(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
NOTE 1 - BASIS OF INTERIM FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited Condensed Financial Statements of CepTor Corporation have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-QSB. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. The results of operations for the three and nine month periods ended September 30, 2007 are not necessarily indicative of the operating results that may be expected for the entire year ending December 31, 2007.
NOTE 2 - THE COMPANY
Organization
The financial statements presented are those of CepTor Corporation ("CepTor" or the "Company"), incorporated in August 1986 in the State of Delaware.
Nature of Business and Development Stage Operations
The Company is a biopharmaceutical company that has historically been engaged in the research and development of therapeutic products for neuromuscular, neurodegenerative and other diseases with a focus on orphan diseases (defined as those which affect 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. Its two lead compounds are Myodur™, for neuromuscular disease, and Neurodur™, for neurodegenerative diseases. In January 2006, CepTor submitted an Investigational New Drug Application (IND) to the Food and Drug Administration (FDA) for Myodur™ with the hope of beginning clinical trials for this compound following approval of the IND. Since that time, the IND has remained on “clinical hold” pending resolution of certain issues raised by the FDA. Most recently, in October 2006, the Company was advised that, despite its efforts to resolve the concerns and issues previously raised by the FDA, the IND would remain on hold pending further testing and research as directed by the FDA.
As a result of the clinical hold status of our lead compound, our existing investors have advised us that they were unwilling to continue to fund either the research and development costs required to fully prosecute the IND filing, or the general operating costs necessary to keep the business afloat as those research and development activities continued. With no other financial resources available to us, we had no choice but to cease all efforts related to the research and development of our compounds, terminate all of our employees, and close down our corporate offices in Maryland. At present, we are maintaining our operations as a “virtual” office operated out of New York City and have one part-time employee, Howard Becker, our CEO appointed in December 2006.
In the period since the closure of the Company’s Maryland offices and the termination of all of its Maryland based employees, we have been focusing on a two-part strategy, in cooperation with the existing secured creditors and investors, whereby (i) our existing technologies would be divested from the corporation pursuant to a transaction that would allow CepTor to retain significant upside should the technologies ultimately fulfill their promise as marketable and commercially viable products, and (ii) a new technology would be acquired by the Company around which we could restructure our affairs. Any such transaction would have to have the full support of the existing secured creditors, which have a priority position with respect to all of CepTor’s current assets.
The Company’s efforts to date in seeking to acquire an alternative technology around which to reorganize its affairs have been unsuccessful. Though the Company is continuing to seek to identify such a company or technology to acquire, there remains substantial doubt as to whether such a transaction will materialize and successfully close. Absent consummation of such a transaction, the Company would very likely cease all operations and wind down its affairs in their entirety.
In connection with the Company’s efforts to divest itself of its existing technologies, on March 29, 2007, CepTor executed a non-binding term sheet with its original founding scientists, Drs. Al Stracher and Leo Kesner, which contemplated the transfer of our Myodur™ and Neurodur™ technologies to a private corporation controlled by these founding scientists in exchange for, among other things, a substantial minority interest in that private entity, as well as a substantial gross royalty on any future product sales. We are continuing to negotiate with the founding scientists the final terms of a mutually acceptable transaction substantially along the lines of those contained in the March 29 term sheet. However, there can be no assurance that such a transaction will be consummated or that, if consummated, it will support the continued operation of the Company.
Even if CepTor is successful either in identifying a new technology to acquire or in consummating an alternative transaction with the founding scientists related solely to the existing technologies, a pre-condition to any such transaction is expected to be the consensual restructuring of our approximately $4 million in trade debt. Without such a consensual restructuring of the trade debt, we do not believe that we will be able to successfully close any transaction, whether it is for the acquisition of a new technology or for the continued development of our existing technologies. In that case, we would likely terminate operations or commence bankruptcy proceedings. These matters raise substantial doubt as to the Company’s ability to continue as a going a concern.
Given our present financial circumstances, as well as the absence of a presently identifiable acquisition transaction, there is a substantial risk that CepTor will be forced to cease operations in their entirety and that current unsecured creditors and equity security holders will receive no value for their claims and interests.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
The Company is a development stage company with a limited history of operations which has not generated any material revenues since its inception. The Company has received a limited amount of funding through grants and collaborative research efforts in connection with developing its products. The Company does not have any products that are approved for commercial distribution at the present time. As a development stage company, the Company is subject to all of the risks and uncertainties that are associated with developing a new business.
NOTE 3 - LIQUIDITY AND FINANCIAL CONDITION AND GOING CONCERN
The Company has had difficulty securing the necessary capital to execute its business plan and has not been able to remain current with respect to the payment terms of its operating obligations including its trade payables and accrued liabilities, which aggregated approximately $5,515,053 at September 30, 2007. As described in Note 8, the Company is in default of substantially all of its convertible note obligations, which total approximately $6 million in aggregate principal amount, together with accrued interest as of September 30, 2007 of $551,180. These defaults occurred principally as a result of (i) the Company's failure to make the required payments of principal and interest under certain of these obligations (which triggered cross default provisions under the remaining note obligations), (ii) its failure to file a registration statement pursuant to the 2006 6% Convertible Notes within a specified period, (iii) its failure to file a post-effective amendment to its registration statement on Form SB-2 covering shares issuable under the 2005 Convertible Debentures within a specified period, and (iv) its failure to have sufficient authorized but unissued shares available to net share settle its 2005 convertible notes and all of its derivative financial instruments. The Company has pledged all of its assets to the holders of the 2006 6% Convertible Notes to secure its repayment obligations under those notes, and the holders of these notes currently have the rights to exercise remedies with respect to the collateral should they desire to do so.
The Company has exhausted substantially all of its capital resources, terminated substantially all of its employees except for its part-time chief executive officer and is currently unable to pursue further development of its product candidates. The primary reason for the Company’s current difficulties has been its inability to date to procure approval of its IND for Myodur™. Specifically, in October 2006, the Company was informed by the FDA that its IND was to remain on hold pending the resolution of two remaining issues. Additional time is required to fully resolve the FDA issues and complete the Company's own internal research program, which the Company estimates would take an additional twelve to eighteen months to complete and would require a substantial investment of capital. Even if sufficient capital were available to the Company, which it is not, there is no assurance that the Company would be successful in obtaining the approval of its IND. Moreover, with no current funding available to it to seek to resolve these issues the Company has halted development of its programs.
To date, the Company has pursued discussions with the owners of a certain potential acquisition targets, but has been unsuccessful in its efforts to identify a suitable transaction for the acquisition of an alternative technology around which to reorganize its affairs. Though the Company is continuing to seek to identify a possible transaction that will allow it to reorganize its affairs, there remains substantial doubt as to whether such a transaction will materialize and successfully close. Absent consummation of such a transaction, the Company would very likely cease all operations and wind down its affairs in their entirety.
In connection with the Company’s efforts to divest itself of its existing technologies, we are continuing to negotiate with our original founding scientists, Drs. Al Stracher and Leo Kesner, over the final terms of a mutually acceptable transaction substantially along the lines of those contained in a term sheet executed by the parties on March 29, 2007. However, there can be no assurance that such a transaction will be consummated or that, if consummated, CepTor will become a viable, self-sustaining entity. There is also no assurance that the Company will ever become operational. Accordingly, there is a material possibility that CepTor may be forced to terminate all operations and wind down its affairs, and/or commence bankruptcy or receivership proceedings.
These matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
Primarily as the result of recording during the nine months ended September 30, 2007 non-cash interest expense of $3,332,470 offset by a non-cash gain associated with the decrease in the liability associated with the fair values of its derivative financial instruments of $5,561,133, the Company recorded a net income for the three and nine month periods ended September 30, 2007 of $857,385 and $1,794,332, respectively. Non-cash interest expense consisted of the amortization of the discount on notes payable of $1,942,979; amortization of deferred financing cost of $953,816, and accrual of liquidated damages of $142,778. The Company used net cash flows in its operating activities of $247,973 during the nine month period ended September 30, 2007. The Company's working capital deficiency amounted to $12,060,556, and its development stage accumulated deficit amounted to $44,283,742 at September 30, 2007. The Company will require substantial additional funding either to develop its existing technologies or to pursue development of alternate technologies it may acquire
At September 30, 2007, the Company had approximately $6,000,000 in principal amount of convertible notes outstanding, together with accrued interest of $551,180. The December 2004 Convertible Note in the principal amount of $448,736, was due July 3, 2006. There has not been an agreement on amended terms and no assurance that the Company will reach agreement with the note holder on amended terms. The terms of the 2004 Convertible Note do not provide for penalties or other payments upon default, and accordingly, the Company has not accrued a penalty as of September 30, 2007. Of the remaining convertible debt, (i) $250,000 in principal plus accrued interest was due on December 9, 2006, (ii) $3,569,444 in principal representing 2006 6% Convertible Notes are now due and payable, and (iii) the Cornell Convertible Debentures of $1,700,000 mature by their terms in December 2008. In addition to its convertible notes, the Company has received $ 563,000 in unsecured cash advances, of which $ 115,000 and $217,000 was borrowed during the three and nine months ended September 30, 2007, respectively. These unsecured cash advances are repayable on demand, and bear interest at the rate of 8% per year.
Currently, the Company is in default of substantially all of its obligations to its convertible noteholders and such noteholders currently have the right to demand immediate payment of these loans. At present, the Company does not have, and has no identifiable prospect of obtaining, the available cash to repay these obligations. The note holders holding $1,700,000 in principal indebtedness have a security interest in all the assets of the Company.
Due to the defaults of its note obligations, its lack of resources to settle its obligations when due and the possibility that all of the Company’s indebtedness will be accelerated if a bankruptcy petition were filed by or against the Company, the Company has recorded all of its liabilities as current.
As a result of the Company’s failure to remain current in its obligations to American Stock Transfer, Inc., its stock transfer agent, all business services customarily performed for the Company by its transfer agent, including issuing stock, processing conversion requests, removing restrictive legends, recording stock transfers, issuing shareholder lists, etc., have been suspended temporarily. We are working to resolve this matter with the stock transfer agent so that normal and customary stock transfer services for the Company can resume. However, unless and until this situation is resolved, our inability to ensure the timely processing of conversion requests, removal of restrictive legends, process transfers, etc. may trigger further liabilities and defaults under our existing debt and equity securities.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company is a development stage enterprise. Accordingly, the Company has included its cumulative statements of operations and cash flows for the period of August 11, 1986 (date of inception) to September 30, 2007 in accordance with Statement of Financial Accounting Standards ("SFAS") No. 7 "Accounting and Reporting by Development Stage Enterprises."
The Company's net loss available to common shareholders as reported in its statement of operations for the period of August 11, 1986 (date of inception) to September 30, 2007 is $44,283,742.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
Accounting for Stock-Based Compensation
Prior to January 1, 2006, the Company accounted for employee stock transactions in accordance with Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees." The Company applied the pro forma disclosure requirements of SFAS No. 123 "Accounting for Stock-Based Compensation."
Effective January 1, 2006, the Company adopted SFAS No. 123R "Share Based Payment." This statement is a revision of SFAS Statement No. 123, and supersedes APB Opinion No. 25, and its related implementation guidance. SFAS 123R addresses all forms of share based payment ("SBP") awards including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Under SFAS 123R, SBP awards result in a cost that will be measured at fair value on the awards' grant date, based on the estimated number of awards that are expected to vest and that will result in a charge to operations. The Company adopted the modified prospective method with respect to accounting for its transition to SFAS 123(R) and had unrecognized compensation cost of $2,520 as deferred compensation at January 1, 2007. Accordingly, the Company recognized expense on the statement of operations of $210 for the fair value of these stock options which vested during the nine month period ended September 30, 2007. The fair value of these awards was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk fee interest rate: 3.3% to 3.6%; expected dividend yield: 0%; expected option life: 10 years; and volatility: 108% to 123%.
Net Loss per Share
Net loss per shares is presented under SFAS No. 128 “Earnings Per Share.” Under SFAS 128, basic net earnings or loss per share is computed by diving net income or loss by the weighted average number of common shares outstanding during the period. Diluted earnings per shares is computed by dividing net income or loss by the weighted average number of shares outstanding, after giving effect to potentially dilutive share equivalents outstanding during the period. Potentially dilutive common share equivalents are not included in the computation of diluted earnings per share if they are anti-dilutive.
Shares of common stock issuable upon the conversion or exercise of potentially dilutive securities are as set forth below. These figures are based on the fixed conversion prices contained in these instruments rather than the floating prices, which could result in an undetermined number of shares issuable upon conversion o the affected securities.
| | | September 30, |
| | | 2007 | | | 2006 |
| | | | | | | |
| Warrants | | | 33,912,855 | | | | 32,509,897 |
| | | | | | | |
| Convertible Notes | | | 45,102,700 | | | | 41,027,483 |
| | | | | | | |
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
Accounting for Warrants and Freestanding Derivative Financial Instruments
The Company accounts for the issuance of common stock purchase warrants and other freestanding derivative financial instruments in accordance with the provisions of EITF 00-19. Based on the provisions of EITF 00-19, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
The terms of the Company’s Cornell Convertible Debentures (see Note 8) provide for a conversion price in certain situations based on a floating conversion price which results in an indeterminable number of shares of common stock potentially issued upon conversion. Under accounting guidance provided by EITF 00-19, as of September 30, 2007, the Company had net liabilities of $485,517 representing the fair value of warrants and options to purchase approximately 35.8 million shares of common stock which had been issued as components of other financing instruments or granted to non-employees for services rendered. The Company recorded additional liabilities for the fair value of warrants granted during the year ended December 31, 2006 in the aggregate amount of approximately $5.7 million. The fair value of these awards was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: risk free interest rate: 4.7% to 5.1%; expected dividend yield: 0%; expected life: 3 years to 5 years; and volatility: 106% to 353%.
The accounting guidance shows that the warrants are a derivative liability and are marked to market for each reporting period. During the three and nine months ended September 30, 2007, the Company recognized a credits of $1,375,921 and $ 5,561,133, respectively, for the decrease in fair value of the derivative financial instruments. The fair value of these awards was estimated at September 30, 2007 using the Black-Scholes option pricing model with the following assumptions: risk fee interest rate: 4.7% to 5.0%; expected dividend yield: 0%; expected option life: 0.5 years to 4.3 years; and volatility: 321%.
Accounting for Conversion Options Embedded in Convertible Notes and Convertible Preferred Stock
The Company accounts for conversion options embedded in convertible notes and convertible preferred stock in accordance with SFAS No. 133 ‘‘Accounting for Derivative Instruments and Hedging Activities’’ and EITF 00-19 ‘‘Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.’’ SFAS 133 generally requires companies to bifurcate conversion options embedded in convertible notes and preferred shares from their host instruments and to account for them as free standing derivative financial instruments in accordance with EITF 00-19. SFAS 133 provides for an exception to this rule when convertible notes and mandatorily redeemable preferred shares, as host instruments, are deemed to be conventional as that term is described in the implementation guidance provided in paragraph 61 (k) of Appendix A to SFAS 133 and further clarified in EITF 05-2 ‘‘The Meaning of ‘Conventional Convertible Debt Instrument’ in Issue No. 00-19.’’ SFAS 133 provides for an additional exception to this rule when the economic characteristics and risks of the embedded derivative instrument are clearly and closely related to the economic characteristics and risks of the host instrument.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
The Company accounts for convertible notes (deemed conventional) in accordance with the provisions of EITF 98-5 ‘‘Accounting for Convertible Securities with Beneficial Conversion Features,’’ and EITF 00-27 ‘‘Application of EITF 98-5 to Certain Convertible Instruments.’’ Accordingly, the Company records, as a discount to convertible notes, the intrinsic value of such conversion options based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption.
The Company has issued $5,519,444 in principal of various convertible notes (see Note 8) with embedded conversion options accounted for as free standing derivative financial instruments in accordance with SFAS 133 and EITF 00-19 and on the dates of issuance recorded liabilities for conversion options of $6,018,813. The fair value of these embedded conversion options were estimated at the date of issuance using the Black-Scholes option pricing model with the following assumptions: risk free interest rate: 3.3% to 5.2%; expected dividend yield: 0%; expected option life: one year to 3 years; and volatility: 130% to 353%. The accounting guidance instructs that the conversion options are a derivative liability and are marked to market for each reporting period. During the three and nine months ended September 30, 2007, the Company recognized a gain of $1,375,921 and $5,561,133, respectively, for the decrease in fair value of the derivative financial instruments. The fair values of these embedded conversion options were estimated at September 30, 2007 using the Black-Scholes option pricing model with the following assumptions: risk free interest rate: 4.8% to 5.0%; expected dividend yield: 0%; expected option life: one year to 2 years; and volatility: 321%.
The Company also determined that the conversion option embedded in its Series A Preferred stock is not a free-standing derivative in accordance with the implementation guidance provided in paragraph 61 (l) of Appendix A to SFAS 133.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement does not require any new fair value measurements. The effective date of this statement is for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, of the adoption of SFAS 157.
In July 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006. We do not anticipate that this FASB will have any material impact on our financial condition or results of operations.
In September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The guidance is applicable for fiscal years ending after November 15, 2006. We do not anticipate that this SAB will have any material impact on our financial condition or results of operations.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
In November 2006, the EITF reached a final consensus in EITF Issue 06-6 “Debtor’s Accounting for a Modification (or Exchange) of Convertible Debt Instruments” (“EITF 06-6”). EITF 06-6 addresses the modification of a convertible debt instrument that changes the fair value of an embedded conversion option and the subsequent recognition of interest expense for the associated debt instrument when the modification does not result in a debt extinguishment pursuant to EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.” The consensus should be applied to modifications or exchanges of debt instruments occurring in interim or annual periods beginning after November 29, 2006. The Company does not expect the adoption of EITF 06-6 to have a material impact on its consolidated financial position, results of operations or cash flows.
In November 2006, the FASB ratified EITF Issue No. 06-7, “Issuer’s Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities” (“EITF 06-7”). At the time of issuance, an embedded conversion option in a convertible debt instrument may be required to be bifurcated from the debt instrument and accounted for separately by the issuer as a derivative under FAS 133, based on the application of EITF 00-19. Subsequent to the issuance of the convertible debt, facts may change and cause the embedded conversion option to no longer meet the conditions for separate accounting as a derivative instrument, such as when the bifurcated instrument meets the conditions of Issue 00-19 to be classified in stockholders’ equity. Under EITF 06-7, when an embedded conversion option previously accounted for as a derivative under FAS 133 no longer meets the bifurcation criteria under that standard, an issuer shall disclose a description of the principal changes causing the embedded conversion option to no longer require bifurcation under FAS 133 and the amount of the liability for the conversion option reclassified to stockholders’ equity. EITF 06-7 should be applied to all previously bifurcated conversion options in convertible debt instruments that no longer meet the bifurcation criteria in FAS 133 in interim or annual periods beginning after December 15, 2006, regardless of whether the debt instrument was entered into prior or subsequent to the effective date of EITF 06-7. Earlier application of EITF 06-7 is permitted in periods for which financial statements have not yet been issued.
In December 2006, the FASB issued FSP EITF 00-19-2 “Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”). FSP EITF 00-19-2 addresses an issuer’s accounting for registration payment arrangements. This pronouncement specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument, should be separately recognized and accounted for as a contingency in accordance with SFAS 5 “Accounting for Contingencies.” FSP EITF 00-19-2 amending previous standards relating to rights agreements became effective on December 21, 2006 with respect to arrangements entered into or modified beginning on such date and for the first fiscal year beginning after December 15, 2006 with respect to those arrangements entered into prior to December 21, 2006. The Company is in the process of evaluating the impact of the adoption of this statement on the Company’s results of operations and financial condition.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). This statement permits all entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity must report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected must be recognized in earnings as incurred and not deferred. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact, if any, of the adoption of SFAS 159.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
NOTE 5 - PREPAID EXPENSES
Prepaid expense consists primarily of unamortized premiums paid to carriers for insurance policies and retainers paid for professional services to be rendered.
NOTE 6 - DEFERRED FINANCING COSTS
The Company capitalizes the costs and expenses incurred in entering into its debt obligations which are then amortized over the term of the debt. During the three and nine months ended September 30, 2007, the Company amortized $8,701 and $953,817, respectively, of deferred financing costs to non-cash interest expense, and at September 30, 2007 the balance in deferred financing costs is $233,397.
NOTE 7 - ACCRUED LIABILITIES
Accrued liabilities at September 30, 2007 are as follows:
Financial investor relations fees | | $ | 188,329 |
| Interest on convertible notes | | | 669,607 |
| | | |
| Total | | $ | 1,500,386 |
Pursuant to the Company's sale of Series A Preferred Stock in a private placement, the Company had agreed to spend up to 3% of the gross proceeds from its private placement on financial investor relations activities, all of which was accrued as ‘‘Financial Investor Relations Fees’’ and charged to additional paid-in capital upon each closing of the private placement.
Pursuant to the registration rights agreement in connection with the 2006 6% Convertible Notes offering, the Company was obligated to pay liquidating damages of 2% of the principal amount for each 30-day period the registration statement was filed past August 21, 2006. As of September 30, 2007, the Company accrued 18% of the outstanding principal, or $642,450.
NOTE 8 - UNSECURED ADVANCES AND CONVERTIBLE NOTES
During the three and nine months ended September 30, 2007, the Company received unsecured advances from Margie Chassman in the amount of $20,000 and $237,000, respectively. These advances bear interest at the rate of 8% per annum.
Note Obligations in Default
The Company is in default of all of its convertible note obligations, which amount to approximately $6,000,000 in aggregate principal amount, plus accrued interest as of September 30, 2007 of $551,180. These defaults occurred as a result of (i) the Company's failure to make the required payments of principal and interest under certain of these obligations (which triggered cross default provisions under the remaining loans), (ii) not filing a registration statement covering shares issuable under the 2006 6% Convertible Notes within the specified period, (iii) not filing a post-effective amendment to its registration statement on Form SB-2 covering shares issuable under the Cornell Convertible Debentures within the specified period, and (iv) its failure to have sufficient authorized but unissued shares available to net share settle its Cornell Convertible Debentures and all of its derivative financial instruments. As of September 30, 2007, the Company, on a fully diluted basis, had 107,799,571 shares issued and potentially issuable in connection with all of its outstanding common stock convertible instruments, stock options and derivative financial instruments based on the fixed conversion and exercise prices in these instruments. The number of shares potentially issuable under the floating price calculations contained in the Cornell Convertible Debentures (i.e., 95% of the lowest closing price for the Company’s common stock during the 20 days preceding the conversion), and the 2006 6% Convertible Notes ( 90% of the lowest closing price for the Company’s common stock during the 20 days preceding the conversion) would result in an indeterminate number of shares being issued.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
Convertible Promissory Notes
Pursuant to an offer dated October 22, 2004 as amended November 15, 2004, made to the holders of certain convertible notes, the Company issued $901,728 of convertible notes due December 8, 2005 in exchange for convertible notes in the principal amount of $825,000 plus accrued interest of $76,728 (the ‘‘December 2004 Convertible Notes’’).
The December 2004 Convertible Notes were convertible into shares of the Company's common stock at $1.25 per share in amounts equal to the outstanding principal cancelled, plus accrued interest at 10% through the date of conversion. In April 2005, the Company renegotiated certain terms of the December 2004 Convertible Notes to extend the maturity date until July 3, 2006 and in exchange the Company (1) increased the contractual interest rate effective December 8, 2005 to 12%, (2) reduced the conversion rate from $1.25 to $0.75 per share and (3) eliminated the Company's right to call the December 2004 Convertible Notes (the ‘‘Amended December 2004 Convertible Notes’’).
On December 9, 2005, the Company amended a portion of the Amended December 2004 Convertible Notes that was payable to Harbor Trust dated December 9, 2004, in the principal amount of $452,991 by reducing the conversion price to $0.375 from $0.75 per share (the ‘‘Amended December 2005 Harbor Note’’). The effect of this modification was insignificant since approximately 50% of the note was converted in December 2005 and the remainder was converted in January 2006. The Amended December 2005 Harbor Note bears interest at the rate of 10% per year through December 8, 2005 and 12% per year thereafter. The Amended December 2005 Harbor Note was fully converted on January 27, 2006.
The remaining Amended December 2004 Convertible Note in the principal amount of $448,736 was due July 3, 2006. There has not been an agreement on amended terms and there is no assurance the Company will reach agreement with the note holder. The terms of the December 2004 Convertible Note do not provide for penalties or other payments upon default, and accordingly, the Company has not accrued any as of December 31, 2006. The conversion price was adjusted to $0.15 from $0.75 pursuant to the 2006 6% Convertible Note offering which commenced June 1, 2006 (see below).
As of September 30, 2007, the principal amount of $448,736 remains outstanding under the December 2004 Convertible Note.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
2005 Harbor Note
On December 9, 2005, the Company issued a convertible promissory note (the ‘‘2005 Harbor Note’’) in the principal amount of $250,000 which bears interest at the rate of 6% per annum. All unpaid principal and interest under the 2005 Harbor Note was due and payable on December 9, 2006. The 2005 Harbor Note is convertible, in whole or in part, at any time, into common stock at an adjusted conversion price of $0.15 per share (adjusted pursuant to the 2006 6% Convertible Note offering commenced on June 1, 2006, see below), subject to certain limitations on conversion as set forth in the 2005 Harbor Note, including where the resulting number of shares converted on a cumulative basis, would exceed 19.99% of the total number of shares of common stock outstanding and, subject to a conversion price adjustment in the event the Company offers or sells an option not pursuant to an approved stock plan to acquire common stock at a price per share less than the conversion price. The conversion option featured in this note is being accounted for as a free standing derivative financial instrument in accordance with SFAS 133 and EITF 00-19.
The fair value of the conversion option was $9,877 at September 30, 2007.
There has not been an agreement on amended terms and no assurance the Company will reach agreement with the note holder. The terms of the 2005 Harbor Note do not provide for penalties or other payments upon default, and accordingly, the Company has not accrued any as of September 30, 2007.
As of September 30, 2007, the principal amount of $250,000 remains outstanding under the 2005 Harbor Note. The amount of discount of this note, based on the original allocation of proceeds to the carrying amount of the note and the free standing conversion option, has been fully amortized to non-cash interest expense at September 30, 2007.
CORNELL CONVERTIBLE DEBENTURES
On December 9, 2005, the Company entered into a securities purchase agreement (the ‘‘Securities Purchase Agreement’’) with Cornell Capital Partners, LP (‘‘Cornell Capital’’) pursuant to which Cornell Capital has purchased, in a private placement, secured convertible debentures in the aggregate principal amount of $2,000,000 (the ‘‘Cornell Convertible Debentures’’), which bear interest at the rate of 8% per annum. Pursuant to the Securities Purchase Agreement, the Company issued a Cornell Convertible Debenture in the principal amount of $1,000,000 on each of December 9, 2005 and December 28, 2005. Each Cornell Convertible Debenture has a three-year maturity from the date of issuance and was subject to earlier conversion or redemption pursuant to its terms.
Cornell Capital has the right to convert a portion or all of the outstanding principal and interest under the Cornell Convertible Debentures into shares of common stock at a conversion price per share equal to the lesser of $0.9765 (105% of the closing bid price of the common stock on December 8, 2005) (the ‘‘Fixed Price’’) or (ii) 95% of the lowest closing bid price of the common stock for the twenty trading days immediately preceding the conversion date (the ‘‘Floating Price’’ and together with the Fixed Price, the ‘‘Conversion Price’’), subject to adjustment as provided in the Cornell Convertible Debentures; provided, that any such conversion based on the Floating Price will generally be limited to $150,000 of principal outstanding under the Cornell Convertible Debentures in any thirty day period; and further provided, that Cornell Capital may not convert the Cornell Convertible Debentures into shares of common stock if such conversion would result in Cornell Capital, together with its affiliates, beneficially owning in excess of 4.9% of the then issued and outstanding shares of common stock. The Conversion Price and number of shares of common stock issuable upon conversion of the Cornell Convertible Debentures is subject to certain exceptions and adjustment for stock splits and combinations and other dilutive events.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
Subject to the terms and condition of the Cornell Convertible Debentures, the Company had the right at any time upon three business days notice to redeem the Cornell Convertible Debentures, in whole or in part. If the closing bid price of the common stock, is less than the Fixed Price at the time of the redemption, the Company is obligated to pay, in addition to the principal and accrued interest being redeemed, a redemption premium of 8% of the principal amount being redeemed (the ‘‘Redemption Amount’’). If the closing bid price is greater than the Fixed Price, the Company may redeem up to 50% of the principal amount at the Redemption Amount and the remaining 50% at the greater of the (x) Redemption Amount or (y) the market value of the common stock. In addition, Cornell Capital will receive a three-year warrant to purchase 25,000 shares of common stock for every $100,000 redeemed by the Company, on a pro rata basis, at an exercise price per share of $0.9765 (the ‘‘Redemption Warrant’’).
If an Event of Default (as such term is defined in the Cornell Convertible Debentures) occurs, any principal and accrued interest outstanding will become immediately due and payable, in cash or common stock, at Cornell Capital’s election. Pursuant to the Securities Purchase Agreement, on December 9, 2005, the Company issued to Cornell Capital a warrant to purchase 1,000,000 shares of common stock at an exercise price per share of $1.023 (110% of the closing bid price of the common stock on December 8, 2005) and (ii) 268,817 shares of common stock, and (iii) on each of December 9, 2005 and December 28, 2005, the Company made a cash payment to an affiliate of Cornell Capital of $80,000 for expenses incurred in connection with the transaction.
On June 29, 2006, the Company entered into an assignment agreement (‘‘Assignment Agreement’’) by and between Cornell Capital, The Longview Fund, LP (‘‘Longview’’), Alpha Capital Aktiengesellschaft (‘‘Alpha’’), Ellis International Ltd. (‘‘Ellis’’) and Momona Capital Corp. (‘‘Momona’’) (each an ‘‘Assignee’’) which provides for, among other things, the assignment of the unpaid and unconverted amounts outstanding under each of the Cornell Convertible Debentures to the Assignees in the amounts listed in the Assignment Agreement. The aggregate unpaid and unconverted principal amount of $1,700,000 under the Cornell Convertible Debentures was assigned. The aggregate purchase price paid by the Assignees was $1,914,180, of which $1,836,000 is being paid for principal (which includes the Redemption Amount) and $78,180 represents accrued interest. The Company now owes the principal amounts of $700,000 and $400,000 to Longview and $300,000, $200,000 and $100,000 to Alpha, Ellis and Momona, respectively, in proportion to their assignment from Cornell Capital. All of the terms and conditions remain unchanged in the Cornell Convertible Debentures except that the Assignment Agreement provides that the Company may not redeem the Cornell Convertible Debentures, in whole or in part.
Pursuant to the Assignment Agreement, the Company was obligated to file an amended registration statement to reflect the change in selling shareholders by July 10, 2006. As of September 30, 2007, the Company had not met this obligation causing it to be in default under the terms of the Assignment Agreement. There has not been an agreement on amended terms and no assurance the Company will reach agreement with the note holders. The terms of the Cornell Convertible Debentures do not provide for penalties or other payments upon default, and accordingly, the Company has not accrued any as of September 30, 2007.
Pursuant to the Securities Purchase Agreement, the Company granted a security interest in all of its assets to Cornell Capital to secure its obligations under the Cornell Convertible Debentures, which security interest will be transferred to the Assignees pursuant to the Assignment Agreement.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
As of September 30, 2007, $1,700,000 of principal of the Debentures remains outstanding. The conversion option featured in these Debentures is being accounted for as a free standing derivative financial instrument in accordance with SFAS 133 and EITF 00-19. The fair value of the conversion option amounted to $153,487 at September 30, 2007. The amount of the unamortized discount of these Debentures, based on the original allocation of proceeds to the carrying amount of the note and the free standing conversion option, amounts to $576,630, at September 30, 2007.
2006 6% CONVERTIBLE NOTES
On May 26, 2006, the Company entered into a placement agency agreement and term sheet for a private offering of one-year 6% convertible notes in an aggregate principal amount of up to $6,000,000 (the ‘‘2006 6% Convertible Notes’’).
The Company offered the 2006 6% Convertible Notes on a ‘‘best efforts’’ basis only to ‘‘accredited investors’’ (as defined in Rule 501 (a) of Regulation D under Section 4(2) of the Securities Act of 1933, as amended) by offer letter dated May 25, 2006 (the ‘‘Offer Letter’’), which sets forth the terms and conditions of the offering.
The 2006 6% Convertible Notes are payable one year after the date of funding, or earlier upon acceleration following the occurrence of an ‘‘Event of Default’’, as defined in the 2006 6% Convertible Notes. Interest on the 2006 6% Convertible Notes will accrue from the date of issue at 6% per annum, or 12 % per annum upon the occurrence of an Event of Default.
The principal of, and accrued interest on, the 2006 6% Convertible Notes is convertible into shares of common stock, at the option of the holders of the 2006 6% Convertible Notes, at an initial conversion price per share of $0.15, subject to adjustment for certain issuances or events that will result in dilution (the ‘‘Fixed Conversion Price’’). Since the 2006 6% Convertible Notes had not been fully converted or repurchased for 200% of their principal amount by September 30, 2006, on October 1, 2006, the conversion price became the lesser of (i) the Fixed Conversion Price and (ii) 90% of the lowest closing price (or, if no closing price is available, the average of closing bid and asked prices) of the Company’s common stock for the 20 trading days immediately preceding the date on which a notice of conversion is delivered (the ‘‘Floating Conversion Price’’).
Purchasers of 2006 6% Convertible Notes who have not previously purchased shares of the Company’s Series A Convertible Preferred Stock, par value $0.0001 per share (the ‘‘Preferred Stock’’) are to receive, without additional consideration, five-year warrants to purchase a number of additional shares of common stock equal to 100% of the number of shares that the purchaser may initially acquire upon conversion of the 2006 6% Convertible Notes, at an initial exercise price of $0.30 per share, subject to adjustment for certain issuances and events that will result in dilution.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
Purchasers of 2006 6% Convertible Notes who purchased shares of Preferred Stock, will be issued a number of additional shares of common stock upon conversion of the Preferred Stock, based upon the principal amount of 2006 6% Convertible Notes purchased relative to the total purchase price of the shares of Preferred Stock purchased, which will effectively reduce the per share conversion price of the Preferred Stock so that it is the same as the conversion price per share of the 2006 6% Convertible Notes, or to the extent purchasers have converted shares of Preferred Stock, but not sold the common stock received upon conversion, the Company will issue a number of additional shares of common stock that will provide equivalent value, in each case without additional consideration. The Company will issue warrants to purchase a number of additional shares of common stock at $0.15 that will provide equivalent value, to those purchasers of 2006 6% Convertible Notes who have sold or otherwise disposed of shares of common stock received upon conversion of Preferred Stock. The Company also will reduce to $0.30 the per share exercise price of warrants purchasers of the 2006 6% Convertible Notes received with their purchase of Preferred Stock, to the extent of the principal amount of 2006 6% Convertible Notes purchased relative to the total purchase price for the shares of Preferred Stock, subject to the Company’s right, after the registration statement referred to below has become effective, to force the exercise of those warrants on 20 days’ notice by offering to purchase those warrants for a nominal price if the closing price per share of the common stock exceeds $0.45 for ten consecutive trading days.
The Company was obligated to file a registration statement by August 21, 2006 to register for resale the shares of common stock that purchasers of 2006 6% Convertible Notes may acquire upon conversion of the 2006 6% Convertible Notes or exercise of the warrants, as well as any additional shares of common stock which may be issued as part of the offering. Since the Company failed to file a registration statement for the resale of these shares by August 21, 2006, the Company is obligated to pay purchasers of the 2006 6% Convertible Notes liquidated damages in an amount equal to 2% of the principal amount of the 2006 6% Convertible Notes for each month, or portion of a month, for which the Company fails to timely file the registration statement or until the registration statement becomes effective, but in no event may the liquidated damages exceed 18% of the principal amount of the 2006 6% Convertible Notes. At March 31, 2007, the Company has accrued $642,500 as estimated liquidated damages, which represent the damages which would be due with a potential delay of ten months in the filing of its registration statement.
As a condition to their purchase of the 2006 6% Convertible Notes, purchasers agreed not to sell, transfer or otherwise dispose of any securities of the Company prior to the 150th day after June 1, 2006, except that the restrictive period applicable to shares of common stock that were acquired, or may be acquired, upon conversion of shares of Preferred Stock held by the purchaser, expired on August 20, 2006 to the extent of the total purchase price paid by the purchaser for 2006 6% Convertible Notes bears in relation to the total purchase price paid for the Preferred Stock.
The Company is obligated to pay a cash fee equal to 10% of the gross proceeds from the sale of the 2006 6% Convertible Notes for purchasers obtained through the assistance of the placement agent, a portion of which may be reallocated to other registered broker-dealers participating in the offering, and reimburse the placement agent for $15,000 of its legal expenses. The Company is obligated to issue to the placement agent, or its designee(s), at each closing, a five-year warrant to purchase such number of shares of common stock at an exercise price of $0.15 per share equal to 10% of such number of shares of common stock into which the 2006 6% Convertible Notes sold through the placement agent at such closing are convertible. In addition, the Company has agreed to reduce to $0.30 the per share exercise price of warrants to purchase shares of common stock issued to the placement agent previously, as placement agent for our Preferred Stock.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
The Harbor Trust has agreed to a pledge of its 2005 Harbor Note dated December 9, 2005 issued in the name of The Harbor Trust in the principal amount of $250,000 to secure a non-recourse obligation to increase the return to purchasers of Preferred Stock to the extent required to protect investors from a loss on their investment to the extent of such collateral, measured on the earlier of May 20, 2007 or the date on which all the 2006 6% Convertible Notes offered have been sold or otherwise disposed of, including by conversion. In consideration for the agreements made by The Harbor Trust, at each closing the Company is obligated to (i) pay The Harbor Trust a yield enhancement incentive fee equal to 10% of the aggregate gross proceeds of the 2006 6% Convertible Notes receiving the benefit of such protection (the ‘‘Yield Protected Notes’’), plus (ii) issue to The Harbor Trust, for nominal consideration, five-year warrants to purchase, for the principal amount thereof, (A) 2006 6% Convertible Notes having a principal amount equal to 10% of the principal amount of the Yield Protected Notes sold in the Offering, and (B) five-year warrants to purchase a number of shares of common stock equal to 10% of the shares of common stock that purchasers of the Yield Protected Notes sold in the offering may acquire upon exercise of the warrants they received with the purchase of the Yield Protected Notes, at an exercise price of $0.30 per share. In no event will the total yield enhancement incentive fee, plus the placement agent fee, paid by the Company exceed 10% of the gross proceeds of the offering.
From June 1, 2006 through October 19, 2006 (date of last closing under the offering), the Company sold an aggregate principal amount of $3,569,444 of 2006 6% Convertible Notes. The Company issued five-year warrants to purchase an aggregate of 14,018,513 shares of common stock, at an initial exercise price of $0.30 per share to purchasers of $2,102,777 of 2006 6% Convertible Notes who had not previously purchased its Preferred Stock. The Company is obligated to issue to those purchasers of $1,466,667 of 2006 6% Convertible Notes who had previously purchased Preferred Stock, upon the conversion of their Preferred Stock, 9,191,113 additional shares of common stock and adjust the exercise price to $0.30 on warrants to purchase an aggregate of 293,333 shares of common stock received upon the purchase of the Preferred Stock. Pursuant to the terms of the 6% Notes Offering, the Company issued (i) warrants to purchase $356,944 of 2006 6% Convertible Notes at an exercise price of $356,944 and attached warrants to purchase 2,379,629 shares of common stock, and (ii) a warrant to purchase 1,401,851 shares of common stock at an exercise price of $0.30, as yield enhancement fees.
Of the $2,102,777 in principal purchased by those investors who had not previously purchased the Company’s Preferred Stock, the Company recognized a debt discount of $1,545,208 at date of issuance based on an allocation of the proceeds based on relative fair values of the 2006 6% Convertible Notes, the warrants and the conversion option, as determined by the Black-Scholes option pricing model. Since the Company is required to account for its derivative financial instruments as liabilities (see Note 3), the Company recorded the full fair values of the warrants and the conversion options at date of issuance of the 2006 6% Convertible Notes of $3,161,789 and $3,019,573, respectively, as liabilities and charged non-cash interest expense. The fair value of the warrants and conversion option was estimated at the date of issuance using the Black-Scholes option pricing model with the following assumptions: risk fee interest rate: 4.7% to 5.1%; expected dividend yield: 0%; expected option life: 3 years to 5 years; and volatility: 173% to 223%. The Company marks to market these derivative financial instruments at each reporting date. At September 30, 2007, the Company valued the warrants and conversion options at $485,516 and $163,363 , respectively.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
Of the $1,466,667 in principal purchased by those investors who had previously purchased the Company’s Preferred Stock, the Company recognized a debt discount of $1,466,667 at date of issuance based on the (i) fair values of the conversion option, (ii) the incremental increase in fair value of the additional shares of common stock to be issued upon conversion of the Preferred Stock and (iii) the change in fair value of the underlying warrants associated with the Preferred Stock due to the change in exercise price, as determined by the Black-Scholes option pricing model. Since the Company is required to account for its derivative financial instruments as liabilities (see Note 3), the Company recorded the incremental fair value of the Preferred Stock warrants and the full fair value of the conversion options at date of issuance of the 2006 6% Convertible Notes of $18,148 and $2,026,398, respectively, as liabilities and charged the excess to non-cash interest expense. The fair value of these derivatives was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: risk fee interest rate: 4.7% to 5.1%; expected dividend yield: 0%; expected option life: 3 years to 5 years; and volatility: 173% to 223%. The Company marks to market these derivative financial instruments at each reporting date. In addition, the Company charged non-cash interest expense and credited equity for the incremental increase in fair value of the additional shares of common stock issuable upon conversion of the Preferred Stock. At September 30, 2007, the Company's authorized common stock was not sufficient to accommodate the exercise of warrants or conversion privileges of outstanding convertible debts and exercisable warrants.
ADJUSTMENTS TO OUTSTANDING CONVERTIBLE SECURITIES AND OTHER RIGHTS TO PURCHASE COMMON STOCK RESULTING FROM 2006 6% CONVERTIBLE NOTES OFFERING
Pursuant to the terms of the 2006 6% Convertible Note offering, the conversion prices on certain convertible securities were adjusted to the conversion price of the 2006 6% Convertible Notes.
The Amended December 2004 Convertible Note and the 2005 Harbor Note in the principal amount of $448,736 and $250,000, respectively and with adjusted conversion prices of $0.75 per share and $0.375 per share, respectively, had their conversion prices adjusted to $0.15 per share. As a result of this adjustment, the Company anticipates that it will issue an 3,190,233 and 1,570,364 shares, respectively, calculated as of September 30, 2007.
The Company evaluated the revision in the remaining Amended December 2004 Convertible Note to determine whether the reduction in the conversion price resulted in the issuance of a substantially different debt instrument. The Company determined that after giving effect to the substantial increase in the fair value of the beneficial conversion feature that resulted from reducing the conversion price, it had issued a substantially different debt instrument which resulted in a constructive extinguishment of the original debt instrument. Accordingly, the Company recorded a gain on the extinguishment of debt in the amounts of $387,362 for the Amended December 2005 Convertible Note that was included in the statement of operations for the year ended December 31, 2006.
Since the incremental fair value of the Company's common stock which would be issued upon conversion, as determined by the Black-Scholes option pricing model, was in the aggregate greater than the principal balance of individual notes, the Company recorded an original issuance discount equal to the fair value of this beneficial conversion feature, limited to the principal balance of the notes. This debt discount is being amortized as non-cash interest expense over the remaining term of the Amended December 2004 Convertible Note. During the year ended December 31, 2006, the Company amortized an aggregate of $448,736 of the debt discount which is included in interest expense in the accompanying statement of operations. Assumptions relating to the estimated fair value of the beneficial conversion features are as follows: risk-free interest rate of 5.1%; expected dividend yield zero percent; expected life of 1.5 years; and current volatility of 165.4%.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
The Cornell Convertible Debentures in the principal of $1,700,000 plus accrued interest, with a Fixed Conversion Price (as that term is defined in the Cornell Convertible Debentures) of $0.9765, adjusted to a Fixed Conversion Price of $0.15. In addition, the exercise price of the warrants issued to Cornell Capital, for the purchase of 1,000,000 shares of common stock at $1.023 per share has been reduced to $0.15 per share. As the terms of Cornell Convertible Debentures provide for a lower of Fixed Conversion Price or Floating Conversion Price (as both terms are defined in the Cornell Convertible Debentures) at conversion, the number of shares of common stock issuable upon conversion is indeterminate.
Certain options granted pursuant to our 2004 Incentive Stock Plan and certain shares of common stock issued upon exercise of those options, contain anti-dilution provisions which provide for a reduction of the exercise price if the Company sells common stock or issues convertible securities at a per share price less than their exercise price of $0.359 (fair market value on the date of grant). As a result of the anti-dilution provision, the Company issued an additional 776,231 shares of common stock and increased the remaining unexercised option by an additional 776,230 shares of common stock issuable upon exercise to the option holders.
NOTE 9 - EQUITY TRANSACTIONS
During the nine month period ended September 30, 2007, the Company issued the following equity securities.
Common Stock Issued Upon Conversion of Series A Preferred Stock
During the nine month period ended September 30, 2007, the Company issued 50,000 shares of common stock upon conversion of five shares of its Preferred Stock.
Insufficient Authorized but Unissued Shares of Common Stock
On May 9, 2006, the Board of Directors authorized an amendment to the Company's Amended and Restated Certificate of Incorporation to increase the number of authorized shares of capital stock from 120,000,000 shares to 270,000,000 shares, of which 250,000,000 shares would be designated as common stock and 20,000,000 shares would be designated as Preferred Stock. The proposed amendment has yet to be considered or approved by the stockholders. Accordingly, the Company has not satisfied its obligations in the agreements relating to those securities, and is in default of its obligations under those agreements (see note 8). As a result, the holders of those securities may accelerate payment of the Company's obligations, obtain liquidated damages under certain of those agreements and pursue other legal remedies against the Company that would have a material adverse effect on the Company's ability to remain in existence.
NOTE 10- STOCK BASED COMPENSATION
The Company, since its inception, has granted non-qualified stock options to various employees and non-employees at the discretion of the Board of Directors under its 2004 Incentive Stock Plan and its 2006 Incentive Stock Plan (the "Plans"). Both Plans have substantially the same terms. Substantially all options granted to date have exercise prices equal to the fair value of the underlying common stock at the date of grant and terms ranging from three to ten years. Vesting periods range from fully vested at the date of grant to four years.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
The fair value of all awards is estimated at the date of grant using the Black-Scholes option pricing model. Assumptions relating to the estimated fair value of stock options that the Company granted prior to January 1, 2006 that were previously accounted for and recorded under the intrinsic value method prescribed under APB 25 are described in Note 3. Pursuant to SFAS 123R, the Company recognized expense on the statement of operations of $70 and $210 for the fair value of those stock options granted prior to January 1, 2006 and which vested during the three and nine month periods ended September 30, 2007.
During March 2006, the Company granted stock options to acquire an aggregate of 1,514,206 shares of common stock to three consultants. The option agreements for two of the consultants contained anti-dilution protection of the exercise price and the number of shares issuable upon conversion in the event the Company issued common stock at a price less then the exercise price contained in their option. Each option was exercisable at a price of $0.359 per share for a period of up to five years from issuance. All of these options were fully vested and non forfeitable on their date of issuance. The Company charged the estimated fair value of $579,591 to compensation expense during the nine-month period ended September 30, 2006 with respect to these options. Assumptions relating to the estimated fair value of these stock options (as determined by the Black-Scholes option pricing model), which the Company accounted for in accordance with SFAS 123I and EITF 96-18, are as follows: risk-free interest rate of 4.7%; expected dividend yield zero percent; expected option life of 5 years; and current volatility of 129.6%.
Pursuant to the 2006 6% Convertible Note offering commencing in May 2006, the options for the two consultants who had the anti-dilution protection were adjusted for the dilutive effect of the offering. The two consultants were issued an aggregate of 776,230 additional shares of common stock of which the fair value of $155,246 was charged to non-cash interest expense as a component of the 2006 6% Convertible Note Offering. In addition, they were granted an additional option, pursuant to the 2006 Incentive Stock Plan, to acquire an aggregate of 776,230 shares of common stock at an exercise price of $0.15 per share, of which the fair value (as determined by the Black-Scholes option pricing model) of $158,144 was charged to non-cash interest expense as a component of the 2006 6% Convertible Note offering. Assumptions related to the estimated fair value of the stock options at the date of adjustment, which the Company accounted for in accordance with SFAS 123R and EITF-96-18 were: risk fee interest rate: 5.1%; expected dividend yield: 0%; expected option life: 5 years; and volatility: 173%. The exercise price on their remaining unexercised options was adjusted to $0.15 per share.
During June 2006, the Company granted stock options to acquire an aggregate of 16,000 shares of common stock to three directors of the Company. Each option was exercisable at a price of $0.21 per share for a period of up to ten years from issuance. All of these options vest over three years and were non forfeitable on their date of issuance. The fair value of these options (as determined by the Black-Scholes option pricing model) was $3,360 and the Company amortized $188 to compensation expense during the nine-month period ended September 30, 2006 with respect to these options. Assumptions relating to the estimated fair value of these stock options, which the Company accounted for in accordance with SFAS 123(R) and EITF 96-18 are as follows: risk-free interest rate of 5.1%; expected dividend yield zero percent; expected option life of 10 years; and current volatility of 220.3%.
During the three months ended March 31, 2007, options previously granted to certain former members of the Company’s Board of Directors were forfeited. A total of 16,000 options previously granted to now terminated Board members was forfeited during the 1st quarter 2007.
No options were granted to officers or directors of the Company during the three months ended September 30, 2007.
CepTor Corporation
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 2007
(Unaudited)
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company has not paid dividends to date and does not expect to pay dividends in the foreseeable future due to its substantial accumulated deficit and limited capital resources. Accordingly, expected dividends yields are zero. Historical cancellations and forfeitures of stock options are insignificant. The Company will adjust its assumptions relating to its expectations of future vesting and terms of options at such times that additional data indicates that changes in these assumptions are necessary. Expected volatility is principally based on the historical volatility of the Company's stock.
A summary of option activity for the nine-month period ended September 30, 2007 is as follows:
| | | | | | | | | Weighted- | | | |
| | | | | | Weighted- | | | Average | | | |
| | | | | | Average | | | Remaining | | | Aggregate |
| | | | | | Exercise | | | Contractual | | | Intrinsic |
Options | | Shares | | | Price | | | Term | | | Value |
Outstanding at January 1, 2007 | | | | | | $ | 1.06 | | | | | | | $ | - |
| Granted | | | - | | | | - | | | | - | | | | - |
| | | | | | | | | | | | | | | |
| Forfeited or expired | | | 16,000 | | | | 4.84 | | | | 7.62 | | | | - |
Outstanding at September 30, 2007 | | | | | | $ | 0.53 | | | | | | | $ | - |
| Exercisable at September 30, 2007 | | | 1,841,834 | | | $ | 0.52 | | | | 3.18 | | | $ | - |
As of September 30, 2007, the Company has $2,100 of unrecognized compensation cost related to non-vested share-based compensation arrangements, which represents the fair value of stock options that the Company accounted for under APB 25 through December 31, 2005. These costs are expected to be recognized over a weighted-average period of 2.00 years.
