EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders,
CepTor Corporation (A Development Stage Company):
We have audited the accompanying balance sheet of CepTor Corporation (A
Development Stage Company) as of December 31, 2003 and 2002, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended and for the period from August 11, 1986 (date of inception) to December
31, 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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, based on our audit these financial statements referred to above
present fairly, in all material respects, the financial position of CepTor
Corporation (A Development Stage Company) as of December 31, 2003 and 2002, and
the results of their operations and their cash flows for the years then ended
and for the period from August 11, 1986 (date of inception) to December 31, 2003
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2 to
the financial statements, the Company has sustained reoccurring operating losses
and has an accumulated deficit of $915,846 as of December 31, 2003. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans regarding those matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
WithumSmith+Brown, P.C.
New Brunswick, New Jersey
July 26, 2004
A-1
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31,
------------
2003 2002
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 68,374 $ 131,440
Prepaid expenses 17,697 11,221
--------- ---------
Total current assets 86,071 142,661
Property and equipment, net 137 410
Deferred financing costs -- 41,637
--------- ---------
TOTAL ASSETS $ 86,208 $ 184,708
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses $ 35,517 $ 256,515
Current portion of long-term debt -- 150,000
--------- ---------
Total current liabilities 35,517 406,515
Long-term debt, less current maturities 275,000 125,000
Due to Xechem International, Inc. 50,000
Stockholders' Deficit
Common stock, $0.01; authorized 4,000,000 shares,
issued and outstanding 3,264,937 and 3,264,937
shares at December 31, 2003 and 2002, respectively 32,649 32,649
Additional paid-in capital 608,888 608,888
Deficit accumulated during the development stage (915,846) (988,344)
--------- ---------
Total stockholders' deficit (274,309) (346,807)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 86,208 $ 184,708
========= =========
A-2
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
CUMULATIVE
AUGUST 11,
FOR THE YEARS ENDING 1986 (DATE OF
DECEMBER 31, INCEPTION) TO
------------ DECEMBER 31,
2003 2002 2003
REVENUES:
Other income $ -- $ -- $ 75,349
Interest income 713 1,615 9,042
--------- --------- ---------
Total revenue 713 1,615 84,391
--------- --------- ---------
OPERATING EXPENSES:
Research and development (58,785) 272,956 587,737
General and administrative (67,507) 204,010 166,922
Financing costs 41,637 168,460 217,660
Interest expense 12,870 10,788 23,658
--------- --------- ---------
Total operating expenses (71,785) 656,214 995,977
--------- --------- ---------
NET INCOME (LOSS) $ 72,498 $(654,599) $(911,586)
========= ========= =========
A-3
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK
------------ DEFICIT
ACCUMULATED
ADDITIONAL DURING THE TOTAL
PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE EQUITY
------ ------ ------- ----- ------
BALANCE, AUGUST 11, 1986 AND DECEMBER 31, 1986 -- $ -- $ -- $ -- $ --
Issuance of common stock for cash, $0.0014 704,226 7,042 (6,042) 1,000
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1987 704,226 7,042 (6,042) -- 1,000
========== ========== ========== ========== ==========
BALANCE, DECEMBER 31, 1988 704,226 7,042 (6,042) -- 1,000
========== ========== ========== ========== ==========
BALANCE, DECEMBER 31, 1989 704,226 7,042 (6,042) -- 1,000
========== ========== ========== ========== ==========
BALANCE, DECEMBER 31, 1990 704,226 7,042 (6,042) -- 1,000
========== ========== ========== ========== ==========
BALANCE, DECEMBER 31, 1991 704,226 7,042 (6,042) -- 1,000
========== ========== ========== ========== ==========
Net loss (8,006) (8,006)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1992 704,226 7,042 (6,042) (8,006) (7,006)
========== ========== ========== ========== ==========
Net loss (1,169) (1,169)
Issuance of common stock for cash, $0.0001 147,887 1,479 (1,458) 21
Issuance of common stock in exchange for services
rendered. $ 0.0169 147,887 1,479 1,021 2,500
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1993 1,000,000 10,000 (6,479) (9,175) (5,654)
========== ========== ========== ========== ==========
Net income 10,222 10,222
Distribution to stockholders (4,260) (4,260)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1994 1,000,000 10,000 (6,479) (3,213) 308
========== ========== ========== ========== ==========
Net loss (1,342) (1,342)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995 1,000,000 10,000 (6,479) (4,555) (1,034)
========== ========== ========== ========== ==========
Net loss (8,727) (8,727)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996 1,000,000 10,000 (6,479) (13,282) (9,761)
========== ========== ========== ========== ==========
Net loss (3,975) (3,975)
Issued pursuant to acquisition, $4.00 50,000 500 199,500 200,000
Issuance of common stock for cash, $4.00 25,000 250 99,750 100,000
Capital contribution by stockholder 50,000 50,000
Expense pursuant to grant of stock option 20,356 20,356
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 1,075,000 10,750 363,127 (17,257) 356,620
========== ========== ========== ========== ==========
Net loss (21,102) (21,102)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 1,075,000 10,750 363,127 (38,359) 335,518
========== ========== ========== ========== ==========
Net loss (25,172) (25,172)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1999 1,075,000 10,750 363,127 (63,531) 310,346
========== ========== ========== ========== ==========
A-4
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK
------------ DEFICIT
ACCUMULATED
ADDITIONAL DURING THE TOTAL
PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE EQUITY
------ ------ ------- ----- ------
BALANCE, DECEMBER 31, 1999 (CONTINUED) 1,075,000 $ 10,750 $ 363,127 $ (63,531) $ 310,346
========== ========== ========== ========== ==========
Net loss (36,256) (36,256)
Issuance of common stock for cash, $3.7498 13,334 133 49,867 50,000
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2000 1,088,334 10,883 412,994 (99,787) 324,090
========== ========== ========== ========== ==========
Net loss (233,958) (233,958)
Issued pursuant to funding agreement, $0.10 907,674 9,077 81,690 90,767
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2001 1,996,008 19,960 494,684 (333,745) 180,899
========== ========== ========== ========== ==========
Net loss (654,599) (654,599)
Issued pursuant to funding agreement, $0.10 1,268,929 12,689 114,204 126,893
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2002 3,264,937 32,649 608,888 (988,344) (346,807)
========== ========== ========== ========== ==========
Net income 72,498 72,498
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2003 3,264,937 $ 32,649 $ 608,888 $ (915,846) $ (274,309)
========== ========== ========== ========== ==========
A-5
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
CUMULATIVE
AUGUST 11,
1986 (DATE OF
FOR THE YEARS ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31,
2003 2002 2003
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 72,498 $(654,599) $(911,586)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 273 273 2,237
Non-cash financing costs 41,637 168,460 217,660
Non-cash research expenses -- -- 200,000
Non-cash compensation expense -- -- 22,856
Changes in assets and liabilities:
Prepaid expenses (6,476) (11,221) (17,697)
Accounts payable and accrued expenses (220,998) 244,974 35,517
Net cash used in operating activities (113,066) (252,113) (451,013)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment -- -- (2,374)
Net cash used in investing activities -- -- (2,374)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuances of common stock -- -- 201,021
Distribution to shareholders -- -- (4,260)
Advance from Xechem International, Inc. 50,000 50,000
Proceeds from issuances of long-term debt -- 225,000 275,000
Net cash provided by financing activities 50,000 225,000 521,761
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (63,066) (27,113) 68,374
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 131,440 158,553 --
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 68,374 $ 131,440 $ 68,374
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During the year ended December 31, 2002 the
Company issued shares of common stock with a
fair value of $126,893 which was capitalized
as deferred financing costs.
A-6
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS:
CepTor Corporation (the Company) is engaged in the research and
development of therapeutic products for neuromuscular and
neurodegenerative diseases. Since its inception, the Company has
devoted its efforts and resources to the development of its receptor
mediated drug-targeting platform for neuromuscular and
neurodegenerative diseases which, to a large extent, is through the
inhibition of the protease calpain, and to raising the funds
necessary to continue this research.
The Company is a development stage company, which has a limited
history of operations and has not generated any revenues from
operations with the exception of funding received through grants and
collaborations. The Company has no products approved for commercial
sale at the present time. There can be no assurance that the Company
will be successful in obtaining regulatory approval for the sale of
existing or any future products or that any of the Company's
products will be commercially viable.
NOTE 2 - OPERATING AND LIQUIDITY DIFFICULTIES AND MANAGEMENT'S PLANS TO OVERCOME
THEM:
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of
business. The Company has experienced negative cash flows from
operations since inception and had an accumulated deficit at
December 31, 2003 of approximately $915,800. The Company has funded
its activities to date almost exclusively from debt and equity
financings.
The Company is in the development stage and has realized minimal
revenues to date. The Company will continue to require substantial
funds to continue research and development, including preclinical
studies and clinical trials of its product candidates, and to
commence sales and marketing efforts, if the FDA or other regulatory
approvals are obtained. Management's plans in order to meet its
operating cash flow requirements, include offerings of its preferred
stock, offerings of its common stock, as well as entering into
research collaborations through licensing opportunities, which will
provide funding for certain research and development projects.
In order to meet these cash needs, the Company has entered into the
following recent financing agreements:
(a) During April and May 2004, the Company entered into bridge debt
financing in the principal amount of $1,100,000. The intent of this
financing is to provide the Company with operating capital as it
evaluates and negotiates a subsequent round of capital infusion.
(See Note 14)
(b) The Company has entered into negotiations with various parties
in an effort to issue shares of its preferred or common stock
through a private placement. The Company anticipates raising
sufficient capital to fund its operations through its next phase of
development.
(c) The Company has also entered into negotiations with a
pharmaceutical company to grant them a license to its technology for
A-7
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - OPERATING AND LIQUIDITY DIFFICULTIES AND
MANAGEMENT'S PLANS TO OVERCOME THEM (CONTINUED):
a specific indication in a specific geographic area, in exchange for
an upfront equity investment in the Company as well as success-based
milestone payments and royalties on sale of the product.
While the Company believes that it will be successful in obtaining
the necessary financing to fund its operations, there are no
assurances that such additional funding will be achieved and that it
will succeed in its future operations. The financial statements do
not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts of liabilities
that might be necessary should the Company be unable to continue in
existence.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
From August 11, 1986 (inception) through December 31, 2003, the
Company has been primarily engaged in research and development of
its platform technology and raising capital to fund that research
and development. The accompanying financial statements have been
prepared in accordance with the provisions of Statement of Financial
Accounting Standard (SFAS) No. 7, "Accounting and Reporting by
Development Stage Enterprises." The Company operates as one business
segment.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is provided on the straight-line method
over the estimated useful lives of the assets, which is five years.
Gains and losses on depreciable assets retired or sold are
recognized in the statement of operations in the year of disposal.
Repairs and maintenance expenditures are expensed as incurred.
PATENTS
The Company expenses patent costs, including legal expenses, in the
period in which they are incurred. Patent expenses are included in
research and development expenses in the Company's statements of
operations. Patent costs incurred for products which have been
approved for marketing by the various regulatory organizations,
would be capitalized and amortized over its useful life, presumably
the life of the patent.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
The Company assesses the impairment of its property, equipment and
organizational costs under SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. A determination of impairment (if any) is made based on
estimates of future cash flows.
A-8
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FINANCIAL INSTRUMENTS
Financial instruments include cash, accounts payable, accrued
expenses, and long-term debt. The fair value of such instruments
approximates the carrying value. The amounts reported for financial
instruments are considered to be reasonable approximations of their
fair values, based on information available to management. The use
of different assumptions and/or estimation methodologies could have
a material effect on the estimated fair value amounts.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses research and development costs in the period in
which they are incurred. These costs consist of direct and indirect
costs associated with specific projects as well as fees paid to
various entities that perform research and clinical trial studies on
behalf of the Company.
During 1997, the Company issued 50,000 shares of its common stock
with a fair market value of $200,000, for the rights to certain
in-process research and development. Consequently, the $200,000 was
charged to research and development expense during that year.
DEFERRED FINANCING COSTS
Deferred financing costs, which represent costs associated with
obtaining long-term financing, are capitalized. The costs generally
represent the value of shares of common stock issued in connection
with the financing arrangements. The costs are amortized over the
life of the financing. Amortization expense relating to deferred
financing costs amounted to approximately $41,600, $168,500, and
$217,700 for the years ended December 31, 2003 and 2002 and for the
period from inception to December 31, 2003, respectively.
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," using an intrinsic value
approach to measure compensation expense, if any. Under this method,
compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise
price. Options issued to non-employees are accounted for in
accordance with SFAS 123, "Accounting for Stock-Based Compensation,"
and Emerging Issues Task Force Issue No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods and Services,"
using a fair value approach.
As of December 31, 2003 and 2002 no stock options were granted or
outstanding which would result in a difference between the results
of operations as reported and the pro forma amounts required by SFAS
123.
INCOME TAXES
Income taxes are accounted for under the asset and liability method
prescribed by SFAS No. 109, "Accounting for Income Taxes." Deferred
income taxes are recorded for temporary differences between
financial statement carrying amounts and the tax basis of assets and
liabilities. Deferred tax assets and liabilities reflect the tax
rates expected to be in effect for the years in which the
A-9
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
differences are expected to reverse. A valuation allowance is
provided if it is more likely than not that some, or all, of the
deferred tax asset will not be realized. The primary deferred tax
item is the Company's net operating losses.
CONCENTRATION OF CREDIT RISK
The Company maintains cash balances, at times, with financial
institutions in the amount which are more than amounts insured by
the Federal Deposit Insurance Corporation. Management monitors the
soundness of these institutions and considers the Company's risk
negligible.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
NOTE 4 - PROPERTY AND EQUIPMENT:
The costs and accumulated depreciation of property and equipment are
summarized as follows:
December 31,
------------
2003 2002
---- ----
Lab Equipment $ 2,374 $ 2,374
Less Accumulated Depreciation (2,237) (1,964)
---------- ----------
Property Equipment, Net $ 137 $ 410
========== ==========
Depreciation expense amounted to $273, $273 and $2,237 for the years
ended December 31, 2003 and 2002, and for the cumulative period of
inception to December 31, 2003, respectively.
NOTE 5 - DEFERRED FINANCING COSTS:
The costs and accumulated amortization of deferred financing costs
are summarized as follows:
2003 2002
---- ----
Deferred Financing Costs $ 217,660 $ 217,660
Amortization of Deferred Financing Costs (217,660) (176,023)
----------- ----------
Ending Balance, December 31 $ - $ 41,637
=========== ===========
Deferred financing costs amortization expense amounted to $41,637,
$175,063 and $217,660 for the years ended December 31, 2003, and
2002, and for the cumulative period of inception to December 31,
2003, respectively.
A-10
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
December 31,
------------
2003 2002
---- ----
Trade Accounts Payable $ 11,859 $ 11,352
Accrued Interest Expense 23,658 10,788
Accrued Compensation Expense - 234,375
---------- ----------
Total $ 35,517 $ 256,515
========== ==========
Pursuant to the terms of a certain Funding Agreement effective
December 17, 2001, management was to be paid, in the aggregate,
$225,000 per annum beginning on the effective date of the Funding
Agreement. Pursuant to the Agreement and Plan of Merger between the
Company and Xechem International, Inc., (see Note 13) all
compensation accrued pursuant to the Funding Agreement was reversed
and included as a reduction of research and development and general
and administrative expenses. The amount accrued for compensation
expense was approximately $220,100 and $225,000 for the years ended
December 31, 2003, and 2002, respectively, and the balance reversed
during the year ended December 31, 2003 was approximately $454,400.
NOTE 7 - RELATED PARTY:
Amounts included in long-term debt are due to stockholders of the
Company. (See Note 9)
NOTE 8 - INCOME TAXES:
The Company has not provided for income taxes since it has generated
net operating losses for current tax purposes, and all deferred tax
assets have been fully reserved. As of December 31, 2003, the
Company had net operating loss carryforwards (NOL) for federal
income tax purposes. As the Company continues to sell stock, it may
undergo ownership changes within the meaning of Section 382 of the
Internal Revenue Code of 1986 as amended. Internal Revenue Code
Section 382 places a limitation on the utilization of federal net
operating losses and other credit carryforwards when an ownership
change, as defined by the tax law, occurs. Generally, this occurs
when a greater than 50 percent change in ownership occurs.
Accordingly, the actual utilization of the net operating loss
carryforwards and other deferred tax assets for tax purposes may be
limited annually to the percentage of the fair market value of the
Company at the time of any such ownership changes.
As of December 31, 2003 and 2002, the Company had a deferred tax
asset of approximately $230,200 and $189,200, respectively,
primarily arising from its net operating losses. A full valuation
allowance has been provided because management believes it is more
likely than not, that it will not be realized.
Deferred income taxes consist of the following:
A-11
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES (CONTINUED):
December 31,
------------
2003 2002
---- ----
Deferred Tax Assets:
Net operating loss carryforwards $ 230,200 $ 189,200
Other timing difference - -
---------- ------------
Total Deferred Tax Assets 230,200 189,200
Valuation Allowance (230,200) (189,200)
----------- ------------
Net Deferred Income Taxes $ - $ -
=========== ============
NOTE 9 - LONG-TERM DEBT:
Long-term debt consists of the following:
December 31,
------------
2003 2002
---- ----
Unsecured, non-interest bearing, convertible loan,
pursuant to Funding Agreement dated December 17, 2001
and Funding and Stock Pledge Agreement dated March 6,
2002 (A) $ 150,000 $ 150,000
Convertible Note dated February 20, 2002, interest at
10% and due August 1, 2005 (B) 125,000 125,000
---------- -----------
Total Debt 275,000 275,000
Less Current Maturities - 150,000
---------- -----------
Long-Term Debt, Less Current Maturities $ 275,000 $ 125,000
========== ============
(A) In December 2001, the Company entered into a funding agreement
for up to $250,000 of unsecured non-interest bearing convertible
loans (the 2001 Loan). The lender was not able to require repayment
prior to the one-year anniversary unless certain events occurred.
Upon the one-year anniversary, the Company had the right to either
repay the 2001 Loan or convert it into shares of common stock as
defined in the funding agreement. In addition, the Company was
required to issue shares of common stock to the lender which would
result in the founders maintaining a 50.1 percent voting interest in
the Company. The fair value of these shares of approximately $90,800
was recorded as a deferred financing cost to be amortized over the
life of the 2001 Loan (see Note 5). The 2001 Loan also provided for
compensation amounts for key individuals (see Note 6).
In March 2002, the Company renegotiated the 2001 Loan to provide a
total of $375,000 of unsecured, non-interest bearing, convertible
loans (the 2002 Loan). The provision of the 2002 Loan remained
consistent with the 2001 Loan, however, the Company was required to
issue additional shares of common stock which would result in the
A-12
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - LONG-TERM DEBT (CONTINUED):
lender having a 65 percent ownership in the Company. The fair value
of these shares of approximately $110,900 was recorded as a deferred
financing cost to be amortized over the life of the 2002 Loan (see
Note 5).
In December 2003, the Company entered into a letter agreement in
contemplation of the Company's acquisition by Xechem International,
Inc. (Xechem) (see Note 13) with the note holder. This letter
agreement cancelled the Company's option to convert the 2001 and
2002 Loans into shares of common stock, released the Company of its
obligation to pay compensation to certain management in accordance
with the 2001 Loan (see Note 6), confirmed all obligations under the
2001 and 2002 Loans have been satisfied and fixed the interest rate
at 10 percent per annum and a maturity date of December 31, 2005.
(B) In February 2002, the Company issued $125,000 of Convertible
Notes (the February 2002 Notes) due August 1, 2005 bearing 10
percent interest accruing until the earlier of certain events as
defined in the agreement or maturity. The February 2002 Notes were
convertible at the option of the holder into common stock at any
time following a liquidity event. The shares to be issued upon
conversion into common stock was to be determined by dividing the
unpaid principal plus accrued interest by the offering price in an
initial public offering or a liquidity event as defined in the
agreement . The Company was required to issue warrants to purchase
additional shares of common stock in an amount equal to $62,500
divided by the per share price paid in a qualified financing as
defined in the agreement. The Company was also required to issue a
warrant convertible into 5,000 shares of common stock at $0.01 per
share. In addition, the Company issued 4.9 percent of the voting
equity of the Company which has been valued at approximately
$16,000, and is being amortized over the life of the February 2002
Note (see Note 5).
In December 2003, the Company entered into a letter agreement in
contemplation of the Company's acquisition by Xechem (see Note 13)
with the note holder. This letter agreement cancelled the holder's
option to convert the note into shares of common stock, cancelled
the outstanding warrants issued in conjunction with the original
agreement, granted an associated individual the right to receive
preferred stock of Xechem at the conversion rate set forth in the
Agreement and Plan of Merger for 5,000 shares of the Company (as if
the warrant had been exercised) and extended the maturity date of
the loan to December 31, 2005.
Aggregate maturities of long-term debt of the Company
due within the next two years ending December 31, are
as follows:
Year Amount
---- ------
2004 $ -
2005 and thereafter 275,000
---------
Total $ 275,000
==========
A-13
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY:
STOCK SPLIT
On September 4, 1997, the Company's board of directors declared a
7,042.25-for-one stock split, effected in the form of a stock
dividend, on the shares of the Company's common stock. Each
shareholder of record on September 11, 1997, received 7,042.25
additional shares of common stock for each share of common stock
held without the capital of the Company being increased or decreased
by the transfer of surplus to capital account or the transfer of
capital to surplus, or otherwise. Stockholders' equity reflects the
stock split by reclassifying from "Additional paid-in capital" to
"Common stock" an amount equal to the par value of the additional
shares arising from the stock split.
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED):
All references in the financial statements to the number of shares
outstanding, per share amounts, and stock option data of the
Company's common stock have been restated to reflect the effect of
the stock split for all periods presented.
WARRANTS
As of December 31, 2002, the Company had outstanding (i) warrants to
purchase $62,500 of its common stock upon the happening of certain
events and at an exercise price to be determined, and (ii) an
additional warrant to purchase 5,000 shares of common stock at a
purchase price of $0.01 per share.
In December 2003, these warrants were cancelled pursuant to the
Agreement and Plan of Merger with Xechem. (See Notes 9 and 13)
NOTE 11 - STOCK BASED COMPENSATION:
Effective June 1, 1997, the shareholders of the Company approved the
Long-Term Performance Plan (the Plan) which provides for, among
others, the grant of stock options exercisable for shares of common
stock which may be granted to employees, directors, consultants and
advisors. A total of 150,000 shares of common stock have been
reserved for issuance under the Plan, plus 15% of the amount of
issued and outstanding shares of the Company in excess of 1,000,000
outstanding from time to time.
The Plan is administered by the Compensation Committee (the
Committee). The Committee is authorized to select those individuals
to whom options are to be granted and to determine the number of
shares to be subject to, and the terms and conditions of, the
options. The Committee is also authorized to prescribe, amend and
rescind terms relating to options granted under the Plan. Generally,
the interpretation and construction of any provision of the Plan or
any options granted hereunder is within the discretion of the
Committee.
The Plan provides that options may or may not be incentive stock
options (ISOs) within the meaning of Section 422 of the Internal
Revenue Code. Only employees of the Company are eligible to receive
ISOs, while employees and non-employee directors, advisors and
consultants are eligible to receive options which are not ISOs, i.e.
non-qualified options." The options granted by the Board in
connection with its adoption of the Plans are non-qualified options.
A-14
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - STOCK BASED COMPENSATION (CONTINUED):
There are no stock options outstanding at December 31, 2003.
During the years ended December 31, 2003 and 2002, no amounts were
charged to compensation expense with respect to options granted and
for the cumulative period of inception to December 31, 2003,
approximately $20,400 was charged to expense with respect to options
granted.
NOTE 12 - COLLABORATIVE AGREEMENTS:
EVALUATION AND TESTING AGREEMENT
Effective September 15, 2003, as amended, the Company entered into
an Evaluation Testing Agreement with the Research Foundation of the
State University of New York for the laboratory of Marie
Badalamente, Ph.D. (the "Badalamente Agreement"), to perform certain
studies in the area of muscular dystrophy. The Badalamente Agreement
is for a term of one year and obligates the Company to pay four
quarterly payments of $19,945.
OTHER AGREEMENTS
From time to time, the Company enters into research collaboration,
with the Company providing the collaborator with research material
and the collaborator providing the research results and data to the
Company. These research collaborations do not typically provide for
payments from the Company, but in certain instances minimal amounts
may be exchanged to offset costs.
NOTE 13 - AGREEMENT AND PLAN OF MERGER WITH XECHEM INTERNATIONAL, INC.:
Pursuant to an Agreement and Plan of Merger entered into by the
Company, the prior shareholders of the Company and Xechem
International, Inc. ("Xechem"), as of December 23, 2003 (the "Merger
Agreement"), Xechem agreed to acquire all of the shares of common
stock of the Company in exchange for 6,000 Class C Series 7
Preferred Stock of Xechem. In addition the Merger Agreement provided
for funding of up to $300,000 to the Company of which $50,000 was
advanced prior to December 31, 2003. (See Note 14)
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED):
The following events occurred subsequent to December 31, 2003:
(a) XECHEM INTERNATIONAL, INC. TRANSACTIONS
MERGER
On January 27, 2004, the former shareholders of the Company received
6,000 Class C Series 7 Preferred Stock of Xechem International, Inc.
(Xechem) in connection with the merger of Ceptor into a wholly-owned
subsidiary of Xechem. The new Class C Series 7 Preferred Stock has a
$6,000,000 liquidation preference and is convertible into 30,000,000
shares of common stock of Xechem at the option of the holders of the
Class C Series 7 Preferred Stock, together with piggyback
registration rights for the underlying common shares. Xechem also
agreed to provide a contingent award of $1,000,000 of its stock
(payable in Xechem stock valued at the lesser of $0.20 per share or
market value) to certain former Ceptor shareholders upon the
A-15
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED):
achievement of a designated milestone for each product developed
with Ceptor technology. Xechem is a holding company, which owns all
of the capital stock of Xechem, Inc, a development stage
biopharmaceutical company currently engaged in the research,
development and limited production of niche generic and proprietary
drugs from natural sources.
The merger was accomplished through a reverse triangular merger
whereby Ceptor Acquisition, Inc., a wholly owned subsidiary of
Xechem, with 100 shares issued and outstanding, was merged into the
Company and the Company was the surviving entity.
XECHEM AGREEMENT
On March 31, 2004, the Company entered into an agreement with Xechem
and William Pursley ("Pursley"), intended to provide a framework for
independent financing of the Company (the "Xechem Agreement"). The
Xechem Agreement calls for Pursley to act full time as chief
executive officer of the Company pursuant to a two-year term,
subject to automatic renewal absent delivery of non-renewal. It
calls for base compensation of $330,000 per annum and a five year
option to purchase 43,000,000 shares of common stock of Xechem at a
purchase price of $.0025 per share subject to vesting provisions
stipulated in the option agreement. As part of the Xechem Agreement,
Mr. Pursley has resigned from his positions as president, chief
operating officer, vice chairman and as a member of the Board of
Directors of Xechem.
The Xechem Agreement contemplates that the Company will take the
necessary steps to effect a stock split so that after the split,
Xechem will own 1,406,250 shares of the Company's $0.00001 per share
par value common stock, constituting all of its then issued and
outstanding stock. The Company has further agreed to issue to its
management team members and founders, options to purchase in the
aggregate 1,093,750 shares of common stock, fully vested and
exercisable at par value for a period of 10 years from the date of
grant. These numbers are subject to proportionate increase or
decrease in the event the Subsequent Round of Capital Infusion is
done with a greater or lesser, respectively, valuation of the
Company.
The Xechem Agreement contemplates that the Company will seek to
obtain bridge funding, which has been completed (see "Bridge Loan"
below), to be followed by a subsequent round of capital infusion
(the "Subsequent Round of Capital Infusion"). Xechem has funded
approximately $350,300 of capital contributions in the form of
direct funding to the Company or payments to vendors on behalf of
the Company, as of June 30, 2004.
In addition, Xechem will be entitled to a 2% royalty on sales of the
Company's products which use intellectual property owned by the
Company on March 31, 2004.
The Xechem Agreement provides that Xechem will sell back to the
Company over time up to 625,000 shares of its common stock in the
Company (subject to proportionate increase or decrease based on the
eventual valuation of the Subsequent Round of Capital Infusion) for
an aggregate of $2,000,000, payable from 25% of the proceeds of
future financing received by the Company other than the bridge
financing. (The Xechem Agreement was subsequently amended to, among
other things, reduce the amount payable from proceeds to 10%). At
the end of two years if the full $2,000,000 has not
A-16
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED):
been paid out to Xechem, Xechem shall have the right to put the
remaining portion of the shares held for sale back to the Company to
cover the deficiency.
In order to induce the funding of the bridge loan, Xechem has agreed
that in the event such a loan is funded and is not paid off when
due, it will permit the bridge lender to convert the unpaid
indebtedness owing with respect to the bridge loan into shares of
Xechem common stock at the lesser of seven cents per share or
seventy five percent (75%) of the average closing price of Xechem's
common stock for the ten trading days preceding the date of funding
of the bridge loan. Xechem has been granted piggyback registration
rights with respect to the shares in the Company it may hold from
time to time, subject to its agreement to lock up the sale of all
such shares on the open market for a period of 180 days following
the initial registration of any the Company's shares pursuant to a
registration statement, and one-half of its shares for an additional
180-day period.
(b) CONSULTING AGREEMENTS
Pursuant to the Agreement and Plan of Merger, Xechem entered into
consulting agreements with Drs. Alfred Stracher and Leo Kesner, the
founding scientists of the Company, for a period of sixty months. In
consideration for the services to be rendered, Xechem was obligated
to pay a total of $276,000, plus expenses as allowed for in the
consulting agreement. In February 2004, in conjunction with the
Xechem Agreement, the Company entered into consulting agreements
with Drs. Stracher and Kesner to replace their consulting agreements
with Xechem with ones of similar terms with the Company. The
consulting agreements are for a period of sixty (60) months
commencing February 1, 2004 and provide for a monthly fee of $5,000
each plus allowable expenses and terminated the consulting
agreements with Xechem.
(c) FACILITY LEASE
The Company leases office space pursuant to a sublease accounted for
as an operating lease. The sublease, effective March 17, 2004,
terminates with the underlying primary lease on December 31, 2006.
Rental commitments for the next three years, is as follows:
2004 $ 58,600
2005 75,800
2006 78,100
----------
TOTAL $ 212,500
===========
The sublease also obligates the Company to reimburse the sublandlord
for certain common area charges levied by the building's landlord.
(d) BRIDGE LOANS
Pursuant to the terms of the Spinoff Agreement and actions taken
thereafter, the Company entered into a selling agreement dated April
23, 2004 providing for the private placement of $1,100,000 of 8%
convertible notes due on the earlier of October 22, 2004 or the date
of closing on the next financing of $1,000,000 or more by the
Company (the "Bridge Loans"), secured by certain rights to put
Bridge Loans to Xechem for Xechem shares in certain circumstances.
Purchasers of the Bridge Loans received 220,000 shares of common
stock of the Company as additional consideration. The selling agent
received 18,000 shares of common stock of the Company, plus
commissions in the amount of $110,000 and a non-accountable expense
allowance in the amount of $22,000, in connection with its services.
The Bridge Loan offering was completed in May 2004.
The Company recorded a $506,600 discount, representing an allocation
of the proceeds of the Bridge Loans based on the relative fair value
of common stock and the Bridge Loans issued to the Bridge Loan
participants, which will be amortized over the six month period from
May 2004 through October 2004 (the term of the Bridge Loans). For
the nine month period ended September 30, 2004, the Company
amortized approximately $422,100 of the discount to interest
expense.
The Company was not able to repay the Bridge Loans on October 22,
2004, therefore pursuant to the terms of the Bridge Loans, the
A-17
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED):
Bridge Loan holders have the option to convert their notes into
shares of common stock of Xechem at the lower of $0.07 per share or
75% of the market price of the previous 20 market days prior to
conversion, a portion of which will be issued by Xechem and the
remainder from Mr. Pursley's personal Xechem option holdings. As of
November 17, 2004 the closing price of Xechem common stock (XKEM.OB)
was approximately $0.02 per share.
Pursuant to an offer dated October 22, 2004 (the "Exchange Offer")
as amended November 15, 2004 the Company offered to exchange with
its holders of outstanding Bridge Loans and other debt certain newly
issued replacement notes due December 31, 2005 convertible into
shares of the common stock of the entity to which the Company merged
into, effective December 9, 2004, at $1.25 per share, to be issued
in amounts equal to the outstanding principal under the notes
cancelled, plus accrued interest. See Note 14 - Agreement of Merger
and Plan of Reorganization and Private Placement.
During the nine month period ended September 30, 2004, the Company
accrued contractual interest expense of approximately $36,600,
related to the Bridge Loans.
(e) EMPLOYMENT AGREEMENTS
The Company entered into employment agreement with certain
executives commencing March 31, 2004 and April 26, 2004 (the
"Executives") which provide each Executive with a base salary for an
initial term of two years, renewable annually thereafter. The
Company is obligated to pay approximately $555,000, $770,000 and
$215,000 for the years ended December 31, 2004, 2005 and 2006,
respectively. If Executive's employment with the Company is
terminated without cause or for good reason, as those terms are
defined in the employment agreement, the Company is obligated to pay
Executive his current base salary for an additional twelve months
and continue to pay for his benefits for the same period. If
Executive's employment is terminated due to total disability, the
Company is obligated to continue to pay his current base salary for
an additional thirty-six months and continue to pay for his benefits
for the same period. If Executive's employment is terminated due to
his death, the Company is obligated to continue to pay his current
base salary for an additional three months and continue to pay for
his benefits for the next twelve months. In addition, the employment
agreement contains a confidentiality provision as well as a covenant
not to compete provision for the period of his employment plus and
additional twelve months.
A-18
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED):
(f) STOCKHOLDERS' EQUITY
STOCK SPLIT
In April 2004, the Company's board of directors declared an
18,000-for-one stock split, effected in the form of a stock
dividend, on the shares of the Company's common stock. Each
shareholder of record received 18,000 additional shares of common
stock for each share of common stock held without the capital of the
Company being increased or decreased by the transfer of surplus to
capital account or the transfer of capital to surplus, or otherwise.
Stockholders' equity reflects the stock split by reclassifying from
"Additional paid-in capital" to "Common stock" an amount equal to
the par value of the additional shares arising from the stock split.
As the result of the stock split, the shares held by Xechem
increased from 100 shares to 1,800,000 shares and the shares held in
reserve for options to be granted to the founders which upon
exercise would be 1,400,000 shares.
In conjunction with the stock split, the Company's Certificate of
Incorporation was amended to increase the authorized capital stock
to 50,000,000 shares, of which 40,000,000 shares were designated as
common stock, $0.00001 par value per share and 10,000,000 shares
were designated as blank check preferred stock, $0.00001 par value
per share.
FOUNDERS PLAN
Pursuant to the grant of the option to Mr. Pursley contained in the
Xechem Agreement, the Company's Board of Directors has approved the
Ceptor Founders' Plan, effective June 1, 2004 (the "Founders'
Plan"). The maximum number of shares that may be issued under the
Founders Plan is 1,400,000 shares. Terms of the Founders' Plan
provide for the grant of options to purchase shares of the Company's
common stock, at its par value, to the initial founders of the
Company (the "Founders" and each a "Founder") and will be
administered by the Board of Directors or the Compensation Committee
of the Company. Upon the happening of certain events described in
the Founders' Plan, such as the cessation of employment by a
participant following an award, shares issued or issuable to
Founders' Plan participants may revert to William Pursley and may be
re-designated or re-issued in his sole discretion. Pursuant to the
terms of the Founders' Plan, restrictions on holders of shares
acquired through the Founders' Plan shall lapse 10% on the six month
anniversary following issuance, an additional 10% six months
thereafter, and the balance upon initiation of a Phase III clinical
trial for the Company's "Myodor" technology for muscular dystrophy,
provided such date is not less than six months following the date of
award.
A-19
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED):
On June 1, 2004 the Compensation Committee granted a ten-year
non-qualified stock option to purchase, at the exercise price of
$0.00001 per share an aggregate of 1,400,000 shares to the Founders'
group (11 persons).
2004 INCENTIVE STOCK PLAN
The 2004 Incentive Stock Plan (the "2004 Plan") was approved by the
Board of Directors and the stockholders of the Company on May 31,
2004 and 606,705 shares of the authorized and un-issued shares of
common stock were reserved for issuance under the 2004 Plan. The
purpose of the 2004 Plan is to provide an incentive to retain in the
employ of and as directors, officers, consultants, advisors and
employees of the Company, persons of training, experience and
ability, to attract new directors, officers, consultants, advisors
and employees whose services are considered valuable, to encourage
the sense of proprietorship and to stimulate the active interest of
such persons into the development and financial success of the
Company. Under the 2004 Plan the Company is authorized to issue
incentive stock options intended to qualify under Section 422 of the
Internal Revenue Code, non-qualified stock options, and restricted
stock. The 2004 Plan shall be administered by the Board of Directors
or the Compensation Committee of the Company. No awards have been
granted to any participant.
(g) AGREEMENT OF MERGER AND PLAN OF REORGANIZATION AND PRIVATE
PLACEMENT
On December 8, 2004, Medallion Crest Management, Inc., a Florida
corporation ("Medallion"), CepTor Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Medallion ("Acquisition
Corp."), and the Company, entered into an Agreement of Merger and
Plan of Reorganization (the "Merger Agreement"). Pursuant to the
Merger Agreement, on December 8, 2004 the Company filed a
certificate of merger to be merged with Acquisition Corp., with the
Company surviving as a wholly-owned subsidiary of Medallion (the
"Merger"). The Company filed with the Florida Department of State
Articles of Amendment to the Articles of Incorporation of the
Company to change its name to CepTor Corporation ("New CepTor"), and
to authorize the issuance of up to 300 shares of its Series A
Convertible Preferred Stock (the "Preferred Stock").
Pursuant to the Merger, Medallion acquired all of the outstanding
capital stock of the Company in exchange for 5,278,068 shares of New
CepTor's common stock, par value $0.0001 per share (the "Common
Stock"), and assumption of certain obligations of the Company. As a
result, the Company's former stockholders became the majority
stockholders of New CepTor. The Merger is being accounted for as a
"reverse merger," since the former stockholders of the Company own a
majority of the outstanding shares of New CepTor's Common Stock
immediately following the Merger.
New CepTor intends to carry on the Company's business as its sole
line of business and will remain in Hunt Valley, Maryland and
continue as a development-stage bio-pharmaceutical company focusing
on therapeutic products for neuromuscular and neurodegenerative
diseases.
Pursuant to an offer dated October 22, 2004 (the "Exchange Offer")
as amended November 15, 2004, made by New CepTor to the Bridge Loans
and other debt holders of the Company, on December 9, 2004 New
CepTor issued $1,100,215.30 of its Convertible Notes due December
31, 2005 which are convertible into shares of New CepTor's Common
Stock at $1.25 per share in amounts equal to the outstanding
principal under the notes cancelled, plus accrued interest. The
Exchange Offer provides that holders of outstanding Bridge Loans who
received in connection with the original issuance of the Bridge
Loans, a total of 150,000 shares of the Company's common stock which
converted into a total of up to 300,000 shares of New CepTor Common
Stock upon effectiveness of the Merger. The remaining $350,000 of
Bridge Loan principal which did not accept the Exchange Offer was
repaid with interest through the date of payment. In addition, the
70,000 shares of common stock of the Company these Bridge Loan
holders received in connection with the issuance of the original
Bridge Loans, has converted into 151,597 shares of common stock of
New CepTor upon effectiveness of the Merger.
A-20
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED):
In connection with the Merger New CepTor adopted the Company's
Founders' Stock Plan and 2004 Incentive Plan. On December 9, 2004
the Company issued to CepTor employees and others 3,031,943 shares
of restricted Common Stock under the Founders' Stock Plan. Under the
2004 Incentive Stock Plan, officers, consultants, third-party
collaborators, and employees of the Company or its subsidiaries may
be granted rights in the form of options or shares or restricted
stock for up to a maximum of 2,268,377 shares of Common Stock.
On December 9, 2004 (the "Closing Date"), New CepTor sold 103.62
units (the "Units") to 42 investors pursuant to a Confidential
Private Placement Memorandum dated October 22, 2004 as supplemented
November 16, 2004, (the "Memorandum"), each Unit consisting of one
share of Preferred Stock and a warrant to purchase Common Stock (the
"Offering"). Each share of Preferred Stock is convertible into
10,000 shares of Common Stock and each warrant entitles the holder
to purchase 5,000 shares of Common Stock for $2.50 per share. The
Units were offered by Brookshire Securities Corporation (the
"Placement Agent") pursuant to a Placement Agent Agreement with the
Company dated October 22, 2004. Under the terms of the Placement
Agent Agreement, the Placement Agent is entitled to a selling
commission of 8%, plus a 2% non-accountable expense reimbursement
payable from the proceeds of the Offering plus 150,000 shares of New
CepTor and warrants to purchase 10% of any Common Stock sold. The
Company realized gross proceeds from the Offering of $2,590,500.00,
before payment of Commissions and expenses of the Offering.
(h) LEGAL PROCEEDINGS
During June 2004, the Company's management was introduced to a
financial intermediary, as a means to locate a candidate for a
public transaction and to seek funding. The Company executed a
"Non-Binding Letter of Intent" for the purposes of structuring a
potential transaction. In late September 2004 ,the Company advised
the financial intermediary that it was not prepared to proceed with
the proposed transaction. The financial intermediary thereafter on
October 8, 2004 commenced an action in the Northern District of
California, entitled Bluewater Partners S.A. v. CepTor Corporation
(Case No. C 04 4277 JCS) alleging, among other things, that the
Company abandoned its obligations to close a transaction on the eve
of a closing, that it had breached its agreements, promissory
estoppel, breach of implied covenant of good faith and fair dealing,
Quantum Meruit, unjust enrichment; and seeking declaratory relief,
and damages in the amount of $3.6 million. On November 12, 2004, the
parties entered into a written proposal outlining material terms for
permanent dismissal of the action providing, among other things, for
immediate withdrawal, without prejudice, of the complaint, exchanges
of mutual releases, transfer of 50,000 shares of Company
unrestricted Common Stock, issuance of 125,000 shares of restricted
Company Common Stock, and payment of $25,000 in full settlement of
the action. On November 12, 2004 the Complaint was withdrawn without
prejudice. The parties are continuing to negotiate the terms of
final settlement. CepTor believes that the action is substantially
without merit and in the event that the parties are unable to agree
on a definitive resolution, intends to defend vigorously the
allegations of the complaint and move for dismissal.
A-21
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
SEPTEMBER 30, 2004
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 457,523
Prepaid expenses 219,293
------------
Total current assets 676,816
Property and equipment, net 61,320
Debt issue costs 37,000
Other assets 18,511
------------
TOTAL ASSETS $ 793,647
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 299,726
Bridge loan financing, net of debt discount of $91,666 1,008,334
Common stock subject to repurchase under put right 2,000,000
------------
Total current liabilities 3,308,060
Long-term debt 275,000
Due to Xechem International, Inc. 350,311
------------
Total liabilities 3,933,371
Stockholders' deficiency:
Preferred stock, $0.00001 par value; authorized 10,000,000
shares; none issued
Common stock, $0.00001 par value; authorized 40,000,000
shares; issued and outstanding 1,537,697, net of
756,303 subject to put right 15
Additional paid-in capital 6,411,716
Deficit accumulated during the development stage (9,551,455)
------------
Total stockholders' deficiency (3,139,724)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 793,647
============
A-22
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
AUGUST 11, 1986
(DATE OF
FOR THE THREE-MONTH PERIODS FOR THE NINE-MONTH PERIODS INCEPTION) TO
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 SEPTEMBER 30,
2004 2003 2004 2003 2004
---- ---- ---- ---- ----
REVENUES:
Other income $ - $ - $ $ $ 75,349
Interest income 96 195 9,237
------------- ---------- ------------- ----------- --------------
Total revenue 96 - 195 - 84,586
------------- ---------- ------------- ----------- --------------
OPERATING EXPENSES:
Research and development 501,531 68,425 785,810 181,120 1,373,547
In-process research and development - - 5,034,309 - 5,034,309
General and administrative 438,088 18,750 948,481 50,785 1,115,403
Stock-related compensation pursuant
to spinoff agreement - 2,082,500 2,082,500
Interest expense 415,163 4,268 700,550 42,631 941,868
------------- ---------- ------------- ----------- --------------
Total operating expenses 1,354,782 91,443 9,551,650 274,536 10,547,627
------------- ---------- ------------- ----------- --------------
NET LOSS $(1,354,686) $(91,443) $(9,551,455) $(274,536) $(10,463,041)
=========== ======== =========== ========= ============
A-23
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
DEFICIT
COMMON STOCK ACCUMULATED
--------------------- ADDITIONAL DURING THE TOTAL
PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE DEFICIENCY
------ ------ ------- ----- ----------
BALANCE, JANUARY 1, 2004 3,264,937 $ 32,649 $ 608,888 $ (915,846) $ (274,309)
Acquisition by Xechem International, Inc. (3,264,937) (32,649) (608,888) 915,846 274,309
Common stock issued January 2004 pursuant to Xechem
merger ($2.64) 1,800,000 18 4,759,982 4,760,000
Common stock subject to repurchase under put right (756,303) (8) (1,999,992) (2,000,000)
Issuance of stock option pursuant to spinoff agreement 2,082,500 2,082,500
Common stock issued May 2004 in connection with
bridge loans ($2.13) 238,000 2 639,998 640,000
Common stock issued September 2004,
net of offering expenses of $70,769 ($3.91) 256,000 3 929,228 929,231
Net loss (9,551,455) (9,551,455)
----------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 2004 1,537,697 $ 15 $ 6,411,716 $(9,551,455) $(3,139,724)
=========== =========== =========== =========== ===========
A-24
CEPTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(UNAUDITED)
AUGUST 11,
FOR THE NINE-MONTH PERIODS 1986 ((DATE OF
ENDED SEPTEMBER 30 INCEPTION) TO
----------------------- SEPTEMBER 30
2004 2003 2004
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,551,455) $ (274,536) $(10,463,041)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 7,586 205 9,823
Write-off of in-process research and development 5,034,309 5,234,309
Charge for stock option issued pursuant to spinoff
agreement 2,082,500 2,082,500
Non-cash compensation expense 22,856
Non-cash interest expense 643,334 33,257 860,994
Changes in assets and liabilities:
Prepaid expenses (201,596) 11,221 (219,293)
Other assets (18,511) (18,511)
Accounts payable and accrued expenses 264,209 166,772 299,726
----------- ------------ ------------
Net cash used in operating activities (1,739,624) (63,081) (2,190,637)
------------ ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (68,769) (71,143)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuances of common stock, net 929,231 1,130,252
Distribution to shareholders (4,260)
Advance from Xechem International, Inc. 300,311 350,311
Proceeds from issuances of long-term debt 1,100,000 1,375,000
Expenses of issuances of long-term debt (132,000) (132,000)
----------- ------------ ------------
Net cash provided by financing activities 2,197,542 2,719,303
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 389,149 (63,081) 457,523
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 68,374 131,440
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 457,523 $ 68,359 $ 457,523
============ ============ ============
SUPPLEMENTAL DISCLOSURE
Non-Cash Financing Activity:
Issued 238,000 shares of common stock to bridge loan
investors and placement agent $ 640,000 $ 640,000
============ ============
A-25
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 1 - THE COMPANY
ORGANIZATION
The financial statements presented are those of CepTor Corporation (the
"Company"), incorporated in August 1986 in the state of Delaware. The
accompanying financial statements have been prepared in accordance with the
provisions of Statement of Financial Accounting Standard (SFAS) No. 7,
"Accounting and Reporting by Development Stage Enterprises." The Company
operates as one business segment.
The Company's net loss from inception through September 30, 2004 was
approximately $10,463,000 but its deficit accumulated during its development
stage as reported on the Company's Balance Sheet at September 30, 2004 amounted
to approximately $9,551,500. The difference is a result of the acquisition of
the Company by Xechem International, Inc. ("Xechem") and restatement of the
Company's assets and liabilities to fair value, which resulted in the Company's
accumulated deficit, net of distributions, from inception through December 31,
2003 (the date of merger for financial reporting purposes) of approximately
$911,500 being reclassified to additional paid-in-capital.
NATURE OF BUSINESS
CepTor Corporation is a biopharmaceutical company engaged in the research and
development of therapeutic products for neuromuscular, neurodegenerative and
other diseases with a focus on orphan diseases (a disease that affects less than
200,000 people). Since its inception, the Company has devoted its efforts and
resources to the development of its receptor mediated drug-targeting platform
for neuromuscular and neurodegenerative diseases, and to raising the funds
necessary to continue this research.
The Company is a development stage company, which has a limited history of
operations and has not generated any revenues from operations with the exception
of funding received through grants and collaborations. The Company has no
products approved for commercial sale at the present time.
As a result of the Company's net losses for the year ended December 31, 2003 and
accumulated deficit since inception, the Company's independent registered public
accounting firm, in their report on our financial statements for the year ended
December 31, 2003, included an explanatory paragraph indicating there is
substantial doubt about our ability to continue as a going concern. This
condition has not changed as of September 30, 2004. The Company's research and
development activities and the time and money required to determine the
commercial value and marketability of its proposed products cannot be estimated
with precision. The Company expects research and development activities to
continue to require significant cost expenditures for an indefinite period in
the future. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts of liabilities that might be necessary should the Company be unable to
continue in existence.
The Company received $1,100,000 during April and May, 2004 from the issuances of
bridge loans, described in NOTE 4, $250,000 from its parent company, Xechem (in
addition to approximately $50,000 in expenses incurred by the Company but paid
by Xechem) (see "Acquisition of CepTor" below) and approximately $929,200, net
of expenses, from the purchase of shares of common stock of the Company pursuant
A-26
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
to an exclusive license entered into by the Company and JCR Pharmaceuticals Co.,
Ltd. (see NOTE 6). The Company is currently seeking additional capital,
collaborative partners, joint ventures and strategic alliance agreements within
the United States and abroad.
The Company's planned activities will require the addition of new personnel,
including management, and personnel with expertise in areas such as preclinical
testing, clinical trial design and management, regulatory affairs, manufacturing
and marketing. Further, if the Company receives regulatory approval for any of
its products in the United States or elsewhere, it will incur substantial
expenditures to develop manufacturing, sales and marketing capabilities and/or
subcontract or joint venture these activities with others. There can be no
assurance that the Company will ever recognize revenue or profit from any such
products. In addition, the Company may encounter unanticipated problems,
including developmental, regulatory, manufacturing or marketing difficulties,
some of which may be beyond its ability to resolve. The Company may lack the
capacity to produce its products in-house and there can be no assurances that it
will be able to locate suitable contract manufacturers or be able to have them
produce products at satisfactory prices.
The Company has expended and plans to expend substantial funds, if available, in
connection with the research and development of its proposed products. As a
result of these expenditures, the Company anticipates that losses will continue
for the foreseeable future.
There can be no assurance that management's plans to obtain additional financing
to fund operations will be successful. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event that we cannot continue in existence.
ACQUISITION OF CEPTOR
On January 27, 2004, the former shareholders of the Company received shares of
preferred stock of Xechem International, Inc., convertible into 30,000,000
shares of common stock of Xechem, in connection with the merger of the Company
into a wholly-owned subsidiary of Xechem. For financial reporting purposes, the
effective date of the merger was considered to be January 1, 2004. The results
of operations from January 1 to January 27, 2004 were not significant. The
merger was accomplished through a reverse triangular merger whereby Ceptor
Acquisition, Inc., a wholly owned subsidiary of Xechem, was merged into the
Company and the Company was the surviving entity. (See NOTE 3)
Effective with being acquired by Xechem, the Company's balance sheet was
adjusted to record existing assets and liabilities at fair value. Fair value was
generally assigned to these assets based on the net present value of the
projected cash flows expected to be generated by those assets. Significant
assumptions underlying these cash flows include our assessment of the timing and
our ability to successfully complete the in-process research and development
projects, and interest rates used to discount these cash flows to their present
value. In accordance with Emerging Issues Task Force ("EITF") Issue No. 99-12,
"Determination of the Measurement Date for the Market Price of an Acquirer's
Securities Issued in a Business Combination," the Company determined the fair
value of the consideration paid in the transaction was the average closing price
of Xechem's common stock for a reasonable period of time before and after the
terms of the acquisition were agreed to and announced. The
A-27
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
fair value of the consideration determined under this method amounted to
$4,760,000. In allocating the consideration paid, the fair value of the recorded
assets and liabilities were determined to equal the carrying value with the
excess value assigned to the in-process research and development which
represents the value assigned to the acquired intangible assets which had not
reached technological feasibility and for which there is no alternative use.
The Company recorded approximately $5,034,000 of in-process research and
development consisting of granted patents and pending patent applications,
which has been expensed as in-process research and development costs.
The following table summarizes the fair value of the assets acquired and
liabilities assumed in the acquisition:
Current and Other Assets $ 86,000
In Process Research and Development 5,034,000
------------
Total assets acquired 5,120,000
Current Liabilities 35,000
Notes and Advances Payable 325,000
------------
Net assets acquired $ 4,760,000
============
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited financial statements included herein have been prepared by the
Company, without audit. The financial statements reflect all adjustments that
are, in the opinion of management, necessary to fairly present such information.
All such adjustments are of a normal recurring nature. Although the Company
believes that the disclosures are adequate to make the information presented not
misleading, certain information and footnote disclosures, including a
description of significant accounting policies normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America, have been condensed or omitted.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's December 31, 2003
Financial Statements included elsewhere in this 8-K. The results of operations
for interim periods are not necessarily indicative of the results for any
subsequent quarter or the entire fiscal year ending December 31, 2004.
A-28
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
The Company is a development stage enterprise, and accordingly, certain
additional financial information is required to be included in the financial
statements from the Company's inception to the date of its current balance
sheet. The Company has included the Company's cumulative statement of operations
from August 11, 1986 (date of inception) to September 30, 2004.
STOCK BASED COMPENSATION
As permitted under SFAS 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure," which amended SFAS No. 123 "Accounting for
Stock-Based Compensation," the Company has elected to continue to follow the
intrinsic value method in accounting for its stock-based compensation
arrangements as defined by Accounting Principles Board Opinion ("APB") No. 25
"Accounting for Stock Issued to Employees," and related interpretations
including Financial Accounting Standards Board Interpretation No. 44 "Accounting
for Certain Transactions Involving Stock Compensation," an interpretation of APB
No. 25.
The Company recorded compensation expense of $2,082,500 as a result of the grant
of the option to purchase 1,400,000 shares of common stock of the Company, with
an exercise price of par value of the underlying common stock ($0.00001 per
share) pursuant to the Spinoff Agreement. The amount of compensation expense
recognized was determined by applying the percent that these shares of common
stock, if issued, represent of the fully diluted share outstanding (43.75%), to
the fair value of the net assets acquired by Xechem in its acquisition of the
Company ($4,760,000). (See NOTE 3) If the Company had used an option pricing
model to calculate compensation expense for these options pursuant to SFAS No.
123, the compensation expense would have been approximately $7.0 million, and
amortized over the period April 2004 through December 2004.
DEBT ISSUE COSTS
Pursuant to the Bridge Loans entered into during April 2004 and May 2004, the
Company paid the placement agent $132,000 in commissions and non-accountable
expense allowance, which are being amortized over the period May 2004 through
October 2004.
ESTIMATES
In preparing financial statements in conformity with accounting principles
generally accepted within the United States of America, management is required
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 and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 3 - ACQUISITION OF CEPTOR AND SUBSEQUENT SPINOFF
XECHEM AGREEMENT AND PLAN OF MERGER
The Company entered into an agreement dated December 23, 2003 providing for the
acquisition, by a wholly-owned subsidiary of Xechem, of the Company from its
owners which acquisition closed in early 2004. Pursuant to the terms of the
acquisition, the Company's stockholders were issued shares of Xechem preferred
stock and Xechem received 1,800,000 shares, post split (see NOTE 8) of the
Company's common stock, whereby the Company became a wholly-owned subsidiary of
Xechem. The net assets of the Company, acquired by Xechem pursuant to this
transaction, were valued at $4,760,000 which became the basis for the 1,800,000
shares of common stock the Company issued to Xechem in this transaction. This
value was determined based on the average closing price of Xechem's common
stock, into which the preferred stock is convertible, for a reasonable period of
time before and after the terms of the acquisition was agreed to and announced.
XECHEM SPINOFF AGREEMENT
Following the acquisition, the board of directors of Xechem determined that
Xechem lacked the resources to fully fund the development and regulatory
A-29
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
approval of the Company's technology. As a result, the board of directors of
Xechem determined that it was in the best interest of Xechem's stockholders to
effect a spinoff of the Company from Xechem, providing an independent platform
to enable it to obtain financing and develop its technology. As a result, an
agreement dated March 31, 2004, as amended July 23, 2004, (the "Spinoff
Agreement"), was entered into among the Company, Xechem, and William Pursley,
Chairman and CEO of the Company, to provide for the separation of the Company
from Xechem, and to provide additional funding for Xechem through partial
redemption of shares of the Company held by Xechem, out of the proceeds of
future financings of the Company.
Under the terms of the original Spinoff Agreement, Xechem was entitled to
receive 25% of the proceeds of any offering of securities of the Company, up to
$2,000,000. Following discussion with prospective selling agents for a proposed
private placement of the Company's securities, Xechem agreed to accept 10% of
the proceeds of any future financing in partial redemption of shares of the
Company held by Xechem, up to $2,000,000.
As additional consideration under the Spinoff Agreement, the Company is
obligated to pay to Xechem royalties in an amount equal to two (2%) percent of
the gross revenues received by the Company, its subsidiaries, affiliates and
assigns, with respect to the sale of any products incorporating any of the
technology owned by the Company on March 31, 2004 or the licensing of any of the
Company's intellectual property, or the sale of the licensing rights to any of
the intellectual property.
Furthermore, pursuant to the terms of the acquisition, Xechem agreed to the
payment of a bonus in the form of additional consideration in shares of stock of
Xechem to the original shareholders of the Company upon the earlier to occur of
filing (i) of a Phase II application for any drug in development or which
relies, in whole or in part, on the technology or the efforts of its management,
provided such Phase II application is filed (or substantial steps taken to be
filed) within 36 months of the date of the final acquisition or merger; (ii) of
any Phase III application for such technology or efforts provided such Phase III
application is filed (or substantial steps taken to filed) within 60 months of
the date of acquisition or merger; and (iii) of any NDA filings made within 72
months of the date of the final acquisition or merger with Xechem. In connection
with the Spinoff Agreement, substantially all of the obligations for the
issuance of shares as additional consideration to the original shareholders of
the Company have been assumed by the Company, and Xechem has been released
therefrom.
Pursuant to the Spinoff Agreement, Mr. Pursley was allocated, initially through
a 10 year option exercisable at $0.00001 per share (par value), shares of the
common stock of the Company equal to 43.75% of the fully diluted common stock
outstanding (the "Founders' Shares") assuming the issuance of these Founders'
Shares. All of the Founders' Shares are to be issued to certain additional
persons designated by Mr. Pursley with importance to the future success of the
Company. All of such Founders' Shares immediately upon exercise will be fully
voting, and will be subject to the Founders' Plan. Pursuant to the terms of the
Founders' Plan, restrictions on holders of Founders' Shares shall lapse 10%
immediately upon issuance, 10% on the six month anniversary following issuance,
and the balance upon initiation of a Phase III clinical trial for the Myodor
technology for muscular dystrophy, provided such date is not less than six
months following the date of award, unless modified by the board of directors
following issuance. Upon the happening of certain events described in the
Founders' Plan, such as the cessation of employment by a participant following
A-30
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
an award, shares issued or issuable to Founders' Plan participants may revert to
William Pursley and may be cancelled, forfeited, re-designated or re-issued in
his sole discretion subject to Board of Directors or Compensation Committee
approvals. Pursuant to the grant of the option to purchase 1,400,000 shares of
the Company's common stock, at the nominal exercise price of par value, on June
1, 2004 (to 11 persons) the Company recorded compensation expense of $2,082,500
representing the intrinsic value as determined by applying the percent that the
Founders' Shares represent of the fully diluted share outstanding to the net
assets acquired by Xechem in its acquisition of the Company.
NOTE 4 - BRIDGE LOANS
Pursuant to the terms of the Spinoff Agreement and actions taken thereafter, the
Company entered into a selling agreement dated April 23, 2004 providing for the
private placement of $1,100,000 of 8% convertible notes due on the earlier of
October 22, 2004 or the date of closing on the next financing of $1,000,000 or
more by the Company (the "Bridge Loans"), secured by certain rights to put
Bridge Loans to Xechem for Xechem shares in certain circumstances. Purchasers of
the Bridge Loans received 220,000 shares of common stock of the Company as
additional consideration. The selling agent received 18,000 shares of common
stock of the Company, plus commissions in the amount of $110,000 and a
non-accountable expense allowance in the amount of $22,000, in connection with
its services. The Bridge Loan offering was completed in May 2004.
The Company recorded a $506,600 discount, representing an allocation of the
proceeds of the Bridge Loans based on the relative fair value of common stock
and the Bridge Loans issued to the Bridge Loan participants, which will be
amortized over the six month period from May 2004 through October 2004 (the term
of the Bridge Loans). For the nine month period ended September 30, 2004, the
Company amortized approximately $422,100 of the discount to interest expense.
The Company was not able to repay the Bridge Loans on October 22, 2004,
therefore pursuant to the terms of the Bridge Loans, the Bridge Loan holders
have the option to convert their notes into shares of common stock of Xechem at
the lower of $0.07 per share or 75% of the market price of the previous 20
market days prior to conversion, a portion of which will be issued by Xechem and
the remainder from Mr. Pursley's personal Xechem option holdings. As of November
17, 2004 the closing price of Xechem common stock (XKEM.OB) was approximately
$0.02 per share.
Pursuant to an offer dated October 22, 2004 (the "Exchange Offer") as amended
November 15, 2004 the Company offered to exchange with its holders of
outstanding Bridge Loans and other debt certain newly issued replacement notes
due December 31, 2005 convertible into shares of the common stock of the entity
to which the Company merged into, effective December 9, 2004, at $1.25 per
share, to be issued in amounts equal to the outstanding principal under the
notes cancelled, plus accrued interest. See Note 9 - Subsequent Events.
During the nine month period ended September 30, 2004, the Company accrued
contractual interest expense of approximately $36,600, related to the Bridge
Loans.
A-31
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 5 - COMMON STOCK SUBJECT TO REPURCHASE UNDER PUT RIGHT
The Spinoff Agreement, as amended, provides for the redemption, out of proceeds
of future financings of the Company, of shares of the Company's common stock
held by Xechem, in an amount that is equal to 25% (adjusted to 10% in
contemplation of the Company's next financing transaction) of the gross proceeds
received by the Company, in cancellation of an equivalent number of shares of
common stock of the Company held by Xechem, up to $2,000,000. At the end of two
years if the full $2,000,000 has not been paid out to Xechem, Xechem shall have
the right to put the remaining portion of the shares held for sale back to the
Company to cover the deficiency. In accordance with EITF 00-18, "Accounting for
Derivative Financial Instruments Indexed To, Potentially Settled In, The
Company's Own Stock," the Company classified the common stock as a liability in
the accompanying balance sheet. The Company estimated that this obligation will
redeem approximately 756,300 shares of common stock of the Company held by
Xechem based on the fair value per share of common stock received by Xechem in
the merger with the Company. The fair value of consideration that Xechem paid in
the merger with the Company for which it received 1,800,000 shares of the
Company's common stock, was $4,760,000, resulting in a fair value per share of
approximately $2.64.
NOTE 6 - LICENSE AGREEMENT WITH JCR PHARMACEUTICALS CO., LTD.
On September 15, 2004 the Company entered into an exclusive license agreement
with JCR Pharmaceuticals Co., Ltd. ("JCR") to manufacture and sell Myodur for
muscular dystrophy in certain Pacific Rim countries consisting of Japan, South
Korea, China, Taiwan, and Singapore. Under the terms of the JCR license, the
Company will receive royalties in the amount of 25% of net sales (as defined),
provided that the sum of cost of goods sold plus royalty payments does not
exceed 35% of net sales in total. In addition, JCR is obligated to make a
$500,000 payment upon filing by the Company of an Investigational New Drug
application ("IND") in the United States to initiate Phase I/II clinical studies
for the Company's therapy for muscular dystrophy.
JCR purchased 256,000 shares of common stock of the Company for a payment of
$1,000,000 before expenses of the transaction. JCR has agreed to purchase an
additional $1,000,000 of common stock of the Company at the market price
existing at the time of approval of an IND for the Company's therapy for
muscular dystrophy.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with certain executives
commencing March 31, 2004 and April 26, 2004 (the "Executives"), which provide
each Executive with a base salary for an initial term of two years, renewable
annually thereafter. The Company is obligated to pay approximately $555,000,
$770,000 and $215,000 for the years ended December 31, 2004, 2005 and 2006,
respectively. If Executive's employment with the Company is terminated without
A-32
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
cause or for good reason, as those terms are defined in the employment
agreement, the Company is obligated to pay Executive his current base salary and
his benefits for an additional twelve months. If Executive's employment is
terminated due to total disability, the Company is obligated to continue to pay
his current base salary and his benefits for an additional thirty-six months. If
Executive's employment is terminated due to his death, the Company is obligated
to continue to pay his current base salary for an additional three months and
continue to pay for his benefits for the next twelve months. In addition, the
employment agreement contains a confidentiality and a covenant not to compete
provisions for the period of his employment plus and additional twelve months.
CONSULTING AGREEMENTS
Pursuant to Xechem's acquisition of the Company, Xechem entered into consulting
agreements with the two founding scientists (the "Scientists") of the Company
for a period of sixty months. In consideration for the services to be rendered,
Xechem was obligated to pay a total of $276,000, plus expenses as allowed for in
the consulting agreements. In February 2004, the Company entered into consulting
agreements with the Scientists to replace their agreements with Xechem with ones
of similar terms. The consulting agreements are for a period of sixty months
commencing February 1, 2004 and provide for a monthly fee of $5,000 each plus
allowable expenses and terminated the consulting agreements with Xechem.
ROYALTY OBLIGATION
As additional consideration under the Spinoff Agreement, the Company is
obligated to pay to Xechem royalties in an amount equal to two (2%) percent of
the gross revenues received by the Company, its subsidiaries, affiliates and
assigns, with respect to the sale of any products incorporating any of the
technology owned by the Company on March 31, 2004 or the licensing of any of the
Company's intellectual property, or the sale of the licensing rights to any of
the intellectual property.
CONTINGENT CONSIDERATION
Pursuant to the terms of the acquisition of the Company by Xechem, Xechem agreed
to the payment of a bonus of $1,000,000 in the form of additional consideration
in shares of stock of Xechem to the original shareholders of the Company for
each proposed product resulting from technology owned by the Company at the
effective date of the Spinoff Agreement, upon the earlier to occur of filing (i)
of a Phase II application for any drug in development or which relies, in whole
or in part, on the technology or the efforts of its management, provided such
Phase II application is filed (or substantial steps taken to be filed) within 36
months of the date of the final acquisition or merger; (ii) of any Phase III
application for such technology or efforts provided such Phase III application
is filed (or substantial steps taken to filed) within 60 months of the date of
acquisition or merger; and (iii) of any NDA filings made within 72 months of the
date of the final acquisition or merger with Xechem. In connection with the
Spinoff Agreement, substantially all of the obligations for the issuance of
shares as additional consideration to the original shareholders of the Company
have been assumed by the Company, and Xechem has been released therefrom.
2004 INCENTIVE STOCK PLAN
The 2004 Incentive Stock Plan ("2004 Plan") was approved by the Board of
Directors and the stockholders of the Company on May 31, 2004. The purpose of
the 2004 Plan is to provide an incentive to retain in the employ of and as
directors, officers, consultants, advisors and employees of the Company, persons
of training, experience and ability, to attract new directors, officers,
consultants, advisors and employees whose services are considered valuable, to
A-33
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
encourage the sense of proprietorship and to stimulate the active interest of
such persons into the development and financial success of the Company. Under
the 2004 Plan, the Company will be authorized to issue Incentive Stock options
intended to qualify under Section 422 of the Code, non-qualified stock options,
and restricted stock. The 2004 Plan is administered by the board of directors.
As of September 30, 2004, 606,705 shares of common stock of the Company have
been reserved for issuance under the 2004 Plan and no awards have been granted
to any participant. Subsequent to September 30, 2004, certain option awards have
been recommended under the 2004 Plan to consultants and an employee but are
subject to approval of the Company's board of directors.
MANUFACTURING AND SUPPLY AGREEMENT
Pursuant to a manufacturing arrangement entered into subsequent to September 30,
2004 with Bachem AG, (a contract manufacturer - "Bachem") the Company is
obligated to purchase approximately $2,822,000 of clinical development supplies,
from Bachem, through the end of 2005. Included in prepaid expenses on the
Company's balance sheet at September 30, 2004, the Company recorded a deposit in
the amount of $211,250 paid to Bachem under this manufacturing arrangement.
NOTE 8 - EQUITY TRANSACTIONS
STOCK SPLIT
In April 2004, the Company's board of directors declared an 18,000-for-one stock
split, affected in the form of a stock dividend, on the shares of the Company's
common stock. Each shareholder of record received 18,000 additional shares of
common stock for each share of common stock held without the capital of the
Company being increased or decreased by the transfer of surplus to capital
account or the transfer of capital to surplus, or otherwise. Stockholders'
equity reflects the stock split by reclassifying from "Additional paid-in
capital" to "Common stock" an amount equal to the par value of the additional
shares arising from the stock split. As the result of the stock split, the
shares held by Xechem increased from 100 shares to 1,800,000 shares and the
shares held in reserve for options to be granted to the founders, which upon
exercise would be 1,400,000 shares.
In conjunction with the stock split, the Company's Certificate of Incorporation
was amended to increase the authorized capital stock to 50,000,000 shares, and
40,000,000 was designated as shares of common stock, $0.00001 par value per
share and 10,000,000 shares of preferred stock.
NOTE 9 - SUBSEQUENT EVENTS
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION AND PRIVATE PLACEMENT On December
8, 2004, Medallion Crest Management, Inc., a Florida corporation ("Medallion"),
CepTor Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of
Medallion ("Acquisition Corp."), and the Company, entered into an Agreement of
Merger and Plan of Reorganization (the "Merger Agreement"). Pursuant to the
Merger Agreement, and on December 8, 2004 the Company filed a Certificate of
Merger to merge with Acquisition Corp., with the Company surviving as a
wholly-owned subsidiary of Medallion (the "Merger"). The Company filed with the
Florida Department of State Articles of Amendment to the Articles of
Incorporation of the Company to change its name to CepTor Corporation ("New
CepTor"), and to authorize the issuance of up to 300 shares of its Series A
Convertible Preferred Stock (the "Preferred Stock").
A-34
CEPTOR CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2004
(UNAUDITED)
Pursuant to the Merger, Medallion acquired all of the outstanding capital stock
of the Company in exchange for 5,278,068 shares of New CepTor's common stock,
par value $0.0001 per share (the "Common Stock"), and assumption of certain
obligations of the Company. As a result, the Company's former stockholders
became the majority stockholders of New CepTor. The Merger is being accounted
for as a "reverse merger," since the former stockholders of the Company own a
majority of the outstanding shares of New CepTor's Common Stock immediately
following the Merger.
New CepTor intends to carry on the Company's business as its sole line of
business and will remain in Hunt Valley, Maryland and continue as a
development-stage bio-pharmaceutical company focusing on therapeutic products
for neuromuscular and neurodegenerative diseases.
Pursuant to an offer dated October 22, 2004 (the "Exchange Offer") as amended
November 15, 2004, made by New CepTor to the Bridge Loans and other debt holders
of the Company, on December 9, 2004 New CepTor issued $1,100,215.30 of its
Convertible Notes due December 31, 2005 which are convertible into shares of New
CepTor's Common Stock at $1.25 per share in amounts equal to the outstanding
principal under the notes cancelled, plus accrued interest. The Exchange Offer
provides that holders of outstanding Bridge Loans who received in connection
with the original issuance of the Bridge Loans, a total of 150,000 shares of the
Company's common stock which converted into a total of up to 300,000 shares of
New CepTor Common Stock upon effectiveness of the Merger. The remaining $350,000
of Bridge Loan principal which did not accept the Exchange Offer was repaid with
interest through the date of payment. In addition, the 70,000 shares of common
stock of the Company these Bridge Loan holders received in connection with the
issuance of the original Bridge Loans, has converted into 151,597 shares of
common stock of New CepTor upon effectiveness of the Merger.
In connection with the Merger New CepTor adopted the Company's Founders' Stock
Plan and 2004 Incentive Plan. On December 9, 2004 the Company issued to CepTor
employees and others 3,031,943 shares of restricted Common Stock under the
Founders' Stock Plan. Under the 2004 Incentive Stock Plan, officers,
consultants, third-party collaborators, and employees of the Company or its
subsidiaries may be granted rights in the form of options or shares or
restricted stock for up to a maximum of 2,268,377 shares of Common Stock.
On December 9, 2004 (the "Closing Date"), New CepTor sold 103.62 units (the
"Units") to 42 investors pursuant to a Confidential Private Placement Memorandum
dated October 22, 2004 as supplemented November 16, 2004, (the "Memorandum"),
each Unit consisting of one share of Preferred Stock and a warrant to purchase
Common Stock (the "Offering"). Each share of Preferred Stock is convertible into
10,000 shares of Common Stock and each warrant entitles the holder to purchase
5,000 shares of Common Stock for $2.50 per share. The Units were offered by
Brookshire Securities Corporation (the "Placement Agent") pursuant to a
Placement Agent Agreement with the Company dated October 22, 2004. Under the
terms of the Placement Agent Agreement, the Placement Agent is entitled to a
selling commission of 8%, plus a 2% non-accountable expense reimbursement
payable from the proceeds of the Offering plus 150,000 shaers of New CepTor and
warrants to purchase 10% of any Common Stock sold. The Company realized gross
proceeds from the Offering of $2,590,500.00, before payment of Commissions and
expenses of the Offering.
LEGAL PROCEEDINGS During June 2004, the Company's management was introduced to a
financial intermediary, as a means to locate a candidate for a public
transaction and to seek funding. The Company executed a "Non-Binding Letter of
Intent" for the purposes of structuring a potential transaction. In late
September 2004 ,the Company advised the financial intermediary that it was not
prepared to proceed with the proposed transaction. The financial intermediary
thereafter on October 8, 2004 commenced an action in the Northern District of
California, entitled Bluewater Partners S.A. v. CepTor Corporation (Case No. C
04 4277 JCS) alleging, among other things, that the Company abandoned its
obligations to close a transaction on the eve of a closing, that it had breached
its agreements, promissory estoppel, breach of implied covenant of good faith
and fair dealing, Quantum Meruit, unjust enrichment; and seeking declaratory
relief, and damages in the amount of $3.6 million. On November 12, 2004, the
parties entered into a written proposal outlining material terms for permanent
dismissal of the action providing, among other things, for immediate withdrawal,
without prejudice, of the complaint, exchanges of mutual releases, transfer of
50,000 shares of Company unrestricted Common Stock, issuance of 125,000 shares
of restricted Company Common Stock, and payment of $25,000 in full settlement of
the action. On November 12, 2004, the complaint was withdrawn without prejudice.
The parties are continuing to negotiate the terms of final settlement. CepTor
believes that the action is substantially without merit and in the event that
the parties are unable to agree on a definitive resolution, CepTor (and the
Company) intend to defend vigorously the allegations of the complaint and move
for dismissal.
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