10KSB: Optional form for annual and transition reports of small business issuers [Section 13 or 15(d), not S-B Item 405]
Published on March 24, 2008
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the Fiscal Year Ended: December 31,
2007
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from _________ to
_________.
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Commission
File Number 333-119366
NOVELOS
THERAPEUTICS, INC.
(Exact
name of Registrant as specified in its Charter)
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Delaware
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04-3321804
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(State
or other jurisdiction
of
incorporation or organization)
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(I.R.S.
Employer Identification No.)
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One
Gateway Center, Suite 504
Newton,
Massachusetts 02458
(Address
of principal executive offices and zip code)
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Issuer’s
telephone number: (617)
244-1616
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Class
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Name
of each exchange on which registered
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None
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Not
Applicable
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Securities
Registered pursuant to Section 12(g) of the Act:
None
(Title
of
class)
Check
whether the issuer is required to file reports pursuant to Section 13 or 15(d)
of the Exchange Act. Yes x
No
o
Check
whether the issuer: (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x No
o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
The
issuer’s revenues for its most recent fiscal year were $0.
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.) was: $26,446,000. As of March 14, 2008 there were
39,360,272 shares of the issuer’s common stock outstanding.
Transitional
Small Business Disclosure Format (check one): Yes o No
x
NOVELOS
THERAPEUTICS, INC.
FORM
10-KSB
TABLE
OF CONTENTS
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Item
1.
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Description
of Business
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2
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Item
2.
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Description
of Property
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9
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Item
3.
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Legal
Proceedings
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9
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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9
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PART
II
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Item
5.
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Market
for Common Equity, Related Stockholder Matters and Small Business
Issuer
Purchases of Equity Securities
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9
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Item
6.
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Management's
Discussion and Analysis or Plan of Operation
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10
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Item
7.
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Financial
Statements
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25
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Item
8.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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44
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Item
8a.
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Controls
and Procedures
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44
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Item
8b.
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Other
Information
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45
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PART
III
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Item
9.
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Directors,
Executive Officers, Promoters and Control Persons
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46
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Item
10.
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Executive
Compensation
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48
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Item
11.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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53
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Item
12.
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Certain
Relationships and Related Transactions, and Director
Independence
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54
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Item
13.
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55
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Item
14.
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Principal
Accountant Fees and Services
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58
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This
annual report on Form 10-KSB contains forward-looking statements, which involve
risks and uncertainties, such as our plans, objectives, expectations and
intentions. You can identify these statements by our use of words such as “may,”
“expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” “continue,”
“plans,” or their negatives or cognates. Some of these statements include
discussions regarding our future business strategy and our ability to generate
revenue, income and cash flow. We wish to caution the reader that all
forward-looking statements contained in this Form 10-KSB are only estimates
and
predictions. Our actual results could differ materially from those anticipated
as a result of risks facing us or actual events differing from the assumptions
underlying such forward-looking statements. Readers are cautioned not to place
undue reliance on any forward-looking statements contained in this annual report
on Form 10-KSB. We will not update these forward-looking statements unless
the
securities laws and regulations require us to do so.
This
annual report on Form 10-KSB contains trademarks and service marks of
Novelos Therapeutics, Inc. Unless otherwise provided in this annual report
on
Form 10-KSB, trademarks identified by ™ are trademarks of Novelos
Therapeutics, Inc. All other trademarks are the properties of their respective
owners.
i
PART
I
ITEM
1. DESCRIPTION
OF 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. 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 (SPA) 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. We
commenced patient enrollment in November 2006 and reached our enrollment target
of 840 patients on March 13, 2008.
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. As of mid-2007, NOV-002 (plus chemotherapy) slowed disease
progression in 60% of evaluable patients (6 out of 10 women). Further results
are expected in March or April 2008.
NOV-002
is also being developed to treat early-stage breast cancer. These patients
are
often treated with chemotherapy to minimize surgical intervention. In June
2007
we commenced enrollment in a U.S. Phase 2 trial in order to evaluate the ability
of NOV-002 to enhance the effectiveness of such chemotherapy while diminishing
dose-limiting side-effects. Interim results are expected in mid-2008.
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. A U.S. Phase 1b trial in patients who previously failed treatment with
pegylated interferon plus ribavirin commenced in September 2006 and was
completed in December 2007. Based on the favorable safety data obtained from
this trial, we plan to initiate a longer duration proof-of-concept trial in
the
second half of 2008.
Our
intellectual property portfolio of issued patents includes five U.S. patents,
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.
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. and Europe, has
demonstrated an excellent safety and efficacy profile in Russia as a combination
treatment with 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
1996-1998 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.
2
We
intend
to obtain a U.S marketing partner for NOV-002 after the non-small cell lung
cancer Phase 3 clinical trial results are available (expected 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 December 2007, we entered into a collaboration agreement
with Lee’s Pharmaceutical (HK) Ltd (which is 30% owned by Sigma-Tau Group) to
develop, manufacture and commercialize NOV-002 for cancer and NOV-205 for
hepatitis in Hong Kong, Macau, China and Taiwan.
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. In December 2007, based on a favorable safety profile, we concluded
a
U.S. Phase 1b clinical trial in chronic hepatitis C non-responders. We plan
to
commence a proof-of-concept trial in the second half of 2008 and will explore
out-license opportunities for NOV-205 after completion of this trial.
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 NOV-205, 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.
Protein
S-glutathionylation attendant to cellular redox changes at the cell surface
and
intracellularly are known to affect a variety of critical cell functions
including:
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Cell
signaling pathways
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Cytoskeletal
structure/function
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Protein
folding/stability
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Calcium
homeostasis
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Energy
metabolism
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Redox
homeostasis
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In
addition, changes in the ratio of reduced to oxidized forms of glutathione
(GSH/GSSG) can modulate protein phosphorylation in signal pathways, further
amplifying the impact of redox changes on cell function. Examples of
redox-sensitive 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. The activities of other
immune/inflammation regulatory proteins are also sensitive to GSH/GSSG (e.g.,
mitogen-activated protein kinases, MAPKs) as are elements of the cytoskeleton
(e.g., actin) that control interaction and communication between the cells
and
their surrounding environment (e.g., extracellular matrix) and cell surface
proteins (e.g., protein disulfide isomerase, PDI) which have been implicated
in
the modulation of tumor cell invasiveness and metastasis.
Importantly,
it has been shown that oxidized glutathione itself is capable of causing protein
glutathionylation leading to changes in cell signaling pathway function. Thus,
GSSG, or NOV-002, added to cells can result in a rapid, transient alteration
of
cell surface or intracellular redox state by shifting the equilibrium towards
the formation of mixed disulfides with protein thiols. This is accompanied
by
glutathionylation of cellular proteins and alterations in phosphorylation of
signaling proteins (e.g., MAPKs, AKT, JAK2, STAT5).
3
Findings
with NOV-002 and NOV-205 in animals and humans are consistent with a variety
of
known effects of modulating cellular redox status (e.g., blood precursor cell
proliferation (hematopoiesis), modulation of cytokine and growth factor
production - including those known to control production of blood cells, immune
system modulation, cytoskeletal alterations that may impact the migration and
invasiveness of tumor cells. Identification of the precise molecular targets
of
the GSSG component of NOV-002 and NOV-205, which account for their 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 to be used 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 numerous types of cancer including:
non-small cell lung cancer, breast cancer, ovarian cancer, colorectal cancer
and
pancreatic 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 1.44 million U.S. men and women were
expected to be diagnosed with cancer in 2007. Over 550,000 U.S. cancer patients
were expected to die in 2007, 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 213,000 people
were expected to be diagnosed with lung cancer in 2007, with over 160,000
deaths. According to a Rodman and Renshaw report dated December 2006, there
are
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.
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 as recently as 2005, 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 dosing regimens with existing
cytotoxic drugs are likely to provide only incremental improvements in efficacy
and/or safety, and are very expensive. Similarly, emerging targeted biologic
therapies, such as Astra Zeneca’s IRESSA®, OSI’s TARCEVA®, Genentech’s AVASTIN®
and ImClone’s ERBITUX®, may offer some benefit for certain patient
subpopulations, but overall efficacy has remained low. Moreover, there are
significant safety concerns and the costs to manufacture are very high. Thus,
there is an absence of effective treatments for non-small cell lung cancer,
particularly for late stage patients.
4
NOV-002
can be distinguished from other drugs for non-small cell lung cancer on the
market or in development because, based on available data, NOV-002 possesses
the
key attributes of safety, improved recovery from chemotherapy toxicity,
potentiation of chemotherapy (increased survival rates and better anti-tumor
effects) and low cost of manufacture. In a controlled randomized U.S. Phase
1/2
clinical trial, advanced NSCLC patients treated with NOV-002 in combination
with
paclitaxel and carboplatin demonstrated improved objective tumor response (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)
and
higher tolerance of chemotherapy versus the control group. In a controlled
randomized Russian trial, when used in combination with cisplatin-based
chemotherapy, NOV-002 increased the one-year survival of advanced non-small
cell
lung cancer patients from 17% to 63% (versus 35% typical in the U.S.). On the
basis of U.S. and Russian data, 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 reached our enrollment target of 840 patients in March 2008.
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 (patients who had not
received prior chemotherapy) were randomized to one of three groups for six
months of treatment:
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Group
A: NOV-002, administered intravenously and intramuscularly, in combination
with cytotoxic chemotherapy (carboplatin +
paclitaxel).
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Group
B: NOV-002, administered intravenously and subcutaneously, in combination
with cytotoxic chemotherapy.
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·
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Group
C: Cytotoxic chemotherapy alone was administered to this control
group.
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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).
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 at least one year.
5
NOV-002
for Chemotherapy (Platinum)-Resistant Ovarian Cancer
According
to the American Cancer Society, approximately 22,000 U.S. women were expected
to
be diagnosed with ovarian cancer in 2007 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 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. To date, NOV-002 (plus chemotherapy) slowed
disease progression in 60% of evaluable patients (6 out of 10 patients). We
expect further results from this trial in March or April 2008.
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 U.S. Phase 2 trial to evaluate the ability of NOV-002
to enhance the effectiveness of such chemotherapy while diminishing
dose-limiting side-effects commenced in June 2007 at the Medical University
of
South Carolina. Interim results are expected in mid-2008.
Breast
cancer remains a serious public health concern throughout the world. According
to American Cancer Society, about 180,000 women in the US were expected to
be
diagnosed with breast cancer in 2007, and approximately 40,000 were expected
to
die from the disease. Neoadjuvant therapy in early-stage breast cancer patients
reduces the size of tumors, allowing for surgical removal with less tissue
damage than if no prior chemotherapy was employed. Further, several studies
have
provided evidence that the development of pathologic complete response (pCR,
a
total absence of the original tumor as assessed by pathological analysis of
surgically removed breast tissue) following neoadjuvant therapy may be
associated with a higher probability of long-term survival. However, only
approximately 20% of patients treated with current neoadjuvant chemotherapy
achieve pCR.
The
primary objective of our open-label single-arm trial is to define the rate
of
pCR in the affected breast after the preoperative administration of NOV-002
in
combination with chemotherapy (doxorubicin and cyclophosphamide followed by
docetaxel) in patients with stage IIB-IIIC breast cancer. Up to 46 women may
be
enrolled in the trial, and may receive up to eight cycles of NOV-002 in
combination with chemotherapy.
6
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.
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 and was completed in December 2007. Based
on the favorable safety data obtained from this trial, we expect to initiate
a
longer duration proof-of-concept trial in the second half of 2008.
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. Funded research collaborations are
also
underway at other academic/scientific institutions including
Harvard/Massachusetts General Hospital, the Wistar Institute and the University
of Massachusetts Medical Center to further elaborate in
vitro
and
in
vivo
mechanisms of drug action that may underlie the clinical therapeutic profiles
of
NOV-002 and NOV-205.
7
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.
The
active pharmaceutical ingredient of NOV-002 is manufactured in the U.S. in
compliance with current Good Manufacturing Practices 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 Practices 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 five issued patents in the U.S. 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
March 1, 2008 we have ten employees, eight 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;
|
8
|
·
|
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
|
|
·
|
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.
We
lease
our executive office in Newton, Massachusetts. Our office consists of
approximately 3,000 square feet and is rented for approximately $7,700 per
month. This lease expires in August 2009. 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.
Item
3. Legal
Proceedings
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.
Item
4. Submission
of Matters to a Vote of Security Holders
No
matters were submitted to a vote of our security holders during the fourth
quarter of the fiscal year ended December 31, 2007.
PART
II
Item
5. Market
for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities
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 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
|
1.40
|
0.82
|
|||||
|
Third
Quarter
|
0.90
|
0.45
|
|||||
|
Fourth
Quarter
|
0.67
|
0.43
|
|||||
9
On
December 31, 2007 there were 122 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
are prohibited from paying any dividends on common stock as long as any shares
of our Series B preferred stock are outstanding. We currently expect to retain
future earnings, if any, for the development of our business.
Our
transfer agent and registrar is American Stock Transfer and Trust Company,
59
Maiden Lane, New York, NY 10038.
Recent
Sales of Unregistered Securities
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 approximately
$1,300,000 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.
On
July
6, 2007 we issued 25,000 shares of our common stock to Dr. Kenneth Tew, the
chairman of our Scientific Advisory Board, upon exercise of his stock option
at
a price per share of $0.01 for total consideration of $250, pursuant to an
option granted in April 2004.
On
January 16, 2008, we issued 100,000 shares of our common stock to Howard
Schneider, one of our directors, upon the exercise of his stock option at a
price of $0.01 per share for total consideration of $1,000, pursuant to an
option granted in February 2005.
These
issuances were exempt from registration under the Securities Act of 1933
pursuant to an exemption under Section 4(2) thereof as a sale of securities
not
involving a public offering.
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. Patient
enrollment commenced in November 2006 and targeted enrollment was reached on
March 13, 2008. NOV-002 is also in Phase 2 development for
chemotherapy-resistant ovarian cancer and early-stage breast cancer.
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.
A
U.S. Phase 1b clinical trial in patients who previously failed treatment with
pegylated interferon plus ribavirin was completed in December 2007. Based on
favorable safety results of that trial, we plan to initiate a longer duration
proof-of-concept trial in the second half of 2008.
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 five U.S. issued patents,
two
European issued patents and one Japanese issued patent.
10
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. After the completion of
the
reverse merger Novelos 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.
During
2005, 2006 and 2007 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 in a private placement
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. 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 $13,693,000
(net of issuance costs). The shares of Series B Preferred Stock are convertible
into 15,000,000 shares of common stock. In connection with that 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 convertible into 3,264,000 shares of common stock.
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 are
currently developing two proprietary 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.
11
Years
Ended December 31, 2007 and 2006
Research
and Development.
Research
and development expense for the year ended December 31, 2007 was $17,428,000
compared to $6,441,000 for the year ended December 31, 2006. The $10,987,000,
or
171%, 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 $4,712,000 in additional contract research and consulting services,
an
increase of $3,310,000 in clinical investigator expenses, an increase of
$669,000 in drug manufacturing and distribution costs (including storage and
shipping chemotherapy drug) and an increase of $217,000 related to salaries
and
overhead costs such as travel and related expenses. We also purchased $3,392,000
of chemotherapy drugs during 2007 (an increase of $2,101,000 over 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 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 9, we have a commitment to purchase an additional
$1,000,000 of chemotherapy drugs. The commitment was fulfilled during January
2008. The increases discussed above were offset by a decrease of $22,000 in
stock compensation expense during 2007 as compared to 2006.
General
and Administrative.
General
and administrative expense for the year ended December 31, 2007 was $2,866,000
compared to $2,488,000 for the year ended December 31, 2006. The $378,000,
or
15%, increase in general and administrative expense was due to four factors.
First, we recorded $396,000 in potential liquidated damages associated with
the
registration of less than 100% of the securities required by the registration
rights agreements with investors in our Series B Preferred Stock. This
represents a $421,000 increase over 2006, which included a credit of $25,000
for
potential liquidated damages associated with a previous financing. Second,
compensation and related costs and fees to directors increased $160,000 as
a
result of the hiring of a full-time director of finance in mid-2006, salary
increases to administrative personnel, and increases in director fees. Third,
overhead costs increased $96,000 due principally to increases in insurance
and
travel costs. Lastly, stock compensation associated with stock options increased
by $81,000 due to new option grants during late 2006 and early 2007 to
employees, directors and consultants. These increases were offset by a decrease
of $380,000 in professional and consulting costs associated with legal,
accounting and investor-relations professional services as we increased our
use
of internal resources to perform those functions. Also, during 2006 we issued
restricted stock to certain investor relations firms. There were no restricted
stock issuances during 2007.
Interest
Income.
Interest
income for the year ended December 31, 2007 was $730,000 compared to $638,000
for the year ended December 31, 2006. The increase in interest income during
2007 related to higher average cash balances in 2007 as a result of the net
proceeds received from 2006 and 2007 financing transactions.
Preferred
Stock Dividends and Deemed Dividends. During
the year ended December 31, 2007 we paid cash dividends to Series A and C
preferred stockholders of $261,000 and dividends of $563,000 to Series B
preferred stockholders. An additional $337,000 of dividends were declared and
accrued but not paid to Series B preferred stockholders. During the year ended
December 31, 2007 we also recorded deemed dividends to preferred stockholders
totaling $9,003,000 (including a payment of $40,000 made upon the exchange
of
Series A for Series C preferred shares). This amount represents the value
attributed to the beneficial conversion feature of the Series B convertible
preferred stock of $7,824,000 and the fair value of warrants and cash of
$1,179,000 transferred to the former Series A preferred stockholders in
connection with the exchange of their shares for shares of Series C preferred
stock that were subordinated to the Series B shares. The deemed dividends and
cash dividends have been included in the calculation of net
loss
attributable to common stockholders of $29,721,000, or $0.76 per share, for
the
year ended December 31, 2007. The deemed dividends and cash dividends are
excluded from our net loss (from operating activities) of $19,557,000 or $0.50
per share, for the year ended December 31, 2007. There were no deemed dividends
recorded during 2006; however we paid cash dividends totaling $261,000 to Series
A preferred stockholders.
Liquidity
and Capital Resources
We
have
financed our operations since inception through the sale of securities and
the
issuance of debt (which was subsequently paid off or converted into equity).
As
of December 31, 2007, we had $10,926,000 in cash and equivalents, including
$1,185,000 of restricted cash that is reserved for research and development
activities.
12
During
the year ended December 31, 2007, cash of approximately $13,468,000 was used
in
operations, primarily due to a net loss of $19,557,000. The cash impact of
the
loss was offset by non-cash stock-based compensation expense of $503,000,
depreciation and amortization of $15,000, a decrease in prepaid expenses of
$162,000, an increase in accrued compensation of $124,000 and an increase in
accounts payable and accrued liabilities of $5,285,000. The significant increase
in accounts payable and accrued liabilities is principally a result of greater
than expected delays in invoicing from clinical research organizations. During
the year ended December 31, 2007, cash of approximately $442,000 was provided
by
investing activities resulting from the release of restrictions on $470,000
of
cash that had been previously restricted, offset by payments of $24,000 to
purchase fixed assets and $4,000 for a lease deposit.
During
the year ended December 31, 2007, cash of approximately $12,830,000 was provided
by financing activities as a result of the net proceeds of $13,693,000 from
the
sale of our Series B preferred stock. This was offset by the payment of cash
dividends on the Series A, B and C convertible preferred stock totaling $824,000
and a $40,000 payment made in connection with the exchange of Series A preferred
shares for Series C preferred shares.
Based
on
our current and anticipated spending, we believe that our
available cash and equivalents will fund our operations through the middle
of
2008. We will need to raise additional capital in order to complete the pivotal
Phase 3 clinical trial for NOV-002 in NSCLC and other research and development
activities. We plan to seek additional funding through collaborative
arrangements and public or private financings. Our ability to continue as a
going concern is dependent on our ability to obtain such funding. 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.
|
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.
13
Accrued
Liabilities. As
part
of the process of preparing financial statements, we are required to estimate
accrued liabilties. 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. 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.
Accounting
for equity instruments granted or sold by us under 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.
Factors
Affecting Future Performance
The
report from our independent registered public accounting firm indicates that
there is substantial doubt about whether we will be able to continue as a going
concern for a period of one year from the date of their report.
The
report from our independent registered public accounting firm included with
this
annual report on Form 10-KSB indicates that factors exist that raise substantial
doubt about our ability to continue as a going concern for a period of one
year
from the date of their report. We have estimated that the cash on hand at
December 31, 2007 will fund our obligations through the middle of 2008. Our
ability to continue as a going concern is dependent on our ability to obtain
capital (through the sale of equity and debt securities and through
collaborative arrangements with partners) to fund our development activities.
If
we are unable to obtain additional capital through these sources, we may have
to
seek other sources of capital or reevaluate our operating plans, including
slowing or stopping the Phase 3 clinical development of our lead drug candidate,
NOV-002.
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.
14
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.
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.
15
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 Practices 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.
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.
16
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 trial of NOV-002 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 pivotal Phase 3 trial of NOV-002 for
non-small cell lung cancer in November 2006. We reached our enrollment target
in
March 2008 and we expect trial conclusion mid-2009. We enrolled the first
patient in the Phase 2 clinical study for NOV-002 for chemotherapy-resistant
ovarian cancer in July 2006 and announced what we believe to be encouraging
results from this ongoing study in June 2007. We also commenced a Phase 2
clinical study for NOV-002 for early-stage breast cancer and expect interim
results in mid-2008. In December 2007, we concluded a U.S. Phase 1b clinical
trial of NOV-205 for chronic hepatitis C non-responders based on favorable
safety profile. 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.
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, obtain required regulatory
approvals for 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.
17
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 our 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.
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.
18
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:
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·
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the
receipt of regulatory clearance of marketing claims for the uses
that we
are developing;
|
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·
|
the
establishment and demonstration of the advantages, safety and efficacy
of
our technologies;
|
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·
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pricing
and reimbursement policies of government and third-party payers such
as
insurance companies, health maintenance organizations and other health
plan administrators;
|
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·
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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;
|
|
·
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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
|
|
·
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redesign
our products, which would be costly and
time-consuming.
|
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.
19
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.
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.
20
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 both Western and Eastern
Europe. We anticipate that approximately 40% of the remaining Phase 3 clinical
trial budget of approximately $18 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.
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. Most 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 from 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.
21
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 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.
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 this annual report for the fiscal year ending
December 31, 2007 we are 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, 2009 we will be required to include an
attestation report of our independent registered public accounting firm on
internal control over financial reporting.
22
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 and holders of our Series B preferred stock beneficially
own, in the aggregate, approximately 32% of our outstanding voting shares.
The
interests of our current officers, directors and Series B investors may differ
from the interests of other stockholders. Further, our current officers,
directors and Series B investors 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 outstanding shares of Series B
preferred stock. We are prohibited from paying dividends to common stockholders,
amending our certificate of incorporation, 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.
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.
23
We
have failed to register 100% of the securities that were required to be
registered in accordance with the Series B Preferred Stock financing
agreements.
In
connection with the private placement of Series B Preferred Stock and warrants
that closed on May 2, 2007, we entered into a registration rights agreement
with
the investors that required the Company to file with the SEC no later than
June
1, 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 (23,400,000 shares). The Registration Statement on Form
SB-2 covering the resale of 23,400,000 shares of common stock was filed on
May
25, 2007. As a result of comments received from the Securities and Exchange
Commission we subsequently amended the registration statement to reduce the
size
of the offering from 23,400,000 shares to 12,000,000 shares. The holders of
Series B Preferred Stock consented to the reduction of shares being covered
by
the registration statement from 23,400,000 to 12,000,000. Additionally, the
investors agreed to extend the date by which the registration statement must
be
declared effective until September 7, 2007. Furthermore, the holders of Series
B
Preferred Stock have waived, through September 7, 2007, any liquidated damages
arising as a result of the reduction in the number of shares being registered
and by any failure to have the registration statement declared effective prior
to September 7, 2007. The registration statement, as amended, was declared
effective on September 6, 2007.
If
the
holders of Series B Preferred Stock do not waive liquidated damages for periods
subsequent to September 7, 2007, we may become liable for 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 Series B Preferred Stock
until May 2, 2009. In the year ended December 31, 2007, the Company accrued
$395,500 for potential liquidated damages, representing an estimate of the
pro
rata portion due to investors as a result of registering 53%, instead of 100%,
of the total shares underlying the preferred stock and warrants held by the
investors. As of the date of this filing, no claim has been made for payment
of
any liquidated damages.
24
ITEM
7. FINANCIAL
STATEMENTS
INDEX
TO FINANCIAL STATEMENTS
FOR NOVELOS THERAPEUTICS, INC.
|
Page
|
||||
|
Report
of Independent Registered Public Accounting Firm
|
26 | |||
|
Balance
Sheets at December 31, 2007 and 2006
|
27 | |||
|
Statements
of Operations for the Years Ended December 31, 2007 and
2006
|
28 | |||
|
Statements
of Redeemable Preferred Stock and Stockholders’ Equity (Deficiency) for
the Years Ended December 31, 2007 and 2006
|
29 | |||
|
Statements
of Cash Flows for the Years Ended December 31, 2007 and
2006
|
30 | |||
|
Notes
to Financial Statements
|
31 | |||
25
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, 2007 and 2006 and the related statements of operations, redeemable
preferred stock and 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, 2007 and 2006 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.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred continuing losses in the
development of its products. Additional funding will be required for the Company
to meet its obligations for the following year. These factors raise
substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans in this regard are described in Note
1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/
Stowe
& Degon
Worcester,
Massachusetts
March
17,
2008
26
NOVELOS
THERAPEUTICS, INC.
BALANCE
SHEETS
|
December
31,
2007
|
December
31,
2006
|
||||||
|
ASSETS
|
|||||||
|
CURRENT
ASSETS:
|
|||||||
|
Cash
and equivalents
|
$
|
9,741,518
|
$
|
9,938,428
|
|||
|
Restricted
cash
|
1,184,702
|
1,655,251
|
|||||
|
Prepaid
expenses and other current assets
|
133,281
|
294,995
|
|||||
|
Total
current assets
|
11,059,501
|
11,888,674
|
|||||
|
FIXED
ASSETS, NET
|
32,809
|
23,810
|
|||||
|
DEPOSITS
|
15,350
|
10,875
|
|||||
|
TOTAL
ASSETS
|
$
|
11,107,660
|
$
|
11,923,359
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
(DEFICIENCY) |
|||||||
|
CURRENT
LIABILITIES:
|
|||||||
|
Accounts
payable and accrued liabilities
|
$
|
6,372,478
|
$
|
1,088,041
|
|||
|
Accrued
compensation
|
349,412
|
225,384
|
|||||
|
Accrued
dividends
|
337,500
|
—
|
|||||
|
Total
current liabilities
|
7,059,390
|
1,313,425
|
|||||
|
COMMITMENTS
AND CONTINGENCIES
|
|||||||
|
REDEEMABLE
PREFERRED STOCK:
|
|||||||
|
Series
B convertible preferred stock, $0.00001 par value; 400 shares designated;
300 shares issued and outstanding at December 31, 2007 (liquidation
preference $15,337,500) (Note 4)
|
9,918,666
|
—
|
|||||
|
STOCKHOLDERS’
EQUITY (DEFICIENCY):
|
|||||||
|
Preferred
stock, $0.00001 par value; 7,000 shares authorized: Series A 8% cumulative
convertible preferred stock; no shares outstanding at December 31,
2007,
3,264 shares issued and outstanding at December 31, 2006; Series
C 8%
cumulative convertible preferred stock; 272 shares issued and outstanding
at December 31, 2007 (liquidation preference $3,264,000), no shares
outstanding at December 31, 2006 (Note 4)
|
—
|
—
|
|||||
|
Common
stock, $0.00001 par value; 150,000,000 shares authorized; 39,260,272
shares issued and outstanding at December 31, 2007; 39,235,272 shares
issued and outstanding at December 31, 2006
|
392
|
392
|
|||||
|
Additional
paid-in capital
|
37,370,959
|
34,294,154
|
|||||
|
Accumulated
deficit
|
(43,241,747
|
) |
(23,684,612
|
)
|
|||
|
Total
stockholders’ equity (deficiency)
|
(5,870,396
|
) |
10,609,934
|
||||
|
TOTAL
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(DEFICIENCY)
|
$
|
11,107,660
|
$
|
11,923,359
|
|||
See
notes to financial statements.
27
NOVELOS
THERAPEUTICS, INC.
STATEMENTS
OF OPERATIONS
|
Year
Ended December 31,
|
|||||||
|
|
2007
|
2006
|
|||||
|
COSTS
AND EXPENSES:
|
|||||||
|
Research
and development
|
$
|
17,427,804
|
$
|
6,441,394
|
|||
|
General
and administrative
|
2,866,383
|
2,488,414
|
|||||
|
Total
costs and expenses
|
20,294,187
|
8,929,808
|
|||||
|
OTHER
INCOME:
|
|||||||
|
Interest
income
|
729,922
|
637,752
|
|||||
|
Miscellaneous
|
7,130
|
6,000
|
|||||
|
Total
other income
|
737,052
|
643,752
|
|||||
|
NET
LOSS
|
(19,557,135
|
)
|
(8,286,056
|
)
|
|||
|
PREFERRED
STOCK DIVIDEND
|
(1,161,120
|
)
|
(261,120
|
)
|
|||
|
PREFERRED
STOCK DEEMED DIVIDEND
|
(9,003,083
|
)
|
—
|
||||
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$
|
(29,721,338
|
)
|
$
|
(8,547,176
|
)
|
|
|
BASIC
AND DILUTED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON
SHARE
|
$
|
(0.76
|
)
|
$
|
(0.23
|
)
|
|
|
SHARES
USED IN COMPUTING BASIC AND DILUTED
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS PER COMMON SHARE
|
39,247,532
|
37,179,878
|
|||||
See
notes to financial statements.
28
NOVELOS
THERAPEUTICS, INC.
STATEMENTS
OF REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
|
|
|
REDEEMABLE
PREFERRED STOCK
|
|
||||||||||||||||||||||||||||||||
|
Series B Convertible
Preferred Stock
|
Common Stock
|
Series A Cumulative
Convertible
Preferred Stock
|
Series C Cumulative
Convertible
Preferred
|
Additional
|
Total
Stockholders’
|
||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Paid-in
Capital
|
Accumulated
Deficit
|
Equity
(Deficiency)
|
|||||||||||||||||||||||||
|
BALANCE
AT JANUARY 1, 2006
|
—
|
$
|
—
|
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
|
—
|
—
|
39,235,272
|
392
|
3,264
|
—
|
—
|
—
|
34,294,154
|
(23,684,612
|
)
|
10,609,934
|
|||||||||||||||||||||||
|
Exercise
of stock options
|
—
|
—
|
25,000
|
—
|
—
|
—
|
—
|
—
|
250
|
—
|
250
|
||||||||||||||||||||||||
|
Compensation
expense associated with options issued to employees
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
343,233
|
—
|
343,233
|
||||||||||||||||||||||||
|
Compensation
expense associated with options issued to non-employees
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
160,057
|
—
|
160,057
|
||||||||||||||||||||||||
|
Issuance
of Series B redeemable convertible preferred stock and warrants,
net of
issuance costs of $1,306,949
|
300
|
17,743,051
|
—
|
—
|
—
|
—
|
—
|
—
|
3,774,385
|
—
|
3,774,385
|
||||||||||||||||||||||||
|
Beneficial
conversion feature on Series B redeemable convertible preferred stock
|
—
|
(7,824,385
|
)
|
—
|
—
|
—
|
—
|
—
|
—
|
7,824,385
|
—
|
7,824,385
|
|||||||||||||||||||||||
|
Deemed
dividend related to the accretion of beneficial conversion feature
on
Series B redeemable convertible preferred stock
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(7,824,385
|
)
|
—
|
(7,824,385
|
)
|
||||||||||||||||||||||
|
Retirement
of Series A preferred stock and issuance of Series C preferred stock
|
—
|
—
|
—
|
—
|
(3,264
|
)
|
—
|
272
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||
|
Issuance
of common stock purchase warrants in connection with exchange of
preferred
stock
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
1,138,698
|
—
|
1,138,698
|
||||||||||||||||||||||||
|
Deemed
dividend recorded in connection with exchange of Series A for Series
C
convertible preferred stock
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(1,178,698
|
)
|
—
|
(1,178,698
|
)
|
||||||||||||||||||||||
|
Dividends
paid on preferred stock
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(823,620
|
)
|
—
|
(823,620
|
)
|
||||||||||||||||||||||
|
Dividends
accrued on preferred stock
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(337,500
|
)
|
—
|
(337,500
|
)
|
||||||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(19,557,135
|
)
|
(19,557,135
|
)
|
||||||||||||||||||||||
|
BALANCE
AT DECEMBER 31, 2007
|
300
|
$
|
9,918,666
|
39,260,272
|
$
|
392
|
—
|
$
|
—
|
272
|
$
|
—
|
$
|
37,370,959
|
$
|
(43,241,747
|
)
|
$
|
(5,870,396
|
)
|
|||||||||||||||
See
notes to financial statements.
29
NOVELOS
THERAPEUTICS, INC.
STATEMENTS
OF CASH FLOWS
|
Year
Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
|
Net
loss
|
$
|
(19,557,135
|
)
|
$
|
(8,286,056
|
)
|
|
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|||||||
|
Depreciation
and amortization
|
15,367
|
9,516
|
|||||
|
Stock-based
compensation
|
503,290
|
588,043
|
|||||
|
Change
in:
|
|||||||
|
Prepaid
expenses and other current assets
|
161,714
|
122,803
|
|||||
|
Accounts
payable and accrued liabilities
|
5,284,437
|
870,885
|
|||||
|
Accrued
compensation
|
124,028
|
225,384
|
|||||
|
Cash
used in operating activities
|
(13,468,299
|
)
|
(6,469,425
|
)
|
|||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Purchases
of fixed assets
|
(24,366
|
)
|
(10,716
|
)
|
|||
|
Change
in restricted cash
|
470,549
|
(1,458,343
|
)
|
||||
|
Deferred
financing costs
|
—
|
24,612
|
|||||
|
Deposits
|
(4,475
|
)
|
(1,219
|
)
|
|||
|
Cash
provided by (used in) investing activities
|
441,708
|
(1,445,666
|
)
|
||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Proceeds
from issuance of common stock, net
|
—
|
13,846,774
|
|||||
|
Proceeds
from issuance of Series B convertible preferred stock, net
|
13,693,051
|
—
|
|||||
|
Dividends
paid to preferred stockholders
|
(823,620
|
)
|
(261,120
|
)
|
|||
|
Payment
to preferred stockholders in connection with exchange of shares
(1)
|
(40,000
|
)
|
—
|
||||
|
Proceeds
from exercise of stock option
|
250
|
750
|
|||||
|
Cash
provided by financing activities
|
12,829,681
|
13,586,404
|
|||||
|
INCREASE
(DECREASE) IN CASH AND EQUIVALENTS
|
(196,910
|
)
|
5,671,313
|
||||
|
CASH
AND EQUIVALENTS AT BEGINNING OF YEAR
|
9,938,428
|
4,267,115
|
|||||
|
CASH
AND EQUIVALENTS AT END OF YEAR
|
$
|
9,741,518
|
$
|
9,938,428
|
|||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW
INFORMATION
|
|||||||
|
SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|||||||
|
Deemed
dividends on preferred stock
|
$
|
8,963,083
|
$
|
—
|
|||
|
Dividends
declared but not paid to preferred stockholders
|
$
|
337,500
|
$
|
—
|
|||
|
Issuance
of warrants to Series B preferred stockholders
|
$
|
3,774,385
|
$
|
—
|
|||
|
Issuance
of warrants to placement agents
|
$
|
768,621
|
$
|
—
|
|||
|
Common
stock issued for services
|
$
|
—
|
$
|
144,050
|
|||
(1)
Included as a deemed dividend in the Statement of Operations.
See
notes to financial statements.
30
NOVELOS
THERAPEUTICS, INC.
NOTES
TO FINANCIAL STATEMENTS
1.
NATURE OF BUSINESS,
ORGANIZATION AND GOING CONCERN
Novelos
Therapeutics, Inc. (‘‘Novelos’’ or 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. In 2005, we completed a two-step reverse merger with Common Horizons,
Inc., and its wholly-owned subsidiary Nove Acquisition, Inc. Following the
merger Novelos was the surviving company. 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 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.
These
financial statements have been prepared on the basis that the Company will
continue as a going concern. 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
operating losses in the foreseeable future. The Company’s ability to continue as
a going concern is dependent on its ability 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 accompanying financial statements do
not
include any adjustments that might be necessary in the event that the Company
cannot continue as a going concern for the next year.
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. Estimates include
those
for unbilled contract service fees such as amounts due to clinical research
organizations, clinical investigators and contract manufacturers. 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, 2007 and 2006 includes $1,185,000 and
$1,550,000, respectively, of cash pledged as security on a letter of credit
agreement with a bank. See Note 9. Restricted cash at December 31, 2006 also
includes approximately $105,000 placed in escrow as contractually required
under
an employment agreement with an officer.
Fixed
Assets —
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.
31
Impairment
of Long-Lived
Assets—
Whenever events or circumstances change, 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).
The
Company accounts 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.
Revenue
Recognition —
Revenue
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. Upfront
payments received in connection with technology license or collaboration
agreements are recognized over the estimated term of the related agreement.
Milestone payments received in connection with license or collaboration
agreements are recognized upon completion of the applicable milestones. Royalty
revenue will be recognized upon the receipt of royalty reports from third
parties.
Research
and Development—
Research and development costs are expensed as incurred.
Income
Taxes—
The
Company uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on temporary
differences between financial statement and tax basis of assets and liabilities
and net operating loss and credit carryforwards using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
effect
on deferred tax assets and liabilities of a change in tax rates is recognized
in
income in the period that includes the enactment date. Valuation allowances
are
established when it is more likely than not that some portion of the deferred
tax assets will not be realized.
The
Company adopted FIN 48, “Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
109”,
on the
first day of its 2007 fiscal year. The implementation did not result in a
material adjustment to the Company’s liability.
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, accrued
expenses and redeemable preferred stock. The estimated fair value of the
redeemable preferred stock, determined on an as-converted basis, was $8,850,000
at December 31, 2007. The estimated fair value of the remaining 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 consist 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
June
2007, the Emerging Issues Task Force reached a consensus on Issue No. 07-3
Accounting
for Nonrefundable Advance Payments for Goods or Services Received for Use
in
Future Research and Development Activities
(EITF
07-3). EITF 07-3 requires that nonrefundable advance payments for goods or
services used or rendered for future research and development activities
be
deferred and capitalized and subsequently recognized as an expense as the
goods
are delivered or the related services are performed. EITF 07-3 is effective
for
fiscal years beginning after December 15, 2007 and interim periods within
those
fiscal years with no earlier application permitted. The Company is currently
evaluating the effect of this consensus on its future reported financial
position and results of operations.
32
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 year ended December 31, 2007.
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 on
the
Company’s financial position or results of operations.
3.
FIXED ASSETS
Fixed
assets consisted of the following at December 31:
|
2007
|
2006
|
||||||
|
Office
and computer equipment
|
$
|
51,652
|
$
|
52,537
|
|||
|
Computer
software
|
7,896
|
7,896
|
|||||
|
Leasehold
improvements
|
4,095
|
2,500
|
|||||
|
Total
fixed assets
|
63,643
|
62,933
|
|||||
|
Less
accumulated depreciation and
amortization
|
(30,834
|
)
|
(39,123
|
)
|
|||
|
Fixed
assets, net
|
$
|
32,809
|
$
|
23,810
|
|||
Included
in fixed assets is equipment under capital lease with a cost of $13,061.
The
equipment was fully depreciated in all periods presented.
4.
STOCKHOLDERS’ EQUITY (DEFICIENCY)
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. 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. The sale of Series B Preferred Stock described below resulted
in a
further adjustment to the warrants, increasing the number of warrants to
5,180,000 and reducing the exercise price of the warrants to $1.00 per
share.
33
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 Stock”) and 969,696 common stock warrants
for net proceeds of $2,864,000, net of issuance costs of $336,000. 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 Series A Preferred Stock and warrants had anti-dilution provisions
that provided 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 (2006 PIPE) and the preferred stock then outstanding became
convertible into 2,417,774 shares of common stock. Pursuant
to the anti-dilution provisions contained in the warrants, the exercise price
of
the warrants was reduced to $1.00 in connection with the sale of the Series
B
Preferred Stock described below. On May 2, 2007, the holders of Series A
Preferred Stock exchanged all of their shares of Series A Preferred Stock
for
shares of Series C Preferred Stock (see
“Series C Preferred” below).
During
2007, the Company paid cash dividends of $87,765 ($26.88 per preferred share)
to
Series A preferred stockholders through the date of the exchange of shares
described below. During 2006, the Company paid cash dividends of $261,120
to
Series A preferred shareholders ($80.00 per preferred share).
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 was included as a component of permanent equity upon issuance.
Pursuant to anti-dilution provisions, the number of warrants issued to investors
and placement agents and finders was subsequently increased to 10,270,018
and
the exercise price of the warrants was reduced to $2.20 per share as a result
of
the sale of Series B Preferred Stock described below.
Registration
Rights, 2005 and 2006 Financings - 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 Series C Preferred Stock and
exercise of certain 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 December 31, 2007.
Series
B Preferred
-
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.
34
Rights
and Preferences
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 only 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. During 2007, the Company declared dividends totaling $900,000
($3,000 per share) to Series B preferred stockholders, $562,500 ($1,875 per
share) of that amount was paid in cash during 2007. 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 the Company’s 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
the Company’s affairs, assets available to pay the holders of Series B Preferred
Stock are not sufficient to permit the payment in full, then all assets will
be
distributed to the holders of Series B Preferred Stock on a pro rata basis.
If
the Company sells, leases or otherwise transfers substantially all of its
assets, consummates a business combination in which the Company is not the
surviving corporation or, if the Company is the surviving corporation, if
the
holders of a majority of the common stock immediately before the transaction
do
not hold a majority of common stock immediately after the transaction, in
one or
a series of events, change the majority of the members of the board of
directors, or if any person or entity (other than the holders of Series B
Preferred Stock) acquires more than 50% of the Company’s 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.
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, (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.
Board
and Observer Rights
The
holders of Series B Preferred Stock 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 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. To date,
a board
member and board observer have not been designated. Pursuant to the agreement
by
holders of Series A Preferred to exchange their shares for shares of Series
C
Preferred Stock, as 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.
35
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 only 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 entered into a registration rights agreement which
required the Company to file with the SEC no later than June 1, 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 rights agreement also required the registration statement
to be
declared effective by August 30, 2007 and requires the Company to use its best
efforts to keep the registration statement continuously effective under the
Securities Act until the earlier of the date when all securities covered by
the
registration statement have been sold or the second anniversary of the closing.
In the event the registration statement was not declared effective within the
timeframe specified by the Registration Rights Agreement or not maintained
effective, the Company is required to pay to the investors liquidated damages
equal to 1.5% per month (prorated 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 registration statement is declared effective. 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.
The
Company filed a registration statement covering 100% of the shares of common
stock issuable on conversion of the preferred stock and exercise of the warrants
(23,400,000 shares, including 900,000 shares underlying the common stock
purchase warrants issued to placement agents) on May 25, 2007. The registration
statement was thereafter amended to reduce the number of shares of common stock
that may be resold under the registration statement to 80% of the shares
issuable upon conversion of the preferred stock and none of the shares of common
stock issuable upon exercise of the warrants. The holders of the Series B
Preferred Stock consented to the filing of the amendment to the registration
statement by which the number of shares of common stock covered by the
registration statement was reduced from 23,400,000 shares to 12,000,000 shares.
The holders of the Series B Preferred Stock also waived any liquidated damages
arising under the registration rights agreement through September 7, 2007,
as a
result of such reduction in the number of shares registered, and by any failure
to have the registration statement declared effective by the SEC prior to
September 7, 2007. The registration statement, as amended, was declared
effective on September 6, 2007.
After
September 7, 2007 the Company may be required to pay to the investors any
liquidated damages due as a result of the failure to (i) register 100% of the
shares of common stock issuable upon conversion of the preferred stock and
exercise of the warrants and (ii) keep the registration statement continuously
effective. In the year ended December 31, 2007, the Company accrued $395,500
for
potential liquidated damages. This amount is included in general and
administrative expenses and represents an estimate of the probable pro rata
portion due to investors as a result of registering 53%, instead of 100%, of
the
total shares underlying the preferred stock and warrants held by the investors.
As of the date of this filing, no claim has been made for payment of any
liquidated damages.
36
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.
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.
Accounting
Treatment
The
terms
of the Series B Preferred Stock contain provisions that allow the holders to
elect to receive a liquidation payment in circumstances that are beyond the
Company’s control. Therefore the shares have been recorded as redeemable
preferred stock outside of permanent equity in the balance sheet as of December
31, 2007. The shares were initially recorded at their estimated as-converted
fair value of $19,050,000, net of cash issuance costs of $1,306,949. The Company
has concluded that since it is not probable that an event will occur that would
allow the holders to elect to receive a liquidation payment, the carrying value
will not be adjusted until the time that such event becomes probable. The
liquidation preference (redemption value) is $15,337,500 at December 31, 2007.
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 closing, the Company determined that
there was a beneficial conversion feature (“BCF”). After allocating the relative
fair value of the warrants issued to investors of $3,774,385 to paid-in-capital,
the intrinsic value of the BCF was determined to be $7,824,385. Since the Series
B Preferred Stock was immediately convertible, the BCF was recorded as a deemed
dividend in the quarter ended June 30, 2007. The fair value of the warrants
issued to placement agents at the date of issuance, calculated using the
Black-Scholes valuation method, was $768,821 and was recorded as a component
of
permanent equity with an offsetting reduction in permanent equity to record
the
issuance cost. The valuation was based on estimated volatility of 80%, a
discount rate of 4.55%, and a term of 5 years.
Series
C Preferred -
As a
condition to closing of the sale of Series B Preferred Stock described above,
the Company entered into an agreement to exchange and consent with the holders
of the Series A Preferred Stock. Pursuant to that agreement, the
holders
of the 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
(“Series C 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; paid them a cash
allowance to defray expenses totaling $40,000; and paid them an amount equal
to
unpaid dividends accumulated through the date of the exchange. The fair value
of
the warrants at the date of issuance calculated using the Black-Scholes
valuation method was $1,138,698. The valuation was based on estimated volatility
of 80%, a discount rate of 4.55%, and a term of 5 years. The total of the fair
value of the warrants and the cash payment of $40,000 has been reflected as
a
deemed dividend to preferred stockholders in the statement of operations.
Pursuant to the exchange agreement, the holders of the 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 stockholders do not have voting rights. 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 dividend rate also increases
to 20% upon certain events of default as defined in the Series C Certificate
of
Designations. The dividends are payable quarterly commencing on June 30, 2007.
Such dividends shall be paid only 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.
During 2007, the Company declared and paid dividends totaling $173,355 ($637
per
share) to Series C preferred stockholders. The conversion price is subject
to
adjustment for stock dividends, stock splits or similar capital reorganizations.
The
Series C 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.
In
the
event of any voluntary or involuntary liquidation, dissolution or winding up
of
the Company’s affairs, the Series C Preferred stock will be treated as senior to
Novelos 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 the Company’s affairs, the Company’s remaining assets
available to pay the holders of Series C preferred stock are not sufficient
to
permit the payment in full, then all of the Company’s assets will be distributed
to the holders of Series C preferred stock (and any remaining holders of Series
B preferred stock as may be required) on a pro rata basis.
37
Common
Stock Warrants — The
following table summarizes information with regard to outstanding warrants
issued in connection with equity and debt financings as of December 31,
2007:
|
Offering
|
Outstanding
(as adjusted)
|
Exercise
Price
(as adjusted)
|
Expiration Date
|
|||||||
|
2005
Bridge Loans
|
720,000
|
$
|
0.625
|
April
1, 2010
|
||||||
|
2005
PIPE:
|
||||||||||
|
Investors
|
4,500,000
|
$
|
1.00
|
August 9, 2008
|
||||||
|
Placement
agents and finders
|
680,000
|
$
|
1.00
|
August 9, 2010
|
||||||
|
Series
A Preferred (1):
|
||||||||||
|
Investors –
September 30, 2005 closing
|
909,090
|
$
|
1.00
|
September 30, 2010
|
||||||
|
Investors
– October 3, 2005 closing
|
60,606
|
$
|
1.00
|
October 3, 2010
|
||||||
|
2006
PIPE:
|
||||||||||
|
Investors
|
9,509,275
|
$
|
2.20
|
March
7, 2011
|
||||||
|
Placement
agents
|
760,743
|
$
|
2.20
|
March
7, 2011
|
||||||
|
Series
B Preferred:
|
||||||||||
|
Investors
|
7,500,000
|
$
|
1.25
|
May
2, 2012
|
||||||
|
Placement
agents
|
900,000
|
$
|
1.25
|
May
2, 2012
|
||||||
|
Series
C Exchange
|
1,333,333
|
$
|
1.25
|
May
2, 2012
|
||||||
|
Total
|
26,873,047
|
|||||||||
(1) Concurrently
with the Series B Financing, the shares of Series A Preferred Stock were
exchanged for shares of Series C Preferred Stock.
On
April
1, 2005, in connection with the issuance of $450,000 bridge notes payable,
the
Company issued warrants to purchase 720,000 shares of Novelos stock at $0.625
per share that are exercisable through April 1, 2010.
No
warrants have been exercised as of December 31, 2007.
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:
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
2000
Stock Option Plan
|
73,873
|
73,873
|
|||||
|
2006
Stock Incentive Plan
|
2,220,000
|
5,000,000
|
|||||
|
Options
issued outside of formalized plans
|
2,553,778
|
2,578,778
|
|||||
|
Warrants
|
28,973,047
|
(1)
|
16,820,135
|
||||
|
Preferred
stock
|
22,014,000
|
(1)
|
2,696,283
|
||||
|
Total
shares reserved for future issuance
|
55,834,698
|
27,169,069
|
|||||
(1)
The amount of reserved shares includes shares
reserved in excess of the number currently exercisable or convertible in
accordance with the related financing agreements.
38
Authorized
Shares —
On July
16, 2007, the Company’s shareholders approved and the Company filed an amendment
to the articles of incorporation to increase the authorized shares of common
stock from 100,000,000 to 150,000,000.
5.
COLLABORATION AGREEMENT
In
December 2007 the Company entered into a Collaboration Agreement with Lee’s
Pharmaceutical (HK) Ltd (“Lee’s Pharma”). Pursuant to the agreement Lee’s Pharma
obtained an exclusive license to develop, manufacture and commercialize NOV-002
and NOV-205 in Hong Kong, Macau, China and Taiwan (the “territory”). Under the
terms of the agreement the Company will receive an upfront license fee of
$500,000 in 2008 and is entitled to receive up to $1,700,000 in future milestone
payments upon the completion of development and marketing milestones by Lee’s
Pharma. Additionally the Company will receive royalty payments of 20-25% of
net
sales of NOV-002 in the territory and will receive royalty payments of 12%-15%
of net sales of NOV-205 in the territory. Lee’s Pharma will also reimburse the
Company for the manufacturing cost of pharmaceutical products provided to Lee’s
Pharma in connection with the agreement. Lee’s Pharma has committed to spending
certain minimum amounts on development in the first 4 years of the agreement.
The agreement expires upon the expiration of the last patent covering any of
the
licensed products, or twelve years from the date of the first commercial sale
in
China; whichever is longer.
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 years ended December 31, 2007
and 2006, stock options for the purchase of 1,380,000 and 840,000 shares of
common stock, respectively, 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 2,653,778 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 years
ended
December 31, 2007 and 2006, options to purchase 25,000 and 75,000 shares,
respectively, were exercised.
39
Adoption
of SFAS No. 123(R)
The
Company accounts for employee stock-based compensation in accordance with 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. The Company accounts for non-employee stock-based
compensation 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.
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
years ended December 31, 2007 and 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.
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:
|
Year Ended
December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Employee
and director stock option grants:
|
|||||||
|
Research
and development
|
$
|
163,558
|
$
|
77,333
|
|||
|
General
and administrative
|
179,675
|
190,948
|
|||||
|
343,233
|
268,281
|
||||||
|
Non-employee
consultants stock option grants and restricted stock
awards:
|
|||||||
|
Research
and development
|
17,233
|
11,435
|
|||||
|
General
and administrative
|
142,824
|
308,327
|
|||||
|
|
160,057
|
319,762
|
|||||
|
Total
stock-based compensation
|
$
|
503,290
|
$
|
588,043
|
|||
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.
40
Forfeitures.
As
required by SFAS 123R, the Company records stock-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, 2007 as the Company has
experienced very few forfeitures to date and 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.
The
following table summarizes weighted average values and assumptions used for
options granted to employees, directors and consultants in the periods
indicated:
|
|
Year Ended
December 31,
|
||||||
|
|
2007
|
2006
|
|||||
|
Volatility
|
80
|
%
|
80
|
%
|
|||
|
Weighted-average
volatility
|
80
|
%
|
80
|
%
|
|||
|
Risk-free
interest rate
|
3.57%-4.66
|
%
|
4.50%-5.05
|
%
|
|||
|
Expected
life (years)
|
5
|
5
|
|||||
|
Dividend
|
0
|
0
|
|||||
|
Weighted-average
exercise price
|
$
|
0.57
|
$
|
0.99
|
|||
|
Weighted-average
grant-date fair value
|
$
|
0.38
|
$
|
0.62
|
|||
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, 2006
|
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
|
1,380,000
|
$
|
0.57
|
||||||||||
|
Options
exercised
|
(25,000
|
)
|
$
|
0.01
|
|||||||||
|
Outstanding
at December 31, 2007
|
4,847,651
|
$
|
0.67
|
8.1
|
$
|
1,308,961
|
|||||||
|
Exercisable
at December 31, 2007
|
3,125,978
|
$
|
0.68
|
7.3
|
$
|
1,177,066
|
|||||||
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, 2007 and 2006, the total
intrinsic value of options exercised was $18,750 and $134,250, respectively
and
the total amount of cash received from exercise of these options was $250 and
$750, respectively.
As
of
December 31, 2007 there was approximately $643,000 of total unrecognized
compensation cost related to unvested share-based compensation arrangements.
Of
this total amount, 51%, 35% and 14% is expected to be recognized during 2008,
2009 and 2010, respectively. The Company expects 1,721,673 in unvested options
to vest in the future. The weighted average grant date fair value of vested
and
unvested options outstanding at December 31, 2007 was $0.39 and $0.41,
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 years ended December 31, 2007
and
2006 was approximately $701,267 and $415,000, respectively.
41
On
January 2, 2008, options to purchase 40,000 shares of our common stock were
granted to each of our six non-employee directors and options to purchase a
total of 95,000 shares of our common stock were granted to consultants. The
director and consultant grants were at the closing price of our common
stock on that day. These options vest on a quarterly basis over a two-year
period. On January 16, 2008, an option to purchase 100,000 shares was exercised
by one of our directors for total consideration of $1,000.
7.
INCOME TAXES
The
Company’s deferred tax assets consisted of the following at December 31:
|
2007
|
2006
|
||||||
|
Net
operating loss carryforwards
|
$
|
4,547,000
|
$
|
3,700,000
|
|||
|
Research
and development
expenses
|
9,718,000
|
3,581,000
|
|||||
|
Tax
credits
|
1,880,000
|
550,000
|
|||||
|
Capital
loss carryforward
|
403,000
|
403,000
|
|||||
|
Stock-based
compensation
|
375,000
|
||||||
|
Gross
deferred tax asset
|
16,923,000
|
8,234,000
|
|||||
|
Valuation
allowance
|
(16,923,000
|
)
|
(8,234,000
|
)
|
|||
|
Net
deferred tax asset
|
$
|
—
|
$
|
—
|
|||
As
of
December 31, 2007, the Company had federal and state net operating loss
carryforwards of approximately $13,198,000 and $7,031,000 respectively, which
expire through 2027. In addition, the Company has federal and state research
and
development and investment tax credits of approximately $1,292,000 and $892,000,
respectively which expire through 2027. 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 have occurred 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. In both 2007 and 2006, the increase in the valuation
allowance represents the principal difference between the Company’s total
statutory tax rate of approximately 40% and its effective rate of 0%.
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an
Interpretation of FASB Statement No. 109” (“FIN No. 48”), which clarifies the
accounting for uncertainty in income tax positions. This interpretation requires
that the Company recognize in its financial statements the impact of a tax
position if that position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of FIN No. 48
are
effective for financial statements for fiscal years beginning after December
15,
2006. The cumulative effect of applying the provisions of FIN No. 48, if any,
are required to be recorded as an adjustment to accumulated deficit. The Company
adopted FIN No. 48 effective January 1, 2007. Upon adoption, there was no
adjustment to accumulated deficit as the Company had no unrecognized tax
benefits, and there were no accrued interest or penalties related to tax
contingencies.
The
Company did not have any unrecognized tax benefits or accrued interest and
penalties at any time during the year ended December 31, 2007, and does not
anticipate having any unrecognized tax benefits over the next twelve months.
The
Company is subject to audit by the IRS for tax periods commencing January 1,
2004.
8.
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.
42
The
following potentially dilutive securities have been excluded from the
computation of diluted net loss per share since their inclusion would be
antidilutive:
|
|
Year Ended
December 31,
|
||||||
|
|
2007
|
2006
|
|||||
|
Stock
options
|
4,847,651
|
3,492,651
|
|||||
|
Warrants
|
26,873,047
|
14,561,449
|
|||||
|
Conversion
of preferred stock
|
18,264,000
|
2,417,774
|
|||||
9.
COMMITMENTS
On
May
25, 2007, the Company entered into a twenty-six-month lease for office space,
commencing July 1, 2007. Monthly rent is $7,175 per month for the first two
months and $7,675 per month for the remaining 24 months. Rent expense was
$81,450 and $62,625 the years ended December 31, 2007 and 2006, respectively.
Future minimum lease payments under this non-cancelable lease are $92,100 in
2008 and $61,400 in 2009.
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.
If
a
royalty is not being paid to ZAO BAM on net sales of oxidized glutathione
products, then the Company is required to pay ZAO BAM 3% of all license
revenues. If license revenues exceed the Company’s cumulative expenditures
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, then the Company would be required
to
pay ZAO BAM an additional 9% of the amount by which license revenues exceed
the
Company’s cumulative expenditures.
As
a
result of the assignment to Novelos of the exclusive worldwide intellectual
property and marketing rights of oxidized glutathione (excluding Russia
and the other states of the former Soviet Union), Novelos is obligated to the
Oxford Group, Ltd. for future royalties. One
of
the Company’s directors is president of Oxford Group, Ltd. Pursuant to the
agreement, as revised May 26, 2005, 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.
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.
In
October 2007, the Company amended the contract to increase its remaining
purchase commitment from $135,000 to approximately $2,000,000 through January
2008. As of December 31, 2007, approximately $1,000,000 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, originally expiring
in
August 2007 and renewed through March 2008. The balance on the standby letter
of
credit at December 31, 2007 equals the remaining purchase commitment of
$1,000,000. In connection with the letter of credit, the Company has pledged
cash of approximately $1,185,000 to the bank as collateral on the letter of
credit. The pledged cash is reflected as restricted cash on the balance sheet.
43
On
July
15, 2005, the Company entered into an employment agreement with Christopher
J.
Pazoles, 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
its terms. 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. In addition, his benefits will
be
paid for the 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 has been renewed for an additional one-year term
in
accordance with its terms. 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.
ITEM
8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM
8a. CONTROLS AND PROCEDURES
Management's
report on internal control over financial reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) of the
Exchange Act. Internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and
that
our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on the
financial statements.
Under
the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of
the
effectiveness of our internal control over financial reporting based on criteria
established in the
Internal Control--Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
Management's evaluation included such elements as the design and operating
effectiveness of key financial reporting controls, process documentation,
accounting policies, and our overall control environment. Based on this
evaluation, our management concluded that our internal control over financial
reporting was effective as of December 31, 2007. This annual report does
not include an attestation report of the Company’s registered public accounting
firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by the Company’s registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission
that
permit the Company to provide only management’s report in this annual report.
Evaluation
of disclosure controls and procedures.
Based
on our management’s evaluation (with the participation of our principal
executive officer and principal financial officer), as of the end of the period
covered by this report, our principal executive officer and principal financial
officer have concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as
amended, (the “Exchange Act”)) are effective to ensure that information required
to be disclosed by us in reports that we file or submit under the Exchange
Act
is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
44
It
should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of
the
system are met. In addition, the design of any control system is based in part
on certain assumptions about the likelihood of future events. Because of these
and other inherent limitations of control systems, there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
Changes
in internal control over financial reporting.
Our
management, in connection with its evaluation of internal controls (with the
participation of our principal executive officer and principal financial
officer), did not identify any change in internal control over the financial
reporting process that occurred during our fourth fiscal quarter of 2007 that
would have materially affected, or would have been reasonably likely to
materially affect, our internal control over financial reporting.
ITEM
8B. OTHER
INFORMATION
None.
45
Part
III
ITEM
9. DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Our
current directors and executive officers are:
|
Name
|
Age
|
Position
|
||
|
Stephen
A. Hill,
B.M. B.Ch., M.A., F.R.C.S.
|
49
|
Chairman
of the Board
|
||
|
Harry
S. Palmin
|
38
|
President,
Chief Executive Officer, Director
|
||
|
M.
Taylor Burtis
|
56
|
Vice
President of Regulatory, Quality and Compliance
|
||
|
Christopher
J. Pazoles, Ph.D.
|
57
|
Vice
President of Research and Development
|
||
|
Joanne
M. Protano
|
39
|
Vice
President, Chief Financial Officer and Treasurer
|
||
|
Kristin
C. Schuhwerk
|
37
|
Vice
President of Clinical Development and Operations
|
||
|
Michael
J. Doyle (1) (2) (3)
|
49
|
Director
|
||
|
Sim
Fass, Ph.D. (1) (2) (3)
|
66
|
Director
|
||
|
James
S. Manuso, Ph.D.
|
59
|
Director
|
||
|
David
B. McWilliams (2) (3)
|
64
|
Director
|
||
|
Simyon
Palmin
|
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.
Stephen
A. Hill, B.M. B.Ch., M.A., F.R.C.S.
Dr. Hill
was elected our chairman of the board of directors in September 2007. Dr. Hill
has served as ArQule's President and Chief Executive Officer since April 1999,
a
position from which he has resigned effective March 31, 2008. As of April 1,
2008, Dr. Hill will join Solvay Pharmaceuticals, Inc. as its President and
Chief
Executive Officer. Before joining ArQule, Dr. Hill was the Head of Global Drug
Development at F. Hoffmann-La Roche Ltd. from 1997 to 1999. Dr. Hill joined
Roche in 1989 as Medical Adviser to Roche Products in the United Kingdom. He
held several senior positions at Roche, including Medical Director where he
was
responsible for clinical trials of compounds across a broad range of therapeutic
areas, including CNS, HIV, cardiovascular, metabolic and oncology products.
Subsequently, he served as Head of International Drug Regulatory Affairs at
Roche headquarters in Basel, Switzerland, where he led the regulatory
submissions for seven major new chemical entities. Dr. Hill also was a member
of
Roche's Portfolio Management, Research, Development and Pharmaceutical Division
Executive Boards. Prior to Roche, Dr. Hill served seven years with the National
Health Service in the United Kingdom in General and Orthopedic Surgery. Dr.
Hill
is a Fellow of the Royal College of Surgeons of England and holds his scientific
and medical degrees from St. Catherine's College at Oxford University.
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 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.
46
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.
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.
Joanne
M. Protano.
Ms.
Protano was appointed our vice president, chief financial and accounting
officer, and treasurer in December 2007. She previously held the position of
Senior Director of Finance and Controller of the Company from June 2006 to
December 2007. From 1996 to 2006, she held various management and senior
management positions with Ascential Software, Inc. and predecessor companies
including Assistant Controller, Reporting for Ascential Software, Vice President
and Chief Financial Officer for the Ascential Software Division of Informix
Software, Inc. and Corporate Controller of Ardent Software, Inc. Prior to her
tenure in the technology industry, from 1990 to 1996 she was employed by
Deloitte and Touche LLP as an audit manager, where she practiced as a certified
public accountant serving technology and healthcare clients. Ms. Protano
received a B.S. in business administration from Bryant College.
Kristin
C. Schuhwerk. Ms.
Schuhwerk was appointed our vice president of clinical development and
operations in December 2007. She previously served as our Director/Senior
Director of Operations from July 2005 to December 2007. Prior to her employment
at Novelos, she worked in the biopharmaceutical industry managing and overseeing
business operations for multiple global Phase 2 and 3 clinical studies. From
2002 to 2005 she held the positions of Senior Project Manager and Director
of
Planning and Business Operations in Clinical Development at Antigenics, Inc.,
a
cancer biotechnology company. From 1993 to 2002, she held research, project
management and management positions at Boston University Medical Center, Parexel
International, AstraZeneca and Brigham & Women’s Hospital. Ms. Schuhwerk
earned a B.S. degree in Chemistry from the University of New Hampshire.
Michael
J. Doyle.
Mr.
Doyle has served as one of our directors since October 2005. Since October
2007
he has served as the chief executive officer of Medsphere Systems Corporation.
From April 2006 to June 2007, he 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.
Sim
Fass,
Ph.D.
Dr.
Fass has served as one of our directors since February 2005. Dr. Fass, now
retired, 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.
47
James
S. Manuso, Ph.D.
Dr.
Manuso was elected as one of our directors in August 2007. Since January 2005,
Dr. Manuso has served as Chairman, President and Chief Executive Officer of
SuperGen, Inc. and has served as a director of SuperGen since February 2001.
Dr.
Manuso is co-founder and former president and chief executive officer of
Galenica Pharmaceuticals, Inc. Dr. Manuso co-founded and was general partner
of
PrimeTech Partners, a biotechnology venture management partnership, from 1998
to
2002, and Managing General Partner of The Channel Group LLC, an international
life sciences corporate advisory firm. He was also president of Manuso,
Alexander & Associates, Inc., management consultants and financial advisors
to pharmaceutical and biotechnology companies. Dr. Manuso was a vice president
and Director of Health Care Planning and Development for The Equitable Companies
(now Group Axa), where he also served as Acting Medical Director. He currently
serves on the board of privately-held KineMed, Inc. and Merrion Pharmaceuticals
Ltd. (Dublin, Ireland). Previously, he served on the boards of Inflazyme
Pharmaceuticals, Inc., Symbiontics, Inc., Quark Biotech, Inc., Galenica
Pharmaceuticals, Inc., and Supratek Pharma, Inc. Dr. Manuso earned a B.A. in
economics and chemistry from New York University, a Ph.D. in experimental
psychophysiology from the Graduate Faculty of The New School University, a
certificate in health systems management from Harvard Business School, and
an
executive M.B.A. from Columbia Business School.
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 from Washington and Jefferson
College.
Simyon
Palmin.
Mr.
Palmin founded us in 1996. He served as our chairman of the board from 1996
until September 2007 and currently serves as a director and our director of
Russian relations. 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.
Howard
M. Schneider.
Mr.
Schneider has served as one of our directors since February 2005. Mr. Schneider
is currently retired. From January to December 2003, he served as chief
executive officer of Metrosoft, Inc., and had been an advisor to such company
from July to December 2002. 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. in economics
from Harvard College and a M.B.A. from New York University.
Code
of Ethics
The
board
of directors has adopted a code of ethics applicable to all of our directors,
officers and employees, including our principal executive officer, principal
financial officer and principal accounting officer. A copy of the Code of Ethics
is available at our website www.novelos.com.
ITEM
10. EXECUTIVE
COMPENSATION
Executive
Officer Compensation
Summary
Compensation: The
following table sets forth certain information about the compensation we paid
or
accrued with respect to our principal 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, 2007 and whose
annual compensation exceeded $100,000 for that year.
48
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)
|
2007
|
$
|
245,000
|
$
|
37,500
|
$
|
59,660
|
$
|
0
|
$
|
342,160
|
||||||||
|
President,
Chief Executive Officer
|
2006
|
225,000
|
50,000
|
91,410
|
0
|
366,410
|
|||||||||||||
|
Christopher
J. Pazoles (2)
|
2007
|
$
|
216,720
|
$
|
30,000
|
$
|
37,288
|
$
|
0
|
$
|
284,008
|
||||||||
|
Vice
President of Research and
Development
|
2006
|
199,200
|
40,320
|
60,940
|
0
|
300,460
|
|||||||||||||
|
M.
Taylor Burtis (3)
|
2007
|
$
|
203,175
|
$
|
20,000
|
$
|
29,830
|
$
|
0
|
$
|
253,005
|
||||||||
|
Vice
President of Quality,
Regulatory
and Compliance
|
2006
|
186,750
|
37,800
|
60,940
|
0
|
285,490
|
|||||||||||||
_____________________________
(1) On
December 17, 2007, the board of directors approved an increase in Mr. H.
Palmin’s annual base salary to $270,000, effective January 1, 2008.
(2) On
December 17, 2007, the board of directors approved an increase in Dr. Pazoles’
annual base salary to $223.000, effective January 1, 2008.
(3)
On
December 17, 2007, the board of directors approved an increase in Ms. Burtis’
annual base salary to $218,000, effective January 1, 2008.
(4)
Bonus
amounts shown in this column relate to services performed in the year shown,
but
were paid in the subsequent year. The bonus amount shown for 2007 represents
50%
of the award approved by the compensation committee. The remaining 50% is
payable upon the completion of an equity financing during 2008.
(5)
The
fair
value of each stock award was estimated on the grant date using the
Black-Scholes option-pricing model.
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. The
agreement is automatically renewed for one-year terms unless 90-day notice
is
provided by either party. The agreement has been renewed for an additional
one-year term in accordance with its terms. On
December 17, 2007, the Board of Directors approved an increase in Mr. Palmin’s
annual salary to $270,000 effective January 1, 2008. 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.
49
“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
whereby he agreed to serve as our 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 its terms.
The agreement provides for minimum salary and bonus amounts during the first
two
years of his employment. These minimum amounts have been satisfied. 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.
“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, 2007 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
|
2007
|
(1)
|
—
|
200,000
|
$
|
0.45
|
12/17/2017
|
|||||||||
|
2006
|
(1)
|
50,000
|
100,000
|
0.91
|
12/11/2016
|
|||||||||||
|
2005
|
(2)
|
250,000
|
—
|
0.01
|
1/31/2015
|
|||||||||||
|
2005
|
(2)
|
150,000
|
—
|
0.01
|
3/31/2015
|
|||||||||||
|
2004
|
(3)
|
330,000
|
—
|
0.01
|
4/1/2014
|
|||||||||||
|
2003
|
(4)
|
7,130
|
—
|
0.70
|
8/1/2013
|
|||||||||||
|
Christopher
J. Pazoles
|
2007
|
(1)
|
—
|
125,000
|
$
|
0.45
|
12/17/2017
|
|||||||||
|
2006
|
(1)
|
33,333
|
66,667
|
0.91
|
12/11/2016
|
|||||||||||
|
2005
|
(5)
|
200,000
|
—
|
0.01
|
4/8/2015
|
|||||||||||
|
2004
|
(6)
|
16,667
|
—
|
0.01
|
4/1/2014
|
|||||||||||
|
M.
Taylor Burtis
|
2007
|
(1)
|
—
|
100,000
|
$
|
0.45
|
12/17/2017
|
|||||||||
|
2006
|
(1)
|
33,333
|
66,667
|
0.91
|
12/11/2016
|
|||||||||||
|
2005
|
(7)
|
150,000
|
—
|
2.20
|
7/1/2015
|
|||||||||||
50
|
(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.
|
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, 2007.
51
|
Name
and Principal Position
|
Year
|
Director
Fees
($)
(2)
|
Option
Awards
($)
(3)
|
All
other compensation
($)
|
Total
($)
|
|||||||||||
|
Stephen
A. Hill, Chairman
|
2007
|
$
|
10,542
|
$
|
70,020
|
$
|
—
|
$
|
80,562
|
|||||||
|
Michael
J. Doyle, Director
|
2007
|
31,500
|
17,919
|
—
|
49,419
|
|||||||||||
|
Sim
Fass, Director
|
2007
|
30,750
|
17,919
|
—
|
48,669
|
|||||||||||
|
James
S. Manuso, Director
|
2007
|
8,250
|
37,510
|
45,760
|
||||||||||||
|
David
B. McWilliams, Director
|
2007
|
25,000
|
17,919
|
—
|
42,919
|
|||||||||||
|
Simyon
Palmin, Director and director of
Russian relations (1)
|
2007
|
—
|
—
|
81,880
|
81,880
|
|||||||||||
|
Howard
M. Schneider, Director
|
2007
|
38,000
|
17,919
|
—
|
55,919
|
|||||||||||
|
(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
2007, we paid our non-employee directors a cash fee of $4,000 per quarter.
The
non-employee directors also received a fee of $1,500 for any board or committee
meeting attended or $750 for each telephonic board or committee meeting in
which
the director participated. We also paid our chairman an additional annual fee
in
the amount of $15,000 (prorated for the portion of the year during which he
served as chairman), each non-employee director who serves as the chair of
the
audit committee an additional annual fee of $10,000 and each non-employee
director who serves as the chairman of the compensation and nominating and
corporate governance committees an additional annual fee of $5,000. We
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
2007, each non-employee director received an annual stock option grant of 30,000
shares of our common stock at the closing price of our common stock on the
first
trading day of the fiscal year. These options vest on a quarterly basis over
a
two-year period.
Effective
January 1, 2008, the quarterly cash fee payable to non-employee directors was
increased to $5,000. Payment of the $1,000 increase over the 2007 fees will
be
deferred until the closing of an equity financing.
On
January 2, 2008, options to purchase 40,000 shares of our common stock were
granted for 2008 to each of our non-employee directors at the closing price
of
our common stock on that day. These options vest on a quarterly basis over
a
two-year period.
Equity
compensation plans
The
following table provides information as of December 31, 2007 regarding shares
authorized for issuance under our equity compensation plans, including
individual compensation arrangements.
We
have
two equity compensation plans approved by our stockholders: the 2000 Stock
Option and Incentive Plan and the 2006 Stock Incentive Plan. We have also issued
options to our directors and consultants that were not approved by our
stockholders. These options are exercisable within a ten-year period from the
date of the grant and vest at various intervals with all options being fully
vested within three years of the date of grant. The option price per share
is
not less than the fair market value of our common stock on the date of
grant.
52
Equity
compensation plan information
|
Plan
category
|
Number of shares to
be issued upon
exercise of
outstanding options,
warrants and rights
(#)
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
($)
|
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
|
2,293,873
|
$
|
0.81
|
2,780,000
|
||||||
|
Equity
compensation plans not approved by stockholders
|
2,553,778
|
$
|
0.55
|
0
|
||||||
|
Total
|
4,847,651
|
$
|
0.67
|
2,780,000
|
||||||
ITEM
11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
At
the
close of business on March 14, 2008, there were issued and outstanding
39,360,272 shares of our common stock. The following table provides information
regarding beneficial ownership of our common stock as of March 14,
2008:
|
·
|
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 that vest within 60 days of March
14,
2008.
|
Shares
Beneficially Owned (3)
|
|||||||||||||
|
Name
and Address of Beneficial Owner
|
Outstanding
|
Right to Acquire
|
Total
|
Percentage
|
|||||||||
|
Harry
S. Palmin (1)
|
582,118
|
787,130
|
1,369,248
|
3.4
|
%
|
||||||||
|
M.
Taylor Burtis
|
0
|
183,333
|
183,333
|
*
|
|||||||||
|
Christopher
J. Pazoles
|
0
|
250,000
|
250,000
|
*
|
|||||||||
|
Stephen
A. Hill
|
0
|
61,250
|
61,250
|
*
|
|||||||||
|
Michael
J. Doyle
|
0
|
140,625
|
140,625
|
*
|
|||||||||
53
|
Shares
Beneficially Owned (3)
|
|||||||||||||
|
Name
and Address of Beneficial Owner
|
Outstanding
|
Right to Acquire
|
Total
|
Percentage
|
|||||||||
|
Sim Fass
|
0
|
140,625
|
140,625
|
*
|
|||||||||
|
James
S. Manuso
|
0
|
30,000
|
30,000
|
*
|
|||||||||
|
David
McWilliams
|
0
|
193,403
|
193,403
|
*
|
|||||||||
|
Simyon
Palmin (2)
|
1,947,481
|
487,826
|
2,435,307
|
6.1
|
%
|
||||||||
|
Howard
Schneider
|
100,000
|
40,625
|
140,625
|
*
|
|||||||||
|
All
directors and officers as a group (12 persons)
|
2,629,599
|
2,473,150
|
5,102,749
|
12.2
|
%
|
||||||||
* Less
than
one percent.
(1)
Shares owned by H. Palmin include 94,000 shares owned by his wife, Deanna
Palmin.
(2)
Shares owned by S. Palmin include 236,542 shares owned by his wife, Alla Palmin.
(3)
The
terms of the Series B Preferred Stock and common stock purchase warrants provide
that the number of shares of common stock to be obtained by each of the holders
of Series B Preferred Stock and common stock purchase warrants, upon conversion
of the Series B Preferred Stock or exercise of the 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 in the
certificate of designations and warrant agreement, of our outstanding common
stock, provided, however that this limitation may be revoked by the stockholder
upon 61 days prior notice to us. For this reason, holders of our Series B
Preferred Stock who might otherwise have the right to acquire 5% or more of
our
common stock have been omitted from this table. Similar provisions apply to
outstanding shares of our Series C Preferred Stock and common stock purchase
warrants issued to the holders of Series C Preferred Stock and therefore holders
of our Series C Preferred Stock who might otherwise have the right to acquire
5%
or more of our common stock have also been omitted from this table.
ITEM
12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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 company that provides consulting and financial
services, a royalty in the amount of 0.8% of our net sales of oxidized
glutathione-based products. One of our directors is president of Oxford Group,
Ltd.
We
are
obligated to ZAO BAM, the Russian company that invented NOV-002 and NOV-205,
under a royalty and technology transfer agreement. One of our former directors,
Mark Balazovsky, is the majority shareholder of ZAO BAM. Mr. Balazovsky resigned
from our 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.
If
a
royalty is not being paid to ZAO BAM on net sales of oxidized glutathione
products, then the Company is required to pay ZAO BAM 3% of all license
revenues. If license revenues exceed the Company’s cumulative expenditures
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, then the Company would be required
to
pay ZAO BAM an additional 9% of the amount by which license revenues exceed
the
Company’s cumulative expenditures.
54
Director
Independence
Each
member of the Audit Committee, the Compensation Committee and the Nominating
and
Corporate Governance Committee meets the independence requirements of the Nasdaq
Stock Market for membership on the committees on which he serves.
The
board of directors considered the information included in transactions with
related parties as outlined above along with other information the board
considered relevant, when considering the independence of each director.
Messrs.
Harry and Simyon Palmin are not independent directors.
ITEM
13. EXHIBITS
|
Filed
|
Incorporated
by Reference
|
|||||||||
|
with this
|
||||||||||
|
Exhibit
|
Form
|
Exhibit
|
||||||||
|
No.
|
Description
|
10-KSB
|
Form
|
Filing
Date
|
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
|
Amended
and Restated Certificate of Incorporation filed as Exhibit A
to the
Certificate of Merger merging Nove Acquisition, Inc. with and
into Novelos
Therapeutics, Inc. dated May 26, 2005
|
10-QSB
|
August
10, 2007
|
3.1
|
||||||
|
3.2
|
Certificate
of Merger merging Common Horizons, Inc. with and into Novelos
Therapeutics, Inc. dated June 13, 2005
|
10-QSB
|
August
10, 2007
|
3.2
|
||||||
|
3.3
|
Certificate
of Correction dated March 3, 2006
|
10-QSB
|
August
10, 2007
|
3.3
|
||||||
|
3.4
|
Certificate
of Amendment to Amended and Restated Certificate of Incorporation
dated
July 16, 2007
|
10-QSB
|
August
10, 2007
|
3.4
|
||||||
|
3.5
|
Certificate
of Designations of Series B convertible preferred stock
|
10-QSB
|
August
10, 2007
|
3.5
|
||||||
|
3.6
|
Certificate
of Designations of Series C cumulative convertible preferred
stock
|
10-QSB
|
August
10, 2007
|
3.6
|
||||||
|
3.7
|
By-laws
|
8-K
|
June
17, 2005
|
2
|
||||||
|
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
|
||||||
55
|
Filed
|
Incorporated
by Reference
|
|||||||||
|
with this
|
||||||||||
|
Exhibit
|
Form
|
Exhibit
|
||||||||
|
No.
|
Description
|
10-KSB
|
Form
|
Filing
Date
|
No.
|
|||||
|
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
|
||||||
|
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
|
||||||
56
|
Filed
|
Incorporated
by Reference
|
|||||||||
|
with this
|
||||||||||
|
Exhibit
|
Form
|
Exhibit
|
||||||||
|
No.
|
Description
|
10-KSB
|
Form
|
Filing
Date
|
No.
|
|||||
|
31.1
|
Certification
of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
X
|
||||||||
|
31.2
|
Certification
of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
X
|
||||||||
|
32.1
|
Certification
of chief executive officer and chief financial officer pursuant
to Section
906 of the Sarbanes-Oxley Act of 2002
|
X
|
||||||||
**
Management contract or compensatory plan.
57
ITEM
13. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Aggregate
fees for professional services by Stowe & Degon for the years ended December
31, 2007 and December 31, 2006 were:
|
2007
|
2006
|
||||||
|
Audit
|
$
|
81,500
|
$
|
79,500
|
|||
|
Audit
Related
|
14,125
|
—
|
|||||
|
Tax
|
—
|
—
|
|||||
|
All
Other
|
—
|
—
|
|||||
|
Total
|
$
|
95,625
|
$
|
79,500
|
|||
Audit
Fees: Audit
fees were for professional services rendered for the audit of our annual
financial statements, the review of quarterly financial statements and the
preparation of statutory and regulatory filings.
Audit-Related
Fees: Audit-related
fees were for professional services rendered in connection with consents
and
assistance with review of registration statements filed with the SEC.
Tax
Fees: Tax
fees
consist of fees billed for professional services for tax compliance, tax
planning and tax advice. These services include assistance regarding federal,
state and international tax compliance and planning, tax audit defense, and
mergers and acquisitions. No such services were provided by Stowe &
Degon.
All
Other Fees: All
other
fees include assistance with miscellaneous reporting requirements and
interpretation of technical issues. No such services were provided by Stowe
& Degon.
At
present, our audit committee approves each engagement for audit and non-audit
services before we engage Stowe & Degon to provide those
services.
Our
audit
committee has not established any pre-approval policies or procedures that
would
allow our management to engage Stowe & Degon to provide any specified
services with only an obligation to notify the audit committee of the engagement
for those services. None of the services provided by Stowe & Degon for 2007
or 2006 were obtained in reliance on the waiver of the pre-approval requirement
afforded in SEC regulations.
58
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
NOVELOS
THERAPEUTICS, INC.
|
||
|
By:
|
/s/
Harry S. Palmin
|
|
|
Harry
S. Palmin
|
||
|
Title:
President, Chief Executive Officer
|
||
|
Date:
March
24, 2008
|
||
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
|
/s/
Harry S. Palmin
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| Harry S. Palmin | ||
| Title: Chief Executive Officer and Director (Principal Executive Officer) | ||
|
Date:
March 24, 2008
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By:
|
/s/
Joanne M. Protano
|
|
| Joanne M. Protano | ||
| Title: Chief Financial Officer (Principal Accounting Officer) | ||
|
Date:
March 24, 2008
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||
|
By:
|
/s/
Stephen A. Hill
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| Stephen A. Hill | ||
| Title: Chairman of the Board of Directors | ||
|
Date:
March 24, 2008
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||
|
By:
|
/s/
Michael J. Doyle
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| Michael J. Doyle | ||
| Title: Director | ||
|
Date:
March 24, 2008
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||
|
By:
|
/s/
Sim Fass
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| Sim Fass | ||
| Title: Director | ||
|
Date:
March 24, 2008
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||
|
By:
|
/s/
James S. Manuso
|
|
|
James
S. Manuso
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||
|
Title:
Director
|
||
|
Date:
March 24, 2008
|
||
|
By:
|
/s/
David B. McWilliams
|
|
|
David
B. McWilliams
|
||
|
Title:
Director
|
||
|
Date:
March 24, 2008
|
||
|
By:
|
/s/
Simyon Palmin
|
|
|
Simyon
Palmin
|
||
|
Title:
Director
|
||
|
Date:
March 24, 2008
|
||
|
By:
|
/s/
Howard M. Schneider
|
|
|
Howard
M. Schneider
|
||
|
Title:
Director
|
||
|
Date:
March 24, 2008
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||