax asset. In 2009, the difference between the Company’s
total statutory tax rate of approximately 38% and its effective tax rate of 0%
is due equally to the increase in valuation allowance and the reduction in tax
loss resulting from the nondeductible loss on derivative warrants. In 2008, the
increase in the valuation allowance represents the principal difference between
the Company’s total statutory tax rate of approximately 38% and its effective
tax rate of 0%. The net income reported for the three months ended
March 31, 2010 is a result of the gain recorded on the revaluation of derivative
warrant liability during that period, which is a nontaxable item.
The
Company did not have any unrecognized tax benefits or accrued interest and
penalties at any time during the years ended December 31, 2009 and 2008, and
does not anticipate having any unrecognized tax benefits over the next twelve
months. The Company is subject to audit by the IRS for tax periods
commencing January 1, 2006.
9.
NET LOSS PER SHARE
Basic net
income (loss) per share is computed by dividing net income (loss) attributable
to common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net income (loss) per share is
computed by dividing net income (loss) attributable to common stockholders by
the sum of weighted average number of shares of common stock and the dilutive
potential common stock equivalents then outstanding. Potential common
stock equivalents consist of stock options, warrants and convertible preferred
stock and accumulated dividends. Since the Company has a net loss for
the years ended December 31, 2009 and 2008 and the three months ended March 31,
2009, the inclusion of common stock equivalents in the computation for those
periods would be antidilutive. Accordingly, basic and diluted net
loss per share are the same for those periods.
The
following table sets forth the shares and net income used in the diluted
earnings per share computation for the three months ended March 31,
2010:
Numerator:
|
||||
Net
income available to common stockholders used in basic earnings per share
calculation
|
$ |
4,693,487
|
||
Derivative
gain recorded on dilutive warrants
|
(2,340,515)
|
|||
Dividends
on convertible preferred stock
|
656,635
|
|||
Net
income available to common stockholders used in diluted earnings per share
calculation
|
$ |
3,009,607
|
||
Denominator:
|
||||
Weighted
average shares of common stock used in the computation of basic earnings
per share
|
79,919,670
|
|||
Dilutive
effect of stock options
|
4,043,826
|
|||
Dilutive
effect of warrants to purchase common stock
|
12,185,984
|
|||
Dilutive
effect of convertible preferred stock
|
38,775,658
|
|||
Shares
used in computation of diluted earnings per share
|
134,925,138
|
F-26
The
following potentially dilutive securities have been excluded from the
computation of diluted net loss per share since their inclusion would be
antidilutive:
Three Months Ended
March 31,
|
Year Ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
|
||||||||||||||||
Stock
options
|
607,463 | 7,279,825 | 9,219,825 | 7,279,825 | ||||||||||||
Warrants
|
6,632,461 | 38,445,170 | 35,521,106 | 28,102,033 | ||||||||||||
Conversion
of preferred stock
|
— | 54,670,982 | (1) | 50,406,149 | (1) | 36,829,192 |
(1) Includes shares of common
stock that may become issuable upon conversion of dividends accumulated at the
respective date.
10.
COMMITMENTS
Property
Lease
On May
11, 2009, the Company entered into a twelve-month lease for office space,
commencing September 1, 2009 at a rate of $5,275 per month. Rent expense was
$15,000 and $24,000 in the three months ended March 31, 2010 and 2009,
respectively and $87,000 and $92,000 for the years ended December 31, 2009 and
2008, respectively. Future minimum lease payments under this non-cancelable
lease are approximately $26,000 during 2010.
Royalty
Arrangements
The
Company is obligated to a Russian company, ZAO BAM, under a royalty and
technology transfer agreement. Mark Balazovsky, a director of the Company until
November 2006, is the majority shareholder of ZAO BAM. Pursuant to the royalty
and technology transfer agreement between the Company and ZAO BAM, the Company
is required to make royalty payments of 1.2% of net sales of oxidized
glutathione-based products. The Company is also required to pay ZAO BAM $2
million for each new oxidized glutathione-based drug within eighteen months
following FDA approval of such drug.
If a
royalty is not being paid to ZAO BAM on net sales of oxidized glutathione
products, then the Company is required to pay ZAO BAM 3% of all license
revenues. If license revenues exceed the Company’s cumulative expenditures
including, but not limited to, preclinical and clinical studies, testing, FDA
and other regulatory agency submission and approval costs, general and
administrative costs, and patent expenses, then the Company would be required to
pay ZAO BAM an additional 9% of the amount by which license revenues exceed the
Company’s cumulative expenditures. During 2008, the Company paid ZAO BAM
$15,000, which was 3% of license payments received under the collaboration
agreement described in Note 5. This amount is included in research and
development expense on the statement of operations.
F-27
As a
result of the assignment to Novelos of the exclusive worldwide intellectual
property and marketing rights of oxidized glutathione (excluding the Russian
Territory), Novelos is obligated to the Oxford Group, Ltd., or its assignees,
for future royalties. Simyon Palmin, a founder of Novelos, a director
until August 12, 2008 and the father of the Company’s president and chief
executive officer, is president of Oxford Group, Ltd. Mr. Palmin was
also an employee of the Company until September 2008 and performed consulting
services through December 2009. Pursuant to the agreement, as revised
May 26, 2005, Novelos is required to pay Oxford Group, Ltd., or its assignees, a
royalty in the amount of 0.8% of the Company’s net sales of oxidized
glutathione-based products.
Employment
Agreements
On July
15, 2005, the Company entered into an employment agreement with Christopher J.
Pazoles, whereby he agreed to serve as the Company’s vice president of research
and development for an initial term of two years. The agreement is
automatically renewed for successive one-year terms unless notice of termination
is provided by either party at least 60 days prior to the end of any such
term. The agreement was renewed for an additional one-year term on
July 15, 2009 in accordance with its terms. The agreement provides
for a minimum salary of $195,000 during the current and any future terms as well
as participation in standard benefit programs. The agreement further
provides that upon resignation for good reason or termination without cause,
both as defined in the agreement, Dr. Pazoles will receive his base salary for
the remainder of the contract term. In addition, his benefits will be
paid for the twelve months following termination. On May 14, 2010,
the agreement was terminated in connection with the entry into a retention
agreement between the Company and Dr. Pazoles (see Note 12).
The
Company entered into an employment agreement with Harry Palmin effective January
1, 2006, whereby he agreed to serve as the Company’s president and chief
executive officer for an initial term of two years. The agreement is
automatically renewed for successive one-year terms unless notice of termination
is provided by either party at least 90 days prior to the end of such
term. The agreement was renewed for an additional one-year term on
January 1, 2010 in accordance with its terms. The agreement provides
for an initial salary of $225,000, participation in standard benefit programs
and an annual cash bonus at the discretion of the compensation
committee. The agreement further provides that upon resignation for
good reason or termination without cause, both as defined in the agreement,
Mr. Palmin will receive his pro rata share of the average of his annual
bonus paid during the two fiscal years preceding his termination; his base
salary and benefits for 11 months after the date of termination and fifty
percent of his unvested stock options will vest. The agreement also
contains a non-compete provision, which prohibits Mr. Palmin from competing
with the Company for one year after termination of his employment with the
Company.
Phase
3 Clinical Trial Bonus Plan
On
December 8, 2009, the board of directors of the Company approved a special bonus
plan for all employees of the Company. The bonus plan provides for
the payment of contingent cash bonuses in three equal installments in aggregate
amounts ranging from 80% to 150% of annual 2009 salaries for each
employee. All payments under the bonus plan are conditioned upon the
achievement of favorable results for our Phase 3 clinical trial of NOV-002 in
non-small cell lung cancer (the “Phase 3 Trial”). As a result of the
unfavorable results of the Phase 3 Trial (see Note 1), no amounts will be paid
under the special bonus plan.
F-28
11. LITIGATION
A
purported class action complaint was filed on March 5, 2010 in the United States
District Court for the District of Massachusetts by an alleged shareholder of
the Company, on behalf of himself and all others who purchased or otherwise
acquired the Company’s common stock in the period between December 14, 2009 and
February 24, 2010, against the Company and its President and Chief Executive
Officer, Harry S. Palmin. On April 7, 2010, Novelos and Mr. Palmin
filed a motion for an order to establish that their response to the complaint
will not be due until some time after the court appoints a lead plaintiff and
affords the lead plaintiff an opportunity to file a consolidated and amended
complaint. On May 4, 2010, motions were filed on behalf of three
different individuals or groups, each seeking to be appointed lead plaintiff,
although two of the three motions were withdrawn on May 18, 2010. The
court has not yet appointed a lead plaintiff. The complaint claims that the
Company violated Section 10(b) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated thereunder in connection with alleged
disclosures related to the Phase 3 clinical trial of NOV-002 for non-small cell
lung cancer. The Company believes the allegations are without merit
and intends to defend vigorously against the allegations. Legal costs
related to the complaint will be expensed as incurred.
On
June 28, 2010, the Company received a letter from counsel to ZAO BAM and ZAO BAM
Research Laboratories (collectively, “BAM”) alleging that the Company modified
the chemical composition of NOV-002 without prior notice to or approval from
BAM, constituting a material breach of a technology and assignment agreement the
Company had entered into with BAM on June 20, 2000. The letter
references the Company’s amendment, submitted to the FDA on August 30, 2005, to
its investigational new drug application dated August 1999 as the basis for
BAM’s claims and demands the transfer of all intellectual property rights
concerning NOV-002 to BAM. Mark Balazovsky, a director of Novelos
from June 1996 until November 2006 and a shareholder of Novelos through at least
June 25, 2010, is, to the Company’s knowledge, still the general director and
principal shareholder of ZAO BAM. The Company believes the
allegations are without merit and intends to defend vigorously against any
proceedings that BAM may initiate as to these allegations.
12. SUBSEQUENT
EVENTS
Retention
Agreements
On May
14, 2010, the Company entered into retention agreements with each of its four
vice-president executive officers. The agreements provide for the
lump-sum payment of six months’ base salary and benefits to each officer
following a termination without cause or a resignation with good reason
occurring on or before November 14, 2011. The agreements further
provide that if the executives remain employed with the Company as of October 1,
2010, they will receive a payment of two months’ base salary as a retention
bonus on that date. The amount paid as a retention bonus will be deducted from
the severance amounts that may become payable upon a subsequent involuntary
termination. The agreements expire November 14, 2011. The total
amounts that may become payable to the named executive officers pursuant to the
retention agreements are approximately $132,000 to Christopher Pazoles and
$129,000 to Elias Nyberg. Concurrently with the execution of the retention
agreements, the employment agreement between the Company and Christopher Pazoles
dated July 15, 2005 was terminated. The employment agreement between
the Company and Harry S. Palmin, the Company’s chief executive officer, remains
unchanged.
On May
14, 2010, the Company entered into retention agreements with each of its three
non-executive employees. The agreements provide for the lump-sum payment of six
months’ base salary and benefits to each employee following a termination
without cause or a resignation with good reason occurring on or before November
14, 2011. The agreements expire November 14, 2011.
F-29
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following table provides information regarding the various actual and
anticipated expenses (other than placement agent fees) payable by us in
connection with the issuance and distribution of the securities being registered
hereby. All amounts shown are estimates except the Securities and
Exchange Commission registration fee.
Nature
of Expense
|
Amount
|
|||
SEC
registration fee
|
$
|
813
|
||
Accounting
fees and expenses
|
5,000
|
|||
Legal
fees and expenses
|
75,000
|
|||
Transfer
agent’s fees and expenses
|
3,000
|
|||
Printing
and related fees
|
5,000
|
|||
Miscellaneous
|
||||
Total
|
$
|
88,813
|
Item 14.
Indemnification of Directors and Officers.
Section
102(b)(7) of the Delaware General Corporation Law allows us to adopt a charter
provision eliminating or limiting the personal liability of directors to us or
our stockholders for breach of fiduciary duty as directors, but the provision
may not eliminate or limit the liability of directors for (a) any breach of the
director's duty of loyalty to us or our stockholders, (b) any acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (c) unlawful payments of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law or (d) any
transaction from which the director derived an improper personal benefit.
Article Seventh of our charter provides that none of our directors shall be
personally liable to us or our stockholders for monetary damages for any breach
of fiduciary duty as a director, subject to the limitations imposed by Section
102(b)(7). Article Seventh also provides that no amendment to or repeal of
Article Seventh shall apply to or have any effect on the liability or the
alleged liability of any director with respect to any acts or omissions of such
director occurring prior to such amendment or repeal. A principal effect of
Article Seventh is to eliminate or limit the potential liability of our
directors for monetary damages arising from breaches of their duty of care,
unless the breach involves one of the four exceptions described in (a) through
(d) above.
Section
145 of the Delaware General Corporation Law provides, in general, that a
corporation incorporated under the laws of the State of Delaware, such as us,
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding (other
than a derivative action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another enterprise, against expenses
(including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. In the case of a
derivative action, a Delaware corporation may indemnify any such person against
expenses (including attorneys’ fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification will be made in respect of any claim, issue or matter as to
which such person will have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery of the State of Delaware or
any other court in which such action was brought determines such person is
fairly and reasonably entitled to indemnity for such expenses.
59
Article
Eighth of our amended and restated certificate of incorporation and Section 5.1
of our bylaws provide that we will indemnify our directors, officers, employees
and agents to the extent and in the manner permitted by the provisions of the
Delaware General Corporation Law, as amended from time to time, subject to any
permissible expansion or limitation of such indemnification, as may be set forth
in any shareholders’ or directors’ resolution or by contract.
The
effect of these provisions would be to permit indemnification by us for, among
other liabilities, liabilities arising out of the Securities Act of
1933.
Item
15. Recent Sales of Unregistered Securities
In the
last three years we have sold the following securities in reliance on, unless
otherwise indicated, the exemption under Section 4(2) of the Securities Act of
1933, as amended, as transactions not involving any public
offering.
2010
From
January 1, 2010 through March 31, 2010:
·
|
We
issued 11,745,779 shares of our common stock upon conversion of
approximately 140 shares of our Series E preferred stock, having an
aggregate stated value of approximately $7,000,000, and accumulated
undeclared dividends thereon.
|
·
|
We
issued 7,191,132 shares of our common stock upon the cashless exercise of
warrants to purchase 11,865,381 shares of common stock. The
warrants had an expiration date of December 31, 2015 and an exercise price
of $0.65 per share.
|
·
|
We
issued 226,544 shares of our common stock upon the cashless exercise of
warrants to purchase 317,350 shares of common stock. The
warrants had an expiration date of August 9, 2010 and an exercise price of
$0.65 per share.
|
·
|
We
issued 35,106 shares of our common stock upon the cashless exercise of
warrants to purchase 75,000 shares of common stock. The
warrants had an expiration date of May 2, 2012 and an exercise price of
$1.25 per share.
|
·
|
We
issued 366,492 shares of our common stock upon the cashless exercise of
warrants to purchase 991,516 shares of common stock. The warrants had an
expiration date of March 7, 2011 and an exercise price of $1.72 per
share.
|
·
|
We
issued 47,902 shares of our common stock upon the cashless exercise of
warrants to purchase 83,333 shares of common stock. The
warrants had an expiration date of May 2, 2012 and an exercise price of
$1.25 per share.
|
·
|
We
issued 314,982 shares of our common stock upon the cashless exercise of
warrants to purchase 400,000 shares of common stock. The warrants had an
expiration date of April 1, 2010 and an exercise price of $0.625 per
share.
|
60
2009
From
October 1, 2009 through December 31, 2009:
·
|
We
issued 4,801,889 shares of our common stock upon conversion of
approximately 58 shares of our Series E preferred stock, having an
aggregate stated value of approximately $2,907,000, and accumulated
undeclared dividends thereon.
|
·
|
We
issued 662,584 shares of our common stock upon conversion of 28 shares of
our Series C preferred stock having an aggregate stated value of $336,000,
and accumulated undeclared dividends
thereon.
|
·
|
We
issued 26,454 shares of our common stock upon the cashless exercise of
warrants to purchase an aggregate of 201,462 shares of common
stock. The warrants had an expiration date of March 7, 2011 and
an exercise price of $1.72 per
share.
|
·
|
We
issued 121,476 shares of our common stock upon the cashless exercise of
warrants to purchase an aggregate of 201,984 shares of common
stock. The warrants had an expiration date of August 9, 2010
and an exercise price of $0.65 per
share.
|
·
|
We
issued 218,648 shares of our common stock upon the cashless exercise of
warrants to purchase an aggregate of 320,000 shares of common
stock. The warrants had an expiration date of April 1, 2010 and
an exercise price of $0.625 per
share.
|
·
|
We
issued 38,223 shares of our common stock upon the cashless exercise of
warrants to purchase an aggregate of 60,606 shares of common
stock. The warrants had an expiration date of October 3, 2010
and an exercise price of $0.65 per
share.
|
·
|
We
sold 8,333,334 shares of our common stock and warrants to purchase
2,916,668 shares of common stock at an exercise price of $0.66 per share
for gross proceeds of approximately
$5,500,000.
|
61
From July
1, 2009 through September 30, 2009:
·
|
We
sold 5,303,030 shares of our common stock and warrants to purchase
1,856,062 shares of common stock at an exercise price of $0.66 per share
for gross proceeds of approximately
$3,500,000.
|
·
|
We
issued 2,084,308 shares of our common stock in exchange for outstanding
warrants to purchase 6,947,728 shares of common stock at an exercise price
of $1.82 per share. These warrants had been issued in a March
2006 financing. The issuance was made pursuant to an exchange
agreement with each warrant holder and was exempt from registration under
Section 3(a)(9) of the Securities
Act.
|
·
|
We
issued 3,137,119 shares of our common stock upon conversion of
approximately 39 shares of our Series E preferred stock, having an
aggregate stated value of approximately $1,952,000, and accumulated
undeclared dividends thereon.
|
·
|
We
issued 114,410 shares of our common stock upon conversion of 5 shares of
our Series C preferred stock, having an aggregate stated value of $60,000,
and accumulated dividends thereon.
|
·
|
We
issued 72,916 shares of our common stock upon the cashless exercise of
warrants to purchase an aggregate of 262,503 shares of common
stock. The warrants had an expiration date of August 9, 2010
and an exercise price of $0.65 per
share.
|
From
April 1, 2009 through June 30, 2009:
·
|
We
issued 6,112 shares of our common stock upon the cashless exercise of
warrants to purchase an aggregate of 20,830 shares of common
stock. The warrants had an expiration date of August 9, 2010
and an exercise price of $0.65 per
share.
|
·
|
We
issued 761,843 shares of our common stock upon conversion of 35 shares of
our Series C preferred stock, having an aggregate stated value of
$420,000, and accumulated dividends
thereon.
|
From
January 1, 2009 through March 31, 2009:
·
|
We
sold 200 shares of our Series E preferred stock and warrants to purchase
9,230,769 shares of our common stock at an exercise price of $0.65 per
share for gross proceeds of approximately $10,000,000 and paying
approximately $800,000 in fees and expenses. In addition, 413.5
shares of our Series D preferred stock and accumulated undeclared
dividends thereon were exchanged for 445.442875 shares of our Series E
preferred stock.
|
2008
In August
2008, we sold 4,615,384 shares of our common stock to two related accredited
investors at $0.65 per share, for gross proceeds of approximately
$3,000,000.
In April
2008, we sold 113.5 shares of our Series D preferred stock and warrants to
purchase 4,365,381 shares of our common stock at an exercise price of $0.65 per
share to institutional investors. We received gross proceeds of $5,675,000 and
paid approximately $200,000 in fees and expenses. In connection with this
transaction, 300 shares of our Series B preferred stock were exchanged for 300
shares of our Series D preferred stock.
62
In
January 2008, we issued 100,000 shares of our common stock to Howard Schneider,
one of our directors, upon the exercise of his stock option at a price of $0.01
per share for total consideration of $1,000, pursuant to an option granted in
February 2005.
2007
In May
2007, we sold 300 shares of our Series B preferred stock and warrants to
purchase 7,500,000 shares of our common stock at an exercise price of $1.25 per
share to institutional investors. We received gross proceeds of $15,000,000 and
paid approximately $1,300,000 in fees and expenses. We also issued warrants to
purchase 900,000 shares of our common stock at an exercise price of $1.25 per
share to Rodman & Renshaw LLC and VFT Special Ventures, Ltd. (an affiliate
of Emerging Growth Equities) as partial consideration for their placement agent
services in connection with the financing.
In July
2007, we issued 25,000 shares of our common stock to Dr. Kenneth Tew, the
chairman of our Scientific Advisory Board, upon exercise of his stock option at
a price of $0.01 per share for total consideration of $250, pursuant to an
option granted in April 2004.
63
Item
16. Exhibits and Financial Statement Schedules
Filed with
this
Registration
Statement
|
Incorporated by
Reference
|
|||||||||
Exhibit
No.
|
Description
|
on Form
S-1
|
Form
|
Filing Date
|
Exhibit
No.
|
|||||
2.1
|
Agreement
and plan of merger among Common Horizons, Inc., Nove Acquisition, Inc. and
Novelos Therapeutics, Inc. dated May 26, 2005
|
8-K
|
June
2, 2005
|
99.2
|
||||||
2.2
|
Agreement
and plan of merger between Common Horizons and Novelos Therapeutics, Inc.
dated June 7, 2005
|
10-QSB
|
August
15, 2005
|
2.2
|
||||||
3.1
|
Certificate
of Incorporation
|
8-K
|
June
17, 2005
|
1
|
||||||
3.2
|
Certificate
of Designations of Series E convertible preferred
stock
|
8-K
|
February
18, 2009
|
4.1
|
||||||
3.3
|
Certificate
of Designations of Series C cumulative convertible preferred
stock
|
10-QSB
|
May
8, 2007
|
3.2
|
||||||
3.4
|
Certificate
of Amendment of the Amended and Restated Certificate of
Incorporation
|
8-K
|
November
4, 2009
|
3.1
|
||||||
3.5
|
Amended
and Restated By-laws
|
8-K
|
August
26, 2009
|
3.1
|
||||||
4.1
|
Form
of Warrant
|
X
|
||||||||
5.1
|
Legal
Opinion of Foley Hoag LLP
|
|
S-1/A
|
June
25, 2010
|
5.1
|
|||||
10.1
|
Employment
agreement with Christopher J. Pazoles dated July 15, 2005
|
10-QSB
|
August
15, 2005
|
10.4
|
||||||
10.2
|
Employment
Agreement with Harry S. Palmin dated January 31, 2006
|
8-K
|
February
6, 2006
|
99.1
|
||||||
10.3
|
2000
Stock Option and Incentive Plan
|
SB-2
|
November 16, 2005
|
10.2
|
||||||
10.4
|
Form
of 2004 non-plan non-qualified stock option
|
SB-2
|
November 16, 2005
|
10.3
|
||||||
10.5
|
Form
of non-plan non-qualified stock option used from February to May
2005
|
SB-2
|
November 16, 2005
|
10.4
|
||||||
10.6
|
Form
of non-plan non-qualified stock option used after May 2005
|
SB-2
|
November 16, 2005
|
10.5
|
64
Filed with
this
Registration
Statement
|
Incorporated by
Reference
|
|||||||||
Exhibit
No.
|
Description
|
on Form
S-1
|
Form
|
Filing Date
|
Exhibit
No.
|
|||||
10.7
|
Form
of common stock purchase warrant issued in March 2005
|
SB-2
|
November
16, 2005
|
10.6
|
||||||
10.8
|
Form
of securities purchase agreement dated May 2005
|
8-K
|
June
2, 2005
|
99.1
|
||||||
10.9
|
Form
of subscription agreement dated September 30, 2005
|
8-K
|
October
3, 2005
|
99.1
|
||||||
10.10
|
Form
of Class A common stock purchase warrant dated September 30,
2005
|
8-K
|
October
3, 2005
|
99.3
|
||||||
10.12
|
Consideration
and new technology agreement dated April 1, 2005 with ZAO
BAM
|
10-QSB
|
August
15, 2005
|
10.2
|
||||||
10.13
|
Letter
agreement dated March 31, 2005 with The Oxford Group, Ltd.
|
10-QSB
|
August
15, 2005
|
10.3
|
||||||
10.14
|
Form
of securities purchase agreement dated March 2, 2006
|
8-K
|
March
3, 2006
|
99.2
|
||||||
10.15
|
Form
of common stock purchase warrant dated March 2006
|
8-K
|
March
3, 2006
|
99.3
|
||||||
10.16
|
2006
Stock Incentive Plan, as amended
|
S-1/A
|
December
7, 2009
|
10.16
|
||||||
10.17
|
Form
of Incentive Stock Option under Novelos Therapeutics, Inc.’s 2006 Stock
Incentive Plan
|
8-K
|
December
15, 2006
|
10.1
|
||||||
10.18
|
Form
of Non-Statutory Stock Option under Novelos Therapeutics, Inc.’s 2006
Stock Incentive Plan
|
8-K
|
December
15, 2006
|
10.2
|
||||||
10.19
|
Form
of Non-Statutory Director Stock Option under Novelos Therapeutics, Inc.’s
2006 Stock Incentive Plan
|
8-K
|
December
15, 2006
|
10.3
|
||||||
10.20
|
Securities
Purchase Agreement dated April 12, 2007
|
10-QSB
|
May
8, 2007
|
10.1
|
||||||
10.21
|
Letter
Amendment dated May 2, 2007 to the Securities Purchase
Agreement
|
10-QSB
|
May
8, 2007
|
10.2
|
||||||
10.22
|
Registration
Rights Agreement dated May 2, 2007
|
10-QSB
|
May
8, 2007
|
10.3
|
||||||
10.23
|
Agreement
to Exchange and Consent dated May 1, 2007
|
10-QSB
|
May
8, 2007
|
10.5
|
||||||
10.25
|
Form
of Common Stock Purchase Warrant dated May 2, 2007 issued pursuant to the
Securities Purchase Agreement dated April 12, 2007
|
10-QSB
|
May
8, 2007
|
4.1
|
65
Filed with
this
Registration
Statement
|
Incorporated by
Reference
|
|||||||||
Exhibit
No.
|
Description
|
on Form
S-1
|
Form
|
Filing Date
|
Exhibit
No.
|
|||||
10.26
|
Form
of Common Stock Purchase Warrant dated May 2, 2007 issued pursuant to the
Agreement to Exchange and Consent dated May 2, 2007
|
10-QSB
|
May
8, 2007
|
4.2
|
||||||
10.27
|
Securities
Purchase Agreement dated March 26, 2008
|
8-K
|
April
14, 2008
|
10.1
|
||||||
10.28
|
Amendment
to Securities Purchase Agreement dated April 9, 2008
|
8-K
|
April
14, 2008
|
10.2
|
||||||
10.29
|
Registration
Rights Agreement dated April 11, 2008
|
8-K
|
April
14, 2008
|
10.3
|
||||||
10.30
|
Form
of Common Stock Purchase Warrant dated April 11, 2008 issued pursuant to
the Securities Purchase Agreement dated March 26, 2008
|
8-K
|
April
14, 2008
|
4.3
|
||||||
10.31
|
Warrant
Amendment Agreement dated April 11, 2008
|
8-K
|
April
14, 2008
|
10.5
|
||||||
10.32
|
Amendment
to Registration Rights Agreement dated April 11, 2008
|
8-K
|
April
14, 2008
|
10.4
|
||||||
10.33
|
Securities
Purchase Agreement dated August 14, 2008
|
8-K
|
August
18, 2008
|
10.1
|
||||||
10.34
|
Securities
Purchase Agreement dated February 11, 2009
|
8-K
|
February
18, 2009
|
10.1
|
||||||
10.35
|
Registration
Rights Agreement dated February 11, 2009
|
8-K
|
February
18, 2009
|
10.2
|
||||||
10.36
|
Series
D Preferred Stock Consent and Agreement to Exchange dated February 10,
2009
|
8-K
|
February
18, 2009
|
10.3
|
||||||
10.37
|
Warrant
Amendment Agreements dated February 11, 2009
|
8-K
|
February
18, 2009
|
10.4
|
||||||
10.38
|
Amendment
No. 2 to Registration Rights Agreement dated February 11,
2009
|
8-K
|
February
18, 2009
|
10.5
|
||||||
10.39
|
Collaboration
Agreement dated February 11, 2009*
|
10-K
|
March
30, 2009
|
10.39
|
||||||
10.40
|
Form
of Warrant Exchange Agreement dated August 21, 2009
|
8-K
|
August
26, 2009
|
10.5
|
||||||
10.41
|
Securities
Purchase Agreement dated August 25, 2009
|
S-1
|
September
15, 2009
|
10.41
|
||||||
10.42
|
Registration
Rights Agreement dated August 25, 2009
|
S-1
|
September
15, 2009
|
10.42
|
66
10.43
|
Common
Stock Purchase Warrant dated August 25,2009
|
S-1
|
September
15, 2009
|
10.43
|
||||||
10.44
|
Letter
Agreement with LP Clover Limited dated August 25, 2009
|
S-1
|
September
15, 2009
|
10.44
|
||||||
10.45
|
Letter
Agreement with Mundipharma International Corporation Limited dated August
25, 2009
|
S-1
|
September
15, 2009
|
10.45
|
||||||
10.46
|
Summary
of Phase 3 Clinical Trial Bonus Plan adopted on December 8,
2009
|
S-1/A
|
January
26, 2010
|
10.46
|
||||||
10.47
|
Consent
and Amendment Agreement dated January 21, 2010
|
S-1/A
|
January
26, 2010
|
10.47
|
||||||
10.48
|
Form
of Executive Retention Agreement dated May 14, 2010
|
10-Q
|
May
17, 2010
|
10.3
|
||||||
10.49
|
Letter
dated May 14, 2010 terminating Employment Agreement dated July 15, 2005
between the Company and Christopher J. Pazoles
|
10-Q
|
May
17, 2010
|
10.4
|
||||||
10.50
|
Form
of Placement Agent Agreement between the Company and Rodman and
Renshaw LLC
|
|
S-1/A
|
June
25, 2010
|
10.50
|
|||||
10.51
|
Form
of Securities Purchase Agreement
|
X
|
||||||||
10.52
|
Written
Consent and Waiver of Holders of Series C Convertible Preferred Stock and
Series E Convertible Preferred Stock dated July 6,
2010
|
X
|
||||||||
10.53
|
Form of Common Stock Purchase Warrant to be issued pursuant to the Consent and Waiver of Holders of Series C Convertible Preferred Stock and Series E Convertible Preferred Stock dated July 6, 2010 |
X
|
||||||||
23.1
|
Consent
of Foley Hoag (included in Exhibit 5.1)
|
S-1/A
|
June
25, 2010
|
23.1
|
||||||
23.2
|
Consent
of Stowe & Degon LLC
|
X
|
||||||||
24.1
|
|
Powers
of Attorney (included on signature page)
|
|
|
|
S-1
|
May
11, 2010
|
24.1
|
*
Portions of this exhibit have been omitted pursuant to a confidential treatment
order.
67
Item
17. Undertakings.
(a) The
undersigned registrant hereby undertakes to:
(1) File,
during any period in which it offers or sells securities, a post-effective
amendment to this Registration Statement to:
(i)
Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii)
Reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the “Calculation of Registration
Fee” table in the effective Registration Statement.
(iii)
Include any additional or changed material information on the plan of
distribution.
(2) For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering.
(3)
File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b)
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the “Act”) may be permitted to directors, officers and controlling
persons of the registrant pursuant to foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
(c)
Each prospectus filed pursuant to Rule 424(b)(§230.424(b) of this
chapter) as part of a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A (§230.430A of this chapter), shall be deemed to be part of
and included in the registration statement as of the date it is first used after
effectiveness. Provided that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such date of first use.
(d) For
purposes of determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b) or under
the Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(e) For
the purpose of determining any liability under the Securities Act of 1933, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
68
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Newton, Commonwealth of
Massachusetts, on July 7, 2010.
NOVELOS
THERAPEUTICS, INC.
|
|
By:
|
/s/
Harry S. Palmin
|
Harry
S. Palmin
|
|
President
and Chief Executive
Officer
|
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature
|
Title
|
Date
|
||
/s/
Harry S. Palmin
|
Chief
Executive Officer and Director
|
|||
Harry
S. Palmin
|
(
principal executive officer
)
|
July
7, 2010
|
||
/s/
Joanne M. Protano
|
Chief
Financial Officer
|
July
7, 2010
|
||
Joanne
M. Protano
|
(
principal financial officer and principal accounting officer)
|
|||
/s/
*
|
Chairman
of the Board of Directors
|
July
7, 2010
|
||
Stephen
A. Hill
|
||||
/s/
*
|
Director
|
July
7, 2010
|
||
Michael
J. Doyle
|
||||
/s/
*
|
Director
|
July
7, 2010
|
||
Sim
Fass
|
||||
/s/
*
|
Director
|
July
7, 2010
|
||
James
S. Manuso
|
||||
/s/
*
|
Director
|
July
7, 2010
|
||
David
B. McWilliams
|
||||
/s/
*
|
|
Director
|
|
July
7, 2010
|
Howard
M. Schneider
|
* /s/ Harry S. Palmin
as attorney-in-fact.
69
EXHIBIT
INDEX
Filed with
this
Registration
Statement
|
Incorporated by
Reference
|
|||||||||
Exhibit
No.
|
Description
|
on Form
S-1
|
Form
|
Filing Date
|
Exhibit
No.
|
|||||
2.1
|
Agreement
and plan of merger among Common Horizons, Inc., Nove Acquisition, Inc. and
Novelos Therapeutics, Inc. dated May 26, 2005
|
8-K
|
June
2, 2005
|
99.2
|
||||||
2.2
|
Agreement
and plan of merger between Common Horizons and Novelos Therapeutics, Inc.
dated June 7, 2005
|
10-QSB
|
August
15, 2005
|
2.2
|
||||||
3.1
|
Certificate
of Incorporation
|
8-K
|
June
17, 2005
|
1
|
||||||
3.2
|
Certificate
of Designations of Series E convertible preferred
stock
|
8-K
|
February
18, 2009
|
4.1
|
||||||
3.3
|
Certificate
of Designations of Series C cumulative convertible preferred
stock
|
10-QSB
|
May
8, 2007
|
3.2
|
||||||
3.4
|
Certificate
of Amendment of the Amended and Restated Certificate of
Incorporation
|
8-K
|
November
4, 2009
|
3.1
|
||||||
3.5
|
Amended
and Restated By-laws
|
|
8-K
|
August
26, 2009
|
3.1
|
|||||
4.1
|
Form
of Warrant
|
X
|
||||||||
5.1
|
Legal
Opinion of Foley Hoag LLP
|
S-1/A
|
June
25, 2010
|
5.1
|
||||||
10.1
|
Employment
agreement with Christopher J. Pazoles dated July 15, 2005
|
10-QSB
|
August
15, 2005
|
10.4
|
||||||
10.2
|
Employment
Agreement with Harry S. Palmin dated January 31, 2006
|
8-K
|
February
6, 2006
|
99.1
|
||||||
10.3
|
2000
Stock Option and Incentive Plan
|
SB-2
|
November
16, 2005
|
10.2
|
||||||
10.4
|
Form
of 2004 non-plan non-qualified stock option
|
SB-2
|
November
16, 2005
|
10.3
|
||||||
10.5
|
Form
of non-plan non-qualified stock option used from February to May
2005
|
SB-2
|
November
16, 2005
|
10.4
|
||||||
10.6
|
Form
of non-plan non-qualified stock option used after May 2005
|
SB-2
|
November
16, 2005
|
10.5
|
70
Filed with
this
Registration
Statement
|
Incorporated by
Reference
|
|||||||||
Exhibit
No.
|
Description
|
on Form
S-1
|
Form
|
Filing Date
|
Exhibit
No.
|
|||||
10.7
|
Form
of common stock purchase warrant issued in March 2005
|
SB-2
|
November
16, 2005
|
10.6
|
||||||
10.8
|
Form
of securities purchase agreement dated May 2005
|
8-K
|
June
2, 2005
|
99.1
|
||||||
10.9
|
Form
of subscription agreement dated September 30, 2005
|
8-K
|
October
3, 2005
|
99.1
|
||||||
10.10
|
Form
of Class A common stock purchase warrant dated September 30,
2005
|
8-K
|
October
3, 2005
|
99.3
|
||||||
10.12
|
Consideration
and new technology agreement dated April 1, 2005 with ZAO
BAM
|
10-QSB
|
August
15, 2005
|
10.2
|
||||||
10.13
|
Letter
agreement dated March 31, 2005 with The Oxford Group, Ltd.
|
10-QSB
|
August
15, 2005
|
10.3
|
||||||
10.14
|
Form
of securities purchase agreement dated March 2, 2006
|
8-K
|
March
3, 2006
|
99.2
|
||||||
10.15
|
Form
of common stock purchase warrant dated March 2006
|
8-K
|
March
3, 2006
|
99.3
|
||||||
10.16
|
2006
Stock Incentive Plan, as amended
|
S-1/A
|
December
7, 2009
|
10.16
|
||||||
10.17
|
Form
of Incentive Stock Option under Novelos Therapeutics, Inc.’s 2006 Stock
Incentive Plan
|
8-K
|
December
15, 2006
|
10.1
|
||||||
10.18
|
Form
of Non-Statutory Stock Option under Novelos Therapeutics, Inc.’s 2006
Stock Incentive Plan
|
8-K
|
December
15, 2006
|
10.2
|
||||||
10.19
|
Form
of Non-Statutory Director Stock Option under Novelos Therapeutics, Inc.’s
2006 Stock Incentive Plan
|
8-K
|
December
15, 2006
|
10.3
|
||||||
10.20
|
Securities
Purchase Agreement dated April 12, 2007
|
10-QSB
|
May
8, 2007
|
10.1
|
||||||
10.21
|
Letter
Amendment dated May 2, 2007 to the Securities Purchase
Agreement
|
10-QSB
|
May
8, 2007
|
10.2
|
||||||
10.22
|
Registration
Rights Agreement dated May 2, 2007
|
10-QSB
|
May
8, 2007
|
10.3
|
||||||
10.23
|
Agreement
to Exchange and Consent dated May 1, 2007
|
10-QSB
|
May
8, 2007
|
10.5
|
71
Filed with
this
Registration
Statement
|
Incorporated by
Reference
|
|||||||||
Exhibit
No.
|
Description
|
on Form
S-1
|
Form
|
Filing Date
|
Exhibit
No.
|
|||||
10.25
|
Form
of Common Stock Purchase Warrant dated May 2, 2007 issued pursuant to the
Securities Purchase Agreement dated April 12, 2007
|
10-QSB
|
May
8, 2007
|
4.1
|
||||||
10.26
|
Form
of Common Stock Purchase Warrant dated May 2, 2007 issued pursuant to the
Agreement to Exchange and Consent dated May 2, 2007
|
10-QSB
|
May
8, 2007
|
4.2
|
||||||
10.27
|
Securities
Purchase Agreement dated March 26, 2008
|
8-K
|
April
14, 2008
|
10.1
|
||||||
10.28
|
Amendment
to Securities Purchase Agreement dated April 9, 2008
|
8-K
|
April
14, 2008
|
10.2
|
||||||
10.29
|
Registration
Rights Agreement dated April 11, 2008
|
8-K
|
April
14, 2008
|
10.3
|
||||||
10.30
|
Form
of Common Stock Purchase Warrant dated April 11, 2008 issued pursuant to
the Securities Purchase Agreement dated March 26, 2008
|
8-K
|
April
14, 2008
|
4.3
|
||||||
10.31
|
Warrant
Amendment Agreement dated April 11, 2008
|
8-K
|
April
14, 2008
|
10.5
|
||||||
10.32
|
Amendment
to Registration Rights Agreement dated April 11, 2008
|
8-K
|
April
14, 2008
|
10.4
|
||||||
10.33
|
Securities
Purchase Agreement dated August 14, 2008
|
8-K
|
August
18, 2008
|
10.1
|
||||||
10.34
|
Securities
Purchase Agreement dated February 11, 2009
|
8-K
|
February
18, 2009
|
10.1
|
||||||
10.35
|
Registration
Rights Agreement dated February 11, 2009
|
8-K
|
February
18, 2009
|
10.2
|
||||||
10.36
|
Series
D Preferred Stock Consent and Agreement to Exchange dated February 10,
2009
|
8-K
|
February
18, 2009
|
10.3
|
||||||
10.37
|
Warrant
Amendment Agreements dated February 11, 2009
|
8-K
|
February
18, 2009
|
10.4
|
||||||
10.38
|
Amendment
No. 2 to Registration Rights Agreement dated February 11,
2009
|
8-K
|
February
18, 2009
|
10.5
|
||||||
10.39
|
Collaboration
Agreement dated February 11, 2009*
|
10-K
|
March
30, 2009
|
10.39
|
||||||
10.40
|
Form
of Warrant Exchange Agreement dated August 21, 2009
|
8-K
|
August
26, 2009
|
10.5
|
72
10.41
|
Securities
Purchase Agreement dated August 25, 2009
|
S-1
|
September
15, 2009
|
10.41
|
||||||
10.42
|
Registration
Rights Agreement dated August 25, 2009
|
S-1
|
September
15, 2009
|
10.42
|
||||||
10.43
|
Common
Stock Purchase Warrant dated August 25,2009
|
S-1
|
September
15, 2009
|
10.43
|
||||||
10.44
|
Letter
Agreement with LP Clover Limited dated August 25, 2009
|
S-1
|
September
15, 2009
|
10.44
|
||||||
10.45
|
Letter
Agreement with Mundipharma International Corporation Limited dated August
25, 2009
|
S-1
|
September
15, 2009
|
10.45
|
||||||
10.46
|
Summary
of Phase 3 Clinical Trial Bonus Plan adopted on December 8,
2009
|
S-1/A
|
January
26, 2010
|
10.46
|
||||||
10.47
|
Consent
and Amendment Agreement dated January 21, 2010
|
S-1/A
|
January
26, 2010
|
10.47
|
||||||
10.48
|
Form
of Executive Retention Agreement dated May 14, 2010
|
10-Q
|
May
17, 2010
|
10.3
|
||||||
10.49
|
Letter
dated May 14, 2010 terminating Employment Agreement dated July 15, 2005
between the Company and Christopher J. Pazoles
|
10-Q
|
May
17, 2010
|
10.4
|
||||||
10.50
|
Form
of Placement Agent Agreement between the Company and Rodman and
Renshaw LLC
|
|
S-1/A
|
June
25, 2010
|
10.50
|
|||||
10.51
|
Form
of Securities Purchase Agreement
|
X
|
||||||||
10.52
|
Written
Consent and Waiver of Holders of Series C Convertible Preferred Stock and
Series E Convertible Preferred Stock dated July 6,
2010
|
X
|
||||||||
10.53
|
Form of Common Stock Purchase Warrant to be issued pursuant to the Consent and Waiver of Holders of Series C Convertible Preferred Stock and Series E Convertible Preferred Stock dated July 6, 2010 |
X
|
||||||||
23.1
|
Consent
of Foley Hoag (included in Exhibit 5.1)
|
|
S-1/A
|
June
25, 2010
|
23.1
|
|||||
23.2
|
Consent
of Stowe & Degon LLC
|
X
|
||||||||
24.1
|
|
Powers
of Attorney (included on signature page)
|
|
|
|
S-1
|
May
11, 2010
|
24.1
|
*
Portions of this exhibit have been omitted pursuant to a confidential treatment
order.
73