SB-2: Optional form for registration of securities to be sold to the public by small business issuers
Published on May 25, 2007
As
filed with the Securities and Exchange Commission on May 25,
2007
Registration
No. 333-[ ]
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
SB-2
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
NOVELOS
THERAPEUTICS, INC.
(Name
of small business issuer in its charter)
|
Delaware
(State
or other jurisdiction
of
incorporation or organization)
|
2834
(Primary
Standard Industrial
Classification
Code Number)
|
04-3321804
(I.R.S.
employer
identification
number)
|
One
Gateway Center
Suite
504
Newton,
Massachusetts 02458
(617)
244-1616
(Address
and telephone number of principal executive offices)
Harry
S. Palmin
President
and Chief Executive Officer
Novelos
Therapeutics, Inc.
One
Gateway Center, Suite 504
Newton,
Massachusetts 02458
(617)
244-1616
(Name,
address and telephone number of agent for service)
Copies
to:
Paul
Bork, Esq.
Foley
Hoag LLP
155
Seaport Boulevard
Boston,
Massachusetts 02110
(617)
832-1000
Approximate
date of proposed sale to the public:
As soon
as practicable after this Registration Statement becomes effective.
If
any of
the securities being registered on this form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933
(“Securities Act”), check the following box. x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. o
CALCULATION
OF REGISTRATION FEE
|
Title
of Each Class of Securities to
be Registered
|
|
Amount
to be
Registered
|
|
Proposed
Maximum
Offering
Price
Per
Share(1)
|
|
Proposed
Maximum
Aggregate
Offering
Price
|
|
Amount
of
Registration
Fee
|
|||||
|
Common
Stock, par value $0.00001 per share
|
15,000,000
|
(2)
|
$
|
1.12
|
$
|
16,800,000
|
|||||||
|
Common
Stock, par value $0.00001 per share
|
7,500,000
|
(3)
|
$
|
1.12
|
$
|
8,400,000
|
|||||||
|
Common
Stock, par value $0.00001 per share
|
900,000
|
(4)
|
$
|
1.12
|
$
|
1,008,000
|
|||||||
|
Total
|
$
|
2,804.26
|
|||||||||||
|
(1)
|
Estimated
based on average of the bid and asked prices of our common stock
as
reported over-the-counter on the OTC Electronic Bulletin Board of
the
National Association of Securities Dealers, Inc. on May 23, 2007
pursuant
to Rule 457(c) promulgated under the Securities Act of
1933.
|
|
(2)
|
Represents
the maximum number of shares issuable upon conversion of our Series
B
Convertible Preferred Stock issued in a private placement transaction
completed on May 2, 2007.
|
|
(3)
|
Represents
the number of shares of our common stock issuable upon exercise of
common
stock purchase warrants issued in a private placement transaction
completed on May 2, 2007.
|
|
(4)
|
Represents
the number of shares of our common stock issuable upon exercise of
common
stock purchase warrants issued as placement agents’ fees in connection
with our private placement transaction completed on May 2, 2007.
|
2
The
information in this prospectus is not complete and may be changed. The selling
stockholders may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities, and the selling stockholders are
not
soliciting offers to buy these securities, in any state where the offer or
sale
of these securities is not permitted.
Subject
to completion dated May 25, 2007
PROSPECTUS
23,400,000
shares of common stock
NOVELOS
THERAPEUTICS, INC.
This
prospectus relates to the resale, from time to time, of up to 23,400,000 shares
of our common stock by the stockholders referred to throughout this prospectus
as “selling stockholders.” 15,000,000 shares of our common stock offered in this
prospectus are issuable on conversion of preferred stock and 8,400,000 shares
of
our common stock are issuable upon exercise of warrants.
The
selling stockholders will receive all of the proceeds from the sales made under
this prospectus. Accordingly, we will receive no part of the proceeds from
sales
made under this prospectus. We are paying the expenses incurred in registering
the shares, but all selling and other expenses incurred by the selling
stockholders will be borne by the selling stockholders.
Our
common stock is quoted on the OTC Electronic Bulletin Board of the National
Association of Securities Dealers, Inc. under the symbol “NVLT.OB.” On May 24,
2007, the last reported sale price of our common stock on the OTC Electronic
Bulletin Board was $1.11 per share.
Investing
in our common stock involves a high degree of risk.
See
risk factors beginning on page 8 of this prospectus.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date
of this prospectus is May [ ], 2007
3
TABLE
OF CONTENTS
|
Page
|
|
|
PROSPECTUS
SUMMARY
|
6
|
|
RISK
FACTORS
|
8
|
|
FORWARD-LOOKING
STATEMENTS
|
18
|
|
USE
OF PROCEEDS
|
18
|
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|
19
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|
19
|
|
BUSINESS
|
25
|
|
LITIGATION
|
33
|
|
PROPERTIES
|
33
|
|
MANAGEMENT
|
33
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
39
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
40
|
|
SELLING
STOCKHOLDERS
|
41
|
|
DESCRIPTION
OF SECURITIES
|
44
|
|
PLAN
OF DISTRIBUTION
|
48
|
|
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
|
50
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
50
|
|
LEGAL
MATTERS
|
50
|
|
EXPERTS
|
50
|
|
INDEX
TO FINANCIAL STATEMENTS
|
F-1
|
|
PART
II. INFORMATION NOT REQUIRED IN PROSPECTUS
|
II-1
|
|
SIGNATURES
|
II-7
|
4
No
dealer, salesperson or other person has been authorized to give any information
or to make any representations other than those contained in this prospectus
in
connection with the offer contained in this prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by us.
Neither
the delivery of this prospectus nor any sale made hereunder shall under any
circumstances create an implication that there has been no change in our affairs
since the date hereof. This prospectus does not constitute an offer to sell
or a
solicitation of an offer to buy securities other than those specifically offered
hereby or of any securities offered hereby in any jurisdiction where, or to
any
person to whom, it is unlawful to make such offer or solicitation. The
information contained in this prospectus speaks only as of the date of this
prospectus unless the information specifically indicates that another date
applies.
This
prospectus has been prepared based on information provided by us and by other
sources that we believe are reliable. This prospectus summarizes certain
documents and other information in a manner we believe to be accurate, but
we
refer you to the actual documents, if any, for a more complete understanding
of
what we discuss in this prospectus. In making a decision to invest in the common
stock, you must rely on your own examination of us and the terms of the offering
and the common stock, including the merits and risks involved.
We
are
not making any representation to you regarding the legality of an investment
in
our common stock under any legal investment or similar laws or regulations.
You
should not consider any information in this prospectus to be legal, business,
tax or other advice. You should consult your own attorney, business advisor
and
tax advisor for legal, business and tax advice regarding an investment in our
common stock.
5
PROSPECTUS
SUMMARY
The
following summary highlights certain material aspects of the offering for resale
of common stock by the selling stockholders covered by this prospectus but
may
not contain all of the information that is important to you. You should read
this summary together with the more detailed information regarding our company,
our common stock and our financial statements and notes to those statements
appearing elsewhere in this prospectus, including the “RISK FACTORS” beginning
on page 9.
Business
We
were
incorporated in June 1996 as AVAM International, Inc. In October 1998, Novelos
Therapeutics, Inc., a newly incorporated entity, merged into AVAM, and the
name
of AVAM was changed to Novelos Therapeutics, Inc. In 2005, we completed a
two-step reverse merger with Common Horizons, Inc., and its wholly-owned
subsidiary Nove Acquisition, Inc. Following the merger, the surviving company
was Novelos Therapeutics, Inc.
We
are a
biopharmaceutical company commercializing oxidized glutathione-based compounds
for the treatment of cancer and hepatitis. NOV-002, our lead compound, is
currently in Phase 3 development for lung cancer under a Special Protocol
Assessment and Fast Track. NOV-002 is also in Phase 2 development for
chemotherapy-resistant ovarian cancer and early-stage breast cancer, and is
also
being developed for acute radiation injury. NOV-205, our second compound, is
in
Phase 1b development for chronic hepatitis C non-responders. Both compounds
have
completed clinical trials in humans and have been approved for use in Russia,
where they were originally developed.
NOV-002,
our lead compound, acts as a chemoprotectant and an immunomodulator. In May
2006, we finalized a Special Protocol Assessment with the FDA for a single
pivotal Phase 3 trial and obtained Fast Track designation in August 2006. The
primary endpoint of this trial is improvement in median overall survival, and
we
commenced patient enrollment in November 2006.
NOV-002
is also being developed to treat chemotherapy-resistant ovarian cancer. A U.S.
Phase 2 trial is ongoing at Massachusetts General Hospital and Dana-Farber
Cancer Institute.
NOV-002
is also being developed to treat early-stage breast cancer. These patients
are
often treated with chemotherapy to minimize surgical intervention. A planned
U.S. Phase 2 trial will evaluate the ability of NOV-002 to enhance the
effectiveness of such chemotherapy while diminishing dose-limiting side-effects.
NOV-002
is also being developed to treat acute radiation injury.
NOV-205,
our second compound, acts as a hepatoprotective agent with immunomodulating
and
anti-inflammatory properties. Our Investigational New Drug Application for
NOV-205 as monotherapy for chronic hepatitis C was accepted by the FDA in April
2006, and a U.S. Phase 1b trial in patients who previously failed treatment
with
pegylated interferon plus ribavirin commenced in September 2006 and is
ongoing.
Our
intellectual property portfolio of issued patents includes four U.S. patents
(plus a fifth notice of allowance), two European patents and one Japanese
patent. Overall, we have filed more than thirty patent applications worldwide,
with coverage including composition of matter, method of use and manufacturing.
The breadth of our intellectual property will also allow us to expand our
product pipeline by claiming and commercializing additional compounds that
are
based on oxidized glutathione.
We
have
devoted substantially all of our efforts towards the research and development
of
our product candidates. We have incurred approximately $13.5 million in research
and development expense from our inception through March 31, 2007. We have
had
no revenue from product sales to date and have funded our operations through
the
sale of equity securities and debt financings. From our inception through March
31, 2007, we raised approximately $29.0 million in equity and debt (subsequently
paid off or converted into equity) financings and in May 2007 we raised $15
million in gross proceeds through the sale of our Series B preferred stock.
We
have never been profitable and have incurred an accumulated deficit of $26.1
million as of March 31, 2007.
6
Recent
Private Placement
Certain
selling stockholders are offering up to 23,400,000 shares of our common stock,
of which 15,000,000 are issuable upon the conversion of our Series B Convertible
Preferred Stock and 7,500,000 are issuable upon exercise of our outstanding
five-year common stock purchase warrants having an exercise price of $1.25
per
share, that were sold in a private placement completed on May 2, 2007. Certain
selling stockholders are also offering up to 900,000 shares of common stock
that
are issuable upon exercise of similar five-year common stock purchase warrants
issued as placement agents’ fees in this private placement
transaction.
We
received gross proceeds of $15,000,000 and net proceeds of approximately
$13,600,000 (after deducting placement agents’ fees and transaction costs) from
this private placement.
The
Offering
|
Securities
Offered:
|
23,400,000
shares of our common stock including:
· 15,000,000
shares of our common stock issuable upon conversion of preferred
stock and
· 8,400,000
shares of our common stock issuable upon exercise of
warrants
|
|
Use
of Proceeds:
|
We
will not receive any of the proceeds from the sale by any selling
stockholder of common stock or the conversion of preferred stock.
However,
we will receive proceeds from the exercise of the warrants if they
are
exercised. We intend to use any proceeds for working capital and
general
corporate purposes.
|
|
Total
Shares of our Common Stock Outstanding as
of
May
23, 2007:
|
39,235,272
|
Summary
Financial Information
The
following table provides selected financial and operating data for the periods
indicated:
|
Three
Months Ended
March
31,
|
Year
Ended
December
31,
|
||||||||||||
|
2007
|
2006
|
2006
|
2005
|
||||||||||
|
Revenue
|
$
|
−
|
$
|
−
|
$
|
−
|
$
|
12,584
|
|||||
|
Costs
and expenses
|
2,517,129
|
1,434,808
|
8,929,808
|
2,578,966
|
|||||||||
|
Other
income (expense)
|
135,459
|
80,722
|
643,752
|
(487,017
|
)
|
||||||||
|
Net
loss
|
(2,381,670
|
)
|
(1,354,086
|
)
|
(8,286,056
|
)
|
(3,053,399
|
)
|
|||||
|
Net
loss attributable to common stockholders
|
(2,446,950
|
)
|
(1,418,086
|
)
|
(8,547,176
|
)
|
(5,194,720
|
)
|
|||||
|
Current
assets
|
9,598,161
|
17,820,963
|
11,888,674
|
4,801,925
|
|||||||||
|
Current
liabilities
|
1,307,165
|
475,599
|
1,313,425
|
217,156
|
|||||||||
|
Total
assets
|
9,632,695
|
17,896,263
|
11,923,359
|
4,938,699
|
|||||||||
Our
principal executive offices are located at One Gateway Center, Suite 504,
Newton, Massachusetts 02458 and our telephone number is (617)
244-1616.
7
RISK
FACTORS
The
following risk factors should be considered carefully in addition to the other
information contained in this prospectus:
Risks
Related to Our Business and Industry
We
may have difficulty raising needed capital because of our limited operating
history and our business risks.
We
currently generate no revenue from our proposed products or otherwise. We do
not
know when this will change. We have expended and will continue to expend
substantial funds in the research, development and clinical and pre-clinical
testing of our drug compounds. We will require additional funds to conduct
research and development, establish and conduct clinical and pre-clinical
trials, establish commercial-scale manufacturing arrangements and provide for
the marketing and distribution of our products. Additional funds may not be
available on acceptable terms, if at all. If adequate funding is not available
to us, we may have to delay, reduce the scope of or eliminate one or more of
our
research or development programs or product launches or marketing efforts,
which
may materially harm our business, financial condition and results of
operations.
Our
long-term capital requirements are expected to depend on many factors,
including:
| · |
the
number of potential products and technologies in
development;
|
| · |
continued
progress and cost of our research and development
programs;
|
| · |
progress
with pre-clinical studies and clinical
trials;
|
| · |
the
time and costs involved in obtaining regulatory
clearance;
|
| · |
costs
involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims;
|
| · |
costs
of developing sales, marketing and distribution channels and our
ability
to sell our drugs;
|
| · |
costs
involved in establishing manufacturing capabilities for clinical
trial and
commercial quantities of our drugs;
|
| · |
competing
technological and market
developments;
|
| · |
market
acceptance of our products;
|
| · |
costs
for recruiting and retaining management, employees and consultants;
|
| · |
costs
for training physicians;
|
| · |
our
status as a bulletin-board listed company and the prospects for our
stock
to be listed on a national exchange;
and
|
| · |
uncertainty
and economic instability resulting from terrorist acts and other
acts of
violence or war.
|
We
may
consume available resources more rapidly than currently anticipated, resulting
in the need for additional funding. We may seek to raise any necessary
additional funds through the issuance of warrants, equity or debt financings
or
executing collaborative arrangements with corporate partners or other sources,
which may be dilutive to existing stockholders or otherwise have a material
effect on our current or future business prospects. In addition, in the event
that additional funds are obtained through arrangements with collaborative
partners or other sources, we may have to relinquish economic and/or proprietary
rights to some of our technologies or products under development that we would
otherwise seek to develop or commercialize by ourselves. If adequate funds
are
not available, we may be required to significantly reduce or refocus our
development efforts with regard to our drug compounds. Currently, we believe
that we have available cash sufficient to meet our working capital requirements
into the middle of 2008, assuming our expense levels do not exceed our current
plan. If we do not generate revenues or raise additional capital, we will not
be
able to sustain our operations at existing levels beyond that date or earlier
if
expense levels increase.
8
The
failure to complete development of our therapeutic technology, obtain government
approvals, including required U.S. Food and Drug Administration (FDA) approvals,
or to comply with ongoing governmental regulations could prevent, delay or
limit
introduction or sale of proposed products and result in failure to achieve
revenues or maintain our ongoing business.
Our
research and development activities and the manufacture and marketing of our
intended products are subject to extensive regulation for safety, efficacy
and
quality by numerous government authorities in the United States and abroad.
Before receiving FDA clearance to market our proposed products, we will have
to
demonstrate that our products are safe and effective on the patient population
and for the diseases that are to be treated. Clinical trials, manufacturing
and
marketing of drugs are subject to the rigorous testing and approval process
of
the FDA and equivalent foreign regulatory authorities. The Federal Food, Drug
and Cosmetic Act and other federal, state and foreign statutes and regulations
govern and influence the testing, manufacturing, labeling, advertising,
distribution and promotion of drugs and medical devices. As a result, clinical
trials and regulatory approval can take many years to accomplish and require
the
expenditure of substantial financial, managerial and other
resources.
In
order
to be commercially viable, we must successfully research, develop, obtain
regulatory approval for, manufacture, introduce, market and distribute our
technologies. For each drug utilizing oxidized glutathione-based compounds,
including NOV-002 and NOV-205, we must successfully meet a number of critical
developmental milestones including:
| · |
demonstrating
benefit from delivery of each specific drug for specific medical
indications;
|
| · |
demonstrating
through pre-clinical and clinical trials that each drug is safe and
effective; and
|
| · |
demonstrating
that we have established a viable Good Manufacturing Process capable
of
potential scale-up.
|
The
timeframe necessary to achieve these developmental milestones may be long and
uncertain, and we may not successfully complete these milestones for any of
our
intended products in development.
In
addition to the risks previously discussed, our technology is subject to
additional developmental risks that include the following:
| · |
uncertainties
arising from the rapidly growing scientific aspects of drug therapies
and
potential treatments;
|
| · |
uncertainties
arising as a result of the broad array of alternative potential treatments
related to cancer, hepatitis and other diseases;
and
|
| · |
anticipated
expense and time believed to be associated with the development and
regulatory approval of treatments for cancer, hepatitis and other
diseases.
|
In
order
to conduct the clinical trials that are necessary to obtain approval by the
FDA
to market a product, it is necessary to receive clearance from the FDA to
conduct such clinical trials. The FDA can halt clinical trials at any time
for
safety reasons or because we or our clinical investigators do not follow the
FDA’s requirements for conducting clinical trials. If we are unable to receive
clearance to conduct clinical trials or the trials are halted by the FDA, we
would not be able to achieve any revenue from such product, as it is illegal
to
sell any drug for human consumption in the U.S. without FDA approval.
9
Data
obtained from clinical trials is susceptible to varying interpretations, which
could delay, limit or prevent regulatory clearances.
Data
already obtained, or in the future obtained, from pre-clinical studies and
clinical trials does not necessarily predict the results that will be obtained
from later pre-clinical studies and clinical trials. Moreover, pre-clinical
and
clinical data are susceptible to varying interpretations, which could delay,
limit or prevent regulatory approval. A number of companies in the
pharmaceutical industry have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials. The failure to
adequately demonstrate the safety and effectiveness of an intended product
under
development could delay or prevent regulatory clearance of the potential drug,
resulting in delays to commercialization, and could materially harm our
business. Our clinical trials may not demonstrate sufficient levels of safety
and efficacy necessary to obtain the requisite regulatory approvals for our
drugs, and our proposed drugs may not be approved for marketing.
We
may
encounter delays or rejections based on additional government regulation from
future legislation or administrative action or changes in FDA policy during
the
period of development, clinical trials and FDA regulatory review. We may
encounter similar delays in foreign countries. Sales of our products outside
the
U.S. would be subject to foreign regulatory approvals that vary from country
to
country. The time required to obtain approvals from foreign countries may be
shorter or longer than that required for FDA approval, and requirements for
foreign licensing may differ from FDA requirements. We may be unable to obtain
requisite approvals from the FDA and foreign regulatory authorities, and even
if
obtained, such approvals may not be on a timely basis, or they may not cover
the
uses that we request.
Even
if
we do ultimately receive FDA approval for any of our products, it will be
subject to extensive ongoing regulation. This includes regulations governing
manufacturing, labeling, packaging, testing, dispensing, prescription and
procurement quotas, record keeping, reporting, handling, shipment and disposal
of any such drug. Failure to obtain and maintain required registrations or
comply with any applicable regulations could further delay or preclude us from
developing and commercializing our drugs and subject us to enforcement
action.
Our
drugs or technology may not gain FDA approval in clinical trials or be effective
as a therapeutic agent, which could affect our future profitability and
prospects.
In
order
to obtain regulatory approvals, we must demonstrate that each drug is safe
and
effective for use in humans and functions as a therapeutic against the effects
of a disease or other physiological response. To date, studies conducted in
Russia involving our NOV-002 and NOV-205 products have shown what we believe
to
be promising results. In fact, NOV-002 has been approved for use in Russia
for
general medicinal use as an immunostimulant in combination with chemotherapy
and
antimicrobial therapy, and specifically for indications such as tuberculosis
and
psoriasis. NOV-205 has been approved in Russia as a monotherapy agent for the
treatment of hepatitis B and C. Russian regulatory approval is not equivalent
to
FDA approval. Pivotal Phase 3 studies with a large number of patients, typically
required for FDA approval, were not conducted for NOV-002 and NOV-205 in Russia.
Further, all of our Russian clinical studies were completed prior to 2000 and
may not have been conducted in accordance with current guidelines either in
Russia or the United States.
A
U.S.-based Phase 1/2 clinical study involving 44 non-small cell lung cancer
patients provided what we believe to be a favorable outcome. As a result, we
enrolled the first patient in the Phase 3 study of NOV-002 for non-small cell
lung cancer in November 2006 and are continuing to enroll patients. We enrolled
the first patient in the Phase 2 clinical study for NOV-002 for
chemotherapy-resistant ovarian cancer in July 2006 and anticipate performing
an
interim analysis in 2007. We enrolled the first patient in the Phase 1b clinical
study for NOV-205 for chronic hepatitis C in September 2006 and we anticipate
completing that study in the third quarter of 2007. There can be no assurance
that we can demonstrate that these products are safe or effective in advanced
clinical trials. We are also not able to give assurances that the results of
the
tests already conducted can be repeated or that further testing will support
our
applications for regulatory approval. As a result, our drug and technology
research program may be curtailed, redirected or eliminated at any
time.
10
There
is no guarantee that we will ever generate substantial revenue or become
profitable even if one or more of our drugs are approved for
commercialization.
We
expect
to incur increasing operating losses over the next several years as we incur
increasing costs for research and development and clinical trials. Our ability
to generate revenue and achieve profitability depends on our ability, alone
or
with others, to complete the development of our proposed products, obtain the
required regulatory approvals and manufacture, market and sell our proposed
products. Development is costly and requires significant investment. In
addition, if we choose to license or obtain the assignment of rights to
additional drugs, the license fees for such drugs may increase our
costs.
To
date,
we have not generated any revenue from the commercial sale of our proposed
products or any drugs and do not expect to receive such revenue in the near
future. Our primary activity to date has been research and development. A
substantial portion of the research results and observations on which we rely
were performed by third parties at those parties’ sole or shared cost and
expense. We cannot be certain as to when or whether to anticipate
commercializing and marketing our proposed products in development, and do
not
expect to generate sufficient revenues from proposed product sales to cover
our
expenses or achieve profitability in the near future.
We
rely solely on research and manufacturing facilities at various universities,
hospitals, contract research organizations and contract manufacturers for all
of
our research, development, and manufacturing, which could be materially delayed
should we lose access to those facilities.
At
the
present time, we have no research, development or manufacturing facilities
of
our own. We are entirely dependent on contracting with third parties to use
their facilities to conduct research, development and manufacturing. Our
inability to have the facilities to conduct research, development and
manufacturing may delay or impair our ability to gain FDA approval and
commercialization of our drug delivery technology and products.
We
currently maintain a good working relationship with such contractors. Should
the
situation change and we are required to relocate these activities on short
notice, we do not currently have an alternate facility where we could relocate
our research, development and/or manufacturing activities. The cost and time
to
establish or locate an alternate research, development and/or manufacturing
facility to develop our technology would be substantial and would delay gaining
FDA approval and commercializing our products.
We
are dependent on our collaborative agreements for the development of our
technologies and business development, which expose us to the risk of reliance
on the viability of third parties.
In
conducting our research, development and manufacturing activities, we rely
and
expect to continue to rely on numerous collaborative agreements with
universities, hospitals, governmental agencies, charitable foundations,
manufacturers and others. The loss of or failure to perform under any of these
arrangements, by any of these entities, may substantially disrupt or delay
our
research, development and manufacturing activities including our anticipated
clinical trials.
We
may
rely on third-party contract research organizations, service providers and
suppliers to support development and clinical testing of our products. Failure
of any of these contractors to provide the required services in a timely manner
or on reasonable commercial terms could materially delay the development and
approval of our products, increase our expenses and materially harm our
business, financial condition and results of operations.
We
are exposed to product, clinical and preclinical liability risks that could
create a substantial financial burden should we be sued.
Our
business exposes us to potential product liability and other liability risks
that are inherent in the testing, manufacturing and marketing of pharmaceutical
products. We cannot assure that such potential claims will not be asserted
against us. In addition, the use in our clinical trials of pharmaceutical
products that we may develop and then subsequently sell or our potential
collaborators may develop and then subsequently sell may cause us to bear a
portion of or all product liability risks. A successful liability claim or
series of claims brought against us could have a material adverse effect on
our
business, financial condition and results of operations.
11
Although
we have not received any product liability claims to date, we have an insurance
policy of $5,000,000 per occurrence and $5,000,000 in the aggregate to cover
such claims should they arise. There can be no assurance that material claims
will not arise in the future or that our insurance will be adequate to cover
all
situations. Moreover, there can be no assurance that such insurance, or
additional insurance, if required, will be available in the future or, if
available, will be available on commercially reasonable terms. Any product
liability claim, if successful, could have a material adverse effect on our
business, financial condition and results of operations. Furthermore, our
current and potential partners with whom we have collaborative agreements or
our
future licensees may not be willing to indemnify us against these types of
liabilities and may not themselves be sufficiently insured or have a net worth
sufficient to satisfy any product liability claims. Claims or losses in excess
of any product liability insurance coverage that may be obtained by us could
have a material adverse effect on our business, financial condition and results
of operations.
Acceptance
of our products in the marketplace is uncertain and failure to achieve market
acceptance will prevent or delay our ability to generate
revenues.
Our
future financial performance will depend, at least in part, on the introduction
and customer acceptance of our proposed products. Even if approved for marketing
by the necessary regulatory authorities, our products may not achieve market
acceptance. The degree of market acceptance will depend on a number of factors
including:
| · |
the
receipt of regulatory clearance of marketing claims for the uses
that we
are developing;
|
| · |
the
establishment and demonstration of the advantages, safety and efficacy
of
our technologies;
|
| · |
pricing
and reimbursement policies of government and third-party payers such
as
insurance companies, health maintenance organizations and other health
plan administrators;
|
| · |
our
ability to attract corporate partners, including pharmaceutical companies,
to assist in commercializing our intended products;
and
|
| · |
our
ability to market our products.
|
Physicians,
patients, payers or the medical community in general may be unwilling to accept,
utilize or recommend any of our products. If we are unable to obtain regulatory
approval or commercialize and market our proposed products when planned, we
may
not achieve any market acceptance or generate revenue.
We
may face litigation from third parties who claim that our products infringe
on
their intellectual property rights, particularly because there is often
substantial uncertainty about the validity and breadth of medical
patents.
We
may be
exposed to future litigation by third parties based on claims that our
technologies, products or activities infringe on the intellectual property
rights of others or that we have misappropriated the trade secrets of others.
This risk is exacerbated by the fact that the validity and breadth of claims
covered in medical technology patents and the breadth and scope of trade-secret
protection involve complex legal and factual questions for which important
legal
principles are unresolved. Any litigation or claims against us, whether or
not
valid, could result in substantial costs, could place a significant strain
on
our financial and managerial resources and could harm our reputation. Most
of
our license agreements would likely require that we pay the costs associated
with defending this type of litigation. In addition, intellectual property
litigation or claims could force us to do one or more of the
following:
| · |
cease
selling, incorporating or using any of our technologies and/or products
that incorporate the challenged intellectual property, which would
adversely affect our future
revenue;
|
| · |
obtain
a license from the holder of the infringed intellectual property
right,
which license may be costly or may not be available on reasonable
terms,
if at all; or
|
| · |
redesign
our products, which would be costly and
time-consuming.
|
12
If
we are unable to adequately protect or enforce our rights to intellectual
property or secure rights to third-party patents, we may lose valuable rights,
experience reduced market share, assuming any, or incur costly litigation to
protect such rights.
Our
ability to obtain licenses to patents, maintain trade secret protection and
operate without infringing the proprietary rights of others will be important
to
our commercializing any products under development. Therefore, any disruption
in
access to the technology could substantially delay the development of our
technology.
The
patent positions of biotechnology and pharmaceutical companies, including us,
that involve licensing agreements, are frequently uncertain and involve complex
legal and factual questions. In addition, the coverage claimed in a patent
application can be significantly reduced before the patent is issued or in
subsequent legal proceedings. Consequently, our patent applications and any
issued and licensed patents may not provide protection against competitive
technologies or may be held invalid if challenged or circumvented. Our
competitors may also independently develop products similar to ours or design
around or otherwise circumvent patents issued or licensed to us. In addition,
the laws of some foreign countries may not protect our proprietary rights to
the
same extent as U.S. law.
We
also
rely on trade secrets, technical know-how and continuing technological
innovation to develop and maintain our competitive position. We generally
require our employees, consultants, advisors and collaborators to execute
appropriate confidentiality and assignment-of-inventions agreements. Our
competitors may independently develop substantially equivalent proprietary
information and techniques, reverse engineer our information and techniques,
or
otherwise gain access to our proprietary technology. We may be unable to
meaningfully protect our rights in trade secrets, technical know-how and other
non-patented technology.
Although
our trade secrets and technical know-how are important, our continued access
to
the patents is a significant factor in the development and commercialization
of
our products. Aside from the general body of scientific knowledge from other
drug delivery processes and technology, these patents, to the best of our
knowledge and based on our current scientific data, are the only intellectual
property necessary to develop our products, including NOV-002 and NOV-205.
We do
not believe that we are or will be violating any patents in developing our
technology.
We
may
have to resort to litigation to protect our rights for certain intellectual
property, or to determine their scope, validity or enforceability. Enforcing
or
defending our rights is expensive, could cause diversion of our resources and
may not prove successful. Any failure to enforce or protect our rights could
cause us to lose the ability to exclude others from using our technology to
develop or sell competing products.
We
have limited manufacturing experience and, if our products are approved, we
may
not be able to manufacture sufficient quantities at an acceptable cost, or
may
be subject to risk that contract manufacturers could experience shut-downs
or
delays.
We
remain
in the research and development and clinical and pre-clinical trial phase of
product commercialization. Accordingly, if our products are approved for
commercial sale, we will need to establish the capability to commercially
manufacture our products in accordance with FDA and other regulatory
requirements. We have limited experience in establishing, supervising and
conducting commercial manufacturing. If we fail to adequately establish,
supervise and conduct all aspects of the manufacturing processes, we may not
be
able to commercialize our products.
We
presently plan to rely on third-party contractors to manufacture our products.
This may expose us to the risk of not being able to directly oversee the
production and quality of the manufacturing process. Furthermore, these
contractors, whether foreign or domestic, may experience regulatory compliance
difficulties, mechanical shutdowns, employee strikes or other unforeseeable
acts
that may delay production.
13
Due
to our limited marketing, sales and distribution experience, we may be
unsuccessful in our efforts to sell our products, enter into relationships
with
third parties or develop a direct sales organization.
We
have
not yet had to establish marketing, sales or distribution capabilities for
our
proposed products. Until such time as our products are further along in the
regulatory process, we will not devote any meaningful time and resources to
this
effort. At the appropriate time, we intend to enter into agreements with third
parties to sell our products or we may develop our own sales and marketing
force. We may be unable to establish or maintain third-party relationships
on a
commercially reasonable basis, if at all. In addition, these third parties
may
have similar or more established relationships with our
competitors.
If
we do
not enter into relationships with third parties for the sale and marketing
of
our products, we will need to develop our own sales and marketing capabilities.
We have limited experience in developing, training or managing a sales force.
If
we choose to establish a direct sales force, we may incur substantial additional
expenses in developing, training and managing such an organization. We may
be
unable to build a sales force on a cost-effective basis or at all. Any such
direct marketing and sales efforts may prove to be unsuccessful. In addition,
we
will compete with many other companies that currently have extensive marketing
and sales operations. Our marketing and sales efforts may be unable to compete
against these other companies. We may be unable to establish a sufficient sales
and marketing organization on a timely basis, if at all.
We
may be
unable to engage qualified distributors. Even if engaged, these distributors
may:
| · |
fail
to satisfy financial or contractual obligations to
us;
|
| · |
fail
to adequately market our products;
|
| · |
cease
operations with little or no notice;
or
|
| · |
offer,
design, manufacture or promote competing
products.
|
If
we
fail to develop sales, marketing and distribution channels, we would experience
delays in product sales and incur increased costs, which would harm our
financial results.
If
we are unable to convince physicians as to the benefits of our intended
products, we may incur delays or additional expense in our attempt to establish
market acceptance.
Achieving
broad use of our products may require physicians to be informed regarding these
products and their intended benefits. The time and cost of such an educational
process may be substantial. Inability to successfully carry out this physician
education process may adversely affect market acceptance of our products. We
may
be unable to timely educate physicians regarding our intended products in
sufficient numbers to achieve our marketing plans or to achieve product
acceptance. Any delay in physician education may materially delay or reduce
demand for our products. In addition, we may expend significant funds towards
physician education before any acceptance or demand for our products is created,
if at all.
Fluctuations
in foreign exchange rates could increase costs to complete international
clinical trial activities.
We
have
initiated a portion of our clinical trial activities in Europe and Eastern
Europe. We anticipate that approximately 40% of the overall Phase 3 clinical
trial budget of approximately $33 million will be incurred in Euros. Significant
depreciation in the value of the U.S. Dollar against principally the Euro could
adversely affect our ability to complete the trials, particularly if we are
unable to redirect funding or raise additional funds. Since the timing and
amount of foreign-denominated payments are uncertain and dependent on a number
of factors, it is difficult to cost-effectively hedge the potential exposure.
Therefore, to date, we have not entered into any foreign currency hedges to
mitigate the potential exposure.
14
The
market for our products is rapidly changing and competitive, and new
therapeutics, new drugs and new treatments that may be developed by others
could
impair our ability to maintain and grow our business and remain
competitive.
The
pharmaceutical and biotechnology industries are subject to rapid and substantial
technological change. Developments by others may render our technologies and
intended products noncompetitive or obsolete, or we may be unable to keep pace
with technological developments or other market factors. Technological
competition from pharmaceutical and biotechnology companies, universities,
governmental entities and others diversifying into the field is intense and
is
expected to increase. Many of these entities have significantly greater research
and development capabilities and budgets than we do, as well as substantially
more marketing, manufacturing, financial and managerial resources. These
entities represent significant competition for us. Acquisitions of, or
investments in, competing pharmaceutical or biotechnology companies by large
corporations could increase such competitors’ financial, marketing,
manufacturing and other resources.
We
are an
early-stage enterprise that operates with limited day-to-day business
management, operating as a vehicle to hold certain technology for possible
future exploration, and have been and will continue to be engaged in the
development of new drugs and therapeutic technologies. As a result, our
resources are limited and we may experience management, operational or technical
challenges inherent in such activities and novel technologies. Competitors
have
developed or are in the process of developing technologies that are, or in
the
future may be, the basis for competition. Some of these technologies may have
an
entirely different approach or means of accomplishing similar therapeutic
effects compared to our technology. Our competitors may develop drugs and drug
delivery technologies that are more effective than our intended products and,
therefore, present a serious competitive threat to us.
The
potential widespread acceptance of therapies that are alternatives to ours
may
limit market acceptance of our products even if commercialized. Many of our
targeted diseases and conditions can also be treated by other medication or
drug
delivery technologies. These treatments may be widely accepted in medical
communities and have a longer history of use. The established use of these
competitive drugs may limit the potential for our technologies and products
to
receive widespread acceptance if commercialized.
If
users of our products are unable to obtain adequate reimbursement from
third-party payers, or if new restrictive legislation is adopted, market
acceptance of our products may be limited and we may not achieve anticipated
revenues.
The
continuing efforts of government and insurance companies, health maintenance
organizations and other payers of healthcare costs to contain or reduce costs
of
health care may affect our future revenues and profitability, and the future
revenues and profitability of our potential customers, suppliers and
collaborative partners and the availability of capital. For example, in certain
foreign markets, pricing or profitability of prescription pharmaceuticals is
subject to government control. In the United States, given recent federal and
state government initiatives directed at lowering the total cost of health
care,
the U.S. Congress and state legislatures will likely continue to focus on
healthcare reform, the cost of prescription pharmaceuticals and on the reform
of
the Medicare and Medicaid systems. While we cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could materially harm our business, financial
condition and results of operations.
Our
ability to commercialize our products will depend in part on the extent to
which
appropriate reimbursement levels for the cost of our products and related
treatment are obtained by governmental authorities, private health insurers
and
other organizations, such as health maintenance organizations (HMO’s).
Third-party payers are increasingly challenging the prices charged for medical
drugs and services. Also, the trend toward managed health care in the United
States and the concurrent growth of organizations such as HMO’s that could
control or significantly influence the purchase of healthcare services and
drugs, as well as legislative proposals to reform health care or reduce
government insurance programs, may all result in lower prices for or rejection
of our drugs. The cost containment measures that healthcare payers and providers
are instituting and the effect of any healthcare reform could materially harm
our ability to operate profitably.
15
We
depend on key personnel who may terminate their employment with us at any time,
and we would need to hire additional qualified personnel.
Our
success will depend to a significant degree on the continued services of key
management and advisors to us. There can be no assurance that these individuals
will continue to provide service to us. In addition, our success will depend
on
our ability to attract and retain other highly skilled personnel. We may be
unable to recruit such personnel on a timely basis, if at all. Our management
and other employees may voluntarily terminate their employment with us at any
time. The loss of services of key personnel, or the inability to attract and
retain additional qualified personnel, could result in delays in development
or
approval of our products, loss of sales and diversion of management resources.
Compliance
with changing corporate governance and public disclosure regulations may result
in additional expense.
Keeping
abreast of, and in compliance with, changing laws, regulations and standards
relating to corporate governance, public disclosure and internal controls,
including the Sarbanes-Oxley Act of 2002, new SEC regulations and, in the event
we seek and are approved for listing on a registered national securities
exchange, the stock exchange rules will require an increased amount of
management attention and external resources. We intend to continue to invest
all
reasonably necessary resources to comply with evolving standards, which may
result in increased general and administrative expense and a diversion of
management time and attention from revenue-generating activities to compliance
activities. Beginning with our annual report for the fiscal year ending December
31, 2007 we will be required to include a report of our management on internal
control over financial reporting. Further, in our annual report for the fiscal
year ending December 31, 2008 we will be required to include an attestation
report of our independent registered public accounting firm on internal control
over financial reporting.
Risks
Related to our Common Stock
In
the time that our common stock has traded, our stock price has experienced
price
fluctuations.
There
can
be no assurance that the market price for our common stock will remain at its
current level and a decrease in the market price could result in substantial
losses for investors. The market price of our common stock may be significantly
affected by one or more of the following factors:
| · |
announcements
or press releases relating to the bio-pharmaceutical sector or to
our own
business or prospects;
|
| · |
regulatory,
legislative, or other developments affecting us or the healthcare
industry
generally;
|
| · |
the
dilutive effect of conversion of our Series B or Series C preferred
stock
into common stock at conversion rates or the exercise of options
and
warrants at below-current-market
prices;
|
| · |
sales
by those financing our company through convertible securities and
warrants
of the underlying common stock, when it is registered with the SEC
and may
be sold into the public market, immediately upon conversion or exercise;
and
|
| · |
market
conditions specific to biopharmaceutical companies, the healthcare
industry and the stock market
generally.
|
There
may be a limited public market for our securities; we may fail to qualify for
listing on certain national securities exchanges.
In
2005
we filed applications for listing of our common stock on Archipelago and AMEX,
but these applications were withdrawn primarily because our stock prices did
not
meet the listing requirements. Although we may reapply, there can be no
assurance if and when initial listing criteria will be met or if such
applications will be granted, or that the trading of our common stock will
be
sustained. In the event that our common stock fails to qualify for initial
or
continued listing on a registered stock exchange or for initial or continued
inclusion in the NASDAQ system, trading, if any, in our common stock, would
then
continue to be conducted on the NASD’s electronic bulletin board in the
over-the-counter market and in what are commonly referred to as ‘pink sheets’.
As a result, an investor may find it difficult to dispose of or to obtain
accurate quotations as to the market value of our common stock, and our common
stock may be less attractive for margin loans, for investment by financial
institutions, as consideration in future capital raising transactions or other
purposes.
16
Trading
of our common stock may be subject to penny-stock rules under the Securities
Exchange Act of 1934. Unless exempt, for any transaction involving a
penny-stock, the regulations require broker-dealers making a market in our
common stock to provide risk disclosure to their customers including regarding
the risks associated with our common stock, the suitability for the customer
of
an investment in our common stock, the duties of the broker-dealer to the
customer, information regarding prices for our common stock and any compensation
the broker-dealer would receive. The application of these rules may result
in
fewer market makers in our common stock. Our common stock is presently subject
to the rules on penny-stocks, and the liquidity of our common stock could be
materially adversely affected so long as we remain subject to such
rule.
Our
executive officers, directors and principal stockholders have substantial
holdings, which could delay or prevent a change in corporate control favored
by
our other stockholders.
Our
directors, officers, 5% stockholders and other principal stockholders (including
the voting shares associated with our Series B preferred stock) beneficially
own, in the aggregate, approximately 50% of our outstanding voting shares.
The
interests of our current officers and directors may differ from the interests
of
other stockholders. Further, our current officers and directors may have the
ability to significantly affect the outcome of all corporate actions requiring
stockholder approval, including the following actions:
| · |
the
election of directors;
|
| · |
the
amendment of charter documents;
|
| · |
issuance
of blank-check preferred or convertible stock, notes or instruments
of
indebtedness which may have conversion, liquidation and similar features,
or completion of other financing arrangements;
or
|
| · |
the
approval of certain mergers and other significant corporate transactions,
including a sale of substantially all of our assets, or merger with
a
publicly-traded shell or other company.
|
Our
common stock could be further diluted as the result of the issuance of
additional shares of common stock, convertible securities, warrants or
options.
In
the
past, we have issued common stock, convertible securities, such as convertible
preferred stock, and warrants in order to raise money. We have also issued
options and warrants as compensation for services and incentive compensation
for
our employees and directors. We have shares of common stock reserved for
issuance upon the conversion and exercise of these securities and may increase
the shares reserved for these purposes in the future. Our issuance of additional
common stock, convertible securities, options and warrants could affect the
rights of our stockholders, and could reduce the market price of our common
stock.
We
are prohibited from taking certain actions and entering into certain
transactions as a result of the issuance of our Series B preferred stock.
For
as
long as any shares of Series B Preferred Stock remain outstanding we are
prohibited from taking certain actions or entering into certain transactions
without the prior consent of the holders of any outstanding shares of Series
B
preferred stock. We are prohibited from paying dividends to common stockholders,
amending our certificate of incorporation (except to increase the number of
shares of authorized common stock to 150,000,000), issuing any equity security
or any security convertible into or exercisable for any equity security at
a
price of $1.00 or less or with rights senior to the Series B Preferred Stock
(except for certain exempted issuances), increasing the number of shares of
Series B Preferred Stock or issuing any additional shares of Series B Preferred
Stock other than the 400 shares designated in the Series B Certificate of
Designations, or changing the number of our directors. We are also prohibited
from entering into certain transactions such as selling or otherwise disposing
of all or substantially all of our assets or intellectual property or entering
into a merger or consolidation with another company unless we are the surviving
corporation, the Series B Preferred Stock remains outstanding and there are
no
changes to the rights and preferences of the Series B Preferred Stock, redeeming
or repurchasing any capital stock other than Series B Preferred Stock, or
incurring any new debt for borrowed money.
17
If
the
board of directors determines that any of these actions are in the best interest
of the Company or our shareholders, we may be unable to complete them if we
do
not get the approval of the holders of the outstanding shares of Series B
preferred stock.
FORWARD-LOOKING
STATEMENTS
Except
for historical facts, the statements in this prospectus are forward-looking
statements. Forward-looking statements are merely our current predictions of
future events. These statements are inherently uncertain, and actual events
could differ materially from our predictions. Important factors that could
cause
actual events to vary from our predictions include those discussed under the
headings “Risk Factors,” “Management’s Discussion and Analysis or Plan of
Operation” and “Business.” We assume no obligation to update our forward-looking
statements to reflect new information or developments. We urge readers to review
carefully the risk factors described in this prospectus and the other documents
that we file with the Securities and Exchange Commission. You can read these
documents at www.sec.gov.
WE
UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, NEW EVENTS OR ANY OTHER
REASON, OR REFLECT ANY EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS PROSPECTUS
OR THE DATE OF ANY APPLICABLE PROSPECTUS SUPPLEMENT THAT INCLUDES
FORWARD-LOOKING STATEMENTS.
USE
OF PROCEEDS
The
selling stockholders will receive all of the proceeds from the sale of the
shares offered for sale by them under this prospectus. We will not receive
any
proceeds from the resale of shares by the selling stockholders covered by this
prospectus. We will receive proceeds from the exercise of the warrants if they
are exercised by the selling shareholders. Such proceeds will be used for
working capital and general corporate purposes.
18
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock has been quoted on the OTC Electronic Bulletin Board of The
National Association of Securities Dealers, Inc. under the symbol “NVLT.OB”
since June 14, 2005. The following table provides, for the periods indicated,
the high and low bid prices for our common stock. These over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
|
Fiscal
Year 2005
|
High
|
Low
|
|||||
|
First
Quarter
|
$
|
N/A
|
$
|
N/A
|
|||
|
Second
Quarter (beginning June 14, 2005)
|
2.90
|
2.00
|
|||||
|
Third
Quarter
|
4.47
|
2.15
|
|||||
|
Fourth
Quarter
|
3.65
|
1.53
|
|||||
|
Fiscal
Year 2006
|
High
|
Low
|
|||||
|
First
Quarter
|
$
|
2.25
|
$
|
1.60
|
|||
|
Second
Quarter
|
1.95
|
0.85
|
|||||
|
Third
Quarter
|
1.05
|
0.63
|
|||||
|
Fourth
Quarter
|
1.02
|
0.60
|
|||||
|
Fiscal
Year 2007
|
High
|
Low
|
|||||
|
First
Quarter
|
$
|
1.24
|
$
|
0.85
|
|||
|
Second
Quarter (through May 24, 2007)
|
$
|
1.40
|
$
|
1.07
|
|||
On
May
24, 2007, the closing sale price of our common stock as reported on the OTC
Bulletin Board was $1.11 per share. On that date, we had approximately 160
holders of record of our common stock. This number does not include stockholders
for whom shares were held in a “nominee” or “street” name.
We
have
not declared or paid any cash dividends on our common stock and do not
anticipate declaring or paying any cash dividends in the foreseeable future.
We
currently expect to retain future earnings, if any, for the development of
our
business. Dividends may be paid on our common stock if and when declared by
our
board of directors, after payment of any accrued dividends on our Series B
and
Series C preferred stock and only upon approval of holders of outstanding shares
of Series B preferred stock.
Our
transfer agent and registrar is American Stock Transfer and Trust Company,
59
Maiden Lane, New York, NY 10038.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
We
are a
biopharmaceutical company, established in 1996, commercializing oxidized
glutathione-based compounds for the treatment of cancer and hepatitis.
NOV-002,
our lead compound currently in Phase 3 development for non-small cell lung
cancer (NSCLC), acts as a chemoprotectant and an immunomodulator. In May 2006,
we finalized a Special Protocol Assessment (SPA) with the FDA for a single
pivotal Phase 3 trial in advanced NSCLC in combination with first-line
chemotherapy, and received Fast Track designation in August 2006. The primary
endpoint of this trial is improvement in median overall survival, and patient
enrollment commenced in November 2006. NOV-002 is also in Phase 2 development
for chemotherapy-resistant ovarian cancer and early-stage breast cancer and,
in
addition, is being developed for treatment of acute radiation injury.
19
NOV-205,
our second compound, acts as a hepatoprotective agent with immunomodulating
and
anti-inflammatory properties. Our Investigational New Drug Application for
NOV-205 as monotherapy for chronic hepatitis C has been accepted by the FDA,
and
a U.S. Phase 1b clinical trial in patients who previously failed treatment
with
pegylated interferon plus ribavirin is ongoing.
Both
compounds have completed clinical trials in humans and have been approved for
use in Russia where they were originally developed. We own all intellectual
property rights worldwide (excluding Russia and other states of the former
Soviet Union) related to compounds based on oxidized glutathione, including
NOV-002 and NOV-205. Our patent portfolio includes four U.S. issued patents
(plus one notice of allowance), two European issued patents and one Japanese
issued patent.
Plan
of Operation
Capital
Structure and Financings
In
2005
following the settlement of certain of our indebtedness, we completed a two-step
reverse merger with Common
Horizons, Inc. (“Common Horizons”), a Nevada-based developer of web portals, and
its wholly-owned subsidiary Nove Acquisition, Inc. In the first step, Nove
Acquisition was merged into Novelos with all outstanding shares of Novelos
(net
of shares of treasury stock) being converted into an equal number of shares
of
common stock of Common Horizons and all outstanding options and warrants to
purchase shares of Novelos common stock were converted into an equal number
of
options and warrants to purchase shares of Common Horizons with the same terms
and conditions as the original options and warrants. In connection with the
merger, all but 4,500,000 shares of outstanding common stock of Common Horizons
were canceled. In the second step, Common Horizons merged into Novelos, changing
its state of incorporation, by-laws, certificate of incorporation and fiscal
year to that of Novelos, which became the surviving corporation. The business
of
Common Horizons, which was insignificant, was abandoned and the business of
Novelos was adopted. The transaction was therefore treated as a reverse
acquisition recapitalization with Novelos as the acquiring party and Common
Horizons as the acquired party for accounting purposes. Accordingly, all
historical information in these financial statements is that of the Novelos
business. The results of operations of Common Horizons prior to the merger
were
not material for purposes of pro forma presentation. The 4,500,000 remaining
shares of Common Horizons outstanding at the completion of the merger, net
of
cancellations, were deemed, for accounting purposes, to be an issuance by
Novelos. Since Common Horizons had no remaining financial assets or liabilities,
the merger with Common Horizons did not have any significant effect on our
assets or liabilities or on our results of operations subsequent to the date
of
the merger.
Since
2005 we completed various private placements of securities. In May through
August of 2005 we sold an aggregate of 4,000,000 shares of common stock and
warrants to purchase 2,000,000 shares of common stock for net cash proceeds
of
$3,715,000 and the conversion of $550,000 of convertible debt and accrued
interest. In September and October 2005, we sold 3,200 shares of Series A
preferred stock and warrants to purchase 969,696 shares of common stock for
aggregate net proceeds of $2,864,000. The preferred stock was initially
convertible into 1,939,393 shares of common stock, and is currently convertible
into 2,370,370, shares of common stock due to certain adjustments to the
conversion price. On March 7, 2006, we sold 11,154,073 shares of our common
stock and warrants to purchase 8,365,542 shares of our common stock for net
proceeds of $13,847,000.
On May 2, 2007, we sold 300 shares of our Series B preferred stock and warrants
to purchase 7,500,000 shares of our common stock for net proceeds of
approximately $13,600,000 (after deducting placement agents’ fees and
transaction costs) and
the
holders of the outstanding Series A preferred stock exchanged their 3,264 shares
of Series A preferred stock for 272 shares of a new Series C convertible
preferred stock that is subordinate to the Series B preferred stock.
20
Results
of Operations
Research
and development expense.
Research
and development expense consists of costs incurred in identifying, developing
and testing product candidates, which primarily consist of salaries and related
expenses for personnel, fees paid to professional service providers for
independent monitoring and analysis of our clinical trials, costs of contract
research and manufacturing and costs to secure intellectual property. We
currently have two compounds, NOV-002 and NOV-205. To date, most of our research
and development costs have been associated with our NOV-002
compound.
General
and administrative expense.
General
and administrative expense consists primarily of salaries and other related
costs for personnel in executive, finance and administrative functions. Other
costs include facility costs, insurance, costs for public and investor
relations, directors’ fees and professional fees for legal and accounting
services.
Three
Months Ended March 31, 2007 and 2006
Research
and Development.
Research
and development expense for the three months ended March 31, 2007 was $1,909,000
compared to $663,000 for the three months ended March 31, 2006. The $1,246,000,
or 188%, increase in research and development expense was due to increased
funding of our clinical, contract manufacturing and non-clinical activities.
The
overall increase resulted principally from expanded activities relating to
our
pivotal Phase 3 clinical trial of NOV-002 for non-small cell lung cancer. The
increase includes $813,000 in additional contract research and consulting
services, $194,000 in clinical site expenses, an increase of $176,000 in drug
manufacturing costs and an increase of $28,000 related to overhead costs such
as
travel and related expenses. Additionally, stock compensation expense increased
$35,000 during the first quarter of 2007 as compared to the first quarter of
2006, principally resulting from additional option grants during 2006. During
the next twelve months,
we
expect research and development spending to continue to increase as our clinical
trials progress.
General
and Administrative.
General
and administrative expense for the three months ended March 31, 2007 was
$608,000 compared to $771,000 for the three months ended March 31, 2006. The
$163,000, or 21%, decrease in general and administrative expense was primarily
due to two factors. First, investor relations costs decreased $156,000
principally from a decrease in restricted stock awards to consultants. Second,
consulting fees for accounting and business development services decreased
by
$63,000 as we increased our use of internal resources to perform those
functions. These decreases were partly offset by a $25,000 increase in stock
compensation associated with new option grants during 2006 to employees,
directors and consultants and a $31,000 increase in travel and overhead costs.
Interest
Income.
Interest
income for the three months ended March 31, 2007 was $134,000 compared to
$81,000 for the three months ended March 31, 2006. The increase in interest
income during 2007 related to higher average cash balances in 2007 as a result
of the remaining net proceeds from the financings described in Note 5 being
placed in interest-bearing accounts.
Years
Ended December 31, 2006 and 2005
Research
and Development.
Research
and development expense for the year ended December 31, 2006 was $6,441,000
compared to $1,261,000 for the year ended December 31, 2005. The $5,180,000,
or
411%, increase in research and development expense was primarily due to
increased funding of our clinical, contract manufacturing and non-clinical
activities. The overall increase resulted principally from activities relating
to the commencement of our pivotal Phase 3 clinical trial of NOV-002 for
non-small cell lung cancer. The increase includes $2,677,000 in additional
contract research and consulting services and an increase of $433,000 in drug
manufacturing costs. We also purchased $1,291,000 of chemotherapy drugs during
2006 to be used in the Phase 3 clinical trial, specifically for clinical sites
in Eastern and Western Europe. Since we do not anticipate recovering any of
the
costs of the chemotherapy and we do not have a reliable method for tracking
the
drugs that have been administered to patients or evaluating any losses
associated with spoilage, we recorded the entire amount as an expense in the
period purchased. As disclosed in Note 10, we have a commitment to purchase
an
additional $1,300,000 million of chemotherapy drugs at specified intervals
through March 2008. Additionally, as a result of hiring that occurred during
the
third quarter of 2005, research and development salaries and related costs
also
increased $644,000 during 2006 compared to 2005. Lastly, stock compensation
expense increased $135,000 during 2006 compared to 2005 principally resulting
from the adoption of SFAS 123R in January 2006 and the associated compensation
expense related to stock options granted to research and development personnel.
For
the
next year, we expect research and development spending to continue to increase
as our clinical trials progress.
21
General
and Administrative.
General
and administrative expense for the year ended December 31, 2006 was $2,488,000
compared to $1,318,000 for the year ended December 31, 2005. The $1,170,000,
or
89%, increase in general and administrative expense was primarily due to
increased costs associated with corporate governance and periodic filing
requirements as a public company, increased overhead costs to support the
research activities described above and expanded investor relations activities.
The total increase includes an increase of $464,000 in compensation and
directors’ fees; an increase of $257,000 in public and investor relations costs
and public company recordkeeping costs (including a $123,000 increase in
non-cash stock compensation related to restricted stock awards); an increase
of
$169,000 related to professional and consulting fees; and an increase of $36,000
in insurance costs. We also incurred an increase of $196,000 in non-cash stock
compensation expense related to stock option grants and an increase of $107,000
in travel and overhead expenses. These increases were offset in 2006 by a
reduction in accrued registration filing penalties that were recorded during
2005.
Interest
Income.
Interest
income for the year ended December 31, 2006 was $638,000 compared to $50,000
for
the year ended December 31, 2005. The increase in interest income during 2006
related to higher average cash balances in 2006, as a result of the financings
described in Note 5 being placed in interest-bearing accounts.
Interest
Expense.
Interest
expense for the year ended December 31, 2006 was $0 compared to $109,000 for
the
year ended December 31, 2005. The decrease was due to all interest-bearing
debt
balances being paid off during 2005.
Gain
on Forgiveness of Debt.
Gain on
forgiveness of debt for the year ended December 31, 2006 was $0 compared to
$2,087,000 for the year ended December 31, 2005. On May 26, 2005, we exchanged
indebtedness of $3,139,000 for 586,352 shares of our common stock with an
aggregate deemed value of $733,000 and $319,000 in cash, which resulted in
forgiveness of debt income of $2,087,000.
Restructuring
Expense.
Restructuring expense for the year ended December 31, 2006 was $0 compared
to
$2,521,000 for the year ended December 31, 2005. On May 26, 2005, we revised
an
arrangement that requires us to pay future royalties, which resulted in the
issuance of 2,016,894 shares of our common stock with an aggregate deemed value
of $2,521,000.
Preferred
Stock Dividends and Deemed Dividend. During
the year ended December 31, 2006 we paid cash dividends to preferred
stockholders of $261,000. In 2005, we issued additional shares of preferred
stock with a deemed value of $64,000 in payment of dividends. During the year
ended December 31, 2005, we recorded a deemed dividend to preferred stockholders
of $2,077,000. This amount represents the value attributed to the beneficial
conversion feature of the Series A 8% Cumulative Convertible Preferred Stock
issued in September and October 2005.
There
were no deemed dividends in the year ended December 31, 2006.
The
deemed dividend and cash dividends have been included in the calculation of
net
loss
attributable to common stockholders for the respective periods.
Liquidity
and Capital Resources
We
have
financed our operations since inception through the sale of equity securities
and the issuance of debt (which was subsequently paid off or converted into
equity). As of March 31, 2007, we had $9,380,000 in cash and equivalents,
including $1,608,000 of restricted cash that is reserved for research and
development activities.
During
the three months ended March 31, 2007, cash of approximately $2,120,000 was
used
in operations, primarily due to a net loss of $2,382,000 and net payment of
accrued compensation of $163,000, offset by non-cash stock-based compensation
expense of $162,000, depreciation and amortization of $4,000, a decrease in
prepaid expenses of $102,000 and an increase in accounts payable and accrued
expenses of $157,000. During the three months ended March 31, 2007, cash of
approximately $19,000 was provided by investing activities resulting from the
release of restrictions on $48,000 of cash that had been previously restricted,
offset by payments of $25,000 for financing costs and to purchase $4,000 of
fixed assets.
22
During
the three months ended March 31, 2007, cash of approximately $65,000 was used
in
financing activities resulting from the payment of cash dividends on the Series
A cumulative convertible preferred stock.
As
discussed in Note 13, on May 2, 2007 we completed a private placement of our
Series B Preferred Stock and warrants with anticipated net proceeds of
approximately $13,600,000 (net of estimated issuance costs). Based on our
current and anticipated spending, we believe that our
available cash and equivalents, including the net proceeds from the Series
B
financing, will be sufficient to meet our working capital requirements,
including operating losses and capital expenditure requirements, into the middle
of 2008,
assuming that our business plan is implemented successfully.
We
believe, however, that we will need to raise additional capital in order to
complete the pivotal Phase 3 clinical trial for NOV-002 and other research
and
development activities. Furthermore, we may license or acquire other compounds
that will require capital for development. We may seek additional funding
through collaborative arrangements and public or private financings. Additional
funding may not be available to us on acceptable terms or at all. In
addition, the terms of any financing may adversely affect the holdings or the
rights of our stockholders. For example, if we raise additional funds by issuing
equity securities, further dilution to our existing stockholders may result.
If
we are unable to obtain funding on a timely basis, we may be required to
significantly curtail one or more of our research or development programs.
We
also could be required to seek funds through arrangements with collaborators
or
others that may require us to relinquish rights to some of our technologies,
product candidates, or products which we would otherwise pursue on our own.
Even
if
we are able to raise additional funds in a timely manner, our future capital
requirements may vary from what we expect and will depend on many factors,
including the following:
| · |
the
resources required to successfully complete our clinical trials;
|
| · |
the
time and costs involved in obtaining regulatory approvals;
|
| · |
continued
progress in our research and development programs, as well as the
magnitude of these programs;
|
| · |
the
cost of manufacturing activities;
|
| · |
the
costs involved in preparing, filing, prosecuting, maintaining, and
enforcing patent claims;
|
| · |
the
timing, receipt, and amount of milestone and other payments, if any,
from
collaborators; and
|
| · |
fluctuations
in foreign exchange rates.
|
23
Commitments
In
July
2006, we entered into a contract with a supplier of pharmaceutical products
that
will provide chemotherapy drugs to be used in connection with Phase 3 clinical
trial activities outside of the United States. Payments under the contract
will
be made in Euros and will be funded with available working capital. The minimum
commitment under the contract is approximately as follows as of March 31, 2007:
|
Payments
Due by Period
|
||||||||||||||||
|
|
Total
|
0-12
Months
|
1
- 3 Years
|
3
- 5 Years
|
After
5 Years
|
|||||||||||
|
Chemotherapy
purchase commitment
|
$
|
1,300,000
|
$
|
1,200,000
|
$
|
100,000
|
$
|
-
|
-
|
|||||||
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States (GAAP) requires
management to make certain estimates, judgments and assumptions that affect
the
reported amounts of assets and liabilities as of the date of the financial
statements, as well as the reported amounts of revenues and expenses during
the
periods presented. Actual results could differ from those estimates. We review
these estimates and assumptions periodically and reflect the effects of
revisions in the period that they are determined to be necessary.
We
believe that the following accounting policies reflect our more significant
judgments and estimates used in the preparation of our financial statements.
Accrued
Expenses. As
part
of the process of preparing financial statements, we are required to estimate
accrued expenses. This process involves identifying services that have been
performed on our behalf, and estimating the level of service performed and
the
associated cost incurred for such service as of each balance sheet date in
our
financial statements. Examples of estimated expenses for which we accrue
include: contract service fees such as amounts paid to clinical research
organizations and investigators in conjunction with clinical trials; fees paid
to contract manufacturers in conjunction with the production of clinical
materials; and professional service fees, such as for lawyers and accountants.
In connection with such service fees, our estimates are most affected by our
understanding of the status and timing of services provided relative to the
actual levels of services incurred by such service providers. The majority
of
our service providers invoice us monthly in arrears for services performed.
In
the event that we do not identify certain costs that have begun to be incurred,
or we over- or underestimate the level of services performed or the costs of
such services, our reported expenses for such period would be too high or too
low. The date on which certain services commence, the level of services
performed on or before a given date and the cost of such services are often
determined based on subjective judgments. We make these judgments based on
the
facts and circumstances known to us in accordance with generally accepted
accounting principles.
Stock-based
Compensation. Commencing
on January 1, 2006 we began applying the provisions of Statement of Financial
Accounting Standards (SFAS) 123R, Share-Based
Payment,
or SFAS
123R, in accounting for stock-based compensation. SFAS 123R requires measurement
of the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost is
recognized over the period during which an employee is required to provide
service in exchange for the award, the requisite service period (usually the
vesting period). Prior to January 1, 2006, we followed Accounting Principles
Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees,
or APB
25, and related interpretations, in accounting for our stock-based compensation
plans, rather than the alternative fair-value method provided for under SFAS
No.
123, Accounting
for Stock-Based Compensation,
or SFAS
123. In the notes to our financial statements, we provide pro-forma disclosures
in accordance with SFAS 123 for periods prior to the adoption of SFAS 123R.
We
account for transactions in which services are received from non-employees
in
exchange for equity instruments based on the fair value of such services
received or of the equity instruments issued, whichever is more reliably
measured, in accordance with SFAS 123 and the Emerging Issues Task Force (EITF)
Issue 96-18, Accounting
for Equity Instruments That Are Issued to Other than Employees for Acquiring,
or
in Conjunction with Selling, Goods or Services,
or EITF
96-18.
24
Accounting
for equity instruments granted or sold by us under APB 25, SFAS 123, SFAS 123R
and EITF 96-18 requires fair-value estimates of the equity instrument granted
or
sold. If our estimates of the fair value of these equity instruments are too
high or too low, our expenses may be over- or understated. For equity
instruments granted or sold in exchange for the receipt of goods or services,
we
estimate the fair value of the equity instruments based on consideration of
factors that we deem to be relevant at that time. Because shares of our common
stock were not publicly traded prior to the corporate restructuring described
in
Note 3 to the financial statements, market factors historically considered
in
valuing stock and stock option grants included corresponding values of
comparable public companies discounted for the risk and limited liquidity
provided for in the shares we are issuing; pricing of private sales of our
convertible preferred stock; prior valuations of stock grants and the effect
of
events that occurred between the times of such grants; economic trends; and
the
comparative rights and preferences of the security being granted compared to
the
rights and preferences of our other outstanding equity.
Prior
to
the reverse merger and subsequent financing that occurred in May 2005, the
fair
value of our common stock was determined by our board of directors
contemporaneously with the grant. In the absence of a public trading market
for
our common stock, our board of directors considered numerous objective and
subjective factors in determining the fair value of our common stock. At the
time of option grants and other stock issuances, our board of directors
considered the liquidation preferences, dividend rights, voting control and
anti-dilution protection attributable to our then-outstanding convertible
preferred stock; the status of private and public financial markets; valuations
of comparable private and public companies; the likelihood of achieving a
liquidity event such as an initial public offering; our existing financial
resources; our anticipated continuing operating losses and increased spending
levels required to complete our clinical trials; and a general assessment of
future business risks.
BUSINESS
We
were
incorporated in June 1996 as AVAM International, Inc. In October 1998, Novelos
Therapeutics, Inc., a newly incorporated entity, merged into AVAM, and the
name
of AVAM was changed to Novelos Therapeutics, Inc. In 2005, we completed a
two-step reverse merger with Common Horizons, Inc., and its wholly-owned
subsidiary Nove Acquisition, Inc. Following the merger, the surviving company
was Novelos Therapeutics, Inc.
We
are a
biopharmaceutical company commercializing oxidized glutathione-based compounds
for the treatment of cancer and hepatitis. NOV-002, our lead compound, is
currently in Phase 3 development for lung cancer under a Special Protocol
Assessment and Fast Track. NOV-002 is also in Phase 2 development for
chemotherapy-resistant ovarian cancer and early-stage breast cancer, and is
also
being developed for acute radiation injury. NOV-205, our second compound, is
in
Phase 1b development for chronic hepatitis C non-responders. Both compounds
have
completed clinical trials in humans and have been approved for use in Russia
where they were originally developed.
NOV-002,
our lead compound, acts as a chemoprotectant and an immunomodulator. It is
marketed in Russia by ZAO BAM under the trade name Glutoxim®, and has been
administered to over 10,000 patients, demonstrating clinical efficacy and
excellent safety. ZAO BAM is a company, controlled by Mark Balazovsky, a
director until November 2006, from which we acquired certain rights in the
oxidized glutathione technology. The U.S.-based Phase 1/2 clinical trial of
NOV-002 for non-small cell lung cancer (NSCLC) was completed in August 2005
and
the treated group demonstrated improved objective tumor response (defined as
greater than 50% tumor shrinkage) and higher tolerance of chemotherapy versus
the control group. In May 2006, we finalized a Special Protocol Assessment
with
the FDA for a single pivotal Phase 3 trial and obtained Fast Track designation
in August 2006. The primary endpoint of this trial is improvement in median
overall survival, and we commenced patient enrollment in November 2006. NOV-002
is also being developed to treat chemotherapy-resistant ovarian cancer. A U.S.
Phase 2 trial is ongoing at Massachusetts General Hospital and Dana-Farber
Cancer Institute. In a 1998 Russian review of case studies, NOV-002 sensitized
previously platinum-resistant ovarian cancer patients to chemotherapy. In
combination with NOV-002, 40% of the women responded favorably (partial or
complete response) to the same chemotherapy that they had failed previously
(compared to the 10% response rate that is typically seen upon such
re-treatment).
NOV-002
is also being developed to treat early-stage breast cancer. These patients
are
often treated with chemotherapy to minimize surgical intervention. A planned
U.S. Phase 2 trial will evaluate the ability of NOV-002 to enhance the
effectiveness of such chemotherapy while diminishing dose-limiting side-effects.
25
NOV-002
is also being developed to treat acute radiation injury.
NOV-205,
our second compound, acts as a hepatoprotective agent with immunomodulating
and
anti-inflammatory properties. Russian clinical studies completed in 1999 in
hepatitis B and C patients showed that after treatment with NOV-205, serum
viral
load was undetectable in a high proportion of patients and serum biochemical
markers of liver damage were significantly decreased. Our Investigational New
Drug Application for NOV-205 as monotherapy for chronic hepatitis C was accepted
by the FDA in April 2006, and a U.S. Phase 1b trial in patients who previously
failed treatment with pegylated interferon plus ribavirin commenced in September
2006 and is ongoing.
Our
intellectual property portfolio of issued patents includes four U.S. patents
(plus a fifth notice of allowance), two European patents and one Japanese
patent. Overall, we have filed more than thirty patent applications worldwide,
with coverage including composition of matter, method of use and manufacturing.
The breadth of our intellectual property will also allow us to expand our
product pipeline by claiming and commercializing additional compounds that
are
based on oxidized glutathione.
We
have
devoted substantially all of our efforts towards the research and development
of
our product candidates. We have incurred approximately $13.5 million in research
and development expense from our inception through March 31, 2007. We have
had
no revenue from product sales to date and have funded our operations through
the
sale of equity securities and debt financings. From our inception through March
31, 2007, we have raised approximately $29.0 million in equity and debt
(subsequently paid off or converted into equity) financings and in May 2007
we
raised $15 million in gross proceeds through the sale of our Series B preferred
stock. We have never been profitable and have incurred an accumulated deficit
of
$26.1 million as of March 31, 2007.
Business
Strategy
Our
primary objective is to fully exploit our proprietary scientific and
intellectual property portfolio in oxidized glutathione-based therapeutics.
NOV-002, currently in Phase 3 development in the U.S., has demonstrated an
excellent safety and efficacy profile in Russia as an adjunctive treatment
to
chemotherapy for a number of different cancers. The Russian data is particularly
compelling in non-small cell lung cancer and platinum-resistant ovarian cancer,
indications with large and growing unmet medical needs. In a 1996-98 Russian
non-small cell lung cancer trial, NOV-002 increased the one-year survival rate
from 17% to 63% when used in combination with chemotherapy. This result
represents an 80% improvement over the U.S. survival rate of 35% that results
from the current standard of care. Positive results in a controlled U.S-based
Phase 1/2 non-small cell lung cancer study completed in August 2005 reinforced
the positive results obtained in earlier Russian clinical studies.
We
also
intend to explore the commercial potential of NOV-002 for treatment of acute
radiation injury in the U.S. and abroad to address the growing concern over
catastrophic radiation exposure from, for example, a nuclear weapon, a “dirty
bomb” or an accident at a nuclear power plant. Significantly, animals treated
with NOV-002 demonstrated substantially increased survival rates (two- to
three-fold, measured at thirty days post-radiation) compared to the irradiated
control animals. In addition, NOV-002-treated animals did not experience severe
neutropenia (loss of white blood cells used for fighting off infections) and
demonstrated significantly higher bone marrow cell counts than the control
(bone
marrow is the source of white blood cells).
We
expect
to obtain a U.S marketing partner for NOV-002 after the non-small cell lung
cancer Phase 3 clinical trial results are available (mid-2009). In the nearer
term, we plan to out-license NOV-002 in Europe and/or Japan and use resources
from these potential arrangements to offset, in part, the expense of our
development.
In
Russian clinical studies, NOV-205 has demonstrated the ability to substantially
decrease the serum viral load of patients with either hepatitis B or C as well
as to restore normal liver function as evidenced by blood biochemical markers.
In the U.S., both hepatitis B and C are relatively large markets, but hepatitis
B is reasonably well served. Therefore, we will concentrate clinical development
efforts on chronic hepatitis C, which should represent a more direct path to
regulatory approval as well as providing patients with an improved therapy
regimen. A U.S. Phase 1b clinical trial commenced in September 2006 and we
will
explore out-license opportunities for NOV-205 once U.S. data become available
(third quarter 2007).
26
Technology
Overview
Glutathione
is a naturally occurring substance present in nearly all cells of the body.
The
glutathione pathway consists of oxidized glutathione, the primary component
of
NOV-002, and associated metabolic enzymes. It is considered to be the most
important cellular system for protection against the toxic effects of a variety
of cell-damaging molecules. More recently, it has become evident that in
addition to this cell protective role, a key function of the glutathione system
is to dynamically regulate cell function by reversibly altering the structure
of
proteins via a process termed glutathionylation. The resulting
activation/inhibition of protein function is analogous to the much-studied
role
of protein phosphorylation as a cellular regulatory mechanism.
Thus,
changes in the ratio of intracellular reduced and oxidized glutathione can
trigger glutathionylation, affecting cell signaling pathways that govern a
variety of critical cell functions including gene expression, cell
proliferation, growth arrest and apoptosis (programmed cell death). Importantly,
it has been shown that oxidized glutathione itself is capable of causing protein
glutathionylation leading to changes in cell signaling pathway function.
Examples of effects of oxidized glutathione on gene expression include
regulation of gene transcription factors such as NFkB and AP-1, which have
been
shown to have pivotal roles in the regulation of many genes involved in immune
and inflammatory responses, including cytokines and growth factors. Findings
with NOV-002 in animals and humans (e.g., cell protection; effects on cytokine
production and blood cell proliferation; immune system modulation) are
consistent with the hypothesis that it may act, at least in part, by such a
mechanism.
Pharmacological
manipulation of reduced and oxidized glutathione (e.g., including protein
glutathionylation) can have multiple and parallel effects on cells, with the
overall impact on cell function being dependent on the type of cell and its
physiological state (i.e., normal or diseased). In light of this complexity,
identification of the precise molecular targets of NOV-002, which account for
its clinical effects, is the subject of ongoing study.
Products
in Development
Our
current developmental pipeline of drugs is based on oxidized glutathione, a
natural metabolite, that has shown excellent safety as well as clinical efficacy
in numerous cancers, hepatitis B and C, HIV, psoriasis, tuberculosis and certain
other diseases. The lead products are believed to act via modulation of critical
regulatory molecules that mediate immune function, tumor progression (in
combination with chemotherapy), and drug detoxification.
NOV-002
NOV-002
is an injectable, small-molecule formulation of a natural metabolite that is
being developed in combination with chemotherapy for treatment of lung, ovarian
and breast cancer.
NOV-002
for Non-Small Cell Lung Cancer
In
the
U.S., NOV-002 is in Phase 3 development for non-small cell lung cancer under
a
Special Protocol Assessment with Fast Track designation. NOV-002 is approved
in
Russia for general medicinal usage as an immunostimulant in combination with
chemotherapy and antimicrobial therapy, and specifically for indications such
as
tuberculosis and psoriasis. Efficacy and excellent safety have been demonstrated
in trials with 340 patients in Russia across several types of cancer including:
non-small cell lung cancer, colorectal cancer, pancreatic cancer, breast cancer
and ovarian cancer. Since the Russian Ministry of Health approval in 1998,
it is
estimated that NOV-002 has been administered to over 10,000 patients.
According
to the American Cancer Society, about 1.4 million U.S. men and women were
expected to be diagnosed with cancer in 2006. Over 550,000 U.S. cancer patients
were expected to die in 2006, which makes cancer the second leading cause of
death in the U.S., exceeded only by deaths related to heart disease. Lung cancer
is the leading cause of cancer death in the U.S. Approximately 175,000 people
were expected to be diagnosed with lung cancer in 2006, with over 160,000
deaths. According to a Rodman and Renshaw report dated December 2006, there
are
currently approximately 405,000 cases of lung cancer among industrial nations
and the pharmaceutical market for treating lung cancer is currently
approximately $800 million per year in the U.S. and $1.8 billion worldwide,
expected to grow to greater than $8 billion by 2011. Non-small
cell lung cancer accounts for more than 80% of lung cancer. Only about 15%
of
non-small cell lung cancer patients are diagnosed early enough to be eligible
for surgery.
27
Platinum-based
chemotherapy regimens are standard first-line treatment for advanced non-small
cell lung cancer patients, since these patients are not eligible for surgery.
Carboplatin and paclitaxel are the most common combination therapy in the U.S.,
while cisplatin and gemcitabine are more common in Europe. During treatment,
patients continue to be subject to serious adverse effects. According to
December 2003 Credit Suisse First Boston and UBS reports and Phase 3 clinical
trials conducted prior to 1999, the one-year
survival rate for first-line therapy is typically only about 35%, median
survival is approximately 8.5 months and the objective tumor response rate
is
about 20%. Overall, fewer than 5% of advanced non-small cell lung cancer
patients survive five years. Docetaxel is approved for use as second-line
treatment of non-small cell lung cancer. New regimens with existing cytotoxic
drugs are expected to provide only incremental improvements in efficacy and/or
safety, and are very expensive. Newly emerged targeted biologic therapies,
such
as Astra Zeneca’s IRESSA®, OSI’s TARCEVA® and Genentech’s AVASTIN®, may offer
some limited benefit for certain patients, but overall efficacy has remained
low, there are safety concerns and the costs are very high. Thus, there is
a
lack of effective treatments for non-small cell lung cancer, particularly for
late stage patients.
NOV-002,
unlike any other marketed drug or product in development, appears to increase
both toleration and efficacy of chemotherapy in that it allows the patient
to
safely undergo more cycles of chemotherapy (demonstrated in both U.S. and
Russian studies), produces a clinical survival benefit (63% and 52% one-year
survival in Russian studies versus 35% typical in the U.S.) and demonstrated
better tumor shrinkage (69% of the patients treated with NOV-002 plus
chemotherapy had 50% or greater tumor shrinkage versus only 33% of the patients
treated with chemotherapy alone). We expect that NOV-002 will be used in
combination with first-line chemotherapy treatments and may be complementary
to
second-line and recently emerging third-line products. Furthermore, we expect
that NOV-002 may have utility in all stages of non-small cell lung cancer and
in
other solid tumor types as well.
The
Russian non-clinical and clinical data set (including clinical safety and
efficacy, extensive animal toxicology studies and a comprehensive chemistry
and
manufacturing package) was accepted by the FDA as the basis of an
Investigational New Drug (IND) application, leading to a Novelos-sponsored
Phase
1/2 clinical trial in advanced non-small cell lung cancer in late 1999. The
aim
of the Phase 1/2 clinical study was to demonstrate safety, detect trends towards
efficacy, compare routes of administration and support initiation of a Phase
3
study. We finalized a Special Protocol Assessment with the FDA in May 2006
for a
single pivotal Phase 3 trial in advanced non-small cell lung cancer in
combination with first-line chemotherapy, and obtained Fast Track designation
in
August 2006. The primary endpoint of this trial is improvement in median overall
survival and we commenced enrollment in November 2006. We expect the pivotal
Phase 3 trial to conclude in mid-2009.
In
the
U.S. Phase 1/2 non-small cell lung cancer clinical trial of NOV-002, 44
chemotherapy-naive late-stage lung cancer patients who had not received prior
chemotherapy were randomized to one of three groups for six months of
treatment:
| · |
Group
A: NOV-002, administered intravenously and intramuscularly, in combination
with cytotoxic chemotherapy (carboplatin +
paclitaxel).
|
| · |
Group
B: NOV-002, administered intravenously and subcutaneously, in combination
with cytotoxic chemotherapy.
|
| · |
Group
C: Cytotoxic chemotherapy alone was administered to this control
group.
|
Based
on
the study protocol, the intent-to-treat analysis of the best overall objective
tumor response (e.g., complete or partial tumor shrinkage) showed that eleven
out of sixteen (69%) NOV-002-treated patients in Group B demonstrated greater
than 50% tumor shrinkage versus only five out of fifteen (33%) in the control
group (C). Six out of thirteen (46%) patients in Group A demonstrated an
objective response. The difference between groups B and C was statistically
significant (p=0.044).
Further,
NOV-002-treated patients better tolerated cytotoxic chemotherapy as evidenced
by
their ability to receive more cycles of chemotherapy compared to the control
group (C). 100% of patients in Group B and 85% in Group A were able to complete
four cycles of chemotherapy, while only 50% of control group patients (C) were
able to do so. The differences between groups was statistically significant
(p=0.004).
28
In
St.
Petersburg, Russia, a multi-center, randomized, open-label study was conducted
more than ten years ago to evaluate the safety and efficacy of NOV-002 in
patients with advanced non-small cell lung cancer. NOV-002, used in combination
with chemotherapy, dramatically and significantly increased the one-year
survival rate (63% treated group vs. 17% control, p<0.05). NOV-002
significantly improved patients’ ability to conduct daily activities and quality
of life, increased tolerance to chemotherapy, improved hematologic parameters
and improved or normalized kidney/liver toxicity markers. As in the U.S. Phase
1/2 trial, patients receiving NOV-002 were able to receive significantly more
cycles of chemotherapy. Importantly, no NOV-002-associated adverse effects
were
observed. In addition, in an independent study in advanced non-small cell lung
cancer study of similar design in Moscow in 2000, 52% of the patients treated
with NOV-002 survived for one year.
NOV-002
for Chemotherapy (Platinum)-Resistant Ovarian Cancer
According
to the American Cancer Society, approximately 20,000 U.S. women were expected
to
be diagnosed with ovarian cancer in 2006 and 15,000 women are expected to die
from it. According to a Rodman and Renshaw report dated December 2006, the
pharmaceutical market for treating ovarian cancer is currently estimated to
be
$300 million per year. There is a lack of effective treatment, particularly
in
the case of patients who are chemotherapy refractory (those who do not respond
to chemotherapy) or resistant (those who relapse shortly after receiving
chemotherapy).
First-line
chemotherapy treatment is the same in ovarian cancer as in non-small cell lung
cancer. Standard first-line treatment for ovarian cancer patients is carboplatin
and paclitaxel chemotherapy in combination. Doxorubicin and topotecan alternate
as second- and third-line chemotherapy treatments.
Refractory/resistant
ovarian cancer patients have a very poor prognosis because they are faced with
inadequate therapeutic options. According to a Lehman Brothers report dated
September 2002, response rates from second-line treatments, such as doxorubicin
and topotecan, are typically less than 12%. Once a woman’s ovarian cancer is
defined as platinum resistant, the chance of having a partial or complete
response to further platinum therapy is typically less than 10%, according
to an
article by A. Berkenblit in the June 2005 issue of the Journal of Reproductive
Medicine.
In
Russia
in 1998, twenty ovarian cancer case studies were analyzed. All of these patients
were treated for three cycles with platinum-based chemotherapy but continued
with progressive disease according to qualitative assessments and Cancer Antigen
125. The patients were then treated with NOV-002 for three to four weeks,
followed by three more cycles of the same platinum-based chemotherapy (which
they previously failed to respond to) in conjunction with NOV-002. The observed
40% objective response rate across these case studies is much higher than would
be expected in such patients. Objective response is defined as partial (50%
or
greater tumor reduction) or complete response; it does not include stabilization
of the disease or small reductions in tumor size. An additional 40% of patients
in the Russian analysis displayed stable disease.
In
the
U.S., a Phase 2 trial in chemotherapy-resistant ovarian cancer patients
commenced in July 2006 and is ongoing at Massachusetts General Hospital and
Dana-Farber Cancer Institute. We expect interim results from this trial in
mid-2007.
NOV-002
for Neoadjuvant Treatment of Breast Cancer
We
are
also developing NOV-002 to treat early-stage breast cancer in combination with
chemotherapy. These patients are often treated with chemotherapy to minimize
surgical intervention. A planned U.S. Phase 2 trial, expected to commence early
to mid-2007, will evaluate the ability of NOV-002 to enhance the effectiveness
of such chemotherapy while diminishing dose-limiting side-effects.
NOV-002
for Treatment of Acute Radiation
Significant
market opportunity and unmet need exist for a drug that may safely treat the
effects of acute radiation injury. In today’s world, there appears to be more
concern than ever about an attack by a nuclear weapon, a “dirty bomb” or an
attack or accident at a nuclear power plant. The majority of deaths following
such an attack do not result from the explosion itself, but from bone marrow
suppression, which in turn leads to neutropenia (severe loss of white blood
cells, neutrophils, leaving the body defenseless against infections) and
depletion of platelets (key clotting factors that stop bleeding). The window
of
opportunity to treat radiation injury is short, thus the drug would need to
be
stockpiled at the local level in high risk areas, such as military bases, major
population centers and within a 10-50 mile radius of nuclear power plant
facilities.
29
Currently,
post-radiation exposure treatment options are essentially non-existent.
Potassium iodide is the only pharmaceutical agent that has been stockpiled
in
the event of radiation exposure. However, it is effective only in reducing
the
risk of thyroid cancer, and does not protect the body from acute radiation
injury. Similarly, the FDA recently approved pentetate calcium trisodium
injection and pentetate zinc trisodium injection, which have been in use for
decades to treat radiation contamination caused by industrial accidents. The
goal of treatment with these agents is to help remove the radioactive elements
from the body and reduce the risk of the development of illnesses such as cancer
that can occur years after exposure, but they do not address acute radiation
injury.
NOV-002
has been safely administered to many thousands of Russian patients since the
mid-1990s and to a limited number of subjects in a U.S. Phase 1/2 lung cancer
trial. Further, NOV-002 has already demonstrated the ability to restore
hematological parameters and boost immune function in cancer patients receiving
cytotoxic chemotherapy. In Russian preclinical experiments in 2003, groups
of
mice and rats were exposed to lethal levels of ionizing radiation. The animals
treated with NOV-002 post-exposure demonstrated an increased survival of two-
to
three-fold (measured at thirty days post-exposure) compared to the irradiated
control animals. Moreover, there was a 2.5-fold increase in the number of
hematopoietic colony-forming units in the spleens of mice receiving NOV-002
after radiation compared to those receiving radiation alone. In another
experiment, two groups of rats were irradiated at sub-lethal levels of exposure.
The control group received no treatment. The treated group received daily
injections of NOV-002. Unlike the control group, NOV-002-treated animals did
not
experience severe neutropenia and demonstrated increased survival compared
to
the control group.
We
intend
to explore the commercial potential of NOV-002 for radiation protection in
the
U.S. and abroad to address the growing concern over catastrophic radiation
exposure from a nuclear weapon, a “dirty bomb”, or an attack/accident at a
nuclear power plant. Meanwhile, we are working with Shriners Hospitals to
conduct studies in animal models to confirm and expand on the positive results
in treatment of acute radiation injury with NOV-002 demonstrated in Russian
experiments.
NOV-205
NOV-205
for Chronic Hepatitis C
NOV-205
is a unique, injectable, small-molecule proprietary formulation of oxidized
glutathione and inosine. We are developing NOV-205 in the U.S. for the treatment
of chronic hepatitis C.
According
to the World Health Organization, chronic hepatitis C affected 170 million
people worldwide in 2003, and up to four million people are newly infected
each
year. Chronic infection can progress to cirrhosis and end-stage liver disease.
While there are varying estimates about the size of the global market for
hepatitis C drugs, according to a September 2006 publication of Nature
Reviews Drug Discovery
the
current global market is believed to be in excess of $3 billion per year,
growing to more than $8 billion by 2010. In
the
U.S., according to the Centers for Disease Control and Prevention, an estimated
3.9 million persons were infected with hepatitis C, and 2.7 million persons
in
the U.S. had chronic infection in 2003. Further, hepatitis C infections account
for approximately 30,000 new infections and 8,000-10,000 deaths each year in
the
U.S.
NOV-205
was approved in Russia by the Ministry of Health in 2001 as monotherapy for
the
treatment of hepatitis B and C. The Russian approval of NOV-205 was supported
by
a Russian New Drug Application, which included studies in hepatitis B and C
totaling 90 treated patients. An additional 88 patients were treated in previous
anecdotal studies. After relatively short treatment periods (1-2 months), the
drug was shown to eliminate the serum viral load in hepatitis B patients and
to
decrease viral load below detection in 40-60% of hepatitis C subjects.
Importantly, these reductions were largely maintained during 1-3 months of
post-treatment follow-up. In addition, NOV-205 improved liver function as
evidenced by significant reductions in serum biochemical markers of liver
toxicity. No NOV-205-related adverse events were reported among any of the
178
patients treated in these studies.
30
The
therapeutic profile of NOV-205 contrasts sharply with those of currently
approved therapies in the U.S., which have limited effectiveness, are expensive
and have severe side effects, particularly in the case of chronic hepatitis
C.
For example, pegylated interferon and ribavirin combinations have limitations
of
safety and tolerability (40-65% of treated patients experience fatigue,
depression, fever, headaches, muscle pain, anemia). Furthermore, these drugs
are
effective in only a fraction of the patient population and are very expensive.
Other new products for hepatitis C, beyond variations of ribavirin and
interferon (e.g., HCV protease inhibitors), are at early stages of development
and could potentially be used in combination with NOV-205.
On
the
basis of the clinical and pre-clinical data package underlying Russian approval
of NOV-205 in combination with U.S. chemistry and manufacturing information,
we
filed an Investigational New Drug Application with the FDA for NOV-205 as
monotherapy in chronic hepatitis C in March 2006. The FDA accepted our
Investigational New Drug Application in April 2006, and a U.S. Phase 1b trial
in
patients who previously failed treatment with pegylated interferon plus
ribavirin commenced in September 2006. We expect this trial to conclude in
the
third quarter of 2007.
Non-clinical
Research Program
Our
non-clinical research program is aimed at (a) gaining a better understanding
of
the mechanism(s) of action of our oxidized glutathione-based drug products
and
(b) adding to the Russian non-clinical data information that will be required
for ultimate FDA filing of our products. This research is being performed via
a
network of academic and commercial (i.e., contract research organizations)
laboratories.
We
are
engaged in funded research collaboration with the laboratory of Kenneth Tew,
Ph.D., D.Sc., Chairman of the Department of Cell and Molecular Pharmacology
and
Experimental Therapeutics at The Medical University of South Carolina. Dr.
Tew
is also chairman of our Scientific Advisory Board and a stockholder. The general
objectives of this research program are to add to the understanding of NOV-002
and NOV-205 as drug products, particularly with respect to their molecular
and
cellular mechanism(s) of action and to facilitate: (1) the design and execution
of clinical studies, (2) the interactions with the FDA and (3) the interactions
with others in the scientific community.
We
are
also working with Jeffrey Gelfand, M.D., senior advisor for international
medical affairs at Partners Healthcare System (Massachusetts General Hospital,
Harvard Medical School, Dana-Farber Cancer Institute, Brigham and Women’s
Hospital) and director of the Center for Integration of Medicine and Innovative
Technology. In his new laboratory at Shriners Hospitals, Dr. Gelfand is
conducting studies in animal models to confirm and expand upon the positive
results in treatment of acute radiation injury with NOV-002 demonstrated in
Russian experiments.
We
also
intend to continue to collaborate, through ZAO BAM, with leading Russian
research institutions in Moscow and St. Petersburg, to enhance the basic science
around oxidized glutathione, support development of NOV-002 and NOV-205 and
develop additional products and product forms. Further, through our other
contacts in Russia, we believe we may have access to products and technologies
developed by other Russian research institutions and scientists.
Manufacturing
Our
proprietary manufacturing process is well-established, simple, inexpensive
and
scalable. We have used U.S. and Canadian contract manufacturing facilities
that
are registered with the FDA to support our U.S. development efforts. We do
not
plan to build manufacturing capability over the next several years. Rather,
we
plan to continue to employ contract manufacturers.
31
The
active pharmaceutical ingredient of NOV-002 is manufactured in the U.S. in
compliance with current Good Manufacturing Principles at Synthetech, Inc.
(Albany, OR) in a single, very cost-effective synthetic step and then
lyophilized into a powder at Oregon Freeze Dry, Inc. (Albany, OR). It is then
filled, finished and packaged at Hyaluron (Burlington, MA) as a sterile
filtered, aseptically processed solution for intravenous, intramuscular and/or
subcutaneous use. NOV-002 clinical trial material (vials containing the active
pharmaceutical ingredient and solution) has successfully completed 36-month
stability studies.
Similar
to NOV-002, NOV-205’s active pharmaceutical ingredient is manufactured in
compliance with current Good Manufacturing Principles in a single, very cost
effective, synthetic step at Synthetech, Inc. and then lyophilized into a powder
at Oregon Freeze Dry, Inc. It is then filled, finished and packaged at Dalton
Pharma Services Inc. (Toronto, Canada).
Intellectual
Property
We
own
all intellectual property rights worldwide (excluding Russia and other states
of
the former Soviet Union) related to both clinical-stage compounds (i.e., NOV-002
and NOV-205) and other pre-clinical compounds based on oxidized glutathione.
We
have four issued patents in the U.S., and received a notice of allowance for
a
fifth U.S. patent in September 2006. We also have two issued patents in Europe
and one in Japan. Overall, we have filed more than 30 patent applications
worldwide.
We
believe that our breadth of intellectual property will allow us to expand our
pipeline by claiming and commercializing additional compounds that are based
on
oxidized glutathione.
Employees
As
of May
1, 2007 we have seven employees, all of whom are full-time employees. We believe
our relationships with our employees are good.
Regulation
The
manufacturing and marketing of NOV-002 and NOV-205 and our related research
and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. We anticipate that these regulations will apply separately to each
drug and compound in our drug therapy technology. We believe that complying
with
these regulations will involve a considerable level of time, expense and
uncertainty.
In
the
United States, drugs are subject to rigorous federal regulation and, to a lesser
extent, state regulation. The Federal Food, Drug and Cosmetic Act and other
federal and state statutes and regulations govern, among other things, the
testing, manufacture, safety, efficacy, labeling, storage, recordkeeping,
approval, advertising and promotion of our drugs. Drug development and approval
within this regulatory framework is difficult to predict and will take a number
of years and involve the expenditure of substantial resources.
The
steps
required before a pharmaceutical agent may be marketed in the United States
include:
| · |
Pre-clinical
laboratory tests, in
vivo
pre-clinical studies, and formulation
studies;
|
| · |
The
submission to the FDA of an Investigational New Drug Application
for human
clinical testing, which must become effective before human clinical
trials
can commence;
|
| · |
Adequate
and well controlled human clinical trials to establish the safety
and
efficacy of the product;
|
| · |
The
submission of a New Drug Application or Biologic Drug License Application
to the FDA; and
|
32
| · |
FDA
approval of the New Drug Application or Biologic Drug License Application
prior to any commercial sale or shipment of the
product.
|
In
addition to obtaining FDA approval for each product, each product manufacturing
facility must be registered with and approved by the FDA. Manufacturing
facilities are subject to biennial inspections by the FDA and must comply with
the FDA’s Good Manufacturing Practices for products, drugs and
devices.
Whether
or not FDA approval has been obtained, approval of a product by regulatory
authorities in foreign countries must be obtained prior to the commencement
of
commercial sales of the drug in such countries. The requirements governing
the
conduct of clinical trials and drug approvals vary widely from country to
country, and the time required for approval may be longer or shorter than that
required for FDA approval. Although there are some procedures for unified
filings for certain European countries, in general, each country at this time
has its own procedures and requirements.
LITIGATION
We
are
not a party to any legal proceedings the outcome of which, in the opinion of
our
management, would have a material adverse effect on our business, financial
condition, or results of operations.
PROPERTIES
We
lease
our executive office in Newton, Massachusetts. Our office consists of
approximately 2,200 square feet and is rented for approximately $5,700 per
month. This lease expires in August 2007. We believe that our present facilities
are adequate to meet our current needs. If new or additional space is required,
we believe that adequate facilities are available at competitive prices.
MANAGEMENT
Directors
and Executive Officers
Our
current directors and executive officers are:
|
Name
|
Age
|
Position
|
||
|
Simyon
Palmin
|
62
|
Chairman
of the Board
|
||
|
Harry
S. Palmin
|
37
|
President,
Chief Executive Officer, Director
|
||
|
George
R. Vaughn
|
53
|
Chief
Financial Officer and Chief Accounting Officer
|
||
|
M.
Taylor Burtis
|
55
|
Vice
President of Regulatory, Quality and Compliance
|
||
|
Christopher
J. Pazoles, Ph.D.
|
56
|
Vice
President of Research and Development
|
||
|
Michael
J. Doyle (1) (2) (3)
|
48
|
Director
|
||
|
Sim
Fass, Ph.D. (1) (2) (3)
|
65
|
Director
|
||
|
David
B. McWilliams (2) (3)
|
63
|
Director
|
||
|
Howard
M. Schneider (1) (3)
|
63
|
Director
|
(1) Member
of
the audit committee.
(2)
Member
of
the compensation committee.
(3) Member
of
the nominating and corporate governance committee.
Our
executive officers are appointed by, and serve at the discretion of, our board
of directors. Simyon Palmin is the father of Harry Palmin.
Simyon
Palmin.
Mr.
Palmin founded us in 1996. He has served as our chairman of the board and
director of Russian relations since 1996. From 1996 to February 2004, he served
as our chief executive officer. From 1984 to 1998, Mr. Palmin served as vice
president of strategic planning and vice president of new product development
of
Design Components Inc. Mr. Palmin received a B.S. in naval instrumentation
from
St. Petersburg Navy Institute, St. Petersburg, Russia and a M.A. in aviation
instrumentation from the Institute of Aviation Instrumentation, St. Petersburg,
Russia. He also completed studies for a Ph.D. in electrical engineering.
33
Harry
S. Palmin.
Mr.
Palmin has served as our president and a director since 1998 and our chief
executive officer since January 2005. From 1998 to September 2005, he served
as
our acting chief financial officer. From 1996 to 1998, he was a vice president
at Lehman Brothers and from 1993 to 1996, he was an associate at Morgan Stanley
& Co. Mr. Palmin earned a B.A. in economics and business, magna
cum laude,
and a
M.A. in international economics and finance from the International Business
School at Brandeis University. He has also studied at the London School of
Economics and the Copenhagen Business School.
George
R. Vaughn.
Mr.
Vaughn has served as our chief financial officer and chief accounting officer
since September 2005. Since April 2001, Mr. Vaughn has been the President of
Vaughn & Associates, P.C., a professional services organization he founded
in 1995 that provides interim and part-time chief financial officer, outsourced
financial management, and tax advisory services for emerging and established
businesses, including Novelos. From 1990 to 1995, Mr. Vaughn served as chief
financial officer of XRL, Inc. Mr. Vaughn is a certified public accountant
and
is a member of the American Institute of Certified Public Accountants and the
Massachusetts Society of Certified Public Accountants. He holds a B.S. in
business administration from Stonehill College.
Christopher
J. Pazoles, Ph.D.
Dr.
Pazoles has served as our vice president of research and development since
July
2005. From May 2004 to June 2005, he held a senior research and development
position at the Abbott Bioresearch Center, a division of Abbott Laboratories.
From October 2002 to January 2004, he served as chief operating officer and
head
of research and development at ALS Therapy Development Foundation. From 1994
to
October 2002, Dr. Pazoles served as vice president of research for Phytera,
Inc.
From 1981 to 1994, he served as a researcher and senior manager with Pfizer.
Dr.
Pazoles holds a Ph.D. in microbiology from the University of Notre
Dame.
M.
Taylor Burtis.
Ms.
Burtis has served as our vice president of regulatory, quality and compliance
since July 2005. From October 2004 to June 2005, she served as a senior director
of regulatory affairs at Therion Biologics. From November 2003 to September
2004, she served as a senior director of regulatory affairs at Antigenics.
From
May 2000 to October 2003, Ms. Burtis served as an associate director for
worldwide regulatory affairs at Wyeth BioPharma. From 1996 to April 2000, she
served as a senior manager of regulatory affairs at Genentech. From 1992 to
1996, Ms. Burtis was an FDA consumer safety officer in the Office of Compliance
at the Center for Biologics Evaluation and Research. From 1991 to 1992, Ms.
Burtis served as a medical research manager at Boston Veterans Administration
Center. From 1987 to 1991, she served as a research lab manager at Children’s
Hospital, from 1985 to 1987, she served as a laboratory director at Brigham
& Women’s Hospital and from 1980 to 1985, she served as a technical
specialist international liaison with the American Red Cross. Ms. Burtis earned
a B.S. in biology from Framingham State College and a M.B.A. in operations
and
strategy from Simmons College.
Michael
J. Doyle.
Mr.
Doyle has served as one of our directors since October 2005. Since April 2006,
he has served as chief executive officer of Advantedge Healthcare Solutions.
From January 2005 to March 2006, he served as chief executive officer of
Windward Advisors. From March 2000 to December 2004, Mr. Doyle served as
chairman and chief executive officer of Salesnet. From 1989 to 1997, he served
as chairman and chief executive officer of Standish Care/Carematrix, a company
he founded. He received a B.S. in biology from Tufts University and a M.B.A.
with a concentration in finance and health care from the University of Chicago,
where he was a Kaiser Fellow.
Sim
Fass,
Ph.D.
Dr.
Fass has served as one of our directors since February 2005. Dr. Fass served
as
chief executive officer and chairman of Savient Pharmaceuticals from 1997 to
2004, its president and chief executive officer from 1984 to 1997, and its
chief
operating officer from 1983 to 1984. From 1980 to 1983, Dr. Fass served as
vice
president and general manager of Wampole Laboratories. From 1969 to 1980, he
held a number of marketing, sales and senior management positions at Pfizer,
Inc
in both pharmaceuticals and diagnostics. He received a B.S. in biology and
chemistry from Yeshiva College and a doctoral degree in developmental
biology/biochemistry from the Massachusetts Institute of
Technology.
34
David
B. McWilliams.
Mr.
McWilliams has served as one of our directors since March 2004. From February
2004 to December 2004, Mr. McWilliams performed chief executive officer services
for us. Since August 2004, Mr. McWilliams has served as chief executive officer
of Opexa Therapeutics, Inc. (formerly PharmaFrontiers Corp.). From 1992 to
March
2002, he served as president, chief executive officer and a director of Encysive
Pharmaceuticals (formerly Texas Biotech). From 1989 to 1992, Mr. McWilliams
served as president, chief executive officer and director of Zonagen. From
1984
to 1988, he served as president and chief executive officer of Kallestad
Diagnostics. From 1980 to 1984, he served as president of Harleco Diagnostics
Division. From 1972 to 1980, he was an executive at Abbott Laboratories, rising
to general manager for South Africa. From 1969 to 1972, he was a management
consultant at McKinsey & Co. Mr. McWilliams is also a director of Fairway
Medical Technologies, Houston Technology Center and Texas Healthcare and
Bioscience Institute. Mr. McWilliams received a M.B.A. in finance from the
University of Chicago and a B.A. in chemistry, Phi
Beta Kappa,
from
Washington and Jefferson College.
Howard
M. Schneider.
Mr.
Schneider has served as one of our directors since February 2005. From January
to December 2003, he served as chief executive officer of Metrosoft, Inc.,
and
had been an advisor to such company from July 2002 to January 2003. From May
2000 to May 2001, he served as president of Wofex Brokerage, Inc. and from
1965
to 1999, he served as an executive at Bankers Trust Company holding a variety
of
positions in the commercial banking and investment banking businesses. Mr.
Schneider received a B.A., magna
cum laude,
in
economics from Harvard College and a M.B.A. with distinction from New York
University.
Compensation
of Directors and Executive Officers
Executive
Officer Compensation
Summary
Compensation: The
following table sets forth certain information about the compensation we paid
or
accrued with respect to our chief executive officer and our two most highly
compensated executive officers (other than our chief executive officer) who
served as executive officers during the year ended December 31, 2006 and whose
annual compensation exceeded $100,000 for that year.
Other
annual compensation in the form of perquisites and other personal benefits
has
been omitted as the aggregate amount of those perquisites and other personal
benefits was less than $10,000.
Summary
Compensation Table
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
(4)
|
Option
Awards
($) (5)
|
All
other compensation ($)
|
Total
($)
|
|||||||||||||
|
Harry
S. Palmin (1)
President,
Chief Executive
Officer
|
2006
2005
|
$
|
225,000
148,000
|
$
|
50,000
29,600
|
$
|
91,410
1,295
|
$
|
0
0
|
$
|
366,410
178,895
|
||||||||
|
Christopher
J. Pazoles, Ph.D. (2) (6)
Vice
President of Research
and
Development
|
2006
2005
|
$
|
199,200
88,000
|
$
|
40,320
23,700
|
$
|
60,940
647
|
$
|
0
30,500
|
$
|
300,460
142,847
|
||||||||
|
M.
Taylor Burtis (3) (6)
Vice
President of Quality,
Regulatory
and Compliance
|
2006
2005
|
$
|
186,750
82,500
|
$
|
37,800
17,119
|
$
|
60,940
218,955
|
$
|
0
3,096
|
$
|
285,490
321,670
|
||||||||
(1) On
December 11, 2006, the board of directors approved an increase in Mr. H.
Palmin’s annual base salary to $245,000, effective January 1, 2007.
(2) On
December 11, 2006, the board of directors approved an increase in Dr. Pazoles’
annual base salary to $216,720, effective January 1, 2007.
(3)
On
December 11, 2006, the board of directors approved an increase in Ms. Burtis’
annual base salary to $203,175, effective January 1, 2007.
(4)
Bonus
amounts shown in this column relate to services performed in the year shown,
but
were paid in the subsequent year.
35
(5)
The
fair
value of each stock award was estimated on the grant date using the
Black-Scholes option-pricing model. Option
grants to Messrs. H. Palmin and Pazoles were made prior to the reverse merger
and recapitalization described in Note 3 to the financial statements, while
the
option grant to Ms. Burtis was made subsequent to the reverse merger and
recapitalization when there was a public market for our common stock. See Note
6
to the financial statements for a description of the assumptions used in
estimating the fair value of stock options.
(6) The
employment of Mr. Pazoles and Ms. Burtis began during 2005. All other
compensation during 2005 represents amounts which they earned in their capacity
as consultants prior to the commencement of their employment.
Employment
Agreements
On
January 31, 2006, we entered into an employment agreement with Harry Palmin
effective January 1, 2006, whereby he agreed to serve as our president and
chief
executive officer for an initial term of two years at an annual salary of
$225,000. On December 11, 2006, the Board of Directors approved an increase
in
Mr. Palmin’s annual salary to $245,000 effective January 1, 2007. He is eligible
to receive an annual cash bonus at the discretion of the compensation committee
and he is entitled to participate in our employee fringe benefit plans or
programs generally available to our senior executives. The agreement provides
that in the event that we terminate Mr. Palmin without cause or he resigns
for
good reason (as defined below), we will (i) pay Mr. Palmin his pro rata share
of
the average of his annual bonus paid during the two fiscal years preceding
his
termination; (ii) pay Mr. Palmin his base salary for 11 months after the date
of
termination; (ii) continue to provide him benefits for 11 months after the
date
of termination; and (iii) fifty percent of his unvested stock options will
vest.
The agreement also contains a non-compete provision, which prohibits Mr. Palmin
from competing with us for one year after termination of his employment with
us.
“Cause”
means (i) gross neglect of duties for which employed; (ii) committing fraud,
misappropriation or embezzlement in the performance of duties as our employee;
(iii) conviction or guilty or nolo plea of a felony or misdemeanor involving
moral turpitude; or (iv) willfully engaging in conduct materially injurious
to
us or violating a covenant contained in the employment agreement.
“Good
Reason” means (i) the failure of our board of directors to elect Mr. Palmin to
the offices of president and chief executive officer; (ii) the failure by our
stockholders to continue to elect Mr. Palmin to our board of directors; (iii)
our failure to pay Mr. Palmin the compensation provided for in the employment
agreement, except for across the board cuts applicable to all of our officers
on
an equal percentage basis; provided that such reduction is approved by our
board
of directors; (iv) relocation of Mr. Palmin’s principal place of employment to a
location beyond 50 miles of Newton, Massachusetts; (v) a reduction of base
salary or material reduction in other benefits or any material change by us
to
Mr. Palmin’s function, duties, authority, or responsibilities, which change
would cause Mr. Palmin’s position with us to become one of lesser
responsibility, importance, or scope; and (vi) our material breach of any of
the
other provisions of the employment agreement.
On
July
15, 2005, we entered into an employment agreement with Christopher J. Pazoles,
Ph.D, whereby he agreed to serve as our vice president of research and
development for an initial term of two years. His annual salary is a minimum
of
$192,000 for the first year and $195,000 for the second year. On December 11,
2006, the Board of Directors approved an increase to Mr. Pazoles’ annual salary
to $216,720 effective January 1, 2007. Dr. Pazoles is also entitled to a minimum
cash bonus of $16,000 at the end of the first year and $25,000 at the end of
the
second year. Dr. Pazoles’ agreement provides that he is entitled to participate
in our employee fringe benefit plans or programs generally available to our
senior executives. The agreement further provides that in the event that we
terminate Dr. Pazoles without cause or he resigns for good reason (as defined
below), we will (i) pay Dr. Pazoles his base salary through the remainder of
the
term of his employment agreement in monthly installments; (ii) continue to
provide him benefits for 12 months after the date of termination; and (iii)
pay,
on a prorated basis, any minimum bonus or other payments earned.
Dr.
Pazoles also entered into a nondisclosure and development agreement with us,
which prohibits him from competing with us and soliciting our employees or
customers during the term of his employment and for two years thereafter. If
we
terminate his employment without cause, this prohibition will only extend for
six months after his termination.
36
“Cause”
means Dr. Pazoles (i) has willfully failed, neglected, or refused to perform
his
duties under the employment agreement; (ii) has been convicted of or pled guilty
or no contest to a crime involving a felony; or (iii) has committed any act
of
dishonesty resulting in material harm to us.
“Good
Reason” means that Dr. Pazoles has resigned due to our failure to meet any of
our material obligations to him under the employment agreement.
Outstanding
equity awards at Fiscal Year-End.
The
following table sets forth certain information regarding stock options held
as
of December 31, 2006 by the executive officers named in the summary compensation
table.
Outstanding
Equity Awards at Fiscal Year-End
|
Individual
Grants
|
||||||||||||||||
|
Name
|
Year
of
Grant
|
Number
of securities underlying unexercised options
(#)
exercisable
|
Number
of securities underlying unexercised options
(#)
unexercisable
|
Exercise
or base price ($/share)
|
Expiration
date
|
|||||||||||
|
Harry
S. Palmin
|
2006(1
2005(2
2005(2
2004(3
2003(4
|
)
)
)
)
)
|
—
250,000
150,000
330,000
7,130
|
150,000
—
—
—
—
|
$
|
0.91
0.01
0.01
0.01
0.70
|
12/11/2016
1/31/2015
3/31/2015
4/1/2014
8/1/2013
|
|||||||||
|
Christopher
J. Pazoles, Ph.D.
|
2006(1
2005(5
2004(6
|
)
)
)
|
—
150,000
16,667
|
100,000
50,000
—
|
$
|
0.91
0.01
0.01
|
12/11/2016
4/8/2015
4/1/2014
|
|||||||||
|
M.
Taylor Burtis
|
2006(1
2005(7
|
)
)
|
—
75,000
|
100,000
75,000
|
$
|
0.91
2.20
|
12/11/2016
7/1/2015
|
|||||||||
| (1) |
These
shares vest annually in increments of one third over three years
from the
date of grant. The exercise price equals the closing price on the
date of
grant.
|
| (2) |
These
shares initially vested over a two-year period. Pursuant to their
terms,
the shares fully vested upon the completion of a non-bridge loan
financing, which occurred in the second quarter of 2005. The exercise
price equals the fair market value of our common stock on the date
of
grant, as determined by our board of directors.
|
| (3) |
These
shares initially vested one third upon grant and one third annually
over
the following two years. Pursuant to their terms, one additional
year of
vesting occurred upon the completion of a non-bridge loan financing,
which
occurred in the second quarter of 2005. The exercise price equals
the fair
market value of our common stock on the date of grant, as determined
by
our board of directors.
|
| (4) |
These
shares vest annually in increments of one third over three years
from the
date of grant. The exercise price equals the fair market value of
our
common stock on the date of grant as determined by our board of directors.
|
| (5) |
These
shares vest in increments of one-fourth every six months over two
years
from the date of grant. The exercise price equals the fair market
value of
our common stock on the date of grant as determined by our board
of
directors.
|
| (6) |
These
shares represent the fully vested portion of an option grant made
to Mr.
Pazoles in consideration of consulting services delivered during
2004.
Pursuant to their terms, the shares vested at the completion of the
consulting engagement expire ten years from the date of grant.
|
| (7) |
These
shares vest in increments of one-fourth every six months over two
years
from the date of grant. The exercise price equals the closing price
on the
date of grant.
|
37
Options
granted pursuant to the 2006 Stock Incentive Plan will become fully vested
upon
a termination event within one year following a change in control, as defined.
A
termination event is defined as either termination of employment other than
for
cause or constructive termination resulting from a significant reduction in
either the nature or scope of duties and responsibilities, a reduction in
compensation or a required relocation.
Director
Compensation
Summary
Compensation: The
following table sets forth certain information about the compensation we paid
or
accrued with respect to our directors who served during the year ended December
31, 2006.
|
Name
and Principal Position
|
Year
|
Director
Fees
($)
(2)
|
Option
Awards
($)
(3)
|
All
other compensation
($)
|
Total
($)
|
|||||||||||
|
Simyon
Palmin, Chairman and director
of
Russian relations (1)
|
2006
|
$
|
—
|
$
|
—
|
$
|
89,820
|
$
|
89,820
|
|||||||
|
Michael
J. Doyle, Director
|
2006
|
27,500
|
10,647
|
—
|
38,147
|
|||||||||||
|
Sim
Fass, Ph.D., Director
|
2006
|
26,500
|
10,647
|
—
|
37,147
|
|||||||||||
|
David
B. McWilliams, Director
|
2006
|
22,500
|
10,647
|
—
|
33,147
|
|||||||||||
|
Howard
M. Schneider, Director
|
2006
|
31,000
|
10,647
|
—
|
41,647
|
|||||||||||
| (1) |
Other
compensation for Simyon Palmin represents salary and bonus he received
in
his capacity as director of Russian relations for the
Company.
|
| (2) |
Director
fees include all fees earned for director services including quarterly
fees, meeting fees and committee chairman fees.
|
| (3) |
The
fair value of each stock award was estimated on the grant date using
the
Black-Scholes option-pricing model. See Note 6 to the financial statements
for a description of the assumptions used in estimating the fair
value of
stock options.
|
During
2006, we paid our non-employee directors a cash fee of $4,000 per quarter.
The
non-employee directors also received a fee of $1,000 for any board or committee
meeting attended or $500 for each telephonic board or committee meeting in
which
the director participated. We also paid each non-employee director who serves
as
the chair of the audit committee an additional annual fee of $5,000 and each
non-employee director who serves as the chairman of the compensation and
nominating and corporate governance committees an additional annual fee of
$3,000. We also reimbursed directors for reasonable out-of-pocket expenses
incurred in attending board and committee meetings and undertaking certain
matters on our behalf. Directors who are our employees will not receive separate
fees for their services as directors.
During
2006, non-employee directors received quarterly stock option grants of 5,000
shares of our common stock at the closing price of our common stock on the
last
day of the quarter. These options vest on a quarterly basis over a two-year
period.
Effective
January 1, 2007, the in-person and telephonic meeting fees were increased to
$1,500 and $750, respectively. Also on that date, the annual fee for the
chairman of the audit committee and chairman of both the compensation committee
and the nominating and corporate governance committee were increased to $10,000
and $5,000, respectively. Directors who are our employees will not receive
separate fees for their services as directors.
On
January 3, 2007, options to purchase 30,000 shares of our common stock were
granted for 2007 to each non-employee directors at the closing price of our
common stock on that day. These options vest on a quarterly basis over a
two-year period.
38
Equity
compensation plans
The
following table provides information as of December 31, 2006 regarding shares
authorized for issuance under our equity compensation plans, including
individual compensation arrangements.
We
have
two equity compensation plans approved by our stockholders: the 2000 stock
option and incentive plan and the 2006 Stock Incentive Plan. We have also issued
options to our directors and consultants that were not approved by our
stockholders. These options are exercisable within a ten-year period from the
date of the grant and vest at various intervals with all options being fully
vested within three years of the date of grant. The option price per share
is
not less than the fair market value of our common stock on the date of
grant.
Equity
Compensation Plan Information
|
Plan
category
|
Number
of shares to be issued upon exercise of outstanding options, warrants
and
rights (#)
|
Weighted-average
exercise price of outstanding options, warrants and rights
($)
|
Number
of shares remaining available for future issuance under equity
compensation plans (excluding shares reflected in column (a))
(#)
|
|||||||
|
(a)
|
(b)
|
(c)
|
||||||||
|
Equity
compensation plans approved by stockholders
|
913,873
|
$
|
1.61
|
4,160,000
|
||||||
|
Equity
compensation plans not approved by stockholders
|
2,578,778
|
$
|
0.54
|
0
|
||||||
|
Total
|
3,492,651
|
$
|
0.70
|
4,160,000
|
||||||
SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL
OWNERS AND MANAGEMENT
At
the
close of business on May 23, 2007, there were issued and outstanding 39,235,272
shares of our common stock. The following table provides information regarding
beneficial ownership of our common stock as of May 23, 2007:
| · |
Each
person known by us to be the beneficial owner of more than five percent
of
our common stock;
|
| · |
Each
of our directors;
|
| · |
Each
executive officer named in the summary compensation table; and
|
| · |
All
of our current directors and executive officers as a
group.
|
The
address of each executive officer and director is c/o Novelos Therapeutics,
Inc., One Gateway Center, Suite 504, Newton, Massachusetts 02458. The persons
named in this table have sole voting and investment power with respect to the
shares listed, except as otherwise indicated. The inclusion of shares listed
as
beneficially owned does not constitute an admission of beneficial ownership.
Shares included in the “Right to Acquire” column consist of shares that may be
purchased through the exercise of options and warrants that vest within 60
days
of May 23, 2007.
39
|
Shares
Beneficially Owned
|
|||||||||||||
|
Name
and Address of Beneficial Owner
|
Outstanding
|
Right
to Acquire
|
Total
|
Percentage
|
|||||||||
|
Margie
Chassman (1)
445
West 23rd
Street, Apt. 16E
New
York, NY 10011
|
2,553,185
|
66,666
|
2,619,851
|
6.7
|
%
|
||||||||
|
Harry
S. Palmin (2)
|
365,118
|
737,130
|
1,102,248
|
2.8
|
%
|
||||||||
|
Simyon
Palmin (3)
|
1,947,481
|
487,826
|
2,435,307
|
6.1
|
%
|
||||||||
|
Christopher
J. Pazoles, Ph.D.
|
0
|
216,667
|
216,667
|
*
|
|||||||||
|
M.
Taylor Burtis
|
0
|
150,000
|
150,000
|
*
|
|||||||||
|
Michael
J. Doyle
|
0
|
91,250
|
91,250
|
*
|
|||||||||
|
David
McWilliams
|
0
|
169,028
|
169,028
|
*
|
|||||||||
|
Sim
Fass
|
0
|
116,250
|
116,250
|
*
|
|||||||||
|
Howard
Schneider
|
0
|
116,250
|
116,250
|
*
|
|||||||||
|
All
directors and officers as a group (9 persons)
|
2,312,599
|
2,196,901
|
4,509,500
|
10.9
|
%
|
||||||||
(1)
The
number of shares in the “Outstanding” column is based on Ms. Chassman’s record
stock holdings as of May 23, 2007 as reported to us by our transfer agent,
American Stock Transfer
and Trust Company.
(2)
Shares owned by H. Palmin include 94,000 shares owned by his wife, Deanna
Palmin.
(3)
Shares owned by S. Palmin include 208,542 shares owned by his wife, Alla Palmin.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
In
January 2005, we entered into an agreement with David Blech (the husband of
Margie Chassman), which provided that he or his designees would lend us $500,000
(inclusive of $100,000 previously advanced to us in December 2004 by Ms.
Chassman) for operating capital pending our debt restructuring and completion
of
our private placements of units, and up to an additional $500,000 on the same
terms if the private placement was delayed.
In
1990,
Mr. Blech founded D. Blech & Company, which, until it ceased doing business
in September 1994, was a registered broker-dealer involved in underwriting
biotechnology issues. In May 1998, David Blech pled guilty to two counts of
criminal securities fraud, and, in September 1999, he was sentenced by the
U.S.
District Court for the Southern District of New York to five years’ probation,
which was completed in September 2004. Mr. Blech also settled administrative
charges by the Commission in December 2000 arising out of the collapse in 1994
of D. Blech & Co., of which Mr. Blech was president and sole stockholder.
The settlement prohibits Mr. Blech from engaging in future violations of the
federal securities laws and from association with any broker-dealer. In
addition, the District Business Conduct Committee for District No. 10 of NASD
Regulation, Inc. reached a decision, dated December 3, 1996, in a matter styled
District Business Conduct Committee for District No. 10 v. David Blech,
regarding the alleged failure of Mr. Blech to respond to requests by the staff
of the NASD for documents and information in connection with seven customer
complaints against various registered representatives of D. Blech & Co. The
decision found that Mr. Blech failed to respond to such requests in violation
of
NASD rules and that Mr. Blech should, therefore, be censured, fined $20,000
and
barred from associating with any member firm in any capacity. Mr. Blech was
discharged in bankruptcy in the United States Bankruptcy Court for the Southern
District of New York in March 2000.
Mr.
Blech
did not lend us any money. Two loans were made under the agreement, both of
which were made by Ms. Chassman, totaled $500,000 and bore interest at 6% per
annum. We repaid Ms. Chassman the entire $500,000 out of proceeds of our private
placements of units on August 9, 2005. According to the agreement, we also
issued the following individuals the following number of shares of our common
stock:
|
Investor
|
Number
of Shares
of
Common stock
|
|||
|
Margie
Chassman
|
2,475,000
|
|||
|
Wood
River Trust
|
3,850,000
|
|||
|
Esther
Blech
|
1,225,000
|
|||
|
Milton
Chassman
|
1,225,000
|
|||
|
Aaron
Eiger
|
1,225,000
|
|||
|
Mark
Germain
|
500,000
|
|||
40
Wood
River Trust is a trust formed for the benefit of Evan Blech, the son of Ms.
Chassman and Mr. Blech. The trustees of the trust are Harvey Kesner and Michael
C. Doyle (no relation to our director, Michael J. Doyle). Esther Blech is the
mother-in-law of Ms. Chassman. Milton Chassman is the brother of Ms. Chassman.
We
understand that in January 2007, Wood River Trust sold approximately one half
of
their shares of our common stock in a private transaction.
In
connection with our 2005 PIPE financing, we paid Margie Chassman, an aggregate
of $52,000 as finders’ fees. In connection with our Series A preferred stock
financing during 2005, Ms. Chassman provided a financial enhancement to the
investors in the form of an escrow of 2,133,000 share of her common stock,
to be
drawn upon by the investors if their investment in our equity securities fails
to provide a specified yield. We paid Ms. Chassman and her brother $166,000
for
providing such financial enhancement.
As
a
result of the assignment to Novelos of the exclusive worldwide intellectual
property and marketing rights of oxidized glutathione (excluding Russia
and the states of the former Soviet Union), Novelos is required
to
pay Oxford Group, Ltd. a royalty in the amount of 0.8% of our net sales of
oxidized glutathione-based products. Our Chairman of the Board of Directors
is
president of Oxford Group, Ltd.
We
are
obligated to ZAO BAM under a royalty and technology transfer agreement. One
of
our Company’s former directors, Mark Balazovsky, is the majority shareholder of
ZAO BAM. Mr. Balazovsky resigned from the board of directors in November 2006.
Pursuant to the royalty and technology transfer agreement between us and ZAO
BAM, we are required to make royalty payments of 1.2% of net sales of oxidized
glutathione-based products. We are also required to pay ZAO BAM $2 million
for
each new oxidized glutathione-based drug within eighteen months following FDA
approval of such drug.
We
have
also agreed to pay ZAO BAM 12% of all license revenues, as defined, in excess
of
our expenditures associated therewith, including but not limited to, preclinical
and clinical studies, testing, FDA and other regulatory agency submission and
approval costs, general and administrative costs, and patent expenses, provided
that such payment be no less than 3% of all license revenues.
SELLING
STOCKHOLDERS
23,400,000
shares are being offered under this prospectus, all of which are being
registered for sale for the account of the selling stockholders.
Private
Placement of Series B Preferred Stock and Warrants
We
completed a private placement of Series B preferred stock and common stock
purchase warrants to the selling stockholders listed in the table below under
the heading “Investors in Private Placement of Series B Preferred Stock” on May
2, 2007. In this private placement, we sold an aggregate of 300 shares of our
Series B preferred stock and warrants to purchase 7,500,000 shares of our common
stock. The registration statement, of which this prospectus is a part, was
filed
pursuant to the terms of our registration rights agreement with these
investors.
41
The
selling stockholders listed in the table below under the heading “Investors in
Private Placement of Series B Preferred Stock” are offering up to 22,500,000
shares of our common stock being registered for resale by this registration
statement, of which this prospectus is a part, consisting of:
| · |
15,000,000
shares of our common stock to be obtained upon conversion of the
Series B
preferred stock in the private placement;
and
|
| · |
7,500,000
shares of our common stock to be obtained upon exercise of five-year
common stock purchase warrants with an exercise price of $1.25 per
share
that were issued in the private
placement.
|
The
selling stockholders listed in the table below under the heading “Placement
Agent Warrants issued in connection with Private Placement of Series B Preferred
Stock” are offering up to 900,000 shares of our common stock to be obtained upon
exercise of five-year common stock purchase warrants with an exercise price
of
$1.25 per share that were obtained as partial compensation for their services
as
placement agents. The placement agents also received cash compensation totaling
$1,050,000 for their services. Rodman and Renshaw LLC acted as co-placement
agent in our 2006 private placement of common stock and received warrants to
purchase common stock, described in the footnotes to the table below, and cash
compensation of approximately $422,000.
We
received gross proceeds of $15,000,000 and net proceeds of approximately
$13,600,000 (after deducting fees and transaction costs) from this private
placement.
Registration
Rights
We
entered into a registration rights agreement with the investors in our private
placement of Series B preferred stock. Pursuant to this agreement we agreed
to
file with the SEC no later than 30 days following the closing of the transaction
(May 2, 2007), a registration statement covering the resale of a number of
shares of common stock equal to 100% of the shares issuable upon conversion
of
the preferred stock and exercise of the warrants as of the date of filing of
the
registration statement. The registration statement covering these shares must
be
declared effective by the SEC no later than 90 days following the closing (or
in
the event there is a review, no later than 120 days from the closing). We are
required to use our best efforts to keep the registration statement continuously
effective under the Securities Act until the earlier of the date when all the
registrable securities covered by the registration statement have been sold
or
the second anniversary of the closing. In the event we fail to file the
registration statement or it is not declared effective within the timeframes
specified by the registration rights agreement, we are required to pay to the
investors liquidated damages equal to 1.5% per month (pro-rated on a daily
basis
for any period of less than a full month) of the aggregate purchase price of
the
preferred stock and warrants until we file the delinquent registration statement
or the registration statement is declared effective, as applicable. We are
allowed to suspend the use of the registration statement for not more than
15
consecutive days or for a total of not more than 30 days in any 12-month period
without incurring liability for the liquidated damages in certain
circumstances.
Selling
Stockholders Table
Based
on
the information supplied to us by each selling stockholder, the following table
sets forth the approximate number of shares beneficially owned as of May 23,
2007 by each of the selling stockholders and their pledgees, assignees and
successors in interest. The ‘‘Right to Acquire’’ column reflects beneficial
ownership of shares subject to warrants and convertible preferred stock that
may
be exercised or converted within 60 days after May 23, 2007. The “Shares
Offered” column reflects all of the shares that each selling stockholder may
offer under this prospectus. Percentage ownership is based on 39,235,272 shares
issued and outstanding as of May 23, 2007. The table assumes that the selling
stockholders sell all of the shares.
We
prepared the table below based on information supplied to us by the selling
stockholders. Although we have assumed for purposes of the table that the
selling stockholders will sell all of the shares offered by this prospectus,
because the selling stockholders may offer from time to time all or some of
their shares covered under this prospectus, or in another permitted manner,
no
assurances can be given as to the actual number of shares that will be resold
by
the selling stockholders or that will be held by the selling stockholders after
completion of the resales.
42
The
terms
of the Series B certificate of designations and common stock purchase warrants
provide that the number of shares to be obtained by each of the holders of
Series B preferred stock and warrants, upon conversion of Series B preferred
stock or exercise of our common stock purchase warrants, cannot exceed the
number of shares that, when combined with all other shares of our common stock
and securities owned by each of them, would result in any one of them owning
more than 4.99% or 9.99%, as applicable, of our outstanding common stock at
any
given point in time, provided however that this limitation may be revoked by
the
stockholder upon 61 days prior notice to the Company.
Information
concerning the selling stockholders may change from time to time and changed
information will be presented in a supplement to this prospectus if and when
necessary and required. Except as described above, there are currently no
agreements, arrangements or understandings with respect to the resale of any
of
the shares covered by this prospectus.
Except
as
described above and in the footnotes to the selling stockholders table and
except for the ownership of our preferred stock and common stock purchase
warrants, none of the selling stockholders had any material relationship with
us
within the past three years.
Selling
Stockholders
|
Beneficial
Ownership Prior to Offering
|
Beneficial
Ownership After Offering
|
|||||||||||||||||||||
|
Name
of Beneficial Owner
|
Outstanding
|
Right
to Acquire
|
Total
|
Shares
Offered
|
Outstanding
|
Right
to Acquire
|
Percent
|
|||||||||||||||
|
Investors
in Private Placement of Series B Preferred Stock
|
||||||||||||||||||||||
|
Xmark
Opportunity Fund, Ltd.
|
0
|
3,000,000
|
3,000,000
|
3,000,000
|
0
|
0
|
*
|
|||||||||||||||
|
Xmark
Opportunity Fund, L.P.
|
0
|
1,500,000
|
1,500,000
|
1,500,000
|
0
|
0
|
*
|
|||||||||||||||
|
Xmark
JV Investment Partners, LLC
|
0
|
1,500,000
|
1,500,000
|
1,500,000
|
0
|
0
|
*
|
|||||||||||||||
|
Caduceus
Capital Master Fund Limited
|
0
|
3,000,000
|
3,000,000
|
3,000,000
|
0
|
0
|
*
|
|||||||||||||||
|
Caduceus
Capital II, L.P.
|
0
|
1,950,000
|
1,950,000
|
1,950,000
|
0
|
0
|
*
|
|||||||||||||||
|
UBS
Eucalyptus Fund, L.L.C.
|
0
|
1,950,000
|
1,950,000
|
1,950,000
|
0
|
0
|
*
|
|||||||||||||||
|
HFR
SHC Aggressive Master Trust
|
0
|
375,000
|
375,000
|
375,000
|
0
|
0
|
*
|
|||||||||||||||
|
PW
Eucalyptus Fund, Ltd.
|
0
|
225,000
|
225,000
|
225,000
|
0
|
0
|
*
|
|||||||||||||||
|
Knoll
Capital Fund II Master Fund, Ltd.
|
0
|
3,000,000
|
3,000,000
|
3,000,000
|
0
|
0
|
*
|
|||||||||||||||
|
Europa
International, Inc.
|
0
|
3,000,000
|
3,000,000
|
3,000,000
|
0
|
0
|
*
|
|||||||||||||||
|
Hunt
BioVentures, L.P.
|
0
|
3,000,000
|
3,000,000
|
3,000,000
|
0
|
0
|
*
|
|||||||||||||||
|
Placement
Agent Warrants issued in connection with Private Placement of Series
B
Preferred Stock
|
||||||||||||||||||||||
|
Rodman
& Renshaw LLC (1)(2)
|
0
|
1,069,296
|
1,069,296
|
765,000
|
0
|
304,296
|
*
|
|||||||||||||||
|
VFT
Special Ventures, Ltd. (3)
|
0
|
135,000
|
135,000
|
135,000
|
0
|
0
|
*
|
|||||||||||||||
*
Less
than 1%
| (1) |
The
selling securityholder has represented in its Selling Securityholder
Notice and Questionnaire that it is a broker-dealer.
|
| (2) |
Shares
in the “Right to Acquire” column include warrants to purchase 304,296
shares of common stock that were issued as compensation for placement
agent services in connection with our private placement of common
stock
that closed on March 7, 2006.
|
43
| (3) |
Shares
in the “Right to Acquire” column include warrants to purchase 135,000
shares of common stock that were issued as compensation for placement
agent services provided by Emerging Growth Equities, Ltd. in connection
with our private placement of Series B preferred stock and warrants.
Gregory J. Berlacher exercises voting and investment power over the
shares
of common stock underlying the warrants held in the name of VFT Special
Ventures, Ltd. Mr. Berlacher is the President and Chief Executive
Officer
of Emerging Growth Equities, Ltd., a registered broker-dealer. He
is also
a limited partner (and the principal owner) of EGE Holdings, Ltd.,
which
owns Emerging Growth Equities, Ltd. and VFT Special Ventures, Ltd.
|
Voting
and Investment Control
The
table
below sets forth selling stockholders that are entities and the names of
individuals having voting and investment control over the securities held by
these entities. We determined beneficial ownership based upon information
supplied to us by the selling stockholders and in accordance with rules
promulgated by the Securities and Exchange Commission, and the information
is
not necessarily indicative of beneficial ownership for any other purpose.
The
inclusion of shares listed as beneficially owned does not constitute an
admission of beneficial ownership. Except
as
otherwise indicated, we believe that the persons or entities named in the
following table have voting and investment power with respect to all shares
of
common stock shown as beneficially owned by them, subject to community property
laws where applicable, and have not held any office or maintained any material
relationship, except as investor or as described above, with us, or any of
our
predecessors or affiliates, over the past three years. Certain of the
individuals with voting and investment control have indicated that they exercise
such control through a corporate or other organizational structure, which
structural information has not been included.
The
following entities have informed us that the following individuals have voting
and investment control over our securities held by them:
|
Entity
|
Voting
and Investment Control
|
|
|
Xmark
Opportunity Fund, Ltd.
|
Mitchell
Kaye and David Cavalier
|
|
|
Xmark
Opportunity Fund, L.P.
|
Mitchell
Kaye and David Cavalier
|
|
|
Xmark
JV Investment Partners, LLC
|
Mitchell
Kaye and David Cavalier
|
|
|
Caduceus
Capital Master Fund Limited
|
OrbiMed
Advisors LLC
|
|
|
Caduceus
Capital II, L.P.
|
OrbiMed
Advisors LLC
|
|
|
UBS
Eucalyptus Fund, L.L.C.
|
OrbiMed
Advisors LLC
|
|
|
HFR
SHC Aggressive Master Trust
|
OrbiMed
Advisors LLC
|
|
|
PW
Eucalyptus Fund, Ltd.
|
OrbiMed
Advisors LLC
|
|
|
Knoll
Capital Fund II Master Fund, Ltd.
|
Fred
Knoll, KOM Capital Management as Investment Manager for Knoll Capital
Fund
II Master Fund, Ltd.
|
|
|
Europa
International, Inc.
|
Fred
Knoll, Knoll Capital Management as Investment Manager for Europa
International Inc.
|
|
|
Hunt-BioVentures,
L.P.
|
Christopher
W. Kleinert
|
|
|
Rodman
& Renshaw LLC
|
Thomas
G. Pinou, Chief Financial Officer of Rodman & Renshaw
LLC
|
|
|
VFT
Special Ventures, Ltd.
|
Gregory
J. Berlacher
|
DESCRIPTION
OF SECURITIES
Under
our
amended and restated certificate of incorporation, our authorized capital stock
consists of 100,000,000 shares of common stock, $0.00001 par value per share
and
7,000 shares of preferred stock, $0.00001 par value per share.
Our
amended and restated certificate of incorporation authorizes us to issue shares
of our preferred stock from time to time in one or more series without
stockholder approval. As of May 23, 2007, we had designated 6,000 shares as
Series A 8% cumulative convertible preferred stock, none of which were issued
and outstanding on that date; 400 shares of Series B convertible preferred
stock, 300 of which were issued and outstanding on that date; and 272 shares
of
Series C cumulative convertible preferred stock, all of which were issued and
outstanding as of that date.
44
As
a
condition to closing the Series B preferred stock and warrant financing, the
holders of the existing Series A preferred stock exchanged their 3,264 shares
of
Series A preferred stock for 272 shares of a new Series C convertible preferred
stock, which are subordinated to the Series B preferred stock as set forth
in
the Series C Certificate of Designations. As part of the exchange, the Company
issued to the holders of the Series A preferred stock warrants to purchase
1,333,333 shares of common stock expiring on May 2, 2012 at a price of $1.25
per
share and paid them a cash allowance to defray expenses totaling $40,000 and
an
amount equal to unpaid dividends accumulated through the date of the exchange.
Pursuant to the exchange agreement the holders of the new Series C preferred
stock retained registration and related rights substantially identical to the
rights that they had as holders of the Series A preferred stock except that
the
holders of the new Series C preferred stock did not retain the right to appoint
a director to our board of directors.
All
outstanding shares of our common stock and preferred stock are duly authorized,
validly issued, fully-paid and non-assessable.
Common
Stock
Voting.
Holders
of our common stock are entitled to one vote per share held of record on all
matters to be voted upon by our stockholders. Our common stock does not have
cumulative voting rights. Persons who hold a majority of the outstanding common
stock entitled to vote on the election of directors can elect all of the
directors who are eligible for election.
Dividends.
Subject
to preferences that may be applicable to the holders of any outstanding shares
of our preferred stock, the holders of our common stock are entitled to receive
such lawful dividends as may be declared by our board of directors.
Liquidation
and Dissolution.
In the
event of our liquidation, dissolution or winding up, and subject to the rights
of the holders of any outstanding shares of our preferred stock, the holders
of
shares of our common stock will be entitled to receive pro rata all of our
remaining assets available for distribution to our stockholders.
Other
Rights and Restrictions.
Our
charter prohibits us from granting preemptive rights to any of our stockholders.
All outstanding shares are fully paid and nonassessable.
Listing.
Our
common stock is traded on the over-the-counter bulletin board under the trading
symbol “NVLT.OB”.
Series
B Convertible Preferred Stock
Stated
Value: The
Series B preferred stock has a stated value of $50,000 per share.
Voting
and Board Rights:
The
Series B preferred stockholders are entitled to vote on all matters on which
the
holders of common stock are entitled to vote. The number of votes to which
each
holder of Series B preferred stock is entitled is equal to the number of shares
of common stock that would be issued to such holder if the Series B Preferred
Stock had been converted at the record date for the meeting of stockholders.
Pursuant
to the Securities Purchase Agreement dated April 12, 2007, as amended May 2,
2007, from and after the closing of the sale of the Series B preferred stock,
Xmark Opportunity Fund, Ltd. and its affiliates (the “Xmark Entities”), will
have the right to designate one member to our Board of Directors. This right
shall last until such time as the Xmark Entities no longer hold
at
least one-third of the Series B preferred stock issued to them at closing.
In
addition, the Xmark Entities and Caduceus Capital Master Fund Limited and its
affiliates (together with the Xmark Entities, the “Lead Investors”) will have
the right to designate one observer to attend all meetings of our Board of
Directors, committees thereof and access to all information made available
to
members of the Board. This right shall last until such time as the Lead
Investors no longer hold
at
least one-third of the Series B preferred stock issued to them.
Dividends:
The
Series B preferred stock has a dividend rate of 9% per annum, payable
semi-annually. Such dividends may be paid in cash or in registered shares of
common stock. While any shares of Series B preferred stock remain outstanding,
we are prohibited from paying dividends to common stockholders without the
prior
consent of the Series B holders. If consent is given, the holders of outstanding
shares of Series B preferred stock are also entitled to participate in any
dividends paid to common stockholders.
45
Conversion:
Each
share of Series B preferred stock is convertible at a price of $1.00 per common
share at any time after issuance. The Series B preferred stock can be converted
only to the extent that the Series B stockholder will not, as a result of the
conversion, beneficially hold in excess of 4.99% or 9.99%, as applicable, of
the
total outstanding shares of our common stock, provided however that this
limitation may be revoked by the stockholder upon 61 days prior notice to the
Company. If there is an effective registration statement covering the shares
of
common stock underlying the outstanding shares of Series B preferred stock
and
the daily volume weighted average price (“VWAP”), as defined in the Series B
Certificate of Designations, of our common stock exceeds $2.00 for 20
consecutive trading days, then the outstanding Series B preferred stock will
automatically convert into common stock at the conversion price then in effect.
Antidilution:
Upon
the occurrence of a stock split, stock dividend, combination of our common
stock
into a smaller number of shares, issuance of any of our shares or other
securities by reclassification of our common stock, merger or sale of
substantially all of our assets, the conversion rate shall be adjusted so that
the conversion rights of the Series B preferred stock will be equivalent to
the
conversion rights of the Series B preferred stock stockholders prior to such
event.
Liquidation:
The
Series B preferred stock ranks senior to all other outstanding series of
preferred stock and common stock as to the payment of dividends and the
distribution of assets upon voluntary or involuntary liquidation, dissolution
or
winding up of our affairs. The Series B preferred stockholders will be entitled
to receive first, $50,000 per share and all accrued and unpaid dividends. They
are then entitled to participate with the holders of the remaining classes
of
common stock in the distribution of remaining assets on a pro rata basis. If,
upon any winding up of our affairs, our assets available to pay the holders
of
Series B Preferred Stock are not sufficient to permit the payment in full,
then
all our assets will be distributed to the holders of our Series B Preferred
Stock on a pro rata basis.
If
we
sell, lease or otherwise transfer substantially all of our assets, consummate
a
business combination in which we are not the surviving corporation or, if we
are
the surviving corporation, if the holders of a majority of our common stock
immediately before the transaction do not hold a majority of our common stock
immediately after the transaction, in one or a series of events, change the
majority of the members of our board of directors, or if any person or entity
(other than the holders of Series B Preferred Stock) acquires more than 50%
of
our outstanding stock, then the holders of Series B preferred stock are entitled
to receive the same liquidation preference as described above, except that
after
receiving $50,000 per preferred share and any accrued but unpaid dividends,
they
are not entitled to participate with other classes or common stock in a
distribution of the remaining assets.
Other
restrictions: For
as
long as any shares of Series B Preferred Stock remain outstanding, the Company
is prohibited from (i) paying dividends to common stockholders; (ii) amending
the Company’s certificate of incorporation (except to increase the number of
shares of authorized common stock to 150,000,000); (iii) issuing any equity
security or any security convertible into or exercisable for any equity security
at a price of $1.00 or less or with rights senior to the Series B Preferred
Stock (except for certain exempted issuances); (iv) increasing the number of
shares of Series B Preferred Stock or issuing any additional shares of Series
B
Preferred Stock other than the 400 shares designated in the Series B Certificate
of Designations; (v) selling or otherwise disposing of all or substantially
all
of the Company’s assets or intellectual property or entering into a merger or
consolidation with another company unless Novelos is the surviving corporation,
the Series B Preferred Stock remains outstanding and there are no changes to
the
rights and preferences of the Series B Preferred Stock; (vi) redeeming or
repurchasing any capital stock other than Series B Preferred Stock; (vii)
incurring any new debt for borrowed money and (viii) changing the number of
the
Company’s directors.
Series
C 8% Cumulative Convertible Preferred Stock
Stated
Value: The
Series C preferred stock has a stated value of $12,000 per share.
Voting
Rights:
The
Series C preferred stockholders do not have voting rights.
46
Dividends:
The
Series C preferred stock has an annual dividend rate of 8% until October 1,
2008
and thereafter has an annual dividend rate of 20%. The dividends are payable
quarterly commencing on June 30, 2007. Such dividends shall only be paid after
all outstanding dividends on the Series B preferred stock (with respect to
the
current fiscal year and all prior fiscal years) shall have been paid to the
holders of the Series B preferred stock. Such dividends shall be paid in cash.
Upon the occurrence of an event of default (as defined in the Series C
Certificate of Designations) the dividend rate shall increase to
20%.
Conversion:
Each
share of Series C preferred stock is convertible at a price of $1.00 per common
share. The Series C preferred stock can be converted only to the extent that
the
Series C stockholder will not, as a result of the conversion, hold in excess
of
4.99% of the total outstanding shares of our common stock, provided however
that
this limitation may be revoked by the stockholder upon 61 days prior notice
to
us.
Antidilution:
Upon
the occurrence of a stock split, stock dividend, combination of our common
stock
into a smaller number of shares, issuance of any of our shares or other
securities by reclassification of our common stock, merger or sale of
substantially all of our assets, the conversion rate shall be adjusted so that
the conversion rights of the Series C preferred stock stockholders will be
equivalent to the conversion rights of the Series C preferred stock stockholders
prior to such event.
Redemption:
The
Series C preferred stock is not redeemable at the option of the holder. However,
we may redeem the Series C preferred stock by paying to the holder a sum of
money equal to one hundred twenty percent (120%) of the stated value per share
plus any accrued but unpaid dividends upon 30 days’ (during which time the
Series A preferred stock may be converted) prior written notice if a
registration statement has been filed with and declared effective by the
Securities and Exchange Commission covering the shares of our common stock
issuable upon conversion of the Series C preferred stock.
Dissolution:
In the
event of any voluntary or involuntary liquidation, dissolution or winding up
of
our affairs, the Series C preferred stock will be treated as senior to our
common stock. After all required payments are made to holders of Series B
preferred stock, the Series C preferred stockholders will be entitled to receive
first, $12,000 per share and all accrued and unpaid dividends. If, upon any
winding up of our affairs, our remaining assets available to pay the holders
of
Series C preferred stock are not sufficient to permit the payment in full,
then
all our assets will be distributed to the holders of our Series C preferred
stock (and any remaining holders of Series B preferred stock as may be required)
on a pro rata basis.
Anti-Takeover
Effect of Delaware Law, Certain By-Law Provisions
Provisions
of Delaware law, our charter and our by-laws could make it more difficult to
acquire us by means of a merger, tender offer, proxy contest, open market
purchases, removal of incumbent directors and otherwise. These provisions,
which
are summarized below, are expected to discourage types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of us to first negotiate with us. We believe that the benefits
of increased protection of our potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure us outweigh
the disadvantages of discouraging takeover or acquisition proposals because
negotiation of these proposals could result in an improvement of their terms.
Authorized
but Unissued Stock.
We have
shares of common stock and preferred stock available for future issuance, in
some cases, without stockholder approval. We may issue these additional shares
for a variety of corporate purposes, including public offerings to raise
additional capital, corporate acquisitions, stock dividends on our capital
stock
or equity compensation plans.
The
existence of unissued and unreserved common stock and preferred stock may enable
our board of directors to issue shares to persons friendly to current management
or to issue preferred stock with terms that could render more difficult or
discourage a third-party attempt to obtain control of us, thereby protecting
the
continuity of our management. In addition, if we issue preferred stock, the
issuance could adversely affect the voting power of holders of common stock
and
the likelihood that such holders will receive dividend payments and payments
upon liquidation.
47
Business
Combinations.
As a
Delaware corporation, we are subject to Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a business combination
with
an interested stockholder for a period of three years after the date the person
becomes an interested stockholder, unless the business combination or the
transaction in which the person becomes an interested stockholder is approved
in
a prescribed manner. Generally, a business combination includes a merger, asset
or stock sale, or other transaction resulting in a financial benefit to an
interested stockholder. An interested stockholder includes a person who,
together with affiliates and associates, owns, or did own within three years
before the person was determined to be an interested stockholder, 15% or more
of
a corporation’s voting stock. The existence of this provision generally will
have an anti-takeover effect for transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price of our common stock.
Vacancies
on the Board of Directors.
Our
by-laws provide that any vacancy on the board of directors, however occurring,
including a vacancy resulting from an enlargement of the board, may be filled
only by the vote of a majority of the directors then in office. This limitation
on the filling of vacancies could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring,
control of us.
Special
Meeting of Stockholders.
Our
by-laws provide that any action required or permitted to be taken by our
stockholders at an annual meeting or special meeting of stockholders may only
be
taken if it is properly brought before the meeting.
PLAN
OF DISTRIBUTION
The
selling stockholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock
or
interests in shares of common stock received after the date of this prospectus
from a selling stockholder as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell, transfer or otherwise dispose of any
or
all of their shares of common stock or interests in shares of common stock
on
any stock exchange, market or trading facility on which the shares are traded
or
in private transactions. These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale,
or at
negotiated prices.
The
selling stockholders may use any one or more of the following methods when
disposing of shares or interests therein:
| · |
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
| · |
block
trades in which the broker-dealer will attempt to sell the shares
as
agent, but may position and resell a portion of the block as principal
to
facilitate the transaction;
|
| · |
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
| · |
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
| · |
privately
negotiated transactions;
|
| · |
short
sales;
|
| · |
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
| · |
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
| · |
a
combination of any such methods of sale;
and
|
48
| · |
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may, from time to time, pledge or grant a security interest
in some or all of the shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock, from time to time, under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus. The selling stockholders also
may
transfer the shares of common stock in other circumstances, in which case the
transferees, pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.
In
connection with the sale of our common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
aggregate proceeds to the selling stockholders from the sale of the common
stock
offered by them will be the purchase price of the common stock less discounts
or
commissions, if any. Each of the selling stockholders reserves the right to
accept and, together with their agents from time to time, to reject, in whole
or
in part, any proposed purchase of common stock to be made directly or through
agents. We will not receive any of the proceeds from this offering. Upon any
exercise of the warrants by payment of cash, however, we will receive the
exercise price of the warrants.
The
selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act of 1933,
provided that they meet the criteria and conform to the requirements of that
rule.
The
selling stockholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock or interests therein may be
"underwriters" within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling stockholders who are "underwriters" within the meaning of Section 2(11)
of the Securities Act will be subject to the prospectus delivery requirements
of
the Securities Act.
To
the
extent required, the shares of our common stock to be sold, the names of the
selling stockholders, the respective purchase prices and public offering prices,
the names of any agents, dealer or underwriter, any applicable commissions
or
discounts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this
prospectus.
In
order
to comply with the securities laws of some states, if applicable, the common
stock may be sold in these jurisdictions only through registered or licensed
brokers or dealers. In addition, in some states the common stock may not be
sold
unless it has been registered or qualified for sale or an exemption from
registration or qualification requirements is available and is complied
with.
We
have
advised the selling stockholders that the anti-manipulation rules of Regulation
M under the Exchange Act may apply to sales of shares in the market and to
the
activities of the selling stockholders and their affiliates. In addition, we
will make copies of this prospectus (as it may be supplemented or amended from
time to time) available to the selling stockholders for the purpose of
satisfying the prospectus delivery requirements of the Securities Act. The
selling stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act.
49
We
have
agreed to indemnify the selling stockholders against liabilities, including
liabilities under the Securities Act and state securities laws, relating to
the
registration of the shares offered by this prospectus.
We
have
agreed with the selling stockholders to keep the registration statement of
which
this prospectus constitutes a part effective until the earlier of (1) such
time
as all of the shares covered by this prospectus have been disposed of pursuant
to and in accordance with the registration statement or (2) the date on which
the shares may be sold pursuant to Rule 144(k) of the Securities
Act.
DISCLOSURE
OF COMMISSION POSITION ON
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our
charter contains provisions to indemnify our directors and officers to the
maximum extent permitted by Delaware law. We believe that indemnification under
our charter covers at least negligence on the part of an indemnified person.
Our
charter permits us to advance expenses incurred by an indemnified person in
connection with the defense of any action or proceeding arising out of the
person’s status or service as our director, officer, employee or other agent
upon an undertaking by the person to repay those advances if it is ultimately
determined that the person is not entitled to indemnification.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable.
WHERE
YOU CAN FIND MORE INFORMATION
We
are a
reporting company and file annual, quarterly and special reports, and other
information with the Securities and Exchange Commission. Copies of the reports
and other information may be read and copied at the SEC’s Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of
such documents by writing to the SEC and paying a fee for the copying cost.
You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains a web site at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC.
This
prospectus is part of a registration statement on Form SB-2 that we filed with
the SEC. Certain information in the registration statement has been omitted
from
this prospectus in accordance with the rules and regulations of the SEC. We
have
also filed exhibits and schedules with the registration statement that are
excluded from this prospectus. For further information you may:
| · |
read
a copy of the registration statement, including the exhibits and
schedules, without charge at the SEC’s Public Reference Room; or
|
| · |
obtain
a copy from the SEC upon payment of the fees prescribed by the SEC.
|
LEGAL
MATTERS
The
validity of the securities being offered by this prospectus has been passed
upon
for us by Foley Hoag LLP, Boston, Massachusetts.
EXPERTS
Stowe
& Degon have audited our financial statements as of December 31, 2006 and
2005 and for the years then ended. The financial statements referred to above
are included in this prospectus with reliance upon the independent registered
public accounting firm’s opinion based on its expertise in accounting and
auditing.
50
INDEX
TO FINANCIAL STATEMENTS FOR NOVELOS THERAPEUTICS,
INC.
|
Page
|
||||
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|||
|
Balance
Sheets at March 31, 2007, December 31, 2006 and December 31, 2005
|
F-3
|
|||
|
Statements
of Operations for the Three Months Ended March 31, 2007 and 2006
and the
Years Ended December 31, 2006 and 2005
|
F-4
|
|||
|
Statements
of Stockholders’ Equity (Deficiency) for the Three Months Ended March 31,
2007 and the Years Ended December 31, 2006 and 2005
|
F-5
|
|||
|
Statements
of Cash Flows for the Three Months Ended March 31, 2007 and 2006
and the
Years Ended December 31, 2006 and 2005
|
F-6
|
|||
|
Notes
to Financial Statements
|
F-7
|
|||
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Stockholders and Board of Directors
Novelos
Therapeutics, Inc.
Newton,
Massachusetts
We
have
audited the accompanying balance sheets of Novelos Therapeutics, Inc. as of
December 31, 2006 and 2005 and the related statements of operations,
stockholders’ equity (deficiency) and cash flows for the years then ended. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As
discussed in Note 6, effective January 1, 2006, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 123(R),
Share-Based Payment.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Novelos Therapeutics, Inc. as
of
December 31, 2006 and 2005 and the results of its operations, changes in
stockholders’ equity (deficiency) and cash flows for the years then ended in
conformity with accounting principles generally accepted in the United
States.
/s/
Stowe
& Degon
Worcester,
Massachusetts
March
19,
2007
F-2
NOVELOS
THERAPEUTICS, INC.
BALANCE
SHEETS
|
March
31,
|
December
31,
|
December
31,
|
||||||||
|
2007
|
2006
|
2005
|
||||||||
|
(unaudited)
|
(audited)
|
(audited)
|
||||||||
|
ASSETS
|
||||||||||
|
CURRENT
ASSETS:
|
||||||||||
|
Cash
and equivalents
|
$
|
7,772,195
|
$
|
9,938,428
|
$
|
4,267,115
|
||||
|
Restricted
cash
|
1,607,711
|
1,655,251
|
196,908
|
|||||||
|
Prepaid
expenses and other current assets
|
193,255
|
294,995
|
337,902
|
|||||||
|
Deferred
financing costs
|
25,000
|
—
|
—
|
|||||||
|
Total
current assets
|
9,598,161
|
11,888,674
|
4,801,925
|
|||||||
|
FIXED
ASSETS, NET
|
23,659
|
23,810
|
22,610
|
|||||||
|
DEFERRED
FINANCING COSTS
|
—
|
—
|
24,612
|
|||||||
|
PREPAID
EXPENSES
|
—
|
—
|
79,896
|
|||||||
|
DEPOSITS
|
10,875
|
10,875
|
9,656
|
|||||||
|
TOTAL
ASSETS
|
$
|
9,632,695
|
$
|
11,923,359
|
$
|
4,938,699
|
||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||||
|
CURRENT
LIABILITIES:
|
||||||||||
|
Accounts
payable and accrued liabilities
|
$
|
1,245,141
|
$
|
1,088,041
|
$
|
217,156
|
||||
|
Accrued
compensation
|
62,024
|
225,384
|
—
|
|||||||
|
Total
current liabilities
|
1,307,165
|
1,313,425
|
217,156
|
|||||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||||||||
|
STOCKHOLDERS’
EQUITY:
|
||||||||||
|
Preferred
Stock, $0.00001 par value; 7,000 shares authorized: Series A 8% cumulative
convertible preferred stock; 3,264 shares issued and outstanding
(liquidation preference $3,264,000)
|
—
|
—
|
—
|
|||||||
|
Common
stock, $0.00001 par value; 100,000,000 shares authorized; 39,235,272,
39,235,272 and 27,921,199 shares issued and outstanding at March
31, 2007,
December 31, 2006 and December 31, 2005, respectively
|
392
|
392
|
279
|
|||||||
|
Additional
paid-in capital
|
34,391,420
|
34,294,154
|
20,119,820
|
|||||||
|
Accumulated
deficit
|
(26,066,282
|
)
|
(23,684,612
|
)
|
(15,398,556
|
)
|
||||
|
Total
stockholders’ equity
|
8,325,530
|
10,609,934
|
4,721,543
|
|||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
9,632,695
|
$
|
11,923,359
|
$
|
4,938,699
|
||||
See
notes to financial statements.
F-3
NOVELOS
THERAPEUTICS, INC.
STATEMENTS
OF OPERATIONS
|
Three
Months Ended March 31,
|
Year
Ended December 31,
|
||||||||||||
|
|
2007
|
2006
|
2006
|
2005
|
|||||||||
|
(unaudited)
|
(unaudited)
|
(audited)
|
(audited)
|
||||||||||
|
REVENUES:
|
|||||||||||||
|
Sales
of samples
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
12,584
|
|||||
|
Total
revenues
|
—
|
—
|
—
|
12,584
|
|||||||||
|
COSTS
AND EXPENSES:
|
|||||||||||||
|
Research
and development
|
1,909,407
|
663,311
|
6,441,394
|
1,260,682
|
|||||||||
|
General
and administrative
|
607,722
|
771,497
|
2,488,414
|
1,318,284
|
|||||||||
|
Total
costs and expenses
|
2,517,129
|
1,434,808
|
8,929,808
|
2,578,966
|
|||||||||
|
OTHER
INCOME (EXPENSE):
|
|||||||||||||
|
Interest
income
|
133,959
|
80,722
|
637,752
|
49,876
|
|||||||||
|
Interest
expense
|
—
|
—
|
—
|
(109,102
|
)
|
||||||||
|
Miscellaneous
|
1,500
|
—
|
6,000
|
5,796
|
|||||||||
|
Gain
on forgiveness of debt
|
—
|
—
|
—
|
2,087,531
|
|||||||||
|
Restructuring
expense
|
—
|
—
|
—
|
(2,521,118
|
)
|
||||||||
|
Total
other income (expense)
|
135,459
|
80,722
|
643,752
|
(487,017
|
)
|
||||||||
|
NET
LOSS
|
(2,381,670
|
)
|
(1,354,086
|
)
|
(8,286,056
|
)
|
(3,053,399
|
)
|
|||||
|
PREFERRED
STOCK DIVIDEND
|
(65,280
|
)
|
(64,000
|
)
|
(261,120
|
)
|
(64,000
|
)
|
|||||
|
PREFERRED
STOCK DEEMED DIVIDEND
|
—
|
—
|
—
|
(2,077,321
|
)
|
||||||||
|
NET
LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS
|
$
|
(2,446,950
|
)
|
$
|
(1,418,086
|
)
|
$
|
(8,547,176
|
)
|
$
|
(5,194,720
|
)
|
|
|
BASIC
AND DILUTED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON
SHARE
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.23
|
)
|
$
|
(0.24
|
)
|
|
|
SHARES
USED IN COMPUTING BASIC AND DILUTED
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS PER COMMON SHARE
|
39,235,272
|
30,927,952
|
37,179,878
|
21,757,424
|
|||||||||
See
notes to financial statements.
F-4
NOVELOS
THERAPEUTICS, INC.
STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
|
Common
Stock
|
Series
A
Cumulative
Convertible
Preferred
Stock
|
Additional
Paid-in
|
Accumulated
|
Treasury |
Total
Stockholders’
Equity
|
||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Stock
|
(Deficiency)
|
||||||||||||||||||
|
BALANCE
AT JANUARY 1, 2005 (audited)
|
4,426,126
|
$
|
44
|
—
|
$
|
—
|
$
|
7,998,110
|
$
|
(12,345,157
|
)
|
$
|
(1,956
|
)
|
$
|
(4,348,959
|
)
|
||||||||
|
Issuance
of common stock for financing
commitment
|
10,500,000
|
105
|
—
|
—
|
—
|
—
|
—
|
105
|
|||||||||||||||||
|
Issuance
of common stock upon conversion
of
convertible debt
|
1,760,000
|
18
|
—
|
—
|
1,099,982
|
—
|
—
|
1,100,000
|
|||||||||||||||||
|
Issuance
of common stock in settlement of
unsecured debt
|
586,351
|
6
|
—
|
—
|
732,935
|
—
|
—
|
732,941
|
|||||||||||||||||
|
Issuance
of common stock in restructuring of
royalty
arrangement
|
2,016,894
|
20
|
—
|
—
|
2,521,098
|
—
|
—
|
2,521,118
|
|||||||||||||||||
|
Issuance
of common stock in merger
|
4,500,000
|
45
|
—
|
—
|
(45
|
)
|
—
|
—
|
—
|
||||||||||||||||
|
Retirement
of treasury stock in merger
|
(195,672
|
)
|
(2
|
)
|
—
|
—
|
(1,954
|
)
|
—
|
1,956
|
—
|
||||||||||||||
|
Issuance
of common stock and warrants in
private
placement, net of issuance costs of
$891,383
|
4,000,000
|
40
|
—
|
—
|
4,108,577
|
—
|
—
|
4,108,617
|
|||||||||||||||||
|
Issuance
of common stock for placement agent
services
|
125,000
|
1
|
—
|
—
|
156,249
|
—
|
—
|
156,250
|
|||||||||||||||||
|
Issuance
of common stock for services
|
202,500
|
2
|
—
|
—
|
527,798
|
—
|
—
|
527,800
|
|||||||||||||||||
|
Compensation
expense associated with options
issued
to non-employees
|
—
|
—
|
—
|
—
|
113,070
|
—
|
—
|
113,070
|
|||||||||||||||||
|
Issuance
of cumulative convertible preferred
stock,
net of issuance costs of $336,000
|
—
|
—
|
3,200
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Issuance
of warrants in connection with
preferred
stock
|
—
|
—
|
—
|
—
|
786,679
|
—
|
—
|
786,679
|
|||||||||||||||||
|
Beneficial
conversion feature on preferred
stock
|
—
|
—
|
—
|
—
|
2,077,321
|
—
|
—
|
2,077,321
|
|||||||||||||||||
|
Issuance
of cumulative convertible preferred
stock
in payment of dividends
|
—
|
—
|
64
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(3,053,399
|
)
|
—
|
(3,053,399
|
)
|
|||||||||||||||
|
BALANCE
AT DECEMBER 31, 2005
(audited)
|
27,921,199
|
279
|
3,264
|
—
|
20,119,820
|
(15,398,556
|
)
|
—
|
4,721,543
|
||||||||||||||||
|
Exercise
of stock options
|
75,000
|
1
|
—
|
—
|
749
|
—
|
—
|
750
|
|||||||||||||||||
|
Issuance
of common stock for services
|
85,000
|
1
|
—
|
—
|
144,049
|
—
|
—
|
144,050
|
|||||||||||||||||
|
Issuance
of common stock and warrants in
private placement, net of issuance costs of
$1,211,232
|
11,154,073
|
111
|
—
|
—
|
13,846,663
|
—
|
—
|
13,846,774
|
|||||||||||||||||
|
Compensation
expense associated with options
issued to employees
|
—
|
—
|
—
|
—
|
268,281
|
—
|
—
|
268,281
|
|||||||||||||||||
|
Compensation
expense associated with options
issued to non-employees
|
—
|
—
|
—
|
—
|
175,712
|
—
|
—
|
175,712
|
|||||||||||||||||
|
Dividends
paid on preferred stock
|
—
|
—
|
—
|
—
|
(261,120
|
)
|
—
|
—
|
(261,120
|
)
|
|||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(8,286,056
|
)
|
—
|
(8,286,056
|
)
|
|||||||||||||||
|
BALANCE
AT DECEMBER 31, 2006
(audited)
|
39,235,272
|
392
|
3,264
|
—
|
34,294,154
|
(23,684,612
|
)
|
—
|
$
|
10,609,934
|
|||||||||||||||
|
Compensation
expense associated with options
issued to employees
|
—
|
—
|
—
|
—
|
104,708
|
—
|
—
|
104,708
|
|||||||||||||||||
|
Compensation
expense associated with options
issued to non-employees
|
—
|
—
|
—
|
—
|
57,838
|
—
|
—
|
57,838
|
|||||||||||||||||
|
Dividends
paid on preferred stock
|
—
|
—
|
—
|
—
|
(65,280
|
)
|
—
|
—
|
(65,280
|
)
|
|||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
(2,381,670
|
)
|
—
|
(2,381,670
|
)
|
||||||||||||||||
|
BALANCE
AT MARCH 31, 2007 (unaudited)
|
39,235,272
|
$
|
392
|
3,264
|
$
|
—
|
$
|
34,391,420
|
$
|
(26,066,282
|
)
|
$
|
—
|
$
|
8,325,530
|
||||||||||
See
notes to financial statements.
F-5
NOVELOS
THERAPEUTICS, INC.
STATEMENTS
OF CASH FLOWS
|
Three
Months Ended March 31,
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2006
|
2005
|
||||||||||
|
(unaudited)
|
(unaudited)
|
(audited)
|
(audited)
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||||||||
|
Net
loss
|
$
|
(2,381,670
|
)
|
$
|
(1,354,086
|
)
|
$
|
(8,286,056
|
)
|
$
|
(3,053,399
|
)
|
|
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|||||||||||||
|
Depreciation
and amortization
|
3,878
|
2,178
|
9,516
|
3,244
|
|||||||||
|
Stock-based
compensation
|
162,546
|
227,517
|
588,043
|
399,461
|
|||||||||
|
Gain
on forgiveness of debt
|
—
|
—
|
—
|
(2,087,531
|
)
|
||||||||
|
Common
stock issued for restructuring expense
|
—
|
—
|
—
|
2,521,118
|
|||||||||
|
Increase
(decrease) in:
|
|||||||||||||
|
Accounts
receivable
|
—
|
—
|
—
|
12,584
|
|||||||||
|
Prepaid
expenses and other current assets
|
101,740
|
114,762
|
122,803
|
(96,653
|
)
|
||||||||
|
Accounts
payable and accrued liabilities
|
157,100
|
258,443
|
870,885
|
(136,538
|
)
|
||||||||
|
Accrued
compensation
|
(163,360
|
)
|
—
|
225,384
|
—
|
||||||||
|
Accrued
interest
|
—
|
—
|
—
|
51,451
|
|||||||||
|
Deferred
revenue
|
—
|
—
|
—
|
(12,584
|
)
|
||||||||
|
Deferred
rent
|
—
|
—
|
—
|
(250
|
)
|
||||||||
|
Cash
used in operating activities
|
(2,119,766
|
)
|
(751,186
|
)
|
(6,469,425
|
)
|
(2,399,097
|
)
|
|||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||||||||
|
Purchases
of property and equipment
|
(3,727
|
)
|
(2,190
|
)
|
(10,716
|
)
|
(25,854
|
)
|
|||||
|
Change
in restricted cash
|
47,540
|
|
(1,201
|
)
|
(1,458,343
|
)
|
(196,908
|
)
|
|||||
|
Deferred
financing costs
|
(25,000
|
)
|
24,612
|
24,612
|
(24,612
|
)
|
|||||||
|
Deposits
|
—
|
—
|
(1,219
|
)
|
(4,798
|
)
|
|||||||
|
Cash
provided by (used in) investing activities
|
18,813
|
21,221
|
(1,445,666
|
)
|
(252,172
|
)
|
|||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||||||||
|
Proceeds
from issuance of common stock, net
|
—
|
13,888,940
|
13,846,774
|
3,714,868
|
|||||||||
|
Proceeds
from issuance of Series A 8% cumulative convertible preferred stock,
net
|
—
|
—
|
—
|
2,864,000
|
|||||||||
|
Dividends
paid to preferred stockholders
|
(65,280
|
)
|
(64,000
|
)
|
(261,120
|
)
|
—
|
||||||
|
Proceeds
from exercise of stock option
|
—
|
750
|
750
|
—
|
|||||||||
|
Payments
of long-term debt
|
—
|
—
|
—
|
(1,840
|
)
|
||||||||
|
Proceeds
from issuance of promissory notes
|
—
|
—
|
—
|
850,000
|
|||||||||
|
Payment
of promissory notes
|
—
|
—
|
—
|
(519,000
|
)
|
||||||||
|
Cash
provided by (used in) financing activities
|
(65,280
|
)
|
13,825,690
|
13,586,404
|
6,908,028
|
||||||||
|
INCREASE
(DECREASE) IN CASH AND EQUIVALENTS
|
(2,166,233
|
)
|
13,095,725
|
5,671,313
|
4,256,759
|
||||||||
|
CASH
AND EQUIVALENTS AT BEGINNING OF YEAR
|
9,938,428
|
4,267,115
|
4,267,115
|
10,356
|
|||||||||
|
CASH
AND EQUIVALENTS AT END OF YEAR
|
$
|
7,772,195
|
$
|
17,362,840
|
$
|
9,938,428
|
$
|
4,267,115
|
|||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW
INFORMATION
|
|||||||||||||
|
Cash
paid during the year for interest
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
57,461
|
|||||
|
SUPPLEMENTAL
DISCLOSURES OF NON-CASH ACTIVITIES
|
|||||||||||||
|
Deemed
dividend on preferred stock
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
2,077,321
|
|||||
|
Preferred
stock issued in payment of dividends
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
64,000
|
|||||
|
Common
stock issued for services
|
$
|
—
|
$
|
125,750
|
$
|
144,050
|
$
|
156,250
|
|||||
|
Common
stock issued on conversion of promissory notes
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
1,100,000
|
|||||
|
Common
stock issued to repay notes payable
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
638,719
|
|||||
|
Common
stock issued in exchange for accounts payable
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
544,221
|
|||||
|
Common
stock issued for accrued interest
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
100,000
|
|||||
|
Common
stock issued for prepaid expenses
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
426,450
|
|||||
|
Demand
notes payable forgiven
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
621,931
|
|||||
|
Accounts
payable forgiven
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
761,880
|
|||||
|
Accrued
compensation forgiven
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
360,357
|
|||||
|
Accrued
interest forgiven
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
343,363
|
|||||
See
notes to financial statements.
F-6
Novelos
Therapeutics, Inc.
Notes
to Financial Statements
(ALL
INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 IS
UNAUDITED)
1.
NATURE OF BUSINESS
Novelos
Therapeutics, Inc. (‘‘Novelos’’ or on or after June 13, 2005, the ‘‘Company’’)
is a drug development company, originally established in 1996 as AVAM
International, focused on the development of therapeutics for the treatment
of
various cancers and infectious diseases. See Note 3 regarding the reverse merger
that occurred during 2005. Novelos owns exclusive worldwide intellectual
property rights (excluding Russia and other states of the former Soviet Union)
related to certain clinical compounds and other pre-clinical compounds based
on
oxidized glutathione. The Company operates in one business segment.
The
Company is devoting substantially all of its efforts toward the research and
development of its products and has incurred operating losses since inception.
The process of developing products will require significant research and
development, non-clinical testing, clinical trials and regulatory approval.
The
Company expects that these activities, together with general and administrative
costs, will result in continuing and increasing operating losses in the
foreseeable future. The Company plans to obtain capital to fund these activities
through the sale of equity and debt securities and through collaborative
arrangements with partners. If the Company is unable to obtain capital through
these sources, it may have to seek other sources of capital or reevaluate its
operating plans.
The
Company is subject to a number of risks similar to those of other companies
in
an early stage of development. Principal among these risks are dependence on
key
individuals, competition from substitute products and larger companies, the
successful development and marketing of its products in a highly regulated
environment and the need to obtain additional financing necessary to fund future
operations.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying financial statements reflect the application of certain accounting
policies, as described in this note and elsewhere in the accompanying notes
to
the financial statements.
Use
of Estimates —
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses and disclosure of contingent assets and liabilities. Management’s
estimates are based primarily on relevant historical experience and other
assumptions that management believes to be reasonable. Actual results could
differ from those estimates.
Cash
Equivalents —
The
Company considers all short-term investments purchased with original maturities
of three months or less to be cash equivalents.
Restricted
Cash —
Restricted cash at December 31, 2005 represents cash placed in escrow as
contractually required under an employment agreement with an officer. At March
31, 2007 and December 31, 2006, restricted cash also includes $1,550,000 of
cash
pledged as security on a letter of credit agreement with a bank. See Note
10.
Property
and Equipment —
Property and equipment are stated at cost. Depreciation on property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets, which range from three to five years. Leasehold
improvements are depreciated over the lesser of the estimated useful lives
of
the assets or the remaining lease term.
Impairment
of Long-Lived
Assets —
At
each
balance sheet date, the Company assesses whether there has been an impairment
in
the value of long-lived assets by determining whether projected undiscounted
cash flows generated by the applicable asset exceed its net book value as of
the
assessment date. There were no impairments of the Company’s assets at the end of
each period presented.
Stock-based
Compensation — Effective
January 1, 2006, the Company adopted the fair-value recognition provisions
of
Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based
Payment
(SFAS
123R) using the modified-prospective-transition method. During
the year ended December 31, 2005, the Company accounted for stock option awards
granted to directors and employees under the recognition and measurement
principles of Accounting Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees, (APB
25).
During the first quarter of 2007 and the years ended December 31, 2006 and
2005
the Company accounted for share-based
payments granted to non-employees in accordance with Emerging Issues Task Force
(EITF) No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling, Goods or Services.
See
Note 6 for a further description of the Company’s accounting policies related to
stock-based compensation.
F-7
Revenue
Recognition —
Revenue
from sales of samples is recognized when persuasive evidence of an arrangement
exists, the price is fixed and determinable, delivery has occurred, and there
is
reasonable assurance of collection.
Research
and Development —
Research and development costs are expensed as incurred.
Income
Taxes—
The
Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting
for Income Taxes (SFAS
109). SFAS 109 requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities using expected
tax
rates estimated to be in effect in the years in which the differences are
expected to reverse. Valuation allowances are established, if necessary, to
reduce the deferred tax asset to the amount that will, more likely than not,
be
realized.
Comprehensive
Income (Loss) —
The
Company had no components of comprehensive income other than net loss in all
of
the periods presented.
Fair
Value of Financial Instruments —
SFAS
No. 107,
Disclosures About Fair Value of Financial Instruments,
requires
disclosure of the fair value of certain financial instruments. The Company’s
financial instruments consist of cash equivalents, accounts payable and accrued
expenses. The estimated fair value of these financial instruments approximates
their carrying value due to their short-term nature.
Concentration
of Credit Risk —
Financial instruments that subject the Company to credit risk consists of cash
and equivalents, on deposit with financial institutions, which may exceed
federally insured limits. The Company’s excess cash is invested on an overnight
basis in securities that are fully collateralized. The Company maintains cash
and equivalent balances with a stable and well-capitalized financial
institution.
New
Accounting Pronouncements —
In
February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No.
159, The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
Amendment to FASB Statement No. 115 (SFAS
159). SFAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value. SFAS 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. Earlier
adoption is permitted as of the beginning of a fiscal year that begins on or
before November 15, 2007, provided that the entity also elects to apply the
provisions of SFAS 157. The Company is currently evaluating the effect of this
standard on its future reported financial position and results of operations.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS
157), to define fair value, establish a framework for measuring fair value
in
generally accepted accounting principles and expand disclosures about fair-value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years, with earlier application allowed. The Company is currently evaluating
the
effect of this standard on its future reported financial position and results
of
operations.
In
February 2006, the FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments—an
amendment of FASB Statements No. 133 and 140 (SFAS
155), to simplify and make more consistent the accounting for certain financial
instruments. SFAS 155 amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities,
to
permit fair-value remeasurement for any hybrid financial instrument with an
embedded derivative that otherwise would require bifurcation, provided that
the
whole instrument is accounted for on a fair-value basis. SFAS 155 amends SFAS
No. 140, Accounting
for the Impairment or Disposal of Long-Lived Assets,
to
allow a qualifying special-purpose entity to hold a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. SFAS 155 applies to all financial instruments acquired
or
issued after the beginning of an entity's first fiscal year that begins after
September 15, 2006, with earlier application allowed. This standard had no
effect on the Company’s reported financial position or results of operations in
the quarter ended March 31, 2007.
F-8
Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 154,
Reporting
Accounting Changes in Interim Financial Statements (‘‘SFAS
154’’),
which
replaces APB Opinion No. 20, Accounting
Changes, and
SFAS
No. 3, Reporting
Accounting Changes in Interim Financial Statement. SFAS
154
changed the requirements for the accounting for and reporting of a change in
accounting principle. SFAS 154 applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement
in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed. The adoption of SFAS 154 had no impact to the
financial position or results of operations.
Reclassifications —
Certain
amounts in prior periods have been reclassified to conform to the current period
presentation.
3.
REVERSE MERGER AND REORGANIZATION
In
May
and June 2005, the Company completed a two-step reverse merger with
Common Horizons, Inc. (“Common Horizons”), a Nevada-based developer of web
portals, and its wholly-owned subsidiary Nove Acquisition, Inc. In the first
step, Nove Acquisition was merged into Novelos with all outstanding shares
of
Novelos (net of shares of treasury stock) being converted into an equal number
of shares of common stock of Common Horizons and all outstanding options and
warrants to purchase shares of Novelos common stock were converted into an
equal
number of options and warrants to purchase shares of Common Horizons with the
same terms and conditions as the original options and warrants. In connection
with the merger all but 4,500,000 shares of outstanding common stock of Common
Horizons were cancelled. In the second step, Common Horizons merged into
Novelos, changing its state of incorporation, by-laws, certificate of
incorporation and fiscal year to that of Novelos, which became the surviving
corporation. Following these transactions, Novelos shareholders owned
approximately 83% of the combined company on a fully diluted basis after giving
effect to the transactions. The business of Common Horizons, which was
insignificant, was abandoned and the business of Novelos was adopted. The
transaction was therefore treated as a reverse acquisition recapitalization
with
Novelos as the acquiring party and Common Horizons as the acquired party for
accounting purposes. Accordingly, all historical information in these
financial statements is that of the Novelos business. The results of operations
of Common Horizons prior to the merger were not material for purposes of pro
forma presentation. The 4,500,000 remaining shares of Common Horizons
outstanding at the completion of the merger, net of cancellations, were deemed,
for accounting purposes, to be an issuance by Novelos. Since Common Horizons
had
no remaining financial assets or liabilities, the merger with Common Horizons
did not have any significant effect on our assets or liabilities or on our
results of operations subsequent to the date of the merger.
4.
FIXED ASSETS
Fixed
assets consisted of the following at December 31:
|
2006
|
2005
|
||||||
|
Office
and computer equipment
|
$
|
52,537
|
$
|
49,717
|
|||
|
Computer
software
|
7,896
|
—
|
|||||
|
Leasehold
improvements
|
2,500
|
2,500
|
|||||
|
Total
fixed assets
|
62,933
|
52,217
|
|||||
|
Less
accumulated depreciation and
amortization
|
(39,123
|
)
|
(29,607
|
)
|
|||
|
Fixed
assets, net
|
$
|
23,810
|
$
|
22,610
|
|||
Included
in fixed assets is equipment under capital lease with a cost of $13,061. The
equipment was fully depreciated in all periods presented.
5.
STOCKHOLDERS’ EQUITY
2005
PIPE —
From May
27, 2005 through August 9, 2005, the Company completed a private offering of
securities structured as a “PIPE” (Private Investment in Public Equity), exempt
from registration under the Securities Act of 1933, in which it sold to
accredited investors 4,000,000 shares of common stock and issued 2,000,000
common stock warrants (initially exercisable at $2.25 per share) for net cash
proceeds of approximately $3,715,000 (net of cash issuance costs of
approximately $735,000) and conversion of debt and accrued interest of $550,000.
In connection with the private placement, the Company also issued 125,000 shares
of common stock to placement agents with a value of approximately $156,000
and
issued 340,000 common stock warrants to placement agents and finders at an
initial exercise price of $2.00 per share. The fair value of the warrants issued
to investors, placement agents and finders were included as a component of
permanent equity upon issuance. Pursuant to anti-dilution provisions, the number
of warrants issued to investors, placement agents and finders was subsequently
increased to 3,139,312 and the exercise price of the warrants was reduced to
$1.65 per share as a result of the Series A Preferred financing described below.
The 2006 PIPE transaction in March 2006 described below resulted in a further
adjustment to the warrants, increasing the number of warrants to 3,836,967
and
reducing the exercise price of the warrants to $1.35 per share.
F-9
Series
A Preferred —
On
September 30, 2005 and October 3, 2005, the Company sold, in a private
placement, a total of 3,200 shares of its Series A 8% Cumulative Convertible
Preferred Stock (Series A Preferred) and 969,696 common stock warrants for
net
proceeds of $2,864,000, net of issuance costs of $336,000.
The
Series A Preferred stockholders do not have voting rights. The holders of a
majority of the Series A Preferred stock nominated Michael J. Doyle to the
company’s board of directors. The preferred stock has an annual dividend rate of
8%, payable quarterly in cash or additional shares of preferred stock. This
dividend rate increases to 20% annually on the second anniversary of issuance
or
upon the occurrence of certain events of default. During 2006, the Company
paid
cash dividends of $261,120 to preferred shareholders ($80.00 per preferred
share). During 2005, the Company issued 64 shares of preferred stock with a
deemed value of $64,000 in payment of dividends ($20.00 per preferred share).
The preferred stock is redeemable only at the option of the Company upon 30
days’ notice at a 20% premium plus any accrued but unpaid dividends. The Series
A Preferred stockholders have a preference in liquidation equal to the face
value of the outstanding shares plus any accrued but any unpaid dividends.
If
there are insufficient assets to permit payment in full, the Company’s assets
will be distributed to the Series A Preferred stockholders on a pro rata basis.
The
preferred shares were originally convertible at a price of $1.65 per common
share into 1,939,393 shares of common stock and the warrants were exercisable
at
$2.00 per share. The
fair
value of the 969,696 warrants, determined on a relative fair-value basis, was
$786,679, which is included in additional paid-in capital. Since the conversion
price of the preferred stock was less than the market value of the Company’s
common stock at the time of the closings, the Company determined that there
was
a beneficial conversion feature. After allocating the value of the warrants
to
paid-in-capital, the intrinsic value of the beneficial conversion feature was
determined to be $4,344,252. There were not sufficient net proceeds remaining
to
allocate the full intrinsic value to the beneficial conversion feature.
Therefore, the remaining net proceeds of $2,077,321 were allocated to the
beneficial conversion feature and that amount was recorded as a deemed dividend
in the year ended December 31, 2005.
The
Series A Preferred stock and warrants have anti-dilution provisions that provide
for adjustments to the conversion or exercise price, as applicable, upon the
occurrence of certain events. Pursuant to these anti-dilution provisions, both
the conversion price of the preferred stock and the exercise price of the
warrants were subsequently adjusted to $1.35 per share on March 7, 2006 in
connection with a subsequent offering of common stock described below and the
preferred stock then outstanding became convertible into 2,417,774 shares of
common stock. The intrinsic value associated with this contingent beneficial
conversion feature was $1,501,686. However, the proceeds had been fully
allocated to the warrants and initial beneficial conversion feature as described
above and therefore no additional deemed dividend was recorded related to this
adjustment to the conversion price.
In
connection with the sale of the Series A Preferred stock and warrants, a
stockholder, Margie Chassman, provided a financial enhancement to the investors
in the form of an escrow of 2,133,000
shares of her common stock, to be drawn upon by the investors if their
investment in the equity securities of the Company fails to provide a specified
yield. In addition, the Company paid $166,000 to Ms. Chassman and her
designee, for providing such financial enhancement. This amount is included
in
the $336,000 of issuance costs netted against the proceeds from the issuance
of
Series A Preferred stock as reported in the Statement of Stockholders’ Equity
(Deficiency).
F-10
See
Note
13 regarding an exchange of all the outstanding shares of Series A Preferred
Stock for shares of a new Series C convertible preferred stock.
2006
PIPE —
On March
7, 2006, the Company completed a private offering of securities structured
as a
PIPE, exempt from registration under the Securities Act of 1933, in which it
sold to accredited investors 11,154,073 shares of common stock at $1.35 per
share and warrants to purchase 8,365,542 shares of its common stock exercisable
at $2.50 per share for net cash proceeds of approximately $13,847,000 (net
of
issuance costs of approximately $1,211,000, including placement agent fees
of
approximately $1,054,000). In connection with the private placement, the Company
issued 669,244 common stock warrants (exercisable at $2.50 per share) to the
placement agents. The fair value of the warrants issued to investors and
placement agents were included as a component of permanent equity upon issuance.
Common
Stock Warrants — The
following table summarizes information with regard to outstanding warrants
issued in connection with equity and debt financings as of March 31,
2007:
|
Offering
|
Outstanding
(as
adjusted)
|
Exercise
Price
(as
adjusted)
|
Expiration
Date
|
|||||||
|
2005
Bridge Loans (see Note 8)
|
720,000
|
$
|
0.625
|
April
1, 2010
|
||||||
|
2005
PIPE:
|
||||||||||
|
Investors
|
3,333,275
|
$
|
1.35
|
August
9, 2008
|
||||||
|
Placement
agents and finders
|
503,692
|
$
|
1.35
|
August
9, 2010
|
||||||
|
Series
A Preferred :
|
||||||||||
|
Investors
- September 30, 2005 closing
|
909,090
|
$
|
1.35
|
September
30, 2010
|
||||||
|
Investors
- October 3, 2005 closing
|
60,606
|
$
|
1.35
|
October
3, 2010
|
||||||
|
2006
PIPE :
|
||||||||||
|
Investors
|
8,365,542
|
$
|
2.50
|
March
7, 2011
|
||||||
|
Placement
agents
|
669,244
|
$
|
2.50
|
March
7, 2011
|
||||||
|
Total
|
14,561,449
|
|||||||||
No
warrants have been exercised as of March 31, 2007.
Registration
Rights — The
shares of common stock sold in the 2005 PIPE and the 2006 PIPE and the shares
of
common stock issuable upon conversion of the preferred stock and exercise of
outstanding warrants have been registered for resale with the Securities and
Exchange Commission. Pursuant to the registration rights associated with the
financings, if the Company fails to maintain the effectiveness of the
registration statements for the periods specified in the agreements, the Company
may become obligated to pay liquidated damages to the selling stockholders.
The
Company believes that an investor claim for liquidated damages relating to
these
registration rights is not probable and therefore has not accrued for such
a
contingency at March 31, 2007 or December 31, 2006.
Reserved
Shares —
The
following shares were reserved for future issuance upon exercise of stock
options or warrants or conversion of preferred stock as of the dates indicated:
|
March
31,
|
December
31,
|
||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
2000
Stock Option Plan
|
73,873
|
73,873
|
73,873
|
||||||||
|
2006
Stock Incentive Plan
|
5,000,000
|
5,000,000
|
—
|
||||||||
|
Options
issued outside of formalized plans
|
2,578,778
|
2,578,778
|
2,653,778
|
||||||||
|
Warrants
|
14,561,449
|
16,820,135
|
4,829,008
|
||||||||
|
Preferred
stock
|
4,231,104
|
(1) |
2,696,283
|
3,393,938
|
|||||||
|
Total
shares reserved for future issuance
|
26,445,204
|
27,169,069
|
10,950,597
|
||||||||
(1)
In
accordance with the terms of the Series A financing documents, the amount of
reserved shares includes shares in excess of the number currently convertible.
F-11
6.
STOCK-BASED COMPENSATION
The
Company’s stock-based compensation plans are summarized below:
2000
Stock Option Plan. The
Company's stock option plan established in August 2000 (the “2000 Plan”)
provides for grants of options to purchase up to 73,873 shares of common stock.
Grants may be in the form of incentive stock options or nonqualified options.
The board of directors determines exercise prices and vesting periods on the
date of grant. Options generally vest annually over three years and expire
on
the tenth anniversary of the grant date. No options were granted, exercised
or
canceled under the 2000 Plan during 2005, 2006 or 2007.
2006
Stock Incentive Plan.
On May
1, 2006, the Company’s board of directors adopted and on July 21, 2006 the
Company’s stockholders approved, the 2006 Stock Incentive Plan (the “2006
Plan”). A total of 5,000,000 shares of common stock are reserved for issuance
under the 2006 Plan for grants of incentive or nonqualified stock options,
rights to purchase restricted and unrestricted shares of common stock, stock
appreciation rights and performance share grants. A committee of the board
of
directors determines exercise prices, vesting periods and any performance
requirements on the date of grant, subject to the provisions of the 2006 Plan.
Options are granted at or above the fair market value of the common stock at
the
grant date and expire on the tenth anniversary of the grant date. Vesting
periods are generally two to three years. In the year ended December 31, 2006,
stock options for the purchase of 840,000 shares of common stock were granted
under the 2006 Plan. In the three-month period ending March 31, 2007, stock
options for the purchase of 120,000 shares of common stock were granted under
the 2006 Plan. There have been no exercises or cancellations of options under
the 2006 Plan. Options granted pursuant to the 2006 Stock Incentive Plan
generally will become fully vested upon a termination event occurring within
one
year following a change in control, as defined. A termination event is defined
as either termination of employment other than for cause or constructive
termination resulting from a significant reduction in either the nature or
scope
of duties and responsibilities, a reduction in compensation or a required
relocation.
Other
Stock Option Activity.
During
2005 and 2004, the Company issued a total of 3,061,000 stock options to
employees, directors and consultants outside of any formalized plan. These
options are exercisable within a ten-year period from the date of grant, and
vest at various intervals with all options being fully vested within two to
three years of the grant date. The options are not transferable except by will
or domestic relations order. The option price per share is not less than the
fair market value of the shares on the date of the grant. During the year ended
December 31, 2006, options to purchase 75,000 shares were exercised. There
have
been no other exercises.
Adoption
of SFAS No. 123(R)
Effective
January 1, 2006, the Company adopted the fair-value recognition provisions
of
SFAS 123R, using the modified-prospective-transition method. SFAS 123R requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair
values. SFAS 123R did not change the accounting guidance for share-based
payments granted to non-employees provided in SFAS No. 123,
Accounting for Stock Based Compensation (SFAS
123), as originally issued and Emerging Issues Task Force (EITF) No. 96-18,
Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling, Goods or Services.
EITF
96-18 requires that companies recognize compensation expense based on the
estimated fair value of options granted to non-employees over their vesting
period, which is generally the period during which services are rendered by
such
non-employees.
Under
the
modified-prospective-transition method, compensation cost recognized for the
year ended December 31, 2006 includes: (a) compensation cost for all stock-based
payments granted, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions
of
SFAS 123, and (b) compensation cost for all stock-based payments granted
subsequent to January 1, 2006, based on the grant-date fair value estimated
in
accordance with the provisions of SFAS 123R. Results for prior periods have
not
been restated. As a result of the adoption of SFAS 123R, the Company recorded
incremental stock-based compensation expense of $268,281 (approximately $0.01
per common share) in the year ended December 31, 2006.
F-12
During
the year ended December 31, 2005, the Company accounted for stock option awards
granted to directors and employees (collectively, employees) under the
recognition and measurement principles of Accounting Principles Board Opinion
(APB) No. 25, Accounting
for Stock Issued to Employees, (APB
25).
Under this method compensation cost is recognized for the amount by which the
market price of the stock on the date of grant exceeds the exercise price of
the
option. For the year ended December 31, 2005, there was no stock-based employee
compensation cost recorded for options granted to employees under the plan
as
none have been granted at exercise prices below the fair market value of the
underlying stock. For those options granted at exercise prices equal to or
greater than the fair market value of the underlying stock on the date of the
grant, the Company applied the disclosure-only provision of SFAS
123.
The
following table summarizes amounts charged to expense for stock-based
compensation related to employee and director stock option grants and
stock-based compensation recorded in connection with stock options and
restricted stock awards granted to non-employee consultants:
|
Three
Months Ended
March
31,
|
Year
Ended
December
31,
|
||||||||||||
|
2007
|
2006
|
2006
|
2005
|
||||||||||
|
Employee
and director stock option grants:
|
|||||||||||||
|
Research
and development
|
$
|
63,066
|
$
|
45,615
|
$
|
77,333
|
$
|
—
|
|||||
|
General
and administrative
|
41,642
|
15,110
|
190,948
|
—
|
|||||||||
|
104,708
|
60,725
|
268,281
|
—
|
||||||||||
|
Non-employee
consultants stock option grants and restricted stock
awards:
|
|||||||||||||
|
Research
and development
|
17,858
|
—
|
11,435
|
67,215
|
|||||||||
|
General
and administrative
|
39,980
|
166,792
|
308,327
|
332,246
|
|||||||||
|
57,838
|
166,792
|
319,762
|
399,461
|
||||||||||
|
Total
stock-based compensation
|
$
|
162,546
|
$
|
227,517
|
$
|
588,043
|
$
|
399,461
|
|||||
Determining
Fair Value
Valuation
and amortization method.
The
fair value of each stock award is estimated on the grant date using the
Black-Scholes option-pricing model. The estimated fair value of employee stock
options is amortized to expense using the straight-line method over the vesting
period.
Volatility.
Volatility is determined based on the Company’s estimate of fluctuation in its
common stock price and its review of comparable public company data due to
the
limited amount of time that the Company’s common stock has been publicly traded.
Risk-free
interest rate.
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect
at
the time of grant commensurate with the expected term assumption.
Expected
term.
The
expected term of stock options granted is based on the Company’s estimate of
when options will be exercised in the future as there have been limited stock
option exercises to date. The expected term is generally applied to one group
as
a whole as the Company does not expect substantially different exercise or
post-vesting termination behavior within its employee population. The expected
term of options granted to employees prior to the Company’s stock becoming
publicly traded was generally longer (10 years) than is currently estimated.
Forfeitures.
As
required by SFAS 123R, the Company records share-based compensation expense
only
for those awards that are expected to vest. SFAS 123R requires forfeitures
to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. The term “forfeitures” is
distinct from “cancellations” or “expirations” and represents only the unvested
portion of the surrendered option. The Company has applied an annual forfeiture
rate of 0% to all unvested options as of December 31, 2006 as the Company
believes that there is insufficient history to develop an accurate estimate
of
future forfeitures. This analysis will be re-evaluated quarterly and the
forfeiture rate will be adjusted as necessary. Ultimately, the actual expense
recognized over the vesting period will be for only those shares that
vest.
F-13
The
following table summarizes weighted average values and assumptions used for
options granted to employees, directors and consultants in the periods
indicated:
|
|
Three
Months Ended
March
31,
|
Year
Ended
December
31,
|
|||||||||||
|
|
2007
|
2006
|
2006
|
2005
|
|||||||||
|
Volatility
|
80
|
%
|
—
|
80
|
%
|
0%-80
|
%
|
||||||
|
Weighted-average
volatility
|
80
|
%
|
—
|
80
|
%
|
23
|
%
|
||||||
|
Risk-free
interest rate
|
4.66
|
%
|
—
|
4.50%-5.05
|
%
|
3.95%-4.81
|
%
|
||||||
|
Expected
life (years)
|
5
|
—
|
5
|
2-10
|
|||||||||
|
Dividend
|
0
|
—
|
0
|
0
|
|||||||||
|
Weighted-average
exercise price
|
$
|
0.89
|
—
|
$
|
0.99
|
$
|
0.78
|
||||||
|
Weighted-average
grant-date fair value
|
$
|
0.60
|
—
|
$
|
0.62
|
$
|
0.49
|
||||||
There
were no option grants in the three months ended March 31, 2006.
Pro-Forma
Information Under SFAS 123 for Periods Prior to January 1,
2006
The
following table illustrates the effect on net loss and net loss per share had
the Company applied the fair-value recognition provisions of SFAS 123R in the
periods prior to adoption. For purposes of this pro-forma disclosure, the value
of the options is estimated using the Black-Scholes option-pricing model and
amortized to expense over the options’ vesting periods.
|
Year
Ended
December
31, 2005
|
||||
|
Net
loss attributable to common stockholders as reported
|
$
|
(5,194,720
|
)
|
|
|
Stock-based
employee compensation expense determined
under
fair-value-based method
|
(111,082
|
)
|
||
|
Pro
forma net loss attributable to common stockholders
|
$
|
(5,305,802
|
)
|
|
|
Basic
and diluted net loss attributable to common stockholders per
share:
|
||||
|
As
reported
|
$
|
(0.24
|
)
|
|
|
Pro
forma
|
$
|
(0.24
|
)
|
|
Stock
Option Activity
A
summary
of stock option activity under the 2000 Plan, the 2006 Plan and outside of
any
formalized plan is as follows:
|
Options
Outstanding
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contracted
Term in
Years
|
Aggregate
Intrinsic
Value
|
||||||||||
|
Outstanding
at January 1, 2005
|
952,651
|
$
|
0.26
|
||||||||||
|
Options
granted
|
1,775,000
|
$
|
0.78
|
||||||||||
|
Outstanding
at December 31, 2005
|
2,727,651
|
$
|
0.60
|
8.9
|
$
|
4,294,257
|
|||||||
|
Options
granted
|
840,000
|
$
|
0.99
|
||||||||||
|
Options
exercised
|
(75,000
|
)
|
$
|
0.01
|
|||||||||
|
Outstanding
at December 31, 2006
|
3,492,651
|
$
|
0.70
|
8.4
|
$
|
1,773,777
|
|||||||
|
Options
granted
|
120,000
|
$
|
0.89
|
||||||||||
|
Outstanding
at March 31, 2007
|
3,612,651
|
$
|
0.71
|
8.2
|
$
|
2,593,113
|
|||||||
|
Exercisable
at March 31, 2007
|
2,466,817
|
$
|
0.52
|
7.7
|
$
|
2,301,079
|
F-14
The
aggregate intrinsic value of options outstanding is calculated based on the
positive difference between the closing market price of the Company’s common
stock at the end of the respective period and the exercise price of the
underlying options. During the year ended December 31, 2006, the total intrinsic
value of options exercised was $134,250 and the total amount of cash received
from exercise of these options was $750. No options were exercised in any of
the
other periods presented.
The
following tables summarize information about stock options outstanding at March
31, 2007:
|
Options Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Exercise
Price
|
Number
of
Shares
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||
|
$
0.01
|
2,053,778
|
7.6
|
$
|
0.01
|
1,977,944
|
$
|
0.01
|
|||||||||
|
$
0.70 - $2.00
|
1,005,705
|
9.4
|
$
|
0.97
|
85,705
|
$
|
0.97
|
|||||||||
|
$
2.01 - $3.22
|
525,000
|
8.4
|
$
|
2.63
|
375,000
|
$
|
2.63
|
|||||||||
|
$
7.01
|
28,168
|
5.3
|
$
|
7.01
|
28,168
|
$
|
7.01
|
|||||||||
|
3,612,651
|
8.2
|
$
|
0.71
|
2,466,817
|
$
|
0.52
|
||||||||||
As
of
March 31, 2007 there was approximately $654,000 of total unrecognized
compensation cost related to unvested share-based compensation arrangements.
Of
this total amount, 53%, 30% and 17% is expected to be recognized during 2007,
2008 and 2009, respectively. The Company expects 1,145,834 in unvested options
to vest in the future. The weighted average grant date fair value of vested
and
unvested options outstanding at March 31, 2007 was $0.29 and $0.68,
respectively. The weighted average grant date fair value of vested and unvested
options outstanding at December 31, 2006 was $0.23 and $0.79, respectively.
The
fair value of options that vested during the three months ended March 31, 2007
and the years ended December 31, 2006 and 2005 was approximately $186,000,
$415,000 and $82,000, respectively.
7.
INCOME TAXES
The
Company’s deferred tax assets consisted of the following at December 31:
|
2006
|
2005
|
||||||
|
Net
operating loss carryforwards
|
$
|
3,700,000
|
$
|
3,331,000
|
|||
|
Research
and development
expenses
|
3,581,000
|
1,556,000
|
|||||
|
Tax
credits
|
550,000
|
282,000
|
|||||
|
Capital
loss carryforward
|
403,000
|
403,000
|
|||||
|
Gross
deferred tax asset
|
8,234,000
|
5,572,000
|
|||||
|
Valuation
allowance
|
(8,234,000
|
)
|
(5,572,000
|
)
|
|||
|
Net
deferred tax asset
|
$
|
—
|
$
|
—
|
|||
F-15
As
of
December 31, 2006, the Company had federal and state net operating loss
carryforwards of approximately $10,053,000 and $4,497,000, respectively, which
expire through 2026. In addition, the Company has federal and state research
and
development and investment tax credits of approximately $409,000 and $214,000,
respectively which expire through 2026. The amount of net operating loss
carryforwards which may be utilized annually in future periods may be limited
pursuant to Section 382 of the Internal Revenue Code as a result of substantial
changes in the Company’s ownership that occurred during 2005 or 2006 or that may
occur in the future.
The
capital loss carryforward relates to the loss recorded in prior years for
Novelos’ investment in an unrelated company.
Because
of the Company’s limited operating history, continuing losses and uncertainty
associated with the utilization of the net operating loss carryforwards in
the
future, management has provided a 100% allowance against the Company’s gross
deferred tax asset.
8.
SETTLEMENT OF OBLIGATIONS TO STOCKHOLDERS AND
VENDORS
Prior
to
the reverse merger and reorganization that occurred in May and June 2005 (see
Note 3), Novelos relied on private investors to fund its operations.
Periodically, these investors advanced monies to Novelos evidenced by notes
payable or other written agreements. Additionally, Novelos accumulated
substantial overdue balances with certain key vendors. During 2005, Novelos
repaid or otherwise settled all of its outstanding debt and overdue vendor
obligations as summarized below.
During
2003 and 2004, Novelos entered into bridge loans with certain stockholders
totaling $1,100,000. The loans bore interest at 15% and matured on May 25,
2005.
Under the terms of the loan agreements, the principal amount of the notes could
be converted into common stock at the noteholder’s option at one half the market
value of the Company’s stock, subject to a maximum conversion price of $1.00 and
a minimum conversion price of $0.38 per share of common stock. In May 2005
these
bridge loans were converted into 1,760,000 shares of common stock in accordance
with the loan agreements. Of the total $206,949 in accrued interest on the
notes
at the time of conversion, $140,497 was paid in cash. The remaining $66,452
was
forgiven and the amount was included as a component of Gain on Forgiveness
of
Debt during the year ended December 31, 2005.
In
December 2004 and January 2005 Novelos received loans totaling $500,000 from
an
individual investor. The loans bore interest at 6% per annum and were repayable
following the closing of one or more equity financings of minimum levels. These
loans allowed Novelos to sustain its operations until the funding was obtained
from the 2005 PIPE financing, as described in Note 5. In exchange for the loans
and the investor’s commitment to provide additional financing of up to $500,000
through August 2005, designees of this individual received 10,500,000 shares
of
common stock of Novelos. The Company repaid these loans plus accrued interest
on
August 9, 2005 with proceeds from the 2005 PIPE financing.
In
April
2005, Novelos issued $450,000 bridge notes payable to private investors. In
connection with the issuance of the notes, the investors received warrants,
expiring in 5 years, to purchase 720,000 shares of Novelos common stock at
$0.625 per share. Since the Company’s common stock was deemed to have
substantially no value at the time of issuance of the warrants prior to the
recapitalization described in Note 3, the fair value of the warrants was not
material. Pursuant to their terms, the notes were converted into 360,000 shares
of common stock and 3-year warrants to purchase 180,000 shares of common stock
at $2.25, in connection with the Company’s 2005 PIPE financing.
F-16
On
May
26, 2005, Novelos settled unsecured obligations with stockholders and vendors
totaling $3,139,185 in exchange for total consideration of $1,051,654 consisting
of 586,351 shares of common stock of Novelos with an aggregate deemed value
of
$732,941 and cash in the amount of $318,713. This settlement resulted in a
gain
on forgiveness of debt of $2,087,531 in the year ended December 31, 2005. The
components of the settlement are summarized as follows:
| · |
Vendors
with overdue balances totaling $1,484,319 settled the outstanding
balances
in exchange for 435,376 shares of Novelos common stock with a deemed
value
of $544,222 and cash of $178,217, resulting in a gain on settlement
of
$761,880;
|
| · |
Unsecured
demand notes totaling $188,719 resulting from cash advances from
stockholders were repaid by the issuance of 150,975 shares of common
stock
with a deemed value of $188,719. The accrued interest of $68,677
was
forgiven;
|
| · |
Unsecured
demand notes to stockholders were forgiven totaling $621,931 consisting
of
officers’ accrued compensation and accrued consulting fees owed to a
stockholder. The accrued interest of $208,234 on these notes was
also
forgiven;
|
| · |
Accrued
interest on secured bridge loans to stockholders totaling $66,452
(described above) was forgiven;
|
| · |
Officers
forgave accrued compensation of
$360,357.
|
9.
NET LOSS PER SHARE
Basic
net
loss per share is computed by dividing net loss attributable to common
stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net loss per share is computed by
dividing net loss attributable to common stockholders by the weighted average
number of shares of common stock and the dilutive potential common stock
equivalents then outstanding. Potential common stock equivalents consist of
stock options, warrants and convertible preferred stock. Since the Company
has a
net loss for all periods presented, the inclusion of stock options and warrants
in the computation would be antidilutive. Accordingly, basic and diluted net
loss per share are the same.
The
following potentially dilutive securities have been excluded from the
computation of diluted net loss per share since their inclusion would be
antidilutive:
|
|
Three
Months Ended
March
31,
|
Year
Ended
December
31,
|
|||||||||||
|
|
2007
|
2006
|
2006
|
2005
|
|||||||||
|
Stock
options
|
3,612,651
|
2,652,651
|
3,492,651
|
2,727,651
|
|||||||||
|
Warrants
|
14,561,449
|
14,561,449
|
14,561,449
|
4,829,008
|
|||||||||
|
Conversion
of preferred stock
|
2,417,774
|
2,417,774
|
2,417,774
|
1,939,393
|
|||||||||
10.
COMMITMENTS
On
August
9, 2006, the Company entered into a one-year lease for office space, commencing
September 1, 2006, at an annual rent of $65,250. Rent expense was $62,625 and
$45,355 in the years ended December 31, 2006 and 2005,
respectively.
The
Company is obligated to ZAO BAM under a royalty and technology transfer
agreement. Mark Balazovsky, a director of the Company until November 2006,
is
the majority shareholder of ZAO BAM. Pursuant to the royalty and technology
transfer agreement between the Company and ZAO BAM, the Company is required
to
make royalty payments of 1.2% of net sales of oxidized glutathione-based
products. The Company is also required to pay ZAO BAM $2 million for each new
oxidized glutathione-based drug within eighteen months following FDA approval
of
such drug.
F-17
The
Company has also agreed to pay ZAO BAM 12% of all license revenues, as defined,
in excess of the Company’s expenditures associated therewith, including but not
limited to, preclinical and clinical studies, testing, FDA and other regulatory
agency submission and approval costs, general and administrative costs, and
patent expenses, provided that such payment be no less than 3% of all license
revenues.
On
July
15, 2005, the Company entered into an employment agreement with Christopher
J.
Pazoles, Ph.D., whereby he agreed to serve as the Company’s vice president of
research and development for an initial term of two years. The agreement is
automatically renewed for one-year terms unless 60-day notice is provided by
either party. The agreement has been renewed for an additional one year term
in
accordance with the terms of the agreement. The agreement provides for a minimum
salary of $195,000 during the current and any future terms as well as
participation in standard benefit programs. The agreement further provides
that
upon resignation for good reason or termination without cause, both as defined,
Dr. Pazoles will receive his base salary for the remainder of the contract
term
as well as any minimum bonus on a prorated basis. In addition, his benefits
will
be paid for following twelve months.
The
Company entered into an employment agreement with Harry Palmin effective January
1, 2006, whereby he agreed to serve as the Company’s president and chief
executive officer for an initial term of two years. The agreement is
automatically renewed for one-year terms unless 90-day notice is provided by
either party. The agreement provides for an initial salary of $225,000,
participation in standard benefit programs and an annual cash bonus at the
discretion of the compensation committee. The agreement further provides that
upon resignation for good reason or termination without cause, both as defined,
Mr. Palmin will receive his pro rata share of the average of his annual
bonus paid during the two fiscal years preceding his termination; his base
salary and benefits for 11 months after the date of termination and fifty
percent of his unvested stock options will vest. The agreement also contains
a
non-compete provision, which prohibits Mr. Palmin from competing with the
Company for one year after termination of his employment with the Company.
In
July,
2006, the Company entered into a contract with a supplier of pharmaceutical
products that will provide chemotherapy drugs to be used in connection with
Phase 3 clinical trial activities outside of the United States. Pursuant to
the
contract, the Company was obligated to purchase a minimum of approximately
$2,600,000 of chemotherapy drugs at specified intervals through March 2008.
During 2006, the Company purchased approximately $1,300,000 under the contract
and as of December 31, 2006, approximately $1,300,000 is remaining under that
commitment. In connection with that agreement, the Company was required to
enter
into a standby letter of credit arrangement with a bank, expiring in August
2007. The balance on the standby letter of credit at December 31, 2006 equals
the remaining purchase commitment of $1,300,000. In connection with the letter
of credit, the Company has pledged cash of approximately $1,550,000 to the
bank
as collateral on the letter of credit. The pledged cash is included in
restricted cash at December 31, 2006.
11.
RELATED-PARTY TRANSACTIONS
During
the year ended December 31, 2005 Novelos paid a contract research organization
that is also a stockholder of the Company $200,611 for services performed during
that year. During 2005 the Company issued 360,000 shares of common stock with
a
deemed value of $450,000 to the same company in full settlement of a $1,185,321
accounts payable balance that was outstanding from 2004. No remaining amounts
were payable to the stockholder at December 31, 2005.
As
a
result of the assignment to Novelos of the exclusive worldwide intellectual
property and marketing rights of oxidized glutathione (excluding Russia
and the states of the former Soviet Union), Novelos is obligated to the Oxford
Group, Ltd. for future royalties. The
Company’s Chairman of the Board of Directors is president of Oxford Group, Ltd.
Effective May 26, 2005, Novelos amended the arrangement for future royalty
payments to Oxford Group, Ltd. which resulted in the issuance of 2,016,894
shares of common stock, including 907,602 shares to each of two directors of
the
Company. Pursuant to the revised agreement, Novelos is required to pay Oxford
Group, Ltd. a royalty in the amount of 0.8% of the Company’s net sales of
oxidized glutathione-based products. The total share issuance had an aggregate
deemed value of $2,521,118 and is included in restructuring expense in the
year
ended December 31, 2005.
See
also
Note 8 regarding settlement of obligations with certain stockholders during
2005.
F-18
12.
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL
STATEMENTS
Subsequent
to the initial filing of the Company’s annual report on Form 10-KSB for the year
ended December 31, 2005 and the Form 10-QSB for the three- and nine-month
periods ended September 30, 2005 (the “Relevant Periods”) and in connection with
an internal review of the terms associated with the Company’s historical
financing transactions, the Company determined that the intrinsic value
associated with the beneficial conversion feature (BCF) of the Company’s Series
A 8% Cumulative Convertible Preferred Stock had not been properly presented
as a
deemed (non-cash) dividend nor included in the calculation of net
loss
attributable to common stockholders in the Relevant Periods. In accordance
with
Emerging Issues Task Force Issue (EITF) No. 98-5, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios,
and
EITF No. 00-27, Application
of Issue No. 98-5 to Certain Convertible Instruments,
a
conversion feature that is ‘in-the-money’ based on the market price of a
company’s common stock at the commitment date is considered a BCF. As the terms
of the Series A 8% Cumulative Convertible Preferred Stock allowed immediate
conversion, the deemed (non-cash) dividend related to the BCF should have been
recorded upon issuance.
The
following table sets forth the effects of the restatement on certain line items
within the Company’s Statements of Operations for the year ended December 31,
2005:
|
|
As
Previously
Reported
|
Revision
|
As
Restated
|
|||||||
|
Year
Ended December 31, 2005:
|
||||||||||
|
Net
Loss
|
$
|
(3,053,399
|
)
|
$
|
—
|
$
|
(3,053,399
|
)
|
||
|
Preferred
Stock (Non-cash) Dividend (1)
|
—
|
(64,000
|
)
|
(64,000
|
)
|
|||||
|
Preferred
Stock Deemed (Non-cash) Dividend
|
—
|
(2,077,321
|
)
|
(2,077,321
|
)
|
|||||
|
Net
Loss Attributable to Common Stockholders
|
$
|
(3,053,399
|
)
|
$
|
(2,141,321
|
)
|
$
|
(5,194,720
|
)
|
|
|
Basic
and Diluted Net Loss Attributable to Common
Stockholders
Per Common Share
|
$
|
(0.14
|
)
|
$
|
(0.10
|
)
|
$
|
(0.24
|
)
|
|
|
(1)
|
Represents
a quarterly dividend paid to preferred stockholders in the quarter
ended
December 31, 2005 in the form of additional shares of preferred stock,
as
permitted pursuant to the terms of the related agreement. This amount
was
inadvertently not previously included as an adjustment in arriving
at net
loss attributable to common stockholders. The amount was not material
in
relation to net loss attributable to common stockholders and would
not
have changed the basic and diluted net loss attributable to common
stockholders per common share as
reported.
|
13.
SUBSEQUENT EVENT
Securities
Purchase Agreement
On
May 2,
2007, pursuant to a securities purchase agreement with accredited investors
dated April 12, 2007 (the “Purchase Agreement”), as amended May 2, 2007, the
Company sold 300 shares of a newly created series of preferred stock, designated
“Series B Convertible Preferred Stock”, with a stated value of $50,000 per share
(the “Series B Preferred Stock”) and issued warrants to purchase 7,500,000
shares of common stock for an aggregate purchase price of $15,000,000.
Series
B Preferred Stock
The
shares of Series B Preferred Stock issued to investors are convertible into
shares of common stock at $1.00 per share at any time after issuance at the
option of the holder. If there is an effective registration statement covering
the shares of common stock underlying the Series B Preferred Stock and the
volume-weighted average price (“VWAP”), as defined in the Series B Certificate
of Designations, of the Company’s common stock exceeds $2.00 for 20 consecutive
trading days, then the outstanding Series B Preferred Stock will automatically
convert into common stock at the conversion price then in effect. The conversion
price is subject to adjustment for stock dividends, stock splits or similar
capital reorganizations. The Series B Preferred Stock has an annual dividend
rate of 9%, payable semi-annually on September 30 and March 31. Such dividends
may be paid in cash or in registered shares of the Company’s common stock at the
Company’s option.
F-19
For
as
long as any shares of Series B Preferred Stock remain outstanding, the Company
is prohibited from (i) paying dividends to common stockholders, (ii) amending
the Company’s certificate of incorporation (except to increase the number of
shares of authorized common stock to 150,000,000), (iii) issuing any equity
security or any security convertible into or exercisable for any equity security
at a price of $1.00 or less or with rights senior to the Series B Preferred
Stock (except for certain exempted issuances), (iv) increasing the number of
shares of Series B Preferred Stock or issuing any additional shares of Series
B
Preferred Stock other than the 400 shares designated in the Series B Certificate
of Designations, (v) selling or otherwise disposing of all or substantially
all
of the Company’s assets or intellectual property or entering into a merger or
consolidation with another company unless Novelos is the surviving corporation,
the Series B Preferred Stock remains outstanding and there are no changes to
the
rights and preferences of the Series B Preferred Stock, (vi) redeeming or
repurchasing any capital stock other than Series B Preferred Stock, (vii)
incurring any new debt for borrowed money and (viii) changing the number of
the
Company’s directors. The Company is required to reserve, out of authorized
shares of common stock, 125% of the number of shares of common stock into which
Series B preferred stock is convertible (which percentage shall be decreased
to
100% in the event the Company’s shareholders do not approve an amendment to the
Company’s certificate of incorporation to increase the number of authorized
shares of common stock to 150,000,000).
Common-Stock
Purchase Warrants
The
common-stock purchase warrants issued to investors are exercisable for an
aggregate of 7,500,000 shares of the Company’s common stock at an exercise price
of $1.25 per share and expire in May 2012. If after the first anniversary of
the
date of issuance of the warrant there is no effective registration statement
registering, or no current prospectus available for, the resale of the shares
issuable upon the exercise of the warrants, the holder may conduct a cashless
exercise whereby the holder may elect to pay the exercise price by having the
Company withhold, upon exercise, shares having a fair market value equal to
the
applicable aggregate exercise price. The warrant exercise price and/or number
of
warrants is subject to adjustment for stock dividends, stock splits or similar
capital reorganizations so that the rights of the warrant holders after such
event will be equivalent to the rights of warrant holders prior to such event.
If there is an effective registration statement covering the shares underlying
the warrants and the VWAP, as defined in the warrant, of the Company’s common
stock exceeds $2.25 for 20 consecutive trading days, then on the 31st
day
following the end of such period any remaining warrants for which a notice
of
exercise was not delivered shall no longer be exercisable and shall be converted
into a right to receive $.01 per share.
Registration
Rights Agreement
The
Company and the investors have entered into a registration rights agreement
which requires the Company to file with the SEC no later than 30 days following
the closing of the transaction, a registration statement covering the resale
of
a number of shares of common stock equal to 100% of the shares issuable upon
conversion of the preferred stock and exercise of the warrants as of the date
of
filing of the registration statement. The registration statement covering these
shares must be declared effective by the SEC no later than 90 days following
the
closing (or in the event there is a review, no later than 120 days from the
closing). The Company is required to use its best efforts to keep the
registration statement continuously effective under the Securities Act until
the
earlier of the date when all the registrable securities covered by the
registration statement have been sold or the second anniversary of the closing.
In the event the Company fails to file the registration statement or it is
not
declared effective within the timeframes specified by the Registration Rights
Agreement, the Company is required to pay to the Investors liquidated damages
equal to 1.5% per month (pro-rated on a daily basis for any period of less
than
a full month) of the aggregate purchase price of the preferred stock and
warrants until the Company files the delinquent registration statement or the
registration statement is declared effective, as applicable. The Company is
allowed to suspend the use of the registration statement for not more than
15
consecutive days or for a total of not more than 30 days in any 12-month period
without incurring liability for the liquidated damages in certain
circumstances.
Placement
Agent Agreement
Upon
the
closing of the preferred stock and warrant financing the Company paid a cash
placement agent fee to Rodman & Renshaw LLC (“Rodman”) and Rodman’s subagent
totaling $1,050,000 and issued Rodman and the subagent warrants to purchase
a
total of 900,000 shares of common stock with the same terms as the warrants
issued to the investors.
F-20
The
Company has agreed to indemnify Rodman from claims arising in relation to the
services it provided to the Company in connection with this
agreement.
Agreement
to Exchange and Consent
As
a
condition to closing the preferred stock and warrant financing, the holders
of
the existing Series A preferred stock have exchanged their 3,264 shares of
Series A preferred stock for 272 shares of a new Series C convertible preferred
stock, which are subordinated to the Series B preferred stock as set forth
in
the Series C Certificate of Designations. The Series C preferred stock is
convertible at $1.00 per share into 3,264,000 shares of common stock. As part
of
the exchange, the Company issued to the holders of the Series A preferred stock
warrants to purchase 1,333,333 shares of common stock expiring on May 2, 2012
at
a price of $1.25 per share and paid them a cash allowance to defray expenses
totaling $40,000 and an amount equal to unpaid dividends accumulated through
the
date of the exchange. Pursuant to the exchange agreement the holders of the
new
Series C preferred stock retained registration and related rights substantially
identical to the rights that they had as holders of the Series A preferred
stock.
The
Series C Preferred Stock has an annual dividend rate of 8% until October 1,
2008
and thereafter has an annual dividend rate of 20%. The dividends are payable
quarterly commencing on June 30, 2007. Such dividends shall only be paid after
all outstanding dividends on the Series B Preferred Stock (with respect to
the
current fiscal year and all prior fiscal years) shall have been paid to the
holders of the Series B Preferred Stock. The conversion price is subject to
adjustment for stock dividends, stock splits or similar capital
reorganizations.
The
following events, if not cured in the applicable time period, are events of
default under the Series C Certificate of Designations and cause the dividend
rate to increase to 20%: (i) failure to timely pay any dividend payment or
the
failure to timely pay any other sum of money due to the Holder, (ii) any breach
of any material covenant, term or condition of the Subscription Agreement or
the
Series C Certificate of Designations, (iii) any material representation or
warranty of the Company made in the Subscription Agreement, or in any agreement,
statement or certificate given in writing pursuant thereto shall prove to have
been false or misleading at the time when made, (iv) an assignment of a
substantial part of the Company’s property or business for the benefit of
creditors, (v) the entry of any money judgment, confession of judgment, writ
or
similar process against the Company or its property or other assets for more
than $100,000 that is not vacated, satisfied, bonded or stayed within 45 days,
(vi) the institution of bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any
law
for the relief of debtors against the Company which is not dismissed within
45
days, (vii) an order entered by a court of competent jurisdiction, or by the
SEC, or by the National Association of Securities Dealers, preventing purchase
and sale transactions in the Company’s Common Stock for a period of five or more
consecutive trading days, (viii) failure to deliver to the Holder Common Stock
or a replacement Preferred Stock certificate within ten (10) business days
of
the required delivery date, (ix) the occurrence and continuation of a
Non-Registration Event as described in Section 11.4 of the Subscription
Agreement for a period of forty-five (45) days, (x) delisting of the Common
Stock from the OTC Bulletin Board (“OTCBB”) or such other principal market or
exchange on which the Common Stock is listed for trading, if the Common Stock
is
not quoted or listed on such market or exchange, or quoted on the automated
quotation system of a national securities association or listed on a national
securities exchange, within ten (10) trading days after such delisting, (xi)
failure to reserve the amount of Common Stock required to be reserved pursuant
to Section 4(h) of the Certificate of Designations, (xii) a default by the
Company of a material term, covenant, warranty or undertaking of any other
agreement to which the Company and Holder are parties, or the occurrence of
a
material event of default under any such other agreement, in each case, which
is
not cured after any required notice and/or cure period, and (xiii) the
occurrence of a Change in Control (as defined in the Series C Certificate of
Designations).
Board
and Observer Rights
Pursuant
to the Purchase Agreement, from and after the closing of the sale of the Series
B Preferred Stock, Xmark Opportunity Fund, Ltd. and its affiliates (the “Xmark
Entities”), will have the right to designate one member to the Company’s Board
of Directors. This right shall last until such time as the Xmark Entities no
longer hold
at
least one-third of the Series B Preferred Stock issued to them at closing.
In
addition, the Xmark Entities and Caduceus Capital Master Fund Limited and its
affiliates (together with the Xmark Entities, the “Lead Investors”) will have
the right to designate one observer to attend all meetings of the Company’s
Board of Directors, committees thereof and access to all information made
available to members of the Board. This right shall last until such time as
the
Lead Investors no longer hold
at
least one-third of the Series B Preferred Stock issued to them. Pursuant to
the
Agreement to Exchange and Consent described above, the holders of the new Series
C preferred stock gave up the right to nominate one person to the Company’s
Board of Directors, which right they previously held as holders of Series A
preferred stock.
F-21
Anti-Dilution
Adjustments
Pursuant
to anti-dilution provisions associated with existing warrant agreements, the
sale of Series B Preferred Stock resulted in adjustments to the amount and/or
exercise price of certain warrants. The following table summarizes the
anti-dilution adjustments to warrants that were outstanding prior to the
financing:
|
Prior
to Series B Financing
|
Following
Series B Financing
|
||||||||||||
|
Offering
|
Number
Outstanding
|
Exercise
Price
|
Number
Outstanding
|
Exercise
Price
|
|||||||||
|
2005
Bridge Loans
|
720,000
|
$
|
0.625
|
720,000
|
$
|
0.625
|
|||||||
|
2005
PIPE:
|
|||||||||||||
|
Investors
|
3,333,275
|
$
|
1.35
|
4,500,000
|
$
|
1.00
|
|||||||
|
Placement
agents and finders
|
503,692
|
$
|
1.35
|
680,000
|
$
|
1.00
|
|||||||
|
Series
A Preferred (1):
|
|||||||||||||
|
Investors
- September 30, 2005 closing
|
909,090
|
$
|
1.35
|
909,090
|
$
|
1.00
|
|||||||
|
Investors
- October 3, 2005 closing
|
60,606
|
$
|
1.35
|
60,606
|
$
|
1.00
|
|||||||
|
2006
PIPE :
|
|||||||||||||
|
Investors
|
8,365,542
|
$
|
2.50
|
9,509,275
|
$
|
2.20
|
|||||||
|
Placement
agents
|
669,244
|
$
|
2.50
|
760,743
|
$
|
2.20
|
|||||||
|
Total
|
14,561,449
|
17,139,714
|
|||||||||||
(1) Following
the Series B Financing, the shares of Series A Preferred Stock are now shares
of
Series C Preferred Stock.
F-22
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
24. Indemnification of Directors and Officers.
Section
102(b)(7) of the Delaware General Corporation Law allows us to adopt a charter
provision eliminating or limiting the personal liability of directors to us
or
our stockholders for breach of fiduciary duty as directors, but the provision
may not eliminate or limit the liability of directors for (a) any breach of
the
director's duty of loyalty to us or our stockholders, (b) any acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (c) unlawful payments of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law or (d)
any
transaction from which the director derived an improper personal benefit.
Article Seventh of our charter provides that none of our directors shall be
personally liable to us or our stockholders for monetary damages for any breach
of fiduciary duty as a director, subject to the limitations imposed by Section
102(b)(7). Article Seventh also provides that no amendment to or repeal of
Article Seventh shall apply to or have any effect on the liability or the
alleged liability of any director with respect to any acts or omissions of
such
director occurring prior to such amendment or repeal. A principal effect of
Article Seventh is to eliminate or limit the potential liability of our
directors for monetary damages arising from breaches of their duty of care,
unless the breach involves one of the four exceptions described in (a) through
(d) above.
Section
145 of the Delaware General Corporation Law provides, in general, that a
corporation incorporated under the laws of the State of Delaware, such as us,
may indemnify any person who was or is a party or is threatened to be made
a
party to any threatened, pending or completed action, suit or proceeding (other
than a derivative action by or in the right of the corporation) by reason of
the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another enterprise, against expenses
(including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of
the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. In the case
of a
derivative action, a Delaware corporation may indemnify any such person against
expenses (including attorneys’ fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit
if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, except that
no
indemnification will be made in respect of any claim, issue or matter as to
which such person will have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery of the State of Delaware
or
any other court in which such action was brought determines such person is
fairly and reasonably entitled to indemnity for such expenses.
Article
Eighth of our amended and restated certificate of incorporation and Section
5.1
of our bylaws provide that we will indemnify our directors, officers, employees
and agents to the extent and in the manner permitted by the provisions of the
Delaware General Corporation Law, as amended from time to time, subject to
any
permissible expansion or limitation of such indemnification, as may be set
forth
in any shareholders’ or directors’ resolution or by contract.
The
effect of these provisions would be to permit indemnification by us for, among
other liabilities, liabilities arising out of the Securities Act of 1933.
Item
25. Other Expenses of Issuance and Distribution
The
following table provides information regarding the various actual and
anticipated expenses payable by us in connection with the issuance and
distribution of the securities being registered. We are paying the expenses
incurred in registering the shares, but all selling and other expenses incurred
by the selling stockholders will be borne by the selling stockholders. All
amounts shown are estimates except the Securities and Exchange Commission
registration fee.
II-1
|
Nature
of Expense
|
Amount
|
|||
|
SEC
registration fee
|
$
|
2,804
|
||
|
Accounting
fees and expenses
|
10,000
|
|||
|
Legal
fees and expenses
|
30,000
|
|||
|
Printing
and related fees
|
10,000
|
|||
|
Miscellaneous
|
10,000
|
|||
|
Total
|
$
|
62,804
|
||
Item
26. Sales of Unregistered Securities
Since
February 2004, we have sold the following securities in reliance on one or
more
exemptions from registration under the Securities Act of 1933, as amended,
including the exemption under Section 4(2) thereof:
2007
On
May 2,
2007, we issued 300 shares of our Series B convertible preferred stock and
warrants to purchase 7,500,000 shares of our common stock to institutional
investors. We received gross proceeds of $15,000,000 and paid or expect to
pay
approximately $1,400,000 in fees and expenses. We also issued warrants to
purchase 900,000 shares of our common stock to Rodman & Renshaw LLC and VFT
Special Ventures, Ltd. (an affiliate of Emerging Growth Equities) as partial
consideration for their placement agent services in connection with the
financing.
2006
On
March
7, 2006, we issued 11,154,073 shares of our common stock and warrants to
purchase 8,365,542 shares of our common stock to 39 accredited investors. We
received gross proceeds of $15,058,005 and paid approximately $1,100,000 in
fees
and expenses.
During
2006, we issued a total of 85,000 shares of our common stock to investor
relations consultants as compensation for services on the following dates and
in
the following amounts: January 23, 2006 20,000 shares; February 27, 2006 15,000
shares; February 28, 2006 20,000 shares; March 28, 2006 10,000 shares; June
22,
2006 10,000 shares; September 22, 2006 10,000 shares.
On
March
27, 2006 we issued 75,000 shares of our common stock to Dr. Kenneth Tew, a
member of our Scientific Advisory Board, upon exercise of his stock option
at a
price per share of $0.01 for total consideration of $750, pursuant to an option
granted in April 2004.
2005
In
January 2005, we issued a 6% promissory note in the principal amount of $400,000
to an accredited investor. We also issued 10,000,000 shares of our common stock
to this accredited investor (and other accredited investors) as partial
consideration for this loan, a 6% promissory note issued in December 2004 in
the
principal amount of $100,000 and a commitment to provide additional financing
of
up to $500,000 through
August 2005.
On
April
1, 2005, we issued three promissory notes to accredited investors in the
aggregate principal amount of $450,000. We also issued these accredited
investors warrants to purchase an aggregate of 720,000 shares of our common
stock. These holders of our promissory notes converted them into units on May
27, 2005 as described below.
On
May
26, 2005, we issued 586,351 shares of our common stock, with an aggregate deemed
value of $732,941, and $318,713 in cash to holders of our promissory notes
in
exchange for the forgiveness of indebtedness in the amount of $3,139,185, which
resulted in forgiveness of debt income of $2,087,531.
II-2
On
May
26, 2005, we issued 1,760,000 shares of our common stock to holders of our
convertible promissory notes in the aggregate principal amount of $1,100,000.
On
May
26, 2005, we issued 2,016,894 shares of our common stock to the Oxford Group,
Ltd, including 907,602 shares to each of two of our directors (one of whom
has
since resigned), in consideration for an amendment to an arrangement for future
royalty payments.
On
May
27, 2005, June 29, 2005, July 29, 2005 and August 9, 2005, we issued an
aggregate of 200 units, each unit initially consisting of 20,000 shares of
our
common stock and warrants to purchase 10,000 shares of our common stock, in
private placement transactions to accredited investors. Holders of $550,000
of
our convertible debt converted debt into 22 of the 200. We received net cash
proceeds of $3,715,000. We paid commissions and finders fees consisting of
$461,000 and warrants to purchase an aggregate of 412,112 shares of our common
stock. vFinance Investments, Inc. and Mercer Capital, Ltd. acted as placement
agents on a best efforts basis. Of the $461,000 paid in commissions and finders
fees, we paid vFinance Investments, Inc. and Mercer Capital Ltd. $292,500.
We
also issued 125,000 shares of our common stock and warrants to purchase an
aggregate of 264,236 shares of our common stock to vFinance Investments, Inc.
and Mercer Capital Ltd. as consideration for placement services rendered in
connection with these private placements.
On
September 30, 2005 and October 3, 2005, we issued an aggregate of 3,200 shares
of our Series A 8% cumulative convertible preferred stock and warrants to
purchase an aggregate of 969,696 shares of our common stock to institutional
investors. We received gross proceeds of $3,200,000 and paid $336,000 in fees
and expenses.
On
October 20, 2005 we issued a total of 55,000 unregistered shares of our common
stock to investor relations consultants as compensation for services.
2004
On
May
25, 2004, we issued a 15% promissory note in the principal amount of $100,000
to
an accredited investor.
In
December 2004, we issued a 6% promissory note in the principal amount of
$100,000 to an accredited investor.
Item
27. Exhibits.
|
Filed
with this
|
Incorporated
by Reference
|
|||||||||
|
Exhibit
No.
|
Description
|
Form
SB-2
|
Form
|
Filing
Date
|
Exhibit
No.
|
|||||
|
2.1
|
Agreement
and plan of merger among Common Horizons, Inc., Nove Acquisition,
Inc. and
Novelos Therapeutics, Inc. dated May 26, 2005
|
8-K
|
June
2, 2005
|
99.2
|
||||||
|
2.2
|
Agreement
and plan of merger between Common Horizons and Novelos Therapeutics,
Inc.
dated June 7, 2005
|
10-QSB
|
August
15, 2005
|
2.2
|
||||||
|
3.1
|
Certificate
of Incorporation
|
8-K
|
June
17, 2005
|
1
|
||||||
|
3.2
|
Certificate
of Designations of Series B convertible preferred stock
|
10-QSB
|
May
8, 2007
|
3.2
|
||||||
|
3.3
|
Certificate
of Designations of Series C cumulative convertible preferred
stock
|
10-QSB
|
May
8, 2007
|
3.2
|
||||||
|
3.4
|
By-laws
|
8-K
|
June
17, 2005
|
2
|
||||||
|
5.1
|
Legal
Opinion of Foley Hoag LLP
|
X
|
||||||||
II-3
|
Filed
with this
|
Incorporated
by Reference
|
|||||||||
|
Exhibit
No.
|
|
Description
|
|
Form
SB-2
|
Form
|
Filing
Date
|
Exhibit
No.
|
|||
|
10.1
**
|
Employment
agreement with Christopher J. Pazoles dated July 15, 2005
|
10-QSB
|
August
15, 2005
|
10.4
|
||||||
|
10.2
**
|
Employment
Agreement with Harry S. Palmin dated January 31, 2006
|
8-K
|
February
6, 2006
|
99.1
|
||||||
|
10.3
**
|
Compensation
for independent directors
|
8-K
|
December
22, 2006
|
99.1
|
||||||
|
10.4**
|
2000
Stock Option and Incentive Plan
|
SB-2
|
November
16, 2005
|
10.2
|
||||||
|
10.5
**
|
Form
of 2004 non-plan non-qualified stock option
|
SB-2
|
November
16, 2005
|
10.3
|
||||||
|
10.6
**
|
Form
of non-plan non-qualified stock option used from February to May
2005
|
SB-2
|
November
16, 2005
|
10.4
|
||||||
|
10.7
**
|
Form
of non-plan non-qualified stock option used after May 2005
|
SB-2
|
November
16, 2005
|
10.5
|
||||||
|
10.8
|
Form
of common stock purchase warrant issued in March 2005
|
SB-2
|
November
16, 2005
|
10.6
|
||||||
|
10.9
|
Form
of securities purchase agreement dated May 2005
|
8-K
|
June
2, 2005
|
99.1
|
||||||
|
10.10
|
Form
of subscription agreement dated September 30, 2005
|
8-K
|
October
3, 2005
|
99.1
|
||||||
|
10.11
|
Form
of Class A common stock purchase warrant dated September 30,
2005
|
8-K
|
October
3, 2005
|
99.3
|
||||||
|
10.12
|
Form
of share escrow agreement
|
8-K
|
November
3, 2005
|
10.3
|
||||||
|
10.13
|
Consideration
and new technology agreement dated April 1, 2005 with ZAO BAM
|
10-QSB
|
August
15, 2005
|
10.2
|
||||||
|
10.14
|
Letter
agreement dated March 31, 2005 with The Oxford Group, Ltd.
|
10-QSB
|
August
15, 2005
|
10.3
|
||||||
|
10.15
|
Form
of securities purchase agreement dated March 2, 2006
|
8-K
|
March
3, 2006
|
99.2
|
||||||
|
10.16
|
Form
of common stock purchase warrant dated March 2006
|
8-K
|
March
3, 2006
|
99.3
|
||||||
|
10.17
|
Placement
Agent Agreement with Oppenheimer & Co. Inc. dated December 19,
2005
|
8-K
|
March
3, 2006
|
99.4
|
||||||
|
10.18**
|
2006
Stock Incentive Plan
|
10-QSB
|
November
6, 2006
|
10.1
|
||||||
|
10.19
|
Form
of Incentive Stock Option under Novelos Therapeutics, Inc.’s 2006 Stock
Incentive Plan
|
8-K
|
December
15, 2006
|
10.1
|
||||||
|
10.20
|
Form
of Non-Statutory Stock Option under Novelos Therapeutics, Inc.’s 2006
Stock Incentive Plan
|
8-K
|
December
15, 2006
|
10.2
|
||||||
II-4
|
Filed
with this
|
Incorporated
by Reference
|
|||||||||
|
Exhibit
No.
|
Description
|
Form
SB-2
|
Form
|
Filing
Date
|
Exhibit
No.
|
|||||
|
10.21
|
Form
of Non-Statutory Director Stock Option under Novelos Therapeutics,
Inc.’s
2006 Stock Incentive Plan
|
8-K
|
December
15, 2006
|
10.3
|
||||||
|
10.22
|
Securities
Purchase Agreement dated April 12, 2007
|
10-QSB
|
May
8, 2007
|
10.1
|
||||||
|
10.23
|
Letter
Amendment dated May 2, 2007 to the Securities Purchase Agreement
|
10-QSB
|
May
8, 2007
|
10.2
|
||||||
|
10.24
|
Registration
Rights Agreement dated May 2, 2007
|
10-QSB
|
May
8, 2007
|
10.3
|
||||||
|
10.25
|
Placement
Agent Agreement with Rodman & Renshaw, LLC dated February 12,
2007
|
10-QSB
|
May
8, 2007
|
10.4
|
||||||
|
10.26
|
Agreement
to Exchange and Consent dated May 1, 2007
|
10-QSB
|
May
8, 2007
|
10.5
|
||||||
|
10.27
|
Form
of Common Stock Purchase Warrant dated May 2, 2007 issued pursuant
to the
Securities Purchase Agreement dated April 12, 2007
|
10-QSB
|
May
8, 2007
|
4.1
|
||||||
|
10.28
|
Form
of Common Stock Purchase Warrant dated May 2, 2007 issued pursuant
to the
Agreement to Exchange and Consent dated May 2, 2007
|
10-QSB
|
May
8, 2007
|
4.2
|
||||||
|
23.1
|
Consent
of Foley Hoag (included in Exhibit 5.1)
|
X
|
||||||||
|
23.2
|
Consent
of Stowe & Degon
|
X
|
||||||||
|
23.3
|
Power
of Attorney (included on signature page)
|
X
|
||||||||
**
Management contract or compensatory plan.
Item
28. Undertakings.
(a)
The
undersigned registrant hereby undertakes to:
(1) File,
during any period in which it offers or sells securities, a post-effective
amendment to this Registration Statement to:
(i) Include
any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) Reflect
in the prospectus any facts or events which, individually or together, represent
a fundamental change in the information in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the “Calculation of Registration
Fee” table in the effective Registration Statement.
II-5
(iii) Include
any additional or changed material information on the plan of
distribution.
(2) For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering.
(3) File
a
post-effective amendment to remove from registration any of the securities
that
remain unsold at the end of the offering.
(4) For
determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned small business issuer undertakes that in a primary offering
of
securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell
the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned
small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
(i)
Any
preliminary prospectus or prospectus of the undersigned small business issuer
relating to the offering required to be filed pursuant to Rule 424 (§230.424 of
this chapter);
(ii)
Any
free-writing prospectus relating to the offering prepared by or on behalf of
the
undersigned small business issuer or used or referred to by the undersigned
small business issuer;
(iii)
The
portion of any other free-writing prospectus relating to the offering containing
material information about the undersigned small business issuer or its
securities provided by or on behalf of the undersigned small business issuer;
and
(iv)
Any
other
communication that is an offer in the offering made by the undersigned small
business issuer to the purchaser.
(b) Insofar
as indemnification for liabilities arising under the Securities Act of 1933
(the
“Act”) may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
(c) Each
prospectus filed pursuant to Rule 424(b)(§230.424(b) of this chapter) as part of
a registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance
on
Rule 430A (§230.430A of this chapter), shall be deemed to be part of and
included in the registration statement as of the date it is first used after
effectiveness. Provided that no statement made in a registration statement
or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify
any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such date of first use.
II-6
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in the City of Newton,
Commonwealth of Massachusetts, on May 25, 2007.
|
NOVELOS
THERAPEUTICS, INC.
|
||
| |
|
|
| By: | /s/ Harry S. Palmin | |
|
President and Chief Executive Officer |
||
POWER
OF ATTORNEY
KNOW
ALL
MEN BY THESE PRESENTS, that each individual whose signature appears below
constitutes and appoints Harry S. Palmin and George R. Vaughn, and each of
them,
his true and lawful attorney-in-fact and agent, with full power of substitution
and re-substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, and to file the same, with all exhibits and
schedules thereto, and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing, which they, or either of them, may deem necessary or
advisable to be done in connection with this registration statement, as fully
to
all intents and purposes as he might or could do in person, hereby ratifying
and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitute or substitutes or any of them, may lawfully do or cause to be done
by
virtue hereof.
In
accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
and
on the dates stated:
|
Signature
|
Title
|
Date
|
||
|
/s/
Harry S. Palmin
Harry
S. Palmin
|
Chief
Executive Officer and Director
(principal executive
officer)
|
May
25, 2007
|
||
|
/s/
George R. Vaughn
George
R. Vaughn
|
Chief
Financial Officer
(principal
financial officer and principal accounting officer)
|
May
25, 2007
|
||
|
/s/
Simyon Palmin
Simyon Palmin |
Chairman
of the Board of Directors
|
May
25, 2007
|
||
|
/s/
Michael J. Doyle
Michael
J. Doyle
|
Director
|
May
25, 2007
|
||
|
/s/
Sim Fass
Sim
Fass
|
Director
|
May
25, 2007
|
||
|
/s/
David B. McWilliams
David
B. McWilliams
|
Director
|
May
25, 2007
|
||
|
/s/
Howard M. Schneider
Howard
M. Schneider
|
Director
|
May
25, 2007
|
II-7
EXHIBIT
INDEX
|
Filed
with this
|
Incorporated
by Reference
|
|||||||||
|
Exhibit
No.
|
Description
|
Form
SB-2
|
Form
|
Filing
Date
|
Exhibit
No.
|
|||||
|
2.1
|
Agreement
and plan of merger among Common Horizons, Inc., Nove Acquisition,
Inc. and
Novelos Therapeutics, Inc. dated May 26, 2005
|
8-K
|
June
2, 2005
|
99.2
|
||||||
|
2.2
|
Agreement
and plan of merger between Common Horizons and Novelos Therapeutics,
Inc.
dated June 7, 2005
|
10-QSB
|
August
15, 2005
|
2.2
|
||||||
|
3.1
|
Certificate
of Incorporation
|
8-K
|
June
17, 2005
|
1
|
||||||
|
3.2
|
Certificate
of Designations of Series B convertible preferred stock
|
10-QSB
|
May
8, 2007
|
3.2
|
||||||
|
3.3
|
Certificate
of Designations of Series C cumulative convertible preferred
stock
|
10-QSB
|
May
8, 2007
|
3.2
|
||||||
|
3.4
|
By-laws
|
8-K
|
June
17, 2005
|
2
|
||||||
|
5.1
|
Legal
Opinion of Foley Hoag LLP
|
X
|
||||||||
|
10.1
**
|
Employment
agreement with Christopher J. Pazoles dated July 15, 2005
|
10-QSB
|
August
15, 2005
|
10.4
|
||||||
|
10.2
**
|
Employment
Agreement with Harry S. Palmin dated January 31, 2006
|
8-K
|
February
6, 2006
|
99.1
|
||||||
|
10.3
**
|
Compensation
for independent directors
|
8-K
|
December
22, 2006
|
99.1
|
||||||
|
10.4**
|
2000
Stock Option and Incentive Plan
|
SB-2
|
November
16, 2005
|
10.2
|
||||||
|
10.5
**
|
Form
of 2004 non-plan non-qualified stock option
|
SB-2
|
November
16, 2005
|
10.3
|
||||||
|
10.6
**
|
Form
of non-plan non-qualified stock option used from February to May
2005
|
SB-2
|
November
16, 2005
|
10.4
|
||||||
|
10.7
**
|
Form
of non-plan non-qualified stock option used after May 2005
|
SB-2
|
November
16, 2005
|
10.5
|
||||||
|
10.8
|
Form
of common stock purchase warrant issued in March 2005
|
SB-2
|
November
16, 2005
|
10.6
|
||||||
|
10.9
|
Form
of securities purchase agreement dated May 2005
|
8-K
|
June
2, 2005
|
99.1
|
||||||
|
10.10
|
Form
of subscription agreement dated September 30, 2005
|
8-K
|
October
3, 2005
|
99.1
|
||||||
|
10.11
|
Form
of Class A common stock purchase warrant dated September 30,
2005
|
8-K
|
October
3, 2005
|
99.3
|
||||||
|
10.12
|
Form
of share escrow agreement
|
8-K
|
November
3, 2005
|
10.3
|
||||||
|
10.13
|
Consideration
and new technology agreement dated April 1, 2005 with ZAO BAM
|
10-QSB
|
August
15, 2005
|
10.2
|
||||||
II-8
|
Filed
with this
|
Incorporated
by Reference
|
|||||||||
|
Exhibit
No.
|
Description
|
Form
SB-2
|
Form
|
Filing
Date
|
Exhibit
No.
|
|||||
|
10.14
|
Letter
agreement dated March 31, 2005 with The Oxford Group, Ltd.
|
10-QSB
|
August
15, 2005
|
10.3
|
||||||
|
10.15
|
Form
of securities purchase agreement dated March 2, 2006
|
8-K
|
March
3, 2006
|
99.2
|
||||||
|
10.16
|
Form
of common stock purchase warrant dated March 2006
|
8-K
|
March
3, 2006
|
99.3
|
||||||
|
10.17
|
Placement
Agent Agreement with Oppenheimer & Co. Inc. dated December 19,
2005
|
8-K
|
March
3, 2006
|
99.4
|
||||||
|
10.18**
|
2006
Stock Incentive Plan
|
10-QSB
|
November
6, 2006
|
10.1
|
||||||
|
10.19
|
Form
of Incentive Stock Option under Novelos Therapeutics, Inc.’s 2006 Stock
Incentive Plan
|
8-K
|
December
15, 2006
|
10.1
|
||||||
|
10.20
|
Form
of Non-Statutory Stock Option under Novelos Therapeutics, Inc.’s 2006
Stock Incentive Plan
|
8-K
|
December
15, 2006
|
10.2
|
||||||
|
10.21
|
Form
of Non-Statutory Director Stock Option under Novelos Therapeutics,
Inc.’s
2006 Stock Incentive Plan
|
8-K
|
December
15, 2006
|
10.3
|
||||||
|
10.22
|
Securities
Purchase Agreement dated April 12, 2007
|
10-QSB
|
May
8, 2007
|
10.1
|
||||||
|
10.23
|
Letter
Amendment dated May 2, 2007 to the Securities Purchase Agreement
|
10-QSB
|
May
8, 2007
|
10.2
|
||||||
|
10.24
|
Registration
Rights Agreement dated May 2, 2007
|
10-QSB
|
May
8, 2007
|
10.3
|
||||||
|
10.25
|
Placement
Agent Agreement with Rodman & Renshaw, LLC dated February 12,
2007
|
10-QSB
|
May
8, 2007
|
10.4
|
||||||
|
10.26
|
Agreement
to Exchange and Consent dated May 1, 2007
|
10-QSB
|
May
8, 2007
|
10.5
|
||||||
|
10.27
|
Form
of Common Stock Purchase Warrant dated May 2, 2007 issued pursuant
to the
Securities Purchase Agreement dated April 12, 2007
|
10-QSB
|
May
8, 2007
|
4.1
|
||||||
|
10.28
|
Form
of Common Stock Purchase Warrant dated May 2, 2007 issued pursuant
to the
Agreement to Exchange and Consent dated May 2, 2007
|
10-QSB
|
May
8, 2007
|
4.2
|
||||||
|
23.1
|
Consent
of Foley Hoag (included in Exhibit 5.1)
|
X
|
||||||||
|
23.2
|
Consent
of Stowe & Degon
|
X
|
||||||||
|
23.3
|
Power
of Attorney (included on signature page)
|
X
|
||||||||
**
Management contract or compensatory plan.
II-9