UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-51290

EpiCept Corporation

(Exact name of registrant as specified in its charter)

Delaware		52-1841431
(State or other jurisdiction of incorporation or organization)		(IRS Employer Id. No.)

777 Old Saw Mill River Road
Tarrytown, NY 10591
(Address of principal executive offices)

Registrant’s telephone number, including area code: (914) 606-3500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of May 6, 2011 the Registrant had outstanding 70,989,292 shares of its $.0001 par value Common Stock.

 

 

TABLE OF CONTENTS

Part I. Financial Information			3
Item 1. Financial Statements (Unaudited)			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			33
Part II. Other Information			34
Item 1. Legal Proceedings			34
Item 1A. Risk Factors			34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 3. Defaults upon Senior Securities			35
Item 4. (removed and reserved)			35
Item 5. Other Information			35
Item 6. Exhibits			35
SIGNATURE PAGE			37
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

Part I. Financial Information

Item 1.		Financial Statements.

EpiCept Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)

		March 31,				December 31,
		2011				2010
ASSETS
Cash and cash equivalents		$	10,212			$	2,435
Inventory			117				179
Prepaid expenses and other current assets			334				333
Total current assets			10,663				2,947
Restricted cash			189				189
Property and equipment, net			193				222
Long-term inventory			805				825
Deferred financing costs			503				506
Total assets		$	12,353			$	4,689
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Accounts payable		$	626			$	1,244
Accrued research contract costs			909				859
Other accrued liabilities			1,689				1,286
Notes and loans payable, current portion			552				524
Deferred revenue, current portion			921				921
Total current liabilities			4,697				4,834
Notes and loans payable			32				62
7.5556% Convertible Subordinated Notes Due 2014			395				386
Deferred revenue			12,682				12,905
Deferred rent and other noncurrent liabilities			570				637
Total liabilities			18,376				18,824
Commitments and contingencies
Common stock, $.0001 par value; authorized 225,000,000 shares; issued 70,993,459 and 54,991,535 shares at March 31, 2011 and December 31, 2010, respectively			7				5
Additional paid-in capital			218,262				210,540
Warrants			30,612				27,227
Accumulated deficit			(253,048	)			(250,582	)
Accumulated other comprehensive loss			(1,781	)			(1,250	)
Treasury stock, at cost (4,167 shares)			(75	)			(75	)
Total stockholders’ deficit			(6,023	)			(14,135	)
Total liabilities and stockholders’ deficit		$	12,353			$	4,689

The accompanying notes are an integral part of these condensed consolidated financial statements.

EpiCept Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)

		Three Months Ended
		March 31,
		2011				2010
Revenue			238				195
Costs and expenses:
Costs of goods sold			90				28
Selling, general and administrative			1,394				2,057
Research and development			1,684				2,039
Total costs and expenses			3,168				4,124
Loss from operations			(2,930	)			(3,929	)
Other income (expense):
Interest income			2				3
Foreign exchange gain (loss)			504				(516	)
Interest expense (see Note 3)			(39	)			(61	)
Other income (expense), net			467				(574	)
Net loss before income taxes			(2,463	)			(4,503	)
Income taxes			(3	)			(5	)
Net loss		$	(2,466	)		$	(4,508	)
Basic and diluted loss per common share		$	(0.04	)		$	(0.10	)
Weighted average common shares outstanding			60,102,966				44,160,266

The accompanying notes are an integral part of these condensed consolidated financial statements.

EpiCept Corporation and Subsidiaries
Condensed Consolidated Statement of Stockholders’ Deficit
(In thousands, except share amounts)
(Unaudited)

																						Accumulated
										Additional												Other								Total
		Common Stock								Paid-In								Accumulated				Comprehensive				Treasury				Stockholders’
		Shares				Amount				Capital				Warrants				Deficit				Loss				Stock				Deficit
Balance at December 31, 2010			54,991,535			$	5			$	210,540			$	27,227			$	(250,582	)		$	(1,250	)		$	(75	)		$	(14,135	)
Net loss			—				—				—				—				(2,466	)			—				—				(2,466	)
Foreign currency translation adjustment			—				—				—				—				—				(531	)			—				(531	)
Comprehensive loss, net of tax			—				—				—				—				(2,466	)			(531	)			—				(2,997	)
Issuance of common stock and warrants, net of issuance costs			16,001,924				2				7,486				3,385				—				—				—				10,873
Amortization of deferred stock compensation			—				—				236				—				—				—				—				236
Balance at March 31, 2011			70,993,459			$	7			$	218,262			$	30,612			$	(253,048	)		$	(1,781	)		$	(75	)		$	(6,023	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

EpiCept Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

		Three Months Ended March 31,
		2011				2010
Cash flows from operating activities:
Net loss		$	(2,466	)		$	(4,508	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			32				40
Gain on disposal of assets			—				(27	)
Foreign exchange (gain) loss			(504	)			516
Stock-based compensation expense			236				209
Excess inventory expense			92				—
Amortization of deferred financing costs and discount on loans			11				11
Changes in operating assets and liabilities:
Increase in inventory			(10	)			(317	)
(Increase) decrease in prepaid expenses and other current assets			(1	)			32
Decrease in accounts payable			(643	)			(266	)
Increase in accrued research contract costs			50				209
Increase (decrease) in other accrued liabilities			73				(204	)
Increase in deferred revenue			—				3,000
Recognition of deferred revenue			(223	)			(167	)
Decrease in other liabilities			(67	)			(46	)
Net cash used in operating activities			(3,420	)			(1,518	)
Cash flows from investing activities:
Proceeds from sale of property and equipment			—				27
Purchases of property and equipment			(1	)			—
Net cash (used in) provided by investing activities			(1	)			27
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants			—				34
Proceeds from issuance of common stock and warrants, net of issuance costs			11,227				—
Deferred financing costs			—				(84	)
Repayment of loans			(27	)			(24	)
Net cash provided by (used in) provided by financing activities			11,200				(74	)
Effect of exchange rate changes on cash and cash equivalents			(2	)			2
Net increase (decrease) in cash and cash equivalents			7,777				(1,563	)
Cash and cash equivalents at beginning of year			2,435				5,142
Cash and cash equivalents at end of period		$	10,212			$	3,579
Supplemental disclosure of cash flow information:
Cash paid for interest		$	5			$	8
Cash paid for income taxes			3				5
Supplemental disclosure of non-cash financing activities:
Unpaid costs associated with issuance of common stock			354				—
Unpaid financing costs			195				24

The accompanying notes are an integral part of these condensed consolidated financial statements.

EpiCept Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization and Description of Business

EpiCept is a specialty pharmaceutical company focused on the development and commercialization of pharmaceutical products for the treatment of cancer and pain. The Company’s strategy is to focus its development efforts on innovative cancer therapies and topically delivered analgesics targeting peripheral nerve receptors. The Company’s lead product is Ceplene^®, which when used concomitantly with low dose interleukin-2 (“IL-2”) is intended as remission maintenance therapy in the treatment of acute myeloid leukemia, or AML, for adult patients who are in their first complete remission. In addition to Ceplene^®, the Company has two other oncology compounds and a late-stage pain product candidate for the treatment of peripheral neuropathies in clinical development. The Company believes this portfolio of oncology and pain management product candidates lessens its reliance on the success of any single product or product candidate.

In January 2010, EpiCept completed an agreement with Meda AB of Sweden to market and sell Ceplene^® in Europe and certain Pacific Rim countries. The commercial launch of Ceplene^® commenced in the United Kingdom in April 2010 and launches are continuing in other European countries. In December 2010, Ceplene^® was approved for marketing in Israel. Upon Ministry of Health approval of labeling and other technical matters expected to be completed in the first half of 2011, Megapharm Ltd., EpiCept’s marketing partner, is expected to commence the commercial launch of Ceplene^®.

In October 2010, the Company reached an agreement with the United States Food and Drug Administration (“FDA”) on the design of a new confirmatory study of Ceplene^® that is to be a two-arm, randomized, open-label trial comparing the efficacy of Ceplene^® plus low-dose IL-2 to standard of care in this indication. Based on FDA guidance, the primary endpoint of the trial will be overall patient survival. In May 2011, EpiCept submitted to the FDA a detailed Phase III protocol. The FDA, via the Special Protocol Assessment (“SPA”) procedure, will provide formal guidance regarding the trial’s design, clinical endpoints, statistical analysis and labeling claims. The Company expects to receive initial comments from the FDA in June 2011, and to reach an agreement with the FDA on all major protocol elements later in 2011. The Company also recently filed an application with the FDA to grant Ceplene^® fast track status. In addition to other benefits, if granted, fast track status permits an expedited review of the Ceplene^® NDA once it is filed.

The Company’s other oncology compounds include crolibulin^TM, a novel small molecule vascular disruption agent (“VDA”), and apoptosis inducer for the treatment of patients with solid tumors and lymphomas. In December 2010, the National Cancer Institute (“NCI”) initiated a Phase II clinical trial for crolibulin^TM to assess the drug’s efficacy and safety in combination with cisplatin in patients with anaplastic thyroid cancer (ATC). Azixa^TM, an apoptosis inducer with VDA activity licensed by the Company to Myrexis, Inc., as part of an exclusive, worldwide development and commercialization agreement, is currently in Phase II clinical trials in patients with primary glioblastoma and cancer that has metastasized to the brain.

The Company’s late-stage pain product candidate, AmiKet^TM cream (formerly known as EpiCept^TM NP-1), is a prescription topical analgesic cream designed to provide effective long-term relief of pain associated with peripheral neuropathies. In February 2011, the Company presented data from its Phase IIb trial for AmiKet^TM in chemotherapy-induced peripheral neuropathy (“CPN”). The multi-center, double-blind, randomized, placebo-controlled study was conducted within a network of approximately 25 sites under the direction of the NCI funded Community Clinical Oncology Program (“CCOP”). More than 460 cancer survivors suffering from painful CPN were enrolled in the six-week study. The results of the trial in the intent to treat (“ITT”) population demonstrated that the change in average daily neuropathy intensity scores in the AmiKet^TM group achieved a statistically significant reduction in CPN intensity versus placebo (p<0.001), which was the trial’s primary endpoint. Secondary efficacy endpoints confirmed the superiority of AmiKet^TM vs. placebo. Furthermore, the safety profile of AmiKet^TM was comparable to placebo.

Other than Ceplene^®, none of the Company’s drug candidates has received FDA or foreign regulatory marketing approval. In order to grant marketing approval, the FDA or foreign regulatory agencies must conclude that the Company’s clinical data and that of its collaborators establish the safety and efficacy of its drug candidates. Furthermore, the Company’s strategy includes entering into collaborative arrangements with third parties to participate in the clinical development and commercialization of its products. In the event that third parties have control over the preclinical development or clinical trial process for a product candidate, the estimated completion date would largely be under control of that third party rather than under the Company’s control. The Company cannot forecast with any degree of certainty which of its drug candidates will be subject to future collaborations or how such arrangements would affect the Company’s development plan or capital requirements.

The Company is subject to a number of risks associated with companies in the specialty pharmaceutical industry. Principal among these are risks associated with the Company’s ability to obtain regulatory approval for its product candidates, its ability to adequately fund its operations, dependence on collaborative arrangements, the development by the Company or its competitors of new technological innovations, the dependence on key personnel, the protection of proprietary technology, the compliance with the FDA and other governmental regulations. The Company has yet to generate significant product revenues from any of its product candidates. The Company has financed its operations primarily through the proceeds from the sales of common stock, warrants, debt instruments, cash proceeds from collaborative relationships and investment income earned on cash balances and short-term investments.

2. Basis of Presentation

The Company has prepared its consolidated financial statements under the assumption that it is a going concern. The Company has devoted substantially all of its cash resources to research and development programs and general and administrative expenses, and to date it has not generated any significant revenues from the sale of products. Since inception, the Company has incurred significant net losses each year. As a result, the Company has an accumulated deficit of $253.0 million as of March 31, 2011. The Company’s recurring losses from operations and the accumulated deficit raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s losses have resulted principally from costs incurred in connection with its development activities and from general and administrative expenses. Even if the Company succeeds in developing and commercializing one or more of its product candidates, the Company may never become profitable. The Company expects to continue to incur significant expenses over the next several years as it:

•

continues to conduct clinical trials for its product candidates;

•

seeks regulatory approvals for its product candidates;

•

develops, formulates, and commercializes its product candidates;

•

implements additional internal systems and develops new infrastructure;

•

acquires or in-licenses additional products or technologies or expands the use of its technologies;

•

maintains, defends and expands the scope of its intellectual property; and

•

hires additional personnel.

The Company believes that its existing cash and cash equivalents will be sufficient to fund the Company’s operations and meet its debt service requirements into 2012. The Company is considering various financing opportunities, particularly those not reliant on the issuance of equity securities, to obtain additional cash resources to fund operations and clinical trials.

The condensed consolidated balance sheet as of March 31, 2011, the condensed consolidated statements of operations for the three months ended March 31, 2011 and 2010, the condensed consolidated statement of stockholders’ deficit for the three months ended March 31, 2011 and the condensed consolidated statements of cash flows for the three months ended March 31, 2011 and 2010 and related disclosures contained in the accompanying notes are unaudited. The condensed consolidated balance sheet as of December 31, 2010 is derived from the audited consolidated financial statements included in the annual report filed on Form 10-K with the U.S. Securities and Exchange Commission (the “SEC”). The condensed consolidated financial statements are presented on the basis of accounting principles that are generally accepted in the United States of America for interim financial information and in accordance with the instructions of the SEC on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for a complete set of financial statements. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the condensed consolidated balance sheet as of March 31, 2011 and the results of operations and cash flows for the periods ended March 31, 2011 and 2010 have been made. The results for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011 or for any other period. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K filed with the SEC. Certain reclasses have been made to the prior year numbers to conform to current year presentation.

3. Summary of Significant Accounting Policies

Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue relating to its collaboration agreements in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104, Revenue Recognition, FASB Accounting Standards Codification (“ASC”) 605-25, “Revenue Recognition — Multiple Element Arrangements” (“ASC 605-25”), and Accounting Standards Update (“ASU”) 2009-13, “Multiple Revenue Arrangements — a Consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”). ASU 2009-13 supersedes certain guidance in ASC 605-25, and requires an entity to allocate arrangement consideration to all of its deliverables at the inception of an arrangement based on their relative selling prices (i.e., the relative-selling-price method). The Company adopted the provisions of ASU 2009-13 beginning on January 1, 2011. The adoption of ASU 2009-13 did not have a material effect on the Company’s financial statements. Revenue under collaborative arrangements may result from license fees, milestone payments, research and development payments and royalty payments.

The Company’s application of these standards requires subjective determinations and requires management to make judgments about value of the individual elements and whether they are separable from the other aspects of the contractual relationship. The Company evaluates its collaboration agreements to determine units of accounting for revenue recognition purposes. To date, the Company has determined that its upfront non-refundable license fees cannot be separated from its ongoing collaborative research and development activities and, accordingly, does not treat them as a separate element. The Company recognizes revenue from non-refundable, upfront licenses and related payments, not specifically tied to a separate earnings process, either on the proportional performance method or ratably over either the development period in which the Company is obligated to participate on a continuing and substantial basis in the research and development activities outlined in the contract, or the later of 1) the conclusion of the royalty term on a jurisdiction by jurisdiction basis or 2) the expiration of the last EpiCept licensed patent. Ratable revenue recognition is only utilized if the research and development services are performed systematically over the development period. Proportional performance is measured based on costs incurred compared to total estimated costs to be incurred over the development period which approximates the proportion of the value of the services provided compared to the total estimated value over the development period. The Company periodically reviews its estimates of cost and the length of the development period and, to the extent such estimates change, the impact of the change is recorded at that time.

EpiCept recognizes milestone payments as revenue upon achievement of the milestone only if (1) it represents a separate unit of accounting as defined in ASC 605-25; (2) the milestone payments are nonrefundable; (3) substantive effort is involved in achieving the milestone; and (4) the amount of the milestone is reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of these conditions is not met, EpiCept will recognize milestones as revenue in accordance with its accounting policy in effect for the respective contract. For current agreements, EpiCept recognizes revenue for milestone payments based upon the portion of the development services that are completed to date and defers the remaining portion and recognizes it over the remainder of the development services on the proportional or ratable method, whichever is applicable. Deferred revenue represents the excess of cash received compared to revenue recognized to date under licensing agreements.

EpiCept has chosen early adoption of the milestone method of Revenue Recognition as defined in ASC 605-28, “Revenue Recognition — Milestone Method” on a prospective basis as of January 1, 2010. Under this method of revenue recognition, the Company will recognize into revenue research-related milestone payments for which there is substantial uncertainty at the date the arrangement is entered into that the event will be achieved, when that event can only be achieved based in whole or in part on EpiCept’s performance or a specific outcome resulting from EpiCept’s performance and, if achieved, would result in additional payments being due to EpiCept. This accounting will be applicable to research milestones under the license agreement entered into with Meda AB in 2010 and all future agreements.

Revenue from the sale of product is recognized when title and risk of loss of the product is transferred to the customer. Provisions for discounts, early payments, rebates, sales returns and distributor chargebacks under terms customary in the industry, if any, are provided for in the same period the related sales are recorded.

Royalty revenue is recognized in the period in which the sales occur, provided that the royalty amounts are fixed or determinable, collection of the related receivable is reasonably assured and the Company has no remaining performance obligations under the arrangement providing for the royalty. If royalties are received when the Company has remaining performance obligations, they would be attributed to the services being provided under the arrangement and, therefore, recognized as such obligations are performed under either the proportionate performance or ratable methods, as applicable.

Foreign Currency Translation

The financial statements of the Company’s foreign subsidiary are translated into U.S. dollars using the period-end exchange rate for all balance sheet accounts and the average exchange rates for expenses. Adjustments resulting from translation have been reported in other comprehensive loss.

Gains or losses from foreign currency transactions relating to inter-company debt are recorded in the consolidated statements of operations in other income (expense).

Stock Based Compensation

The Company has various stock-based compensation plans for employees and outside directors, which are described more fully in Note 8 “Share-Based Payments.”

Income Taxes

The Company accounts for income taxes in accordance with ASC 740, “Income Taxes.” The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company’s income tax returns for tax years after 2006 are still subject to review. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of operating expense. The Company had no accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the quarters ended March 31, 2011 and 2010. Income tax expense for the quarters ended March 31, 2011 and 2010 is primarily due to minimum state and local income taxes.

The Company accounts for its income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized based upon the differences arising from carrying amounts of the Company’s assets and liabilities for tax and financial reporting purposes using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in the period when the change in tax rates is enacted. A valuation allowance is established when it is determined that it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of March 31, 2011 and December 31, 2010, a full valuation allowance has been applied against the Company’s net deferred tax assets because it is not more likely than not that the Company will realize future benefits associated with these deferred tax assets.

Loss per Share:

Basic and diluted loss per share is computed by dividing loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted weighted average shares outstanding excludes shares underlying stock options, restrictive stock and warrants, since the effects would be anti-dilutive. Accordingly, basic and diluted loss per share is the same. Such excluded shares are summarized as follows:

		March 31,
		2011				2010
Common stock options			4,411,390				2,966,757
Restricted stock and restricted stock units			75,441				95,551
Shares issuable upon conversion of convertible debt			185,185				185,185
Warrants			33,382,125				12,495,541
Total shares excluded from calculation			38,054,141				15,743,034

Interest Expense:

Interest expense consisted of the following for the three months ended March 31, 2011 and 2010:

		Three Months Ended March 31,
		2011				2010
		(in thousands)
Interest expense		$	(28	)		$	(50	)
Amortization of debt issuance costs and discount			(11	)			(11	)
Interest and amortization of debt discount and expense		$	(39	)		$	(61	)

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents.

Restricted Cash

The Company has lease agreements for the premises it occupies. Letters of credit in lieu of lease deposits for leased facilities totaling $0.1 million are secured by restricted cash in the same amount at March 31, 2011. During 2008, the Company failed to make certain payments on its lease agreement for the premises located in San Diego, California. As a result, the landlord exercised their right to draw down the full letter of credit, amounting to approximately $0.3 million, and applied approximately $0.2 million to unpaid rent. The remaining balance of $0.1 million is classified as prepaid expense.

On February 4, 2009, the Company issued $25.0 million in principal aggregate amount of 7.5556% convertible subordinated notes due 2014. Approximately $0.1 million remained in escrow for payment of the interest on the remaining notes not converted and was accordingly classified as restricted cash at March 31, 2011.

Inventory

Inventories are valued at the lower of cost (first-in, first-out) or market. The Company periodically evaluates its inventories and will reduce inventory to its net realizable value depending on certain factors, such as product demand, remaining shelf life, future marketing plans, obsolescence and slow-moving inventories.

As of March 31, 2011 and December 31, 2010, inventory consists of the following:

		March 31,				December 31,
		2011				2010
		(in thousands)
Raw materials		$	157			$	144
Work-in-process			765				860
Finished goods			—				—
Total inventory		$	922			$	1,004
Recognized as:
Inventory		$	117			$	179
Long-term inventory			805				825

During the first quarter of 2011, the Company expensed $0.1 million of Ceplene^® inventory as it believes such inventory will not be sold prior to reaching its product expiration date. The portion of inventory classified as long-term is not expected to be realized in cash or sold or consumed during the normal operating cycle of the Company.

Prepaid Expenses and Other Current Assets:

As of March 31, 2011 and December 31, 2010, prepaid expenses and other current assets consist of the following:

		March 31,				December 31,
		2011				2010
		(in thousands)
Prepaid expenses		$	165			$	151
Prepaid insurance			154				158
Other			15				24
Total prepaid expenses and other current assets		$	334			$	333

Property and Equipment:

Property and equipment consists of furniture, office and laboratory equipment, and leasehold improvements stated at cost. Furniture and office and laboratory equipment are depreciated on a straight-line basis over their estimated useful lives ranging from five to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset. Maintenance and repairs are charged to expense as incurred.

As of March 31, 2011 and December 31, 2010, property and equipment consist of the following:

		March 31,				December 31,
		2011				2010
		(in thousands)
Furniture, office and laboratory equipment		$	981			$	977
Leasehold improvements			764				763
			1,745				1,740
Less accumulated depreciation			(1,552	)			(1,518	)
		$	193			$	222

Depreciation expense was approximately $32,000 and $36,000 for the three months ended March 31, 2011 and 2010, respectively.

Deferred Financing Cost

Deferred financing costs represent legal and other costs and fees incurred to negotiate and obtain debt financing. Deferred financing costs are capitalized and amortized using the effective interest method over the life of the applicable financing. As of March 31, 2011 and December 31, 2010, deferred financing costs were approximately $0.5 million. Amortization expense was $11,000 for each of the three months ended March 31, 2011 and 2010.

Other Comprehensive Loss

A summary of other comprehensive loss for three months ended March 31, 2011 and 2010 is as follows:

		Three Months Ended March 31,
		2011				2010
		(in thousands)
Net loss			(2,466	)			(4,508	)
Foreign currency translation gain (loss)			(531	)			603
Total other comprehensive loss		$	(2,997	)		$	(3,905	)

At March 31, 2011 and December 31, 2010, the Company’s only element of accumulated other comprehensive loss was foreign currency translation adjustments of ($1.8) million and ($1.3) million, respectively.

Fair Value of Financial Instruments

The Company applies ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) to all financial instruments that are being measured and reported on a fair value basis, non-financial assets and liabilities measured and reported at fair value on a non-recurring basis, and disclosures of fair value of certain financial assets and liabilities.

The following fair value hierarchy is used in selecting inputs for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels:

•

Level 1 — Quoted prices in active markets for identical assets or liabilities.

•

Level 2 — Inputs other than Level 1 that are observable for similar assets or liabilities either directly or indirectly.

•

Level 3 — Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.

The financial instruments recorded in the Company’s Consolidated Balance Sheets consist primarily of cash and cash equivalents, money market funds, accounts payable and the Company’s debt obligations. The carrying amounts of the Company’s cash and cash equivalents and accounts payable approximate fair value due to their short-term nature. The carrying amount of the Company’s money market funds approximates fair value based on quoted market prices of the identical underlying security in active markets, which approximate market rates and is considered a Level 1 asset. The fair market value of the Company’s convertible and non-convertible loans is based on the present value of their cash flows discounted at a rate that approximates current market returns for issues of similar risk.

The carrying amount and estimated fair values of the Company’s debt instruments are as follows:

March 31, 2011

December 31, 2010

Carrying

Fair

Carrying

Fair

Amount

Value

Amount

Value

(in millions)

Non-convertible loans

0.6

0.6

0.6

0.6

Convertible loans

0.5

0.6

0.5

0.6

Recent Accounting Pronouncements

On October 7, 2009, the FASB issued ASU 2009-13, “Multiple Revenue Arrangements — a Consensus of the FASB Emerging Issues Task Force” which supersedes certain guidance in ASC 605-25, “Revenue Recognition-Multiple Element Arrangements,” and requires an entity to allocate arrangement consideration to all of its deliverables at the inception of an arrangement based on their relative selling prices (i.e., the relative-selling-price method). The use of the residual method of allocation will no longer be permitted in circumstances in which an entity recognized revenue for an arrangement with multiple deliverables subject to ASC 605-25. ASU 2009-13 also requires additional disclosures. The Company adopted the provisions of ASU 2009-13 beginning on January 1, 2011. Based on the Company’s current revenue arrangements, the adoption of ASU 2009-13 did not have a material impact on the Company’s consolidated financial statements.

4. License Agreements

Meda AB

In January 2010, the Company entered into an exclusive commercialization agreement for Ceplene^® with Meda AB (“Meda”), a leading international specialty pharmaceutical company based in Stockholm, Sweden. Under the terms of the agreement, the Company granted Meda the right to market Ceplene^® in Europe and several other countries including Japan, China, and Australia. The Company received a $3.0 million fee on signing and an additional $2.0 million milestone payment in May 2010 upon the first commercial sale of Ceplene^® in a major European market, which have been deferred and are being recognized as revenue ratably over the life of the commercialization agreement with Meda. Additional potential payments include a $5 million payment upon achievement of a regulatory milestone and up to $30 million in sales-based milestones that commence upon attainment of at least $50 million in annual sales. The Company will also receive an escalating percentage royalty on net sales in the covered territories ranging from the low teens to the low twenties and is responsible for Ceplene^®’s commercial supply. The initial term of this agreement is ten years and is subject to automatic two year extensions at Meda’s option. The agreement can be terminated at any time by Meda upon six months prior written notice. The agreement can also be terminated by mutual agreement or for cause. For each of the three months ended March 31, 2011 and 2010, the Company recognized revenue from Meda of approximately $0.1 million relating to the signing fee and milestone payment. For the three months ended March 31, 2011 and 2010, the Company recognized revenue relating to commercial sales of Ceplene^® of approximately $1,000 and $12,000, respectively.

Myrexis, Inc.

In connection with its merger with Maxim Pharmaceuticals on January 4, 2006, EpiCept acquired a license agreement with Myrexis Inc. (“Myrexis”) under which the Company licensed the MX90745 series of caspase-inducer anti-cancer compounds to Myrexis. Under the terms of the agreement, Maxim granted to Myrexis a research license to develop and commercialize any drug candidates from the series of compounds during the Research Term (as defined in the agreement) with a non-exclusive, worldwide, royalty-free license, without the right to sublicense the technology. Myrexis is responsible for the worldwide development and commercialization of any drug candidates from the series of compounds. Maxim also granted to Myrexis a worldwide royalty bearing development and commercialization license with the right to sublicense the technology. The agreement requires that Myrexis make licensing, research and milestone payments to the Company totaling up to $27 million, of which $3.0 million was paid and recognized as revenue by Maxim prior to the merger on January 4, 2006, assuming the successful commercialization of the compound for the treatment of cancer, as well as pay an escalating mid to high single digit percentage royalty on product sales. In March 2008, the Company received a milestone payment of $1.0 million following dosing of the first patient in a Phase II registration sized clinical trial, which has been deferred and is being recognized as revenue ratably over the life of the last to expire patent that expires in July 2024. For each of the three months ended March 31, 2011 and 2010, the Company recorded revenue from Myrexis of approximately $15,000.

DURECT Corporation (DURECT)

In December 2006, the Company entered into a license agreement with DURECT Corporation (“DURECT”), pursuant to which it granted DURECT the exclusive worldwide rights to certain of its intellectual property for a transdermal patch containing bupivacaine for the treatment of back pain. Under the terms of the agreement, EpiCept received a $1.0 million payment which has been deferred and is being recognized as revenue ratably over the life of the last to expire patent that expires in March 2020. In September 2008, the Company amended its license agreement with DURECT. Under the terms of the amended agreement, the Company granted DURECT royalty-free, fully paid up, perpetual and irrevocable rights to the intellectual property licensed as part of the original agreement in exchange for a cash payment of $2.25 million from DURECT, which has also been deferred and is being recognized as revenue ratably over the life of the last to expire patent. For each of the three months ended March 31, 2011 and 2010, the Company recorded revenue from DURECT of approximately $0.1 million.

Endo Pharmaceuticals Inc. (Endo)

In December 2003, the Company entered into a license agreement with Endo Pharmaceuticals Inc. (“Endo”) under which it granted Endo (and its affiliates) the exclusive (including as to the Company and its affiliates) worldwide right to commercialize LidoPAIN BP. The Company also granted Endo worldwide rights to use certain of its patents for the development of certain other non-sterile, topical lidocaine containing patches, including Lidoderm^®, Endo’s topical lidocaine-containing patch for the treatment of chronic lower back pain. Upon the execution of the Endo agreement, the Company received a non-refundable payment of $7.5 million, which has been deferred and is being recognized as revenue on the proportional performance method. The Company is eligible to receive payments of up to $52.5 million upon the achievement of various milestones relating to product development and regulatory approval for both the Company’s LidoPAIN BP product and licensed Endo products, including Lidoderm^®, so long as, in the case of Endo’s product candidate, the Company’s patents provide protection thereof. The Company is also entitled to receive royalties from Endo based on the net sales of LidoPAIN BP. These royalties are payable until generic equivalents to the LidoPAIN BP product are available or until expiration of the patents covering LidoPAIN BP, whichever is sooner. The Company is also eligible to receive milestone payments from Endo of up to approximately $30.0 million upon the achievement of specified net sales milestones for licensed Endo products, including Lidoderm^®, so long as the Company’s patents provide protection thereof. The future amount of milestone payments the Company is eligible to receive under the Endo agreement is $82.5 million. For the three months ended March 31, 2011 and 2010, the Company recorded revenue from Endo of approximately $10,000 and $5,000, respectively.

Under the terms of the license agreement, the Company is responsible for continuing and completing the development of LidoPAIN BP, including the conduct of all clinical trials and the supply of the clinical products necessary for those trials and the preparation and submission of the NDA in order to obtain regulatory approval for LidoPAIN BP. Endo remains responsible for continuing and completing the development of Lidoderm^® for the treatment of chronic lower back pain, including the conduct of all clinical trials and the supply of the clinical products necessary for those trials. No progress in the development of LidoPAIN BP or Lidoderm with respect to back pain has been reported. Accordingly, the Company does not expect to receive any further cash compensation pursuant to this license agreement.

The Company has the option to negotiate a co-promotion arrangement with Endo for LidoPAIN BP or similar product in any country in which an NDA (or foreign equivalent) filing has been made within thirty days of such filing. The Company also has the right to terminate its license to Endo with respect to any territory in which Endo has failed to commercialize LidoPAIN BP within three years of the receipt of regulatory approval permitting such commercialization.

5. Other Accrued Liabilities

Other accrued liabilities consist of the following:

		March 31,				December 31,
		2011				2010
		(in thousands)
Accrued professional fees		$	428			$	277
Accrued salaries and employee benefits			484				554
Accrued financing expenses			517				—
Other accrued liabilities			260				455
Total other accrued liabilities		$	1,689			$	1,286

6. Notes, Loans and Financing

The Company is a party to several loan agreements in the following amounts:

		March 31,				December 31,
		2011				2010
		(in thousands)
Ten-year, non-amortizing loan due June 30, 2011 (1)		$	436			$	410
7.5556% convertible subordinated notes due February 9, 2014 (2)			500				500
July 2006 note payable due July 1, 2012 (3)			148				176
Total notes and loans payable and 7.5556% Convertible Subordinated Notes, before debt discount			1,084				1,086
Less: Debt discount			105				114
Total notes and loans payable and 7.5556% Convertible Subordinated Notes			979				972
Less: Notes and loans payable, current portion			552				524
Notes and loans payable and 7.5556% Convertible Subordinated Notes, long-term		$	427			$	448

7. Common Stock and Common Stock Warrants

In March 2011, the Company raised $4.6 million in gross proceeds, $4.3 million net of $0.3 million in transaction costs, through a public offering of common stock and common stock purchase warrants registered pursuant to a shelf registration statement on Form S-3 registering the issuance and sale of up to $50.0 million of the Company’s common stock, preferred stock, debt securities, convertible debt securities and/or warrants to purchase the Company’s securities. Approximately 7.1 million shares of the Company’s common stock were sold at a price of $0.65 per share. Five year common stock purchase warrants were issued to investors and the placement agent granting them the right to purchase approximately 5.3 million and 0.4 million shares of the Company’s common stock at an exercise price of $0.72 and $0.8125 per share, respectively. The Company allocated the $4.6 million in gross proceeds between the common stock and the warrants based on their relative fair values. Approximately $1.7 million of this amount was allocated to the warrants. The warrants meet the requirements of and are being accounted for as equity in accordance with ASC 815-40.

In February 2011, the Company raised $7.1 million in gross proceeds, $6.6 million net of $0.5 million in transactioncosts, through a public offering of common stock and common stock purchase warrants registered pursuant to a shelf registration statement on Form S-3 registering the issuance and sale of up to $50.0 million of the Company’s common stock, preferred stock, debt securities, convertible debt securities and/or warrants to purchase the Company’s securities. Approximately 8.9 million shares of the Company’s common stock were sold at a price of $0.80 per share. Five year common stock purchase warrants were issued to investors and the placement agent granting them the right to purchase approximately 2.7 million and 0.4 million shares of the Company’s common stock at an exercise price of $0.75 and $1.00 per share, respectively. The Company allocated the $7.1 million in gross proceeds between the common stock and the warrants based on their relative fair values. Approximately $1.7 million of this amount was allocated to the warrants. The warrants meet the requirements of and are being accounted for as equity in accordance with ASC 815-40.

In November 2010, the Company raised $2.0 million in gross proceeds, $1.9 million net of $0.1 million in transaction costs, through a public offering of common stock and common stock purchase warrants registered pursuant to a shelf registration statement on Form S-3 registering the issuance and sale of up to $50.0 million of the Company’s common stock, preferred stock, debt securities, convertible debt securities and/or warrants to purchase the Company’s securities. Approximately 3.3 million shares of the Company’s common stock were sold at a price of $0.61 per share. Five year common stock purchase warrants were issued to investors and the placement agent granting them the right to purchase approximately 1.3 million and 0.2 million shares of the Company’s common stock at an exercise price of $0.56 and $0.7625 per share, respectively. The Company allocated the $2.0 million in gross proceeds between the common stock and the warrants based on their relative fair values. Approximately $0.5 million of this amount was allocated to the warrants. The warrants meet the requirements of and are being accounted for as equity in accordance with ASC 815-40.

In June 2010, the Company raised $6.7 million in gross proceeds, $6.2 million net of $0.5 million in transaction costs, through a public offering of common stock and common stock purchase warrants registered pursuant to a shelf registration statement on Form S-3 registering the issuance and sale of up to $50.0 million of the Company’s common stock, preferred stock, debt securities, convertible debt securities and/or warrants to purchase the Company’s securities. Approximately 6.1 million shares of the Company’s common stock were sold at a price of $1.10 per share. Five year common stock purchase warrants were issued to investors and the placement agent granting them the right to purchase approximately 4.6 million and 0.3 million shares of the Company’s common stock at an exercise price of $1.64 and $1.375 per share, respectively. In addition, one year common stock purchase warrants were issued to investors granting them the right to purchase approximately 6.1 million shares of the Company’s common stock at an exercise price of $1.64 per share. The Company allocated the $6.7 million in gross proceeds between the common stock and the warrants based on their relative fair values. Approximately $3.2 million of this amount was allocated to the warrants. The warrants meet the requirements of and are being accounted for as equity in accordance with ASC 815-40.

The following table summarizes information about warrants outstanding at March 31, 2011:

		Expiration		Common Shares
Issued in Connection With		Date		Issuable				Exercise Price
February 2006 stock issuance		2011			340,069				12.00
December 2006 stock issuance		2011			1,284,933				4.41
June 2007 stock issuance		2012			889,576				8.79
Termination of sublicense agreement		2012			83,333				5.88
October 2007 stock issuance		2013			709,745				5.64
December 2007 stock issuance		2013			555,555				4.50
March 2008 stock issuance		2013			1,011,744				2.58
2006 Senior Secured Term Loan		2013			27,968				1.17
2006 Senior Secured Term Loan		2013			325,203				1.23
June 2008 stock issuance		2013			766,667				1.17
July 2008 stock issuance		2013			33,333				1.17
August 1, 2008 stock issuance		2013			92,166				2.04
August 11, 2008 stock issuance		2013			60,409				1.89
August 11, 2008 stock issuance		2013			460,830				2.08
August 11, 2008 stock issuance		2013			86,748				2.85
February 2009 convertible debt (See Note 6)		2014			3,703,704				3.11
February 2009 convertible debt (See Note 6)		2013			462,963				3.87
June 2009 stock issuance		2013			1,400,000				2.70
June 2009 stock issuance		2013			200,000				3.00
June 2010 stock issuance		2011			6,136,363				1.64
June 2010 stock issuance		2015			4,602,273				1.64
June 2010 stock issuance		2015			306,818				1.38
November 2010 stock issuance		2015			163,935				0.76
February 2011 stock issuance		2016			3,570,000				0.75
February 2011 stock issuance		2016			446,250				1.00
March 2011 stock issuance		2016			5,307,693				0.72
March 2011 stock issuance		2016			353,847				0.81
Total					33,382,125			$	2.18

8. Share-Based Payments

The Company records stock-based compensation expense at fair value in accordance with ASC 718-10, “Compensation — Stock Compensation” (“ASC 718-10”). The Company utilizes the Black-Scholes valuation method for determination of share-based compensation expense. Certain assumptions need to be made with respect to utilizing the Black-Scholes valuation model, including the expected life, volatility, risk-free interest rate and anticipated forfeiture of the stock options. The expected life of the stock options was calculated using the method allowed by the provisions of ASC 718-10. In accordance with ASC 718-10, the simplified method for “plain vanilla” options may be used where the expected term is equal to the vesting term plus the original contract term divided by two. The risk-free interest rate is based on the rates paid on securities issued by the U.S. Treasury with a term approximating the expected life of the options. Estimates of pre-vesting option forfeitures are based on the Company’s experience. The Company will adjust its estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.

The Company accounts for stock-based transactions with non-employees in which services are received in exchange for the equity instruments based upon the fair value of the equity instruments issued, in accordance with ASC 718-10 and ASC 505-50, “Equity-Based Payments to Non-Employees.” The two factors that most affect charges or credits to operations related to stock-based compensation are the estimated fair market value of the common stock underlying stock options for which stock-based compensation is recorded and the estimated volatility of such fair market value. The value of such options is periodically remeasured and income or expense is recognized during the vesting terms.

2005 Equity Incentive Plan

The 2005 Equity Incentive Plan (the “2005 Plan”) was adopted on September 1, 2005, approved by stockholders on September 5, 2005 and became effective on January 4, 2006. The 2005 Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to EpiCept’s employees and its parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units, performance-based awards and cash awards to its employees, directors and consultants and its parent and subsidiary corporations’ employees and consultants. Options are granted and vest as determined by the Board of Directors. A total of 13,000,000 shares of EpiCept’s common stock are reserved for issuance pursuant to the 2005 Plan. No optionee may be granted an option to purchase more than 1,500,000 shares in any fiscal year. Options issued pursuant to the 2005 Plan have a maximum maturity of 10 years and generally vest over 4 years from the date of grant. The Company records stock-based compensation expense at fair value. During the three months ended March 31, 2011, the Company’s Board of Directors granted approximately 1.4 million options to purchase shares of the Company’s common stock at a fair market value exercise price of $0.87 per share to certain employees. The Company estimates that $0.9 million of stock based compensation related to 2011 options granted will be recognized as compensation expense over the vesting period.

The following table presents the total employee, board of directors and third party stock-based compensation expense resulting from stock options, restricted stock, restricted stock units and the Employee Stock Purchase Plan included in the consolidated statement of operations for the three months ended March 31, 2011 and 2010:

		Three Months Ended March 31,
		2011				2010
		(in thousands)
General and administrative		$	167			$	125
Research and development			69				68
Stock-based compensation costs before income taxes			236				193
Benefit for income taxes (1)			—				—
Net compensation expense		$	236			$	193

Summarized information for stock option grants for the three months ended March 31, 2011 is as follows:

										Weighted Average
						Weighted Average				Remaining Contractual				Aggregate Intrinsic
		Options				Exercise Price				Term (years)				Value
Options outstanding at December 31, 2010			3,044,073			$	7.11				7.13			$	34,358
Granted			1,390,000				0.87
Exercised			—				—
Forfeited			(15,883	)			2.36
Expired			(6,800	)			102.06
Options outstanding at March 31, 2011			4,411,390			$	5.01				7.86			$	—
Vested or expected to vest at March 31, 2011			4,189,748			$	5.21				6.43			$	—
Options exercisable at March 31, 2011			2,194,970			$	8.75				6.43			$	—

There were no stock option exercises during each of the three months ended March 31, 2011 and 2010. Intrinsic value is measured using the fair market value at the date of exercise (for shares exercised) or at March 31, 2011 (for outstanding options), less the applicable exercise price. The weighted average grant-date fair value of options granted for the three months ended March 31, 2011 and 2010 was $0.87 and $1.67, respectively.

As of March 31, 2011, the total remaining unrecognized compensation cost related to the non-vested stock options amounted to $1.9 million, which will be amortized over the weighted-average remaining requisite service period of 3.07 years. Summarized Black-Scholes option pricing model assumptions for stock option grants to employees and directors for the three months ended March 31, 2011 and 2010 are as follows:

		Three Months Ended
		March 31, 2011		March 31, 2010
Expected volatility		110%			109%
Risk free interest rate		1.93% – 1.97%			2.39%
Dividend yield		—			—
Expected life		5 Yrs		5 Yrs

Restricted Stock Units

Restricted stock units were not issued to employees and non-employee members of the Company’s Board of Directors for the three months ended March 31, 2011 and 2010. Typically restricted stock units entitle the holder to receive a specified number of shares of the Company’s common stock at the end of the two year or four year vesting term. This restricted stock unit grant is accounted for at fair value at the date of grant and an expense is recognized during the vesting term. Summarized information for restricted stock unit grants for the three months ended March 31, 2011 is as follows:

		Restricted				Weighted Average
		Stock Units				Grant Date Value Per Share
Nonvested at December 31, 2010			75,441			$	3.72
Granted			—				—
Vested			—				—
Forfeited			—				—
Nonvested at March 31, 2011			75,441			$	3.72

2009 Employee Stock Purchase Plan

The 2009 Employee Stock Purchase Plan (the “2009 ESPP”) was adopted by the Board of Directors on December 19, 2008, subject to stockholder approval, and was approved by the stockholders at the Company’s 2009 Annual Meeting held on June 2, 2009. The 2009 ESPP was effective on January 1, 2009 and a total of 1,000,000 shares of common stock have been reserved for sale. The 2009 ESPP is implemented by offerings of rights to all eligible employees from time to time. Unless otherwise determined by the Company’s Board of Directors, common stock is purchased for accounts of employees participating in the 2009 ESPP at a price per share equal to the lower of (i) 85% of the fair market value of a share of the Company’s common stock on the first day the offering or (ii) 85% of the fair market value of a share of the Company’s common stock on the last trading day of the purchase period. The initial period commenced January 1, 2009 and ended on June 30, 2009. Each subsequent offering period will have a six month duration.

The number of shares to be purchased at each balance sheet date is estimated based on the current amount of employee withholdings and the remaining purchase dates within the offering period. The fair value of share options expected to vest is estimated using the Black-Scholes option-pricing model. Share options for employees entering the ESPP were estimated using the Black-Scholes option-pricing model and the assumptions noted on the table below.

		Three Months Ended March 31,
		2011				2010
Expected life		.50 years				.50 years
Expected volatility			110.0	%			110.0	%
Risk-free interest rate			0.19	%			0.20	%
Dividend yield			0	%			0	%

For the three months ended March 31, 2011 and 2010, the Company recorded an expense of $4,000 and $16,000 respectively, based on the estimated number of shares to be purchased.

9. Legal Proceedings

There are no material legal proceedings pending against the Company as of March 31, 2011.

10. Segment Information

The Company operates as one business segment: the development and commercialization of pharmaceutical products. The Company maintains development operations in the United States and Germany.

Geographic information for the three months ended March 31, 2011 and 2010 are as follows:

		Three Months Ended
		March 31,
		2011				2010
		(in thousands)
Revenue
United States		$	237			$	194
Germany			1				1
		$	238			$	195
Net loss
United States		$	2,793			$	3,737
Germany			(327	)			771
		$	2,466			$	4,508

		March 31,				December 31,
		2011				2010
		(in thousands)
Total Assets
United States		$	12,277			$	4,564
Germany			76				125
		$	12,353			$	4,689
Long Lived Assets, net
United States		$	182			$	211
Germany			11				11
		$	193			$	222

11. Subsequent Events

None.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion and analysis of EpiCept’s condensed consolidated financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. The Company has based these forward-looking statements on its current expectations and projections of future events. Such statements reflect the Company’s current views with respect to future events and are subject to unknown risks, uncertainties and other factors that may cause results to differ materially from those contemplated in such forward looking statements. Statements made in this document related to the development, commercialization and market expectations of the Company’s drug candidates, to the establishment of corporate collaborations, and to the Company’s operational projections are forward-looking and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Among the factors that could result in a materially different outcome are the inherent uncertainties accompanying new product development, action of regulatory authorities and the results of further trials. Additional economic, competitive, governmental, technological, marketing and other factors identified in EpiCept’s filings with the SEC could affect such results. This report refers to trademarks of the Company as well as trademarks of third parties. All trademarks referenced herein are property of their respective owners. Azixa^TM is a registered trademark of Myrexis, Inc.

Overview

We are a specialty pharmaceutical company focused on the clinical development and commercialization of pharmaceutical products for the treatment of cancer and pain. We focus our clinical development efforts on innovative cancer therapies and topically delivered analgesics targeting peripheral nerve receptors. Our lead product is Ceplene^®, which when used concomitantly with low-dose interleukin-2, or IL-2, is intended as remission maintenance therapy in the treatment of acute myeloid leukemia, or AML, for adult patients who are in their first complete remission. In addition to Ceplene^®, we have two other oncology compounds and a late-stage pain product candidate for the treatment of peripheral neuropathies in clinical development. We believe this portfolio of oncology and pain management product candidates lessens our reliance on the success of any single product or product candidate.

In January 2010 we completed an agreement with Meda AB of Sweden to market and sell Ceplene^® in Europe and certain Pacific Rim countries. The commercial launch of Ceplene^® commenced in the United Kingdom in April 2010 and launches continue in other European countries. In December 2010, Ceplene^® was approved for marketing in Israel. Upon Ministry of Health approval of labeling and other technical matters expected to be completed in the first half of 2011, Megapharm Ltd., our Israeli marketing partner, is expected to commence the commercial launch of Ceplene^®.

In October 2010, we reached an agreement with the United States Food and Drug Administration, or FDA, on the design of a new confirmatory study of Ceplene^® that is to be a two-arm, randomized, open-label trial comparing the efficacy of Ceplene^® plus low-dose IL-2 to standard of care in this indication. Based on FDA guidance, the primary endpoint of the trial will be overall patient survival. In May 2011, we submitted to the FDA a detailed Phase III protocol. The FDA, via the Special Protocol Assessment, or SPA, procedure, will provide formal guidance regarding the trial’s design, clinical endpoints, statistical analysis and labeling claims. We expect to receive initial comments from the FDA in June 2011, and to reach an agreement with the FDA on all major protocol elements later in 2011. We also recently filed an application with the FDA to grant Ceplene^® fast track status. In addition to other benefits, if granted, this should permit an expedited review of the Ceplene^® NDA once it is filed.

Our other oncology compounds include crolibulin^TM, a novel small molecule vascular disruption agent, or VDA, and apoptosis inducer for the treatment of patients with solid tumors. In December 2010, the National Cancer Institute, or NCI, initiated a Phase II trial with crolibulin^TM. The trial will assess the drug’s efficacy and safety in combination with cisplatin in patients with anaplastic thyroid cancer, or ATC. Azixa^TM, an apoptosis inducer with VDA activity licensed by us to Myrexis, Inc., or Myrexis, as part of an exclusive, worldwide development and commercialization agreement, is currently in Phase II clinical trials in patients with primary glioblastoma, and cancer that has metastasized to the brain. In December 2010, Myrexis began a Phase IIb clinical study of Azixa^TM to treat glioblastoma multiforme, an aggressive brain tumor, in order to evaluate Azixa^TM combination therapy as a first-line GBM treatment. The study will enroll as many as 120 patients in the U.S. and India. Azixa^TM has received orphan drug status in the United States for the treatment of glioblastoma.

Our late-stage pain product candidate, AmiKet^TM cream, formerly known as EpiCept^TM NP-1, is a prescription topical analgesic cream designed to provide effective long-term relief of pain associated with peripheral neuropathies. In February 2011, we presented data from our Phase IIb trial for AmiKet^TM in chemotherapy-induced peripheral neuropathy, or CPN, which is being conducted by the NCI. CPN may affect 50% of women undergoing treatment for breast cancer. A common therapeutic agent for the treatment of advanced breast cancer is paclitaxel, and as many as 80% of the patients with advanced breast cancer experience some signs and symptoms of CPN, such as burning, tingling pain associated sometimes with mild muscular weakness, after high dose paclitaxel administration. The multi-center, double-blind, randomized, placebo-controlled study was conducted within a network of approximately 25 sites under the direction of the NCI funded Community Clinical Oncology Program (CCOP). More than 460 cancer survivors suffering from painful CPN were enrolled in the six-week study. The results of the trial in the intent to treat (ITT) population demonstrated that the change in average daily neuropathy intensity scores in the AmiKet^TM group achieved a statistically significant reduction in CPN intensity versus placebo (p<0.001), which was the trial’s primary endpoint. Additionally, a pre-specified subgroup of the ITT population, those patients who previously received taxane chemotherapy, also showed a statistically significant reduction in average daily neuropathy intensity scores (p=0.034). This subgroup constituted more than 50% of the ITT population. Secondary efficacy endpoints confirmed the superiority of AmiKet^TM vs. placebo. Furthermore, the safety profile of AmiKet^TM was comparable to placebo.

Other than Ceplene^®, none of our drug candidates has received FDA or foreign regulatory marketing approval. In order to grant marketing approval, the FDA or foreign regulatory agencies must conclude that our clinical data and that of our collaborators establish the safety and efficacy of our drug candidates. Furthermore, our strategy includes entering into collaborative arrangements with third parties to participate in the clinical development and commercialization of our products. In the event that third parties have control over the preclinical development or clinical trial process for a product candidate, the estimated completion date would largely be under control of that third party rather than under our control. We cannot forecast with any degree of certainty which of our drug candidates will be subject to future collaborations or how such arrangements may affect our development plan or capital requirements.

We are subject to a number of risks associated with companies in the specialty pharmaceutical industry. Principal among these are risks associated with our ability to obtain regulatory approval for our product candidates, our ability to adequately fund our operations, dependence on collaborative arrangements, the development by us or our competitors of new technological innovations, dependence on key personnel, protection of proprietary technology and compliance with the FDA and other governmental regulations. We have yet to generate significant product revenues from any of our product candidates. We have financed our operations primarily through the proceeds from the sale of common stock, warrants, debt instruments, cash proceeds from collaborative relationships and investment income earned on cash balances and short-term investments.

We have prepared our consolidated financial statements under the assumption that we are a going concern. We have devoted substantially all of our cash resources to research and development programs and selling, general and administrative expenses, and to date we have not generated any significant revenues from the sale of products. Since inception, we have incurred significant net losses each year. As a result, we have an accumulated deficit of $253.0 million as of March 31, 2011. Our recurring losses from operations and the accumulated deficit raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our losses have resulted principally from costs incurred in connection with our development activities and from selling, general and administrative expenses. Even if we succeed in developing and commercializing one or more of our product candidates, we may never become profitable. We expect to continue to incur significant expenses over the next several years as we:

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continue to conduct clinical trials for our product candidates;

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seek regulatory approvals for our product candidates;

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develop, formulate, and commercialize our product candidates;

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implement additional internal systems and develop new infrastructure;

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acquire or in-licenses additional products or technologies or expand the use of our technologies;

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maintain, defend and expand the scope of our intellectual property; and

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hire additional personnel.

Cash at March 31, 2011 is expected to be sufficient to fund our operations and meet our debt service requirements into 2012. Future funding is anticipated to be derived from sales of Ceplene^® in Europe, fees from our strategic partners, and funding through public or private financings, strategic relationships or other arrangements. The Company is considering other financing opportunities, particularly those not reliant on the issuance of equity securities, to obtain additional cash resources to fund operations and clinical trials.

The Nasdaq Capital Market Listing

On October 6, 2010, we received a letter from the Nasdaq Listing Qualifications Department stating that we are not in compliance with the continued listing requirements of The Nasdaq Capital Market because the bid price of our common stock closed below the minimum $1.00 per share requirement for 30 consecutive business days (pursuant to Listing Rule 5550(a)(2)). Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), we were provided a period of 180 calendar days, or until April 4, 2011, to regain compliance with the minimum bid price rule.

On April 6, 2011, we received a letter from the Nasdaq Listing Qualifications Department stating that we had not regained compliance with the minimum bid price requirement under Listing Rule 5550(a)(2) by April 4, 2011 and, as a result, our common stock would be subject to delisting from The Nasdaq Capital Market unless we requested an appeal before the Nasdaq Hearings Panel (the “Panel”). We requested such a hearing before the Panel, which is scheduled for May 12, 2011, and which stayed the delisting of our common stock pending the issuance of a decision by the Panel following the hearing. At the hearing, we will request continued listing on The Nasdaq Capital Market based upon our plan for demonstrating compliance with the applicable listing requirements. Pursuant to the Nasdaq Marketplace Rules, the Panel has the authority to grant us up to an additional 180 days from April 4, 2011 (i.e. October 1, 2011) to implement our plan of compliance.

Recent Events

None.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included in our Annual Report filed on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of its financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period, stock-based compensation and warrant liability. Actual results could differ from those estimates.

Revenue Recognition

We recognize revenue relating to our collaboration agreements in accordance with the SEC Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition, FASB Accounting Standards Codification (“ASC”) 605-25, “Revenue Recognition — Multiple Element Arrangements” (“ASC 605-25”), and Accounting Standards Update (“ASU”) 2009-13, “Multiple Revenue Arrangements — a Consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”). ASU 2009-13 supersedes certain guidance in ASC 605-25, and requires an entity to allocate arrangement consideration to all of its deliverables at the inception of an arrangement based on their relative selling prices (i.e., the relative-selling-price method). We adopted the provisions of ASU 2009-13 beginning on January 1, 2011. The adoption of ASU 2009-13 did not have a material effect on our financial statements. Revenue under collaborative arrangements may result from license fees, milestone payments, research and development payments and royalties.

Our application of these standards involves subjective determinations and requires management to make judgments about value of the individual elements and whether they are separable from the other aspects of the contractual relationship. We evaluate our collaboration agreements to determine units of accounting for revenue recognition purposes. For collaborations containing a single unit of accounting, we recognize revenue when the fee is fixed or determinable, collectibility is assured and the contractual obligations have occurred or been rendered. For collaborations involving multiple elements, our application requires management to make judgments about value of the individual elements and whether they are separable from the other aspects of the contractual relationship. To date, we have determined that our upfront non-refundable license fees cannot be separated from our ongoing commercial or collaborative research and development activities to the extent such activities are required under the agreement and, accordingly, do not treat them as a separate element. We recognize revenue from non-refundable, up-front licenses and related payments, not specifically tied to a separate earnings process, either on the proportional performance method with respect to our license with Endo, or ratably over either the development period or the later of (1) the conclusion of the royalty term on a jurisdiction by jurisdiction basis; and (2) the expiration of the last EpiCept licensed patent as we do with respect to our license with DURECT, Myrexis and GNI, Ltd., or GNI.

Proportional performance is measured based on costs incurred compared to total estimated costs over the development period which approximates the proportion of the value of the services provided compared to the total estimated value over the development period. The proportional performance method currently results in revenue recognition at a slower pace than the ratable method as many of our costs are incurred in the latter stages of the development period. We periodically review our estimates of cost and the length of the development period and, to the extent such estimates change, the impact of the change is recorded at that time. During 2010 we increased the estimated development period by an additional twelve months to reflect additional time required to obtain clinical data from our partner.

We will recognize milestone payments as revenue upon achievement of the milestone only if (1) it represents a separate unit of accounting as defined in ASC 605-25; (2) the milestone payments are nonrefundable; (3) substantive effort is involved in achieving the milestone; and (4) the amount of the milestone is reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of these conditions are not met, we will recognize milestones as revenue in accordance with our accounting policy in effect for the respective contract. At the time of a milestone payment receipt, we will recognize revenue based upon the portion of the development services that are completed to date and defer the remaining portion and recognize it over the remainder of the development services on the proportional or ratable method, whichever is applicable. When payments are specifically tied to a separate earnings process, revenue will be recognized when the specific performance obligation associated with the payment has been satisfied. Deferred revenue represents the excess of cash received compared to revenue recognized to date under licensing agreements.

We have chosen early adoption of the milestone method of revenue recognition as defined in ASC 605-28, “Revenue Recognition — Milestone Method” on a prospective basis as of January 1, 2010. Under this method of revenue recognition, we will recognize into revenue research-related milestone payments for which there is substantial uncertainty at the date the arrangement is entered into that the event will be achieved, when that event can only be achieved based in whole or in part on our performance or a specific outcome resulting from our performance and, if achieved, would result in additional payments being due to us. This accounting will be applicable to research milestones under the license agreement entered into with Meda AB in 2010.

The Meda AB agreement entitles us to a $3.0 million upfront payment, a $2.0 million payment upon launch of Ceplene^® in a major country in the European Union, and milestone payments and royalties on sales of Ceplene^®. The $3.0 million upfront payment received in the first quarter of 2010 and the $2.0 million payment upon launch of Ceplene^® in a major country in the European Union received in the second quarter of 2010 have been deferred and are being recognized as revenue ratably over the life of the commercialization agreement with Meda AB.

Royalty revenue is recognized in the period the sales occur, provided that the royalty amounts are fixed or determinable, collection of the related receivable is reasonably assured and we have no remaining performance obligations under the arrangement providing for the royalty. If royalties are received when we have remaining performance obligations, they would be attributed to the services being provided under the arrangement and, therefore, recognized as such obligations are performed under either the proportionate performance or straight-line methods, as applicable.

Royalty Expense

Upon receipt of marketing approval and commencement of commercial sales, some of which may not occur for several years, we will owe royalties to licensors of certain patents generally based upon net sales of the respective products. Under a license agreement with respect to AmiKet^TM, we are obligated to pay royalties based on annual net sales derived from the products incorporating the licensed technology. Under a license agreement with respect to crolibulin^TM, we are required to provide a portion of any sublicensing payments we receive if we relicense the series of compounds or make milestone payments, assuming the successful commercialization of the compound by us for the treatment of a cancer indication, as well as pay a royalty on product sales. Under a royalty agreement with respect to Ceplene^®, we are obligated to pay royalties based on annual net sales derived from the products incorporating the licensed technology. In each case, our royalty obligation ends the later of (1) the conclusion of the royalty term on a jurisdiction by jurisdiction basis; and (2) the expiration of the last EpiCept licensed patent.

Stock-Based Compensation

We record stock-based compensation expense at fair value in accordance with the Financial Accounting Standards Board, or FASB, issued ASC 718-10, “Compensation — Stock Compensation” (“ASC 718-10”). We utilize the Black-Scholes valuation method to recognize compensation expense over the vesting period. Certain assumptions need to be made with respect to utilizing the Black-Scholes valuation model, including the expected life, volatility, risk-free interest rate and anticipated forfeiture of the stock options. The expected life of the stock options was calculated using the method allowed by the provisions of ASC 718-10. In accordance with ASC 718-10, the simplified method for “plain vanilla” options may be used where the expected term is equal to the vesting term plus the original contract term divided by two. The risk-free interest rate is based on the rates paid on securities issued by the U.S. Treasury with a term approximating the expected life of the options. Estimates of pre-vesting option forfeitures are based on our experience. We will adjust our estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.

We account for stock-based transactions with non-employees in which services are received in exchange for the equity instruments based upon the fair value of the equity instruments issued, in accordance with ASC 718-10 and ASC 505-50, “Equity-Based Payments to Non-Employees.” The two factors that most affect charges or credits to operations related to stock-based compensation are the estimated fair market value of the common stock underlying stock options for which stock-based compensation is recorded and the estimated volatility of such fair market value. The value of such options is periodically remeasured and income or expense is recognized during the vesting terms.

Accounting for stock-based compensation granted by us requires fair value estimates of the equity instrument granted or sold. If our estimate of the fair value of stock-based compensation is too high or too low, it will have the effect of overstating or understating expenses. When stock-based grants are granted in exchange for the receipt of goods or services, we estimate the value of the stock-based compensation based upon the value of our common stock.

During the three months ended March 31, 2011 and 2010, we issued approximately 1.4 million and 0.6 million stock options, respectively, with varying vesting provisions to certain of our employees. Based on the Black-Scholes valuation method (volatility — 110%, risk free rate — 1.93%-1.97%, dividends — zero, weighted average life — 5 years; forfeiture — 10%), for the grants issued in 2011, we estimated $0.9 million of share-based compensation will be recognized as compensation expense over the vesting period, which will be amortized over the weighted average remaining requisite service period of 3.75 years. During each of the three months ended March 31, 2011 and 2010, we recognized total share-based compensation of approximately $0.2 million, related to stock option grants. Future grants of options will result in additional charges for stock-based compensation that will be recognized over the vesting periods of the respective options.

Deferred Financing Costs

Deferred financing costs represent legal and other costs and fees incurred to negotiate and obtain debt financing. These costs are capitalized and amortized using the effective interest rate method over the life of the applicable financing.

Derivatives

As a result of certain financings, derivative instruments were created that we have measured at fair value and mark to market at each reporting period. Fair value of the derivative instruments will be affected by estimates of various factors that may affect the respective instrument, including our cost of capital, risk free rate of return, volatility in the fair value of our stock price, future foreign exchange rates of the U.S. dollar to the euro and future profitability of our German subsidiary. At each reporting date, we review applicable assumptions and estimates relating to fair value and record any changes in the statement of operations.

Foreign Exchange Gains and Losses

We have a 100%-owned subsidiary in Germany, EpiCept GmbH, that performs certain research and development activities on our behalf pursuant to a research collaboration agreement. EpiCept GmbH has been unprofitable since its inception. Its functional currency is the euro. The process by which EpiCept GmbH’s financial results are translated into U.S. dollars is as follows: income statement accounts are translated at average exchange rates for the period and balance sheet asset and liability accounts are translated at end of period exchange rates. Translation of the balance sheet in this manner affects the stockholders’ equity account, referred to as the cumulative translation adjustment account. This account exists only in EpiCept GmbH’s U.S. dollar balance sheet and is necessary to keep the foreign balance sheet stated in U.S. dollars in balance.

Certain of our debt instruments, originally expressed in German deutsche marks, are now denominated in euros. Changes in the value of the euro relative to the value of the U.S. dollar could affect the U.S. dollar value of our indebtedness at each reporting date as substantially all of our assets are held in U.S. dollars. These changes are recognized by us as a foreign currency transaction gain or loss, as applicable, and are reported in other expense or income in our consolidated statements of operations.

Research and Development Expenses

We expect that a large percentage of our future research and development expenses will be incurred in support of current and future preclinical and clinical development programs. These expenditures are subject to numerous uncertainties in timing and cost to completion. We test our product candidates in numerous preclinical studies for toxicology, safety and efficacy. We then conduct early stage clinical trials for each drug candidate. As we obtain results from clinical trials, we may elect to discontinue or delay clinical trials for certain product candidates or programs in order to focus resources on more promising product candidates or programs. Completion of clinical trials may take several years but the length of time generally varies according to the type, complexity, novelty and intended use of a drug candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including:

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the number of sites included in the trials;

•

the length of time required to enroll suitable patients;

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the number of patients that participate in the trials;

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the number of doses that patients receive;

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the duration of follow-up with the patient;

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the product candidate’s phase of development; and

•

the efficacy and safety profile of the product.

Expenses related to clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations that conduct clinical trials on the our behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, estimates of expenses are modified accordingly on a prospective basis.

Other than Ceplene^®, none of our drug candidates has received FDA or foreign regulatory marketing approval. In order to grant marketing approval, the FDA or foreign regulatory agencies must conclude that our clinical data and that of our collaborators establish the safety and efficacy of our drug candidates. Furthermore, our strategy includes entering into collaborations with third parties to participate in the development and commercialization of our products. In the event that third parties have control over the preclinical development or clinical trial process for a product candidate, the estimated completion date would largely be under control of that third party rather than under our control. We cannot forecast with any degree of certainty which of our drug candidates will be subject to future collaborations or how such arrangements would affect our development plan or capital requirements.

Recent Accounting Pronouncements

On October 7, 2009, the FASB issued ASU 2009-13, “Multiple Revenue Arrangements — a Consensus of the FASB Emerging Issues Task Force” which supersedes certain guidance in ASC 605-25, “Revenue Recognition-Multiple Element Arrangements,” and requires an entity to allocate arrangement consideration to all of its deliverables at the inception of an arrangement based on their relative selling prices (i.e., the relative-selling-price method). The use of the residual method of allocation will no longer be permitted in circumstances in which an entity recognized revenue for an arrangement with multiple deliverables subject to ASC 605-25. ASU 2009-13 also requires additional disclosures. We adopted the provisions of ASU 2009-13 beginning on January 1, 2011. Based on our current revenue arrangements, the adoption of ASU 2009-13 did not have a material impact on our financial statements.

Results of Operations

Three months ended March 31, 2011 and 2010

Revenues. During each of the three months ended March 31, 2011 and 2010, we recognized revenue of approximately $0.2 million from prior upfront licensing fees and milestone payments received from our strategic alliances, royalties with respect to certain technology, and product revenues from the sales of Ceplene^® to Meda. We recognize revenue from our agreement with Endo using the proportional performance method with respect to LidoPAIN BP, from our agreement with Meda using the Milestone Method and from our agreements with Myrexis, DURECT and GNI on a straight line method over the life of the last to expire patent. For the three months ended March 31, 2011 and 2010, we recognized revenue of $15,000 and $16,000, respectively, from royalties received with respect to acquired Maxim technology.

The current portion of deferred revenue as of March 31, 2011 of $0.9 million represents our estimate of revenue to be recognized over the next twelve months primarily related to the upfront payments received from our strategic alliances.

Cost of goods sold. Cost of goods sold was $0.1 million and $28,000 for the three months ended March 31, 2011 and 2010, respectively. Cost of goods sold related solely to the costs of sales of Ceplene^®, including manufacturing costs and royalty expense related to sales of Ceplene^®. During the first quarter of 2011, we expensed $0.1 million of Ceplene^® inventory as we believe such inventory will not be sold prior to reaching its product expiration date.

Selling, general and administrative expense. Selling, general and administrative expense decreased by 32.2%, or $0.7 million, to $1.4 million for the three months ended March 31, 2011 from $2.1 million for the three months ended March 31, 2010. The decrease was primarily attributable to lower salary and salary related expenses of $0.2 million, lower promotion and advertising expenses of $0.2 million, and lower legal expenses of $0.1 million. Selling expenses have been significantly reduced, and we expect general and administrative expenses to remain at approximately current levels over the next few quarters.

Research and development expense. Research and development expense decreased by 17.4%, or $0.4 million, to $1.7 million for the three months ended March 31, 2011 from $2.0 million for the three months ended March 31, 2010. The decrease was primarily attributable to lower regulatory fees for Ceplene^®. During the first quarter of 2011, our clinical efforts were focused on our post-approval trial of Ceplene^® for the European Medicines Agency, or EMA, and preparing the protocol for a confirmatory Phase III trial in the United States. During the first quarter of 2010, our clinical efforts were focused on our post-approval trial of Ceplene^® for the EMA and our regulatory efforts were focused on the filing of our NDA for Ceplene^® with the FDA and responding to questions from Health Canada concerning our NDS for Ceplene^®.

Other income (expense). Our other income (expense) consisted of the following for the three months ended March 31, 2011 and 2010:

		Three Months Ended March 31,
		2011				2010
		(in thousands)
Other income (expense) consists of:
Interest income			2				3
Foreign exchange gain (loss)			504				(516	)
Interest and amortization of debt discount and expense			(39	)			(61	)
Other income (expense), net		$	467			$	(574	)

For the three months ended March 31, 2011, we recorded other income, net of $0.5 million as compared with other expense, net of $0.6 million for the three months ended March 31, 2010. Other income (expense), net was positively impacted by a $1.0 million change in foreign exchange gains.

Liquidity and Capital Resources

We have devoted substantially all of our cash resources to research and development programs and general and administrative expenses. To date, we have not generated any significant revenues from the sale of products and may not generate any such revenues for a number of years, if at all. As a result, we have incurred an accumulated deficit of $253.0 million as of March 31, 2011, and we anticipate that we will continue to incur operating losses in the future. Our recurring losses from operations and our stockholders’ deficit raise substantial doubt about our ability to continue as a going concern. Should we be unable to generate sufficient revenue from the sale of Ceplene^® or raise adequate financing in the future, operations will need to be scaled back or discontinued. Since our inception, we have financed our operations primarily through the proceeds from the sales of common and preferred securities, debt, revenue from collaborative relationships, investment income earned on cash balances and short-term investments and the sales of a portion of our New Jersey net operating loss carryforwards.

The following table describes our liquidity and financial position on March 31, 2011 and December 31, 2010.

		March 31,				December 31,
		2011				2010
		(in thousands)
Working capital		$	5,966			$	(1,887	)
Cash and cash equivalents			10,212				2,435
Notes and loans payable, current portion			552				524
Notes and loans payable, long term portion			427				448

Working Capital

At March 31, 2011, we had working capital of $6.0 million consisting of current assets of $10.7 million and current liabilities of $4.7 million. This represents a favorable change in working capital of approximately $7.9 million from a working capital deficit of $1.9 million at December 31, 2010, which consisted of current assets of $2.9 million and current liabilities of $4.8 million. We funded our working capital and the cash portion of our 2011 operating loss with the cash proceeds from our March 2011, February 2011 and November 2010 financings.

Cash, Cash Equivalents and Marketable Securities

At March 31, 2011, our cash and cash equivalents totaled $10.2 million. At December 31, 2010, cash and cash equivalents totaled $2.4 million. Our cash and cash equivalents consist primarily of an interest bearing money market account. In March 2011, we sold approximately 7.1 million shares of common stock and warrants to purchase 5.7 million shares of common stock for gross proceeds of $4.6 million, $4.3 million net of $0.3 million in transaction costs. In February 2011, we sold approximately 8.9 million shares of common stock and warrants to purchase 4.0 million shares of common stock for gross proceeds of $7.1 million, $6.6 million net of $0.5 million in transaction costs.

In January 2010, we received $3.0 million from Meda in connection with the signing of the Ceplene^® European marketing and distribution agreement and in May 2010 we received $2.0 million from Meda in connection with the launch of Ceplene^® in Europe. In June 2010, we sold approximately 6.1 million shares of common stock and warrants to purchase 11.0 million shares of common stock for gross proceeds of $6.7 million, $6.2 million net of $0.5 million in transaction costs. In November 2010, we sold approximately 3.3 million shares of common stock and warrants to purchase 1.5 million shares of common stock for gross proceeds of $2.0 million, $1.9 million net of $0.1 million in transaction costs. During 2010, we sold approximately 31,000 shares of common stock through our at-the-market program for gross proceeds of $0.1 million and we received proceeds of $0.8 million from the exercise of approximately 1.4 million warrants.

Current and Future Liquidity Position

During the first quarter of 2011, we raised gross proceeds of $11.7 million, $10.9 million net of $0.8 million in transaction costs. As of March 31, 2011 we had approximately $10.2 million in cash and cash equivalents. Our anticipated average monthly cash operating expenses in 2011 is approximately $1.1 million. In addition, we are required to make a final interest and principal payment to our lender tbg on June 30, 2011 in the amount of approximately $0.5 million. We believe that our cash is sufficient to fund operations into 2012. We may receive cash from certain of our licensing partners during 2011 for achievement of clinical milestones, and we anticipate raising additional funds through the issuance of debt and/or equity to meet our cash needs. We are considering other financing opportunities, particularly those not reliant on the issuance of equity securities, to obtain additional cash resources for operations and for clinical trials.

We plan to out license our AmiKet^TM compound to a third party who will complete clinical development and commercialize the product upon receipt of necessary regulatory approvals. Discussions with prospective partners are continuing, however at this time we are unable to determine whether or when such an agreement might be concluded or the amount of any fees that may be paid to us in 2011 in connection with the agreement.

If additional funds are raised by issuing equity, substantial dilution to existing shareholders may result. If we fail to obtain capital when required, we may be forced to delay, scale back, or eliminate some or all of our commercialization efforts for Ceplene^® and our research and development programs or to cease operations entirely.

Our future capital uses and requirements depend on numerous forward-looking factors. These factors include, but are not limited to, the following:

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revenues generated from the sale of Ceplene® in Europe, including payments from our marketing partner;

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manufacturing costs of Ceplene®;

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the timing, receipt and amount of front-end fees and milestone payments that may become payable through an AmiKetTM license;

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progress in our research and development programs, as well as the magnitude of these programs;

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the timing, receipt and amount of milestone and other payments, if any, from present and future collaborators, if any;

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the ability to establish and maintain additional collaborative arrangements;

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the resources, time and costs required to successfully initiate and complete our preclinical and clinical trials, obtain regulatory approvals and protect our intellectual property;

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the cost of preparing, filing, prosecuting, maintaining and enforcing patent claims; and

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the timing, receipt and amount of sales and royalties, if any, from our potential products.

Our ability to raise additional capital will depend on financial, economic and market conditions and other factors, many of which are beyond our control. We cannot be certain that such additional funding will be available upon acceptable terms, or at all. To the extent that we raise additional capital by issuing equity securities, our then-existing stockholders may experience further dilution. Our sales of equity have generally included the issuance of warrants, and if these warrants are exercised in the future, stockholders may experience significant additional dilution. We may not be able to raise additional capital through the sale of our securities which would severely limit our ability to fund our operations. Debt financing, if available, may subject us to restrictive covenants that could limit our flexibility in conducting future business activities. Given our available cash resources, existing indebtedness and results of operations, obtaining debt financing may not be possible. To the extent that we raise additional capital through collaboration and licensing arrangements, it may be necessary for us to relinquish valuable rights to our product candidates that we might otherwise seek to develop or commercialize independently.

Operating Activities

Net cash used in operating activities for the first three months of 2011 was $3.4 million as compared to $1.5 million in the first three months of 2010. Cash was primarily used to fund our net loss for the applicable period resulting from research and development, selling, general and administrative and other expenses related to our convertible debt financing. Accounts payable and accrued expenses decreased by approximately $0.5 million as a result of paying vendors. The 2011 net loss was partially offset by a non-cash charge of $0.2 million of stock-based compensation and $0.5 million in foreign exchange gains. Deferred revenue decreased by $0.2 million to account for the portion of the deferred revenue received from our licensing partners that was recognized as revenue.

Investing Activities

Net cash used in investing activities for the first three months of 2011 was $1,000 compared with net cash provided by investing activities of $27,000 for the first three months of 2010. During the first quarter of 2010, cash was provided by the sale of equipment.

Financing Activities

Net cash provided by financing activities for the first three months of 2011 was $11.2 million compared to net cash used in financing activities of $0.1 million for the first three months of 2010. In March 2011, we raised $4.6 million in gross proceeds, $4.3 million net of $0.3 million in transaction costs, in connection with the issuance of common stock and warrants. In February 2011, we raised $7.1 million gross proceeds, $6.6 million net of $0.5 million in transaction costs, in connection with the issuance of common stock and warrants.

During the first quarter of 2010, we incurred transaction costs of $0.1 million in establishing our at-the-market program. We also received proceeds of $33,000 related to the exercise of approximately 0.1 million warrants in the first three months of 2010.

Contractual Obligations

As of March 31, 2011, the annual amounts of future minimum payments under debt obligations, interest, lease obligations and other long term obligations consisting of research, development, consulting and license agreements (including maintenance fees) are as follows (in thousands of U.S. dollars, using exchange rates where applicable in effect as of March 31, 2011):

		Less than												More than
		1 Year				1 – 3 Years				3 – 5 Years				5 Years				Total
Long-term debt		$	552			$	532			$	—			$	—			$	1,084
Interest expense			57				70				—				—				127
Operating leases			1,094				1,396				19				—				2,509
Other obligations			3,012				2,933				45				—				5,990
Total		$	4,715			$	4,931			$	64			$	—			$	9,710

Our current commitments of debt consist of the following:

€1.5 Million Due 2011. In August 1997, our subsidiary, EpiCept GmbH entered into a ten-year non-amortizing loan in the amount of €1.5 million with Technologie-Beteiligungs Gesellschaft mbH der Deutschen Ausgleichsbank, or tbg. The loan initially bore interest at 6% per annum. Tbg was also entitled to receive additional compensation equal to 9% of the annual surplus (income before taxes, as defined in the agreement) of EpiCept GmbH, reduced by any other compensation received from EpiCept GmbH by virtue of other loans to or investments in EpiCept GmbH provided that tbg is an equity investor in EpiCept GmbH during that time period. We considered the additional compensation element based on the surplus of EpiCept GmbH to be a derivative. We assigned no value to the derivative at each reporting period as no surplus of EpiCept GmbH was anticipated over the term of the agreement. In addition, any additional compensation as a result of surplus would be reduced by the additional interest noted below.

At the demand of tbg, additional amounts could have been due at the end of the loan term up to 30% of the loan amount, plus 6% of the principal balance of the loan for each year after the expiration of the fifth complete year of the loan period, such payments to be offset by the cumulative amount of all payments made to tbg from the annual surplus of EpiCept GmbH. We were accruing these additional amounts as additional interest up to the maximum amount due over the term of the loan.

On December 20, 2007, EpiCept GmbH entered into a repayment agreement with tbg, whereby EpiCept GmbH paid tbg approximately €0.2 million ($0.2 million) in January 2008, representing all interest payable to tbg as of December 31, 2007. The loan balance of €1.5 million ($2.0 million), plus accrued interest at a rate of 7.38% per annum beginning January 1, 2008 was required to be repaid to tbg no later than June 30, 2008. Tbg waived any additional interest payments of approximately €0.5 million ($0.7 million). EpiCept GmbH considered this a substantial modification to the original debt agreement and has recorded the new debt at its fair value in accordance with ASC 470-50, “Modifications and Extinguishments” (“ASC 470-50”). As a result of the modification to the original debt agreement, EpiCept GmbH recorded a gain on the extinguishment of debt of $0.5 million in December 2007. Accrued interest attributable to the additional interest payments totaled $0 at December 31, 2009 and 2008.

On May 14, 2008, EpiCept GmbH entered into a prolongation of the repayment agreement with tbg, whereby the loan balance of €1.5 million ($2.0 million) was required to be repaid to tbg no later than December 31, 2008. Interest continued to accrue at a rate of 7.38% per annum and all the provisions of the repayment agreement dated December 20, 2007 continued to apply without change.

On November 26, 2008, EpiCept GmbH entered into a second amendment to the repayment agreement with tbg, whereby the loan balance of €1.5 million ($2.0 million) was required to be repaid to tbg no later than June 30, 2009. Interest will continue to accrue at a rate of 7.38% per annum and all the provisions of the repayment agreement dated December 20, 2007 will continue to apply without change.

On June 25, 2009, EpiCept GmbH entered into a third amendment to the repayment agreement with tbg, whereby €0.3 million of the loan balance of €1.5 million ($2.1 million) plus accrued interest of €56,000 ($0.1 million) was repaid to tbg on June 30, 2009. The remaining loan balance of €1.2 million ($1.7 million) plus accrued interest will be paid in four semi-annual installments of €0.3 million ($0.4 million) beginning December 31, 2009. Interest will continue to accrue at a rate of 7.38% per annum and all the provisions of the repayment agreement dated December 20, 2007 will continue to apply without change.

$25.0 million 7.5556% Convertible Notes Due 2014. On February 4, 2009, we issued $25.0 million principal aggregate amount of 7.5556% convertible subordinated notes due February 2014 and five and-a-half year warrants to purchase approximately 4.2 million shares of common stock at an exercise price of $3.105 per share. Each $1,000 in principal aggregate amount of the notes is initially convertible into approximately 371 shares of Common Stock, at the option of the holders or upon specified events, including a change of control, and if our common stock trades at or greater than $5.10 a share for 20 out of 30 days, beginning February 9, 2010. Upon any conversion or redemption of the notes, the holders will receive a make-whole payment in an amount equal to the interest payable through the scheduled maturity of the converted or redeemed notes, less any interest paid before such conversion or redemption. Interest is due and payable on the notes semi-annually in arrears on June 30 and December 31, beginning on June 30, 2009.

We allocated the $25.0 million in proceeds between the convertible subordinated notes and the warrants based on their relative fair values. We calculated the fair value of the warrants at the date of the transaction at approximately $8.8 million with a corresponding amount recorded as a debt discount. The debt discount is being accreted over the life of the outstanding convertible subordinated notes using the effective interest method. At the date of the transaction, the fair value of the warrants of $8.8 million was determined utilizing the Black-Scholes option pricing model under the following assumptions: dividend yield of 0%, risk free interest rate of 1.99%, volatility of 118% and an expected life of five years. During 2009, we recognized approximately $8.6 million of non-cash interest expense related to the accretion of the debt discount as a result of the conversion of $24.5 million of the convertible subordinated notes into approximately 9.1 million shares of our common stock.

As of March 31, 2011, after giving effect to the conversions into common stock, the remaining aggregate principal amount of the Notes outstanding is $0.5 million.

$0.8 million Due 2012. In July 2006, Maxim, our wholly-owned subsidiary, issued a six-year non-interest bearing promissory note in the amount of $0.8 million to Pharmaceutical Research Associates, Inc., or PRA, as compensation for PRA assuming the liability on a lease in San Diego, CA. The note is payable in seventy-two equal installments of approximately $11,000 per month. We terminated our lease of certain property in San Diego, CA as part of our exit plan upon the completion of the merger with Maxim on January 4, 2006. Our loan balance at March 31, 2011 is $0.2 million.

Other Commitments. Our long-term commitments under operating leases shown above consist of payments relating to our facility lease in Tarrytown, New York, which expires in February 2012, and Munich, Germany, which expires in July 2014. Long-term commitments under operating leases for facilities leased by Maxim and retained by us relate primarily to the research and development site at 6650 Nancy Ridge Drive in San Diego, which is leased through October 2013. In June 2008, we defaulted on our lease agreement for the premises located in San Diego, California by failing to make the monthly rent payment. As a result, the landlord exercised their right to draw down the full letter of credit, amounting to approximately $0.3 million, and applied approximately $0.2 million to unpaid rent. The remaining balance of $0.1 million is classified as prepaid rent. At March 31, 2011, we are current with our lease payments on this facility. We discontinued our drug discovery activities at this location and are currently looking to sublease the premises located in San Diego, California.

We have a number of research, consulting and license agreements that require us to make payments to the other party to the agreement upon us attaining certain milestones as defined in the agreements. As of March 31, 2011, we may be required to make future milestone payments, totaling approximately $6.0 million, under these agreements, depending upon the success and timing of future clinical trials and the attainment of other milestones as defined in the respective agreement. Our current estimate as to the timing of other research, development and license payments, assuming all related research and development work is successful, is listed in the table above in “Other obligations.”

We are also obligated to make future royalty payments to three of our collaborators under existing license agreements, based on net sales of Ceplene^®, AmiKet^TM and crolibulin^TM, to the extent revenues on such products are realized. We cannot reasonably determine the amount and timing of such royalty payments and they are not included in the table above.

Item 3.		Quantitative and Qualitative Disclosures About Market Risk.

The financial currency of our German subsidiary is the euro. As a result, we are exposed to various foreign currency risks. First, our consolidated financial statements are in U.S. dollars, but a portion of our consolidated assets and liabilities is denominated in euros. Accordingly, changes in the exchange rate between the euro and the U.S. dollar will affect the translation of our German subsidiary’s financial results into U.S. dollars for purposes of reporting consolidated financial results. We also bear the risk that interest on our euro-denominated debt, when translated from euros to U.S. dollars, will exceed our current estimates and that principal payments we make on those loans may be greater than those amounts currently reflected on our consolidated balance sheet. Historically, fluctuations in exchange rates resulting in transaction gains or losses have had a material effect on our consolidated financial results. We have not engaged in any hedging activities to minimize this exposure, although we may do so in the future.

Our exposure to interest rate risk is limited to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short term debt securities and bank deposits. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. To minimize risk, we maintain our portfolio of cash and cash equivalents and marketable securities in a variety of interest-bearing instruments, primarily bank deposits and money market funds, which may also include U.S. government and agency securities, high-grade U.S. corporate bonds and commercial paper. Due to the nature of our short-term and restricted investments, we believe that we are not exposed to any material interest rate risk. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. All of our debt arrangements have a fixed interest rate, so we are not exposed to interest rate risk on our debt instruments. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or related parties.

Item 4.		Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer, with the assistance of other members of our management, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2011, our disclosure controls and procedures were effective to ensure that all information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the United States and Exchange Commission rules and forms.

There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f)) during the fiscal quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1.		Legal Proceedings.

None.

Item 1A.		Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results. To the extent that the risk factors set forth below appear in our Annual Report on Form 10-K, the risk factors set forth below amend and supplement those risk factors with the same titles contained in such previously filed report.

Risks Related to our Financial Condition and Business

We have limited liquidity and, as a result, may not be able to meet our obligations.

As of March 31, 2011 we had approximately $10.2 million in cash and cash equivalents. In March 2011, we sold approximately 7.1 million shares of common stock and warrants to purchase 5.7 million shares of common stock for gross proceeds of $4.6 million, $4.3 million net of $0.3 million in transaction costs. In February 2011, we sold approximately 8.9 million shares of common stock and warrants to purchase 4.0 million shares of common stock for gross proceeds of $7.1 million, $6.6 million net of $0.5 million in transaction costs. Our anticipated average monthly cash operating expense in 2011 is approximately $1.1 million per month. In addition, we are required to make a final interest and principal payment to our lender tbg on June 30, 2011 in the amount of approximately $0.5 million. We believe that our cash is sufficient to fund operations into 2012. We may receive cash from certain of our licensing partners during 2011 for achievement of clinical milestones, and we are considering other financing opportunities, particularly those not reliant on the issuance of equity securities, to obtain additional cash resources to fund operations and for clinical trials.

We plan to out-license our AmiKet^TM compound to a third party who will complete clinical development and commercialize the product upon receipt of necessary regulatory approvals. Discussions with prospective partners are continuing, however at this time we are unable to determine whether or when such an agreement might be concluded or the amount of any fees that may be paid to us in 2011 in connection with the agreement.

If additional funds are raised by issuing equity, substantial dilution to existing shareholders may result. If we fail to obtain capital when required, we may be forced to delay, scale back, or eliminate some or all of our commercialization efforts for Ceplene^® and our research and development programs or to cease operations entirely.

We may not be able to continue as a going concern.

Our recurring losses from operations and our stockholders’ deficit raise substantial doubt about our ability to continue as a going concern and, as a result, our independent registered public accounting firm included an explanatory paragraph in its report on our consolidated financial statements for the year ended December 31, 2010, which was included in our Annual Report on Form 10-K, with respect to this uncertainty. We will need to generate significant revenue from the sale of Ceplene^® or raise additional capital to continue to operate as a going concern. In addition, the perception that we may not be able to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations and may adversely affect our ability to raise additional capital.

Risks Relating to our Common Stock

Our common stock may be delisted from The Nasdaq Capital Market or the Nasdaq OMX Stockholm Exchange, which may make it more difficult for you to sell your shares.

In October 2010, we received a letter from the Nasdaq Listing Qualifications Department stating that we are not in compliance with the continued listing requirements of The Nasdaq Capital Market because the bid price of our common stock had closed below the minimum $1.00 per share requirement for 30 consecutive business days (pursuant to Listing Rule 5550(a)(2)). Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), we were provided a period of 180 calendar days, or until April 4, 2011, to regain compliance with the minimum bid price rule

On April 6, 2011, we received a letter from the Nasdaq Listing Qualifications Department stating that we had not regained compliance with the minimum bid price requirement under Listing Rule 5550(a)(2) by April 4, 2011 and, as a result, our common stock would be subject to delisting from The Nasdaq Capital Market unless we requested an appeal before the Nasdaq Hearings Panel (the “Panel”). We requested such a hearing before the Panel, which is scheduled for May 12, 2011, and which stayed the delisting of our common stock pending the issuance of a decision by the Panel following the hearing. At the hearing, we will request continued listing on The Nasdaq Capital Market based upon our plan for demonstrating compliance with the applicable listing requirements. Pursuant to the Nasdaq Marketplace Rules, the Panel has the authority to grant us up to an additional 180 days from April 4, 2011 (i.e. October 1, 2011) to implement our plan of compliance.

Delisting of our common stock by The Nasdaq Capital Market may result in the delisting of our common stock on the Nasdaq OMX Stockholm Exchange in Sweden. The delisting of our common stock on The Nasdaq Capital Market or the Nasdaq OMX Stockholm Exchange could adversely affect the market price and liquidity of our common stock and warrants, your ability to sell your shares of our common stock and our ability to raise capital.

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.		Defaults upon Senior Securities.

None.

Item 4.		(removed and reserved).

Item 5.		Other Information

None.

Item 6.		Exhibits

Number				Exhibit
	3.1			Third Amended and Restated Certificate of Incorporation of EpiCept Corporation (incorporated by reference to Exhibit 3.1 to EpiCept Corporation’s Current Report on Form 8-K filed May 21, 2008).
	3.2			Amendment to the Third Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to EpiCept Corporation’s Current Report on Form 8-K filed July 9, 2009).
	3.3			Certificate of Amendment to the Third Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on January 14, 2010 (incorporated by reference to Exhibit 3.1 to EpiCept Corporation’s Current Report on Form 8-K filed January 14, 2010).
	3.4			Amended and Restated Bylaws of EpiCept Corporation (incorporated by reference to Exhibit 3.1 to EpiCept Corporation’s Current Report on Form 8-K filed February 18, 2010).
	4.1			Form of Warrant (incorporated by reference to Exhibit 4.1 to EpiCept Corporation’s Current Report on Form 8-K filed February 11, 2011).
	4.2			Form of Warrant (incorporated by reference to Exhibit 4.1 to EpiCept Corporation’s Current Report on Form 8-K filed March 30, 2011).
	10.1			Securities Purchase Agreement, dated February 7, 2011 (incorporated by reference to Exhibit 10.1 to EpiCept Corporation’s Current Report on Form 8-K filed February 11, 2011).
	10.2			Amendment to Placement Agent Agreement, dated February 11, 2011 (incorporated by reference to Exhibit 10.3 to EpiCept Corporation’s Current Report on Form 8-K filed February 11, 2011).
	10.3			Securities Purchase Agreement, dated March 28, 2011 (incorporated by reference to Exhibit 10.1 to EpiCept Corporation’s Current Report on Form 8-K filed March 30, 2011).
	31.1			Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a- 14(a) and 15(d)-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2			Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a- 14(a) and 15(d)-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1			Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURE PAGE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.