10-K 1 a13-1332_110k.htm 10-K

Table of Contents

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

 

For the Fiscal Year Ended

December 31, 2012

 

Commission File No. 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 Identification No.)

 

777 Old Saw Mill River Road

Tarrytown, NY 10591

(Address of principal executive offices) (zip code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, par value $.0001 per share

(Title of Class)

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

(Title of Class)

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x.

 

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x.

 

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 x No o.

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. 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 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 x

 

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

 

As of June 30, 2012, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of shares of common stock held by non-affiliates was $10,506,091.

 

As of February 28, 2013, the registrant had 112,215,568 shares of its common stock, par value $.0001 per share, outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

 

 

 

 

 

ITEM 1. BUSINESS

4

 

 

ITEM 1A. RISK FACTORS

10

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

22

 

 

ITEM 2. PROPERTIES

22

 

 

ITEM 3. LEGAL PROCEEDINGS

22

 

 

ITEM 4. MINE SAFETY DISCLOSURES

22

PART II

 

 

23

 

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

23

 

 

ITEM 6. SELECTED FINANCIAL DATA

23

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

24

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

38

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

39

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

39

 

 

ITEM 9A. CONTROLS AND PROCEDURES

39

 

 

ITEM 9B. OTHER INFORMATION

39

PART III

 

 

40

 

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

40

 

 

ITEM 11. EXECUTIVE COMPENSATION

44

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

50

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

52

 

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

52

PART IV

 

 

53

 

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

53

SIGNATURES

54

 

2



Table of Contents

 

FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Form 10-K are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

 

These forward-looking statements are based on assumptions that we have made in light of our industry experience and on our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Form 10-K, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. These factors include, among others:

 

·       the risk that we may be unable to complete the proposed merger transaction with Immune Pharmaceuticals;

·       the risks associated with the adequacy of our existing cash resources and our ability to continue as a going concern;

·       the risks associated with our ability to continue to meet our obligations under our existing debt agreements;

·       the risk that clinical trials for AmiKetTM or crolibulinTM will not be successful;

·      the risk that AmiKetTM, Azixa™ or crolibulinTM will not receive regulatory approval or achieve significant commercial success;

·      the risk that we will not be able to find a partner to help conduct the Phase III trials for AmiKetTM on attractive terms, a timely basis or at all;

·      the risk that our other product candidates that appeared promising in early research and clinical trials do not demonstrate safety and/or efficacy in larger-scale or later stage clinical trials;

·      the risk that we will not obtain approval to market any of our product candidates;

·      the risks associated with dependence upon key personnel;

·      the risks associated with reliance on collaborative partners and others for further clinical trials, development, manufacturing and commercialization of our product candidates;

·       the cost, delays and uncertainties associated with our scientific research, product development, clinical trials and regulatory approval process;

·      our history of operating losses since our inception;

·      the highly competitive nature of our business;

·      risks associated with litigation;

·      risks associated with our ability to protect our intellectual property; and

·      the other factors described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

There may be other factors that may cause our actual results to differ materially from the forward-looking statements. Because of these factors, we caution that you should not place undue reliance on any of our forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as required by law, we have no duty to, and do not intend to, update or revise the forward-looking statements in this Form 10-K after the date of this Form 10-K. This Form 10-K also contains market data related to our business and industry. This market data includes projections that are based on a number of assumptions. If these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, financial condition, results of operations and the market price of our common stock. We do not undertake to discuss matters relating to our ongoing clinical trials or our regulatory strategies beyond those which have already been made public or discussed herein. As used herein, references to “we,” “us,” “our,” “EpiCept” or the “Company” refer to EpiCept Corporation and its subsidiaries. References in this Form 10-K to the “FDA” means the U.S. Food and Drug Administration.

 

3



Table of Contents

 

ITEM 1. BUSINESS

 

We are a specialty pharmaceutical company focused on the clinical development and commercialization of pharmaceutical products for the treatment of cancer and pain.  Our strategy is to focus on topically delivered analgesics targeting peripheral nerve receptors and on innovative cancer therapies.  In November 2012, we entered into a definitive merger agreement with Immune Pharmaceuticals Ltd.  The transaction is anticipated to close during the first half of 2013 and is subject to satisfaction of certain customary closing conditions, including the approval of a majority of our shareholders.

 

The combined entity, to be named Immune Pharmaceuticals, Inc., will be primarily focused on developing antibody therapeutics and other targeted drugs for the treatment of inflammatory diseases and cancer.  Immune’s lead product candidate, bertilimumab, is a fully human monoclonal antibody that targets eotaxin-1, a chemokine involved in eosinophilic inflammation, angiogenesis and neurogenesis.    Immune is currently initiating a placebo-controlled, double-blind Phase II clinical trial with bertilimumab for the treatment of ulcerative colitis. Based on amendment no. 2 to the merger agreement with Immune dated February 11, 2013, the values for EpiCept and Immune are estimated to be $14 million and $61 million, respectively, for an assumed combined company valuation of approximately $75 million.  The following results of operations and discussion of business is of EpiCept only and does not represent the combined entity.

 

In December 2011, we met with the Food and Drug Administration, or FDA, and were granted permission by the FDA to initiate immediately the Phase III clinical development of AmiKetTM, a late-stage pain product candidate for the treatment of peripheral neuropathies.  Fast Track designation was granted in April 2012.  The FDA’s Fast Track program is designed to facilitate the development and expedite the review of drugs intended to treat serious or life-threatening conditions and address unmet medical needs.

 

Our oncology compounds include crolibulinTM and Azixa®.  CrolibulinTM is a novel small molecule vascular disruption agent, or VDA, and apoptosis inducer for the treatment of patients with solid tumors.  Azixa®, 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 development for the treatment of brain cancer.  Ceplene®, 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.

 

Product Portfolio

 

The following table illustrates the depth of our product pipeline at December 31, 2012:

 

Product Candidate

 

Indication

 

Strategic Partner

 

Status

AmiKetTM

 

Neuropathic Pain

CIPN, PHN, DPN

 

n/a

 

Phase II completed; seeking partner

Azixa®

 

Brain Cancer

 

n/a

 

Phase II; seeking partner

CrolibulinTM

 

Solid Tumors

 

n/a

 

Phase I completed

 

AmiKetTM

 

AmiKetTM is a prescription topical analgesic cream containing a patented formulation of two FDA-approved drugs; amitriptyline, which is a widely-used antidepressant, and ketamine, an NMDA antagonist that is used as an intravenous anesthetic. AmiKetTM is designed to provide effective, long-term relief from the pain caused by peripheral neuropathies.  Peripheral neuropathy is a medical condition caused by damage to the nerves in the peripheral nervous system which includes nerves that run from the brain and spinal cord to the rest of the body.  Since each of these ingredients has been shown to have significant analgesic effects and because NMDA (N-methyl-D-aspartic acid) antagonists, such as ketamine, have demonstrated the ability to enhance the analgesic effects of amitriptyline, we believe the combination is a good candidate for the development of a new class of analgesics. We believe that AmiKetTM can be used effectively in conjunction with orally delivered analgesics, such as gabapentin.

 

AmiKetTM is an odorless, white vanishing cream that is applied twice daily and is quickly absorbed into the applied area. We believe the topical delivery of its patented combination represents a fundamentally new approach for the treatment of pain associated with peripheral neuropathy. In addition, we believe that the topical delivery of our product candidate will significantly reduce the risk of adverse side effects and drug to drug interactions associated with the systemic delivery of the active ingredients. The results of our clinical trials to date have demonstrated the safety of the cream for use for up to one year and a potent analgesic effect in subjects with chemotherapy-induced peripheral neuropathy, or CIPN, diabetic peripheral neuropathy, or DPN and post-herpetic neuralgia.

 

4



Table of Contents

 

In December 2011, we met with the FDA and were granted permission by the FDA to initiate immediately the Phase III clinical development of  AmiKetTM in the treatment of CIPN.  Fast Track designation was granted to us in April 2012. The FDA’s Fast Track program is designed to facilitate the development and expedite the review of drugs intended to treat serious or life-threatening conditions and address unmet medical needs.

 

There are no plans to initiate the Phase III program for AmiKet until we are able to secure the funding necessary to complete such a program.  The Phase III program is anticipated to take approximately two years and, if successful, may lead to an NDA filing.

 

The key element of the proposed Phase III clinical program is a 12-week, four-arm, factorial-designed trial in CIPN that would seek to demonstrate AmiKet’s superiority compared with placebo and with each of the component drugs of AmiKet™, amitriptyline and ketamine. We intend to submit the protocol for this trial to the FDA via a SPA. An additional two-arm efficacy study in another painful peripheral neuropathy may be performed as an alternative strategy to a second factorial-designed trial for the NDA filing, which could potentially lead to a broader label in the treatment of peripheral neuropathic pain. In addition to the positive outcome previously reported for AmiKet™ in CIPN, we have reported statistically significant positive results in the treatment of pain from post-herpetic neuralgia in several Phase II studies, the non-inferiority of AmiKet™ compared with gabapentin in another placebo controlled study, and a positive trend in the treatment of pain in a diabetic neuropathy Phase II study.

 

CrolibulinTM

 

CrolibulinTM is a novel small molecule vascular disruption agent, or VDA, and apoptosis inducer for the treatment of patients with solid tumors.  CrolibulinTM has shown promising vascular targeting activity with potent anti-tumor activity in pre-clinical in vitro and in vivo studies. The molecule has been shown to induce tumor cell apoptosis and selectively inhibit growth of proliferating cell lines, including multi-drug resistant cell lines. Murine models of human tumor xenografts demonstrated crolibulinTM inhibits growth of established tumors of a number of different cancer types. In preclinical tumored animal models, combination therapy has demonstrated synergistic activity.

 

In December 2010, the National Cancer Institute, or NCI, initiated a Phase Ib/II trial with crolibulinTMto assess the drug’s efficacy and safety in combination with cisplatin in patients with anaplastic thyroid cancer, or ATC. The Phase Ib/II trial consists of two stages. The primary objective of the first stage is to assess the safety and tolerability of cisplatin and crolibulinTM given in 21-day treatment cycles. The study will assess the toxicities of crolibulinTM co-administered with cisplatin, evaluate dose-limiting toxicities, or DLTs, and determine the maximum tolerated dose, or MTD for the combination. Enrollment in the first stage of the trial has been completed and top line data is anticipated to be reported in the first half of 2013.  The primary objective in the second stage of the trial will be to compare the combination of crolibulinTM and cisplatin against cisplatin alone in adult ATC patients by assessing the duration of progression-free survival, or PFS. An important secondary objective is the comparison of the response rates evaluated by Response Evaluation Criteria in Solid Tumors, or RECIST. Up to 70 patients are planned to be enrolled in the trial which is expected to commence later this year.

 

In October 2007, we completed a Phase I clinical trial for crolibulinTM.  We successfully identified the MTD of crolibulinTM in the Phase I study.  The MTD was below the dose which produced the expected toxicity based on preclinical studies at higher doses.  CrolibulinTM was administered as a single agent in increasing doses to small cohorts of patients with advanced solid tumors. A total of seventeen patients were enrolled in the study. The drug was tested in a variety of cancer types including melanoma, prostate, lung, breast, colon, and pancreatic cancers. The study, which was initiated in December 2006, was conducted at three cancer centers in the U.S.

 

Azixaä

 

Azixa® is a novel small molecule VDA and apoptosis inducer discovered internally and licensed to Myrexis Inc. for clinical development.  It is a lipophilic compound that collects in the brain at significant concentrations.  Azixa® demonstrated a broad range of anti-tumor activities against many tumor types in various animal models as well as activity against different types of multi-drug resistant cell lines. In March 2007, Myrexis initiated two Phase II clinical trials for Azixa® in patients with primary brain cancer and in patients with melanoma that has spread to the brain.  The trials were designed to assess the safety profile of Azixa® and the extent to which it can improve the overall survival of these patients.

 

In August 2012, Myrexis elected to terminate the license agreement, resulting in the reversion of all rights and licenses granted under the license agreement back to us.  In January 2013, we negotiated with Myrexis to license the Myriad patents and know-how as set forth in the License Agreement.  Under the agreement, we will be responsible for paying milestone payments and royalties to Myrexis if we decide to further develop Azixa® ourselves, or to share in milestones and royalties we receive from a partner in the

 

5



Table of Contents

 

event we out-license the drug candidate to a third party who successfully completes product development and obtains marketing approval.  We have no plans to pursue further development of Azixa® on our own.

 

Ceplene®

 

AML is the most deadly and most common type of acute leukemia in adults. There are approximately 40,000 AML patients in the European Union, or EU, with 16,000 new cases occurring each year. Additionally, there are approximately 13,000 new cases of AML and 9,000 deaths caused by this cancer each year in the U.S.  Once diagnosed with AML, patients typically receive induction and consolidation chemotherapy, with the majority achieving complete remission. However, about 70-80% of patients who achieve first complete remission will relapse, with the median time in remission before relapse with current treatments being only 12 months. Less than 15% of relapsed patients survive long-term.

 

Ceplene® (histamine dihydrochloride) is our proprietary product for the remission maintenance and prevention of relapse in adult patients with AML in first remission. Ceplene® is to be administered in conjunction with low-dose IL-2 and is designed to protect lymphocytes responsible for immune-mediated destruction of residual leukemic cells. Ceplene® reduces the formation of oxygen radicals from phagocytes, inhibiting nicotinamide adenine dinucleotide phosphate-oxidase, or NADPH oxidase, and protecting IL-2-activated Natural Killer cells, or NK-cells, and Thymus cells, or T-cells. These two kinds of cells, NK-cells and T-cells, possess an ability to kill and support the killing of cancer cells and virally infected cells.

 

We sold all of our rights to Ceplene® in Europe and certain Pacific Rim countries and a portion of our remaining Ceplene® inventory to Meda AB for approximately $2.6 million in June 2012.  Ceplene® is licensed to MegaPharm Ltd. to market and sell in Israel, where it is currently available on a named-patient basis.  Following Ministry of Health approval of labeling and other technical matters, Megapharm Ltd. is expected to commence the commercial launch of Ceplene® in Israel.  The Company has retained its rights to Ceplene® in all other countries, including countries in North and South America.

 

In order to obtain marketing approval in the U.S., the Food and Drug Administration, or FDA, is requiring that we undertake an additional Phase III study having overall survival as the primary endpoint.  To meet the FDA’s latest requirements we must commit significant funding and time to a new trial that will not yield results for several years.  Given the capital commitment required and the uncertainty with respect to clinical results and commercial success, we do not intend to proceed with a Phase III trial for Ceplene® at this time.

 

Our Strategic Alliances

 

Meda AB

 

In January 2010, we entered into an exclusive commercialization agreement for Ceplene® with Meda AB, a leading international specialty pharmaceutical company based in Stockholm, Sweden.  Under the terms of the agreement, we granted Meda the right to market Ceplene® in Europe and several other countries including Japan, China, and Australia.  Pursuant to the terms of the agreement, we received a $3 million fee on signing and an additional $2 million milestone payment in May 2010 upon the first commercial sale of Ceplene® in a major European market.  We sold all of our rights to Ceplene® in the territories previously licensed to Meda for $2.0 million in June 2012.  In addition, Meda purchased a portion of our remaining Ceplene® inventory for approximately $0.6 million and Meda has assumed all of our ongoing responsibilities related to the manufacture and maintenance of the marketing authorization of Ceplene® in the European Union.

 

Myrexis, Inc.

 

We licensed the MX90745 series of caspase-inducer anti-cancer compounds to Myrexis in 2003, including Azixa™. Under the terms of the agreement, we granted to Myrexis a research license to develop and commercialize any drug candidates from the series of compounds with a non-exclusive, worldwide, royalty-free license, without the right to sublicense the technology.  In August 2012, Myrexis elected to terminate the license agreement, resulting in the reversion of all rights and licenses granted under the license agreement back to us.  In January 2013, we negotiated with Myrexis to license the Myriad patents and know-how as set forth in the License Agreement.  Under the agreement, we will be responsible for paying milestone payments and royalties to Myrexis if we decide to further develop Azixa® ourselves, or to share in milestones and royalties we receive from a partner in the event we out-license the drug candidate to a third party who successfully completes product development and obtains marketing approval.  We have no plans to pursue further development of Azixa® on our own.

 

6



Table of Contents

 

DURECT Corporation

 

In December 2006, we entered into a license agreement with DURECT Corporation, pursuant to which we granted DURECT the exclusive worldwide rights to certain of our intellectual property for a transdermal patch containing bupivacaine for the treatment of back pain. Under the terms of the agreement, we received a $1.0 million upfront payment.  In September 2008, we amended our license agreement with DURECT.  Under the terms of the amended agreement, we 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.

 

Endo Pharmaceuticals, Inc.

 

In December 2003, we entered into a license agreement with Endo under which we granted Endo (and its affiliates) the exclusive (including as to us and our affiliates) worldwide right to commercialize LidoPAIN BP, a lidocaine patch developed by EpiCept for the treatment of acute back pain. We also granted Endo worldwide rights to use certain of our patents for the development of certain other non-sterile, topical lidocaine patches, including Lidoderm®, Endo’s non-sterile topical lidocaine-containing patch for the treatment of chronic lower back pain. Upon the execution of the Endo agreement, we received a non-refundable payment of $7.5 million.  Other potential compensation under this agreement includes additional milestone payments of up to $82.5 million related to both our LidoPAIN BP product and Lidoderm® and a royalty on net sales of LidoPAIN BP.

 

The last published clinical study of Lidoderm® in back pain occurred in 2005.  We believe that no measurable progress has occurred with Lidoderm® for back pain and do not expect further revenue from this license at this time.

 

Manufacturing

 

We currently outsource all of our manufacturing activities. We believe that this strategy enables us to direct operational and financial resources to the development of our product candidates rather than diverting resources to establishing a manufacturing infrastructure.  We have entered into arrangements with qualified third parties for the formulation and manufacture of our clinical supplies. We may enter into additional written supply agreements in the future. We generally purchase our supplies from current suppliers pursuant to purchase orders. We believe that in most cases there are several manufacturing sources available to us, including our current manufacturers, which can meet our commercial supply requirements on commercially reasonable terms. We will continue to look for and secure the appropriate manufacturing capabilities and capacity to ensure commercial supply at the appropriate time.

 

Sales and Marketing

 

We currently have no capabilities to market and sell any of our product candidates in the event they receive marketing approval in the U.S. or any foreign market.  We intend to make decisions regarding internal sales and marketing of our product candidates on a product-by-product and country-by-country basis.

 

Intellectual Property

 

Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our technologies and drug candidates as well as successfully defending these patents against third-party challenges. We have various compositions of matter and use patents, which have claims directed to our product candidates or their methods of use. Our patent policy is to retain and secure patents for the technology, inventions and improvements related to our core portfolio of product candidates. We also rely on trade secrets, technical know-how and continuing innovation to develop and maintain our competitive position.

 

The following is a summary of the patent position relating to our three in-house product candidates:

 

AmiKetTM — We own a U.S. patent with claims directed to a formulation containing a combination of amitriptyline and ketamine, which can be used as a treatment for the topical relief of pain, including neuropathic pain, that expires in August 2021. We also have a license to additional patents, which expire in September 2015 and May 2018, and which have claims directed to topical uses of tricyclic antidepressants, such as amitriptyline, and NMDA antagonists, such as ketamine, as treatments for relieving pain, including neuropathic pain.

 

CrolibulinTM — The intellectual property protection regarding this compound is covered by two issued U.S. patents , with the latest one expiring in May 2022 and one application pending covering the composition and uses of this compound and structurally related analogs. Additional foreign patent applications are pending in major pharmaceutical markets outside the U.S.

 

7



Table of Contents

 

Azixa®— The intellectual property protection regarding this compound is covered by 14 issued U.S. and international patents , with the latest one expiring in July 2029.

 

Ceplene® — The intellectual property protection surrounding our histamine technology includes 24 U.S. patents issued or allowed, with the term for the latest one expiring in February 2023. Patents issued or pending in the international markets concern specific therapeutic areas or manufacturing. Claims include the therapeutic administration of histamine or any H2 receptor agonist in the treatment of cancer, infectious diseases and other diseases, either alone or in combination therapies, the novel synthetic method for the production of pharmaceutical-grade histamine dihydrochloride, the mechanism of action including the binding receptor and pathway, and the rate and route of administration.

 

We may seek to protect our proprietary information by requiring our employees, consultants, contractors, outside partners and other advisers to execute, as appropriate, nondisclosure and assignment of invention agreements upon commencement of their employment or engagement. We also require confidentiality or material transfer agreements from third parties that receive our confidential data or materials.

 

We also rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, partners and other advisors may unintentionally or willfully disclose information to competitors. Enforcing a claim that a third party illegally obtained and is using trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the U.S. are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

 

The pharmaceutical, biotechnology and other life sciences industries are characterized by the existence of a large number of patents and frequent litigation based upon allegations of patent infringement. While our drug candidates are in clinical trials, and prior to commercialization, we believe our current activities fall within the scope of the exemptions provided by 35 U.S.C. Section 271(e) in the U.S. and Section 55.2(1) of the Canadian Patent Act, each of which covers activities related to developing information for submission to the FDA and its counterpart agency in Canada. As our drug candidates progress toward commercialization, the possibility of an infringement claim against us increases. While we attempt to ensure that our drug candidates and the methods we employ to manufacture them do not infringe other parties’ patents and other proprietary rights, competitors or other parties may assert that we infringe on their proprietary rights.

 

For a discussion of the risks associated with our intellectual property, see Item 1A. “Risk Factors — Risks Relating to Intellectual Property.”

 

License Agreements

 

We have in the past licensed and will continue to license patents from collaborating research groups and individual inventors.

 

Epitome/Dalhousie

 

In July 2007, we entered into a direct license agreement with Dalhousie University under which we were granted an exclusive license to certain patents for the topical use of tricyclic anti-depressants and NMDA antagonists as topical analgesics for neuralgia. These and other patents cover the combination treatment consisting of amitriptyline and ketamine in AmiKetTM.  This technology has been incorporated into AmiKetTM.

 

We have been granted worldwide rights to make, use, develop, sell and market products utilizing the licensed technology in connection with passive dermal applications. We are obligated to make payments to Dalhousie totaling $0.9 million, of which $0.2 million has been paid, upon achievement of specified milestones and to pay single-digit royalties based on annual net sales derived from the products incorporating the licensed technology. We are obligated to pay Dalhousie an annual maintenance fee of $0.5 million until the license agreement expires or is terminated, or an NDA for AmiKetTM is filed with the FDA, otherwise Dalhousie will have the option to terminate the contract. The license agreement with Dalhousie terminates upon the expiration of the last to expire licensed patent.  We incurred a maintenance fee of $0.5 million with Dalhousie during each of the years 2012 and 2011, respectively.  These payments were expensed to research and development.  We are currently negotiating certain amendments to the license agreement based on our pending merger with Immune Pharmaceuticals, Ltd.

 

8



Table of Contents

 

Hellstrand

 

In October 1999, we entered into a royalty agreement with Dr. Kristoffer Hellstrand under which we have an exclusive license to certain patents for Ceplene® configured for the systemic treatment of cancer, infectious diseases, autoimmune diseases and other medical conditions. Under this agreement, we paid Dr. Hellstrand $1.0 million in 1999. In November 2009 we expanded our collaboration with Dr. Hellstrand by concluding a new agreement in which we acquired rights to develop certain new compounds.  As compensation for this agreement and for providing certain ongoing consulting services, we awarded Dr. Hellstrand options to purchase 50,000 shares of our common stock and agreed to pay a monthly consulting fee.  In November 2011, we terminated the November 2009 collaboration agreement with Dr. Hellstrand.  We paid Dr. Hellstrand royalties based on net sales of Ceplene® of inconsequential amounts in 2012 and 2011.

 

Shire Biochem

 

In March 2004 and as amended in January 2005, we entered into a license agreement reacquiring the rights to the MX2105 series of apoptosis inducer anti-cancer compounds from Shire BioChem, Inc., formerly known as BioChem Pharma, Inc., which had previously announced that oncology would no longer be a therapeutic focus of the company’s research and development efforts. Under the agreements, Shire BioChem agreed to assign and/or license to us rights it owned under or shared under its oncology research program. The agreement requires that we provide Shire BioChem a portion of any sublicensing payments we receive if we relicense the series of compounds, and make milestone payments to Shire BioChem totaling up to $26 million, assuming the successful commercialization of a compound for the treatment of a cancer indication, as well as pay a royalty on product sales.  A license fee of $0.5 million that became payable to Shire BioChem as a result of the commencement of a Phase I clinical trial for crolibulinTM in December 2006, and approximately $0.2 million in accrued interest, was reversed in 2012 as we believe that this amount is not due.

 

Corporate Information

 

We were incorporated in Delaware in March 1993. We have two wholly-owned subsidiaries, EpiCept GmbH, based in Munich, Germany, which is currently in liquidation, and Maxim Pharmaceuticals, Inc., which is currently inactive. Our principal executive offices are located at 777 Old Saw Mill River Road, Tarrytown, NY, and our telephone number is (914) 606-3500. Our website address is www.epicept.com. Our website, and the information contained in our website, is not a part of this annual report.

 

Employees

 

Our workforce consists of 4 full-time employees as of February 28, 2013, one of whom is a M.D. We have no collective bargaining agreements with our employees and have not experienced any work stoppages. We believe that our relations with our employees are good.

 

Research and Development

 

Since our inception, we have made substantial investments in research and development.  We incurred research and development expenses of $3.4 million and $7.9 million during the years 2012 and 2011, respectively.  We will need to make additional investments in research and development to bring our product candidates to market.

 

Availability of SEC Filings

 

We have filed reports, proxy statements and other information with the SEC. Copies of our reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the SEC at SEC Headquarters, Public Reference Section, 100 F Street, N.E., Washington D.C. 20549. The public may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy statements and other information regarding us. The address of the SEC website is http://www.sec.gov. We will also provide copies of our Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge available through our website at www.epicept.com as soon as reasonably practicable after filing electronically such material with the SEC. Copies are also available, without charge, from EpiCept Corporation, 777 Old Saw Mill River Road, Tarrytown, NY, 10591.

 

9



Table of Contents

 

ITEM 1A. RISK FACTORS

 

An investment in our common stock involves a high degree of risk. You should carefully consider the risk factors described below as well as the other information contained in this Annual Report before buying shares of our common stock. If any of the following risks or uncertainties occurs, our business, financial conditions and operating results could be materially and adversely affected. As a result, the trading price of our common stock could decline and you may lose all or a part of your investment in our common stock.

 

Risks Relating to our Financial Condition

 

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

 

We had approximately $0.2 million in cash and cash equivalents at December 31, 2012 plus restricted cash held with our senior secured lender of $0.8 million and restricted cash held by our landlord of $0.1 million.  We received $0.3 million of net cash in February 2013 from Immune through the issuance of approximately 2.3 million shares of our common stock.   Our anticipated average monthly cash operating expenses in 2013 is approximately $0.3 million.  In addition, we are required to make monthly interest and principal payments on our senior secured term loan in the amount of approximately $0.3 million.  We believe that our cash is sufficient to fund operations into the second quarter of 2013.  We entered into a definitive merger agreement which is anticipated to close during the first half of 2013 and is subject to satisfaction of certain customary closing conditions.  However, as the merger will not close before the need for additional funds, we are considering various transactions to obtain additional cash resources to fund operations and clinical trials, including the sale or licensing of assets and the sale of equity securities.  If we are unable to complete such a transaction or otherwise obtain funding on a timely basis, we may be forced to further reduce expenses or curtail operations.

 

We plan to out-license our AmiKetTM 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 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 research and development programs or to cease operations entirely.

 

We have a history of losses and have never generated significant revenue from product sales and we expect to incur substantial losses in the future.

 

We have incurred significant losses since our inception, and we expect that we will experience net losses and negative cash flow for the foreseeable future. Since our inception in 1993, we have incurred significant net losses in each year. Our losses have resulted principally from expenses incurred in connection with our development activities and from general and administrative expenses associated with our operations. Our net loss was $2.6 million and $15.7 million for the years ended December 31, 2012 and 2011, respectively. Our accumulated deficit was $268.8 million and $266.2 million at December 31, 2012 and 2011, respectively. We may never generate sufficient net revenue to achieve or sustain profitability.  We expect to continue to incur significant expenses over the next several years.

 

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

 

Our recurring losses from operations, insufficient working capital resources 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, 2012, which is included herein, with respect to this uncertainty. We will need to 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.

 

Our quarterly financial results are likely to fluctuate significantly, which could have an adverse effect on our stock price.

 

Our quarterly operating results will be difficult to predict and may fluctuate significantly from period to period, particularly because we are a relatively small company and we have not generated any meaningful revenue to date. The level of our revenues and expenses and our results of operations at any given time could fluctuate as a result of any of the following factors:

 

10



Table of Contents

 

·                  research and development expenses incurred and other operating expenses;

 

·                  results of our clinical trials;

 

·                  our ability to obtain regulatory approval for our product candidates;

 

·                  our ability to achieve milestones under our strategic relationships on a timely basis or at all;

 

·                  timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;

 

·                  regulatory approvals and legislative changes affecting the products we may offer or those of our competitors;

 

·                  our ability to establish and maintain a productive sales force;

 

·                  demand and pricing of any of our products;

 

·                  physician and patient acceptance of our products;

 

·                  levels of third-party reimbursement for our products;

 

·                  interruption in the manufacturing or distribution of our products;

 

·                  the effect of competing technological and market developments;

 

·                  litigation involving patents, licenses or other intellectual property rights; and

 

·                  product failures or product liability lawsuits.

 

With the exception of Ceplene®, we have not yet obtained regulatory approval for any of our product candidates. In addition, we do not manufacture products ourselves or conduct significant sales and marketing activities. Consequently, it is difficult to make any predictions about our future success, viability or profitability based on our historical operations. It is also difficult to predict the timing of the achievement of various milestones under our strategic relationships. In addition, our operating expenses may continue to increase as we develop product candidates and build commercial capabilities. Accordingly, we may experience significant quarterly losses.

 

Because of these factors, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors, which could cause our stock price to decline significantly.

 

We have had limited operating activities, which may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

 

Our activities to date have been limited to organizing and staffing our operations, acquiring, developing and securing our technology, licensing product candidates, and undertaking preclinical and clinical studies and clinical trials. With the exception of Ceplene®, we have not yet demonstrated an ability to obtain regulatory approval, manufacture products or conduct sales and marketing activities. Consequently, it is difficult to make any predictions about our future success, viability or profitability based on our historical operations.

 

Clinical and Regulatory Risks

 

Other than the marketing authorization for Ceplene® in the European Union and Israel, we currently have no products approved for sale and we cannot guarantee you that we will ever obtain regulatory approval for such other product candidates, which could delay or prevent us from being able to generate revenue from product sales.

 

All of our product candidates are subject to extensive government regulations related to development, clinical trials, manufacturing and commercialization. The process of obtaining approvals from the U.S. Food and Drug Administration, or FDA, European Medicines Agency for the Evaluation of Medicinal Products, or EMA, and other governmental and similar international regulatory agencies is costly, time consuming, uncertain and subject to unanticipated delays. The FDA, EMA and similar international regulatory authorities may not ultimately approve the candidate for commercial sale in any jurisdiction. Despite the fact we received the marketing authorization for Ceplene® in the European Union and Israel, we may not receive regulatory approval outside of the European Union and Israel, including in the U.S. or Canada. The FDA, EMA and similar international regulators may refuse to approve an application for approval of a drug candidate if they believe that applicable regulatory criteria are not satisfied. The FDA, EMA or similar international regulators may also require additional testing for safety and efficacy. Any failure or delay in obtaining these approvals could prohibit or delay us from marketing product candidates. If our other product candidates do not meet applicable regulatory requirements for approval, we may not have the financial resources to continue

 

11



Table of Contents

 

research and development of these product candidates and we may not generate significant revenues from the commercial sale of any of our products.

 

To obtain regulatory approval for our other product candidates, we or our partners must conduct extensive human tests, which are referred to as clinical trials, as well as meet other rigorous regulatory requirements. Satisfaction of all regulatory requirements typically takes many years and requires the expenditure of substantial resources.

 

We currently have several product candidates in various stages of clinical testing. All of our product candidates are prone to the risks of failure inherent in drug development and testing. Product candidates in later-stage clinical trials may fail to show desired safety and efficacy traits despite having progressed through initial clinical testing. In addition, the data collected from clinical trials of our product candidates may not be sufficient to support regulatory approval, or regulators could interpret the data differently than we do. The regulators may require us or our partners to conduct additional clinical testing, in which case we would have to expend additional time and resources. The approval process may also be delayed by changes in government regulation, future legislation or administrative action or changes in regulatory policy that occur prior to or during regulatory review.

 

We and other drug development companies have suffered setbacks in late-stage clinical trials even after achieving promising results in early stage development. Accordingly, the results from completed preclinical studies and early stage clinical trials may not be predictive of results in later stage trials and may not be predictive of the likelihood of regulatory approval. Any failure or significant delay in completing clinical trials for our product candidates, or in receiving regulatory approval for the sale of our product candidates, may severely harm our business and delay or prevent us from being able to generate revenue from product sales, and our stock price will likely decline.

 

Clinical trial designs that were discussed with regulatory authorities prior to their commencement may subsequently be considered insufficient for approval at the time of application for regulatory approval.

 

We or our partners discuss with and obtain guidance from regulatory authorities on clinical trial protocols. Over the course of conducting clinical trials, circumstances may change, such as standards of safety, efficacy or medical practice, which could affect regulatory authorities’ perception of the adequacy of any of our clinical trial designs or the data we develop from our studies. Changes in circumstances could affect our ability to conduct clinical trials as planned. Even with successful clinical safety and efficacy data, we may be required to conduct additional, expensive trials to obtain regulatory approval.

 

If we receive regulatory approval, our marketed products will also be subject to ongoing FDA and/or foreign regulatory agency obligations and continued regulatory review, and if we fail to comply with these regulations, we could lose approvals to market any products, and our business would be seriously harmed.

 

Following initial regulatory approval of any of our product candidates, we will be subject to continuing regulatory review, including review of adverse experiences and clinical results that are reported after our products become commercially available. This would include results from any post-marketing tests or vigilance required as a condition of approval. The manufacturer and manufacturing facilities we use to make any of our product candidates will also be subject to periodic review and inspection by the FDA or foreign regulatory agencies. If a previously unknown problem or problems with a product, manufacturing or laboratory facility used by us is discovered, the FDA or foreign regulatory agency may impose restrictions on that product or on the manufacturing facility, including requiring us to withdraw the product from the market. Any changes to an approved product, including the way it is manufactured or promoted, often require FDA approval before the product, as modified, can be marketed. We and our manufacturers will be subject to ongoing FDA requirements for submission of safety and other post-market information. If we or our manufacturers fail to comply with applicable regulatory requirements, a regulatory agency may:

 

·                        issue warning letters;

 

·                        impose civil or criminal penalties;

 

·                        suspend or withdraw regulatory approval;

 

·                        suspend any ongoing clinical trials;

 

·                        refuse to approve pending applications or supplements to approved applications;

 

·                        impose restrictions on operations;

 

·                        close the facilities of manufacturers; or

 

·                        seize or detain products or require a product recall.

 

12



Table of Contents

 

In addition, the policies of the FDA or other applicable regulatory agencies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature, or extent of adverse government regulation that may arise from future legislation or administrative action, either in the U.S. or abroad.

 

Any regulatory approval we receive for our product candidates will be limited to those indications and conditions for which we are able to show clinical safety and efficacy.

 

Any regulatory approval that we may receive for our current or future product candidates will be limited to those diseases and indications for which such product candidates are clinically demonstrated to be safe and effective. For example, in addition to the FDA approval required for new formulations, any new indication to an approved product also requires FDA approval. If we are not able to obtain regulatory approval for a broad range of indications for our product candidates, our ability to effectively market and sell our product candidates may be greatly reduced and may harm our ability to generate revenue.

 

While physicians may choose to prescribe drugs for uses that are not described in the product’s labeling and for uses that differ from those tested in clinical studies and approved by regulatory authorities, our regulatory approvals will be limited to those indications that are specifically submitted to the regulatory agency for review. These “off-label” uses are common across medical specialties and may constitute the best treatment for many patients in varied circumstances. Regulatory authorities in the U.S. generally do not regulate the behavior of physicians in their choice of treatments. Regulatory authorities do, however, restrict communications by pharmaceutical companies on the subject of off-label use. If our promotional activities fail to comply with these regulations or guidelines, we may be subject to warnings from, or enforcement action by, these authorities. In addition, our failure to follow regulatory rules and guidelines relating to promotion and advertising may cause the regulatory agency to delay its approval or refuse to approve a product, the suspension or withdrawal of an approved product from the market, recalls, fines, disgorgement of money, operating restrictions, injunctions or criminal prosecutions, any of which could harm our business.

 

The results of our clinical trials are uncertain, which could substantially delay or prevent us from bringing our product candidates to market.

 

Before we can obtain regulatory approval for a product candidate, we must undertake extensive clinical testing in humans to demonstrate safety and efficacy to the satisfaction of the FDA or other regulatory agencies. Clinical trials are very expensive and difficult to design and implement. The clinical trial process is also time consuming. The commencement and completion of our clinical trials could be delayed or prevented by several factors, including:

 

·                        delays in obtaining regulatory approvals to commence or continue a study;

 

·                        delays in reaching agreement on acceptable clinical trial parameters;

 

·                        slower than expected rates of patient recruitment and enrollment;

 

·                        inability to demonstrate effectiveness or statistically significant results in our clinical trials;

 

·                        unforeseen safety issues;

 

·                        uncertain dosing issues;

 

·                        inability to monitor patients adequately during or after treatment; and

 

·                        inability or unwillingness of medical investigators to follow our clinical protocols.

 

We cannot assure you that our planned clinical trials will begin or be completed on time or at all, or that they will not need to be restructured prior to completion. Significant delays in clinical testing will impede our ability to commercialize our product candidates and generate revenue from product sales and could materially increase our development costs. Completion of clinical trials may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a drug candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including:

 

·                        the number of sites included in the trials;

 

·                        the length of time required to enroll suitable patient subjects;

 

·                        the number of patients that participate in the trials;

 

13



Table of Contents

 

·                        the number of doses that patients receive;

 

·                        the duration of follow-up with the patient;

 

·                        the product candidate’s phase of development; and

 

·                        the efficacy and safety profile of the product.

 

The use of FDA-approved therapeutics in certain of our pain product candidates could require us to conduct additional preclinical studies and clinical trials, which could increase development costs and lengthen the regulatory approval process.

 

Certain of our pain product candidates utilize proprietary formulations and topical delivery technologies to administer FDA-approved pain management therapeutics. We may still be required to conduct preclinical studies and clinical trials to determine if our product candidates are safe and effective. In addition, we may also be required to conduct additional preclinical studies and Phase I clinical trials to establish the safety of the topical delivery of these therapeutics and the level of absorption of the therapeutics into the bloodstream. The FDA may also require us to conduct clinical studies to establish that our delivery mechanisms are safer or more effective than the existing methods for delivering these therapeutics. As a result, we may be required to conduct complex clinical trials, which could be expensive and time-consuming and lengthen the anticipated regulatory approval process.

 

In some instances, we rely on third parties, over which we have little or no control, to conduct clinical trials for our products and their failure to perform their obligations in a timely or competent manner may delay development and commercialization of our product candidates.

 

The nature of clinical trials and our business strategy requires us to rely on clinical research centers and other third parties to assist us with clinical testing and certain research and development activities, such as the agreement we had with Myrexis, Inc. related to the MX90745 series of apoptosis-inducer anti-cancer compounds. As a result, our success is dependent upon the success of these third parties in performing their responsibilities. We cannot directly control the adequacy and timeliness of the resources and expertise applied to these activities by such third parties. If such contractors do not perform their activities in an adequate or timely manner, the development and commercialization of our product candidates could be delayed. We may enter into agreements, similar to the agreement we had with Myrexis, Inc., from time to time with additional third parties for our other product candidates whereby these third parties undertake significant responsibility for research, clinical trials or other aspects of obtaining FDA approval. As a result, we may face delays if these additional third parties do not conduct clinical studies and trials, or prepare or file regulatory related documents, in a timely or competent fashion. The conduct of the clinical studies by, and the regulatory strategies of, these additional third parties, over which we have limited or no control, may delay or prevent regulatory approval of our product candidates, which would delay or limit our ability to generate revenue from product sales.

 

Risks Relating to Commercialization

 

If we fail to enter into and maintain successful strategic alliances for our product candidates, we may have to reduce or delay our product commercialization or increase our expenditures.

 

Our strategy for developing, manufacturing and commercializing potential product candidates in multiple therapeutic areas currently requires us to enter into and successfully maintain strategic alliances with pharmaceutical companies that have product development resources and expertise, established distribution systems and direct sales forces to advance our development programs and reduce our expenditures on each development program and market any products that we may develop. We have formed a strategic alliance with DURECT for our intellectual property for a transdermal patch containing bupivacaine for the treatment of back pain. We may not be able to negotiate additional strategic alliances on acceptable terms, or at all.

 

We have entered into collaborative arrangements with respect to marketing or selling Ceplene® in Israel. We may rely on collaborative partners to market and sell Ceplene® in other international markets.  We cannot assure you that we will be able to enter into any more such arrangements on terms favorable to us, or at all.

 

If we are unable to maintain our existing strategic alliances or establish and maintain additional strategic alliances, we may have to limit the size or scope of, or delay, one or more of our product development or commercialization programs, or undertake the various activities at our own expense. In addition, our dependence on strategic alliances is subject to a number of risks, including:

 

·                  the inability to control the amount or timing of resources that our collaborators may devote to developing the product candidates;

 

14



Table of Contents

 

·                  the possibility that we may be required to relinquish important rights, including intellectual property, marketing and distribution rights;

 

·                  the receipt of lower revenues than if we were to commercialize such products ourselves;

 

·                  our failure to receive future milestone payments or royalties should a collaborator fail to commercialize one of our product candidates successfully;

 

·                  the possibility that a collaborator could separately move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors;

 

·                  the possibility that our collaborators may experience financial difficulties;

 

·                  business combinations or significant changes in a collaborator’s business strategy that may adversely affect that collaborator’s willingness or ability to complete its obligations under any arrangement; and

 

·                  the chance that our collaborators may operate in countries where their operations could be negatively impacted by changes in the local regulatory environment or by political unrest.

 

If the market does not accept and use our product candidates, we will not achieve sufficient product revenues and our business will suffer.

 

If we receive regulatory approval to market our product candidates, physicians, patients, healthcare payors and the medical community may not accept and use them. The degree of market acceptance and use of any approved products will depend on a number of factors, including:

 

·                  perceptions by members of the healthcare community, including physicians, about the safety and effectiveness of our products;

 

·                  cost effectiveness of our products relative to competing products;

 

·                  relative convenience and ease of administration;

 

·                  availability of reimbursement for our products from government or healthcare payors; and

 

·                  effectiveness of marketing and distribution efforts by us and our licensees and distributors.

 

Because we expect to rely on sales and royalties generated by our product candidates, the failure of any of these drugs to find market acceptance would harm our business and could require us to seek additional funding to continue our other development programs.

 

Our product candidates could be rendered obsolete by technological change and medical advances, which would adversely affect the performance of our business.

 

Our product candidates may be rendered obsolete or uneconomical by the development of medical advances to treat the conditions that our product candidates are designed to address. Pain management therapeutics are the subject of active research and development by many potential competitors, including major pharmaceutical companies, specialized biotechnology firms, universities and other research institutions. Research and development by others may render our technology or product candidates obsolete or noncompetitive or result in treatments or cures superior to any therapy we developed. Technological advances affecting costs of production could also harm our ability to cost-effectively produce and sell products.

 

We have no manufacturing capacity and anticipate continued reliance on third parties for the manufacture of our product candidates.

 

We do not currently operate manufacturing facilities for any of our product candidates. We lack the resources and the capabilities to manufacture any of our product candidates. We currently rely on one or more contract manufacturers for each product candidate to supply, store and distribute drug supplies for commercial use and for our clinical trials. Any performance failure or delay on the part of our existing manufacturers could result in lost sales or delay clinical development or regulatory approval of our product candidates and their commercialization, producing additional losses and depriving us of potential product revenues.

 

15



Table of Contents

 

If the FDA or other regulatory agencies approve any of our product candidates for commercial sale, the product will need to be manufactured in larger quantities. While Ceplene® and AmiKet™ have been manufactured on a commercial scale, our other product candidates have been manufactured in only small quantities for preclinical and clinical trials. In those cases, our third party manufacturers may not be able to successfully increase their manufacturing capacity in a timely or economical manner, or at all. We may be forced to identify alternative or additional third party manufacturers for our product candidates, which may prove difficult because the number of potential manufacturers is limited and the FDA and or other regulatory agencies must approve any replacement contractor prior to manufacturing our products. Such approval would require new testing and compliance inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our product candidates. It may be difficult or impossible for us to find a replacement manufacturer on acceptable terms quickly, or at all. If we are unable to successfully increase the manufacturing capacity for a drug candidate in a timely and economical manner, the regulatory approval or commercial launch of any related products may be delayed or there may be a shortage in supply, both of which may have an adverse effect on our business.

 

Our product candidates require precise, high quality manufacturing. A failure to achieve and maintain high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously hurt our business. Manufacturers often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel. These manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the U.S. Drug Enforcement Agency and corresponding state and foreign agencies to ensure strict compliance with current Good Manufacturing Practice and other applicable government regulations and corresponding foreign standards; however, we do not have control over third party manufacturers’ compliance with these regulations and standards. If one of our manufacturers fails to maintain compliance, the production of our product candidates could be interrupted, resulting in delays, additional costs and potentially lost revenues. Additionally, third-party manufacturers must pass a pre-approval inspection before we can obtain marketing approval for any of our products in development.

 

Furthermore, our existing and future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to successfully produce, store and distribute our product candidates. We may not own, or may have to share, the intellectual property rights to such innovation. In the event of a natural disaster, equipment failure, power failure, strike or other difficulty, we may be unable to replace our third party manufacturers in a timely manner.

 

We may be the subject of costly product liability claims or product recalls, and we may be unable to obtain or maintain insurance adequate to cover potential liabilities.

 

The risk of product liability is inherent in the development, manufacturing and marketing of human therapeutic products. Regardless of merit or eventual outcome, product liability claims may result in:

 

·                  reduced revenues or a total withdrawal of a product from one or more markets;

 

·                  delays in, or failure to complete, our clinical trials;

 

·                  withdrawal of clinical trial participants;

 

·                  decreased demand for our product candidates;

 

·                  injury to our reputation;

 

·                  litigation costs;

 

·                  substantial monetary awards against us; and

 

·                  diversion of management or other resources from key aspects of our operations.

 

Product liability claims could result in an FDA investigation of the safety or efficacy of our products or our marketing programs. An FDA investigation could also potentially lead to a recall of our products or more serious enforcement actions, or limitations on the indications for which our products may be used, or suspension or withdrawal of approval.

 

We cannot be certain that the coverage limits of the insurance policies or those of our strategic partners will be adequate. We further intend to expand our insurance coverage to include the sale of commercial products if marketing approval is obtained for our product candidates. We may not be able to obtain additional insurance or maintain our existing insurance coverage at a reasonable cost or at all. If we are unable to obtain sufficient insurance at an acceptable cost or if a claim is brought against us, whether fully covered by insurance or not, our business, results of operations and financial condition could be materially adversely affected.

 

16



Table of Contents

 

The coverage and reimbursement status of newly approved healthcare drugs is uncertain and failure to obtain adequate coverage and reimbursement could limit our ability to market our products.

 

Our ability to commercialize any products successfully will depend in part on the extent to which reimbursement will be available from governmental and other third-party payors, both in the U.S. and in foreign markets. The amount reimbursed for our products may be insufficient to allow them to compete effectively with products that are reimbursed at a higher level. If the price we are able to charge for any product we develop is inadequate in light of our development costs, our profitability would be reduced.

 

Reimbursement by a governmental and other third-party payor may depend upon a number of factors, including the governmental and other third-party payor’s determination that the use of a product is:

 

·                  a covered benefit under its health plan;

 

·                  safe, effective and medically necessary;

 

·                  appropriate for the specific patient;

 

·                  cost-effective; and

 

·                  neither experimental nor investigational.

 

Obtaining reimbursement approval for a product from each third-party and governmental payor is a time consuming and costly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our products to each payor. We may not be able to provide data sufficient to obtain reimbursement.

 

Eligibility for coverage does not imply that any drug product will be reimbursed in all cases or at a rate that allows us to make a profit. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not become permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on payments allowed for lower-cost drugs that are already reimbursed, may be incorporated into existing payments for other products or services and may reflect budgetary constraints and/or Medicare or Medicaid data used to calculate these rates. Net prices for products also may be reduced by mandatory discounts or rebates required by government health care programs or by any future relaxation of laws that restrict imports of certain medical products from countries where they may be sold at lower prices than in the U.S.

 

The health care industry is experiencing a trend toward containing or reducing costs through various means, including lowering reimbursement rates, limiting therapeutic class coverage and negotiating reduced payment schedules with service providers for drug products. There have been, and we expect that there will continue to be, federal and state proposals to constrain expenditures for medical products and services, which may affect reimbursement levels for our future products. In addition, the Centers for Medicare and Medicaid Services frequently change product descriptors, coverage policies, product and service codes, payment methodologies and reimbursement values. Third-party payors often follow Medicare coverage policies and payment limitations in setting their own reimbursement rates and may have sufficient market power to demand significant price reductions.

 

Foreign governments tend to impose strict price controls, which may adversely affect our future profitability.

 

In some foreign countries, particularly in the European Union, prescription drug pricing is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidates to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our profitability would be reduced.

 

Risks Relating to Our Business and Industry

 

Our failure to attract and retain skilled personnel could impair our product development and commercialization efforts.

 

Our success is substantially dependent on our continued ability to attract, retain and motivate highly qualified management, scientific and technical personnel and our ability to develop and maintain important relationships with leading institutions, clinicians and scientists. We are highly dependent upon our key management personnel, particularly Robert W. Cook, our Interim President and Chief Executive Officer and Dr. Stephane Allard, our Chief Medical Officer.  The loss of the services of any member of senior management may significantly delay or prevent the achievement of product development, commercialization and other

 

17



Table of Contents

 

business objectives. Mr. Cook has entered into an employment agreement with us, however, he may decide to voluntarily terminate his employment with us. We do not maintain key-man life insurance on any of our employees.

 

Our competitors may develop and market drugs that are less expensive, safer, or more effective, which may diminish or eliminate the commercial success of any of our product candidates.

 

The biotechnology and pharmaceutical industries are highly competitive and characterized by rapid technological change. Because we anticipate that our research approach will integrate many technologies, it may be difficult for us to stay abreast of the rapid changes in technology. If we fail to stay at the forefront of technological change, we will be unable to compete effectively. Our competitors may render our technologies obsolete by advances in existing technological approaches or the development of different approaches by one or more of our current or future competitors.

 

We will compete with Pfizer and Endo, among others, in the treatment of neuropathic pain. There are also many companies, both publicly and privately held, including well-known pharmaceutical companies and academic and other research institutions, engaged in developing pharmaceutical products for the treatment of life-threatening cancers and diseases.

 

Our competitors may:

 

·                  develop and market product candidates that are less expensive and more effective than our future product candidates;

 

·                  adapt more quickly to new technologies and scientific advances;

 

·                  commercialize competing product candidates before we or our partners can launch any product candidates developed from our product candidates;

 

·                  initiate or withstand substantial price competition more successfully than we can;

 

·                  have greater success in recruiting skilled scientific workers from the limited pool of available talent;

 

·                  more effectively negotiate third-party licenses and strategic alliances; and

 

·                  take advantage of acquisition or other opportunities more readily than we can.

 

We will compete for market share against fully-integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical companies, new companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors, either alone or together with their partners, may develop new product candidates that will compete with our product candidates, as these competitors may operate larger research and development programs or have substantially greater financial resources than us. Our competitors may also have significantly greater experience in:

 

·                  developing drugs;

 

·                  undertaking preclinical testing and human clinical trials;

 

·                  building relationships with key customers and opinion-leading physicians;

 

·                  obtaining and maintaining FDA and other regulatory approvals of drugs;

 

·                  formulating and manufacturing drugs; and

 

·                  launching, marketing and selling drugs.

 

These and other competitive factors may negatively impact our financial performance.

 

Risks Relating to Intellectual Property

 

If we are unable to protect our intellectual property, our competitors could develop and market products with features similar to our products and demand for our products may decline.

 

Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our technologies and product candidates as well as successfully defending these patents and trade secrets against third party challenges. We will only be able to protect our intellectual property from unauthorized use by third parties to the extent that valid and enforceable patents or trade secrets cover them.

 

18



Table of Contents

 

The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. In addition, changes in either the patent laws or in interpretations of patent laws in the U.S. or other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third party patents.

 

The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

 

·                  we might not have been the first to make the inventions covered by each of its pending patent applications and issued patents, and we could lose our patent rights as a result;

 

·                  we might not have been the first to file patent applications for these inventions or our patent applications may not have been timely filed, and we could lose our patent rights as a result;

 

·                  others may independently develop similar or alternative technologies or duplicate any of our technologies;

 

·                  it is possible that none of our pending patent applications will result in issued patents;

 

·                  our issued patents may not provide a basis for commercially viable drugs or therapies, may not provide us with any protection from unauthorized use of our intellectual property by third parties, and may not provide us with any competitive advantages;

 

·                  our patent applications or patents may be subject to interference, opposition or similar administrative proceedings;

 

·                  we may not develop additional proprietary technologies that are patentable; or

 

·                  the patents of others may have an adverse effect on our business.

 

Moreover, the issuance of a patent is not conclusive as to its validity or enforceability and it is uncertain how much protection, if any, will be afforded by our patents if we attempt to enforce them and they are challenged in court or in other proceedings, such as oppositions, which may be brought in U.S. or foreign jurisdictions to challenge the validity of a patent. A third party may challenge the validity or enforceability of a patent after its issuance by the U.S. Patent and Trademark Office, or USPTO.

 

The defense and prosecution of intellectual property suits, interferences, oppositions and related legal and administrative proceedings in the U.S. are costly, time consuming to pursue and result in diversion of resources. The outcome of these proceedings is uncertain and could significantly harm our business.

 

We will also rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We will use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific partners and other advisors may unintentionally or willfully disclose its confidential information to competitors. Enforcing a claim that a third party improperly obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the U.S. are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

 

If we are not able to defend the patent protection position of our technologies and product candidates, then we will not be able to exclude competitors from marketing product candidates that directly compete with our product candidates, and we may not generate enough revenue from our product candidates to justify the cost of their development and to achieve or maintain profitability.

 

If we are sued for infringing intellectual property rights of third parties, such litigation will be costly and time consuming, and an unfavorable outcome could increase our costs or have a negative impact on our business.

 

Our ability to commercialize our products depends on our ability to sell our products without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending applications, which are owned by third parties, exist with respect to the therapeutics utilized in our product candidates and topical delivery mechanisms. Because we are utilizing existing therapeutics, we will continue to need to ensure that we can utilize these therapeutics without infringing existing patent rights. Accordingly, we have reviewed related patents known to us and, in some instances, licensed related patented technologies. In addition, because patent applications can take several years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that the combined organization’s product candidates may infringe. There could also be existing patents of which we are not aware that our product candidates may inadvertently infringe.

 

19



Table of Contents

 

We cannot assure you that any of our product candidates does not infringe the intellectual property of others. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. If a third party claims that we infringe on their technology, we could face a number of issues that could increase its costs or have a negative impact on its business, including:

 

·                  infringement and other intellectual property claims which, with or without merit, can be costly and time consuming to litigate and can delay the regulatory approval process and divert management’s attention from our core business strategy;

 

·                  substantial damages for past infringement, which we may have to pay if a court determines that our products infringes a competitor’s patent;

 

·                  an injunction prohibiting us from selling or licensing our product unless the patent holder licenses the patent to us, which the holder is not required to do; and

 

·                  if a license is available from a patent holder, we may have to pay substantial royalties or grant cross licenses to our patents.

 

We may be subject to damages resulting from claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

 

Many of our employees were previously employed at other biotechnology or pharmaceutical companies, including competitors or potential competitors. We may be subject to claims that we or these employees have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary claims, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain product candidates, which could severely harm our business. Litigation could result in substantial costs and be a distraction to management.

 

Risks Relating to our Common Stock

 

We expect that our stock price will fluctuate significantly due to external factors, which could cause the value of your investment to decline.

 

Securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our common stock regardless of our operating performance.

 

Our common stock trades on the Nasdaq OMX Stockholm Exchange and the OTCQX® U.S. trading platform since September 19, 2011. Our common stock traded on The Nasdaq Capital Market from January 30, 2007 through September 18, 2011.  Our common stock traded on The Nasdaq National Market from January 5, 2006 through January 29, 2007. Our common stock did not trade on an exchange prior to January 4, 2006. Sales of substantial amounts of our common stock in the public market through equity financing or otherwise could adversely affect the prevailing market prices of the common stock and our ability to raise equity capital in the future. In particular, we have outstanding warrants to purchase approximately 25.1 million shares of our common stock as of February 28, 2013, and although most of these warrants are currently exercisable at prices that are higher than the current market price of our stock, their future exercise could have a negative impact on the market price of our common stock. These exercises or sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate.

 

If securities or industry analysts do not publish research or reports about us, if they change their recommendations regarding our stock adversely or if our operating results do not meet their expectations, our stock price and trading volume could decline.

 

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who covers us downgrades our stock or if our operating results do not meet their expectations, our stock price could decline.

 

20



Table of Contents

 

Future sales of common stock may cause our stock price to fall.

 

We have outstanding and exercisable warrants to purchase approximately 13.4 million shares of our common stock with exercise prices ranging from $0.21 - $1.38 and warrants to purchase approximately 11.7 million shares of our common stock with exercise prices ranging from $1.64 - $5.64 as of February 28, 2013.  The market price of our common stock could decline as a result of exercises or sales by our existing warrant holders and stockholders in the market or the perception that these exercises or sales could occur.  These sales might also make it more difficult for us to sell equity securities or convertible debt securities at a time and price that we deem appropriate.  We may decide to sell new equity securities at a discount to the current market price of our common stock, which could have a negative impact on the market price of our common stock.

 

Provisions of our charter documents or Delaware law could delay or prevent an acquisition of us, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management.

 

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. This is because these provisions may prevent or frustrate attempts by stockholders to replace or remove our management. These provisions include:

 

·                  a classified board of directors;

 

·                  a prohibition on stockholder action through written consent;

 

·                  a requirement that special meetings of stockholders be called only by the board of directors or a committee duly designated by the board of directors whose powers and authorities include the power to call such special meetings;

 

·                  advance notice requirements for stockholder proposals and nominations; and

 

·                  the authority of the board of directors to issue preferred stock with such terms as the board of directors may determine.

 

In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person that together with its affiliates owns or within the last three years has owned 15% of voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change in control of us.

 

As a result of these provisions in our charter documents and Delaware law, the price investors may be willing to pay in the future for shares of our common stock may be limited.

 

The requirements of being a public company may strain our resources and distract management.

 

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the listing requirements of The OTCQX® U.S. trading platform and the Nasdaq OMX Stockholm Exchange. The obligations of being a public company require significant additional expenditures and place additional demands on our management as we comply with the reporting requirements of a public company.

 

21



Table of Contents

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

We have no written comments regarding our periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of our 2012 fiscal year that remain unresolved.

 

ITEM 2. PROPERTIES

 

We lease approximately 4,000 square feet located at 777 Old Saw Mill River Road, Tarrytown, NY; the lease expires in May 2013.  We currently lease approximately 23,500 rentable square feet of laboratory and office space in San Diego, California that we are attempting to sublease; the lease expires in October 2013.  Other than the leased space in San Diego that we are attempting to sublease, we believe that our existing facilities are adequate to accommodate our business needs for the foreseeable future.

 

ITEM 3. LEGAL PROCEEDINGS

 

On September 5, 2012, plaintiffs Kenton L. Crowley and John A. Flores filed an appeal against us in the United States District Court for the Southern District of California.  We filed an Answering Brief in October 2012.  We continue to believe this complaint is entirely without merit and that incurrence of a liability is not probable.

 

On November 25, 2008 plaintiffs Kenton L. Crowley and John A. Flores filed a complaint against us in the United States District Court, New Jersey, which was transferred on March 20, 2009 to the United States District Court for the Southern District of California.  The complaint alleges breach of contract, breach of covenant of good faith and fair dealing, fraud, and rescission of contract with respect to the development of a topical cream containing ketamine and butamben, known as EpiCept NP-2.  Discovery was conducted in 2010 and 2011.  We filed a motion for summary judgment on April 29, 2011, which was granted on January 24, 2012.  Therefore, in 2011 we reversed the reserve of approximately $0.2 million that was previously recorded.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

22



Table of Contents

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Price Range of Common Stock

 

Our common stock is traded on both the Nasdaq OMX Stockholm Exchange and the OTCQX under the symbol “EPCT.” Our common stock began trading on the OTCQX on September 19, 2011; prior to that date, it was traded on The Nasdaq Capital Market. The following table sets forth the range of high and low sales prices per share for our common stock as reported on, as applicable, the OTCQX (since September 19, 2011) and The Nasdaq Capital Market (prior to September 19, 2011) during the periods indicated. Prior to January 4, 2006, all of our common stock, par value $.0001 per share, was privately held.  We have never declared or paid dividends on our common stock and we do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business.  On February 28, 2013, there were approximately 21,000 record holders of our common stock and approximately 4,000 beneficial owners of our common stock, based upon the number of shares of common stock held in “street name”.

 

 

 

Price Range

 

 

 

High

 

Low

 

For Year Ended December 31, 2012

 

 

 

 

 

First Quarter

 

$

0.39

 

$

0.20

 

Second Quarter

 

0.25

 

0.11

 

Third Quarter

 

0.19

 

0.10

 

Fourth Quarter

 

0.18

 

0.03

 

 

 

 

Price Range

 

 

 

High

 

Low

 

For Year Ended December 31, 2011

 

 

 

 

 

First Quarter

 

$

0.93

 

$

0.57

 

Second Quarter

 

0.75

 

0.42

 

Third Quarter

 

0.57

 

0.29

 

Fourth Quarter

 

0.41

 

0.26

 

 

The high and low sales prices for the Common Stock during the first quarter of 2013 (through February 28, 2013) were $0.12 and $0.05 respectively. The closing price on February 28, 2013 was $0.08.

 

ITEM 6.     SELECTED FINANCIAL DATA

 

Not required.

 

23



Table of Contents

 

ITEM 7.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, including those set forth under the section entitled “Risk Factors” and elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements.

 

Overview

 

We are a specialty pharmaceutical company focused on the clinical development and commercialization of pharmaceutical products for the treatment of pain and cancer. Our strategy is to focus on topically delivered analgesics targeting peripheral nerve receptors and on innovative cancer therapies.  In November 2012, we entered into a definitive merger agreement with Immune Pharmaceuticals Ltd.  The transaction is anticipated to close during the first half of 2013 and is subject to satisfaction of certain customary closing conditions, including the approval of a majority of our shareholders.

 

The combined entity, to be named Immune Pharmaceuticals, Inc., will be primarily focused on developing antibody therapeutics and other targeted drugs for the treatment of inflammatory diseases and cancer.  Immune’s lead product candidate, bertilimumab, is a fully human monoclonal antibody that targets eotaxin-1, a chemokine involved in eosinophilic inflammation, angiogenesis and neurogenesis.    Immune is currently initiating a placebo-controlled, double-blind Phase II clinical trial with bertilimumab for the treatment of ulcerative colitis.  Based on amendment no. 2 to the merger agreement with Immune dated February 11, 2013, the values for EpiCept and Immune are estimated to be $14 million and $61 million, respectively, for an assumed combined company valuation of approximately $75 million.  The following results of operations and discussion of business is of EpiCept only and does not represent the combined entity.

 

In December 2011, we met with the Food and Drug Administration (“FDA”) and were granted permission by the FDA to initiate immediately the Phase III clinical development of AmiKet™, a late-stage pain product candidate for the treatment of peripheral neuropathies.  Fast Track designation was granted in April 2012.  The FDA’s Fast Track program is designed to facilitate the development and expedite the review of drugs intended to treat serious or life-threatening conditions and address unmet medical needs.

 

Our oncology compounds include crolibulinTM, a novel small molecule vascular disruption agent (“VDA”) and apoptosis inducer for the treatment of patients with solid tumors that is currently in a Phase Ib/II clinical trial sponsored by the National Cancer Institute (“NCI”) to assess the drug’s efficacy and safety in combination with cisplatin in patients with anaplastic thyroid cancer (“ATC”).  Azixa®, an apoptosis inducer with VDA activity licensed by us to Myrexis, Inc. (“Myrexis”), as part of an exclusive, worldwide development and commercialization agreement, is currently in Phase II development for the treatment of brain cancer.  In August 2012, Myrexis elected to terminate the license agreement resulting in the reversion of all rights and licenses granted under the license agreement back to us.  In January 2013, we negotiated with Myrexis to license the Myriad patents and know-how as set forth in the License Agreement.  Under the agreement, we will be responsible for paying milestone payments and royalties to Myrexis if we decide to further develop Azixa® ourselves, or to share in milestones and royalties we receive from a partner in the event we out-license the drug candidate to a third party who successfully completes product development and obtains marketing approval.  We have no plans to pursue further development of Azixa® on our own.

 

Ceplene®, 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.  We sold all of our rights to Ceplene® in Europe and certain Pacific Rim countries and a portion of our remaining Ceplene® inventory to Meda AB for approximately $2.6 million in June 2012.  Ceplene® is licensed to MegaPharm Ltd. to market and sell in Israel, where it is currently available on a named-patient basis.  Following Ministry of Health approval of labeling and other technical matters, Megapharm Ltd. is expected to commence the commercial launch of Ceplene® in Israel.  We have retained our rights to Ceplene® in all other countries, including countries in North and South America, but at the current time have no plans to continue development.

 

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 $268.8 million as of December 31, 2012. Our recurring losses from operations and the accumulated deficit raise substantial doubt about our 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.  Our losses have resulted principally from costs incurred in connection with our development activities and from selling, general and administrative expenses.

 

24



Table of Contents

 

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.

 

We believe that our cash at December 31, 2012, plus $0.3 million of net cash received in February 2013 from Immune through the issuance of approximately 2.3 million shares of our common stock will be sufficient to fund our operations and meet our debt service requirements into the second quarter of 2013.  The definitive merger with Immune is anticipated to close during the first half of 2013 and is subject to satisfaction of certain customary closing conditions.  However, as the merger will not close before the need for additional funds, we will rely on Immune for such funding or seek other financing to obtain additional cash resources to fund operations. If such funding is insufficient or unavailable to us on a timely basis, we may be forced to further reduce expenses or curtail operations.

 

Common Stock Listing

 

We currently maintain our primary stock listing on the Nasdaq OMX Stockholm Exchange.  We maintain a U.S. stock listing on the OTCQX® U.S. trading platform.  Our ticker symbol is “EPCT”.  We continue to make quarterly and other regulatory filings with the Securities and Exchange Commission, or SEC.

 

Recent Events

 

All 1,065 shares of our Series B 0% convertible preferred stock were converted into approximately 13.3 million shares of our common stock in January 2013.

 

The remaining 236 shares of our Series A Preferred were converted into approximately 3.0 million shares of our common stock in February 2013.

 

We received $0.3 million cash in February 2013 from Immune through the issuance of approximately 2.3 million shares of our common stock.

 

License Agreements

 

Meda AB.  We entered into an exclusive commercialization agreement for Ceplene® with Meda AB, a leading international specialty pharmaceutical company based in Stockholm, Sweden in January 2010.  Under the terms of the agreement, we granted Meda the right to market Ceplene® in Europe and several other countries including Japan, China, and Australia.  We received a $3 million fee on signing and received an additional $2 million upon the first commercial launch of Ceplene® in a major European market.  We sold all of our rights to Ceplene® in Europe and certain Pacific Rim countries and a portion of our remaining Ceplene® inventory to Meda AB for approximately $2.6 million in June 2012.  The Company has retained its rights to Ceplene® in all other countries, including countries in North and South America, but at the current time have no plans to continue development.

 

Myrexis Inc.  In connection with our merger with Maxim Pharmaceuticals on January 4, 2006, we acquired a license agreement with Myrexis under which we licensed the MX90745 series of caspase-inducer anti-cancer compounds to Myrexis.  Myrexis had initiated clinical trials for Azixa®, a MX90745 series compound, for the treatment of brain cancer.  We received a milestone payment of $1.0 million following dosing of the first patient in a Phase II registration sized clinical trial in March 2008.  In February 2012, Myrexis suspended development activities of all its preclinical and clinical programs in oncology and autoimmune diseases, and in May 2012 the company stated that it is focused on the identification, evaluation and acquisition of appropriate commercial-stage assets.

 

In August 2012, Myrexis elected to terminate its efforts to develop and commercialize any product under the license agreement. As a result of the termination of the license agreement, all rights and licenses granted under the license agreement by us to Myrexis have terminated and reverted to us.  In January 2013, we negotiated with Myrexis to license the Myriad patents and know-how as set forth in the License Agreement.  Under the agreement, we will be responsible for paying milestone payments and royalties to Myrexis if we decide to further develop Azixa® ourselves, or to share in milestones and royalties we receive from a partner in the event we out-license the drug candidate to a third party who successfully completes product development and obtains marketing approval.  We have no plans to pursue further development of Azixa® on our own.

 

DURECT Corporation.  We entered into a license agreement with DURECT in December 2006, pursuant to which we granted DURECT the exclusive worldwide rights to certain of our intellectual property for a transdermal patch containing bupivacaine for the treatment of back pain. Under the terms of the agreement, we received a $1.0 million payment.  We amended our license agreement with DURECT in September 2008.  Under the terms of the amended agreement, we 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

 

25



Table of Contents

 

payment of $2.25 million from DURECT.  We recorded revenue related to this license agreement of $0.3 million in each of the years 2012 and 2011.

 

Endo Pharmaceuticals Inc.  We entered into a license agreement with Endo Pharmaceuticals Inc. (“Endo”) in December 2003 under which we granted Endo (and its affiliates) the exclusive (including as to us and our affiliates) worldwide right to commercialize LidoPAIN BP. We also granted Endo worldwide rights to certain of our other patents used by Endo in the development of certain Endo products, including Lidoderm®, Endo’s topical lidocaine-containing patch, for the treatment of chronic lower back pain. Upon the execution of the Endo agreement, we received a non-refundable payment of $7.5 million, which has been deferred and is being recognized as revenue on the proportional performance method. We may receive payments of up to $52.5 million upon the achievement of various milestones relating to product development and regulatory approval for both our LidoPAIN BP product candidate and licensed Endo product candidates, including Lidoderm®, so long as, in the case of Endo’s product candidate, our patents provide protection thereof. We are also entitled to receive royalties from Endo based on the net sales of LidoPAIN BP. These royalties are payable until generic equivalents to the LidoPAIN BP product are available or until expiration of the patents covering LidoPAIN BP, whichever is sooner. We are also eligible to receive milestone payments from Endo of up to approximately $30.0 million upon the achievement of specified net sales milestones for licensed Endo products, including Lidoderm®, so long as our patents provide protection thereof. The future amount of milestone payments we are eligible to receive under the Endo agreement is $82.5 million. We recorded revenue related to this license agreement in the amount of $33,000 and $27,000 in 2012 and 2011, respectively.

 

Under the terms of the license agreement, we are 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, we do not expect to receive any further cash compensation pursuant to this license agreement.

 

Dalhousie University.  We entered into a direct license with Dalhousie University in July 2007, under which we were granted an exclusive license to certain patents for the topical use of tricyclic anti-depressants and NMDA antagonists as topical analgesics for neuralgia. These, and other patents, cover the combination treatment consisting of amitriptyline and ketamine in AmiKetTM. This technology has been incorporated into AmiKetTM.

 

We have been granted worldwide rights to make, use, develop, sell and market products utilizing the licensed technology in connection with passive dermal applications. We are obligated to make payments to Dalhousie upon achievement of specified milestones and to pay royalties based on annual net sales derived from the products incorporating the licensed technology. We are  obligated to pay Dalhousie an annual maintenance fee until the license agreement expires or is terminated, or an NDA for AmiKetTM is filed with the FDA, or Dalhousie will have the option to terminate the contract. The license agreement with Dalhousie terminates upon the expiration of the last to expire licensed patent.  We incurred a maintenance fee of $0.5 million with Dalhousie in each of the years 2012 and 2011.  These payments were expensed to research and development in their respective years. We are currently negotiating certain amendments to the license agreement based on our pending merger with Immune Pharmaceuticals, Ltd.

 

Shire BioChem.  We entered into a license agreement reacquiring the rights to the MX2105 series of apoptosis inducer anti-cancer compounds from Shire Biochem, Inc (formerly known as BioChem Pharma, Inc.) in March 2004 and as amended in January 2005, which had previously announced that oncology would no longer be a therapeutic focus of the company’s research and development efforts.  Under the agreement, all rights and obligations of the parties under the July 2000 agreement were terminated and Shire BioChem agreed to assign and/or license to us rights it owned under or shared under the prior research program. The agreement did not require any up-front payments, however, we are required to provide Shire Biochem a portion of any sublicensing payments we receive if we relicense the series of compounds or make milestone payments to Shire BioChem totaling up to $26.0 million, assuming the successful commercialization of the compounds by us for the treatment of a cancer indication, as well as pay a royalty on product sales.  A license fee of $0.5 million that became payable to Shire BioChem as a result of the commencement of a Phase I clinical trial for crolibulinTM in December 2006, and approximately $0.2 million in accrued interest, was reversed to research and development expense in 2012 as we believe that this amount is not due at December 31, 2012.

 

Off Balance Sheet Arrangements

 

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

 

26



Table of Contents

 

if we had engaged in these relationships. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires that we make estimates and judgments affecting 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 this annual report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.

 

Consolidation

 

The accompanying consolidated financial statements include the accounts of EpiCept Corporation and the Company’s 100%-owned subsidiaries,  Maxim Pharmaceuticals, Inc., Cytovia, Inc. and EpiCept GmbH.. All inter-company transactions and balances have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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, including stock-based compensation. 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, or SAB 104, “Revenue Recognition”, Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 605-25, “Revenue Recognition -  Multiple Element Arrangements” (“ASC 605-25”), and Accounting Standards Update, or 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 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 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; 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 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 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

 

27



Table of Contents

 

recorded at that time. We increased the estimated development period with respect to our license with Endo by an additional twelve months to reflect additional time required to obtain clinical data from our partner during each of the years 2012 and 2011.

 

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.  For current agreements,, 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 chose 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 was applicable to research milestones under the license agreement entered into with Meda AB in 2010.

 

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 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.

 

Foreign Currency

 

The financial statements of our 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 all statements of operations and comprehensive loss accounts.  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 and comprehensive loss in other income (expense).

 

Share-Based Compensation

 

We record stock-based compensation expense at fair value in accordance with the 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

 

28



Table of Contents

 

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.

 

We issued approximately 0.1 million and 1.4 million stock options during the years 2012 and 2011, respectively, with varying vesting provisions to certain of our employees and directors. Based on the Black-Scholes valuation method (volatility — 110.0%, risk free rate — 0.89%, dividends — zero, weighted average life — 5 years; forfeiture — 0%), for the grants issued in 2012, we estimated $28,000 of share-based compensation will be recognized as compensation expense over the vesting period, which was amortized over the weighted average remaining requisite service period of 1.0 year. We recognized total share-based compensation of approximately $0.7 million and $0.9 million in 2012 and 2011, respectively, related to the options granted.  Future grants of options will result in additional charges for stock-based compensation that will be recognized over the vesting periods of the respective options.

 

Following the departure of three former directors in August 2012, we agreed to extend the period during which they would be entitled to exercise certain vested stock options to purchase our common stock from three months following the effective date of their resignations to the expiration date of each option granted to each former director.  Additionally, all options and restricted stock units that were not vested on the date of their respective resignations will continue to vest.  We recorded compensation expense related to the modification of the exercise period and vesting period of $23,000 in 2012.

 

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, the 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 and comprehensive loss.

 

Foreign Exchange Gains and Losses

 

Our 100%-owned subsidiary in Germany, EpiCept GmbH, is currently in liquidation. EpiCept GmbH performed certain commercialization activities on our behalf and has generally 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’ deficit 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, which were repaid in 2011, were denominated in euros. Changes in the value of the euro relative to the value of the U.S. dollar affected 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 were recognized by us as a foreign currency transaction gain or loss, as applicable, and were reported in other expense or income in our consolidated statements of operations and comprehensive loss.

 

Research and Development Expenses

 

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

 

·                  the number of sites included in the trials;

·                  the length of time required to enroll suitable patients;

 

29


 


Table of Contents

 

·                  the number of patients that participate in the trials;

·                  the number of doses that patients receive;

·                  the duration of follow-up with the patient;

·                  the product candidate’s phase of development; and

·                  the efficacy and safety profile of the product.

 

Expenses related to clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations that conduct clinical trials on the 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.

 

Income Taxes

 

We account for income taxes in accordance with ASC 740, “Income Taxes.” We file income tax returns in the U.S. federal jurisdiction and, New York, California and Germany. Our income tax returns for tax years after 2008 are still subject to review. Since we incurred losses in the past, all prior years that generated losses are open and subject to audit examination in relation to the losses generated from those years.  We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

 

We account for our 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 our 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.  A full valuation allowance has been applied against our net deferred tax assets at December 31, 2012 and 2011,  because it is not more likely than not that we will realize future benefits associated with these deferred tax assets.

 

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of operating expense. We did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the years ended December 31, 2012 and 2011. Income tax expense for the years ended December 31, 2012 and 2011 is primarily due to minimum state and local income taxes.

 

Recent Accounting Pronouncements

 

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income” which amends Topic 220, “Comprehensive Income”.  ASU 2011-05 gives an entity the option to present the total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  We adopted the provisions of ASU 2011-05 on a retrospective basis in the year ended December 31, 2011. The adoption of ASU 2011-05 did not have a material impact on our consolidated financial statements. In December 2011, the FASB issued ASU 2011-12 “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This update stated that the specific requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income will be deferred. In February 2013, the FASB issued ASU 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This update requires companies to present the effects on the line items of net income of significant reclassifications out of accumulated other comprehensive income if the amount being reclassified is required under U.S. generally accepted accounting principles to be reclassified in its entirety to net income in the same reporting period.  ASU 2013-02 is effective

 

30



Table of Contents

 

prospectively for the Company for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of ASU 2013-02 is not expected to have a material impact on our consolidated financial statements.

 

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and IFRS”, which amends ASC 820 “Fair Value Measurement”.  ASU 2011-04 improves the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements.  ASU 2011-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  We adopted the provisions of ASU 2011-04 beginning on January 1, 2012. The adoption of ASU 2011-04 did not have a material impact on our consolidated financial statements.

 

31



Table of Contents

 

Results of Operations

 

Years Ended December 31, 2012 and 2011

 

Revenues. We recognized revenue of approximately $7.8 million and $0.9 million in 2012 and 2011, respectively, from the sale of our rights to Ceplene®  to Meda, commercial sales of Ceplene®, recognition of prior upfront licensing fees and milestone payments received from our strategic alliances and royalties with respect to certain technology.  We recognized 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 on a straight line method over the life of the last to expire patent with Myrexis, DURECT and GNI.

 

Myrexis terminated its license and collaboration agreement with us in August 2012, and as a result we recognized the remaining deferred revenue of approximately $0.7 million in 2012. We terminated our commercialization agreement with Meda in June 2012, and as a result recognized the remaining deferred revenue of approximately $3.8 million in 2012.  We also simultaneously sold the rights to Ceplene® under the original agreement to Meda for $2.0 million.  In addition, Meda purchased approximately $0.6 million of Ceplene® commercial and clinical supply and our supply of Proleukin® for use in the Ceplene® post-approval trial.  We recognized the $2.0 million payment received from Meda as revenue in 2012.  We recognized $0.5 million of product revenue from the sale of Ceplene® inventory and $0.1 million expense reimbursement from the sale of Proleukin®.  We recognized total revenue from the original commercialization agreement of approximately $4.1 million and $0.4 million in 2012 and 2011, respectively.  We recognized revenue relating to commercial sales of Ceplene® of approximately $0.6 million and $39,000 in 2012 and 2011, respectively.  We recognized revenue of $26,000 and $29,000 during the years 2012 and 2011, respectively, from royalties with respect to acquired Maxim technology.

 

The current portion of deferred revenue at December 31, 2012 of $0.3 million represents our estimate of revenue to be recognized over the next twelve months primarily related to the upfront payments from our strategic alliances.

 

Cost of goods sold. Cost of goods sold was $0.4 million and $0.7 million in 2012 and 2011, 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®.  We expensed $0.7 million of Ceplene® inventory in 2011 as we believed such inventory would not be sold prior to reaching its product expiration date.

 

Selling, general and administrative expense. Selling, general and administrative expense decreased by 29%, or $1.9 million, to $4.6 million for 2012 from $6.5 million in 2011.  The decrease was primarily attributable to lower salary and salary related expenses of $0.4 million and a $0.4 million expense in 2011 related to a financing that was not completed.  Lower stock-based compensation of $0.3 million, lower public reporting expenses of $0.2 million, lower investor relations expenses of $0.2 million, lower insurance expenses of $0.1 million and lower audit fees of $0.1 million also contributed to the decline, which was partially offset by a $0.1 million increase in director fees and expenses.

 

Research and development expense. Research and development expense decreased by 57%, or $4.5 million, to $3.4 million in 2012 from $7.9 million in 2011.  The decrease was primarily attributable to $3.5 million in lower clinical trial and consulting costs for Ceplene®, the reversal of $0.7 million in license fees payable to Shire BioChem since we believe this amount is not due as a result of Shire BioChem’s failure to request payment of the milestone fee resulting from  the commencement of a Phase I clinical trial for crolibulinTM in December 2006 within the six year statute of limitation, lower salary and salary related expenses of $0.1 million and $0.1 million in lower patent expenses.  Our clinical efforts in 2012 were focused on obtaining fast track designation and the preparation of a Phase III clinical trial protocol for AmiKet and on our open label trial of Ceplene® that was intended to meet our post-approval requirements with the EMA.   Our clinical efforts in 2011 were focused on preparing the protocol for a confirmatory Phase III trial for Ceplene® in the U.S and on our open label trial of Ceplene®.  We sold all of our rights to Ceplene® in Europe and certain Pacific Rim countries to Meda AB in June 2012, and Meda AB assumed responsibility for completing the open label trial of Ceplene® as of that date.

 

32



Table of Contents

 

We incurred the following research and development expense in 2012 and 2011:

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Direct Expenses:

 

 

 

 

 

AmiKet™

 

$

653

 

$

881

 

CrolibulinTM

 

(589

)

399

 

Ceplene®

 

659

 

3,759

 

 

 

723

 

5,039

 

 

 

 

 

 

 

Indirect Expenses:

 

 

 

 

 

Staffing

 

1,363

 

1,332

 

Other indirect

 

1,314

 

1,482

 

 

 

2,677

 

2,814

 

Total Research & Development

 

$

3,400

 

$

7,853

 

 

 Direct expenses consist primarily of fees paid to vendors and consultants for services related to preclinical product development, clinical trials, and manufacturing of the respective products. Generally, we have flexibility with respect to the timing and magnitude of a significant portion of our direct expenses. Indirect expenses are those expenses we incur that are not allocated by project, which consist primarily of the salaries and benefits of our research and development staff and related premises.

 

Other income (expense), net. We recorded other expense, net of $2.0 million in 2012 as compared to other expense, net of $1.6 million in 2011.  The $0.4 million increase in other expense, net was primarily related to a $0.9 million warrant amendment expense.  Other income (expense) was positively impacted by a $0.5 million change in foreign exchange gains (losses).

 

As a result of the amendment to our Series B Common Stock Purchase Warrant dated June 25, 2010, we agreed to extend the period during which investors would be entitled to exercise warrants to purchase our common stock from January 9, 2012 to April 9, 2012 (three months following the original termination date).  Approximately 6.1 million warrants were originally issued in connection with a common stock and warrant transaction entered into on June 28, 2010.  As a result of the amendment to the warrant agreements, the fair value of the warrants was recalculated using the Black-Scholes option pricing model immediately before and after the date of modification.  The resulting difference in fair value of approximately $0.9 million on the date of modification was recorded as a warrant amendment expense in 2012.  Approximately 3.9 million warrants were exercised in 2012.

 

Income Taxes. Income tax expense was $2,000 and $4,000 for the years 2012 and 2011, respectively.  We had federal net operating loss carryforwards, or NOLs, of $141.8 and $134.2 million, state NOLs of $139.3 and $129.4  million, and German NOLs of $16.5 and $16.7 million as of December 31, 2012 and 2011, respectively, available to reduce future taxable income. Our federal and state NOLs will begin to expire after 2012 through 2032. In accordance with ASC 740, “Income Taxes,” we have provided a valuation allowance for the full amount of our net deferred tax assets because it is not more likely than not that we will realize future benefits associated with these deferred tax assets at December 31, 2012 and 2011.

 

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 $268.8 million as of December 31, 2012, 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 close on the merger with Immune 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.

 

33



Table of Contents

 

The following table describes our liquidity and financial position at December 31, 2012 and 2011.

 

 

 

December 31,
2012

 

December 31,
2011

 

 

 

(in thousands)

 

Working capital (deficit)

 

$

(6,604

)

$

(5,500

)

Cash and cash equivalents

 

172

 

6,378

 

Notes and loans payable, current portion

 

3,975

 

8,022

 

Notes and loans payable, long term portion

 

 

 

 

Working Capital (Deficit)

 

We had a working capital deficit of $6.6 million at December 31, 2012, consisting of current assets of $1.2 million and current liabilities of $7.8 million. This represents a negative change in working capital of approximately $1.1 million from our working capital deficit of $5.5 million consisting of current assets of $6.7 million and current liabilities of $12.2 million at December 31, 2011.  We funded our working capital and the cash portion of our 2012 operating loss with the cash proceeds from our May 2011 senior secured term loan, our February 2012 financing,  April 2012 financing, the sale of the rights to Ceplene® to Meda and the reset offer of our Series A and Series B Preferred Stock and warrants.  Our current liabilities include approximately $0.7 million in principal amount due more than twelve months from the date of these financial statements on our May 2011 senior secured term loan and a $0.3 million fee payable on maturity of this loan as a result of classifying all payments due under this loan as a current liability because of the likelihood that the due date could be accelerated in accordance with a subjective acceleration clause in this loan agreement.

 

Cash and Cash Equivalents

 

Our cash and cash equivalents totaled $0.2 million and $6.4 million at December 31, 2012 and 2011, respectively. Our cash and cash equivalents consist primarily of an interest bearing account.  We reduced the conversion price of our Series A and Series B Preferred Stock and the exercise price of 8.1 million warrants granted in these two transactions, resulting in the immediate exercise of all warrants for proceeds of approximately $0.8 million in 2012.  We also reduced the exercise price and extended the expiration date of our outstanding Series B Common Stock Purchase Warrants that were issued in a registered direct offering that closed on June 30, 2010 in January 2012.   A total of 3.9 million warrants were exercised for proceeds of $0.7 million in 2012.  We received $1.8 million cash, net of $0.2 million in transaction costs, in February 2012 from the issuance of 2,000 shares of our Series A 0% Preferred Stock, at a price of $1,000 per share, and warrants to purchase 5.0 million shares of our common stock.  The shares of Series A Preferred Stock were originally convertible into an aggregate of 10.0 million shares of our common stock.  A total of 1,764 shares of Series A Preferred Stock were converted into approximately 8.8 million shares of our common stock as of December 31, 2012.  As a result of the reduction in the conversion price of the Series A Preferred Stock, the remaining 236 shares of Series A Preferred Stock are convertible into approximately 3.0 million shares of our common stock as of December 31, 2012.  We received $1.0 million cash, net of $0.1 million in transaction costs, in April 2012 from the issuance of 1,065 shares of our Series B Preferred Stock, at a price of $1,000 per share, and warrants to purchase 3.1 million shares of our common stock.  The Shares of Series B Preferred Stock were originally convertible into an aggregate of 6.3 million shares of our common stock.  As a result of the reduction in the conversion price of the Series B Preferred Stock in September 2012, the remaining 1,065 shares of Series B Preferred Stock are convertible into approximately 13.3 million shares of our common stock as of December 31, 2012.  We also sold the rights to Ceplene® under the original agreement to Meda for $2.0 million.  In addition, Meda purchased approximately $0.6 million of Ceplene® commercial and clinical supply and our supply of Proleukin® for use in the Ceplene® post-approval trial.

 

In May 2011, we borrowed $8.6 million through a senior secured term loan and issued common stock purchase warrants, which was offset by transaction related payments of $0.2 million. 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 March 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 February 2011.

 

Current and Future Liquidity Position

 

We raised gross proceeds of $4.7 million, $4.4 million net of $0.3 million in transaction costs, in 2012.  We received $0.3 million of net cash from Immune in February 2013 through the issuance of approximately 2.3 million shares of our common stock.  We had approximately $0.2 million in cash and cash equivalents at December 31, 2012 plus restricted cash held with our senior secured lender of $0.8 million and restricted cash held by our landlord of $0.1 million.  Our anticipated average monthly cash operating expense in 2013 is approximately $0.3 million.  In addition, we are required to make monthly interest and principal payments on our senior secured term loan of approximately $0.3 million.  We believe that our cash is sufficient to fund operations into the second quarter of 2013.  We entered into a definitive merger agreement which is anticipated to close during the first half of

 

34



Table of Contents

 

2013 and is subject to satisfaction of certain customary closing conditions.  However, as additional funds are required prior to the merger closing, we will rely on Immune for such funding or seek other financing to obtain additional cash resources to fund operations. .  If such funding is insufficient or unavailable to us on a timely basis, we may be forced to further reduce expenses or curtail operations.

 

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:

 

·                  the completion of our pending merger with Immune Pharmaceuticals, Ltd.

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

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

·                  the ability to establish and maintain additional collaborative arrangements;

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

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

 

We cannot be certain that additional funding will be available upon acceptable terms, or at all. Should we raise additional capital by issuing equity securities, our then-existing stockholders will likely experience further significant 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 was $5.3 million in 2012, as compared to $14.0 million in 2011. Cash was primarily used to fund our net loss in 2012 resulting from research and development, general, administrative and other expenses. The 2012 net loss was partially offset by non-cash charges of $0.9 million in warrant amendment expense, $0.7 million in stock-based compensation, $0.5 million in amortization of deferred financing costs and discount on loans and $0.1 million of depreciation and amortization expense. The 2012 net loss was also partially offset by a $0.4 million decrease in inventory of  Ceplene® that was sold to Meda.  Deferred revenue decreased by $5.1 million to account for the portion of the deferred revenue received from our strategic partners that was recognized as revenue and there was a $0.2 million foreign exchange gain. Accounts payable and accrued expenses also decreased by $0.2 million.

 

Cash was primarily used to fund our net loss in 2011 resulting from research and development, general, administrative and other expenses. The 2011 net loss was partially offset by non-cash charges of $0.9 million in stock-based compensation, $0.9 million in amortization of deferred financing costs and discount on loans and $0.1 million of depreciation and amortization expense. The 2011 net loss was also partially offset by a $0.7 million expense for excess inventory of  Ceplene® that we believe would not be sold prior to reaching its product expiration date and $0.3 million in foreign exchange loss.  Deferred revenue decreased by $0.9 million to account for the portion of the deferred revenue received from our strategic partners that was recognized as revenue. Accounts payable and accrued expenses also decreased by $0.2 million as a result of payments to our vendors and the reversal of a legal reserve.

 

Investing Activities

 

Net cash used in investing activities was $0.8 million in 2012 compared with net cash provided by investing activities of  $0.1 million in 2011.  Cash was used to establish a $1.1 million restricted cash account with our senior secured lender upon entering into an amendment to our senior secured term loan in 2012.  Cash was provided by the release of $0.1 million of restricted cash to pay interest on the February 2009 convertible notes in 2011.  We do not anticipate significant capital expenditures in the near future.

 

35



Table of Contents

 

Financing Activities

 

Net cash used in financing activities was $13,000 in 2012 compared to cash provided by financing activities $17.8 million in 2011.  We reduced the conversion price of our Series A and Series B Preferred Stock and the exercise price of 8.1 million warrants granted in these two transactions, resulting in the immediate exercise of all warrants for proceeds of approximately $0.8 million in 2012.  We reduced the exercise price and extended the expiration date of our outstanding Series B Common Stock Purchase Warrants that were issued in a registered direct offering that closed on June 30, 2010 in January 2012. A total of 3.9 million warrants were exercised for proceeds of $0.7 million as of December 31, 2012.  We received $1.8 million cash, net of $0.2 million in transaction costs, in February 2012 from the issuance of 2,000 shares of our Series A Preferred Stock, at a price of $1,000 per share, and warrants to purchase 5.0 million shares of our common stock.  The shares of Series A Preferred Stock were originally convertible into an aggregate of 10.0 million shares of our common stock.  A total of 1,764 shares of Series A Preferred Stock were converted into approximately 8.8 million shares of our common stock as of December 31, 2012.  As a result of the reduction in the conversion price of the Series A Preferred Stock, the remaining 236 shares are convertible into approximately 3.0 million shares of our common stock as of December 31, 2012. We also received $1.0 million cash, net of $0.1 million in transaction costs, in April 2012 from the issuance of 1,065 shares of our Series B Preferred Stock, at a price of $1,000 per share, and warrants to purchase approximately 3.1 million shares of our common stock.  The shares of Series B Preferred Stock were originally convertible into an aggregate of 6.3 million shares of our common stock.  As a result of the reduction in the conversion price of the Series B Preferred Stock in September 2012, the remaining 1,065 shares are convertible into approximately 13.3 million shares of our common stock as of December 31, 2012.  In January 2013, all 1,065 shares of Series B Preferred were converted into approximately 13.3 million shares of our common stock.

 

We borrowed $8.6 million in May 2011 through a senior secured term loan and issued common stock purchase warrants, which were offset by transaction related payments of $0.2 million.  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 March 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 February 2011.

 

Contractual Obligations

 

The annual amounts of future minimum payments under debt obligations, interest, lease obligations and other long term liabilities consisting of research, development, consulting and license agreements (including maintenance fees) are as follows as of December 31, 2012 (in thousands of U.S. dollars, using exchange rates where applicable in effect at December 31, 2012):

 

 

 

Less than

 

 

 

 

 

More than

 

 

 

 

 

1 Year

 

1 - 3 Years

 

3 - 5 Years

 

5 Years

 

Total

 

Notes and loans payable

 

$

3,329

 

$

742

 

$

 

$

 

$

4,071

 

Interest expense

 

298

 

2

 

 

 

300

 

Operating leases

 

758

 

 

 

 

758

 

Severance

 

285

 

 

 

 

285

 

Other obligations

 

500

 

1,150

 

 

 

1,650

 

Total

 

$

5,170

 

$

1,894

 

$

 

$

 

$

7,064

 

 

$0.8 million Due 2012. Maxim, our wholly-owned subsidiary, issued a six-year non-interest bearing promissory note in July 2006,  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.  This note was repaid in June 2012.

 

Senior Secured Term Loan. In May 2011, we entered into a senior secured term loan in the amount of $8.6 million with Midcap Financial, LLC., (“Midcap”).  We had the option to borrow an additional $2.0 million from Midcap on or before December 31, 2011 upon meeting certain conditions, including the commencement of a Phase III clinical trial, which we did not exercise. The interest rate on the loan is 11.5% per year. In addition, we issued five year common stock purchase warrants to Midcap granting them the right to purchase 1.1 million shares of our common stock at an exercise price of $0.63 per share. The basic terms of the loan required monthly payments of interest only through November 1, 2011, with 30 monthly payments of principal and interest which commenced on December 1, 2011. Any outstanding balance of the loan and accrued interest is to be repaid on May 27, 2014. In connection with the terms of the loan agreement, we granted Midcap a security interest in substantially all of our personal property including our intellectual property.

 

We allocated the $8.6 million in proceeds between the term loan 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 $0.5 million with a corresponding amount

 

36



Table of Contents

 

recorded as a debt discount. The debt discount is being accreted over the life of the outstanding term loan using the effective interest method. At the date of the transaction, the fair value of the warrants of $0.5 million was determined utilizing the Black-Scholes option pricing model utilizing the following assumptions: dividend yield of 0%, risk free interest rate of 1.71%, volatility of 110% and an expected life of five years.  During 2012 and 2011, we recognized approximately $0.3 million and $0.2 million, respectively, of non-cash interest expense related to the accretion of the debt discount.

 

We entered into a consent agreement with Midcap in June 2012 with respect to the sale of our Ceplene® asset to Meda.  As a result of entering into this consent agreement, we paid Midcap $0.8 million as a partial payment of principal on the loan in return for Midcap’s release of security interest in the assets sold to Meda.

 

We entered into an amendment to the  loan agreement with Midcap in August 2012.  The amendment was not a result of a default under the loan agreement.  Under the amendment, we agreed to make a principal prepayment of $1.2 million, which approximates the scheduled principal payments due under the loan agreement from September 1, 2012 through December 31, 2012. As a result of the prepayment, the current principal balance of the loan was reduced to $4.1 million. In light of the pending merger with Immune, Midcap has indicated its willingness to restructure the loan upon closing of the merger.  Negotiations are continuing.  We will continue to make monthly payments of interest to Midcap as per the loan agreement.

 

We also agreed, pursuant to the amendment, to maintain a cash balance of $1.1 million in a bank account that is subject to the security interest maintained by Midcap under the loan agreement. Midcap deducted interest payable under the loan agreement and advanced us $0.1 million to cover operating expenses in 2012, resulting in a restricted cash balance of $0.8 million at December 31, 2012. Further, we committed to signing a definitive agreement, acceptable to Midcap, by November 15, 2012 with respect to a sale or partnering transaction (which the Company satisfied by entering into a definitive merger agreement with Immune Pharmaceuticals, Ltd. on November 8, 2012).

 

Our term loan with Midcap contains a subjective acceleration clause, which allows the lender to accelerate the loan’s due date in the event of a material adverse change in our ability to pay our obligations when due.  We believe that our losses from operations, our stockholders’ deficit and a cash balance that is lower than our loan payable increase the likelihood of the due date being accelerated in this manner, and therefore we have classified loan repayments due more than twelve months from the date of these financial statements as a short term liability. The original deferred financing fees and debt discount continue to be amortized over the life of the debt that was assumed when the obligation was originally recorded.

 

Severance.  We are obligated to pay severance to two of our former executive officers in the amount of $0.3 million at December 31, 2012.

 

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 May 2013.  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. We defaulted on our lease agreement for the premises located in San Diego, California in June 2008 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.  We defaulted on this lease agreement again in April 2012 by ceasing  to make the monthly rent payments.  As a result, we applied the remaining $0.1 million of prepaid rent to unpaid rent and we are currently accruing rent payable on this lease.  We discontinued our drug discovery activities at this location and are currently looking to sublease or otherwise terminate our lease on 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. We may be required to make future milestone payments, totaling approximately $1.7 million as of December 31, 2012, 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®, AmiKetTM and crolibulinTM, to the extent revenues on such products are realized. We cannot reasonably determine the amount and timing of such royalty payments and they are not included in the table above.

 

37



Table of Contents

 

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS

 

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. 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 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. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.

 

38



Table of Contents

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

See the Company’s consolidated financial statements filed with this Annual Report on Form 10-K under Item 15 below.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Not applicable.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

The Company’s Interim Chief Executive Officer and Chief Financial Officer, with the assistance of other members of the Company’s management, has 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 Annual Report on Form 10-K. Based on this evaluation, the Company’s Interim Chief Executive Officer and Chief Financial Officer has concluded that, as of December 31, 2012, the Company’s disclosure controls and procedures were effective.

 

Management’s Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee.

 

Based on this assessment, management determined that, as of December 31, 2012, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

There have not been any changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f)) during the fiscal quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

39


 


Table of Contents

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Management and Board of Directors

 

We have an experienced team of business executives, scientific professionals and medical specialists. Our executive officers and directors, their ages and positions as of February 28, 2013 are as follows:

 

Name

 

Age

 

Position/Affiliation

 

Robert W. Cook

 

57

 

Interim President and Chief Executive Officer, Chief Financial Officer — Senior Vice President, Finance and Administration, Secretary and Director

 

Stephane Allard, M.D.

 

59

 

Chief Medical Officer

 

Alan W. Dunton, M.D.

 

58

 

Non-Executive Chairman

 

Keith L. Brownlie

 

60

 

Director

 

Robert G. Savage

 

59

 

Director

 

 

Executive Officers and Key Employees

 

Robert W. Cook was appointed to the position of Interim President and Chief Executive Officer and director in August 2012, following the resignation of our former Chief Executive Officer, Mr. John V. Talley.  Mr. Cook has been our Chief Financial Officer and Senior Vice President, Finance and Administration since April 2004 and continues to hold those titles. Prior to joining us, Mr. Cook was Vice President, Finance and Chief Financial officer of Pharmos Corporation since January 1998 and became Executive Vice President of Pharmos in February 2001. From May 1995 until his appointment as Pharmos’s Chief Financial Officer, he was a vice president in GE Capital’s commercial finance subsidiary, based in New York. From 1977 until 1995, Mr. Cook held a variety of corporate finance and capital markets positions at The Chase Manhattan Bank, both in the United States of America (“U.S.”) and in several overseas locations. He was named a managing director of Chase and several of its affiliates in January 1986. Mr. Cook received his B.S. in International Finance from The American University, Washington, D.C.  Based on Mr. Cook’s familiarity with the Company in serving as our Chief Financial Officer since 2004 and his overall background and experience as an executive in the pharmaceutical industry, the Corporate Governance and Nominating Committee of the Board of Directors concluded that Mr. Cook has the requisite experience, qualifications, attributes and skill necessary to serve as a member of the Board of Directors.

 

Stephane Allard, M.D., has been our Chief Medical Officer since March 2007. Prior to that he was Chief Executive Officer, President and a Director of Biovest International.  Dr. Allard also served in executive positions at Sanofi-Synthelabo, Synthelabo, Inc. and Lorex Pharmaceuticals.  Dr. Allard received his medical doctorate from Rouen Medical College and received a Diplomate of CESAM (Certificate of Statistical Studies Applied to Medicine) and a PhD in Clinical Pharmacology and Pharmacokinetics (Pitie Salpetriere Hospital); Paris, France.

 

John V. Talley resigned in August 2012.  Mr. Talley had been our President, Chief Executive Officer and a Director since October 2001.

 

Dileep Bhagwat, Ph.D.’s employment with us terminated in December 2012.  Dr. Bhagwat had been our Senior Vice President of Pharmaceutical Development since February 2004.

 

Board of Directors

 

Alan W. Dunton, M.D.,  joined our board of directors in January 2012 and serves as Non-Executive Chairman.  Dr. Dunton is the Founder of Danerius, LLC, a consulting company that advises pharmaceutical and biotechnology companies on issues related to drug development, licensing and regulatory matters.  He is currently a Director at Targacept, Inc., Palatin Technologies and Oragenics, Inc.  From 2007 to 2009 Dr. Dunton served as President and CEO of Panacos Pharmaceuticals Inc., a NASDAQ-listed biotechnology company.  At Panacos he guided an HIV product into late-stage clinical development and its subsequent sale.  From 2003 to 2005 Dr. Dunton was President, CEO and a Director of Metaphore Pharmaceuticals, Inc., and served as Chairman of ActivBiotics, Inc. in 2006 after the two companies merged.  In 2002 he was President and COO of Emisphere Technologies, Inc.  From 1994 to 2002 Dr. Dunton was a senior executive in various capacities within the Pharmaceuticals Group of Johnson & Johnson, including President of  The Janssen Research Foundation where he was responsible for the development and regulatory activities for such blockbuster drugs as Levaquin®, Topamax® and Risperdal® line extensions.  Earlier in his career he held

 

40



Table of Contents

 

clinical research and clinical pharmacology positions at Syntex Corporation, Ciba-Geigy Corporation, Hoffmann La Roche Inc. and Revlon Health Care Group. Based on his extensive knowledge of, and experience in, the pharmaceutical industry, the Corporate Governance and Nominating Committee of the Board of Directors concluded that Dr. Dunton has the requisite experience, qualifications, attributes and skill necessary to serve as a member of the Board of Directors.

 

Keith L. Brownlie has served as a member of our board of directors since April 2011.  Mr. Brownlie spent his entire career with the accounting firm of Ernst & Young LLP, retiring from the New York/New Jersey offices in 2010 after 36 years with the firm. At Ernst & Young, he served as audit partner for numerous public companies and was the Life Sciences Industry Leader for the New York Metro Area.  Mr. Brownlie is a director of Soligenix Inc., and RXi Pharmaceuticals Corp., and is a member of the compensation committee and the audit committee of both companies.  Mr. Brownlie received a B.S. in Accounting from Lehigh University and is a Certified Public Accountant. Mr. Brownlie co-founded the New Jersey Entrepreneur of the Year Program and was co-chair of the BIONJ/PABIO Annual Symposium.  Based on Mr. Brownlie’s roles, experience and responsibilities which qualify him as a financial expert, the Corporate Governance and Nominating Committee of the Board of Directors concluded that Mr. Brownlie has the requisite experience, qualifications, attributes and skill necessary to serve as a member of the Board of Directors.

 

Robert G. Savage has been a member of our Board since December 2004 and served as the Chairman of the Board through December 2011. Mr. Savage has been a senior pharmaceutical executive for over twenty five years. He held the position of Worldwide Chairman of the Pharmaceuticals Group at Johnson & Johnson and was both a company officer and a member of the Executive Committee. He also served Johnson & Johnson in the capacity of a Company Group Chairman and President of Ortho-McNeil Pharmaceuticals. Most recently, Mr. Savage was President of the Worldwide Inflammation Group for Pharmacia Corporation and is presently President and CEO of Strategic Imagery LLC, a consulting company of which he is the principal. He has held multiple positions leading marketing, business development and strategic planning at Hoffmann-La Roche and Sterling Drug. Mr. Savage is a director of The Medicines Company, a specialty pharmaceutical company, and is a member of the compensation committee and the corporate governance and nominating committee. Mr. Savage is also a director of Savient Pharmaceuticals and Nuovo Biologics and is a member of the compensation committee of both companies.  Mr. Savage received a B.S. in Biology from Upsala College and an M.B.A. from Rutgers University. Based on Mr. Savage’s familiarity with the Company as an incumbent member of the Company’s Board of Directors, his membership on the board of directors of other public companies and his knowledge of the pharmaceutical industry, the Corporate Governance and Nominating Committee of the Board of Directors concluded that Mr. Savage has the requisite experience, qualifications, attributes and skill necessary to serve as a member of the Board of Directors.

 

A. Collier Smyth, M.D. resigned from our board of directors in August 2012.  Dr. Smyth had served as a member of our board of directors since April 2009.

 

Gerhard Waldheim resigned from our board of directors in August 2012.  Dr. Waldheim had been a member of our board of directors since July 2005.

 

Wayne P. Yetter resigned from our board of directors in August 2012.  Mr. Yetter had served as a member of our board of directors since January 2006.

 

Board Composition and Leadership Structure

 

Our board of directors is divided into three classes, with each director serving a three-year term and one class being elected at each year’s annual meeting of stockholders. A majority of the members of our board of directors are “independent” of us and our management. Directors Dunton and Brownlie are in the class of directors whose term was scheduled to expire at the 2012 annual meeting of stockholders. Since there was no annual meeting of stockholders in 2012, they will continue to serve as directors until their respective successors are elected and qualified.  Director Cook is in the class of directors whose term expires at the 2013 annual meeting of stockholders.  Director Savage is in the class of directors whose term expires at the 2014 annual meeting of stockholders.

 

Dr. Dunton is the Chairman of the Board.  Our Interim Chief Executive Officer, Mr. Cook, serves as a director, though he is not a member of any standing committee of the board.

 

Meetings and Meeting Attendance

 

During the fiscal year ended December 31, 2012, there were 22 meetings of the board of directors. All incumbent directors attended 75% or more of the Board meetings and meetings of the committees on which they served during the last fiscal year. There was no annual meeting of stockholders in 2012.

 

41



Table of Contents

 

Committees of the Board

 

Our board of directors has established three standing committees: the audit committee, the compensation committee and the corporate governance and nominating committee. Each standing committee has a charter, accessible on our website at http://www.epicept.com, or by sending a request in writing to EpiCept Corporation, 777 Old Saw Mill River Road, Tarrytown, New York 10591, Attention: Robert W. Cook. Our website, and the information contained in our website, is not part of this annual report.

 

Audit Committee. Our Audit Committee is responsible for the oversight of such reports, financial statements or charters as may be required by The Nasdaq OMX Stockholm Exchange, the OTCQX or U.S. federal securities laws, as well as, among other things:

 

·                  overseeing and monitoring the integrity of our consolidated financial statements, our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters, and our internal accounting and financial controls and risk management;

 

·                  preparing the report that SEC rules require be included in our annual proxy statement;

 

·                  overseeing and monitoring our independent registered public accounting firm’s qualifications, independence and performance;

 

·                  providing the board with the results of our monitoring and recommendations; and

 

·                  providing to the board additional information and materials as it deems necessary to make the board aware of significant financial matters that require the attention of the board.

 

Messrs. Brownlie, Dunton and Savage are currently members of the audit committee, each of whom is a non-employee member of the board of directors. Mr. Brownlie serves as Chairman of the Audit Committee and also qualifies as an “audit committee financial expert,” as that term is defined under the SEC rules implementing Section 407 of the Sarbanes-Oxley Act. The board has determined that each member of our audit committee meets the current independence and financial literacy requirements under the Sarbanes-Oxley Act, the OTCQX and SEC rules and regulations. We intend to comply with future requirements to the extent they become applicable to us.

 

Compensation Committee. Our Compensation Committee is composed of Messrs. Savage, Dunton and Brownlie, all of whom are a non-employee member of our board of directors. Mr. Savage serves as Chairman of our Compensation Committee. Each member of our Compensation Committee is an “outside director” as that term is defined in Section 162(m) of the Internal Revenue Code of 1986 and a “non-employee” director within the meaning of Rule 16b-3 of the rules promulgated under the Exchange Act and the rules of The OTCQX. The Compensation Committee is responsible for, among other things:

 

·                  reviewing and approving for the chief executive officer and other executive officers (a) the annual base salary, (b) the annual incentive bonus, including the specific goals and amount, (c) equity compensation, (d) employment agreements, severance arrangements and change in control arrangements, and (e) any other benefits, compensations, compensation policies or arrangements;

 

·                  reviewing and making recommendations to the board regarding the compensation policy for such other officers as directed by the board;

 

·                  preparing a report to be included in the annual proxy statement, if required, that describes: (a) the criteria on which compensation paid to the chief executive officer for the last completed fiscal year is based; (b) the relationship of such compensation to our performance; and (c) the committee’s executive compensation policies applicable to executive officers; and

 

·                  reviewing our current benefit plans and making recommendations to the board with respect to amendments to the plans, changes in the number of shares reserved for issuance thereunder and regarding other benefit plans proposed for adoption.

 

Corporate Governance and Nominating Committee. Our Corporate Governance and Nominating Committee is composed of Messrs. Dunton, Brownlie and Savage, each of whom is a non-employee member of the board of directors and independent in

 

42



Table of Contents

 

accordance with the applicable rules of the Sarbanes-Oxley Act and the OTCQX. Mr. Dunton serves as chairman of the Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee is responsible for, among other things:

 

·                  reviewing board structure, composition and practices, and making recommendations on these matters to the board;

 

·                  reviewing, soliciting and making recommendations to the board and stockholders with respect to candidates for election to the board;

 

·                  overseeing compliance by the chief executive officer and senior financial officers with the Code of Ethics for the Chief Executive Officer and Senior Financial Officers; and

 

·                  overseeing compliance by employees with the Code of Business Conduct and Ethics.

 

In making its recommendations to the board, the committee considers, among other things, the qualifications of individual director candidates. While the committee has no specific policy with regard to the consideration of diversity in identifying director candidates, the committee works with the board to determine the appropriate characteristics, skills, and experiences for the board as a whole and its individual members with the objective of having a board with diverse backgrounds and experience in business, finance, and medicine. Characteristics expected of all directors include independence, integrity, high personal and professional ethics, sound business judgment, and the ability and willingness to commit sufficient time to the board. In evaluating the suitability of individual board members, the board takes into account many factors, including general understanding of marketing, finance, and other disciplines relevant to the success of a publicly traded company in today’s business environment; understanding of our business and technology; educational and professional background; personal accomplishment; and gender, age, and diversity. The board evaluates each individual in the context of the board as a whole, with the objective of recommending a group that can best perpetuate the success of our business and represent stockholder interests through the exercise of sound judgment using its diversity of experience. In determining whether to recommend a director for re-election, the committee also considers the director’s past attendance at meetings, participation in and contributions to the activities of the board, and the results of the most recent board self-evaluation. The Corporate Governance and Nominating Committee will consider director candidates recommended by stockholders submitted in accordance with our by-laws.

 

The information contained in this annual report with respect to the charters of each of the Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee and the independence of the non-management members of the Board of Directors shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall the information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference in a filing. Our website, and the information contained in our website, is not a part of this annual report.

 

Code of Ethics

 

We have adopted a Code of Business Conduct and Ethics that applies to all our employees, and a Supplemental Code of Ethics that specifically applies to chief executive officer and chief financial officer. This Code of Ethics is designed to comply with the OTCQX marketplace rules related to codes of conduct.  A copy of this Supplemental Code of Ethics may be obtained on our website at http://www.epicept.com. We intend to post on our website any amendments to, or waiver from, our Code of Business Conduct and Ethics or our Supplemental Code of Ethics for the benefit of our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing a similar function, and other named executives. Our website, and the information contained in our website, is not a part of this annual report.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

No person who, during the fiscal year ended December 31, 2012, was a “Reporting Person” defined as a director, officer or beneficial owner of more than ten percent of the our common stock which is the only class of securities of the Company registered under Section 12 of the Exchange Act, failed to file on a timely basis reports required by Section 16 of the Exchange Act during the most recent fiscal year. The foregoing is based solely upon a review by us of Forms 3 and 4 during the most recent fiscal year as furnished to us under Rule 16a-3(d) under the Exchange Act, and Forms 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year, and any representation received by us from any reporting person that no Form 5 is required.

 

43



Table of Contents

 

ITEM 11. EXECUTIVE COMPENSATION

 

Executive Compensation

 

The following table sets forth the compensation earned for services rendered to us in all capacities by our chief executive officer and certain executive officers whose total cash compensation exceeded $100,000 for the year ended December 31, 2012, collectively referred to in this annual report as the “named executive officers.”

 

Summary Compensation Table

 

Name/Principal Position

 

Year

 

Salary
 ($)

 

Bonus
 ($)(1)

 

Stock
 Awards
 ($)

 

Option
 Awards
 ($)(2)

 

Non-Equity 
Incentive Plan
Compensation

 ($)

 

Nonqualified
deferred
compensation
earnings
 ($)

 

All Other
 Compensation
 ($)

 

Total
 ($)

 

John V. Talley (3)

 

2012

 

350,197

 

 

9,917

 

 

 

 

31,863

(4)

391,977

 

President and Chief Executive Officer

 

2011

 

443,700

 

 

 

392,606

 

 

 

44,923

(4)

881,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Robert W. Cook (5)

 

2012

 

326,229

(6)

 

57,615

 

 

 

 

18,215

(7)

402,059

 

Interim President and CEO,
Chief Financial Officer,

 

2011

 

284,082

 

 

 

130,869

 

 

 

24,955

(7)

439,906

 

Senior Vice President
Finance & Administration

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stephane Allard

 

2012

 

283,662

 

 

45,615

 

 

 

 

18,200

(7)

347,477

 

Chief Medical Officer

 

2011

 

283,662

 

 

 

130,869

 

 

 

34,940

(7)

439,471

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dileep Bhagwat (8)

 

2012

 

283,662

 

 

45,615

 

 

 

 

24,980

(7)

354,257

 

Senior Vice President,
Pharmaceutical Development

 

2011

 

283,662

 

 

 

130,869

 

 

 

34,051

(7)

448,582

 

 


(1)         Annual cash bonus awards are determined based on the executive’s performance during the year and paid the following year.

 

(2)      This column represents the grant date fair values of the stock options awarded in 2012 and 2011, respectively.  The grant date fair values have been determined based on the assumptions and methodologies set forth in the Company’s 2012 Annual Report (Note 10, Share-Based Payments).

 

(3)      Mr. Talley resigned in August 2012.

 

(4)      Includes premiums for health benefits, life and disability insurance and automobile allowance paid on behalf of Mr. Talley.

 

(5)      Mr. Cook was appointed Interim President and CEO in August 2012.  He retained his title as CFO.

 

(6)      Includes $36,290 in compensation that has not been paid and has been deferred until the closing of the pending merger with Immune.

 

(7)      Includes premiums for health benefits and for life and disability insurance paid on behalf of the named executive officer.

 

(8)      Dr. Bhagwat’s employment with us terminated in December 2012.

 

44



Table of Contents

 

Outstanding Equity Awards at December 31, 2012

 

 

 

Option Awards

 

Stock Awards

 

 

 

Number of Securities
Underlying

Unexercised Options

 

Equity
Incentive Plan

Awards:
Number of

Securities
Underlying
Unexercised

 

Option

 

Option

 

Number of
Shares or
Units of
Stock

 

Market
Value of
Shares or
Units of
Stock

 

Equity Incentive
Plan

Awards:
Number of

Unearned
Shares, Units or
Other Rights

 

Equity Incentive
Plan Awards:
Market or
Payout Value of

Unearned
Shares, Units or
Other Rights

 

Name

 

Number
Exercisable

 

Number
Unexercisable

 

Unearned
Options

 

Exercise
Price

 

Expiration
Date

 

That have
Not Vested

 

That have
Not Vested

 

That have
Not Vested

 

That have
Not Vested

 

Robert Cook

 

70,523

 

 

 

$

17.52

 

1/4/2016

 

 

 

 

 

 

 

20,750

 

 

 

$

4.38

 

1/8/2017

 

 

 

 

 

 

 

42,567

 

 

 

$

4.02

 

1/7/2018

 

 

 

 

 

 

 

5,000

 

 

 

$

1.89

 

9/8/2018

 

 

 

 

 

 

 

29,167

 

 

 

$

1.89

 

1/5/2019

 

 

 

 

 

 

 

11,376

 

26,541

 

 

$

1.68

 

2/20/2019

 

 

 

 

 

 

 

54,687

 

20,313

 

 

$

2.11

 

2/11/2020

 

 

 

 

 

 

 

49,998

 

50,002

 

 

$

0.87

 

1/10/2021

 

 

 

 

 

 

 

 

100,000

 

 

$

0.87

 

1/18/2021

 

 

 

 

 

Stephane Allard

 

33,334

 

 

 

$

4.89

 

3/23/2017

 

 

 

 

 

 

 

42,567

 

 

 

$

4.02

 

1/7/2018

 

 

 

 

 

 

 

16,667

 

 

 

$

1.89

 

9/8/2018

 

 

 

 

 

 

 

33,334

 

 

 

$

1.89

 

1/5/2019

 

 

 

 

 

 

 

13,000

 

30,334

 

 

$

1.68

 

2/20/2019

 

 

 

 

 

 

 

54,687

 

20,313

 

 

$

2.11

 

2/11/2020

 

 

 

 

 

 

 

49,998

 

50,002

 

 

$

0.87

 

1/10/2021

 

 

 

 

 

 

 

 

100,000

 

 

$

0.87

 

1/18/2021

 

 

 

 

 

Dileep Bhagwat

 

37,500

 

 

 

$

17.52

 

12/15/2013

 

 

 

 

 

 

 

31,922

 

 

 

$

4.38

 

12/15/2013

 

 

 

 

 

 

 

42,567

 

 

 

$

4.02

 

12/15/2013

 

 

 

 

 

 

 

16,667

 

 

 

$

1.89

 

12/15/2013

 

 

 

 

 

 

 

33,334

 

 

 

$

1.89

 

12/15/2013

 

 

 

 

 

 

 

43,334

 

 

 

$

1.68

 

12/15/2013

 

 

 

 

 

 

 

75,000

 

 

 

$

2.11

 

12/15/2013

 

 

 

 

 

 

 

100,000

 

 

 

$

0.87

 

12/15/2013

 

 

 

 

 

 

 

100,000

 

 

 

$

0.87

 

12/15/2013

 

 

 

 

 

 

Employment Agreements and Potential Payments Upon Termination or Change-in-Control

 

We believe that reasonable and appropriate severance and change-in-control benefits are appropriate to protect our named executives against circumstances over which they have no control. Furthermore, we believe change-in-control severance payments align the named executives’ interests with our own by enabling the named executive to evaluate a transaction in the best interests of our shareholders and our other constituents without undue concern over whether the transaction may jeopardize the named executive’s own employment.

 

We entered in to an Amended and Restated Employment Agreement with John V. Talley, Jr. and Robert W. Cook on June 9, 2010 and July 21, 2010, respectively. Pursuant to their employment agreements Messrs. Talley and Cook received an annual base salary of $435,000 and $278,512 in 2010, respectively, which is reviewed no less frequently than annually for increase in the discretion of the Board of Directors or our compensation committee.  Messrs. Talley and Cook shall also be eligible for an annual incentive award, with a target incentive opportunity equal to 55% and 30%, respectively, of his base salary.  The agreements expired on December 31, 2011; provided, however, that the term of the agreement shall thereafter be automatically extended for unlimited additional one-year periods unless, at least three months prior to the then-scheduled date of expiration, either we or Mr. Talley or Mr. Cook give notice that we/he are electing not to so extend the term of the agreement. Upon the occurrence of a change in control, the term shall automatically be extended for one additional year from the date of the change in control.  Mr. Talley resigned from EpiCept in August 2012, effectively terminating his agreement as of that date.  For 2013, Mr. Cook will receive a base salary of $300,000 with an additional $100,000 annually accruing through the date at which there is a change in control.

 

45



Table of Contents

 

The information below describes and quantifies certain compensation that would become payable under Mr. Cook’s employment agreement if, as of December 31, 2012, his employment had been terminated or there was a change in control. Due to the number of factors that affect the nature and amount of any benefits provided upon the events discussed below, any actual amounts paid or distributed may be different. Factors that could affect these amounts include the timing during the year of any such event.

 

Mr. Cook would be entitled to the compensation described below in the event of termination of his employment under the agreement:

 

Termination for any Reason. Upon termination for any reason and in addition to any other payments disbursed in connection with termination, Mr. Cook is entitled to:

 

·                        receive payment of his applicable base salary through the termination date;

·                        the balance of any annual, long-term or incentive award earned in any period prior to the termination date; and

·                        a lump-sum payment for any accrued but unused vacation days.

 

Termination due to Death or Disability. If termination occurs due to death or disability, Mr. Cook is or his estate is entitled to:

 

·                        a lump-sum payment equal to one-fourth of his base salary times a fraction, the numerator being the number of days he was employed in the calendar year of termination and the denominator being the number of days in that year;

·                        have 50% of outstanding stock options that are not then vested or exercisable become vested and exercisable as of the termination date;

·                        have the remaining outstanding stock options that are not then vested or exercisable become vested and exercisable ratably and quarterly for two years following the termination date; and

·                        have each outstanding stock option remain exercisable for all securities for the later of (i) the 90th day following the date that the option becomes fully vested and exercisable and (ii) the first anniversary of the termination date.

 

Termination Without Cause. If Mr. Cook is terminated without cause, he is entitled to receive payments equal to:

 

·                        a lump-sum payment equal to three quarters (0.75) times his base salary provided, however, that in the case of a termination resulting from the expiration of the agreement pursuant to a notice of non-extension from us, the amount shall equal one and one half (0.5) times his base salary;

·                        each stock option that was granted prior to the effective date and is outstanding as of the termination date shall (A) become fully vested as of the termination date, (B) become exercisable as of the termination date with respect to fifty percent (50%) of any securities and other property subject to it for which it is not then exercisable, (C) become exercisable with respect to the remainder of any such securities and other property ratably and monthly over the two years immediately following the termination date, and (D) remain exercisable, for all securities and other property for which it is or becomes exercisable, through at least the later of the ninetieth (90th) day following the date upon which such stock option becomes fully exercisable and the first anniversary of the termination date, but in no event beyond its maximum stated term;

·                        each stock option that is granted on or after the effective date and is outstanding as of the termination date shall be fully vested and exercisable, as of the termination date, to the extent that it is then scheduled to become vested or exercisable within eighteen months following the termination date (had his employment hereunder continued indefinitely), and shall remain exercisable through the first anniversary of the termination date (but in no event beyond its maximum stated term);

·                        each time-vested equity award that is outstanding as of the termination date shall vest, and become non-forfeitable, as of the termination date to the extent that it is then scheduled to become vested within eighteen months following termination date (had his employment hereunder continued indefinitely);

·                        each performance-vesting equity award that is outstanding as of the termination date shall become vested, and non-forfeitable, to the extent that the applicable performance vesting criteria are achieved within eighteen months following the termination date; and

·                        continued participation, for 9 months immediately following the termination date, in all employee welfare benefit plans, programs and arrangements, on terms and conditions that are no less favorable to him than those applied immediately prior to the termination date, and with COBRA benefits commencing thereafter; provided, however, that in the case of a termination due to expiration of the term pursuant to notice of non-extension from us, the continuation period shall be 6 months rather than 9 months.

 

Termination in Connection With a Change in Control. If Mr. Cook is terminated within six months prior to, or within one year and a day following, a change in control, he is entitled to:

 

46



Table of Contents

 

·                        a lump sum payment equal to the sum of (x) his base salary and (y) the greater of (I) his target for the year in which the termination occurs and (II) the annual incentive award awarded to him for the most recently completed calendar year;

·                        have each outstanding stock option (including both time-vesting and performance-vesting awards) become fully vested and exercisable as of the termination date and remain exercisable through the first anniversary of the termination date, but in no event beyond its maximum stated term;

·                        have each other equity-based award (including both time-vesting and performance-vesting awards) become fully vested, and non-forfeitable, as of the termination date; and

·                        continued participation, for 12 months immediately following the termination date, in all employee welfare benefit plans, programs and arrangements, in which he was participating immediately prior to the Termination Date, on terms and conditions that are no less favorable to him than those applied immediately prior to the termination date, and with COBRA benefits commencing thereafter.

 

On July 21, 2010, we entered in to a severance agreement with each of Stephane Allard, M.D., the Chief Medical Officer of EpiCept, and Dileep Bhagwat, Ph.D. Senior Vice President of EpiCept. The terms of the Severance Agreements for each of the two executives are identical and are summarized below.

 

The agreement expired on December 31, 2011; provided, however, that the term of the agreement shall thereafter be automatically extended for unlimited additional one-year periods unless, at least three months prior to the then-scheduled date of expiration, either we or the executive gives notice that we/he are electing not to so extend the term of the agreement. Upon the occurrence of a change in control, the term shall automatically be extended for one additional year from the date of the change in control.  The executive would be entitled to the compensation described below in the event of termination of his employment under the agreement:

 

Termination for any Reason. Upon termination for any reason and in addition to any other payments disbursed in connection with termination, the executive is entitled to:

 

·                  receive payment of his applicable base salary through the termination date;

·                  the balance of any annual, long-term or incentive award earned in any period prior to the termination date;

·                  a lump-sum payment for any accrued but unused vacation days at his base salary rate in effect as of the termination date; provided that no payment shall be made in respect of more than forty (40) accrued but unused vacation days;

·                  other or additional benefits in accordance with the terms of the applicable plans, programs and arrangements of the company; and

·                  payment, promptly when due, of all amounts due in connection with the termination.

 

Termination Without Cause. If the executive is terminated without cause, he is entitled to receive payments equal to:

 

·                        a lump-sum payment equal to three quarters (0.75) times his base salary provided, however, that in the case of a termination resulting from the expiration of the agreement pursuant to a notice of non-extension from EpiCept, the amount shall equal one half (0.5) times his base salary; and

·                        continued participation, for nine months immediately following the termination date, in all employee welfare benefit plans, programs and arrangements, on terms and conditions that are no less favorable to him than those applied immediately prior to the termination date, and with COBRA benefits commencing thereafter; provided, however, that in the case of a termination due to expiration of the term pursuant to notice of non-extension from us, the continuation period shall be six months rather than nine months.

 

Termination in Connection With a Change in Control. If the executive is terminated within six months prior to, or within one year and a day following, a change in control, he is entitled to:

 

·                        a lump sum payment equal to the sum of (x) his base salary and (y) the greater of (I) his target for the year in which the termination occurs and (II) the annual incentive award awarded to him for the most recently completed calendar year;

·                        have each outstanding stock option (including both time-vesting and performance-vesting awards) become fully vested and exercisable as of the termination date and remain exercisable through the first anniversary of the termination date, but in no event beyond its maximum stated term;

·                        have each other equity-based award (including both time-vesting and performance-vesting awards) become fully vested, and non-forfeitable, as of the termination date; and

·                        continued participation, for 12 months immediately following the termination date, in all employee welfare benefit plans, programs and arrangements, in which he was participating immediately prior to the Termination Date, on terms and

 

47



Table of Contents

 

conditions that are no less favorable to him than those applied immediately prior to the termination date, and with COBRA benefits commencing thereafter.

 

The following table summarizes the potential payments to our named executive officers with whom we have entered into employment and severance agreements, assuming that such events occurred as of December 31, 2012.

 

 

 

 

 

 

 

 

 

 

 

Accelerated

 

 

 

 

 

 

 

 

 

 

 

Vested

 

Vesting of

 

 

 

 

 

Severance

 

 

 

Benefit

 

Incentive

 

Incentive

 

 

 

 

 

Amounts

 

Benefits

 

Continuation

 

Units

 

Units

 

Total

 

 

 

($)

 

($)

 

($)

 

($)

 

($)

 

($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Robert W. Cook

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Termination for any reason (other than without cause)

 

46,154

 

 

 

 

 

46,154

 

Termination due to death or disability

 

75,000

 

 

 

 

5,906

 

80,906

 

Termination without cause

 

225,000

 

 

17,748

 

 

11,811

 

254,559

 

Change in control

 

390,000

 

 

23,665

 

 

11,811

 

425,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stephane Allard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Termination for any reason (other than without cause)

 

37,945

 

 

 

 

 

37,945

 

Termination without cause

 

212,747

 

 

17,737

 

 

 

230,484

 

Change in control

 

368,761

 

 

23,650

 

 

12,039

 

404,450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dileep Bhagwat (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Termination for any reason (other than without cause)

 

 

 

 

 

 

 

Termination without cause

 

229,434

 

 

17,250

 

 

 

246,684

 

Change in control

 

156,014

 

 

17,250

 

 

 

173,264

 

 


(1)      Dr. Bhagwat’s employment with us terminated in December 2012.  The amounts listed in this table for termination without cause are actual amounts due Dr. Bhagwat at December 31, 2012.  If a change of control occurs prior to December 31, 2013 then the additional amounts listed in this table will become payable to Dr. Bhagwat.

 

48



Table of Contents

 

Director Compensation

 

We compensate our non-employee directors in cash, stock options and/or restricted stock units.  We also reimburse our non-employee directors for their expenses incurred in connection with attending board and committee meetings.

 

For 2012, the compensation committee retained Radford to analyze the Company’s non-executive director and chairman compensation. The committee determined that cash compensation should be benchmarked to the 50th percentile and that equity-based compensation should be benchmarked to the 75th percentile for comparable companies in the biotechnology and specialty pharmaceutical industries. As a result of that analysis, the board approved a 2012 annual equity grant in the form of restricted stock units vesting monthly over one year for each named director and for the chairman of 60,000 shares and 105,000 shares, respectively.

 

The following table set forth all material Director compensation information during the year ended December 31, 2012:

 

Director Compensation Table

 

 

 

 

 

 

 

 

 

 

 

Change in pension

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

value and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

nonqualified

 

 

 

 

 

 

 

Fees Earned

 

 

 

 

 

Non-equity

 

deferred

 

 

 

 

 

 

 

or Paid in

 

Stock

 

Option

 

Incentive plan

 

compensation

 

All Other

 

 

 

 

 

Cash (1)

 

Awards ($)(2)

 

Awards ($) (3)

 

compensation($)

 

earnings($)

 

Compensation

 

Total

 

Alan Dunton

 

$

93,250

 

$

43,050

 

$

27,512

 

$

 

$

 

$

 

$

163,812

 

Robert G. Savage

 

61,250

 

9,600

 

 

 

 

 

70,850

 

Keith L. Brownlie

 

67,000

 

9,600

 

 

 

 

 

76,600

 

Gerhard Waldheim (4)

 

29,917

 

9,600

 

 

 

 

 

39,517

 

A. Collier Smyth (4)

 

39,167

 

9,600

 

 

 

 

 

48,767

 

Wayne P. Yetter (4)

 

40,917

 

9,600

 

 

 

 

 

50,517

 

 


(1)      This column reports the amount of cash compensation earned in 2012 for Board and committee service.

 

(2)      Restricted stock and restricted stock unit awards were granted to the named directors in 2012.

 

(3)      This column represents the grant date fair values of the stock options awarded to the named directors in 2012, The grant date fair values have been determined based on the assumptions and methodologies set forth in the Company’s 2012 Annual Report (Note 10, Share-Based Payments).

 

(4)     Messrs. Waldheim, Smyth and Yetter resigned from the Board effective August 28, 2012.

 

In 2012, the chairperson of the board received an annual retainer of $60,000, while each other non-employee director received an annual retainer of $25,000. In addition, the chairperson of the audit committee received an annual retainer of $10,000 and the chairperson of each of the other committees received an annual retainer of $7,500. Each non-employee director also received $1,500 for their attendance at each board meeting, $750 for their participation in each telephonic board meeting, $750 for their attendance at each committee meeting and $500 for their participation in a telephonic committee meeting. We have in the past granted non-employee directors restricted stock units and options to purchase our common stock pursuant to the terms of our 2005 Equity Incentive Plan upon joining the board and annually thereafter as determined by the Compensation Committee after considering market data.  Typically annual equity compensation vests monthly over two years. The value of the options granted to non-employee directors set forth in the Director Compensation Table above reflect grants of options to compensate for their service and were issued at the market value of our common stock at the date of grant.

 

Tax Implications of Executive Compensation

 

We do not believe that Section 162(m) of the Internal Revenue Code, which limits deductions for executive compensation paid in excess of $1.0 million, is applicable to us, and accordingly, our Compensation Committee did not consider its impact in determining compensation levels for our named executive officers in 2012.

 

Compensation Committee Interlocks and Insider Participation

 

All members of the Compensation Committee of the Board of Directors during the fiscal year ended December 31, 2012 were independent directors and none of them were our employees or our former employees. During the fiscal year ended December 31, 2012, none of our executive officers served on the Compensation Committee (or equivalent), or the board of directors, of another entity whose executive officers served on the Compensation Committee of our board of directors.

 

49



Table of Contents

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Equity Compensation Plan Information

 

The following table provides certain information with respect to all of the Company’s equity compensation plans in effect as of December 31, 2012.

 

Plan Category

 

Number of securities to
be issued upon exercise of
outstanding options,
warrants and rights
(a)

 

Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)

 

Number of securities
remaining available for
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(c)

 

Total equity compensation plans approved by stockholders

 

2,530,864

 

$

3.94

 

11,360,058

 

Equity compensation plans not approved by stockholders

 

 

$

 

 

 

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth information as of February 28, 2013, regarding the beneficial ownership of the Company’s common stock by:

 

·                  each stockholder known by EpiCept to own beneficially more than five percent of EpiCept common stock;

 

·                  each of the named executive officers;

 

·                  each of EpiCept’s directors; and

 

·                  all of EpiCept’s directors and the named executive officers as a group.

 

Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Unless otherwise indicated, the principal address of each of the stockholders below is in care of EpiCept Corporation, 777 Old Saw Mill River Road, Tarrytown, NY 10591.

 

Name and Address of Beneficial Owner

 

Number of Shares
 Beneficially Owned

 

Percent of Shares
 Beneficially Owned(1)(2)

 

 

 

 

 

 

 

5% Stockholders

 

 

 

 

 

Försäkringsaktiebolaget Avanza Pension (3)

 

9,610,229

 

8.56

 

Sabby Management, LLC (4) 

 

12,079,817

 

10.76

 

Hudson Bay Master Fund (5)

 

6,740,328

 

5.67

 

 

 

 

 

 

 

Executive Officers and Directors

 

 

 

 

 

Robert W. Cook (6)

 

803,609

 

*

 

Dr. Stephane Allard (7)

 

675,684

 

*

 

Robert G. Savage (8)

 

277,228

 

*

 

Dr. Alan W. Dunton (9)

 

175,000

 

*

 

Keith L. Brownlie (10)

 

38,195

 

*

 

All directors and named executive officers as a group (5 persons) (11)

 

1,969,716

 

1.74

 

 


*                  Represents beneficial ownership of less than one percent (1%) of the outstanding shares of EpiCept common stock.

 

(1)          Beneficial ownership is determined with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to stock options and warrants currently exercisable or exercisable within 60 days are deemed to be outstanding for computing the percentage ownership of the person holding such options and the percentage ownership of any group of which the holder is a member, but are not deemed

 

50



Table of Contents

 

outstanding for computing the percentage of any other person. Except as indicated by footnote, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown beneficially owned by them.

 

(2)          Percentage ownership is based on 112,215,568 shares of common stock outstanding on February 28, 2013.

 

(3)          As reported with the SEC on Form 13G on February 12, 2013.

 

(4)          As reported with the SEC on Form 13G on January 22, 2013.  Sabby Management, LLC converted 236 shares of preferred into an additional 2,950,000 shares of EpiCept common stock after this filing, which has been included in their number of shares beneficially owned.

 

(5)          Includes 6,740,328 shares exercisable upon the exercise of warrants.  The Investment Manager, which serves as the investment manager to  Hudson Bay Master Fund Ltd., may be deemed to be the beneficial owner of all shares of Common Stock held by Hudson Bay Master Fund Ltd.  Mr. Gerber serves as the managing member of Hudson Bay Capital GP LLC, which is the general partner of the Investment Manager.  Each of Hudson Bay Master Fund Ltd. and Mr. Gerber disclaims beneficial ownership of these securities. Hudson Bay Master Fund Ltd. is named as a Beneficial Owner herein solely to report the securities held in its name.

 

(6)          Includes 504,957 shares of common stock and 298,652 shares exercisable upon the exercise of options that are exercisable within 60 days.

 

(7)          Includes 417,513 shares of common stock and 258,171 shares issuable upon the exercise of options that are exercisable within 60 days.

 

(8)          Includes 36,550 shares of common stock and 240,678 shares issuable upon the exercise of options that are exercisable within 60 days.

 

(9)          Includes 75,000 shares of common stock and 100,000 shares issuable upon the exercise of options that are exercisable within 60 days.

 

(10)   Includes 38,195 shares issuable upon the exercise of options that are exercisable within 60 days.

 

(11)   Includes 935,696 shares issuable upon the exercise of restricted stock units and stock options that are exercisable within 60 days.

 

51



Table of Contents

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

Transactions with Related Persons

 

None

 

Director Independence

 

Other than Mr. Cook, each of our current directors is, and, other than Mr. Talley, each of our former directors who served in 2012 were, independent under the definition in Nasdaq Listing Rule 5605 (a)(2).

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

We retained EisnerAmper LLP as our independent registered public accounting firm to audit our consolidated financial statements for the year ended December 31, 2012 and Deloitte & Touche LLP to audit our consolidated financial statements for the year ended December 31, 2011.

 

To ensure the independence of the firm selected to audit the Company’s annual consolidated financial statements, the audit committee of the Board of Directors has established a policy allowing it to review in advance and either approve or disapprove, any audit, audit-related, internal control-related, tax or non-audit service to be provided to us by EisnerAmper LLP and Deloitte & Touche LLP. Annually and generally, in the early part of each fiscal year, the audit committee will approve the engagement of the independent registered public accounting firm to perform the annual integrated audit of our consolidated financial statements and the effectiveness of our internal controls over financial reporting, and to review our interim consolidated financial statements.

 

Independent Registered Public Accounting Firm Fees

 

We were not billed fees for any professional services by EisnerAmper LLP in 2012 or 2011.  The aggregate fees billed for professional services by Deloitte & Touche LLP in 2012 and 2011 for various services were:

 

Types of Fees

 

2012

 

2011

 

 

 

(in thousands)

 

Audit Fees (1)

 

$

208

 

$

322

 

Audit Related Fees

 

 

 

Tax Fees

 

 

 

All Other Fees

 

 

 

Total

 

$

208

 

$

322

 

 


(1)      Fees for services to perform an audit or review in accordance with generally accepted auditing standards and services that generally only our independent registered public accounting firm can reasonably provide, such as the audit of our consolidated financial statements, the review of the consolidated financial statements included in our quarterly reports on Form 10-Q, issuance of comfort letters and for services that are normally provided by independent registered public accounting firms in connection with statutory and regulatory engagements.  Our independent registered public accounting firm did not provide an annual attestation report on the effectiveness of the Company’s internal controls over financial reporting in 2012 and 2011 since it was not required.

 

52



Table of Contents

 

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)     (1) and (2) Financial Statements and Financial Statement Schedules

 

The following consolidated financial statements of EpiCept Corporation and subsidiaries, the notes thereto and the related report thereon of independent registered public accounting firm are filed under Item 8 of this report.

 

Reports of Independent Registered Public Accounting Firms

Consolidated Balance Sheets as of December 31, 2012 and 2011

Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2012 and 2011

Consolidated Statements of Stockholders’ Deficit for the Years Ended December 31, 2012 and 2011

Consolidated Statements of Cash Flows for the Years Ended December 31, 2012 and 2011

Notes to Consolidated Financial Statements

 

Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because they either are not required under the related instructions, are inapplicable, or the required information is shown in the consolidated financial statements or the notes thereto.

 

(a)     (3) See Exhibits Index.

 

(b)      Exhibits. See Item 15 (a) (3) above.

 

(c) Financial Statement Schedules

 

None.

 

53



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

EPICEPT CORPORATION

 

 

 

By:

/s/ Robert W. Cook

 

 

Robert W. Cook

 

 

Interim President and Chief Executive Officer

 

 

March 5, 2013

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated and on the dates indicated:

 

Signature

 

Title

 

Date

/s/ Robert W. Cook

 

Director, Interim President and Chief Executive Officer, Chief Financial Officer

 

March 5, 2013

Robert W. Cook

 

(Principal Executive, Financial and Accounting Officer)

 

 

 

 

 

 

 

/s/ Alan W. Dunton

 

Director

 

March 5, 2013

Alan W. Dunton

 

 

 

 

 

 

 

 

 

/s/ Robert G. Savage

 

Director

 

March 5, 2013

Robert G. Savage

 

 

 

 

 

 

 

 

 

/s/ Keith L. Brownlie

 

Director

 

March 5, 2013

Keith L. Brownlie

 

 

 

 

 

54




Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Epicept Corporation

Tarrytown, NY

 

We have audited the accompanying consolidated balance sheet of EpiCept Corporation and subsidiaries (the “Company”) as of December 31, 2012, and the related consolidated statements of operations and comprehensive loss, stockholders’ deficit, and cash flows for the year ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of EpiCept Corporation and subsidiaries as of December 31, 2012, and the results of their operations and their cash flows for the year ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s recurring losses from operations, insufficient working capital resources and stockholders’ deficit raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ EISNERAMPER LLP

 

Edison, New Jersey

 

March 5, 2013

 

F-2



Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Epicept Corporation

Tarrytown, NY

 

We have audited the accompanying consolidated balance sheet of EpiCept Corporation and subsidiaries (the “Company”) as of December 31, 2011, and the related consolidated statements of operations and comprehensive loss, stockholders’ deficit, and cash flows for the year ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of EpiCept Corporation and subsidiaries as of December 31, 2011, and the results of their operations and their cash flows for the year ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.