SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
FOR
ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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x
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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,
2005
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o
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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 1-10113
ACURA
PHARMACEUTICALS, INC.
(Exact
name of registrant as specified in its charter)
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NEW
YORK
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11-0853640
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(State
or other jurisdiction of
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(I.R.S.
Employer
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Incorporation
or organization)
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Identification
No.)
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616
N. NORTH COURT, SUITE 120,
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PALATINE,
ILLINOIS
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60067
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(Address
of principal executive offices)
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(Zip
Code)
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REGISTRANT'S
TELEPHONE NUMBER, INCLUDING AREA CODE:
847
705
7709
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(TITLE
OF
CLASS)
NONE
SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(TITLE
OF
CLASS)
COMMON
STOCK, PAR VALUE $0.01
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act Yes
o
No
x
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes
x
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K.
o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Act). Yes
o
No
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
As
of
February 1, 2006, the registrant had 329,293,522 shares of Common Stock, par
value $0.01, outstanding. Based on the average closing bid and asked prices
of
the Common Stock on June 30, 2005 ($0.595) (the last business day of the
registrant's most recently completed second fiscal quarter), the aggregate
market value of the voting stock held by non-affiliates of the registrant was
approximately
$
39,691,511.
DOCUMENTS
INCORPORATED BY REFERENCE
NONE
CONTENTS
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PAGE
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PART
I
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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10
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Item
1B.
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Unresolved
Staff Comments
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19
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Item
2.
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Properties
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19
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Item
3.
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Legal
Proceedings
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20
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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20
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PART
II
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Item
5.
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Market
for Registrant's Common Equity and Related Stockholder Matters and
Issuer
Purchases of Equity Securities
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20
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Item
6.
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Selected
Financial Data
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21
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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22
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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35
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Item
8.
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Financial
Statements and Supplementary Data
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35
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Item
9.
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Changes
in and Disagreement with Accountants on Accounting and Financial
Disclosure
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35
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Item
9A.
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Controls
and Procedures
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35
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Item
9B.
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Other
Information
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35
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PART
III
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Item
10.
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Directors
and Executive Officers of the Registrant
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36
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Item
11.
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Executive
Compensation
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39
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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47
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Item
13.
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Certain
Relationships and Related Transactions
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48
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Item
14.
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Principal
Accountant Fees and Services
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50
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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51
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Signatures
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52
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Index
to Consolidated Financial Statements
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F-1
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FORWARD-LOOKING
STATEMENTS
Certain
statements throughout this Report constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Acura Pharmaceuticals, Inc. (the "Company"), or industry
results, to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. The most
significant of such factors include, but are not limited to, the Company’s
ability to secure additional financing to fund continued product development
and
operations, the Company’s ability to enter into contractual arrangements with
qualified pharmaceutical partners to license, develop and commercialize the
Company’s technology and product candidates, and the Company’s ability to
fulfill the U.S. Food and Drug Administration’s requirements for approving the
Company’s product candidates for commercial distribution in the United States.
Other important factors that may also affect future results include, but are
not
limited to: the Company’s ability to attract and retain highly skilled
personnel; its ability to secure and protect its patents, trademarks and
proprietary rights; its ability to avoid infringement of patents, trademarks
and
other proprietary rights or trade secrets of third parties; litigation or
regulatory action that could require the Company to pay significant damages
or
change the way it conducts its business; the Company’s ability to compete
successfully against current and future competitors; its dependence on
third-party suppliers of raw materials; its ability to secure U.S. Drug
Enforcement Administration quotas and source controlled substances that
constitute the active ingredients of the Company’s products in development;
difficulties or delays in clinical trials for Company products or in the
manufacture of Company products; and other risks and uncertainties detailed
in
this Report. The Company is at development stage and may not ever have any
products or technologies that generate revenue. When used in this Report, the
words "estimate," "project," "anticipate," "expect," "intend," "believe," and
similar expressions are intended to identify forward-looking
statements.
PART
I
ITEM
1. BUSINESS
General
Acura
Pharmaceuticals, Inc.
is
a
specialty pharmaceutical company primarily engaged in research, development
and
manufacture of innovative abuse deterrent, abuse resistant and tamper resistant
formulations ("Aversion® Technology") intended for use in orally administered
opioid-containing pharmaceutical products. The Company’s lead product candidate
utilizing its
Aversion®
Technology, OxyADF
TM
tablets,
(formerly referred to by the Company as Product Candidate #2) is being developed
pursuant to an active investigational new drug application (“IND”) on file with
the U.S. Food and Drug Administration (“FDA”). The status of the development of
the Aversion®
Technology
and OxyADF™ tablets are described below under the captions “Aversion®
Technology” and “OxyADF™ Development Program”.
In
addition, to a much lesser extent, during 2004 and early 2005, the Company
was
engaged in the research, development and manufacture of proprietary, high-yield,
short cycle time, environmentally sensitive opioid synthesis processes (the
"Opioid Synthesis Technologies") intended for use in the commercial production
of certain bulk opioid active pharmaceutical ingredients (“APIs”). In early
2005, the Company suspended development and commercialization efforts relating
to the Opioid Synthesis Technologies. The status of the Opioid Synthesis
Technologies is described below under the caption “Opioid Synthesis
Technologies”.
As
of the
date of this Report the Company had three US non-provisional and two
international patent applications pending relating to its Aversion® Technology.
Additionally, as of the date of this Report, the Company had six US patents
issued and three US patent applications pending related to its Opioid Synthesis
Technologies.
As of
the date of this Report, the Company retained ownership of all issued patents,
patent applications, other intellectual property and commercial rights to its
product candidates, Aversion® Technology and Opioid Synthesis
Technologies.
The
Company conducts research, development, laboratory, manufacturing and
warehousing activities for the Aversion® Technology at its Culver, Indiana
facility (the "Culver Facility"). The Culver Facility is registered by the
U.S.
Drug Enforcement Administration (the "DEA") to perform research, development
and
manufacture for certain Schedule II - V controlled substances in bulk and
finished dosage forms. In 2001, the Company filed with the DEA an application
for registration (the “Import Registration”) to import narcotic raw materials
("NRMs"). The status of the application for the Import Registration is described
below under the caption "Import Registration."
The
Company performs pre-clinical and clinical research on its product candidates
through a combination of internal and external collaborations. The Company
has
and will continue to rely on contract research organizations ("CROs") to perform
key components of its product development activities. In the first quarter
of
2004, the Company entered into a Master Services Agreement with a full service
CRO with wide ranging capabilities and expertise in regulatory and clinical
development consultation, clinical trial and clinical data management,
biostatistics, medical writing, and other relevant research and development
services. On behalf of the Company, such full service CRO is engaged in writing
clinical trial protocols, contracting with clinical trial sites, compilation
of
regulatory documents, and making various regulatory submissions to the
FDA.
To
generate revenue, the Company expects to enter into development and
commercialization agreements with strategically focused pharmaceutical company
partners (the "Partners") providing that such Partners license the Company’s
product candidates utilizing the Aversion
®
Technology and further develop, register and commercialize multiple formulations
and strengths of such product candidates in the U.S. and international
territories. The Company expects to receive milestone payments and a share
of
profits and/or royalty payments derived from the Partners' sale of products
incorporating the Aversion® Technology. As of the date of this Report the
Company did not have executed collaborative agreements with Partners, nor can
there be any assurance that the Company will successfully enter into such
collaborative agreements in the future.
The
Company’s business involves inherent risk as set forth in Item 1A of this
Report. These risks include, among others, the need for FDA approval prior
to
commercial distribution of the Company’s product candidates in the United
States, acceptance by healthcare providers and third-party payers of such
product candidates, dependence on key personnel, determination of patentability
of our Aversion® Technology by the United States Patent and Trademark Office,
and freedom to operate for the Company’s product candidates.
The
Company is a publicly traded New York corporation established in 1935. As such,
the Company files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC").
These
filings are available to the public over the internet at the SEC's web site
at
http://www.sec.gov. You may also read and copy any document we file at the
SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room.
The
Company's internet address is www.acurapharm.com. We make available free of
charge, with a link to the SEC’s website, on www.acurapharm.com our annual,
quarterly and current reports and amendments to those reports, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. In addition, you may request a copy of these filings
(excluding exhibits) at no cost by contacting us at Acura Pharmaceuticals,
Inc.,
616 N. North Court, Suite 120, Palatine, Illinois 60067, Attn: Investor
Relations, 847.705.7709
Aversion®
Technology
The
Company is focused on research and development of innovative and proprietary
abuse deterrent, abuse resistant and tamper resistant formulation technologies
(“Aversion® Technology”) intended to discourage abuse of orally administered
opioid analgesic products. The Company believes that the internally developed
Aversion® Technology is applicable to both immediate release and extended
release orally administered tablets and capsules which are formulated with
an
opioid analgesic or other potentially abusable orally administered drug, such
as
an amphetamine, as an active ingredient. Company research and laboratory
experiments to date suggest that the Aversion® Technology may be formulated into
an orally administered tablet with the commonly utilized opioid active
pharmaceutical ingredients and related salts including morphine, codeine,
hydrocodone and oxycodone. The Aversion® Technology utilizes certain
pharmaceutical product excipients and other ingredients in addition to the
opioid API. The Aversion® Technology does
not
utilize
opioid antagonists. The Company believes that the Aversion® Technology will
discourage or deter a pre-existing opioid drug abuser, or a legitimate patient
properly using opioid containing analgesics for management of pain, from abusing
an orally administered opioid containing product. Provided the Aversion®
Technology is appropriately tested and proves successful in clinical trials,
of
which no assurance can be given, the Company believes that its Aversion®
Technology will discourage or deter the three most commonly utilized routes
of
opioid abuse, including (1) intravenous, (2) intranasal/snorting and (3) excess
oral consumption of tablets or capsules. However, the Company can provide no
assurance that such clinical testing will demonstrate that the Aversion®
Technology will discourage or deter abuse. In addition, if such abuse deterrent
characteristics are demonstrated, the Company can provide no assurance that
the
magnitude of such effect will be statistically significant or clinically
meaningful.
We
have
formulated and evaluated numerous distinct product candidates incorporating
the
Aversion® Technology. These product candidates are tablet formulations intended
for oral administration and contain, among other ingredients, widely prescribed
opioid active pharmaceutical ingredients. To date, all product candidates
utilizing our Aversion® Technology may be economically produced using a dry
blend and direct compression tablet manufacturing process.
Product
candidates formulated with Aversion® Technology are intended to reduce or
discourage all three common routes of abuse of tablet and capsule pharmaceutical
products including (i) intravenous injection of dissolved tablets, (ii)
inhalation/nasal snorting of crushed or pulverized tablets, and (iii)
intentional consumption of excessive numbers of tablets by oral
administration.
The
Company’s lead product candidate, OxyADF™, (formerly referred to by the Company
as Product Candidate #2), incorporates our Aversion® Technology in an immediate
release tablet formulation intended for oral administration. The Company has
clearance from the U. S. Food and Drug Administration (“FDA”) for testing
OxyADF™ tablets in a clinical trial program under an active Investigational New
Drug application ("IND"). The clinical development program is designed to
evaluate the efficacy, safety and tolerability of OxyADF™ tablets in both opioid
naïve patients and patients with a history of opioid abuse. Our goal is to
demonstrate that, when prescribed and used appropriately by patients, OxyADF™
tablets will provide effective analgesia and an adverse event profile similar
to
currently marketed products containing the same opioid active ingredient but
without our unique Aversion® Technology. The status of the development of
OxyADF™ tablets is more fully described below under the caption “OxyADF™
Development Program”.
To
receive clearance from the FDA for distribution and sale in the United States,
the Company’s product candidates formulated with Aversion® Technology will
require the development, compilation, submission, filing and final approval
by
the FDA of a 505(b)(2) new drug application (“NDA”) The FDA requirements for
approving product candidates for commercial distribution are more fully
described below under the caption “FDA Pharmaceutical Product Approvals”. The
FDA has confirmed in writing to the Company that OxyADF
TM
is an
appropriate product candidate for submission as a 505(b)(2) NDA. However, at
this stage, the Company can provide no assurances that OxyADF™ tablets or any
other product candidates formulated with Aversion® Technology will lead to an
NDA submission or that if an NDA is submitted, that the FDA will accept the
NDA
submission and approve these product candidates for commercial distribution
and
sale.
U.S.
Market for Opioid Products Incorporating Aversion® Technology
The
class
of pharmaceutical products exhibiting morphine-like properties is referred
to as
opioids, opioid agonists or opioid analgesics. The Company believes that
healthcare providers are generally not able to determine which, if any, of
their
prescriptions for opioid analgesics will ultimately be abused or diverted.
However, based on primary market research conducted by the Company, U.S. based
physicians perceive that nearly one out of six prescriptions for opioid
analgesics may be abused. The results of a survey published in 2006 of over
1,500 adults conducted by the market research firm of Schulman, Ronca and
Bucuvalas, Inc. revealed that 37% of those surveyed know someone personally
who
has abused opioid painkillers. Of those reporting knowing someone who has abused
opioid painkillers, ten percent revealed that they personally had abused these
products and nearly twenty percent of the abusers were identified as coworkers,
with the balance being identified as family members or acquaintances. The
uncertainty about which, if any, prescriptions for opioid analgesics will be
abused or diverted implies that certain segments of the U.S. market for
dispensed prescriptions for opioid analgesics represent a major opportunity
for
products formulated with our Aversion® Technology. The table below sets forth
commonly prescribed opioid analgesics in the U.S.
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Opioid
Active Ingredients
(Generic
Names)
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Frequently
Prescribed Opioid Analgesics
(Brand
Names)
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Oxycodone
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Percocet®,
Oxycontin®
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Hydrocodone
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Vicodin®,
Lortab®, Lorcet®
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Morphine
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Avinza®,
Kadian®, MSContin®
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Hydromorphone
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Dilaudid®,
Palladone®
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Codeine
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Tylenol®
with Codeine
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Tramadol
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Ultram®,
Ultracet®
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Propoxyphene
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Darvon®,
Darvocet®
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Fentanyl
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Duragesic®,
Actiq®
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Based
on
market research data purchased by the Company from IMS Health, for the 12 months
ending September 30, 2005, in the U.S. approximately 221 million total
prescriptions for the above major brands, minor brands and generic equivalents
thereto were dispensed. Of this total, approximately 18 million dispensed
prescriptions were for extended release products (usually administered once
every 8 to 24 hours) and 203 million dispensed prescriptions were for immediate
release products (usually administered every 4 to 6 hours). Extended release
products are more commonly prescribed for relief of pain for a duration ranging
from a few weeks to several months or longer. Immediate release products are
more commonly prescribed for relief of pain for a duration of generally less
than 30 days. The Company’s primary market research suggests that OxyADF™
tablets will be considered by healthcare providers for use in both the market
for immediate release and extended release opioid products.
The
potential for the development of tolerance, physical and/or psychological
dependence (i.e., addiction) with repeated use is a characteristic feature
of
most opioid containing drugs. Another concern associated with the use of opioids
is the diversion of these drugs from a patient in legitimate pain to other
individuals (non-patients) for illegitimate purposes. There are three basic
patterns of behavior leading to opioid abuse. The first involves individuals
whose opioid drug use begins in the context of medical treatment and who obtain
their initial drug supplies through prescriptions from physicians. The second
begins with experimental or "recreational" drug use and progresses to more
intensive use. A third pattern of abuse involves users who begin in one or
another of the preceding ways but later switch to oral opioids such as
methadone, obtained from organized addiction treatment programs. Physicians
cannot easily identify or predict which of their patients may fall into one
of
these behavior patterns.
Drug
abusers and/or addicts typically may obtain a commercial dosage form containing
an opioid analgesic and crush, shear, grind, chew, dissolve and/ or heat,
extract or otherwise manipulate the product so that a significant amount or
even
the entire amount of the drug becomes available for immediate absorption by
injection, inhalation, and/or oral consumption. There are various routes of
administration by which an abuser may commonly attempt to abuse an opioid
containing drug formulation. The most common methods include (1) intravenous
injection, (2) intranasal (e.g., snorting), and (3) repeated oral ingestion
of
excessive quantities of orally administered tablets or capsules. One mode of
abuse of oral solid opioid drug products involves first crushing/pulverizing
and
then mixing the tablet with water, and then subsequently extracting the opioid
component from the mixture for use in a solution suitable for intravenous
injection of the opioid to achieve a "high."
Attempts
have been made by several companies, as more fully described below under the
caption “Competition”, to develop technology to deter abuse of orally
administered opioid analgesics. Some of these attempts have included the use
of
an opioid antagonist in the oral dosage form designed to substantially block
the
analgesic effects of the opioid if one attempts to crush/grind the tablet and
snort the resulting powder or dissolve/extract the opioid and administer the
opioid drug intravenously. The Aversion® Technology does not utilize opioid
antagonists. A clear need exists for a formulation technology for commonly
used
immediate release and extended release tablets and capsules which discourages
misuse and minimizes or reduces the potential for physical or psychological
dependency. The need is particularly imperative for opioid analgesics. It is
with the growing concern about the illegitimate use of legitimate opioid
analgesics described above that the Company is pursuing development of its
Aversion® Technology.
OxyADF
TM
Development Program
The
Company’s lead product candidate, OxyADF™ tablets (formerly referred to by the
Company as Product Candidate #2) is an immediate release tablet formulation
intended for oral administration being developed pursuant to an active IND
on
file with the FDA. The FDA has confirmed in written correspondence to the
Company that OxyADF™ is an appropriate product candidate for submission as a
505(b)(2) NDA. Refer to the caption, “Government Regulation / FDA Pharmaceutical
Product Approvals” in this Report for a description of a 505(b)(2)
NDA.
To
date
the Company, in concert with its CROs has completed one phase I clinical study
and one phase II clinical study relating to development of OxyADF™ tablets. The
results from the phase I clinical study were used, among other things, to guide
the formulation of the OxyADF tablets used in the phase II clinical study.
Results from the phase II clinical study suggest that at the anticipated
recommended therapeutic doses in normal subjects, OxyADF tablets will provide
a
side effects profile similar to the same opioid active ingredient formulated
in
a tablet without the Company’s Aversion® Technology. The Company, intends to use
the data from such clinical studies in its 505(b)(2) NDA submission for
OxyADF™.
The
Company, in concert with an independent clinical CRO, has completed a pilot
and
a pivotal bioequivalence study for OxyADF™ tablets. The pivotal bioequivalence
study used tablets from batches manufactured by the Company at its Culver,
Indiana facility at a scale of sufficient size to fulfill the FDA’s requirements
for a 505(b)(2) NDA submission. The final report from the CRO for the pivotal
bioequivalence study confirms that OxyADF™ tablets are bioequivalent to the
applicable reference listed drug. The Company intends to use such data in its
505(b)(2) NDA submission for OxyADF™.
In
addition, the Company, in concert with an independent laboratory CRO, completed
a pivotal study to assess certain physical/chemical properties of OxyADF™ using
tablets from batches manufactured by the Company at its Culver, Indiana facility
at a scale of sufficient size to fulfill the FDA’s requirements for a 505(b)(2)
NDA submission. The final report from this pivotal laboratory study confirms
that extracting the active opioid ingredient from OxyADF™ tablets in a form
which may be administered via intravenous injection is substantially more
difficult than extracting the active opioid ingredient from several currently
marketed opioid-based commercial products. The Company intends to utilize the
data from this pivotal laboratory study in its 505(b)(2) NDA submission for
OxyADF™.
During
the first quarter of 2006, as a routine part of the development process for
OxyADF™ tablets, at the Company’s written request, the Company and the FDA
convened a face-to-face End of Phase II meeting (the “EOP2 Meeting”) for OxyADF
tablets. As part of the EOP2 Meeting, the Company and the FDA discussed, among
other things, the laboratory and clinical studies completed by the Company
to
date relating to OxyADF™ tablets and the remaining laboratory and clinical
studies anticipated to be completed prior to the submission of a 505(b)(2)
NDA
for OxyADF™ tablets. The Company believes the guidance provided by FDA at the
EOP2 Meeting clarifies the remaining development requirements relating to the
Company’s proposed indication and contemplated labeling for OxyADF™
tablets.
To
receive marketing authorization for commercial distribution in the United
States, OxyADF™ and any drug product formulated with the Aversion® Technology
will require the development, compilation, submission and filing of a NDA and
approval of such application by the FDA. Estimating the dates of completion
of
laboratory and clinical development, and the costs to complete development,
of
the Company's product candidates, including OxyADF™, would be highly
speculative, subjective and potentially misleading. Pharmaceutical products
require significant time to research, develop and commercialize. The Company
expects to reassess its future research and development plans based on the
review of data received from current research and development activities and
future guidance from the FDA. The cost and pace of future research and
development activities are linked and subject to change. At this stage there
can
be no assurance that any of the Company’s research and development efforts,
including those for OxyADF™, will lead to a 505(b)(2) NDA submission or that if
NDA submissions are made with the FDA, that any such submission will be approved
by the FDA.
Commercial
Strategy and Status
To
generate revenue, the Company plans to enter into development and
commercialization agreements with strategically focused pharmaceutical company
partners (the "Partners") providing that such Partners license
OxyADF
TM
tablets
and other product candidates utilizing the Aversion® Technology and further
develop, register and commercialize multiple formulations and strengths of
such
product candidates. The Company expects to receive milestone payments and a
share of profits and/or royalty payments derived from the Partners’ sale of
products incorporating the Aversion® Technology. Future revenue, if any, would
be derived from milestone payments and a share of profits and/or royalty
payments relating to our Partners’ sale of products incorporating the Aversion®
Technology. To date, the Company does not have any executed collaborative
agreements with Partners nor can there be any assurance that the Company will
successfully enter into such collaborative agreements in the
future.
Patents
Issued and Pending
As
of the
date of this Report, the Company had three US non-provisional and two
international patent applications pending relating to its Aversion® Technology.
Additionally, as of the date of this Report, the Company had six US
patents issued and three US patent applications pending related to its Opioid
Synthesis Technologies. As of the date of this Report, the Company retained
ownership of all issued patents, patent applications, other intellectual
property and commercial rights to its product candidates and its Aversion®
Technology and Opioid Synthesis Technology.
The
typical review time of a patent application by the United States Patent and
Trademark Office (“PTO”) varies. Depending on the field of invention, the
initial PTO review generally occurs within 30 months from date of filing a
non-provisional patent application. At the completion of the initial review,
the
patent examiner will issue an Office Action letter, detailing any necessary
amendments, supplements or reasons for rejection. Subsequent processing of
the
patent application will depend on the number of Office Action letters issued
and
the speed of review of an applicant's responses to these letters. If an
application is granted, a Notice of Allowance will be issued requiring a payment
of the issue fee within three (3) months from the date of the notice. Upon
the payment of the fee to the PTO the patent would then be issued.
No
assurance can be given that any currently pending patent applications or future
patent applications relating to our Aversion® Technology will issue, or if such
patents issue, that the claims granted will be sufficiently broad to provide
economic value. Moreover, even if such patents issue, there can be no
assurance that the commercialization of products incorporating the Aversion®
Technology will not infringe the patents or other intellectual property rights
of third parties. The Company's success depends in significant part on our
to obtain patent protection for the Aversion® Technology, both in the United
States and in other countries, to enforce these patents and to avoid infringing
third-party patent and intellectual property rights.
Opioid
Synthesis Technologies
Historically
the Company was engaged in research, development and manufacture of proprietary,
high-yield, short cycle time, environmentally sensitive opioid synthesis
processes (the "Opioid Synthesis Technologies") intended for use in the
commercial production of certain bulk opioid active pharmaceutical ingredients
(“APIs”). In early 2005, the Company suspended further development and
commercialization efforts relating to the Opioid Synthesis Technologies. The
Company determined based on, among other factors, the Company’s limited cash
balances, prospects for third-party financing, the Company’s focus on its
Aversion® Technology, and the projected timeline and expense for resolution of
the Company’s application for the Import Registration (see “Import Registration”
below), that suspending further activities relating to the Opioid Synthesis
Technologies is in the Company’s best interests. The Company expects to
re-evaluate the development and commercialization of the Opioid Synthesis
Technologies after the Administrative Law Judge’s determination relating to the
Import Registration. No assurance can be given that development and
commercialization efforts relating to the Opioid Synthesis Technologies will
resume in the future, or even if such activities resume, that the Opioid
Synthesis Technologies will be capable of commercial scale up or be
commercialized.
Import
Registration
To
provide for an economical source of raw materials for the commercial
manufacturing of opioids utilizing the Opioid Synthesis Technologies, on January
31, 2001, the Company filed with the DEA an application for registration to
import (the “Import Registration”) narcotic raw materials ("NRMs") including raw
opium, opium poppy and concentrate of poppy straw from certain foreign
countries. These NRMs are commonly used as the initial starting materials in
the
synthesis of certain opioid APIs. Notice of the Company’s application was
published in the Federal Register on September 6, 2001. Within the 30 day period
provided under DEA guidelines, three parties, including two companies that
the
Company believes are the largest U.S. importers of NRMs requested a hearing
to
formally object to the Company’s request for an Import Registration. Pursuant to
established procedures, an evidentiary hearing relating to the Company’s Import
Registration application was held before a DEA Administrative Law Judge (“ALJ”)
in August 2003. The ALJ later re-opened the administrative record, at the
request of opposing parties, to consider the Company’s November and December
2003 announcements concerning the Company restructuring and financing
activities. After submission of additional testimony by the Company and certain
of the opposing parties, the ALJ closed the evidentiary record on May 25, 2004.
As of August 31, 2004, the Company and the opposing parties submitted to the
ALJ
briefing documents based on the evidentiary record and replies to the opposing
parties’ briefing documents. At the request of certain opposing parties, the ALJ
later allowed the submission of additional briefing documents to consider the
Company’s February 2005 announcement relating to the suspension of further
development of the Opioid Synthesis Technologies. As of September 15
,
2005,
the Company and the opposing parties submitted to the ALJ additional briefing
documents based on the Company’s February 2005 announcement relating to the
suspension of further development of the Opioid Synthesis Technologies. With
the
evidentiary record currently closed and all briefing documents and reply
briefing documents requested by the ALJ submitted, the Company estimates that
within 18 months from September 15
,
2005,
the ALJ will make findings of fact, draw legal conclusions and make a specific
recommendation on the Company’s Import Registration application to the DEA
Deputy Administrator. Historically, within 14 months after receiving the ALJ’s
recommendation, the DEA deputy administrator will issue an order relating to
the
Company’s application. Assuming the DEA grants the Company’s application, of
which no assurance can be given, the Company would be permitted to import NRMs
upon appropriate notice in the Federal Register. However, the opposing parties
may challenge the DEA decision to grant the Company’s application in an
appropriate Court of Appeals. In such a case, assuming the Company opposes
an
appellate challenge, the Company would likely incur additional time delays
and
legal expenses prior to the issuance of a final decision by the U.S. Court
of
Appeals. Provided the Company continues to seek the Import Registration, it
is
expected that the proceedings will continue through 2006 and beyond.
No
assurance can be given that the Company's Import Registration application will
be approved by the DEA or that, if granted by DEA, the Import Registration
would
be upheld following an appellate challenge. Furthermore, the Company's cash
flow
and limited sources of available financing make it uncertain that the Company
will have sufficient capital to continue to fund the development of the Opioid
Synthesis Technologies, to obtain required DEA approvals and to fund the capital
improvements necessary for the manufacture of APIs and finished dosage products
incorporating the Opioid Synthesis Technologies.
Recent
Events
2004
Debenture Offering
On
February 10, 2004, the Company consummated a private offering of convertible
senior secured debentures (the "2004 Debentures") in the aggregate principal
amount of approximately $12.3 million (the "2004 Debenture Offering"). The
2004
Debentures were issued by the Company pursuant to a certain Debenture and Share
Purchase Agreement dated as of February 6, 2004 (the "2004 Purchase Agreement")
by and among the Company, Care Capital Investments, Essex Woodlands Health
Ventures, Galen Partners and each of the purchasers listed on the signature
page
thereto. On April 14, 2004 and May 26, 2004, the Company completed additional
closings under the 2004 Purchase Agreement raising the aggregate gross proceeds
received by the Company from the offering of the 2004 Debentures to $14 million.
The 2004 Debentures carried an interest rate of 1.62% per annum and were secured
by a lien on all assets of the Company and the assets of Acura Pharmaceutical
Technologies, Inc. and Axiom Pharmaceutical Corporation, each a wholly-owned
subsidiary of the Company.
In
accordance with the terms of the documents executed in connection with the
2004
Debenture Offering, effective August 13, 2004, the business day following the
Company's receipt of shareholder approval to restate the Company's Certificate
of Incorporation to authorize the Series A Preferred and the Junior Preferred
Shares (as described below) as provided in the 2004 Purchase Agreement, the
aggregate principal amount of the 2004 Debentures converted into an aggregate
of
21,963,757 shares of the Company’s Series A Preferred shares. In addition,
effective August 13, 2004, the Company’s 5% convertible debentures issued during
the period from 1998 through 2003 in the aggregate principal amount of
approximately $86.6 million were converted into the Company’s Series B Preferred
shares, Series C-1 Preferred shares, Series C-2 Preferred shares and Series
C-3
Preferred shares (the “Junior Preferred Shares”). As the result, on August 13,
2004, the Company issued an aggregate of approximately 20.2 million Series
B
Preferred shares, 56.4 million Series C-1 Preferred shares, 37.4 million Series
C-2 Preferred shares and 81.9 million Series C-3 Preferred shares.
Conversion
of Preferred Shares into Common Stock
Effective
November 10, 2005, all of the issued and outstanding preferred shares of the
Company were automatically and mandatorily converted into the Company’s common
stock, $.01 par value per share (the “Common Stock”) in accordance with the
terms of the Company’s Restated Certification of Incorporation (the “Preferred
Stock Conversion”). In accordance with the conversion provisions contained in
the Restated Certificate of Incorporation, all issued and outstanding shares
of
the Company’s Series A Preferred Stock, Series B Preferred Stock, Series C-1
Preferred Stock, Series C-2 Preferred Stock and Series C-3 Preferred Stock
(collectively, the “Preferred Stock”) are converted automatically into the
Company’s Common Stock upon the Company’s receipt of the written consent to the
Preferred Stock Conversion from the holders of at least 51% of the shares of
the
Company’s Series A Preferred Stock. On November 10, 2005, the Company received
the consent to the Preferred Stock Conversion from GCE Holdings LLC (the
assignee of all Preferred Stock formerly held by each of Care Capital
Investments II, LP, Care Capital Offshore Investments II, LP, Essex Woodlands
Health Ventures V, L.P., Galen Partners International III, L.P., Galen Partners
III, L.P. and Galen Employee Fund III, L.P.), such entity holding in the
aggregate in excess of 51% of the issued and outstanding shares of the Company’s
Series A Preferred Stock. In accordance with the terms of the Company’s Restated
Certificate of Incorporation, all shares of the Company’s Preferred Stock were
automatically converted into an aggregate of approximately 305.4 million shares
of the Company’s Common Stock. After giving effect to the Preferred Stock
Conversion, effective November 10, 2005 the Company had an aggregate of
approximately 329.0 million shares of Common Stock issued and outstanding.
Bridge
Loan Financing
The
Company is a party to four Loan Agreements completed in January,
2006,
November,
2005, September, 2005 and June, 2005 pursuant to which the Company has received
bridge loan financing in the aggregate principal amount of $3.3 million from
Essex Woodlands Health Ventures V, L.P., Care Capital Investments II, LP, Care
Capital Offshore Investments II, LP, Galen Partners III, L.P., Galen Partners
International III, L.P., Galen Employee Fund III, L.P. and certain other
shareholders of the Company listed on the signature page to such Loan
Agreements. Reference is made to “Item 7 - Management’s Discussion and Analysis
of Financial Condition and Results of Operations -Liquidity and Capital
Resources” for a more detailed description of the bridge loan
transactions.
Segment
Reporting
The
Company operates in only one business segment,
which
is
the research, development and manufacture of innovative abuse deterrent, abuse
resistant and tamper resistant formulations ("
Aversion®
Technology")
intended for use in orally administered opioid-containing pharmaceutical
products. As described above in this Report under the captions “Opioid Synthesis
Technologies” the Company has suspended activities relating to its Opioid
Synthesis Technologies.
Prior
to
2005, in addition to its Aversion® Technology research and development
activities, the Company manufactured and sold generic finished dosage
pharmaceutical products. The Company discontinued the manufacture and sale
of
such products in the first quarter of 2004.
Government
Regulation
General
All
pharmaceutical technology and manufacturing firms, including the Company, are
subject to extensive regulation by the Federal government, principally by the
FDA, and, to a lesser extent, by state and local governments. Additionally,
the
Company is subject to extensive regulation by the DEA for research, development
and manufacturing of controlled substances. The Company cannot predict the
extent to which it may be affected by legislative and other regulatory
developments concerning its products and the healthcare industry in general.
The
Federal Food, Drug, and Cosmetic Act, the Controlled Substances Act and other
Federal statutes and regulations govern or influence the testing, manufacture,
labeling, storage, record keeping, approval, pricing, advertising, promotion,
sale and distribution of pharmaceutical products. Noncompliance with applicable
requirements can result in fines, recall or seizure of products, criminal
proceedings, total or partial suspension of production, and refusal of the
government to enter into supply contracts or to approve new drug applications.
The FDA also has the authority to revoke or withhold approvals of new drug
applications.
FDA
approval is required before any "new drug," can be marketed. A "new drug" is
one
not generally recognized by the FDA as safe and effective for its intended
use.
Such approval must be based on adequate and well controlled clinical
investigations. In addition to providing required safety and effectiveness
data
for FDA approval, a drug manufacturer's practices and procedures must conform
to
current Good Manufacturing Practice Regulations ("cGMPs"), which apply to the
manufacture, receiving, holding and shipping of all drugs, whether or not
approved by the FDA. To ensure full compliance with relevant standards, some
of
which are set forth in regulations, the Company must continue to expend time,
money and effort in the areas of production and quality control. Failure to
so
comply risks delays in approval of drugs, disqualification from eligibility
to
sell to the government, and possible FDA enforcement actions, such as an
injunction against shipment of the Company's products, the seizure of
non-complying drug products, and/or, in serious cases, criminal prosecution.
The
Company's manufacturing facility is subject to periodic inspection by the
FDA.
In
addition to the regulatory approval process, the Company is subject to
regulation under Federal, state and local laws, including requirements regarding
occupational safety, laboratory practices, environmental protection and
hazardous substance control, and may be subject to other present and future
local, state, Federal and foreign regulations, including possible future
regulations of the pharmaceutical industry.
FDA
Pharmaceutical Product Approvals
There
are
currently three pathways to obtain FDA approval to commercially market and
distribute a new pharmaceutical product in the U.S.:
1.
New
Drug Applications ("NDA"). Unless one of the procedures discussed in paragraph
2
or 3 below is available, a prospective manufacturer must conduct and submit
to
the FDA complete clinical studies to prove a drug's safety and efficacy, in
addition to the bioavailability and/or bioequivalence studies discussed below,
and must also submit to the FDA information about manufacturing practices,
the
chemical make-up of the drug and labeling. Some of the products anticipated
to
be developed by the Company which will incorporate the Opioid Synthesis
Technologies and the Aversion® Technology will require an NDA filing. The full
clinical testing required for the preparation and filing of an NDA requires
the
expenditure of substantial resources. The Company intends to collaborate with
third-parties to fund the preparation and filing of any such NDAs. There can
be
no assurance that any such collaboration will be available on terms acceptable
to the Company, if at all.
2.
505(b)(2) NDA. An alternative NDA procedure is provided by the Drug Price
Competition and Patent Term Restoration Act of 1984 (the “1984 Act”) whereby the
applicant may rely on published literature and more limited testing
requirements. This application process is useful when the API is commercially
available in an alternative dosage form or formulation. The Company has received
written confirmation from the FDA that OxyADF
TM
tablets,
the Company’s lead product candidate utilizing the Aversion® Technology, is an
appropriate product candidate for submission as a 505(b)(2) NDA.
3.
Abbreviated New Drug Applications ("ANDAs"). The 1984 Act established the ANDA
procedure for obtaining FDA approval for those drugs that are off-patent or
whose exclusivity has otherwise expired and that are bioequivalent to certain
reference listed drugs (“RLD”) in the FDA’s Orange Book. An ANDA is similar to
an NDA, except that the FDA waives the requirement of conducting complete
pre-clinical and clinical studies of safety and efficacy and usually requires
bioavailability and bioequivalence studies. "Bioavailability" refers to the
concentration of a drug in the blood. "Bioequivalence" means equivalence in
bioavailability between two drug products. In general, an ANDA will be approved
only upon demonstrating that the drug product subject to the ANDA is
bioequivalent to the RLD, i.e., that the rate of absorption and the
concentration of a generic drug in the blood are substantially equivalent to
those of a previously approved RLD.
Healthcare
Reform
Over
the
last few years several legislative proposals addressing the cost and
availability of healthcare products and services have been introduced in
Congress and state legislatures. Such proposals include insurance market
reforms, the requirement that businesses provide health insurance coverage
for
all their employees, significant revisions to the process for administering
Medicare and Medicaid expenditures, and stringent government cost controls
that
would influence insurance premiums and indirectly affect the fees of hospitals,
physicians and other healthcare providers. Such proposals could adversely affect
the Company's business by, among other things, reducing the demand, and the
prices paid, for pharmaceutical products such as those being developed by the
Company. Additionally, other developments, such as (i) the adoption of a
nationalized health insurance system or a single payor system, (ii) changes
in
needs-based medical assistance programs, or (iii) greater prevalence of
capitated reimbursement of healthcare providers, could adversely affect the
demand for the products candidates in development utilizing the Company’s
Aversion® Technology.
Environmental
Compliance
In
addition to regulation by the FDA and DEA, the Company is subject to regulation
under Federal, state and local environmental laws. The Company believes it
is in
material compliance with applicable environmental laws. The Company incurred
$61,650
,
$180,000
and $227,000 in the years ended December 31, 2005, 2004 and 2003, respectively,
on environmental compliance relating and disposal of hazardous and controlled
substances waste.
Competition
The
Company competes to varying degrees with numerous companies in the
pharmaceutical research, development, manufacturing and commercialization
fields. Most, of the Company's competitors have substantially greater financial
and other resources and are able to expend more funds and effort than the
Company in research and development of their competitive technologies and
products. Although a larger company with greater resources than the Company
will
not necessarily have a higher likelihood of receiving regulatory approval for
a
particular product or technology as compared to a smaller competitor, the
company with a larger research and development expenditure will be in a position
to support more development projects simultaneously, thereby improving the
likelihood of obtaining regulatory approval of a commercially viable product
or
technology than its smaller rivals.
The
Company is aware of potential competitors that may be developing technologies
designed to have one or more of the abuse deterrent, abuse resistant or tamper
resistant features of the Company’s Aversion®
Technology.
Such competitors include, but are not limited to, Elite Pharmaceuticals, Inc.
of
Northvale, New Jersey, Collegium Pharmaceuticals of Cumberland, Rhode Island,
New River Pharmaceuticals, Inc. of Radford, Virginia and Pain Therapeutics
of
South San Francisco, California. In addition, we believe that Purdue Pharma
of
Stamford, Connecticut, Alpharma Inc. of Fort Lee, New Jersey and Endo
Pharmaceuticals of Chadds Ford, Pennsylvania are pursuing abuse deterrent,
abuse
resistant and tamper resistant formulations of opioid analgesic products. The
Company believes that Endo Pharmaceuticals has entered into a license agreement
with Collegium Pharmaceuticals to develop pain products with abuse deterrent
properties.
Raw
Materials
To
purchase certain active ingredients required for the Company’s development and
manufacture of product candidates utilizing its Aversion® Technology, the
Company is required to file for and obtain quotas from the DEA. No assurance
can
be given that the Company will be successful in obtaining adequate DEA quotas
in
a timely manner. Even assuming adequate and timely DEA quotas, there can be
no
assurances that the approved manufacturers of raw materials for the Company’s
product candidates will supply the Company with its requirements for the active
ingredients required for the development and manufacture of its product
candidates.
Subsidiaries
The
Company's Culver, Indiana research, development, and manufacturing operations
are conducted by Acura Pharmaceutical Technologies, Inc., an Indiana corporation
and wholly-owned subsidiary of the Company. Axiom Pharmaceutical Corporation,
a
Delaware corporation, is a wholly-owned subsidiary of the Company and was
formerly engaged in generic product manufacturing and distribution in Congers,
New York. The Company is in the process of dissolving Axiom Pharmaceutical
Corporation.
Employees
As
of the
date of this Report, the Company had 13
full-time
employees, eight of whom are engaged in the research, development and
manufacture of product candidates utilizing the Aversion®
Technology.
The remaining employees are engaged in administrative, legal, accounting,
finance, market research, business development and licensing
activities.
ITEM
1A. RISK FACTORS
The
Company Received a "Going Concern" Opinion from Its Registered Independent
Public Accounting Firm, Has a History of Operating Losses and May Not Achieve
Profitability Sufficient to Generate a Positive Return on Shareholders'
Investment
We
have
incurred net losses of approximately
$12.1
million
for the year ended December 31, 2005 and $70.0 million, $48.5 million, and
$59.6
million for 2004, 2003, and 2002, respectively. As of
December
31
,
2005
our accumulated deficit was approximately
$
291.6
million.
The Company's consolidated financial statements for the years ended December
31,
2005 and 2004 have been prepared on a “going concern” basis; however, in its
report dated February 1, 2006 regarding those financial statements, our
registered independent public accounting firm referred to substantial doubt
about the Company's ability to continue as a going concern as a result of
recurring losses, net capital deficiency and negative cash flows. Our future
profitability will depend on many factors, including: (i) the Company’s ability
to secure additional financing to fund continued operations, (ii) the successful
completion of the formulation development, clinical testing and acceptable
regulatory review of product candidates utilizing the Aversion® Technology;
(iii) the receipt of issued patents from the U.S. Patent and Trademark Office
(“PTO”) for the material claims in the Company's patent applications relating to
the Aversion®
Technology;
(iv) the Company's ability to negotiate and execute appropriate licensing,
development and commercialization agreements with qualified third parties
relating to the Company’s product candidates; and (v) the successful
commercialization by licensees of products incorporating the Aversion®
Technology without infringing the patents and other intellectual property rights
of third parties. We cannot assure you that we will ever have a product approved
by the FDA, that we will bring any product to market or, if we are successful
in
doing so, that we will ever become profitable.
We
Require Additional Funding
Our
requirements for additional new funding will depend on many factors, including:
(i) the time required and expenses incurred in the development and
commercialization of products incorporating our Aversion® Technology; (ii) the
structure of any future collaborative or development agreements relating to
the
Aversion® Technology, including the timing and amount of payments, if any, that
may be received under possible future collaborative agreements; (iii) our
ability to develop additional product candidates utilizing the Aversion®
Technology; (iv) our ability to negotiate agreements with qualified third
parties for development, manufacture, marketing, sale and distribution of
products utilizing our Aversion® Technology; (v) the prosecution, defense and
enforcement of patent claims and other intellectual property rights relating
to
the Aversion® Technology; and (vi) the successful commercialization by licensees
of products incorporating our Aversion® Technology without infringing
third-party patents or other intellectual property rights.
To
continue funding operations the Company must raise additional financing, or
enter into alliances or collaborative agreements with third parties providing
for net proceeds to the Company. No assurance can be given that the Company
will
be successful in obtaining any such financing or in securing collaborative
agreements with third parties on acceptable terms, if at all, or if secured,
that such financing or collaborative agreements will provide for payments to
the
Company sufficient to continue to fund operations. In the absence of such
financing or third-party collaborative agreements, the Company will be required
to scale back or terminate operations and/or seek protection under applicable
bankruptcy laws. Even assuming the Company is successful in securing additional
sources of financing to fund the continued development of the Aversion®
Technology, or otherwise enters into alliances or collaborative agreements
relating to the Aversion® Technology, there can be no assurance that the
Company's development efforts will result in commercially viable
products.
We
Have No Near Term Sources of Revenue and Must Rely on Current Cash Reserves,
Third-Party Financing, and Technology Licensing Fees to Fund Operations
Pending
the negotiation of appropriate licensing agreements with pharmaceutical company
partners, of which no assurance can be given, the Company must rely on its
current cash reserves, third-party financing and technology licensing fees
to
fund the Company's operations.
No
assurance can be given that current cash resources will be sufficient to fund
the continued development of our product candidates until such time as we
generate revenue from the license of products incorporating the Aversion®
Technology to third parties. Moreover, no assurance can be given that we will
be
successful in raising additional financing to fund operations or, if funding
is
obtained, that such funding will be sufficient to fund operations until the
Company's product candidates incorporating our Aversion® Technology, may be
commercialized.
The
Company Is Subject to Restrictions on the Incurrence of Additional Indebtedness,
Which May Adversely Impact the Company's Ability to Fund
Operations
Pursuant
to the terms of each of the Company's outstanding secured term Loan Agreements
the Company is limited as to the type and amount of future indebtedness it
may
incur. The restriction on the Company's ability to incur additional indebtedness
in the future may adversely impact the Company's ability to fund the development
of its product candidates and commercialization of its products.
Our
Product Candidates Are Based on Technology That Could Ultimately Prove
Ineffective
Our
lead
product candidate, OxyADF™ incorporating our Aversion® Technology is a tablet
formulation intended for oral administration and has an active IND on file
with
FDA. The Company is focusing substantially all of its product development
activities on OxyADF™ tablets. Additional clinical and non-clinical testing will
be required to continue development of OxyADF™ tablets and for the preparation
and submission of a 505(b)(2) new drug application (“NDA”) with the FDA. There
can be no assurance that OxyADF™ tablets or any other product candidate
developed using the Aversion®
Technology
will lead to a NDA submission to the FDA and that if a NDA is submitted, that
the FDA will accept such submission and subsequently approve such regulatory
application to allow for commercial distribution of the product.
The
Company is committing substantially all of its resources and available capital
to the development of OxyADF™ tablets and the prosecution of its patent
applications for the Aversion® Technology. The failure of the Company to
successfully develop a product candidate utilizing the Aversion®
Technology,
to successfully obtain an issued patent from the PTO relating to the
Aversion®
Technology
and to avoid infringing third-party patents and intellectual property rights
in
the commercialization of products utilizing the Aversion®
Technology
will have a material adverse effect on the Company's operations and financial
condition.
If
Pre-Clinical or Clinical Testing For Our Product Candidates Are Unsuccessful
or
Delayed, We Will Be Unable to Meet Our Anticipated Development and
Commercialization Timelines
To
obtain
FDA approval to commercially market any of our product candidates, we must
submit to the FDA a NDA demonstrating, among other things, that the product
candidate is safe and effective for its intended use. This demonstration
requires significant pre-clinical and clinical testing. As we do not possess
the
resources or employ all the personnel necessary to conduct such testing we
rely
on contract research organizations for the majority of this testing with our
product candidates. As a result, we have less control over the timing and other
aspects of our development program than if we performed the testing entirely
on
our own. Third parties may not perform their responsibilities on our anticipated
schedule. Delays in our development programs could significantly increase our
product development costs and delay product commercialization. In addition,
many
of the factors that may cause, or lead to a delay in the development program,
may also ultimately lead to denial of regulatory approval of a product
candidate.
The
commencement of clinical trials with our product candidates may be delayed
for
several reasons, including but not limited to delays in demonstrating sufficient
pre-clinical safety required to obtain regulatory approval to commence a
clinical trial, reaching agreements on acceptable terms with prospective
collaborative partners, manufacturing and quality assurance release of a
sufficient supply of a product candidate for use in our clinical trials and/or
obtaining institutional review board approval to conduct a clinical trial at
a
prospective site. Once a clinical trial has begun, it may be delayed, suspended
or terminated by us or the FDA or other regulatory authorities due to several
factors, including ongoing discussions with the FDA or other regulatory
authorities regarding the scope or design of our clinical trials, failure to
conduct clinical trials in accordance with regulatory requirements, lower than
anticipated recruitment or retention rate of patients in clinical trials,
inspection of the clinical trial operations or trial sites by the FDA or other
regulatory authorities, the imposition of a clinical hold by FDA, lack of
adequate funding to continue clinical trials; and/or negative or unanticipated
results of clinical trials.
Clinical
trials, where required by the FDA for commercial approval, may not demonstrate
safety or efficacy of our product candidates. Success in pre-clinical testing
and early clinical trials does not ensure that later clinical trials will be
successful. Results of later clinical trials may not replicate the results
of
prior clinical trials and pre-clinical testing. Even if the results of our
pivotal clinical trials are positive, we and our collaborative partners may
have
to commit substantial time and additional resources to conduct further
pre-clinical and clinical studies before we can submit NDAs or obtain regulatory
approval for our product candidates.
Clinical
trials may be expensive and difficult to design and implement, in part because
they are subject to rigorous regulatory requirements. Further, if participating
subjects or patients in clinical studies suffer drug-related adverse reactions
during the course of such trials, or if we, our collaborative partner(s) or
the
FDA believes that participating patients are being exposed to unacceptable
health risks, our collaborative partner(s) may have to suspend the clinical
trials. Failure can occur at any stage of the trials, and our collaborative
partner(s) could encounter problems causing the abandonment of clinical trials
or the need to conduct additional clinical studies, relating to a product
candidate.
Even if our clinical trials are completed as planned, their results may not
support our targeted product label claims. The clinical trial process may fail
to demonstrate that our product candidates are safe and effective for their
intended use. Such failure would cause us or our collaborative partner to
abandon a product candidate and may delay the development of other product
candidates.
We
May Not Obtain Required FDA Approval; the FDA Approval Process Is Time-Consuming
and Expensive
The
development, testing, manufacturing, marketing and sale of pharmaceutical
products are subject to extensive federal, state and local regulation in the
United States and other countries. Satisfaction of all regulatory requirements
typically takes many years, is dependent upon the type, complexity and novelty
of the product candidate, and requires the expenditure of substantial resources
for research, development and testing. Substantially all of the Company's
operations are subject to compliance with FDA regulations. Failure to adhere
to
applicable FDA regulations by the Company or its licensees, if any, would have
a
material adverse effect on the Company's operations and financial condition.
In
addition, in the event the Company is successful in developing product
candidates for sale in other countries, the Company would become subject to
regulation in such countries. Such foreign regulations and product approval
requirements are expected to be time consuming and expensive.
We
may
encounter delays or rejections during any stage of the regulatory approval
process based upon the failure of clinical or laboratory data to demonstrate
compliance with, or upon the failure of the products to meet, the FDA's
requirements for safety, efficacy and quality; and those requirements may become
more stringent due to changes in regulatory agency policy or the adoption of
new
regulations. After submission of a marketing application, in the form of a
new
drug application (“NDA”), a 505(b)(2) NDA, or an Abbreviated New Drug
Application ("ANDA"), the FDA may deny the application, may require additional
testing or data and/or may require post-marketing testing and surveillance
to
monitor the safety or efficacy of a product. The FDA commonly takes one to
two
years to grant final approval to a marketing application (NDA, 505(b)(2) NDA
or
ANDA). Further, the terms of approval of any marketing application, including
the labeling content, may be more restrictive than we desire and could affect
the marketability of the products incorporating the Aversion®
Technology.
Even
if
we comply with all FDA regulatory requirements, we may never obtain regulatory
approval for any of our product candidates. If we fail to obtain regulatory
approval for any of our product candidates, we will have fewer saleable products
and corresponding lower revenues. Even if we receive regulatory approval of
our
products, such approval may involve limitations on the indicated uses or
marketing claims we may make for our products.
The
FDA
also has the authority to revoke or suspend approvals of previously approved
products for cause, to debar companies and individuals from participating in
the
drug-approval process, to request recalls of allegedly violative products,
to
seize allegedly violative products, to obtain injunctions to close manufacturing
plants allegedly not operating in conformity with current Good Manufacturing
Practices (cGMP) and to stop shipments of allegedly violative products. As
any
future source of Company revenue will be derived from the sale of FDA approved
products, the taking of any such action by the FDA would have a material adverse
effect on the Company.
We
Must Maintain FDA Approval to Manufacture Our Products Candidates at Our
Facilit
y;
Failure to Maintain Compliance with FDA Requirements May Prevent or Delay the
Manufacture of Our Product Candidates and Costs of Manufacture May Be Higher
Than Expected
We
have
constructed and installed the equipment necessary to manufacture clinical trial
supplies of our Aversion®
Technology
product candidates in tablet formulations at our Culver, Indiana facility.
To be
used in clinical trials, all of our product candidates must be manufactured
in
conformity with current Good Manufacturing Practice (cGMP) regulations as
interpreted and enforced by the FDA. All such product candidates must be
manufactured, packaged, and labeled and stored in accordance with cGMPs.
Modifications, enhancements or changes in manufacturing sites of marketed
products are, in many circumstances, subject to FDA approval, which may be
subject to a lengthy application process or which we may be unable to obtain.
Our Culver, Indiana facility, as well as those of any third-party manufacturers
that we may use, are periodically subject to inspection by the FDA and other
governmental agencies, and operations at these facilities could be interrupted
or halted if such inspections are unsatisfactory.
Failure to comply with FDA or other governmental regulations can result in
fines, unanticipated compliance expenditures, recall or seizure of products,
total or partial suspension of production or distribution, suspension of FDA
review of our products, termination of ongoing research, disqualification of
data for submission to regulatory authorities, enforcement actions, injunctions
and criminal prosecution.
If
We Retain Collaborative Partners and Our Partners Do Not Satisfy Their
Obligations, We Will Be Unable to Develop Our Partnered Product Candidates
To
complete the development and regulatory approval of our products and
commercialize our product candidates, if any are approved by the FDA, we plan
to
enter into development and commercialization agreements with strategically
focused pharmaceutical company partners providing that such partners license
our
Aversion® Technologies and further develop, register, manufacture and
commercialize multiple formulations and strengths of each product candidate
utilizing our Aversion® Technology. We expect to receive a share of profits
and/or royalty payments derived from such collaborative partners' sale of
products incorporating our Aversion® Technologies. Currently, we do not have any
such collaborative agreements, nor can there be any assurance that we will
actually enter into collaborative agreements in the future. Our inability to
enter into collaborative agreements, or our failure to maintain such agreements,
would limit the number of product candidates that we can develop and ultimately,
decrease our potential sources of any future revenues. In the event we enter
into any collaborative agreements, we may not have day-to-day control over
the
activities of our collaborative partners with respect to any product candidate.
Any collaborative partner may not fulfill its obligations under such agreements.
If a collaborative partner fails to fulfill its obligations under an agreement
with us, we may be unable to assume the development of the product covered
by
that agreement or to enter into alternative arrangements with a third-party.
In
addition, we may encounter delays in the commercialization of the product
candidate that is the subject of a collaboration agreement. Accordingly, our
ability to receive any revenue from the product candidates covered by
collaboration agreements will be dependent on the efforts of our collaborative
partner. We could be involved in disputes with a collaborative partner, which
could lead to delays in or termination of, our development and commercialization
programs and result in time consuming and expensive litigation or arbitration.
In addition, any such dispute could diminish our collaborative partners’
commitment to us and reduce the resources they devote to developing and
commercializing our products. If any collaborative partner terminates or
breaches its agreement, or otherwise fails to complete its obligations in a
timely manner, our chances of successfully developing or commercializing our
product candidates would be materially and adversely effected. Additionally,
due
to the nature of the market for our product candidates, it may be necessary
for
us to license all or a significant portion of our product candidates to a single
collaborator, thereby eliminating our opportunity to commercialize other product
candidates with other collaborative partners.
The
Market May Not Be Receptive to Products Incorporating Our Aversion®
Technology
The
commercial success of products incorporating our Aversion® Technology that are
approved for marketing by the FDA and other regulatory authorities will depend
on acceptance by health care providers and others that such products are
clinically useful, cost-effective and safe. There can be no assurance given,
even if we succeed in the development of products incorporating our Aversion®
Technology and receive FDA approval for such products, that products
incorporating the Aversion® Technology would be accepted by health care
providers and others. Factors that may materially affect market acceptance
of
products incorporating our Aversion® Technology include: (i) the relative
advantages and disadvantages of our Aversion® Technology compared to competitive
abuse deterrent technologies; (ii) the relative timing to commercial launch
of
products utilizing our Aversion® Technology compared to products incorporating
competitive abuse deterrent technologies; (iii) the relative timing of the
receipt of marketing approvals and the countries in which such approvals are
obtained; (iv) the relative safety and efficacy of products incorporating our
Aversion® Technology compared to competitive products; and/or (v) the
willingness of third party payors to reimburse for or otherwise pay for products
incorporating our Aversion® Technology.
Our
product candidates, if successfully developed and commercially launched, will
compete with both currently marketed and new products marketed by other
companies. Health care providers may not accept or utilize any of our product
candidates. Physicians and other prescribers may not be inclined to prescribe
the products utilizing our Aversion®
Technology
unless our products bring clear and demonstrable advantages over other products
currently marketed for the same indications. If our products licensed to
partners do not achieve market acceptance, we may not be able to generate
significant revenues or become profitable.
In
the Event That We Are Successful in Bringing Any Products to Market, Our
Revenues May Be Adversely Affected If We Fail to Obtain Acceptable Prices or
Adequate Reimbursement For Our Products From Third-Party Payors
Our
ability to commercialize pharmaceutical products successfully may depend in
part
on the availability of reimbursement for our products from government and health
administration authorities, private health insurers, and other third-party
payors, including Medicaid and Medicare. We cannot predict the availability
of
reimbursement for newly-approved products incorporating our Aversion®
Technology. Third-party payors, including state Medicaid programs and Medicare,
are challenging the prices charged for pharmaceutical products. Government
and
other third-party payors increasingly are limiting both coverage and the level
of reimbursement for new drugs. Third-party insurance coverage may not be
available to patients for any of our products. The continuing efforts of
government and third-party payors to contain or reduce the costs of health
care
may limit our commercial opportunity. If government and other third-party payors
do not provide adequate coverage and reimbursement for any product incorporating
our Aversion® Technology, health care providers may not prescribe them or
patients may ask to have their health care providers to prescribe competing
products with more favorable reimbursement. In some foreign markets, pricing
and
profitability of pharmaceutical products are subject to government control.
In
the United States, we expect that there will continue to be federal and state
proposals for similar controls. In addition, we expect that increasing emphasis
on managed care in the United States will continue to put pressure on the
pricing of pharmaceutical products. Cost control initiatives could decrease
the
price that we receive for any products in the future. Further, cost control
initiatives could impair our ability or the ability of our partners to
commercialize our products and our ability to earn revenues from this
commercialization.
Our
Success Depends on Our Ability to Protect Our Intellectual
Property
Our
success depends in significant part on our ability to obtain patent protection
for our Aversion®
Technology,
in the United States and in other countries, and to enforce these patents.
The
patent positions of pharmaceutical firms, including us, are generally uncertain
and involve complex legal and factual questions. There is no assurance that
any
of our patent applications for our Aversion® Technology will issue or, if
issued, that such patent(s) will be valid and enforceable against third-party
infringement or that such patent(s) will not infringe any third-party patent
or
intellectual property. Moreover, even if patents do issue on our
Aversion®
Technology,
the claims allowed may not be sufficiently broad to protect the products
incorporating the Aversion®
Technology.
In addition, issued patents may be challenged, invalidated or circumvented.
Even
if issued, our patents may not afford us protection against competitors with
similar technology or permit the commercialization of our products without
infringing third-party patents or other intellectual property
rights.
Our
success also depends on our not infringing patents issued to competitors or
others. We may become aware of patents and patent applications belonging to
competitors and others that could require us to alter our technologies. Such
alterations could be time consuming and costly. We may not be able to obtain
a
license to any technology owned by or licensed to a third party that we require
to manufacture or market one or more products incorporating our Aversion®
Technology. Even if we can obtain a license, the financial and other terms
may
be disadvantageous.
Our
success also depends on our maintaining the confidentiality of our trade secrets
and know-how. We seek to protect such information by entering into
confidentiality agreements with employees, potential collaborative partners,
potential investors and consultants. These agreements may be breached by such
parties. We may not be able to obtain an adequate, or perhaps, any remedy to
such a breach. In addition, our trade secrets may otherwise become known or
be
independently developed by our competitors. Our inability to protect our
intellectual property or to commercialize our products without infringing
third-party patents or other intellectual property rights would have a material
adverse effect on our operations and financial condition.
We
May Become Involved in Patent Litigation or Other Intellectual Property
Proceedings Relating to Our Products, Aversion® Technology or Opioid Synthesis
Technologies Which Could Result in Liability for Damages or Delay or Stop Our
Development and Commercialization Efforts
The
pharmaceutical industry has been characterized by significant litigation and
other proceedings regarding patents, patent applications and other intellectual
property rights. The types of situations in which we may become parties to
such
litigation or proceedings include: (i) we may initiate litigation or other
proceedings against third parties to enforce our patent rights or other
intellectual property rights; (ii) we may initiate litigation or other
proceedings against third parties to seek to invalidate the patents held by
such
third parties or to obtain a judgment that our products or processes do not
infringe such third parties' patents; (iii) if our competitors file patent
applications that claim technology also claimed by us, we may participate in
interference or opposition proceedings to determine the priority of invention;
and (iv) if third parties initiate litigation claiming that our processes or
products infringe their patent or other intellectual property rights, we will
need to defend against such proceedings.
The
costs
of resolving any patent litigation or other intellectual property proceeding,
even if resolved in our favor, could be substantial. Many of our competitors
will be able to sustain the cost of such litigation and proceedings more
effectively than we can because of their substantially greater resources.
Uncertainties resulting from the initiation and continuation of patent
litigation or other intellectual property proceedings could have a material
adverse effect on our ability to compete in the marketplace. Patent litigation
and other intellectual property proceedings may also consume significant
management time.
Our
Aversion® Technology may be found to infringe upon claims of patents owned by
others. If we determine or if we are found to be infringing on a patent held
by
another, we might have to seek a license to make, use, and sell the patented
technologies. In that case, we might not be able to obtain such license on
terms
acceptable to us, or at all. If a legal action is brought against us, we could
incur substantial defense costs, and any such action might not be resolved
in
our favor. If such a dispute is resolved against us, we may have to pay the
other party large sums of money and our use of our Aversion® Technology and the
testing, manufacturing, marketing or sale of one or more of our products could
be restricted or prohibited. Even prior to resolution of such a dispute, use
of
our Aversion® Technology and the testing, manufacturing, marketing or sale of
one or more of our products could be restricted or prohibited.
Moreover,
other parties could have blocking patent rights to products made using the
Aversion®
Technology.
The Company is aware of certain United States and International pending patent
applications owned by third parties claiming abuse deterrent technologies.
If
such patent applications result in issued patents, with claims encompassing
our
Aversion®
Technology
or products, the Company may need to obtain a license to such patents, should
one be available, or alternatively, alter the Aversion®
Technology
so as to avoid infringing such third-party patents. If the Company is unable
to
obtain a license on commercially reasonable terms, the Company could be
restricted or prevented from commercializing products utilizing the
Aversion®
Technology.
Additionally, any alterations to the Aversion®
Technology
in view of pending third-party patent applications could be time consuming
and
costly and may not result in technologies or products that are non-infringing
or
commercially viable.
The
Company expects to seek and obtain licenses to such patents or patent
applications when, in the Company's judgment, such licenses are needed. If
any
such licenses are required, there can be no assurances that the Company would
be
able to obtain any such license on commercially favorable terms, or at all,
and
if these licenses are not obtained, the Company might be prevented from making,
using and selling the Aversion®
Technology
and products. The Company's failure to obtain a license to any technology that
it may require would materially harm the Company's business, financial condition
and results of operations. We cannot assure that the Company's products and/or
actions in developing products incorporating our Aversion®
Technology
will not infringe third-party patents.
We
May Be Exposed to Product Liability Claims and May Not Be Able to Obtain
Adequate Product Liability Insurance
Our
business exposes us to potential product liability risks, which are inherent
in
the testing, manufacturing, marketing and sale of pharmaceutical products.
Product liability claims might be made by consumers, health care providers
or
pharmaceutical companies or others that sell our products. These claims may
be
made even with respect to those products that are manufactured in licensed
and
regulated facilities or that otherwise possess regulatory approval for
commercial sale.
We
are currently covered by clinical trial product liability insurance on a
claims-made basis. This coverage may not be adequate to cover any product
liability claims. Product liability coverage is expensive. In the future, we
may
not be able to maintain or obtain such product liability insurance at a
reasonable cost or in sufficient amounts to protect us against losses due to
liability claims. Any claims that are not covered by product liability insurance
could have a material adverse effect on our business, financial condition and
results of operations.
The
pharmaceutical industry is characterized by frequent litigation. Those companies
with significant financial resources will be better able to bring and defend
any
such litigation. No assurance can be given that we would not become involved
in
such litigation. Such litigation may have material adverse consequences to
the
Company's financial conditions and operations.
We
Face Significant Competition Which May Result in Others Developing or
Commercializing Products Before or More Successfully Than We
Do
The
pharmaceutical industry is highly competitive and is affected by new
technologies, governmental regulations, health care legislation, availability
of
financing, litigation and other factors. If our product candidates receive
FDA
approval, they will compete with a number of existing and future drugs and
therapies developed, manufactured and marketed by others. Existing or future
competing products may provide greater therapeutic convenience or clinical
or
other benefits for a specific indication than our products, or may offer
comparable performance at lower costs. If our products are unable to capture
and
maintain market share, we will not achieve significant product revenues and
our
financial condition will be materially adversely affected.
We
will
compete for market share against fully integrated pharmaceutical companies
or
other companies that collaborate with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations. Many of these competitors have products already approved,
marketed or in development. In addition, many of these competitors, either
alone
or together with their collaborative partners, operate larger research and
development programs, have substantially greater financial resources, experience
in developing products, obtaining FDA and other regulatory approvals,
formulating and manufacturing drugs, and commercializing drugs than we
do.
Subject
to a decision and recommendation by the administrative law judge about our
application for a license to import narcotic raw materials, we are concentrating
substantial all of our efforts on developing product candidates incorporating
our Aversion® Technology. The commercial success of products using our Aversion®
Technology will depend, in large part, on the intensity of competition from
other companies marketing branded opioid containing products, generic versions
of branded opioid containing products and other drugs and technologies that
compete with the products incorporating our Aversion® Technology, and the
relative timing and sequence of new product approvals. Alternative technologies
and products are being developed to improve or replace the use of opioids for
pain management, several of which are in clinical trials or are awaiting
approval from the FDA. In the event that such alternatives to opioid containing
products are widely adopted, then the market for products incorporating our
Aversion® Technology may be substantially decreased subsequently reducing the
Company’s opportunity to generate future revenues and profits.
The
U.S. Drug Enforcement Administration ("DEA") Limits the Availability of the
Active Ingredients Used in Our Product Candidates and, as a Result, Our Quota
May Not Be Sufficient to Complete Clinical Trials or to Meet Commercial Demand
or May Result in Development Delays
The
DEA
regulates certain finished products and bulk active pharmaceutical ingredients.
Certain opioid active pharmaceutical ingredients in our current product
candidates are classified by the DEA as Schedule II substances under the
Controlled Substances Act of 1970. Consequently, their manufacture, research,
shipment, storage, sale and use are subject to a high degree of regulation.
Furthermore, the amount of Schedule II substances we can obtain for clinical
trials and commercial distribution is limited by the DEA and our quota may
not
be sufficient to complete clinical trials or meet commercial demand. There
is a
risk that DEA regulations may interfere with the supply of the products used
in
our clinical trials, and, in the future, our ability to produce and distribute
our products in the volume needed to meet commercial demand.
We
May Not Be Successful in Commercializing Our Opioid Synthesis
Technologies
Historically
the Company has been engaged in research, development and manufacture of
proprietary, high yield, short cycle time, environmentally sensitive opioid
manufacturing processes (the "Opioid Synthesis Technologies") intended for
use
in the commercial manufacturing of certain bulk opioid active pharmaceutical
ingredients ("APIs"). The Company has suspended further development and
commercialization efforts relating to its Opioid Synthesis Technologies. We
have
determined based on our limited cash reserves, the additional funding required
for facility improvements for commercial scale up for our Opioid Synthesis
Technologies, the projected timeline for resolution of our application to the
DEA for a narcotic raw material import registration (the “Import Registration”),
and other factors that suspending activities relating to the Opioid Synthesis
Technologies is in our best interest. We expect to re-evaluate the development
and commercialization of the Opioid Synthesis Technologies after the
Administrative Law Judge makes a determination relating to our Import
Registration. No assurance can be given that development and commercialization
efforts relating to the Opioid Synthesis Technologies will resume in the future,
or even if such activities resume, that the Opioid Synthesis Technologies will
be capable of commercial scale up or will be commercialized.
We
May Not Obtain DEA Approval for Our Import Registration
Since
early 2001 we have been engaged in the application process to obtain an Import
Registration from the DEA to import narcotic raw materials directly from foreign
countries for use in commercial manufacturing certain bulk opioid APIs. No
assurance can be given that the Import Registration application will be approved
by the DEA or that if granted by DEA, the Import Registration would be upheld
following an appellate challenge.
The
Market Price of Our Common Stock May Be Volatile
The
market price of our common stock, like the market price for securities of
pharmaceutical, biopharmaceutical and biotechnology companies, has historically
been highly volatile. The market from time to time experiences significant
price
and volume fluctuations that are unrelated to the operating performance of
particular companies. Factors, such as fluctuations in our operating results,
future sales of our common stock, announcements of technological innovations
or
new therapeutic products by us or our competitors, announcements regarding
collaborative agreements, clinical trial results, government regulation,
developments in patent or other proprietary rights, public concern as to the
safety of drugs developed by us or others, changes in reimbursement policies,
comments made by securities analysts and general market conditions may have
a
significant effect on the market price of our common stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted. A securities
class
action suit against us could result in substantial costs, potential liabilities
and the diversion of management's attention and resources.
The
Company's common stock trades on the OTC Bulletin Board, a NASD-sponsored
inter-dealer quotation system. As the Company's common stock is not quoted
on a
stock exchange and is not qualified for inclusion on the NASD Small-Cap Market,
our common stock could be subject to a rule by the Securities and Exchange
Commission that imposes additional sales practice requirements on broker-dealers
who sell such securities to persons other than established customers and
accredited investors. For transactions covered by this rule, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent for a transaction prior to sale.
Consequently, the rule may affect the ability of broker-dealers to sell the
Company's common stock and the ability of purchasers in the offering to sell
the
common stock received upon conversion of the Preferred Shares in the secondary
market. There is no guarantee that an active trading market for our common
stock
will be maintained on the OTC Bulletin Board. Investors may be not able to
sell
their shares of common stock quickly or at the latest market price if trading
in
our common stock is not active.
Our
Quarterly Results of Operations Will Fluctuate, and These Fluctuations Could
Cause Our Stock Price to Decline
Our
quarterly operating results are likely to fluctuate in the future. These
fluctuations could cause our stock price to decline. The nature of our business
involves variable factors, such as the timing of the research, development
and
regulatory pathways of our product candidates that could cause our operating
results to fluctuate.
No
Dividends
The
Company has not declared and paid cash dividends on its common stock in the
past, and the Company does not anticipate paying any cash dividends in the
foreseeable future. The Company's senior term loan indebtedness prohibits the
payment of cash dividends.
Control
of the Company
GCE
Holdings LLC beneficially owns approximately 78%
of
the
Company's outstanding common stock. In addition, pursuant to the terms of the
Amended and Restated Voting Agreement dated February 6, 2004, as amended,
between the Company and the former holders of the Company's outstanding
convertible preferred stock, all such shareholders have agreed that the Board
of
Directors shall be comprised of not more than 7 members, 4 of whom shall be
the
designees of GCE Holdings LLC
(the
assignee of all Preferred Stock (prior to its conversion into common stock)
formerly held by each of Care Capital Investments II, LP, Care Capital Offshore
Investments II, LP, Essex Woodlands Health Ventures V, L.P., Galen Partners
International III, L.P., Galen Partners III, L.P. and Galen Employee Fund III,
L.P.),
As a
result, GCE Holdings LLC, in view of its ownership percentage of the Company
and
by virtue of its controlling position on the Company's Board of Directors,
will
be able to control or significantly influence all matters requiring approval
by
our shareholders, including the approval of mergers or other business
combination transactions. The interests of GCE Holdings LLC may not always
coincide with the interests of other shareholders and such entity may take
action in advance of its interests to the detriment of our other
shareholders.
Key
Personnel Are Critical to Our Business, and Our Future Success Depends on Our
Ability to Retain Them
We
are
highly dependent on the principal members our of management and scientific
team,
particularly Andrew D. Reddick, our President and Chief Executive Officer,
and
Ron J. Spivey, Ph.D. our Senior Vice President and Chief Scientific Officer.
We
may not be able to attract and retain personnel on acceptable terms given the
intense competition for such personnel among biotechnology, pharmaceutical
and
healthcare companies, universities and non-profit research institutions. While
we have employment agreements with certain employees, all of our employees
are
at-will employees who may terminate their employment with the Company at any
time. We do not have key personnel insurance on any of our officers or
employees. The loss of any of our key personnel, or the inability to attract
and
retain such personnel, may significantly delay or prevent the achievement of
our
product and technology development and business objectives and could materially
adversely affect our business, financial condition and results of such
operations.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
The
Company leases from an unaffiliated Lessor, approximately 1,600 square feet
of
administrative office space at 616 N. North Court, Suite 120, Palatine, Illinois
60067. The lease agreement has a term expiring February 28, 2007 with an option
for a one-year extension. The lease agreement provides for annual rent, property
taxes, common area maintenance and janitorial services for approximately $29,200
per year. This leased office space is utilized for the Company's administrative
marketing and business development functions.
The
Company conducts research, development, laboratory, manufacturing and
warehousing activities relating to the Aversion®
Technology
at its facility located at 16235 State Road 17, Culver, Indiana (the “Culver
Facility”). At this location the Company's Acura Pharmaceutical Technologies,
Inc. subsidiary owns a ~28,000 square foot
facility
with (approximately) 7,000 square feet of warehouse, 10,000 square feet of
manufacturing space, 6,000 square feet of research and development labs and
5,000 square feet of administrative and storage space. The facility is located
on approximately 30 acres of land. The Culver Facility is subject to a mortgage
lien granted in favor of the holders of the Company’s 2004 Note. See “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Amendment to Watson Term Loan
Agreement.”
ITEM
3. LEGAL PROCEEDINGS
In
May
2001, the Company was named as a defendant in an action entitled Alfred Kohn
v.
Halsey Drug Co. in the Supreme Court of New York, Bronx County. The plaintiff
sought, among other things, damages of $1.0 million for breach of an alleged
oral contract to pay a finder's fee for a business transaction involving the
Company. The Company's and the Plaintiff’s motion for summary judgment were due
to be heard by the Court in August 2003. Plaintiff Kohn deceased shortly prior
to such hearing date, and the motions for summary judgment and any trial of
this
matter were stayed pending the substitution of Mr. Kohn's estate as the
plaintiff. In February, 2005, with the substitution of Kohn’s estate as
Plaintiff, the Court ruled in favor of the Company under its motion for summary
judgment. In doing so, the Court dismissed all aspects of Plaintiff’s complaint,
with the exception of Plaintiff’s claim for payment of the fair value for the
services alleged to have been performed by Plaintiff. In March 2005, the Company
and the Estate of Mr. Kohn agreed to settle this matter, pursuant to which
the
Company would make a one-time payment of $35,000. Following receipt of the
approval of the Bronx, New York Surrogate’s Court obtained in November 2005, the
Company and the Estate of Mr. Kohn executed the definitive settlement agreement
and in December 2005 the Company remitted to the Estate of Mr. Kohn $35,000
in
full settlement and dismissal of this matter.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of security holders during the fourth quarter
of 2005.
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
Market
and Market Prices of Common Stock
Set
forth
below for the periods indicated are the high and low bid prices for the
Company's Common Stock for trading in the Common Stock on the OTC Bulletin
Board
as reported by the OTC Bulletin Board. Such over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission
and
may not necessarily represent actual transactions.
|
|
|
BID
PRICE
|
|
PPERIOD
|
|
HIGH
|
|
LOW
|
|
2004
Fiscal Year
|
|
|
|
|
|
First
Quarter
|
|
0.82
|
|
0.41
|
|
Second
Quarter
|
|
0.62
|
|
0.37
|
|
Third
Quarter
|
|
0.53
|
|
0.31
|
|
Fourth
Quarter
|
|
0.64
|
|
0.32
|
|
2005
Fiscal Year
|
|
|
|
|
|
First
Quarter
|
|
0.70
|
|
0.33
|
|
Second
Quarter
|
|
0.81
|
|
0.41
|
|
Third
Quarter
|
|
0.73
|
|
0.40
|
|
Fourth
Quarter
|
|
1.36
|
|
0.27
|
|
2006
Fiscal Year
|
|
|
|
|
|
First
Quarter
(through
February 1, 2006)
|
|
0.50
|
|
0.25
|
Holders
There
were approximately
689
holders of record of the Company's common stock on February 1, 2006. This
number, however, does not reflect the ultimate number of beneficial holders
of
the Company's Common Stock.
Dividend
Policy
The
payment of cash dividends from current earnings is subject to the discretion
of
the Board of Directors and is dependent upon many factors, including the
Company's earnings, its capital needs and its general financial condition.
The
terms of the Term Loan Agreement assigned by Watson Pharmaceuticals, Inc. to
Care Capital Investments II, LP, Essex Woodlands Health Ventures V, L.P., Galen
Partners III, L.P. and certain other investors in the 2004 Debentures as well
as
the Bridge Loan Agreements between the Company and the bridge lenders a party
thereto (see “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources - Bridge
Loan Financings”, and “Item 13. Certain Relationships and Related Transactions”)
prohibit the Company from paying cash dividends. The Company does not intend
to
pay any cash dividends in the foreseeable future.
Recent
Sales of Unregistered Securities
During
the quarter ended December 31, 2005, the Company issued 330,711 shares of the
Company’s Common Stock in satisfaction of the payment of $144,521 in accrued
interest due December 31, 2005 under the Company’s senior secured term note.
Each of the recipients of such Common Stock is an Accredited Investor as defined
in Rule 501(a) of Regulation D promulgated under the Securities Act. Such Common
Stock was issued without registration under the Securities Act in reliance
upon
Section 4(2) of the Securities Act and Regulation D promulgated
thereunder.
Securities
Authorized for Issuance Under Equity Compensation
Plans
Reference
is made to “Item 11 - Executive Compensation - Restricted Stock Unit Award Plan;
and Securities Authorized for Issuance Under Equity Compensation
Plans”.
ITEM
6. SELECTED FINANCIAL DATA
The
selected consolidated financial data presented on below for the years ended
December 31, 2005, 2004, 2003, 2002 and 2001 are derived from the Company's
audited Consolidated Financial Statements. The Consolidated Financial Statements
as of December 31, 2005 and 2004, and for each of the years in the three-year
period ended December 31, 2005, and the reports thereon, are included elsewhere
herein. The selected financial information as of and for the years ended
December 31, 2002 and 2001 are derived from the audited Consolidated Financial
Statements of the Company not presented herein.
The
information set forth below is qualified by reference to, and should be read
in
conjunction with, the Consolidated Financial Statements and related notes
thereto included elsewhere in this Report and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
|
|
|
YEARS
ENDED DECEMBER 31,
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
(IN
THOUSANDS, EXCEPT PER SHARE DATA)
|
|
|
OPERATING
DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
--
|
|
$
|
838
|
|
$
|
5,750
|
|
$
|
8,205
|
|
$
|
16,929
|
|
|
Operating
Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of manufacturing
|
|
|
--
|
|
|
1,435
|
|
|
11,705
|
|
|
12,535
|
|
|
14,857
|
|
|
Research
and development
|
|
|
6,265
|
|
|
4,130
|
|
|
1,460
|
|
|
1,517
|
|
|
1,327
|
|
|
Selling,
general and Administrative expenses
|
|
|
5,296
|
|
|
5,238
|
|
|
7,903
|
|
|
7,216
|
|
|
6,616
|
|
|
Plant
shutdown costs
|
|
|
--
|
|
|
--
|
|
|
1,926
|
|
|
(126
|
)
|
|
68
|
|
|
Interest
expense
|
|
|
636
|
|
|
2,962
|
|
|
6,001
|
|
|
4,728
|
|
|
3,913
|
|
|
Interest
income
|
|
|
(36
|
)
|
|
(59
|
)
|
|
(25
|
)
|
|
(15
|
)
|
|
(69
|
)
|
|
Amortization
of debt discount and deferred private offering costs
|
|
|
--
|
|
|
72,491
|
|
|
24,771
|
|
|
12,558
|
|
|
2,591
|
|
|
Loss
(gain) on extinguishments of debt
|
|
|
--
|
|
|
(12,401
|
)
|
|
--
|
|
|
28,415
|
|
|
--
|
|
|
Investment
in joint venture
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(202
|
)
|
|
Other
(income) expense
|
|
|
(86
|
)
|
|
(2,962
|
)
|
|
464
|
|
|
966
|
|
|
(13
|
)
|
|
Loss
before income tax benefit
|
|
|
(12,075
|
)
|
|
(69,996
|
)
|
|
(48,455
|
)
|
|
(59,589
|
)
|
|
(12,563
|
)
|
|
Income
tax benefit
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Net
loss
|
|
$
|
(12,075
|
)
|
$
|
(69,996
|
)
|
$
|
(48,455
|
)
|
$
|
(59,589
|
)
|
$
|
(12,563
|
)
|
|
Basic
and diluted loss per common share
|
|
$
|
(.18
|
)
|
$
|
(3.20
|
)
|
$
|
(2.28
|
)
|
$
|
(3.90
|
)
|
$
|
(.84
|
)
|
|
Weighted
average number of outstanding shares
|
|
|
66,573
|
|
|
21,861
|
|
|
21,227
|
|
|
15,262
|
|
|
15,021
|
|
|
|
|
DECEMBER
31,
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
(IN
THOUSANDS)
|
|
|
BALANCE
SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (deficiency)
|
|
$
|
(2,478
|
)
|
$
|
2,423
|
|
$
|
(3,770
|
)
|
$
|
5,933
|
|
$
|
(8,276
|
)
|
|
Total
assets
|
|
|
1,792
|
|
|
4,967
|
|
|
6,622
|
|
|
19,364
|
|
|
11,069
|
|
|
Total
debt
|
|
|
7,613
|
|
|
5,093
|
|
|
53,142
|
|
|
25,398
|
|
|
67,321
|
|
|
Total
liabilities
|
|
|
7,954
|
|
|
6,052
|
|
|
58,689
|
|
|
31,632
|
|
|
76,505
|
|
|
Accumulated
deficit
|
|
|
(291,616
|
)
|
|
(279,541
|
)
|
|
(209,546
|
)
|
|
(161,090
|
)
|
|
(101,501
|
)
|
|
Stockholders'
equity (deficit)
|
|
$
|
(6,162
|
)
|
$
|
(1,085
|
)
|
$
|
(52,067
|
)
|
$
|
(12,268
|
)
|
$
|
(65,436
|
)
|
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
This
discussion and analysis should be read in conjunction with the Company’s
financial statements and accompanying notes included elsewhere in this Report.
Operating results are not necessarily indicative of results that may occur
in
the future periods. Certain statements in this Report under this Item 7, Item
1,
"Business", Item 1A, “Risk Factors,” Item 3, "Legal Proceedings" and elsewhere
in this Report constitute "forward-looking statements" within the meaning of
the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements
of
the Company, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. The most significant of such factors include, but
are not limited to, the Company’s ability to secure additional financing to fund
continued product development and operations, the Company’s ability to enter
into contractual arrangements with qualified pharmaceutical partners to license,
develop and commercialize the Company’s technology and product candidates, and
the Company’s ability to fulfill the U.S. Food and Drug Administration’s
requirements for approving the Company’s product candidates for commercial
distribution in the United States. Other important factors that may also affect
future results include, but are not limited to: the Company’s ability to attract
and retain highly skilled personnel; its ability to secure and protect its
patents, trademarks and proprietary rights; its ability to avoid infringement
of
patents, trademarks and other proprietary rights or trade secrets of third
parties; litigation or regulatory action that could require the Company to
pay
significant damages or change the way it conducts its business; the Company’s
ability to compete successfully against current and future competitors; its
dependence on third-party suppliers of raw materials; its ability to secure
U.S.
Drug Enforcement Administration quotas and source controlled substances that
constitute the active ingredients of the Company’s products in development;
difficulties or delays in clinical trials for Company products or in the
manufacture of Company products; and other risks and uncertainties detailed
in
this Report. The Company is at development stage and may not ever have any
products or technologies that generate revenue. When used in this Report, the
words "estimate," "project," "anticipate," "expect," "intend," "believe," and
similar expressions are intended to identify forward-looking
statements.
Company
Overview
Acura
Pharmaceuticals, Inc.
is
a
specialty pharmaceutical company primarily engaged in research, development
and
manufacture of innovative abuse deterrent, abuse resistant and tamper resistant
formulations ("
Aversion®
Technology") intended for use in orally administered opioid-containing
pharmaceutical products. The Company’s lead product candidate utilizing its
Aversion®
Technology, OxyADF
TM
tablets,
(formerly referred to by the Company as Product Candidate #2) is being developed
pursuant to an active investigational new drug application (“IND”) on file with
the U.S. Food and Drug Administration (“FDA”). The FDA has confirmed that
OxyADF
TM
is
an
appropriate product candidate for submission as a 505(b)(2) new drug application
(“NDA”). The Company utilizes several contract research organizations and an
academic institution for laboratory and clinical evaluation and testing of
product candidates incorporating the Aversion® Technology. The status of the
development of the Aversion®
Technology
and the OxyADF™ tablets are described in Item 1, “Business” under the caption
“Aversion® Technology”.
In
addition, to a much lesser extent, during 2004 and early 2005, the Company
was
engaged in the research, development and manufacture of proprietary, high-yield,
short cycle time, environmentally sensitive opioid synthesis processes (the
"Opioid Synthesis Technologies") intended for use in the commercial production
of certain bulk opioid active pharmaceutical ingredients (“APIs”). In early
2005, the Company suspended development and commercialization efforts relating
to the Opioid Synthesis Technologies. The status of the Opioid Synthesis
Technologies is described in Item 1, “Business” under the caption “Opioid
Synthesis Technologies”.
As
of the
date of this Report the Company had three US non-provisional and two
international patent applications pending relating to its Aversion® Technology.
Additionally, as of the date of this Report, the Company had six US patents
issued and three US patent applications pending related to its Opioid Synthesis
Technologies.
As of
the date of this Report, the Company retained ownership of all issued patents,
patent applications, other intellectual property and commercial rights to its
product candidates, Aversion Technology and Opioid Synthesis
Technologies.
The
Company conducts research, development, laboratory, manufacturing and
warehousing activities for its Aversion® Technology at its Culver, Indiana
facility (the "Culver Facility"). The Culver Facility is registered by the
U.S.
Drug Enforcement Administration (the "DEA") to perform research, development
and
manufacture for certain Schedule II - V controlled substances in bulk and
finished dosage forms. In 2001, the Company filed with the DEA an application
for registration (the “Import Registration”) to import narcotic raw materials
("NRMs"). The status of the application for the Import Registration is described
in Item 1, “Business” under the caption "Import Registration."
To
generate revenue, the Company expects to enter into development and
commercialization agreements with strategically focused pharmaceutical company
partners (the "Partners") providing that such Partners license the Company’s
product candidates utilizing the Aversion
®
Technology and further develop, register and commercialize multiple formulations
and strengths of such product candidates. The Company expects to receive
milestone payments and a share of profits and/or royalty payments derived from
the Partners' sale of products incorporating the Aversion® Technology. As of the
date of this Report the Company did not have executed collaborative agreements
with Partners, nor can there be any assurance that the Company will successfully
enter into such collaborative agreements in the future.
The
Company’s business involves inherent risk as set forth in Item 1A of this
Report. These risks include, among others, the need for FDA approval prior
to
commercial distribution of the Company’s product candidates in the United
States, acceptance by healthcare providers and third-party payers of such
product candidates, dependence on key personnel, determination of patentability
of our Aversion® Technology by the United States Patent and Trademark Office,
and freedom to operate for the Company’s product candidates.
The
Company has incurred net losses since 1992 and the Company's consolidated
financial statements for each of the years ended December 31, 2005 and 2004
have
been prepared on a going-concern basis; however, in its report dated February
1,
2006 regarding those financial statements, our registered independent public
accounting firm referred to substantial doubt about the Company's ability to
continue as a going-concern as a result of recurring losses, net capital
deficiency and negative cash flows. The Company's future profitability will
depend on several factors, including
:
(a)
the
Company’s ability to secure additional financing to fund continued
operations;
(b)
the
successful completion of the formulation development, clinical testing and
acceptable regulatory review of product candidates utilizing the Aversion®
Technology; (c) the receipt of issued patents from the U.S. Patent and Trademark
Office (“PTO”) for the material claims in the Company's patent applications
relating to the Aversion®
Technology;
(d) the Company's ability to negotiate and execute appropriate licensing,
development and commercialization agreements with interested third parties
relating to the Company’s product candidates; and (e) the successful
commercialization by licensees of products incorporating the Aversion®
Technology without infringing the patents and other intellectual property rights
of third parties.
Company’s
Present Financial Condition and Commercial Focus
At
December 31, 2005, the Company had cash and cash equivalents of approximately
$260,000 compared to approximately $3.1 million at December 31, 2004. The
Company had a working capital deficit of $2.5 million at December 31, 2005
and
working capital of approximately $2.4 million at December 31, 2004. The Company
had an accumulated deficit of approximately $291.6 and $279.5 million at
December 31, 2005 and December 31, 2004, respectively.
The
Company incurred a loss from operations of approximately
$11.6
million
and a net loss of approximately
$12.1
million
during the year ended December 31, 2005, as compared to a loss from operations
of $10.0 million and a net loss of
$70.0
million for the year ended December 31, 2004
.
The
Company is focused on (a)
the
development and evaluation, in concert with contract research organizations
(“CROs”), in laboratory settings and clinical trials, of product candidates
utilizing the Company's Aversion® Technology; (b) the manufacture, quality
assurance testing and release, and stability studies of clinical trial supplies
and NDA submission batches of certain finished dosage form product candidates
utilizing the Company’s Aversion® Technology; (c) the prosecution of the
Company’s patent applications relating to the
Aversion®
Technology
with the
PTO and foreign equivalents; (d) the negotiation and execution of license and
development agreements with strategic pharmaceutical company partners providing
that such licensees will further develop certain finished dosage product
candidates utilizing the Aversion® Technology, file for regulatory approval with
the FDA and other regulatory authorities and commercialize such products; and
(e) the prosecution of the Company's application to the U.S. Drug Enforcement
Administration (“DEA”) for registration to import narcotic raw materials
(“NRMs”).
Prior
to
2005, in addition to its Aversion® Technology research and development
activities, the Company manufactured and sold generic finished dosage
pharmaceutical products. The Company discontinued the manufacture and sale
of
such products in the first quarter of 2004.
As
of
February 1, 2006, the Company had cash and cash equivalents of approximately
$647,000
.
The
Company estimates its current cash reserves will be sufficient to fund the
development of the Aversion® Technology and related operating expenses only
through mid-to-late March
,
2006.See
“Liquidity and Capital Resources - Commercial Focus, Cash Reserves and Funding
Requirements.”
Results
of Operations for the Year Ended December 31, 2005 and 2004
In
comparing results of operations for the year ended December 31, 2005 with those
for 2004 it is important
to
consider that in 2005 the Company, focused all of its efforts and resources
on
research and development activities and, subsequent to March, 2004, no longer
maintained any generic product manufacturing facilities or conducted any
finished dosage generic product manufacturing activities. As such, the Company
had no product revenues or manufacturing expenses in 2005.
Research and development expenses for the year ended December 31, 2005 and
2004
were as follows (in thousands):
|
12/31/05
R&D
EXPENSES
|
12/31/04
R&D
EXPENSES
|
12/31/05-12/31/04
R&D
EXPENSES
$
CHANGE
|
12/31/05-12/31/04
R&D
EXPENSES
%
CHANGE
|
|
|
|
|
|
|
$
6,265
|
$
4,130
|
$
2,135
|
52%
|
During
2005 and 2004, research and development expenses consisted primarily of
development of
our
Aversion®
Technology, including costs of preclinical, clinical trials, clinical supplies
and related formulation and design costs, salaries and other personnel related
expenses, and facility costs. The increase in R&D expenses in 2005 versus
2004 is primarily due to the recording of a non cash compensation charge of
$3,325 arising from the issuance of stock options and restricted stock units
to
R&D personnel as compared to $553 for such items in 2004. Except for this
non cash compensation charge, R&D expenses declined in 2005 versus 2004 by
approximately $637 primarily as a result of elimination in 2004 of the
development of generic pharmaceutical products and the suspension in 2005 of
further development of the Opioid Synthesis Technologies.
Selling,
marketing, general and administrative expenses for the
year
ended December 31, 2005 and 2004 were as follows (in thousands):
|
12/31/05
SELLING,
MARKETING,
G&A
EXPENSES
|
12/31/04
SELLING,
MARKETING,
G&A
EXPENSES
|
12/31/05-12/31/04
SELLING,
MARKETING, G&A EXPENSES
$
CHANGE
|
12/31/05-12/31/04
SELLING,
MARKETING, G&A EXPENSES
%
CHANGE
|
|
|
|
|
|
|
$5,296
|
$5,238
|
$58
|
1%
|
Included
in 2005 selling, marketing, general and administrative expenses is a non cash
compensation charge of $3,133 arising from the issuance of stock options and
restricted stock units to SG&A personnel as compared to only $1,453 for such
items in 2004. Except for this charge, SG&A expenses in 2005 decreased
approximately $1,622 as compared to 2004 due primarily to the Company’s 2004
discontinuation of the manufacture and sale of generic pharmaceutical products
and the related reduction of its administrative and manufacturing support staff.
Environmental
compliance expenses
for
the
year ended December 31, 2005 and 2004, were as follows (in thousands):
|
12/31/05
ENVIRONMENTAL
COMPLIANCE
EXPENSES
|
12/31/04
ENVIRONMENTAL
COMPLIANCE
EXPENSES
|
12/31/05-12/31/04
ENVIRONMENTAL
COMPLIANCE
EXPENSES
CHANGE
|
12/31/05-12/31/04
ENVIRONMENTAL
COMPLIANCE
EXPENSES
CHANGE
|
|
|
|
|
|
|
$
61
|
$
180
|
(
$
119
)
|
(66%)
|
The
environmental compliance expenses, which are included as part of R&D expense
in the financial statements, related primarily to disposal of hazardous and
controlled substances waste and related personnel costs for environmental
compliance incurred while performing research and development activities at
the
Company’s Culver, Indiana facility. The decrease in 2005 from the prior year
resulted primarily from the elimination of API manufacturing operations at
that
site in 2004.
Interest
expense, net of interest income for the year ended December 31, 2005 2004 was
as
follows (in thousands):
|
12/31/05
INTEREST
EXPENSE,
NET
OF INTEREST INCOME
|
12/31/04
INTEREST
EXPENSE,
NET
OF INTEREST INCOME
|
12/31/05-12/31/04
INTEREST
EXPENSE,
NET
OF INTEREST INCOME
$
CHANGE
|
12/31/05-12/31/04
INTEREST
EXPENSE,
NET
OF INTEREST INCOME
%
CHANGE
|
|
|
|
|
|
|
$
600
|
$
2,903
|
(
$
2,303
)
|
(79%)
|
The
change in the interest expense, net of interest income reflects the interest
savings from the restructuring of the Company's term note indebtedness to Watson
Pharmaceuticals, Inc. in February, 2004 as well as the conversion of the
Company’s 5% convertible debentures into convertible preferred stock on August
13, 2004.
The
Company incurred no amortization of debt discount or deferred private debt
offering costs for the year ended December 31, 2005 as all such costs were
fully
amortized to expense in 2004 when all convertible debentures were converted
into
preferred stock. Similarly, the extinguishment of approximately $16.4 million
of
the Watson debt, which gave rise in 2004 to a gain of $12,401, was completed
in
2004.
Net
loss
for the year ended December 31, 2005 and 2004 was as follows (in
thousands):
|
12/31/05
NET
LOSS
|
12/31/04
NET
LOSS
|
12/31/05-12/31/04
NET
LOSS
$
CHANGE
|
12/31/05-12/31/04
NET
LOSS
%
CHANGE
|
|
|
|
|
|
|
$
12,075
|
$
69,996
|
($
57,921)
|
(83%)
|
Included
in the net loss for 2005 is a non cash compensation charge of $6,458 arising
from the issuance of stock options and restricted stock units as compared to
$2,006 for such charges in 2004. Certain significant expenses occurred in 2004
as a result of restructuring operations and conversion of debt to preferred
shares. These expenses included the full amortization of the remaining debt
discount and deferred private offering costs of $72,491, gains on debt
restructuring of the Watson note of $12,401 and asset sales of $2,359, net
interest expense of $2,903 and other income of $603 relating to settlements
of a
liabilities at discount.
The
Company’s loss per share in 2005 versus 2004 ($0.18 versus $3.20, respectively)
was favorably impacted by the conversion on November 10, 2005 of approximately
218.0 million preferred shares into approximately 305.8 million common shares.
On a weighted average basis, this increased the number of common shares in
the
loss per share calculation to approximately 66.5 million shares in 2005 as
compared to 21.9 million shares in 2004. For periods prior to November 10,
2005
the Company’s convertible preferred shares were anti-dilutive and therefore
excluded from the loss per share calculation.
Results
of Operations for the Year Ended December 31, 2004 and 2003
In
comparing results of operations for the year ended December 31, 2004 with those
for 2003 it is important to understand that in 2004 the Company focused the
majority of its efforts and resources on Aversion® Technology research and
development activities and, subsequent to March, 2004, no longer maintained
any
generic product manufacturing facilities or conducted any manufacturing
activities. Net product revenues and manufacturing expenses realized in 2004
were incurred as part of an orderly phase out of all generic product
manufacturing activities.
Net
product revenues for the year ended December 31, 2004 and 2003 were as follows
(in thousands):
|
12/31/04
NET
PRODUCT REVENUES
|
12/31/03
NET
PRODUCT REVENUES
|
12/31/04-12/31/03
NET
PRODUCT
REVENUE
$
CHANGE
|
12/31/04-12/31/03
NET
PRODUCT
REVENUE
%
CHANGE
|
|
|
|
|
|
|
$
838
|
$
5,750
|
($4,912)
|
(85%)
|
The
decrease in net product revenues was a result of discontinuing the manufacture
and sale of finished dosage generic pharmaceutical products. The net product
revenues for the year ended December 31, 2004 reflect the sale of all remaining
inventories of saleable finished dosage generic pharmaceutical products during
the first two quarters of 2004. No product sales revenues were recorded for
the
third or fourth quarter of 2004.
Cost
of
manufacturing for the year ended December 31, 2004 and 2003 were as follows
(in
thousands):
|
12/31/04
COST
OF MANUFACTURING
|
12/31/03
COST
OF MANUFACTURING
|
12/31/04-12/31/03
COST
OF MANUFACTURING
$
CHANGE
|
12/31/04-12/31/03
COST
OF MANUFACTURING
%
CHANGE
|
|
|
|
|
|
|
$
1,435
|
$
11,705
|
($10,270)
|
(88%)
|
For
the
year ended December 31, 2004, cost of manufacturing includes the fixed costs
of
the Company's generic finished dosage manufacturing operations in the first
quarter of 2004 and residual expenses through the second quarter of 2004. The
Company’s generic finished dosage manufacturing operations ceased in March
2004.
Research
and development expenses for the year ended December 31, 2004 and 2003 were
as
follows (in thousands):
|
12/31/04
R&D
EXPENSES
|
12/31/03
R&D
EXPENSES
|
12/31/04-12/31/03
R&D
EXPENSES
$
CHANGE
|
12/31/04-12/31/03
R&D
EXPENSES
%
CHANGE
|
|
|
|
|
|
|
$4,130
|
$1,460
|
$2,670
|
183%
|
In
2003,
research and development expense consisted primarily of generic product
development costs. During 2004, research and development expense consists
primarily of research and development associated with our Aversion® Technology,
including costs of preclinical, clinical trials, clinical supplies and related
formulation and design costs, salaries and other personnel related expenses,
and
facility costs. The increase in R&D expenses is primarily related to the
Company’s strategic decision to devote a major portion of its resources in 2004
to research and development activities relating to its Aversion® Technology and
to a lesser extent to its Opioid Synthesis Technologies. The 2004 expenses
include a non cash compensation charge of $553 recorded for the issuance of
stock options and $1,093 of personnel costs for employees which were reassigned
to research and development.
Selling,
marketing, general and administrative expenses for the
year
ended December 31, 2004 and 2003 were as follows (in thousands):
|
12/31/04
SELLING,
MARKETING,
G&A
EXPENSES
|
12/31/03
SELLING,
MARKETING,
G&A
EXPENSES
|
12/31/04-12/31/03
SELLING,
MARKETING,
G&A
EXPENSES
$
CHANGE
|
12/31/04-12/31/03
SELLING,
MARKETING,
G&A
EXPENSES
%
CHANGE
|
|
|
|
|
|
|
$
5,238
|
$
7,903
|
(
$
2,665
)
|
(34%)
|
The
decrease in selling, marketing, general and administrative expenses resulted
from discontinuing the marketing and sale of generic products and reducing
its
related
administrative and manufacturing support staff. The decrease includes $1,093
of
personnel costs for employees which were reassigned to research and development
in connection with the Company’s strategic decision to devote a major portion of
its resources in 2004 to research and development activities, a nonrecurring
benefit for settlement of trade payables at a discount of $194 and a non cash
compensation charge of $1,453 recorded for the issuance of stock options.
Environmental
compliance expenses for
the
year
ended December 31, 2004 and 2003, were as follows (in thousands):
|
12/31/04
ENVIRONMENTAL
COMPLIANCE EXPENSES
|
12/31/03
ENVIRONMENTAL
COMPLIANCE EXPENSES
|
12/31/04-12/31/03
ENVIRONMENTAL
COMPLIANCE EXPENSES
$
CHANGE
|
12/31/04-12/31/03
ENVIRONMENTAL
COMPLIANCE EXPENSES
%
CHANGE
|
|
|
|
|
|
|
$
180
|
$
227
|
(
$
47
)
|
(21%)
|
Environmental
compliance expenses related primarily to disposal of hazardous and controlled
substances waste and related personnel costs for environmental
compliance.
Interest
expense, net of interest income for the year ended December 31, 2004 and 2003
was as follows (in thousands):
|
12/31/04
INTEREST
EXPENSE, NET OF INTEREST INCOME
|
12/31/03
INTEREST
EXPENSE, NET OF INTEREST INCOME
|
12/31/04-12/31/03
INTEREST
EXPENSE, NET OF INTEREST INCOME
$
CHANGE
|
12/31/04-12/31/03
INTEREST
EXPENSE, NET OF INTEREST INCOME
%
CHANGE
|
|
|
|
|
|
|
$
2,903
|
$
5,976
|
(
$
3,073
)
|
(51%)
|
The
change in the interest expense, net of interest income reflects the interest
savings from the restructuring of the Company's term note indebtedness to Watson
Pharmaceuticals, Inc. in February, 2004 and the conversion of the Company’s 5%
convertible debentures into convertible preferred stock on August 13,
2004.
Debt
discount and deferred private debt offering costs for the year ended December
31, 2004 and 2003 were as follows (in thousands):
|
12/31/04
DEBT
DISCOUNT AND DEFERRED PRIVATE DEBT OFFERING COSTS
|
12/31/03
DEBT
DISCOUNT AND DEFERRED PRIVATE DEBT OFFERING COSTS
|
12/31/04-12/31/03
DEBT
DISCOUNT AND DEFERRED PRIVATE DEBT OFFERING COSTS
$
CHANGE
|
12/31/04-12/31/03
DEBT
DISCOUNT AND DEFFERED PRIVATE DEBT OFFERING COSTS
%
CHANGE
|
|
|
|
|
|
|
$72,491,
consisting of
$1,030
private debt offering costs and
$71,461
debt discount
|
$24,771,
consisting of
$1,099
private debt offering costs and
$23,672
debt discount
|
$
47,720
|
193%
|
The change in the debt discount and deferred private debt offering costs
reflects the amortization of the remaining deferred debt discount and private
debt offering costs incurred from all of the Company’s debenture and bridge loan
financings consummated from March 1998 through May, 2004. As a result of the
conversion of all convertible debentures into preferred stock at August 13,
2004, all remaining unamortized debt discount and deferred private debt offering
cost balances were written off to expense.
Net
loss
for the year ended December 31, 2004 and 2003 was as follows (in
thousands):
|
12/31/04
NET
LOSS
|
12/31/03
NET
LOSS
|
12/31/04-12/31/03
NET
LOSS
$
CHANGE
|
12/31/04-12/31/03
NET
LOSS
%
CHANGE
|
|
|
|
|
|
|
$
69,996
|
$
48,455
|
$21,541
|
44%
|
Included
in the net loss for the year ended December 31, 2004 is the full amortization
of
the remaining debt discount and deferred private offering costs of $72,491,
gains on debt restructuring of the Watson note of $12,401 and asset sales of
$2,359, net interest expense of $2,903 and other income of $603 relating to
settlements of a liabilities at discount.
Liquidity
and Capital Resources
At
December 31, 2005, the Company had cash and cash equivalents of $260,000
compared to $3.1 million at December 31, 2004. The Company had a working capital
deficit of $2.5 million at December 31, 2005 compared to working capital of
$2.4
million at December 31, 2004.
2004
Debenture Offering
On
February 10, 2004, the Company consummated a private offering of convertible
senior secured debentures (the "2004 Debentures") in the aggregate principal
amount of approximately $12.3 million (the "2004 Debenture Offering"). The
2004
Debentures were issued by the Company pursuant to a certain Debenture and Share
Purchase Agreement dated as of February 6, 2004 (the "2004 Purchase Agreement")
by and among the Company, Care Capital Investments, Essex Woodlands Health
Ventures, Galen Partners and each of the purchasers listed on the signature
page
thereto. On April 14, 2004 and May 26, 2004, the Company completed additional
closings under the 2004 Purchase Agreement raising the aggregate gross proceeds
received by the Company from the offering of the 2004 Debentures to $14 million.
The 2004 Debentures carried an interest rate of 1.62% per annum and were secured
by a lien on all assets of the Company and the assets of Acura Pharmaceutical
Technologies, Inc. and Axiom Pharmaceutical Corporation, each a wholly-owned
subsidiary of the Company.
Pursuant
to the terms of the 2004 Purchase Agreement and other documents executed in
connection with the 2004 Debentures, effective August 13, 2004, each of the
holders of the Company’s 2004 Debentures converted the 2004 Debentures into the
Company’s Series A preferred shares (the “Series A Preferred”). In addition,
effective August 13, 2004, each of the holders of the Company’s 5% convertible
senior secured debentures issued during the period 1998 through and including
2003 converted such debentures into the Company’s Series B Preferred Stock (the
“Series B Preferred”) and/or Series C-1, C-2 and/or C-3 preferred stock
(collectively, the “Series C Preferred”). The Series C Preferred shares together
with the Series B Preferred shares are herein referred to as the “Junior
Preferred Shares”). Upon conversion of the Company’s outstanding debentures, the
Company issued approximately 21.9 million Series A Preferred shares,
approximately 20.2 million Series B Preferred shares, approximately 56.4 million
Series C-1 Preferred shares, approximately 37.4 million Series C-2 Preferred
shares and approximately 81.9 million Series C-3 Preferred shares.
Conversion
of Preferred Shares into Common Stock
Effective
November 10, 2005, all of the Company’ s issued and outstanding shares of
preferred stock were automatically and mandatorily converted into the Company’s
common stock in accordance with the terms of the Company’s Restated
Certification of Incorporation (the “Preferred Stock Conversion”). In accordance
with the conversion provisions contained in the Restated Certificate of
Incorporation, all issued and outstanding shares of the Company’s Series A
Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series
C-2 Preferred Stock and Series C-3 Preferred Stock (collectively, the “Preferred
Stock”) are converted automatically into the Company’s common stock upon the
Company’s receipt of the written consent to the Preferred Stock Conversion from
the holders of at least 51% of the shares of the Company’s Series A Preferred
Stock. On November 10, 2005, the Company received the consent to the Preferred
Stock Conversion from GCE Holdings LLC
(the
assignee of all Preferred Stock (prior to its conversion into common stock)
formerly held by each of Care Capital Investments II, LP, Care Capital Offshore
Investments II, LP, Essex Woodlands Health Ventures V, L.P., Galen Partners
International III, L.P., Galen Partners III, L.P. and Galen Employee Fund III,
L.P.), such entity holding in the aggregate in excess of 51% of the issued
and
outstanding shares of the Company’s Series A Preferred Stock. In accordance with
the terms of the Company’s Restated Certificate of Incorporation, all shares of
the Company’s Preferred Stock were automatically converted into an aggregate of
approximately 305.4 million shares of the Company’s common stock.
Amendment
to Watson Term Loan Agreement
The
Company was a party to a certain loan agreement with Watson Pharmaceuticals,
Inc. ("Watson") pursuant to which Watson made term loans to the Company (the
"Watson Term Loan Agreement") in the aggregate principal amount of $21.4 million
as evidenced by two promissory notes (the "Watson Notes"). It was a condition
to
the completion of the 2004 Debenture Offering that simultaneous with the closing
of the 2004 Purchase Agreement, the Company shall have paid Watson the sum
of
approximately $4.3 million (which amount was funded from the proceeds of the
2004 Debenture Offering) and conveyed to Watson certain Company assets in
consideration for Watson's forgiveness of approximately $16.4 million of
indebtedness under the Watson Notes. A part of such transaction, the Watson
Notes were amended to extend the maturity date of such notes from March 31,
2006
to June 30, 2007, to provide for satisfaction of future interest payments under
the Watson Notes in the form of the Company's Common Stock, to reduce the
principal amount of the Watson Notes from $21.4 million to $5.0 million, and
to
provide for the forbearance from the exercise of rights and remedies upon the
occurrence of certain events of default under the Watson Notes (the Watson
Notes
as so amended, the "2004 Note"). Simultaneous with the issuance of the 2004
Note, each of Care Capital, Essex Woodlands Health Ventures, Galen Partners
and
the other investors in the 2004 Debentures as of February 10, 2004
(collectively, the "Watson Note Purchasers") purchased the 2004 Note from Watson
in consideration for a payment to Watson of $1.0 million.
In
addition to Watson's forgiveness of approximately $16.4 million under the Watson
Notes, as additional consideration for the Company's payment to Watson of
approximately $4.3 million and the Company's conveyance of certain Company
assets, all supply agreements between the Company and Watson were terminated
and
Watson waived the dilution protections contained in the Common Stock purchase
warrant dated December 20, 2002 exercisable for approximately 10.7 million
shares of the Company's Common Stock previously issued by the Company to Watson,
to the extent such dilution protections were triggered by the transactions
provided in the 2004 Debenture Offering.
Terms
of the
2004
Note
The
2004
Note in the principal amount of $5.0 million as purchased by the Watson Note
Purchasers is secured by a lien on all of the Company's and its subsidiaries'
assets, carries a floating rate of interest equal to the prime rate plus 4.5%
(paid quarterly in the Company’s common stock) and matures on June 30,
2007.
Bridge
Loan Financing
January
2006 Bridge Loan
The
Company is a party to a Loan Agreement, dated January 31, 2006 (the “January
2006 Bridge Loan Agreement”) by and among Essex Woodlands Health Ventures V,
L.P., Care Capital Investments II, LP , Care Capital Offshore Investments II,
LP, Galen Partners III, L.P., Galen Partners International III, L.P., Galen
Employee Fund III, L.P. and such Additional Lenders as may become a party
pursuant to the terms of the January 2006 Bridge Loan Agreement (collectively,
the “January 2006 Bridge Lenders”). In accordance with the terms of the January
2006 Bridge Loan Agreement, on January 31, 2006 the January 2006 Bridge Lenders
provided a bridge loan to the Company in the principal amount of $750,000.
The
January 2006 Bridge Loan Agreement also permits the funding of additional loans
in the principal amount of up to $250,000 and, with the consent of any two
of
Care Capital Investments, Essex Woodlands Health Ventures and Galen Partners,
additional loan amounts mutually agreed to by the Company and the January 2006
Bridge Lenders (the “January 2006 Bridge Loan”). No assurance can be given that
any additional loans will be made available to the Company under the January
2006 Bridge Loan Agreement. The net proceeds from the January 2006 Bridge Loan,
after the satisfaction of related expenses, will be used by the Company to
continue the development of its
Aversion®
Technology and to fund operating expenses. The January 2006 Bridge Loan is
secured by a lien on all of the Company’s assets, senior in right of payment and
lien priority to all other indebtedness of the Company. The January 2006 Bridge
Loan bears interest at the rate of ten percent (10%) per annum and matures
on
June 1, 2006. The January 2006 Bridge Loan is subject to mandatory pre-payment
by the Company upon the Company’s completion of equity or debt financing or any
sale, transfer, license or similar arrangement pursuant to which the Company
or
any of its Subsidiaries sells, licenses or otherwise grant rights in any
material portion of the Company’s intellectual property to any third party,
provided that the consummation of any such transaction results in cash proceeds
to the Company, net of all costs and expenses, at least equal to the sum of
(i)
$5.05 million, plus (ii) the aggregate principal amount of the January 2006
Bridge Loan (a “Funding Event”). The January 2006 Bridge Loan Agreement
restricts the Company’s ability to issue any shares of its currently authorized
Series A, B or C preferred stock without the prior consent of the January 2006
Bridge Lenders, and grants the January 2006 Bridge Lenders preemptive rights
relating to the issuance of the Company’s Series A, B and C preferred stock. The
January 2006 Bridge Loan Agreement also contains normal and customary
affirmative and negative covenants, including restrictions on the Company’s
ability to incur additional debt or grant any lien on the assets of the Company
or its Subsidiaries, subject to certain permitted exclusions.
November
2005
Bridge Loan
The
Company is a party to a Loan Agreement, dated November 9, 2005 (the “November
2005 Bridge Loan Agreement”) by and among Essex Woodlands Health Ventures V,
L.P., Care Capital Investments II, LP, Care Capital Offshore Investments II,
LP,
Galen Partners III, L.P., Galen Partners International III, L.P., Galen Employee
Fund III, L.P. and certain other shareholders of the Company listed on the
signature page thereto (collectively, the “November 2005 Bridge Lenders”)
providing for bridge financing to the Company in the principal amount of $1.05
million (the “November 2005 Bridge Loan”). The net proceeds from the November
2005 Bridge Loan, after the satisfaction of related expenses, are being used
by
the Company to continue the development of its Aversion™ Technology and to fund
operating expenses. The terms of the November 2005 Bridge Loan are identical
to
the terms of the January 2006 Bridge Loan, except that (i) the lien securing
the
November 2005 Bridge Loan is junior in right of payment and lien priority to
the
January 2006 Bridge Loan, and (ii) the funding event is $5.05 million.
September
2005
Bridge
Loan
The
Company is a party to a Loan Agreement, dated
September 16,
2005
(the “
September
2005
Bridge
Loan Agreement”) by and among Essex Woodlands Health Ventures V, L.P., Care
Capital Investments II, LP, Care Capital Offshore Investments II, LP, Galen
Partners III, L.P., Galen Partners International III, L.P., and Galen Employee
Fund III, L.P. (collectively, the “
September
2005
Bridge
Lenders”) providing for bridge financing to the Company in the principal amount
of $
0.5
million
(the “
September
2005
Bridge Loan”). The net proceeds from the
September
2005
Bridge Loan, after the satisfaction of related expenses, were used by the
Company to continue the development of its
Aversion™
Technology and to fund operating expenses. The terms of the September 2005
Bridge Loan are identical to the terms of the January 2006 Bridge Loan, except
that (i) the September 2005 Bridge Loan required that the Company maintain
minimum cash reserves of $200,000, (ii) the lien securing the September 2005
Bridge Loan is junior in right of payment and lien priority to each of the
January 2006 Bridge Loan and the November 2005 Bridge Loan, and (iii) the
Funding Event is $4.0 million. On October 20, 2005, the September 2005 Bridge
Lenders waived the requirement that the Company maintain minimum cash reserves
of $200,000 until such time as the Company receives additional financing
providing net proceeds to the Company of at least $2.0 million.
June
2005
Bridge Loan
The
Company also is a party to a Loan Agreement, dated June 22, 2005 (the “June 2005
Bridge Loan Agreement”) by and among Essex Woodlands Health Ventures V, L.P.,
Care Capital Investments II, LP, Care Capital Offshore Investments II, LP,
Galen
Partners III, L.P., Galen Partners International III, L.P., and Galen Employee
Fund III, L.P. (collectively, the “June 2005 Bridge Lenders”) providing for
bridge financing to the Company in the principal amount of $1.0 million (the
“June 2005 Bridge Loan”). The net proceeds from the June 2005 Bridge Loan, after
the satisfaction of related expenses, were used by the Company to continue
the
development of its
Aversion™
Technology and to fund operating expenses. The terms of the June 2005 Bridge
Loan are identical to the terms of the January 2006 Bridge Loan described above,
except that (i) the June 2005 Bridge Loan required that the Company maintain
minimum cash reserves of $200,000, (ii) the lien securing the June 2005 Bridge
Loan is junior in right of payment and lien priority to each of the January
2006
Bridge Loan, the November 2005 Bridge Loan and the September 2005 Bridge Loan
and (iii) the Funding Event amount is $3.5 million.
On
October 20, 2005, the June 30, 2005 Bridge Lenders waived the requirement that
the Company maintain minimum cash reserves of $200,000 until such time as the
Company receives additional financing providing net proceeds to the Company
of
at least $2.0 million.
Commercial
Focus, Cash Reserves and Funding Requirements
As
of
February 1, 2006, the Company had cash and cash equivalents of approximately
$647,000. The majority of such cash reserves will be dedicated to the
development of the Company's Aversion® Technology, the prosecution of the
Company's patent applications relating to the Aversion® Technology and for
administrative and related operating expenses. The Company has suspended further
development and commercialization efforts relating to the Opioid Synthesis
Technologies and expects to minimize the use of cash and cash equivalents for
the prosecution of patent applications relating to the Opioid Synthesis
Technologies (See “Item 1 - Business - Opioid Synthesis
Technologies”).
The
Company must rely on its current cash reserves to fund the development of its
Aversion® Technology and related ongoing administrative and operating expenses.
The Company's future sources of revenue, if any, will be derived from contract
signing fees, milestone payments and royalties and/or profit sharing payments
from licensees for the Company's Aversion® Technology. The Company estimates
that its current cash reserves , including the net proceeds from the January
2006 Bridge Loan will be sufficient to fund the development of the Aversion®
Technology and related operating expenses through mid-to-late March,
2006
.
To fund
further operations and product development activities, the Company must raise
additional financing, or enter into alliances or collaboration agreements with
third parties. No assurance can be given that the Company will be successful
in
obtaining any such financing or in securing collaborative agreements with third
parties on acceptable terms, if at all, or if secured, that such financing
or
collaborative agreements will provide for payments to the Company sufficient
to
continue to fund operations. In the absence of such financing or third-party
collaborative agreements, the Company will be required to scale back or
terminate operations and/or seek protection under applicable bankruptcy
laws.
Even
assuming the Company is successful in securing additional sources of financing
to fund the continued development of the Aversion® Technology, or otherwise
enters into alliances or collaborative agreements relating to the Aversion®
Technology, there can be no assurance that the Company's development efforts
will result in commercially viable products. The Company's failure to
successfully develop the Aversion® Technology in a timely manner, to obtain an
issued U.S. patent relating to the Aversion® Technology and to avoid infringing
third-party patents and other intellectual property rights will have a material
adverse impact on its financial condition and results of
operations.
In
view
of the matters described above, recoverability of a major portion of the
recorded asset amounts shown in the Company's accompanying consolidated balance
sheets is dependent upon continued operations of the Company, which in turn
are
dependent upon the Company's ability to meet its financing requirements on
a
continuing basis, to maintain present financing, and to succeed in its future
operations. The Company's financial statements do not include any adjustment
relating to the recoverability and classification of recorded asset amounts
or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
The
following table presents the Company's expected cash payments on contractual
obligations outstanding as of December 31, 2005 (in thousands):
|
|
|
TOTAL
|
|
DUE
IN
2006
|
|
DUE
IN
2007
|
|
DUE
IN
2008
|
|
DUE
THEREAFTER
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
7,550
|
|
$
|
2,550
|
|
$
|
5,000
|
|
|
--
|
|
|
--
|
|
|
Capital
leases
|
|
|
63
|
|
|
31
|
|
|
26
|
|
|
6
|
|
|
--
|
|
|
Operating
leases
|
|
|
35
|
|
|
30
|
|
|
5
|
|
|
--
|
|
|
--
|
|
|
Annual
interest on fixed rate debt (1)
|
|
|
128
|
|
|
128
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Employment
agreements
|
|
|
740
|
|
|
740
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations
|
|
$
|
8,516
|
|
$
|
3,479
|
|
$
|
5,031
|
|
$
|
6
|
|
$
|
--
|
|
|
Expected
cash payments on contractual obligations entered into subsequent
to
December 31, 2005
|
|
TOTAL
|
|
DUE
IN
2006
|
|
DUE
IN
2007
|
|
DUE
IN
2008
|
|
DUE
THEREAFTER
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
750
|
|
$
|
750
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
|
Annual
interest on fixed rate debt (1)
|
|
|
25
|
|
|
25
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
775
|
|
$
|
775
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
|
(1)
|
Interest
on variable rate debt is paid with shares of the Company’s common stock.
Such interest expense is estimated to be $600,000 for
2006.
|
Critical
Accounting Policies
Note
A of
the Notes to Consolidated Financial Statements included as a part of this
Report, includes a summary of the Company's significant accounting policies
and
methods used in the preparation of the financial statements. In preparing these
financial statements, the Company has made its best estimates and judgments
of
certain amounts included in the financial statements, giving due consideration
to materiality. The application of these accounting policies involves the
exercise of judgment and use of assumptions as to future uncertainties and,
as a
result, actual results could differ from these estimates. The Company does
not
believe there is a consequential likelihood that materially different amounts
would be reported under different conditions or using different assumptions.
The
Company's critical accounting policies are as follows:
Income
Taxes
Deferred
income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities and loss carry-forwards
for which income tax benefits are expected to be realized in future years.
A
valuation allowance is established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. In estimating future tax
consequences, the Company generally considers all expected future events other
than an enactment of changes in the tax laws or rates. The Company has recorded
a full valuation allowance to reduce its net deferred income tax assets to
the
amount that is more likely than not to be realized. In the event the Company
were to determine that it would be able to realize its deferred income tax
assets in the future, an adjustment to reduce the valuation allowance would
increase income in the period such determination was made.
Stock
Compensation
The
Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25") and complies with the disclosure provision of
SFAS
No. 148, "Accounting for Stock-based Compensation - Transition and Disclosure,
an amendment of FASB Statement No. 123" ("SFAS No. 148"). The amounts disclosed
include various estimates used to determine fair value of stock options. and
restricted stock units. Management determines the amount of the compensation
associated with options and restricted stock units, based, in part, by the
relative fair values ascribed to these instruments through the use of the
Black-Scholes valuation model. Inherent in the Black-Scholes valuation model
are
assumptions made by management regarding the estimated life of these
instruments, the estimated volatility of the Company's common stock (as
determined by reviewing its historical public market closing prices) and the
expected dividend yield. If the Company were to include the cost of stock-based
employee compensation in the financial statements, which it will be required
to
do starting in 2006, the Company's operating results would decline based on
the
fair value of the stock-based employee compensation.
Debt Discount
Debt
discount has and will result from the issuance of stock warrants and beneficial
conversion features in connection with the issuance of subordinated debt, common
stock interest payments and other notes payable. The amount of the discount
is
recorded as a reduction of the related obligation and is amortized over the
remaining life of the related obligations. Management determines the amount
of
the discount, based, in part, by the relative fair values ascribed to the
warrants determined by an independent valuation or through the use of the
Black-Scholes valuation model. Inherent in the Black-Scholes valuation model
are
assumptions made by management regarding the estimated life of the warrant,
the
estimated volatility of the Company's common stock (as determined by reviewing
its historical public market closing prices) and the expected dividend
yield.
New
Accounting Pronouncements
Stock
Based Payment
On
December 16, 2004, the FASB released FASB Statement No. 123 (revised 2004),
“Share-Based Payment, (“FASB 123R”)”. These changes in accounting replace
existing requirements under FASB Statement No. 123, “Accounting for Stock-Based
Compensation”, and eliminates the ability to account for share-based
compensation transaction using APB Opinion No.25, “Accounting for Stock Issued
to Employees”. The compensation cost relating to share-based payment
transactions will be measured based on the fair value of the equity or liability
instruments issues. This Statement does not change the accounting for similar
transactions involving parties other than employees. Publicly traded companies
must apply this Standard as of the beginning of the first annual period that
begins after June 15, 2005.
FASB
123R
permits public companies to choose between two adoption methods, one of which
is
the “modified prospective” method. The modified prospective method recognizes
compensation cost beginning with the effective date (a) based on the
requirements of FASB 123R for all share-based payments granted after the
effective date and to awards modified, repurchased, or cancelled after that
date
and (b) based on the requirements of FASB Statement No. 123 for all awards
granted to employees prior to the effective date of FAS 123R that remain
unvested on the effective date. The cumulative effect of initially applying
this
Statement, if any, is recognized as of the required effective date. The
Company’s required effective date is January 1, 2006. The Company has not
completed its evaluation of the impact of adopting FASB 123R on its consolidated
financial statements because it will depend on levels of share-based payments
granted in the future. However, the Company has estimated $100,000 of additional
unearned compensation will be recorded and expensed over the applicable
remaining vesting periods for all share-based payments granted to employees
on
or before December 31, 2005 that remain unvested on January 1, 2006. The Company
anticipates that more compensation costs will be recorded in the future if
the
use of options and restricted stock units for employees and director
compensation continues as in the past.
Changes
and Error Corrections
In
May
2005, the FASB issued Statement of Financial Accounting Standards No. 154,
“Accounting Changes and Error Corrections - A Replacement of APB Opinion No.
20
and FASB Statement No. 3”, (“SFAS 154”). SFAS 154 primarily requires
retrospective application to prior periods’ financial statements for the direct
effects of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005, and early adoption
is
permitted. The Company is required to adopt the provision of SFAS 154, as
applicable, beginning in fiscal 2006.
Capital
Expenditures
The
Company's capital expenditures during 2005, 2004 and 2003 were $35,000, $444,000
and $410,000, respectively. The capital expenditures during 2004 and 2003 are
attributable to capital improvements to the Company's Congers, NY and Culver,
Indiana facilities. Capital expenditures in 2005 were attributable to the
purchase of scientific equipment and improvements to the Culver, Indiana
facility.
Impact
of Inflation
The
Company believes that inflation did not have a material impact on its operations
for the periods reported.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
None
of
the securities that we invest in are subject to market risk. To minimize this
risk in the future, we intend to maintain our portfolio of cash equivalents
in a
variety of securities, including commercial paper, governmental and
non-government debt securities and/or money market funds that invest in such
securities. We have no holdings of derivative financial and commodity
instruments. As of December 31, 2005, our investments consisted primarily of
short-term bank commercial paper and checking funds with variable, market rates
of interest.
The
Company has indebtedness which incurs interest on a floating basis in relation
to the Prime Rate. To the extent that inflation is reflected in higher interest
rates, the Company would expect to incur greater interest costs on this debt.
A
one-percentage point increase in interest rates would result in a $50,000
increase in annual interest expense.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This
item
is submitted as a separate section of this Report commencing on page
F-1.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not
Applicable.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures.
The
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company’s Chief
Executive Officer and Chief Financial Officer of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant
to
Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its subsidiaries) required to
be
included in the Company's periodic Securities and Exchange Commission filings.
No significant changes were made in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date
of
their evaluation.
Changes
in Internal Control Over Financial Reporting.
There
was no change in the Company’s internal control over financial reporting that
occurred during the period covered by this Report that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control
over-financial reporting.
Item
9B.
OTHER
INFORMATION
Not
Applicable.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The
directors and executive officers of the Company are as follows:
|
NAME
|
|
AGE
|
|
POSITION
|
|
|
|
|
|
|
|
Andrew
D. Reddick
|
|
53
|
|
President,
Chief Executive Officer and Director
|
|
Ron
J. Spivey
|
|
59
|
|
Senior
Vice President and Chief Scientific Officer
|
|
Peter
A. Clemens
|
|
53
|
|
Senior
Vice President, Chief Financial Officer and Secretary
|
|
James
F. Emigh
|
|
50
|
|
Vice
President of Marketing and Administration
|
|
Robert
A. Seiser
|
|
42
|
|
Vice
President, Corporate Controller and Treasurer
|
|
Bruce
F. Wesson
|
|
63
|
|
Director
|
|
William
A. Sumner
|
|
68
|
|
Director
|
|
Jerry
N. Karabelas
|
|
53
|
|
Director
|
|
William
G. Skelly
|
|
55
|
|
Director
|
|
Immanuel
Thangaraj
|
|
35
|
|
Director
|
Andrew
D.
Reddick has been President and Chief Executive Officer since August, 2003 and
a
Director of the Company since August, 2004. From April, 2000 to September,
2002
Mr. Reddick was Chief Operating Officer and Sr. Vice President Commercial
Operations for Adolor Corporation, a pharmaceutical company. From June, 1999
to
March, 2000 he served as President of Faulding Laboratories, Inc. Mr. Reddick
holds a BA degree in Biology from the University of California and an MBA degree
from Duke University.
Ron
J.
Spivey has been Senior Vice President and Chief Scientific Officer since April,
2004. From June, 2002 to March, 2004 Dr. Spivey was President of Gibraltar
Associates, a private company providing consulting services to the
pharmaceutical industry relating to product research and development. From
March, 1998 to May, 2002 he served as Vice President, Scientific Affairs for
Alpharma/Purepac Pharmaceuticals. Dr. Spivey holds a BA degree from Indiana
University and a Ph.D. degree in pharmaceutics from the University of
Iowa.
Peter
A.
Clemens has been Senior Vice President, Chief Financial Officer and Secretary
since April 2004. Mr. Clemens was Vice President, Chief Financial Officer and
Secretary of the Company from February 1998 to March 2004 and a Director of
the
Company from June, 1998 to August, 2004. Mr. Clemens is a Certified Public
Accountant and earned a B.B.A. degree from the University of Notre Dame and
an
MBA from Indiana University.
James
F.
Emigh has been Vice President of Marketing and Administration since April 2004.
Prior to such time, Mr. Emigh was Vice President of Sales and Marketing. Mr.
Emigh joined the Company in May, 1998, serving first as Executive Director
of
Customer Relations and then as Vice President of Operations until November,
2002. Mr. Emigh holds a Bachelor of Pharmacy from Washington State University
and a Masters of Business Administration from George Mason
University.
Robert
A.
Seiser has been a Vice President, Corporate Controller and Treasurer since
April
2004. Mr. Seiser joined the Company in March 1998 as the Corporate Controller
and Treasurer. Mr. Seiser is a Certified Public Accountant and earned a B.B.A.
degree from Loyola University of Chicago.
Bruce
F.
Wesson has been a Director of the Company since March, 1998. Mr. Wesson is
President of Galen Associates, a health care venture firm, and a General Partner
of Galen Partners III, L.P. Prior to January, 1991, he was Senior Vice President
and Managing Director of Smith Barney, Harris Upham & Co. Inc., an
investment banking firm. He currently serves on the Boards of Encore Medical
Corporation, QMed, Inc., and Chemtura Corporation, each a publicly traded
company, and several privately held companies. Mr. Wesson earned a degree from
Colgate University and a Masters of Business Administration from Columbia
University.
William
A. Sumner has been a Director of the Company since August, 1997. From 1974
until
his retirement in 1995, Mr. Sumner held various positions within Hoechst-Roussel
Pharmaceuticals, Inc., a manufacturer and distributor of pharmaceutical
products, including Vice President and General Manager, Dermatology Division
from 1991 through 1995, Vice President, Strategic Business Development, from
1989 to 1991 and Vice President, Marketing from 1985 to 1989. Since his
retirement from Hoechst-Roussel Pharmaceuticals, Inc. in 1995, Mr. Sumner has
acted as a consultant to various entities in the pharmaceutical
field.
Jerry
N.
Karabelas has been a Director of the Company since December, 2002 and Chairman
of the Board from May 2003 through May, 2005. Dr. Karabelas was Head of
Healthcare and CEO of Worldwide Pharmaceuticals for Novartis AG from 1998 until
July 2000. Prior to joining Novartis, Dr. Karabelas was Executive Vice President
of SmithKline Beecham. From July, 2000 until December, 2001, Dr. Karabelas
was
the Founder and Chairman of the Novartis Bio Venture Fund. Since November,
2001
he has been a Partner with Care Capital LLC. Dr. Karabelas holds a Ph.D. in
pharmacokinetics from the Massachusetts College of Pharmacy and serves as a
Director of SykePharma Plc., Human Genome Sciences, Nitromed, Anadys and
Renova.
William
G. Skelly has been a Director of the Company since May, 1996 and served as
Chairman of the Company from October, 1996 through June, 2000. Since 1990,
Mr.
Skelly has served as Chairman, President and Chief Executive Officer of Central
Biomedia, Inc. and its subsidiary SERA, Inc., companies involved in the animal
health industry including veterinary biologicals and custom manufacturing of
animal sera products. From 1985 to 1990, Mr. Skelly served as President of
Martec Pharmaceutical, Inc., a distributor and manufacturer of human generic
prescription pharmaceuticals.
Immanuel
Thangaraj has been a Director of the Company since December, 2002. Mr. Thangaraj
has been a Managing Director of Essex Woodlands Health Ventures, a venture
capital firm specializing in the healthcare industry, since 1997. Prior to
joining Essex Woodlands Health Ventures, he helped form a telecommunication
services company, for which he served as its CEO. Mr. Thangaraj holds a Bachelor
of Arts and a Masters in Business Administration from the University of Chicago
and serves as a Director of iKnowMed Systems, Sound ID and CBR
Systems.
Audit
Committee
The
Audit
Committee of the Board of Directors is composed of Messrs. William A. Sumner,
Chairman, Immanuel Thangaraj and Bruce F. Wesson. The Audit Committee is
responsible for selecting the Company's registered independent public accounting
firm, approving the audit fee payable to the auditors, working with independent
auditors and other corporate officials, reviewing the scope and results of
the
audit by, and the recommendations of, the Company's independent auditors,
approving the services provided by the auditors, reviewing the financial
statements of the Company and reporting on the results of the audits to the
Board, reviewing the Company's insurance coverage, financial controls and
filings with the Securities and Exchange Commission (the "Commission"),
including, meeting quarterly prior to the filing of the Company's quarterly
and
annual reports containing financial statements filed with the Commission, and
submitting to the Board its recommendations relating to the Company's financial
reporting, accounting practices and policies and financial, accounting and
operational controls.
In
assessing the independence of the Audit Committee members during 2005, the
Company has reviewed and analyzed the standards for independence provided in
Section 121A of the American Stock Exchange Listing Standards. Based on this
analysis, the Company has determined that Mr. Sumner is deemed an independent
member of the Audit Committee. Messrs. Wesson and Thangaraj do not satisfy
the
standards for independence set forth in the American Stock Exchange Listing
Standards as a result of their positions in entities having a controlling
interest in GCE Holdings, LLC, the Company’s 78% shareholder. GCE Holdings, LLC
was the assignee of all the Company’s preferred shares previously held by each
of
Care
Capital Investments II, LP, Essex Woodlands Health Ventures V, L.P. and Galen
Partners III, L.P. In view of the controlling interests in GCE Holdings, LLC
held by each of Galen Partners III, L.P., of which Mr. Wesson is a general
partner, and Essex Woodlands Health Ventures V, L.P., of which Mr. Thangaraj
is
a general partner, each of Messrs. Wesson and Thangaraj fail to satisfy the
standards for independence set forth in the American Stock Exchange Listing
Standards. Nevertheless,
the
Board
values the experience of Messrs. Wesson and Thangaraj in the review of the
Company's financial statements and believes that each is able to exercise
independent judgment in the performance of his duties on the Audit
Committee.
The
Audit
Committee does not have a financial expert (as defined under applicable
regulations of the Commission) serving on the Committee. The Board has
determined that while none of the Audit Committee members meet all of the
criteria established by the Commission to be classified as a "financial expert",
the Company believes that in general, the members of the Audit Committee have
a
sufficient understanding of audit committee functions, internal control over
financial reporting and financial statement evaluation so as to capably perform
the tasks required of the Audit Committee.
Nominating
Committee
Currently
the entire Board of Directors functions as the Company's nominating committee.
As required, the Board will perform the functions typical of a nominating
committee, including the identification, recruitment and selection of nominees
for election as directors of the Company. Two of the six members of the Board
(Messrs. Sumner and Skelly) are "independent" as that term is defined by Section
121(A) of the American Stock Exchange Listing Standards and will participate
with entire Board in the consideration of director nominees. The Board believes
that a nominating committee separate from itself is not necessary at this time,
given the relative size of the Company and the Board. The Board also believes
that, given the Company's relative size and the size of its Board, an additional
committee of the Board would not add to the effectiveness of the evaluation
and
nomination process. The Board's process for recruiting and selecting nominees
for Board members, if required, would be to identify individuals who are thought
to have the business background and experience, industry specific knowledge
and
general reputation and expertise allowing them to contribute as effective
directors to the Company's governance, and who would be willing to serve as
directors of a public company. To date, the Company has not engaged any third
party to assist in identifying or evaluating potential nominees. If a possible
candidate is identified, the individual will meet with various members of the
Board and be sounded out concerning his/her possible interest and willingness
to
serve, and Board members would discuss amongst themselves the individual's
potential to be an effective Board member. If the discussions and evaluation
are
positive, the individual would be invited to serve on the Board. To date, no
shareholder has presented any candidate for Board membership to the Company
for
consideration, and the Company does not have a specific policy on
shareholder-recommended director candidates. The Board believes its process
for
evaluation of nominees proposed by shareholders would be no different than
the
process of evaluating any other candidate. In evaluating candidates, the Board
will require that candidates possess, at a minimum, a desire to serve on the
Company's Board, an ability to contribute to the effectiveness of the Board,
an
understanding of the function of the Board of a public company and relevant
industry knowledge and experience. In addition, while not required of any one
candidate, the Board would consider favorably experience, education, training
or
other expertise in business or financial matters and prior experience serving
on
boards of public companies.
Shareholder
Communications to the Board
Shareholders
who wish to send communications to the Company's Board of Directors may do
so by
sending them in care of the Secretary of the Company at the address on the
cover
page of this Report. The envelope containing such communication must contain
a
clear notation indicating that the enclosed letter is a "Shareholder-Board
Communication" or "Shareholder-Director Communication" or similar statement
that
clearly and unmistakably indicates the communication is intended for the Board.
All such communications must clearly indicate the author as a shareholder and
state whether the intended recipients are all members of the Board or just
certain specified directors. The Secretary of the Company will have the
discretion to screen and not forward to directors communications which the
Secretary determines in his or her discretion are communications unrelated
to
the business or governance of the Company and its subsidiaries, commercial
solicitations, or communications that are offensive, obscene, or otherwise
inappropriate. The Secretary will, however, compile all shareholder
communications which are not forwarded and such communications will be available
to any director.
Code
of Ethics
The
Company has a Code of Ethics applying to the Company's principal executive
officer, principal financial officer and principal accounting officer. The
Code
of Ethics and any amendments to or waivers there from, is available on the
Company's website, www.acurapharm.com, under the link “Code of
Ethics”.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's
Directors and executive officers, and persons who own beneficially more than
ten
percent (10%) of the Common Stock of the Company, to file reports of ownership
and changes of ownership with the Commission. Copies of all filed reports are
required to be furnished to the Company pursuant to Section 16(a). Based solely
on the reports received by the Company and on written representations from
reporting persons, the Company believes that the Directors, executive officers
and greater than ten percent (10%) beneficial owners of the Company's Common
Stock complied with all Section 16(a) filing requirements during the year ended
December 31, 2005, except that (i) Galen Partners III, L.P. and Care Capital
Investments II, LP failed to file Form 4s, (ii) GCE Holdings LLC failed to
file
a Form 3, and (iii) Peter Clemens filed a Form 4 late.
ITEM
11. EXECUTIVE COMPENSATION
The
following table sets forth a summary of the compensation paid by the Company
for
services rendered in all capacities to the Company during the fiscal years
ended
December 31, 2005, 2004 and 2003 to the Company's Chief Executive Officer and
the Company's next four most highly compensated executive officers
(collectively, the "named executive officers") whose total annual compensation
for 2005 exceeded $100,000:
SUMMARY
COMPENSATION TABLE
|
|
ANNUAL
COMPENSATION
|
|
LONG
TERM COMPENSATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNDERLYING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
|
|
RESTRICTED
|
|
OPTIONS
and
|
|
ALL
|
|
|
|
|
|
|
|
|
|
|
ANNUAL
|
|
STOCK
|
|
RESTRICTED
|
|
OTHER
|
|
|
NAME
AND
|
|
|
|
|
|
|
|
COMPEN-
|
|
UNIT
|
|
STOCK
|
|
COMPEN-
|
|
|
PRINCIPAL
POSITION
|
|
YEAR
|
|
SALARY
|
|
BONUS
|
|
SATION
(3)
|
|
AWARDS($)
(1)
|
|
UNITS
(#)
|
|
SATION
|
|
|
Andrew
D. Reddick
|
|
|
2005
|
|
$
|
300,000
|
|
$
|
--
|
|
$
|
--
|
|
$
|
2,660,625
|
|
|
8,250,000
|
|
$
|
--
|
|
|
President
and Chief
|
|
|
2004
|
|
|
305,769
|
|
|
60,000
|
|
|
--
|
|
|
--
|
|
|
8,750,000
|
|
|
--
|
|
|
Executive
Officer
|
|
|
2003
|
|
|
96,923
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Ron
J. Spivey
|
|
|
2005
|
|
|
260,000
|
|
|
--
|
|
|
--
|
|
|
2,128,500
|
|
|
10,600,000
(2
|
))
|
|
--
|
|
|
Senior
Vice President
|
|
|
2004
|
|
|
190,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
3,000,000
|
|
|
--
|
|
|
and
Chief Scientific Officer
|
|
|
2003
|
|
|
-0-
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Peter
A. Clemens
|
|
|
2005
|
|
|
180,000
|
|
|
--
|
|
|
9,000
|
|
|
1,419,000
|
|
|
4,400,000
|
|
|
--
|
|
|
Senior
Vice President and
|
|
|
2004
|
|
|
172,789
|
|
|
60,000
|
|
|
9,000
|
|
|
--
|
|
|
375,000
|
|
|
--
|
|
|
Chief
Financial Office
|
|
|
2003
|
|
|
146,000
|
|
|
60,000
|
|
|
9,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
James
F. Emigh
|
|
|
2005
|
|
|
140,000
|
|
|
--
|
|
|
--
|
|
|
443,438
|
|
|
1,375,000
|
|
|
--
|
|
|
Vice
President/Marketing
|
|
|
2004
|
|
|
137,692
|
|
|
50,000
|
|
|
4,200
|
|
|
--
|
|
|
249,000
|
|
|
--
|
|
|
and
Administration
|
|
|
2003
|
|
|
127,800
|
|
|
--
|
|
|
4,200
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Robert
A. Seiser
|
|
|
2005
|
|
|
132,942
|
|
|
--
|
|
|
--
|
|
|
532,125
|
|
|
1,650,000
|
|
|
--
|
|
|
Vice
President, Corporate
|
|
|
2004
|
|
|
123,077
|
|
|
50,000
|
|
|
4,500
|
|
|
--
|
|
|
249,000
|
|
|
--
|
|
|
Controller
and Treasurer
|
|
|
2003
|
|
$
|
110,923
|
|
$
|
7,000
|
|
$
|
4,500
|
|
$
|
--
|
|
|
--
|
|
$
|
--
|
|
|
(1)
|
The
dollar value of the Restricted Stock Unit Awards is equal to the
difference between (A) the product of (x) the number of shares of
the
Company’s Common Stock underlying each award, multiplied by (y) $0.3325,
the average of the closing bid and asked prices of the Company’s Common
Stock on December 22, 2005, the date of grant of the Restricted Stock
Unit
Awards, as reported by the Over-the-Counter Bulletin Board (“OTCBB”), less
(B) the par value of $0.01 per share payable by the recipient of
the
Restricted Stock Unit Award upon the Company’s issuance of the shares. The
aggregate number of shares underlying Restricted Stock Unit Awards
made by
the Company as of December 31, 2005 to Messrs. Reddick, Spivey, Clemens,
Emigh and Seiser is 8,250,000, 6,600,000, 4,400,000, 1,375,000 and
1,650,000 shares respectively. The value of the shares underlying
Restricted Stock Unit Awards made by the Company as of December 31,
2005
to Messrs. Reddick, Spivey, Clemens, Emigh and Seiser is $2,103,750,
$1,683,000, $1,122,000, $350,625, and $420,750, respectively, based
on the
average of the closing bid and asked prices on December 30, 2005
of
$0.265, as reported by the OTCBB. Each of the Restricted Stock Units
vests
one-third upon grant and the balance in equal monthly increments
on the
first day of each month beginning January 1, 2006 and ending December
1,
2007. The vested shares underlying the Restricted Stock Unit Awards
will
be issued by the Company on the earlier of (i) a Change of Control
(as
defined in the Company‘s 2005 Restricted Stock Unit Award Plan), or (ii)
January 1, 2011. In the event of a Change of Control, the issuance
of
shares by the Company shall be made in a lump sum distribution. In
the
absence of a Change of Control, the issuance shall be made in four
(4)
equal installments on each of January 1, 2011, January 1, 2012, January
1,
2013 and January 1, 2014. The recipients of the Restricted Stock
Unit
Awards have no rights as a stockholder, including no dividend or
voting
rights, with respect to the shares underlying such Awards until the
shares
are issued by the Company.
|
|
(2)
|
Consists
of (i) 6,600,000 shares of common stock underlying Restricted Stock
Unit
Awards, and (ii) 4,000,000 shares of common stock underlying stock
options.
|
|
(3)
|
Consisted
of auto allowances which were discontinued after
2005.
|
Other
Compensatory Arrangements
Executive
officers and key employees participate in medical, dental, life and disability
insurance plans provided to all Company employees.
Employment
Agreements
Andrew
D.
Reddick is employed pursuant to an Employment Agreement effective as of August
26, 2003, as amended, which provides that Mr. Reddick will serve as the
Company's Chief Executive Officer and President for a term expiring December
31,
2006. The term of the Employment Agreement provides for automatic one (1) year
renewals in the absence of written notice to the contrary from the Company
or
Mr. Reddick at least ninety (90) days prior to the expiration of the initial
term or any subsequent renewal period. The Employment Agreement provides for
an
annual base salary of $300,000, plus the payment of annual bonus of up to one
hundred percent (100%) of Mr. Reddick's base salary based on the achievement
of
such targets, conditions, or parameters as may be set from time to time by
the
Board of Directors or the Compensation Committee of the Board of Directors.
For
the Company’s 2006 fiscal year, the Employment Agreement provides for a cash
bonus equal to 100% of Mr. Reddick’s then current base salary (the “2006 Cash
Bonus”) upon the Company’s receipt of aggregate proceeds of at least $15.0
million on or before March 31, 2007 from an offering of the Company’s equity
securities and/or from license fees or milestone payments from third-party
licensing or similar transactions (subject to the payment of a pro-rata portion
of the 2006 Cash Bonus provided the Company receives aggregate gross proceeds
from such transactions of at least $11.0 million on or before March 31, 2007).
The Employment Agreement also provides for the Company’s grant to Mr. Reddick of
stock options exercisable for up to 8,750,000 shares of Common Stock at an
exercise price of $0.13 per share. The stock options provide for vesting of
3,000,000 shares on the date of grant of the option, with the balance vesting
in
monthly increments of 250,000 shares at the expiration of each monthly period
thereafter commencing with the month ending August 31, 2004. The exercise price
of $0.13 per share represents a discount to the fair market value of the
Company’s common stock on the date of grant. On August 12, 2004, the date of
grant of the stock options, the average of the closing bid and asked prices
for
the Company’s Common Stock was $0.435. The Employment Agreement also
acknowledges the grant to Mr. Reddick of a Restricted Stock Unit Award providing
for the Company’s issuance of up to 8,250,000 shares of the Company’s Common
Stock. The Restricted Stock Unit vests one-third (1/3) upon grant and the
balance in equal monthly increments on the first day of each month beginning
January 1, 2006 and ending December 1, 2007. The vested shares underlying the
Restricted Stock Unit Award will be issued by the Company on the earlier of
(i)
a Change in Control (as defined in the Company’s 2005 Restricted Stock Unit
Award Plan), or (ii) January 1, 2011. In the event of a Change in Control,
the
Company shall issue the vested shares in a lump sum distribution. In the absence
of a Change of Control, the issuance of the vested shares shall be made in
four
(4) equal installments on each of January 1, 2011, January 1, 2012, January
1,
2013 and January 1, 2014. Upon issuance of the shares underlying the Restricted
Stock Unit Award, Mr. Reddick must remit to the Company the par value of $0.01
per share. On December 22, 2005, the date of grant of the Restricted Stock
Unit
Award, the average of the closing bid and asked prices of the Company’s common
stock was $0.3325, as reported by the OTCBB. Mr. Reddick has no rights as a
stockholder, including no dividend or voting rights, with respect to the shares
underlying the Restricted Stock Unit Award until the shares are issued by the
Company. The Employment Agreement contains standard termination provisions,
including upon death, disability, for Cause, for Good Reason and without Cause.
In the event the Employment Agreement is terminated due to death or disability,
the Company is required to pay Mr. Reddick, or his designee, a pro rata portion
of the annual bonus that would have been payable to Mr. Reddick during such
year
assuming full achievement of the bonus criteria established for such bonus.
Additionally, Mr. Reddick or his designees shall have a period of twelve (12)
months following such termination (except for “Cause,” in which case it is 40
days) to exercise Mr. Reddick's vested stock options (or, for those vested
stock
options subject to Section 409A of the Internal Revenue Code of 1986, as amended
(“Section 409A”) the lesser of (a) twelve (12) months following the date of
termination, or (b) the maximum exercise period permitted under Section 409A).
In the event that the Employment Agreement is terminated by the Company without
Cause or by Mr. Reddick for Good Reason, the Company is required to pay Mr.
Reddick an amount equal to the bonus for such year, calculated on a pro rata
basis assuming full achievement of the bonus criteria for such year, as well
as
Mr. Reddick's base salary for one year (the "Severance Pay"), payable in equal
monthly installments over a period of twelve (12) months. In addition, Mr.
Reddick is entitled to continued coverage under the Company's then existing
benefit plans, including medical and life insurance, for twelve (12) months
from
the date of termination. The Employment Agreement permits Mr. Reddick to
terminate the Employment Agreement in the event of a Change in Control (as
defined in the Employment Agreement), in which case such termination is
considered to be made without Cause, entitling Mr. Reddick to the benefits
described above, except that (i) the Severance Pay is payable in a lump sum
within thirty (30) days of the date of termination, and (ii) all outstanding
stock options granted to Mr. Reddick shall fully vest and be immediately
exercisable. The Employment Agreement restricts Mr. Reddick from disclosing,
disseminating or using for his personal benefit or for the benefit of others,
confidential or proprietary information (as defined in the Employment Agreement)
and, provided the Company has not breached the terms of the Employment
Agreement, from competing with the Company at any time prior to one year after
the termination of his employment with the Company.
Ron
J.
Spivey, Ph.D., is employed pursuant to an Employment Agreement effective as
of
April 5, 2004, as amended, which provides that Dr. Spivey will serve as the
Company's Senior Vice President and Chief Scientific Officer for term expiring
December 31, 2006. The term of the Employment Agreement provides for automatic
one (1) year renewals in the absence of written notice to the contrary from
the
Company or Dr. Spivey at least ninety (90) days prior to the expiration of
the
initial term or any subsequent renewal period. The Employment Agreement provides
for an annual base salary of $260,000, plus the payment of annual bonus of
up to
one hundred percent (100%) of Dr. Spivey's base salary based on the achievement
of such targets, conditions, or parameters as may be set from time to time
by
the Board of Directors or the Compensation Committee of the Board of Directors.
For the Company’s 2006 fiscal year, the Employment Agreement provides for a cash
bonus equal to one hundred percent (100%) of Mr. Spivey’s then current base
salary (the “2006 Cash Bonus”) upon the Company’s receipt of aggregate proceeds
of at least $15.0 million on or before March 31, 2007 from an offering of the
Company’s equity securities and/or from license fees or milestone payments from
third-party licensing or similar transactions (subject to the payment of a
pro-rata portion of the 2006 Cash Bonus provided the Company receives aggregate
gross proceeds from such transactions of at least $11.0 million on or before
March 31, 2007. The Employment Agreement also provides for the Company’s grant
to Mr. Spivey of stock options exercisable for up to 7,000,000 shares of Common
Stock at an exercise price of $0.13 per share. The stock option provides for
vesting of 1,000,000 shares on October 1, 2004, 333,333 shares on each January
1, 2005, April 1, 2005, July 1, 2005 and October 1, 2005, 3,888,667 shares
on
January 1, 2006 and 778,001 on April 1, 2006. The exercise price of $0.13 per
share represents a discount to the fair market value of the Company’s common
stock on the date of grant. The Employment Agreement also acknowledges the
grant
to Mr. Spivey of a Restricted Stock Unit Award providing for the Company’s
issuance of up to 6,600,000 shares of the Company’s Common Stock. The Restricted
Stock Unit vests one-third (1/3) upon grant and the balance in equal monthly
increments on the first day of each month beginning January 1, 2006 and ending
December 1, 2007. The vested shares underlying the Restricted Stock Unit Award
will be issued by the Company on the earlier of (i) a Change in Control (as
defined in the Company’s 2005 Restricted Stock Unit Award Plan), or (ii) January
1, 2011. In the event of a Change in Control, the Company shall issue the vested
shares in a lump sum distribution. In the absence of a Change in Control, the
issuance of the vested shares shall be made in four (4) equal installments
on
each of January 1, 2011, January 1, 2012, January 1, 2013 and January 1, 2014.
Upon issuance of the shares underlying the Restricted Stock Unit Award, Mr.
Spivey must remit to the Company the par value of $0.01 per share. On December
22, 2005, the date of grant of the Restricted Stock Unit Award, the average
of
the closing bid and asked prices of the Company’s common stock was $0.3325, as
reported by the OTCBB. Mr. Spivey has no rights as a stockholder, including
no
dividend or voting rights, with respect to the shares underlying the Restricted
Stock Unit Award until the shares are issued by the Company. The Employment
Agreement contains standard termination provisions, including upon death,
disability, for Cause, for Good Reason and without Cause. Additionally, Dr.
Spivey or his designees shall have a period of twelve (12) months following
such
termination (except for “Cause,” in which case it is 40 days) to exercise Dr.
Spivey's vested stock options, (or, for those vested stock options subject
to
Section 409A, the lesser of (a) twelve (12) months following the date of
termination, or (b) the maximum exercise period permitted under Section 409A).
In the event that the Employment Agreement is terminated by the Company without
Cause or by Dr. Spivey for Good Reason, the Company is required to pay Dr.
Spivey an amount equal to the bonus for such year, calculated on a pro rata
basis assuming full achievement of the bonus criteria for such year, as well
as
Dr. Spivey's base salary for one year (the "Severance Pay"), payable in equal
monthly installments over a period of twelve (12) months. In addition, Dr.
Spivey is entitled to continued coverage under the Company's then existing
benefit plans, including medical and life insurance, for twelve (12) months
from
the date of termination. The Employment Agreement permits Dr. Spivey to
terminate the Employment Agreement in the event of a Change in Control (as
defined in the Employment Agreement), in which case such termination is
considered to be made without Cause, entitling Dr. Spivey to the benefits
described above, except that (i) the Severance Pay is payable in a lump sum
within thirty (30) days of the date of termination, and (ii) all outstanding
stock options granted to Dr. Spivey shall fully vest and be immediately
exercisable. The Employment Agreement restricts Dr. Spivey from disclosing,
disseminating or using for his personal benefit or for the benefit of others,
confidential or proprietary information (as defined in the Employment Agreement)
and, provided the Company has not breached the terms of the Employment
Agreement, from competing with the Company at any time prior to one year after
the termination of his employment with the Company.
Peter
A.
Clemens is employed pursuant to an Employment Agreement effective as of March
10, 1998, as amended, which provides that Mr. Clemens will serve as the
Company's Senior Vice President and Chief Financial Officer for a term expiring
December 31, 2006. The term of the Employment Agreement provides for automatic
one (1) year renewals in the absence of written notice to the contrary from
the
Company or Mr. Clemens at least one hundred eighty (180) days prior to the
expiration of any renewal period. The Employment Agreement provides for an
annual base salary of $180,000 plus the payment of an annual bonus to be
determined based on the satisfaction of such targets, conditions or parameters
as may be determined from time to time by the Compensation Committee of the
Board of Directors. For the Company’s 2006 fiscal year, the Employment Agreement
provides for a cash bonus equal to 100% of Mr. Clemens’ then current base salary
(the “2006 Cash Bonus”) upon the Company’s receipt of aggregate proceeds of at
least $15.0 million on or before March 31, 2007 from an offering of the
Company’s equity securities and/or from license fees or milestone payments from
third-party licensing or similar transactions (subject to the payment of a
pro-rata portion of the 2006 Cash Bonus provided the Company receives aggregate
gross proceeds from such transactions of at least $11.0 million on or before
March 31, 2007). The Employment Agreement also provides for the grant of stock
options on March 10, 1998 to purchase 300,000 shares of the Company's common
stock at an exercise price of $2.375 per share, which options vest in equal
increments of 25,000 option shares at the end of each quarterly period during
the term of the Employment Agreement (as such vesting schedule may be amended
by
mutual agreement of Mr. Clemens and the Board of Directors). In addition, in
August 2004, the Company granted stock options to Mr. Clemens to purchase
375,000 shares of Common Stock at an exercise price of $0.13 per share, which
exercise price represents a discount to the fair market value of the Company’s
common stock on the date of grant. Such stock options vest in four equal
portions at the end of each annual period commencing March 9, 2005. The
Employment Agreement also acknowledges the grant to Mr. Clemens of a Restricted
Stock Unit Award providing for the Company’s issuance of up to 4,400,000 shares
of the Company’s Common Stock. The Restricted Stock Unit vests one-third (1/3)
upon grant and the balance in equal monthly increments on the first day of
each
month beginning January 1, 2006 and ending December 1, 2007. The vested shares
underlying the Restricted Stock Unit Award will be issued by the Company on
the
earlier of (i) a Change in Control (as defined in the Company’s 2005 Restricted
Stock Unit Award Plan), or (ii) January 1, 2011. In the event of a Change in
Control, the Company shall issue the vested shares in a lump sum distribution.
In the absence of a Change in Control, the issuance of the vested shares shall
be made in four (4) equal installments on each of January 1, 2011, January
1,
2012, January 1, 2013 and January 1, 2014. Upon issuance of the shares
underlying the Restricted Stock Unit Award, Mr. Clemens must remit to the
Company the par value of $0.01 per share. On December 22, 2005, the date of
grant of the Restricted Stock Unit Award, the average of the closing bid and
asked prices of the Company’s common stock was $0.3325, as reported by the
OTCBB. Mr. Clemens has no rights as a stockholder, including no dividend or
voting rights, with respect to the shares underlying the Restricted Stock Unit
Award until the shares are issued by the Company. The Employment Agreement
contains standard termination provisions, including upon death, disability,
for
Cause, for Good Reason and without Cause. In the event the Employment Agreement
is terminated by the Company without Cause or by Mr. Clemens for Good Reason,
the Company is required to pay Mr. Clemens an amount equal to $310,000 or twice
his then base salary, whichever is greater, payable in a lump sum within 30
days
of termination and to continue to provide Mr. Clemens coverage under the
Company's then existing benefit plans, including medical and life insurance,
for
a term of 24 months. Additionally, Mr. Clemens or his designees shall have
a
period of twelve (12) months following termination (except for “Cause,” in which
case it is 40 days) to exercise Mr. Clemens’ vested stock options (or, for those
vested stock options subject to Section 409A, the lesser of (a) twelve (12)
months following the date of termination, or (b) the maximum exercise period
permitted under Section 409A). The Employment Agreement permits Mr. Clemens
to
terminate the Employment Agreement in the event of a Change in Control (as
defined in the Employment Agreement). The Employment Agreement also restricts
Mr. Clemens from disclosing, disseminating or using for his personal benefit
or
for the benefit of others confidential or proprietary information (as defined
in
the Employment Agreement) and, provided the Company has not breached the terms
of the Employment Agreement, from competing with the Company at any time prior
to two years after the earlier to occur of the expiration of the term and the
termination of his employment.
Compensation
of Directors
Directors
who are employees of the Company receive no additional or special remuneration
for their services as Directors. Directors who are not employees of the Company
receive an annual grant of options to purchase 50,000 shares of the Company's
common stock and $500 for each meeting attended ($250 in the case of telephonic
meetings). The Company also reimburses Directors for travel and lodging
expenses, if any, incurred in connection with attendance at Board meetings.
Directors who serve on any of the Committees established by the Board of
Directors receive $250 for each Committee meeting attended unless held on the
day of a full Board meeting. In addition, on February 11, 2006, the Company
granted to each of Messrs. William Sumner and William Skelly Restricted Stock
Unit Awards providing for the Company’s issuance of up to 1 million shares of
the Company’s common stock. The Restricted Stock Unit Awards are made pursuant
to the Company’s 2005 Restricted Stock Unit Award Plan and are in consideration
of the services provided by Messrs. Sumner and Skelly to the Company as
independent members of the Board and as representatives of the Independent
Committee of the Board of Directors for various material transactions undertaken
by the Company during the period 2002 through 2005, including, without
limitation, the Company’s 2002 Debenture Offering, the 2004 Debenture Offering,
the conversion of the Company’s Preferred Shares into common stock and the
various bridge loans financing transactions with the Company, as well as for
their continued service as directors of the Company. The Restricted Stock Unit
Awards to each of Messrs. Sumner and Skelly vest 388,889 shares on grant and
the
balance in equal monthly installments on the first day of each month beginning
March 1, 2006 and ending December 1, 2007. The vested shares underlying the
Restricted Stock Unit Awards will be issued by the Company on the earlier of
(i)
a Change in Control (as defined in the Company’s 2005 Restricted Stock Unit
Award Plan), or (ii) January 1, 2011. In the event of a Change in Control,
the
Company will issue the vested shares underlying the Restricted Stock Unit Award
in a lump sum distribution. In the absence of a Change in Control, the issuance
of the vested shares shall be made in four (4) equal installments on each of
January 1, 2011, January 1, 2012, January 1, 2013 and January 1, 2014. Upon
the
issuance of the vested shares underlying the Restricted Stock Unit Awards,
Messrs. Sumner and Skelly must pay to the Company the $0.01 par value per
share.
Stock
Option Plans
The
Company currently maintains two stock option plans adopted in 1995 and 1998,
respectively. The Company in the past has used, and may continue to use, stock
options to attract and retain key employees in the belief that employee stock
ownership and stock-related compensation devices encourage a community of
interest between employees and shareholders.
The
1995 Stock Option Plan
.
The
1995 Stock Option Plan was approved by the Company’s shareholders in September,
1995. As of the date of this Report, incentive stock options (“ISO's”) to
purchase 322,510 shares and non-qualified options to purchase 106,390 shares
were granted under the 1995 Stock Option Plan. In May, 2005 the 1995 Stock
Option Plan expired and the remaining unissued shares allocated to the Plan
were
terminated. The average per share exercise price for all outstanding options
under the 1995 Stock Option Plan is approximately $1.64.
The
1998 Stock Option Plan
.
The
1998 Stock Option Plan was adopted by the Board of Directors in April, 1998
and
approved by the Company's shareholders in June, 1998. The 1998 Stock Option
Plan
permits the grant of ISO's and non-qualified stock options to purchase shares
of
the Company's Common Stock. The 1998 Stock Option Plan was amended by the Board
of Directors in April, 1999 to increase the number of shares available for
the
grant of options under the Plan from 2,600,000 to 3,600,000 shares. The
Company's shareholders ratified the Plan amendment on August 19, 1999. The
1998
Stock Option Plan was further amended by Board of Directors in April, 2001
to
increase the number of shares available for grant of options under the Plan
from
3,600,000 to 8,100,000 shares. The Company's shareholders ratified the Plan
amendment on June 14, 2001. The 1998 Stock Option Plan was further amended
by
the Board of Directors on May 5, 2004 to increase the number of shares available
for grant of options under the Plan from 8,100,000 to 20,000,000 shares. The
Company’s shareholders ratified the Plan amendment on August 12, 2004. As of the
date of this Report, stock options to purchase 19,326,095 shares of Common
Stock
had been granted under the 1998 Stock Option Plan. Of such option grants,
789,826 are ISOs and 18,536,269 are non-qualified options. The average per
share
exercise price for all outstanding options under the 1998 Stock Option Plan
is
approximately $0.24. No exercise price of an ISO was set at less than 100%
of
the fair market value of the underlying Common Stock. The exercise price of
non-qualified options exercisable for 16,823,000 shares of common stock has
been
set at less than the fair market value on the date of grant of the underlying
Common Stock. Subject to the terms of the 1998 Stock Option Plan, the Board
of
Directors, or a Committee appointed by the Board determines the persons to
whom
grants are made and the vesting, timing, amounts and other terms of such grant.
An employee may not receive ISO's exercisable in any one calendar year for
shares with a fair market value on the date of grant in excess of $100,000.
No
quantity limitations apply to the grant of non-qualified stock
options.
Restricted
Stock Unit Award Plan
On
December 22, 2005, the Board of Directors adopted the Company’s 2005 Restricted
Stock Unit Award Plan (the “2005 RSU Plan”) for its employees and non-employee
directors. A Restricted Stock Unit (“RSU”) represents the contingent obligation
of the Company to deliver a share of its common stock to the holder of the
RSU
on a distribution date. RSUs for up to 30 million shares of common stock are
authorized for issuance under the 2005 RSU Plan. The Company believes that
the
2005 RSU Plan does not require shareholder approval. Nevertheless, the Company
intends to seek shareholder ratification for the 2005 RSU Plan at its next
Annual Shareholders’ Meeting.
The
purpose of the 2005 RSU Plan is to attract, motivate and retain experienced
and
knowledgeable employees by offering additional stock based compensation and
incentives to defer and potentially enhance their compensation and to encourage
stock ownership in the Company and to attract and retain qualified non-employee
directors. The 2005 RSU Plan is intended to comply with Section 409A of the
Internal Revenue Code of 1986, as amended and is designed to confirm that
compensation deferred under the Plan which is subject to Code Section 409A
is
not included in the gross income of 2005 RSU Plan participants until such time
as the shares of common stock underlying RSUs are distributed as set forth
in
the Plan and Code Section 409A.
The
RSU
Plan is administered by the Company’s Board of Directors or a Committee
appointed by the Board of Directors. However, with respect to non-employee
directors, the Board administers the Plan, and the Committee has no discretion
with respect to any grants to non-employee directors. RSUs granted under the
RSU
plan vest on a schedule determined by the Board of Directors or such Committee
as set forth in a restricted stock unit award agreement. Unless otherwise set
forth in such award agreement, the RSUs fully vest upon a change in control
(as
defined in the 2005 RSU Plan) of the Company or upon termination of an
employee’s employment with the Company without cause or due to death or
disability, and in the case of a non-employee director, such person’s death or
disability or if such person is not renominated as a director (other than for
“cause” or refusal to stand for re-election) or is not elected by the Company’s
stockholders, if nominated. Vesting of an RSU entitles the holder thereof to
receive a share of common stock of the Company on a distribution date (after
payment of the $0.01 par value per share).
Absent
a
change of control, one-fourth of vested shares of common stock underlying an
RSU
award will be distributed (after payment of $0.01 par value per share) on
January 1 of each of 2011, 2012, 2013 and 2014. If a change in control occurs
(whether prior to or after 2011), the vested shares underlying the RSU award
will be distributed at or about the time of the change in control. No dividends
accrue on the shares underlying the RSUs prior to issuance by the Company.
The
recipients of RSU awards need not be employees or directors of the Company
on a
distribution date.
RSUs
may
generally not be transferred, except recipients of RSUs may designate
beneficiaries to inherit their RSU’s upon their death. A married recipient of an
RSU award may generally only designate a spouse as a beneficiary unless spousal
consent is obtained.
Recipients
of RSUs generally will not recognize income when they are awarded RSUs (unless
they elect to recognize income by making a Section 83(b) election). RSU
recipients will recognize ordinary income in an amount equal to the fair market
value of the shares of the Company’s common stock issued pursuant to a
distribution under the RSU. The Company will generally be entitled to a tax
deduction in the same amount.
As
of the
date of this Report the Company had granted RSUs providing for the Company’s
issuance of up to an aggregate of 29,500,000 shares of the Company’s common
stock. 27,500,000 of such Restricted Stock Unit Awards vest one-third (1/3)
on
grant and the balance vest in equal monthly increments on the first day of
each
month beginning January 1, 2006 and ending December 1, 2007. The remaining
2
million Restricted Stock Unit Awards vest 777,778 shares on grant and the
balance vest in equal monthly increments on the first day of March 1, 2006
and
ending December 1, 2007.
Securities
Authorized For Issuance Under Equity Compensation Plans
The
following table includes information as of December 31, 2005 relating to the
Company's 1995 and 1998 Stock Option Plans and the Company’s 2005 Restricted
Stock Unit Award Plan, which comprise all of the equity compensation plans
of
the Company. The table provides the number of securities to be issued upon
the
exercise of outstanding options and distributions under outstanding Restricted
Stock Unit Awards under such plans, the weighted-average exercise price of
outstanding options and the number of securities remaining available for future
issuance under such equity compensation plans:
EQUITY
COMPENSATION PLAN INFORMATION
|
PLAN
CATEGORY
|
|
NUMBER
OF SECURITIES
TO
BE
ISSUED UPON
EXERCISE
OF
OUTSTANDING
OPTIONS,
WARRANTS
AND RIGHTS
|
|
WEIGHTED-AVERAGE
EXERCISE
PRICE OF
OUTSTANDING
OPTIONS,
WARRANTS
AND RIGHTS
|
|
NUMBER
OF SECURITIES
REMAINING
AVAILABLE FOR
FUTURE
ISSUANCE UNDER EQUITY
COMPENSATION
PLANS
(EXCLUDING
SECURITIES
REFLECTED
IN
COLUMN(a))
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Stock
Option Equity Compensation Plans Approved by Security
Holders
|
|
19,754,995
|
|
$
0.27
|
|
616,655
|
|
Stock
Option Equity Compensation Plans Not Approved by Security
Holders
|
|
0
|
|
0
|
|
0
|
|
Restricted
Stock Unit Equity Compensation Plans Approved by Security
Holders
|
|
0
|
|
0
|
|
0
|
|
Restricted
Stock Unit Equity Compensation Plans Not Approved by Security
Holders
|
|
27,500,000
|
|
$0.01
|
|
2,500,000
|
|
TOTAL
|
|
47,254,995
|
|
$
0.11
|
|
3,116,655
|
OPTION
GRANTS AND RESTRICTED STOCK UNIT AWARDS IN 2005
The
following tables present information regarding (i) the grant of options to
purchase shares of the Company’s common stock, and (ii) the award of Restricted
Stock Units providing for the Company’s future issuance of Common Stock, for
each of the named executive officers in 2005.
|
Name
|
|
Number
of Securities Underlying Options
Granted
|
|
Percent
of Total Options Granted in
Fiscal Year
|
|
Exercise
Price
Per
Share (1)
|
|
Expiration
Date
|
|
Potential
Realizable Value of
Assumed
Annual Rates of
Stock
Price Appreciation
for
Option
Term(2)
|
|
|
|
|
|
|
|
|
|
|
|
5%
|
|
10%
|
|
Andrew
D. Reddick
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
Ron
J. Spivey
|
|
4,000,000
|
|
100%
|
|
$0.13
|
|
2014
|
|
$2,489,577
|
|
$4,054,419
|
|
Peter
A. Clemens
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
James
F. Emigh
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
Robert
A. Seiser
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
(1)
|
The
stock option granted to Dr. Spivey provides for vesting of 3,110,668
shares upon the grant, 444,666 shares on January 1, 2006, and 444,666
shares on April 1, 2006.
|
|
(2)
|
The
dollar amounts in these columns represent the potential realizable
value
of each option assuming that the market price of the Company’s common
stock (based on the average of the closing bid and asked prices of
the
Company’s common stock on December 9, 2005, the date of grant of the stock
option, of $0.485) appreciates in value from the date of grant at
the 5%
and 10% annual rates prescribed by regulation and therefore are not
intended to forecast possible future appreciation, if any, of the
price of
the Common Stock.
|
|
|
Individual
Restricted Stock Unit
Awards (“RSUs”)
|
|
|
Name
|
|
Number
of Securities Underlying
RSUs
Granted
|
|
%
of Total RSUs Granted to Employees
in
Fiscal
Year
|
|
Payment
Price
Per
Share (1)
|
|
Expiration
Date
|
|
Potential
Realizable value at
Assumed
Annual Rates of
Stock
Price Appreciation
for
the RSU
Term(2)
|
|
|
|
|
|
|
|
|
|
|
|
5%
|
|
10%
|
|
Andrew
D. Reddick
|
|
8,250,000
|
|
30%
|
|
$0.01
|
|
2014
|
|
$4,173,000
|
|
$6,385,600
|
|
Ron
J. Spivey
|
|
6,600,000
|
|
24%
|
|
$0.01
|
|
2014
|
|
$3,338,400
|
|
$5,108,500
|
|
Peter
A. Clemens
|
|
4,400,000
|
|
16%
|
|
$0.01
|
|
2014
|
|
$2,225,600
|
|
$3,405,700
|
|
James
F. Emigh
|
|
1,375,000
|
|
5%
|
|
$0.01
|
|
2014
|
|
$695,500
|
|
$1,064,300
|
|
Robert
A. Seiser
|
|
1,650,000
|
|
6%
|
|
$0.01
|
|
2014
|
|
$834,600
|
|
$1,277,100
|
|
(1)
|
Each
of the Restricted Stock Unit Awards vest one-third (1/3) upon grant
and
the balance in equal monthly increments on the first day of each
month
beginning January 1, 2006 and ending December 1, 2007. The vested
shares
underlying the Restricted Stock Unit Awards will be issued by the
Company
on the earlier (i) a Change of Control (as defined in the Company’s 2005
Restricted Stock Unit Award Plan), or (ii) January 1, 2011. In the
event
of a Change of Control, the Company’s issuance of the vested shares shall
be made in a lump sum distribution. In the absence of a Change of
Control,
the issuance of the vested shares shall be made in four (4) equal
installments on each of January 1, 2011, January 1, 2012, January
1, 2013
and January 1, 2014. Upon the Company’s distribution of the vested shares
underlying the Restricted Stock Unit Awards, the recipients must
submit to
the Company the par value of $0.01 per share. The recipients of the
Restricted Stock Unit Awards have no rights as a stockholder, including
no
dividend or voting rights, with respect to the shares underlying
such
awards until the shares are issued by the Company.
|
|
(2)
|
The
dollar amounts in these columns represent the potential realizable
value
of each RSU assuming that the market price of the Common Stock (based
on
the average of the closing bid and asked prices of the Company’s Common
Stock on December 22, 2005, the date of award of Restricted Stock
Units,
of $0.3325) appreciates in value from the date of grant at the 5%
and 10%
annual rates prescribed by regulation and therefore are not intended
to
forecast possible future appreciation, if any, of the price of the
Common
Stock.
|
AGGREGATE
OPTION EXERCISED IN LAST FISCAL YEAR
AND
FISCAL YEAR END OPTION VALUES
No
stock
options were exercised by the named executive officers during 2005. The
following table presents information regarding the value of options outstanding
at December 31, 2005 for each of the named executive officers.
|
|
|
NUMBER
OF SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
AT FISCAL YEAR END
|
|
VALUE
OF UNEXERCISED
IN-THE-MONEY
OPTIONS AT
FISCAL
YEAR END (1)
|
|
NAME
|
|
EXERCISABLE
|
|
UNEXERCISABLE
|
|
EXERCISABLE
|
|
UNEXERCISABLE
|
|
|
|
|
|
|
|
|
|
|
|
Andrew
D. Reddick
|
|
7,000,000
|
|
1,750,000
|
|
$945,000
|
|
$236,250
|
|
Ron
J. Spivey
|
|
5,777,334
|
|
1,222,666
|
|
$779,940
|
|
$165,060
|
|
Peter
A. Clemens
|
|
718,750
|
|
281,250
|
|
$12,656
|
|
$37,969
|
|
James
F. Emigh
|
|
213,250
|
|
186,750
|
|
$8,404
|
|
$25,211
|
|
Robert
A. Seiser
|
|
213,250
|
|
186,750
|
|
$8,404
|
|
$25,211
|
|
(1)
|
Value
is based upon difference between the exercise price of the options
and the
average of the closing bid and asked prices of the Company’s Common Stock
of $
0.265
per share at December 30, 2005.
|
Compensation
Committee Interlocks and Insider Participation
During
2005, the Company’s Compensation Committee consisted of Messrs. Karabelas,
Skelly and Reddick. During 2005, except for Mr. Reddick, there were no
Compensation Committee interlocks or insider participation in compensation
decisions.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth information regarding the beneficial ownership of
the
Common Stock, as of February 1, 2006, for individuals or entities in the
following categories: (i) each of the Company's Directors and nominees for
Directors; (ii) the Chief Executive Officer and the next four highest paid
executive officers of the Company whose total annual compensation for 2005
exceeded $100,000 (the "named executive officers"); (iii) all Directors and
executive officers as a group; and (iv) each person known by the Company to
be a
beneficial owner of more than 5% of the Common Stock. Unless indicated
otherwise, each of the shareholders has sole voting and investment power with
respect to the shares beneficially owned.
|
NAME
OF BENEFICIAL OWNER
|
|
AMOUNT
OWNED
|
|
PERCENT
OF
CLASS(1)
|
|
|
|
|
|
|
|
GCE
Holdings LLC,
c/o
Galen Partners III, L.P.
610
Fifth Ave., 5
th
Floor, New York, New York 10020
|
|
256,325,501(2)
|
|
78.2%
|
|
Oracle
Strategic Partners, L.P
200
Greenwich Avenue, Suite 3, Greenwich, CT 06830
|
|
18,085,708(3)
|
|
5.5%
|
|
Andrew
D. Reddick
|
|
7,750,000(4)
|
|
2.3%
|
|
Ron
J. Spivey
|
|
7,000,000(5)
|
|
2.1%
|
|
William
G. Skelly
|
|
401,000(6)
|
|
.*
|
|
Bruce
F. Wesson
|
|
--(2)
|
|
*
|
|
William
A. Sumner
|
|
250,000(7)
|
|
*
|
|
Peter
A. Clemens
|
|
1,127,823(8)
|
|
*
|
|
Jerry
N. Karabelas
|
|
--(2)
|
|
*
|
|
Immanuel
Thangaraj
|
|
--(2)
|
|
*
|
|
Robert
A. Seiser
|
|
275,250
(9)
|
|
*
|
|
James
F. Emigh
|
|
320,000(10)
|
|
*
|
|
All
Directors and Officers as a Group (10 persons)
|
|
17,124,323(11)
|
|
5.0%
|
|
*
|
Represents
less than 1% of the outstanding shares of the Company's Common
Stock.
|
|
(1)
|
Shows
percentage ownership assuming (i) such party converts all of its
currently
convertible securities or securities convertible within 60 days of
February 1, 2006 into the Company's common stock, and (ii) no other
Company securityholder converts any of its convertible
securities.
|
|
(2)
|
GCE
Holdings LLC, a Delaware limited liability company, is the assignee
of all
of the Company’s Preferred Stock (prior to its conversion into common
stock) formerly held by each of Galen Partners III, L.P., Galen Partners
International III, L.P., Galen Employee Fund III, L.P. (collectively,
“Galen”), Care Capital Investments II, LP, Care Capital Offshore
Investments II, LP (collectively, “Care Capital”) and Essex Woodlands
Health Ventures V, L.P. (“Essex”). Galen, Care Capital and Essex own 43%,
27% and 30%, respectively, of the membership interests in GCE Holdings
LLC. The following natural persons exercise voting, investment and
dispositive rights over the Company’s securities held of record by GCE
Holdings LLC: (i) Galen Partners III, L.P., Galen Partners International
III, L.P. and Galen Employee Fund III, L.P., William Grant, Bruce
F.
Wesson, L. John Wilkenson, David W. Jahns, Zubeen Shroff and Srini
Conjeevaram; and (ii) Care Capital Investments II, LP and Care Capital
Offshore Investments II, LP, Jan Leschly, Jerry Karabelas and David
Ramsay; and (iii) Essex Woodlands Health Ventures V, L.P., Immanuel
Thangaraj.
|
|
(3)
|
Larry
N. Feinberg exercises voting, investment and dispositive rights over
the
Company’s securities held of record by Oracle Strategic Partners, L.P. The
information with respect to Oracle Strategic Partners is based on
filings
with the Commission and/or information provided to the
Company.
|
|
(4)
|
Includes
7,750,000 shares subject to currently exercisable stock options.
Excludes
8,250,000 restricted stock unit awards (“RSUs”) granted to Mr. Reddick.
Mr. Reddick has no rights as a stockholder, including no dividend
or
voting rights, with respect to the shares underlying the RSUs until
the
shares are issued by the Company pursuant to the terms of Company’s 2005
Restricted Stock Unit Plan.
|
|
(5)
|
Includes
7,000,000 shares subject to currently exercisable stock options.
Excludes
6,600,000 RSUs granted to Dr. Spivey. Dr. Spivey has no rights as
a
stockholder, including no dividend or voting rights, with respect
to the
shares underlying the RSUs until the shares are issued by the Company
pursuant to the terms of Company’s 2005 Restricted Stock Unit
Plan.
|
|
(6)
|
Includes
390,000 shares subject to currently exercisable stock options. Excludes
1,000,000 RSUs granted to Mr. Skelly. Mr. Skelly has no rights as
a
stockholder, including no dividend or voting rights, with respect
to the
shares underlying the RSUs until the shares are issued by the Company
pursuant to the terms of the Company’s 2005 Restricted Stock Unit Plan.
|
|
(7)
|
Includes
250,000 shares subject to currently exercisable stock options. Excludes
1,000,000 RSUs granted to Mr. Sumner. Mr. Sumner has no rights as
a
stockholder, including no dividend or voting rights, with respect
to the
shares underlying the RSUs until the shares are issued by the Company
pursuant to the terms of the Company’s 2005 Restricted Stock Unit Plan.
|
|
(8)
|
Includes
812,500 shares subject to currently exercisable stock options. Excludes
4,400,000 RSUs granted to Mr. Clemens. Mr. Clemens has no rights
as a
stockholder, including no dividend or voting rights, with respect
to the
shares underlying the RSUs until the shares are issued by the Company
pursuant to the terms of Company’s 2005 Restricted Stock Unit
Plan.
|
|
(9)
|
Includes
275,250 shares subject to currently exercisable stock options. Excludes
1,650,000 RSUs granted to Mr. Seiser. Mr. Seiser has no rights as
a
stockholder, including no dividend or voting rights, with respect
to the
shares underlying the RSUs until the shares are issued by the Company
pursuant to the terms of Company’s 2005 Restricted Stock Unit
Plan.
|
|
(10)
|
Includes
275,250 shares subject to currently exercisable stock options. Excludes
1,375,000 RSUs granted to Mr. Emigh. Mr. Emigh has no rights as a
stockholder, including no dividend or voting rights, with respect
to the
shares underlying the RSUs until the shares are issued by the Company
pursuant to the terms of Company’s 2005 Restricted Stock Unit
Plan.
|
|
(11)
|
Includes
16,753,000 shares which Directors and executive officers have the
right to
acquire within 60 days of February 1, 2006 through exercise of outstanding
stock options.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On
February 10, 2004, the Company consummated a private offering of convertible
senior secured debentures (the "2004 Debentures") in the aggregate principal
amount of approximately $12.3 million (the "2004 Debenture Offering"). The
2004
Debentures were issued by the Company pursuant to a certain Debenture and Share
Purchase Agreement dated as of February 6, 2004 (the "2004 Purchase Agreement")
by and among the Company, Care Capital, Essex Woodlands Health Ventures, Galen
Partners and each of the purchasers listed on the signature page thereto. Of
the
approximate $12.3 million in debentures issued on February 10, 2004 under in
the
2004 Debenture Offering, approximately $2 million of 2004 Debentures were issued
in exchange for the surrender of a like amount of principal plus accrued and
unpaid interest under the Company's convertible debentures issued to Care
Capital, Essex Woodlands Health Ventures and Galen Partners during November
and
December, 2003.
Effective
August 13, 2004, the 2004 Debentures (including the principal amount plus
interest accrued at the date of conversion) were converted automatically into
the Company's Series A convertible preferred stock (“Series A Preferred”) at a
price per share (the "Conversion Price") of $0.6425, representing the average
of
the closing bid and asked prices of the Company's Common Stock for the 20
trading days ending February 4, 2004, as reported by the OTCBB. The Company
issued on an aggregate of approximately 22 million shares of Series A Preferred
of which approximately 5.2 million, 6.8 million and 6.8 million were issued
to
Care Capital, Essex Woodlands Health Ventures and Galen Partners, respectively,
under the 2004 Debentures held by such parties (representing 23.8%, 30.9% and
30.9%, respectively, of the total Series A Preferred issuable upon conversion
of
the 2004 Debentures).
As
a
condition to the completion of the 2004 Purchase Agreement, the Company, the
investors in the 2004 Debentures and the holders of the Company's outstanding
5%
convertible senior secured debentures due March 31, 2006 issued by the Company
in during the period from 1998 through 2003 (collectively, the "1998-2003
Debentures"), executed a certain Voting Agreement dated as of February 6, 2004
(the "Voting Agreement"). The Voting Agreement provided that each of Care
Capital, Essex Woodlands Health Ventures and Galen Partners (collectively,
the
"Lead 2004 Investors") had the right to designate for nomination one member
of
the Company's Board of Directors, and that the Lead 2004 Investors collectively
may designate one additional member of the Board (collectively, the
"Designees"). In connection with the conversion of the Company’s Preferred
Shares (as described below), the Voting Agreement was amended to reflect to
the
conveyance by each of Care Capital, Essex Woodlands Health Ventures and Galen
Partners of their holdings in the Company’s Preferred Shares (prior to its
conversion into common stock) to GCE Holdings, LLC, a limited liability company
controlled by such parties. As amended, the Voting Agreement provides that
the
Board of Directors of the Company shall be comprised of not more than seven
(7)
members, four (4) of whom shall be designees of GCE Holdings, LLC (as the
assignee of the Preferred Shares of the Company held by Care Capital, Essex
Woodlands Health Ventures and Galen Partners). The designees of GCE Holdings,
LLC are Messrs. Karabelas, Thangaraj and Wesson, respectively, each of whom
are
current Board members. As of the date of this Report, the fourth designee of
GCE
Holdings had not been determined.
Simultaneous
with the execution of a 2004 Purchase Agreement, and as a condition to the
initial closing of the 2004 Purchase Agreement, the Company, the investors
in
the 2004 Debentures and each of the holders of the 1998-2003 Debentures executed
a certain Debenture Conversion Agreement dated as of February 6, 2004 (the
"Conversion Agreement"). In accordance with the terms of the Conversion
Agreement, the 1998-2003 Debentures were converted automatically into the
Company's Series B convertible preferred stock (the "Series B Preferred") and/or
the Company's Series C convertible preferred stock (the "Series C Preferred").
.
It
was a
condition to the completion of the 2004 Debenture Offering that the Company’s
senior term loan agreement (the “Watson Loan Agreement”) with Watson
Pharmaceuticals, Inc. (“Watson”) be restructured to provide for a reduction in
the principal amount of the Watson term loan and for the assignment of the
Watson term loan as restructured to Care Capital, Essex Woodlands Health
Ventures, Galen Partners and the other investors in the 2004 Debentures as
of
February 10, 2004 (collectively, the "Watson Note Purchasers"). Accordingly,
simultaneous with the closing of the 2004 Purchase Agreement, each of the
Company, Watson and the Watson Note Purchasers executed an Umbrella Agreement
dated as of February 10, 2004 (the "Umbrella Agreement"). The Umbrella Agreement
provides for (i) the Company's payment to Watson of approximately $4.3 million
in consideration of amendments to the Watson term notes in the aggregate
principal amount of approximately $21.4 million evidencing the Watson term
loan
(the "Watson Notes") (A) to forgive approximately $16.4 million of indebtedness
under that Watson Notes, leaving a $5.0 million principal balance, (B) to extend
the maturity date of the Watson Notes from March 31, 2006 to June 30, 2007,
(C)
to provide for the satisfaction of future interest payments under the Watson
Notes in the form of the Company's Common Stock, and (D) to provide for the
forbearance from the exercise of rights and remedies upon the occurrence of
certain events of default under the Watson Notes (the Watson Notes as so
amended, the "2004 Note"), and (ii) Watson's sale and conveyance of the 2004
Note to the Watson Note Purchasers for cash consideration of $1.0 million.
In
addition to Watson forgiveness of approximately $16.4 million of indebtedness
under the Watson Notes, all current supply agreements between the Company and
Watson were terminated and Watson waived the dilution protections contained
in
the warrant previously granted to Watson to purchase approximately 10.7 million
shares of Common Stock, to the extent such dilution protections were triggered
by the transactions contemplated in the 2004 Debenture Offering.
The
2004
Note in the principal amount of $5.0 million is secured by a lien on all of
the
Company's and its subsidiaries' assets, carries a floating rate of interest
equal to the prime rate plus 4.5% and matures on June 30, 2007. The allocation
of ownership of the $5.0 million 2004 Note among each of the Watson Note
Purchasers was based on the quotient of the principal amount of the 2004
Debentures purchased by such Watson Note Purchaser, divided by approximately
$12.3 million, representing the aggregate principal amount of the 2004
Debentures issued by the Company on February 10, 2004. As such, of the $5.0
million principal amount of the 2004 Note, approximately $1,352,000, $1,754,000,
and $1,754,000, is owed by the Company to Care Capital, Essex Woodlands Health
Ventures and Galen Partners, respectively (representing approximately 27%,
35%
and 35%, respectively, of the 2004 Note).
Effective
November 10, 2005, all of the Company’ s issued and outstanding shares of
preferred stock were automatically and mandatorily converted into the Company’s
common stock in accordance with the terms of the Company’s Restated
Certification of Incorporation (the “Preferred Stock Conversion”). In accordance
with the conversion provisions contained in the Restated Certificate of
Incorporation, all issued and outstanding shares of the Company’s Series A
Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series
C-2 Preferred Stock and Series C-3 Preferred Stock (collectively, the “Preferred
Stock”) are converted automatically into the Company’s common stock upon the
Company’s receipt of the written consent to the Preferred Stock Conversion from
the holders of at least 51% of the shares of the Company’s Series A Preferred
Stock. On November 10, 2005, the Company received the consent to the Preferred
Stock Conversion from GCE Holdings LLC
(the
assignee of all Preferred Stock (prior to its conversion to common stock)
formerly held by each of Care Capital Investments II, LP, Care Capital Offshore
Investments II, LP, Essex Woodlands Health Ventures V, L.P., Galen Partners
International III, L.P., Galen Partners III, L.P. and Galen Employee Fund III,
L.P.), such entity holding in the aggregate in excess of 51% of the issued
and
outstanding shares of the Company’s Series A Preferred Stock. In accordance with
the terms of the Company’s Restated Certificate of Incorporation, all shares of
the Company’s Preferred Stock were automatically converted into an aggregate of
approximately 305.4 million shares of the Company’s common stock.
The
Company is a party to four (4) Loan Agreements completed in January 2006,
November, 2005, September, 2005 and June, 2005 pursuant to which the Company
has
received bridge financing in the aggregate principal amount $3.3 million from
Essex
Woodlands Health Ventures V, L.P., Care Capital Investments II, LP, Care Capital
Offshore Investments II, LP, Galen Partners International III, L.P., Galen
Partners III, L.P., Galen Employee Fund III, L.P. and certain other shareholders
of the Company listed on the signature page to such Loan Agreements. Reference
is made to “Item 7-Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources” for a more detailed
description of the bridge loan transactions.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
Company’s registered independent public accounting firm is BDO Seidman, LLP. The
fees billed by this firm in 2005 and 2004 were as follows:
|
BDO
Seidman, LLP
|
2005
|
2004
|
|
Audit
Fees
|
$67,867
|
$45,613
|
|
Audit-Related
Fees
|
$7,480
|
-
|
|
|
Total
Audit and Audit-Related Fees
|
$75,347
|
$45,613
|
|
Tax
Fees
|
$28,000
|
-
|
|
All
Other Fees
|
-
|
-
|
|
Total
for BDO Seidman, LLP
|
$103,347
|
$45,613
|
Audit-Related
Fees include the audits of employee benefit plans and accounting consultations
related to accounting, financial reporting or disclosure matters not classified
as "Audit Fees."
Tax
Fees
include tax compliance, tax advice and tax planning services. These services
related to the preparation of various state and federal tax
returns.
There
were no fees billed by our auditors for professional services rendered for
products and services provided other than those described above.
Audit
Committee's Pre-Approval Policies and Procedures
Consistent
with policies of the Commission regarding auditor independence and the Audit
Committee Charter, the Audit Committee has the responsibility for appointing,
setting compensation and overseeing the work of the registered independent
public accounting firm (the “Firm”). The Audit Committee's policy is to
pre-approve all audit and permissible non-audit services provided by the
Firm.
Pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. The Audit Committee may also
pre-approve particular services on a case-by-case basis. In assessing requests
for services by the Firm, the Audit Committee considers whether such services
are consistent with the Firm’s independence, whether the Firm is likely to
provide the most effective and efficient service based upon their familiarity
with the Company, and whether the service could enhance the Company's ability
to
manage or control risk or improve audit quality.
All
of
the audit-related, tax and other services provided by BDO Seidman in 2004
and
2005 and related fees (as described in the captions above) were approved
in
advance by the Audit Committee.
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
|
(a)(1)
|
Consolidated
Financial Statements -- See Index to Financial
Statements.
|
|
(b)
|
Exhibits
-- See Index to Exhibits
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
|
|
|
|
|
ACURA
PHARMACEUTICALS, INC.
|
|
|
|
|
|
By:
|
/s/ ANDREW
D.
REDDICK
|
|
|
Andrew
D. Reddick
|
|
|
President
and
Chief Executive Officer
|
|
|
(Principal Executive
Officer)
|
Date:
February 14, 2006
Pursuant
to the requirements of the Securities Exchange Act of 1934, 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/
Andrew D. Reddick
|
President,
Chief Executive Officer and Director
|
February
14, 2006
|
|
Andrew
D. Reddick
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
/s/
Peter A. Clemens
|
Senior
Vice President and Chief Financial Officer
|
February
16, 2006
|
|
Peter
Clemens
|
(Principal
Financial and Accounting
Officer)
|
|
|
|
|
|
|
/s/
William G. Skelly
|
Director
|
February
15, 2006
|
|
William
G. Skelly
|
|
|
|
|
|
|
|
/s/
Bruce F. Wesson
|
Director
|
February
16, 2006
|
|
Bruce
F. Wesson
|
|
|
|
|
|
|
|
/s/
William Sumner
|
Director
|
February
14, 2006
|
|
William
Sumner
|
|
|
|
|
|
|
|
|
Director
|
February
__, 2006
|
|
Jerry
Karabelas
|
|
|
|
|
|
|
|
/s/
Immanuel Thangaraj
|
Director
|
February
16, 2006
|
|
Immanuel
Thangaraj
|
|
|
|
|
|
|
INDEX
TO
FINANCIAL STATEMENTS
|
|
Page
|
|
Reports
of Independent Registered Public Accounting Firms
|
F-2
- F-3
|
|
|
|
|
Consolidated
Balance Sheets
|
F-4
- F-5
|
|
|
|
|
Consolidated
Statements of Operations
|
F-6
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity (Deficit)
|
F-7
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
F-9
- F-10
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-11
- F-27
|
Report
of Independent Registered Public Accounting Firm
Board
of
Directors and Stockholders
ACURA
PHARMACEUTICALS, INC.
Palatine,
Illinois
We
have
audited the accompanying consolidated balance sheets of Acura Pharmaceuticals,
Inc. and Subsidiaries as of December 31, 2005 and 2004 and the related
consolidated statements of operations, stockholders’ deficit, and cash flows for
each of 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 required to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit 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.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Acura Pharmaceuticals,
Inc.
and Subsidiaries at December 31, 2005 and 2004, and the results of their
operations and their cash flows for the years then ended
,
in
conformity with accounting principles generally accepted in the United States
of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As described in Note B to the financial
statements, the Company has suffered recurring losses from operations and
has a
net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note B. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Chicago,
Illinois
February
1, 2006
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Directors
and Stockholders
ACURA
PHARMACEUTICALS, INC.
We
have
audited the accompanying consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the year ended December 31, 2003 of
Acura
Pharmaceuticals, Inc and Subsidiaries (formerly Halsey Drug Co., Inc. and
Subsidiaries) (the "Company"). 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 audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the consolidated result of operations and cash flows
for the
year ended December 31, 2003 of Acura Pharmaceuticals, Inc. and Subsidiaries,
in
conformity with accounting principles generally accepted in the United
States of
America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern., The Company incurred a net
loss
of $48,455,000 during the year ended December 31, 2003, and, as of that
date,
the Company's current liabilities exceeded its current assets by $3,770,000,
and
its total liabilities exceeded its total assets by $52,067,000. These factors,
among others, as discussed in Note B to the financial statements, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note
B. The
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty.
/s/
GRANT THORNTON LLP
New
York,
New York
February
26, 2004, except for the second paragraph of Note A, as to which the date
is
March 19, 2004
ACURA
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2005 and 2004
(in
thousands)
|
ASSETS
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
260
|
|
$
|
3,103
|
|
|
Prepaid
insurance
|
|
|
179
|
|
|
212
|
|
|
Prepaid
expenses and other current assets
|
|
|
5
|
|
|
95
|
|
|
Total
current assets
|
|
|
444
|
|
|
3,410
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT & EQUIPMENT, NET
|
|
|
1,341
|
|
|
1,555
|
|
|
|
|
|
|
|
|
|
|
|
DEPOSITS
|
|
|
7
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
1,792
|
|
$
|
4,967
|
|
See
accompanying notes to the consolidated financial statements.
ACURA
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
DECEMBER
31, 2005 and 2004
(in
thousands, except share data)
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Senior
secured term notes payable
|
|
$
|
2,550
|
|
$
|
|
|
|
Current
maturities of capital lease obligations
|
|
|
31
|
|
|
29
|
|
|
Accrued
expenses
|
|
|
341
|
|
|
959
|
|
|
Total
current liabilities
|
|
|
2,922
|
|
|
988
|
|
|
|
|
|
|
|
|
|
|
|
SECURED
TERM NOTE PAYABLE
|
|
|
5,000
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL
LEASE OBLIGATIONS, less current maturities
|
|
|
32
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
$
|
7,954
|
|
$
|
6,052
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
Common
stock - $.01 par value;
|
|
|
|
|
|
|
|
|
650,000,000
shares authorized;
|
|
|
|
|
|
|
|
|
329,293,530
and 22,466,967 shares issued and
|
|
|
|
|
|
|
|
|
outstanding
in 2005 and 2004, respectively
|
|
|
3,293
|
|
|
225
|
|
|
Convertible
preferred stock - $.01 par value;
|
|
|
|
|
|
|
|
|
72,027,014
and 290,000,000 shares authorized
|
|
|
|
|
|
|
|
|
and
available for issuance in 2005 and 2004, respectively;
|
|
|
|
|
|
|
|
|
none
and 217,972,986 shares issued and
|
|
|
|
|
|
|
|
|
outstanding
in 2005 and 2004, respectively
|
|
|
|
|
|
2,180
|
|
|
Additional
paid-in capital
|
|
|
287,885
|
|
|
277,129
|
|
|
Unearned
compensation
|
|
|
(5,724
|
)
|
|
(1,078
|
)
|
|
Accumulated
deficit
|
|
|
(291,616
|
)
|
|
(279,541
|
)
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
(6,162
|
)
|
|
(1,085
|
)
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
1,792
|
|
$
|
4,967
|
|
See
accompanying notes to the consolidated financial statements.
ACURA
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS
ENDED DECEMBER 31, 2005, 2004 and 2003
(in
thousands, except per share data)
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Net
product revenues
|
|
$
|
-
|
|
$
|
838
|
|
$
|
5,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of manufacturing
|
|
|
-
|
|
|
1,435
|
|
|
11,705
|
|
|
Research
and development
|
|
|
6,265
|
|
|
4,130
|
|
|
1,460
|
|
|
Selling,
marketing, general and administrative
|
|
|
5,296
|
|
|
5,238
|
|
|
7,903
|
|
|
Plant
shutdown costs
|
|
|
-
|
|
|
-
|
|
|
1,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(11,561
|
)
|
|
(9,965
|
)
|
|
(17,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(636
|
)
|
|
(2,962
|
)
|
|
(6,001
|
)
|
|
Interest
income
|
|
|
36
|
|
|
59
|
|
|
25
|
|
|
Amortization
and write-off of debt discount and deferred private debt offering
costs
|
|
|
-
|
|
|
(72,491
|
)
|
|
(24,771
|
)
|
|
Gain
on debt restructuring
|
|
|
-
|
|
|
12,401
|
|
|
-
|
|
|
Gain
on asset disposals
|
|
|
81
|
|
|
2,359
|
|
|
-
|
|
|
Other
|
|
|
5
|
|
|
603
|
|
|
(464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(12,075
|
)
|
$
|
(69,996
|
)
|
$
|
(48,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
$
|
(0.18
|
)
|
$
|
(3.20
|
)
|
$
|
(2.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of outstanding common shares
|
|
|
66,573
|
|
|
21,861
|
|
|
21,227
|
|
See
accompanying notes to the consolidated financial statements
.
ACURA
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' DEFICIT
YEARS
ENDED DECEMBER 31, 2005, 2004 and 2003
(in
thousands, except par values)
|
|
|
Common
Stock
$.01
Par Value
|
|
Preferred
Stock
$.01
Par Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Additional
Paid-in
Capital
|
|
Unearned
Compensation
|
|
Accumulated
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2003
|
|
|
21,035
|
|
$
|
211
|
|
|
-
|
|
$
|
-
|
|
$
|
148,611
|
|
$
|
-
|
|
$
|
(161,090
|
)
|
$
|
(12,268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year ended
December
31, 2003
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(48,455
|
)
|
|
(48,455
|
)
|
|
Conversion
of debentures
|
|
|
567
|
|
|
5
|
|
|
-
|
|
|
-
|
|
|
322
|
|
|
-
|
|
|
-
|
|
|
327
|
|
|
Issuance
of warrant for lending
commitment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
581
|
|
|
-
|
|
|
-
|
|
|
581
|
|
|
Beneficial
conversion features in
connection
with debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,178
|
|
|
-
|
|
|
-
|
|
|
7,178
|
|
|
Issuance
of warrant in severance
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
113
|
|
|
-
|
|
|
-
|
|
|
113
|
|
|
Increase
in fair value of warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
457
|
|
|
-
|
|
|
-
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
|
21,602
|
|
|
216
|
|
|
-
|
|
|
-
|
|
|
157,262
|
|
|
-
|
|
|
(209,545
|
)
|
|
(52,067
|
)
|
|
Net
loss for the year ended
December
31, 2004
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(69,996
|
)
|
|
(69,996
|
)
|
|
Issuance
of Common Shares for
payment
of interest
|
|
|
865
|
|
|
9
|
|
|
-
|
|
|
-
|
|
|
391
|
|
|
-
|
|
|
-
|
|
|
400
|
|
|
Intrinsic
value of issued options
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,030
|
|
|
(3,030
|
)
|
|
-
|
|
|
-
|
|
|
Amortization
of unearned
compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
55
|
|
|
1,952
|
|
|
-
|
|
|
2,007
|
|
|
Issuance
of Preferred Shares for
convertible
debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible
|
|
|
-
|
|
|
-
|
|
|
21,964
|
|
|
220
|
|
|
13,892
|
|
|
-
|
|
|
-
|
|
|
14,112
|
|
|
Series
B Junior Convertible
|
|
|
-
|
|
|
-
|
|
|
20,246
|
|
|
203
|
|
|
6,722
|
|
|
-
|
|
|
-
|
|
|
6,925
|
|
|
Series
C-1 Junior Convertible
|
|
|
-
|
|
|
-
|
|
|
56,423
|
|
|
564
|
|
|
32,025
|
|
|
-
|
|
|
-
|
|
|
32,589
|
|
|
Series
C-2 Junior Convertible
|
|
|
-
|
|
|
-
|
|
|
37,433
|
|
|
374
|
|
|
22,059
|
|
|
-
|
|
|
-
|
|
|
22,433
|
|
|
Series
C-3 Junior Convertible
|
|
|
-
|
|
|
-
|
|
|
81,907
|
|
|
819
|
|
|
27,693
|
|
|
-
|
|
|
-
|
|
|
28,512
|
|
|
Beneficial
conversion features in
conjunction
with issuance
of
convertible debentures
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14,000
|
|
|
-
|
|
|
-
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
22,467
|
|
|
225
|
|
|
217,973
|
|
|
2,180
|
|
|
277,129
|
|
|
(1,078
|
)
|
|
(279,541
|
)
|
|
(1,085
|
)
|
|
Balance
at December 31, 2004
|
|
|
22,467
|
|
|
225
|
|
|
217,973
|
|
|
2,180
|
|
|
277,129
|
|
|
(1,078
|
)
|
|
(279,541
|
)
|
|
(1,085
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year ended
December
31, 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(12,075
|
)
|
|
(12,075
|
)
|
|
Issuance
of Common Shares for
interest
|
|
|
963
|
|
|
10
|
|
|
-
|
|
|
-
|
|
|
525
|
|
|
-
|
|
|
-
|
|
|
535
|
|
|
Intrinsic
value of issued options
and
restricted stock units
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11,105
|
|
|
(11,105
|
)
|
|
-
|
|
|
-
|
|
|
Amortization
of unearned
compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6,459
|
|
|
-
|
|
|
6,459
|
|
|
Issuance
of Common Shares for
exercise
of options
|
|
|
35
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
4
|
|
|
-
|
|
|
-
|
|
|
5
|
|
|
Conversion
of Preferred Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred
|
|
|
109,819
|
|
|
1,098
|
|
|
(21,964
|
)
|
|
(220
|
)
|
|
(878
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Series
B Junior Convertible
|
|
|
20,246
|
|
|
203
|
|
|
(20,246
|
)
|
|
(203
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Series
C-1 Junior Convertible
|
|
|
56,423
|
|
|
564
|
|
|
(56,423
|
)
|
|
(564
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Series
C-2 Junior Convertible
|
|
|
37,433
|
|
|
374
|
|
|
(37,433
|
)
|
|
(374
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Series
C-3 Junior Convertible
|
|
|
81,907
|
|
|
819
|
|
|
(81,907
|
)
|
|
(819
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
329,293
|
|
$
|
3,293
|
|
|
-
|
|
$
|
-
|
|
$
|
287,885
|
|
$
|
(5,724
|
)
|
$
|
(291,616
|
)
|
$
|
(6,162
|
)
|
See
accompanying notes to the consolidated financial statements
.
ACURA
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2005, 2004, and 2003
(in
thousands, except supplemental data)
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
Cash
flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(12,075
|
)
|
$
|
(69,996
|
)
|
$
|
(48,455
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
137
|
|
|
291
|
|
|
811
|
|
|
Amortization
of debt discount and deferred private debt offering costs
|
|
|
-
|
|
|
30,684
|
|
|
24,771
|
|
|
Write
off unamortized debt discount and deferred private debt offering
costs
|
|
|
-
|
|
|
41,807
|
|
|
-
|
|
|
Gain
on debt restructuring
|
|
|
-
|
|
|
(12,401
|
)
|
|
-
|
|
|
Non-cash
stock compensation expense
|
|
|
6,459
|
|
|
2,007
|
|
|
-
|
|
|
Gain
on Department of Justice settlement
|
|
|
-
|
|
|
(402
|
)
|
|
-
|
|
|
Amortization
of deferred product acquisition costs
|
|
|
-
|
|
|
6
|
|
|
42
|
|
|
Provision
for losses on accounts receivable
|
|
|
-
|
|
|
(428
|
)
|
|
351
|
|
|
(Gain)
or loss on asset disposals
|
|
|
(81
|
)
|
|
(2,359
|
)
|
|
7
|
|
|
Debentures
and stock issued for interest expense
|
|
|
535
|
|
|
401
|
|
|
3,241
|
|
|
Change
in fair value of warrants due to modification of terms
|
|
|
-
|
|
|
-
|
|
|
457
|
|
|
Impairment
reserve against fixed assets
|
|
|
-
|
|
|
-
|
|
|
3,619
|
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
-
|
|
|
729
|
|
|
(2,244
|
)
|
|
Inventories
|
|
|
-
|
|
|
312
|
|
|
28
|
|
|
Prepaid
expenses and other current assets
|
|
|
121
|
|
|
94
|
|
|
(76
|
)
|
|
Other
assets and deposits
|
|
|
(5
|
)
|
|
184
|
|
|
103
|
|
|
Accounts
payable
|
|
|
-
|
|
|
(1,882
|
)
|
|
(877
|
)
|
|
Accrued
expenses
|
|
|
(618
|
)
|
|
1,460
|
|
|
2,137
|
|
|
Total
adjustments
|
|
|
6,548
|
|
|
60,503
|
|
|
32,270
|
|
|
Net
cash used in operating activities
|
|
|
(5,527
|
)
|
|
(9,493
|
)
|
|
(16,085
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(35
|
)
|
|
(444
|
)
|
|
(410
|
)
|
|
Proceeds
from asset disposals
|
|
|
193
|
|
|
4,538
|
|
|
-
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
158
|
|
|
4,094
|
|
|
(410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on senior secured term notes payable
|
|
|
-
|
|
|
(4,000
|
)
|
|
-
|
|
|
Proceeds
from issuance of senior secured term notes payable
|
|
|
2,550
|
|
|
-
|
|
|
2,000
|
|
|
Proceeds
from the exercise of stock options
|
|
|
5
|
|
|
-
|
|
|
-
|
|
|
Payments
to Department of Justice
|
|
|
-
|
|
|
(31
|
)
|
|
(328
|
)
|
|
Payments
on capital lease obligations
|
|
|
(29
|
)
|
|
(45
|
)
|
|
(46
|
)
|
|
Proceeds
from issuance of subordinated convertible debentures
|
|
|
-
|
|
|
11,951
|
|
|
6,600
|
|
|
Payments
of private offering costs
|
|
|
-
|
|
|
(315
|
)
|
|
-
|
|
|
Net
cash provided by financing activities
|
|
|
2,526
|
|
|
7,560
|
|
|
8,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(2,843
|
)
|
|
2,161
|
|
|
(8,269
|
)
|
|
Cash
and cash equivalents at beginning of year
|
|
|
3,103
|
|
|
942
|
|
|
9,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
260
|
|
$
|
3,103
|
|
$
|
942
|
|
See
accompanying notes to the consolidated financial statements
.
ACURA
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR
ENDED DECEMBER 31, 2005, 2004, and 2003
(in
thousands, except supplemental data)
Supplemental
disclosures of noncash investing and financing activities:
Year
ended December 31, 2005
|
1.
|
The
Company issued 963,000 shares of common stock as payment of $535,000
of
Secured Term Note Payable accrued
interest.
|
|
2.
|
217,973,000
shares of Convertible Preferred Stock were converted into 305,829,000
shares of Common Stock.
|
Year
ended December 31, 2004
|
1.
|
The
Company's Convertible Subordinated Debentures contained beneficial
conversation features which were valued at
$14,000,000.
|
|
2.
|
The
Company repaid $166,000 of indebtedness in the form of product
deliveries.
|
|
3.
|
Bridge
Loans of $2,000,000 and accrued interest of $49,000 were converted
into
like amounts of Convertible Subordinated
Debentures.
|
|
4.
|
The
Company issued 865,000 shares of common stock as payment of $400,000
of
Senior Secured Term Note Payable accrued
interest.
|
|
5.
|
Convertible
Subordinated Debentures of $100,632,000 and accrued interest of
$3,939,000
were converted into 217,973,000 shares of Convertible Preferred
Stock.
|
Year
ended December 31, 2003
|
1.
|
The
Company's bridge loans contained beneficial conversion features
valued at
$578,000.
|
|
2.
|
The
Company's convertible debentures contained beneficial conversation
features valued at $6,600,000.
|
|
3.
|
The
Company issued $3,241,000 of debentures as payment of like amounts
of
debenture accrued interest.
|
|
4.
|
The
Company repaid $2,037,000 of indebtedness in the form of product
deliveries.
|
|
5.
|
The
Company issued 645,000 warrants with an estimated relative fair
value of
$582,000 for the lending commitment in the form of debentures and
bridge
loans.
|
|
6.
|
The
Company issued 567,000 shares of common stock upon conversion of
$327,000
of debentures.
|
|
7.
|
The
Company issued 150,000 warrants with an estimated relative fair
value of
$113,000 in connection with the termination of an employment
agreement.
|
|
8.
|
Equipment
financed through capital leases aggregated approximately
$111,000.
|
See
accompanying notes to the consolidated financial statements
.
ACURA
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
NOTE
A - DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
The
Company is a New York corporation established in 1935. Prior to the
restructuring of the Company's operations described below, the Company was
engaged in the development, manufacture, sale and distribution of generic
finished dosage pharmaceutical products (“Generic Products”) and active
pharmaceutical ingredients ("APIs"). On November 6, 2003, the Company
announced
a restructuring plan to focus on research and development related to its
Aversion® Technology and Opioid Synthesis Technologies. In making its
determination, the Board of Directors considered, among other factors, the
Company's ability and time required to generate positive cash flow and income
from the operation of the Company's manufacturing, packaging, labeling and
distribution facilities located in Congers, New York (collectively, the "Congers
Facilities") in the manufacture and distribution of Generic Products pursuant
to
abbreviated new drug applications ("ANDAs").
In
implementing the restructuring of operations at the Congers Facilities, Generic
Product manufacturing operations substantially ceased on January 30, 2004.
Packaging and labeling operations ceased approximately February 12, 2004
and
quality assurance and related support activities ceased on approximately
February 27, 2004. Such dates also mark the substantial completion of the
reduction in work force of approximately 70 employees engaged in these
activities at the Congers Facilities. On February 18, 2004, the Company and
Mutual Pharmaceuticals, Inc. (“Mutual”) entered into an asset purchase agreement
pursuant to which the Company sold certain inactive, non-revenue generating
ANDAs to Mutual in consideration of $2.0 million. The decision to divest
ANDAs
was based, among other things, on the Company’s revised business strategy which
focuses on research and development of the Aversion
®
Technology and the Opioid Synthesis Technologies, and that the Company had
ceased operations at the Congers Facilities. On March 19, 2004, the Company
and
its wholly-owned subsidiary, Axiom Pharmaceutical Corporation (“Axiom”) entered
into an asset purchase agreement with Ivax Pharmaceuticals New York, LLC
(“Ivax”) pursuant to which the Company and Axiom sold to Ivax substantially all
of the Company’s assets used at the Congers Facilities in consideration for $2.5
million. The asset sale transaction with Ivax was completed on August 13,
2004.
As
restructured, the Company
is
a
specialty pharmaceutical company primarily engaged in research, development
and
manufacture of innovative abuse deterrent, abuse resistant and tamper resistant
formulations ("Aversion
®
Technology") intended for use in orally administered opioid-containing
pharmaceutical products. The Company’s lead product candidate utilizing the
Aversion
®
Technology, OxyADF
TM
tablets
(formerly referred to by the Company as Product Candidate #2) is being developed
pursuant to an active investigational new drug application (“IND”) on file with
the U.S. Food and Drug Administration (“FDA”).
To
a much
lesser extent, during 2004 and early 2005, the Company was engaged in the
research, development and manufacture of proprietary, high-yield, short cycle
time, environmentally sensitive opioid synthesis processes (the "Opioid
Synthesis Technologies") intended for use in the commercial production of
certain bulk opioid active pharmaceutical ingredients (“APIs”). In early 2005,
the Company suspended development and commercialization efforts relating
to the
Opioid Synthesis Technologies.
A
s
the
date of this Report, the Company had three US non provisional and two
international patent applications pending relating to its Aversion® Technology
and six (6) issued US patents and three (3) US patent applications pending
relating to the Opioid Synthesis Technologies.
As
of the
date of this Report, the Company retained ownership of all issued patents,
patent applications, other intellectual property and commercial rights to
its
product candidates, Aversion® Technology and Opioid Synthesis
Technology.
The
Company conducts research, development, laboratory, manufacturing and
warehousing activities for the Aversion
®
Technology
at its Culver, Indiana facility (the "Culver Facility"). The Culver Facility
is
registered by the U.S. Drug Enforcement Administration (the "DEA") to perform
research, development and manufacture for certain Schedule II - V controlled
substances in bulk and finished dosage forms.
To
generate revenue, the Company expects to enter into development and
commercialization agreements with strategically focused pharmaceutical company
partners (the "Partners") providing that such Partners license the Company’s
product candidates utilizing the Aversion
®
Technology and further develop, register and commercialize multiple formulations
and strengths of such product candidates in the U.S. and international
territories. The Company expects to receive milestone payments and a share
of
profits and/or royalty payments derived from the Partners' sale of products
incorporating the Aversion
®
Technology. As the date of this Report, the Company did not have any executed
collaborative agreements with Partners, nor can there be any assurance that
the
Company will successfully enter into such collaborative agreements in the
future.
Summary
of Accounting Policies
A
summary
of the significant accounting policies consistently applied in the preparation
of the accompanying consolidated financial statements follows.
1.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and
its
wholly-owned subsidiaries, Acura Pharmaceutical Technologies, Inc., and Axiom
Pharmaceutical Corporation. All material intercompany accounts and transactions
have been eliminated. During 2003, the Company dissolved all of its inactive
subsidiaries with the exception of Acura Pharmaceutical Technologies, Inc.
and
Axiom Pharmaceutical Corporation. The dissolution of the inactive subsidiaries
had no impact on the consolidated financial position, results of operations
or
cash flows of the Company. The Company is currently in the process of dissolving
Axiom Pharmaceutical Corporation.
2.
Statements
of Cash Flows
For
purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months
or
less to be cash equivalents. The Company paid no income taxes for the years
ended December 31, 2005, 2004 and 2003. In addition, the Company paid cash
interest of approximately $101,000,
$47,000
and $526,000 for the years ended December 31, 2005, 2004 and 2003,
respectively.
3.
Accounts
Receivable - Trade and Allowance Accounts
Consistent
with the cessation of the manufacture and sale of
Generic
Products in the first quarter of 2004, the Company had no accounts receivable
from customers at each of December 31, 2005 and 2004. For prior periods,
the
Company's accounts receivable - trade were due from customers for the purchase
of Generic Products. Credit was extended based on evaluation of a customer's
financial condition and, generally, collateral was not required. Estimates
that
were used in determining allowances were based on the Company's historical
experience, current trends, credit policy and a percentage of its accounts
receivable by aging category.
Changes
in the Company's trade allowance accounts are as follows (in thousands):
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
428
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for losses on accounts receivable
|
|
|
-
|
|
|
351
|
|
|
Provision
for all other allowances
|
|
|
-
|
|
|
71
|
|
|
Write-offs
|
|
|
(428
|
)
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
-
|
|
$
|
428
|
|
4.
Inventories
The
Company had no inventories at each of December 31, 2005 and 2004.
5.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Depreciation is recorded on a
straight-line basis over the estimated useful lives of the related assets.
Amortization of capital lease assets is included in depreciation expense.
Leasehold improvements are amortized on a straight-line basis over the shorter
of their useful lives or the terms of their respective leases. Betterments
are
capitalized and maintenance and repairs are charged to operations as incurred.
The estimated lives of the major classification of depreciable assets
are:
|
Building
and building improvements
|
10
- 40 years
|
|
Land
improvements
|
20
- 40 years
|
|
Machinery
and equipment
|
7
-
10 years
|
|
Scientific
equipment
|
5
-
10 years
|
|
Computer
hardware and software
|
3
-
10 years
|
|
Office
equipment
|
5
-
10 years
|
6.
Asset
Impairment
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate the carrying value may not be recoverable. Impairment is measured
by
comparing the carrying value of the long-lived assets to the estimated
undiscounted future cash flows expected to result from use of the assets
and
their ultimate disposition. To the extent impairment has occurred, the carrying
amount of the asset would be written down to an amount to reflect the fair
value
of the asset.
7.
Deferred Private Debt Offering Costs
Private
debt offering costs represented costs incurred by the Company in conjunction
with securing debt financing. The Company incurred approximately $582,000
in
private debt offering costs during the year ended December 31, 2003 in
conjunction with a lending commitment received for the private offering of
securities in the form of Debentures and Bridge Loans. Private debt offering
costs were amortized to interest expense over the life of the related
obligations. In August 2004, all outstanding debentures were converted into
various series of preferred stock and approximately $717,000 of unamortized
deferred private debt offering costs were charged to
expense.
8.
Debt Discount
Debt
discount resulting from the issuance of stock warrants in connection with
the
issuance of subordinated debt and other notes payable as well as beneficial
conversion features contained in convertible debt instruments was recorded
as a
reduction of the related obligations and was amortized over the remaining
life
of the related obligations. Debt discount related to the stock warrants issued
is determined by a calculation which is based on the relative fair values
ascribed to such warrants determined by management's use of the Black-Scholes
valuation model. Inherent in the Black-Scholes valuation model are assumptions
made by management regarding the estimated life of the warrant, the estimated
volatility of the Company's common stock (as determined by reviewing its
historical public market closing prices) and the expected dividend yield.
In
August 2004, all outstanding debentures were converted into various series
of
preferred stock and approximately $41,090,000 of unamortized and outstanding
debt discount was charged to expense.
9.
Revenue
Recognition
The
Company had no Generic Product sales revenues after second quarter 2004.
Prior
to that, the
Company
recognized revenue, net of sales discounts and allowances, when title to
the
Generic Products passed to the customer, which occurred upon shipment. The
Company established sales provisions for estimated chargebacks, discounts,
rebates, returns, pricing adjustments and other sales allowances concurrently
with the recognition of revenue. The sales provisions were established based
upon consideration of a variety of factors, including, but not limited to,
actual return and historical experience by product type, the number and timing
of competitive products approved for sale, the expected market for the product,
estimated customer inventory levels by product, price declines and current
and
projected economic conditions and levels of competition. Actual product return,
chargebacks and other sales allowances incurred were, however, dependent
upon
future events.
10.
Shipping and Handling Costs
Prior
to
cessation
of the manufacture and sale of
Generic
Products in the first quarter of 2004, the
Company
included all shipping and handling expenses incurred as a component of cost
of
manufacturing.
11.
Research and Development
Prior
to
the cessation of development, manufacture and sale of Generic Products, research
and development (R&D) expenses consisted primarily of activities associated
with development of Generic Products and the Company’s Opioid Synthesis
Technologies. During 2005 and beginning in the first quarter of 2004,
R&D expenses were primarily associated with the Company’s Aversion®
Technology and, to a much lessor extent, the Company’s Opioid Synthesis
Technologies. R&D expenses include internal R&D activities and use
of external contract research organizations (CROs). Internal R&D
expenses include items such as facility overhead, maintenance, repair and
depreciation, laboratory supplies, equipment maintenance, repair and
depreciation, salaries, benefits, incentive compensation and other
administrative expenses. CRO expenses include items such as preclinical
laboratory experiments, clinical trials, clinical trial and regulatory
consulting and patent counsel. R&D expenses are charged to operations
as incurred. The Company reviews and accrues clinical trial expenses based
on work performed and rely on an estimate of the costs applicable to the
stage
completion of a clinical trial. Accrued clinical costs are subject to revisions
as such trials progress to completion. Revisions are charged to expense in
the period in which the facts that give rise to the revision become
known.
12.
Income Taxes
The
Company accounts for income taxes under the liability method in accordance
with
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes." Under this method, deferred income tax assets
and
liabilities are determined based on differences between financial reporting
and
tax bases of assets and liabilities and are measured using the enacted tax
rates
and laws that will be in effect when the differences are expected to reverse.
A
valuation allowance is established if it is more likely than not that all,
or
some portion, of deferred income tax assets will not be realized. The Company
has recorded a full valuation allowance to reduce its net deferred income
tax
assets to zero. In the event the Company were to determine that it would
be able
to realize some or all its deferred income tax assets in the future, an
adjustment to the deferred income tax asset would increase income in the
period
such determination was made.
13.
Earnings (Loss) Per Share
The
computation of basic earnings (loss) per share of common stock is based upon
the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are based on the same number of common shares adjusted
for
the effect of other potentially dilutive securities. Excluded from the 2005,
2004 and 2003 computation are approximately 63,496,565,
356,204,000
and 249,877,000, respectively, of outstanding restricted stock units, options,
and warrants and the effects of outstanding convertible debentures and
convertible preferred stock which would have been antidilutive.
14.
Stock-Based Compensation
The
Company has three stock-based compensation plans covering stock options and
restricted stock units for its employees and directors, which are described
more
fully in Note H.
The
Company accounts for stock-based compensation using the intrinsic value method
in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for
Stock Issued to Employees," and related Interpretations ("APB No. 25") and
has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,
("SFAS No. 148"), an amendment of FASB Statement No. 123. Under APB No. 25,
when
the exercise price of the Company's employee stock options or restricted
stock
units equals the market price of the underlying common stock on the date
of
grant, no compensation expense is recognized. Accordingly, no compensation
expense has been recognized in the consolidated financial statements in
connection with these types of grants for 2005 and earlier. When the exercise
price of the Company's employee stock options or restricted stock units is
less
than the market price of the underlying common stock on the date of grant,
compensation expense is recognized.
The
following table illustrates the effect on net loss and loss per share had
the
Company applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation (“SFAS
123”)," to stock-based employee compensation for these types of stock option
or
restricted stock unit grants.
|
|
|
Year
ended December 31,
|
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss, as reported
|
|
$
|
(12,075
|
)
|
$
|
(69,996
|
)
|
$
|
(48,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
total stock-based employee compensation expense included in reported
net
loss
|
|
|
6,458
|
|
|
1,952
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
total stock-based employee compensation expense determined under
fair
value-based method for all awards
|
|
|
(7,242
|
)
|
|
(3,058
|
)
|
|
(662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss, pro forma
|
|
$
|
(12,859
|
)
|
$
|
(71,102
|
)
|
$
|
(49,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted EPS - as reported
|
|
$
|
(0.18
|
)
|
$
|
(3.20
|
)
|
$
|
(2.28
|
)
|
|
Basic
and Diluted EPS - as pro forma
|
|
$
|
(0.19
|
)
|
$
|
(3.25
|
)
|
$
|
(2.31
|
)
|
Pro
forma
compensation expense may not be indicative of future expense.
For
purposes of estimating the fair value of each stock option or restricted
stock
unit on the date of grant, the Company utilized the Black-Scholes option-pricing
model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require
the
input of highly subjective assumptions including the expected volatility
factor
of the market price of the Company’s common stock (as determined by reviewing
its historical public market closing prices). Because the Company's employee
stock options and restricted stock units have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options or restricted stock
units.
The
weighted-average option and restricted stock unit fair values and the
assumptions used to estimate these fair values are as follows:
|
|
|
Grants
issued during
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Expected
life (years)
|
|
|
4
|
|
|
2
- 5
|
|
|
2.5
|
|
|
Risk-free
interest rate
|
|
|
4.5
|
%
|
|
2.4%
- 4.6
|
%
|
|
1.8
|
%
|
|
Expected
volatility factor
|
|
|
120
|
%
|
|
73%
- 87
|
%
|
|
94
|
%
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
Weighted
average fair value
|
|
$
|
0.37
|
|
$
|
0.25
|
|
$
|
0.53
|
|
During
2005 and 2004, the Company granted approximately 4,000,000 and 13,175,000
stock
options, respectively. In 2005, the Company granted 27,500,000 restricted
stock
units. These stock options and restricted stock units had an exercise price
less
than the market price of the underlying common stock on the date of grant.
Under
APB No. 25, compensation expense is recognized for the difference between
the
exercise price of the employee stock option or restricted stock unit and
the
market price of the underlying stock on the date of grant. Total compensation
expense of approximately $14,136,000 will be recognized over the vesting
period
of the options and stock units, of which approximately $6,459,000
and
$1,952,000
was recorded in 2005 and 2004, respectively.
In
2004,
the Company recorded compensation expense of $55,000 on the issuance of 200,000
stock options in connection with separation agreement of an
employee.
Equity
instruments issued to nonemployees in exchange for goods, fees and services
are
accounted for under the fair value-based method of SFAS No.
123.
15.
Use of Estimates in Consolidated Financial Statements
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and use assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities
at
the date of the consolidated financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Management
periodically evaluates estimates used in the preparation of the consolidated
financial statements for continued reasonableness. Appropriate adjustments,
if
any, to the estimates used are made prospectively based on such periodic
evaluations.
16.
Carrying Amount and Fair Value of Financial Instruments
The
carrying amount of cash and cash equivalents approximates fair value due
to the
short-term maturities of the instruments. The fair value of the Company's
short-term and long-term debt approximates the book value based upon the
proximity of the issuance of new debt where the cash consideration received
equaled the face value of the debt.
17.
Reclassifications
Certain
reclassifications have been made to the prior years' amounts to conform to
the
current year's presentation.
New
Accounting Pronouncements
Share-Based
Payment
On
December 16, 2004, the FASB released FASB Statement No. 123 (revised 2004),
“Share-Based Payment, (“FASB 123R”)”. These changes in accounting replace
existing requirements under FASB Statement No. 123, “Accounting for Stock-Based
Compensation”, and eliminates the ability to account for share-based
compensation transaction using APB Opinion No.25, “Accounting for Stock Issued
to Employees”. The compensation cost relating to share-based payment
transactions will be measured based on the fair value of the equity or liability
instruments issues. This Statement does not change the accounting for similar
transactions involving parties other than employees. Publicly traded companies
must apply this Standard as of the beginning of the first annual period that
begins after June 15, 2005.
FASB
123R
permits public companies to choose between two adoption methods, one of which
is
the “modified prospective” method. The modified prospective method recognizes
compensation cost beginning with the effective date (a) based on the
requirements of FASB 123R for all share-based payments granted after the
effective date and to awards modified, repurchased, or cancelled after that
date
and (b) based on the requirements of FASB Statement No. 123 for all awards
granted to employees prior to the effective date of FAS 123R that remain
unvested on the effective date. The cumulative effect of initially applying
this
Statement, if any, is recognized as of the required effective date. The
Company’s required effective date is January 1, 2006. The Company has not
completed its evaluation of the impact of adopting FASB 123R on its consolidated
financial statements because it will depend on levels of share-based payments
granted in the future. However, the Company has estimated $100,000 of additional
unearned compensation will be recorded and expensed over the applicable
remaining vesting periods for all share-based payments granted to employees
on
or before December 31, 2005 that remain unvested on January 1, 2006. The
Company
anticipates that more compensation costs will be recorded in the future if
the
use of options and restricted stock units for employees and director
compensation continues as in the past.
Changes
and Error Corrections
In
May
2005, the FASB issued Statement of Financial Accounting Standards No. 154,
“Accounting Changes and Error Corrections - A Replacement of APB Opinion No.
20
and FASB Statement No. 3”, (“SFAS 154”). SFAS 154 primarily requires
retrospective application to prior periods’ financial statements for the direct
effects of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of
the
change. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005, and early adoption
is
permitted. The Company is required to adopt the provision of SFAS 154, as
applicable, beginning in fiscal 2006.
NOTE
B - BASIS OF PRESENTATION
The
accompanying financial statements have been prepared assuming the Company
will
continue as a going concern.
As
restructured,
the Company is no longer engaged in the manufacture and sale of Generic
Products. As a result, the Company has no ability presently to generate revenue
from product sales. Accordingly, the Company must rely on its current cash
reserves to fund the development of its Aversion
®
Technology and related ongoing administrative and operating expenses. The
Company's future sources of revenue, if any, will be derived from contract
signing fees, milestone payments and royalties and/or profit sharing payments
from licensees for the Company's Aversion
®
Technology.
The Company estimates that its current cash reserves, including the net proceeds
from the January 2006 Bridge Loan described in Note J will be sufficient
to fund
the development of the Aversion
®
Technology and related operating expenses through mid-to-late March, 2006.
To
fund further operations and product development activities, the Company must
raise additional financing, or enter into alliances or collaboration agreements
with third parties. No assurance can be given that the Company will be
successful in obtaining any such financing or in securing collaborative
agreements with third parties on acceptable terms, if at all, or if secured,
that such financing or collaborative agreements will provide for payments
to the
Company sufficient to continue to fund operations. In the absence of such
financing or third-party collaborative agreements, the Company will be required
to scale back or terminate operations and/or seek protection under applicable
bankruptcy laws.
Even
assuming the Company is successful in securing additional sources of financing
to fund the continued development of the Aversion
®
Technology, or otherwise enters into alliances or collaborative agreements
relating to the Aversion
®
Technology, there can be no assurance that the Company's development efforts
will result in commercially viable products. The Company's failure to
successfully develop the Aversion
®
Technology in a timely manner, to obtain an issued U.S. patent relating to
the
Aversion
®
Technology and to avoid infringing third-party patents and other intellectual
property rights will have a material adverse impact on its financial condition
and results of operations.
In
view
of the matters described above, recoverability of a major portion of the
recorded asset amounts shown in the Company's accompanying consolidated balance
sheets is dependent upon continued operations of the Company, which in turn
are
dependent upon the Company's ability to meet its financing requirements on
a
continuing basis, to maintain present financing, and to succeed in its future
operations. The Company's financial statements do not include any adjustment
relating to the recoverability and classification of recorded asset amounts
or
amounts and classification of liabilities that might be necessary should
the
Company be unable to continue in existence.
NOTE
C - FINANCING TRANSACTIONS
2004
Debenture Offering
On
February 10, 2004, the Company consummated a private offering of convertible
senior secured debentures (the "2004 Debentures") in the aggregate principal
amount of approximately $12.3 million (the "2004 Debenture Offering"). The
2004
Debentures were issued by the Company pursuant to a certain Debenture and
Share
Purchase Agreement dated as of February 6, 2004 (the "2004 Purchase Agreement")
by and among the Company, Care Capital Investments, Essex Woodlands Health
Ventures, Galen Partners and each of the purchasers listed on the signature
page
thereto. On April 14, 2004 and May 26, 2004, the Company completed additional
closings under the 2004 Purchase Agreement raising the aggregate gross proceeds
received by the Company from the offering of the 2004 Debentures to $14 million.
The 2004 Debentures carried an interest rate of 1.62% per annum and were
secured
by a lien on all assets of the Company and the assets of Acura Pharmaceutical
Technologies, Inc. and Axiom Pharmaceutical Corporation, each a wholly-owned
subsidiary of the Company.
In
accordance with the terms of the documents executed in connection with the
2004
Debenture Offering, effective August 13, 2004, the business day following
the
Company's receipt of shareholder approval to restate the Company's Certificate
of Incorporation to authorize the Series A Preferred and the Junior Preferred
Shares (as described below) as provided in the 2004 Purchase Agreement, the
aggregate principal amount of the 2004 Debentures converted into an aggregate
of
21,963,757 shares of the Company’s Series A Preferred shares. In addition,
effective August 13, 2004, the Company’s 5% convertible debentures issued during
the period from 1998 through 2003 in the aggregate principal amount of
approximately $86.6 million (including $6.6 million in 2003) were converted
into
the Company’s Series B Preferred shares, Series C-1 Preferred shares, Series C-2
Preferred shares and Series C-3 Preferred shares (the “Junior Preferred
Shares”). As the result, on August 13, 2004, the Company issued an aggregate of
approximately 20.2 million Series B Preferred shares, 56.4 million Series
C-1
Preferred shares, 37.4 million Series C-2 Preferred shares and 81.9 million
Series C-3 Preferred shares. As a result of the conversion, the Company wrote
off $41.8 million of unamortized debt discount and deferred private debt
offering costs.
Conversion
of Preferred Shares into Common Stock
Effective
November 10, 2005, all of the issued and outstanding preferred shares of
the
Company were automatically and mandatorily converted into the Company’s common
stock, $.01 par value per share (the “Common Stock”) in accordance with the
terms of the Company’s Restated Certification of Incorporation (the “Preferred
Stock Conversion”). In accordance with the conversion provisions contained in
the Restated Certificate of Incorporation, all issued and outstanding shares
of
the Company’s Series A Preferred Stock, Series B Preferred Stock, Series C-1
Preferred Stock, Series C-2 Preferred Stock and Series C-3 Preferred Stock
(collectively, the “Preferred Stock”) are converted automatically into the
Company’s Common Stock upon the Company’s receipt of the written consent to the
Preferred Stock Conversion from the holders of at least 51% of the shares
of the
Company’s Series A Preferred Stock. On November 10, 2005, the Company received
the consent to the Preferred Stock Conversion from GCE Holdings LLC (the
assignee of all of the Company’s Preferred Stock (prior to its conversion into
Common Stock) formerly held by each of Care Capital Investments II, LP, Care
Capital Offshore Investments II, LP, Essex Woodlands Health Ventures V, L.P.,
Galen Partners International III, L.P., Galen Partners III, L.P. and Galen
Employee Fund III, L.P.), such entity holding in the aggregate in excess
of 51%
of the issued and outstanding shares of the Company’s Series A Preferred Stock.
In accordance with the terms of the Company’s Restated Certificate of
Incorporation, all shares of the Company’s Preferred Stock were automatically
converted into an aggregate of approximately 305.4 million shares of the
Company’s Common Stock. After giving effect to the Preferred Stock Conversion,
effective November 10, 2005 the Company had an aggregate of approximately
329.0
million shares of Common Stock issued and outstanding.
At
December 31, 2005, convertible preferred stock consists of the following
(in
thousands):
|
Convertible
Preferred
Stock
|
|
Authorized
Preferred
Shares
at
12/31/04
|
|
Number
of
Converted
Preferred
Shares
|
|
Number
of
Common
Shares
Issued
Upon
Conversion
|
|
Authorized
Preferred
Shares
Available
for
Issuance
at 12/31/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A
|
|
|
45,000
|
|
|
21,964
|
|
|
109,819
|
|
|
23,036
|
|
|
Series
B Junior
|
|
|
25,000
|
|
|
20,246
|
|
|
20,246
|
|
|
4,754
|
|
|
Series
C-1 Junior
|
|
|
70,000
|
|
|
56,423
|
|
|
56,423
|
|
|
13,577
|
|
|
Series
C-2 Junior
|
|
|
50,000
|
|
|
37,433
|
|
|
37,433
|
|
|
12,567
|
|
|
Series
C-3 Junior
|
|
|
100,000
|
|
|
81,907
|
|
|
81,907
|
|
|
18,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
290,000
|
|
|
217,973
|
|
|
305,828
|
|
|
72,027
|
|
NOTE
D - PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment are summarized as follows (in thousands):
|
|
|
December
31,
|
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Building
and building improvements
|
|
$
|
1,485
|
|
$
|
1,510
|
|
|
Land
and land improvements
|
|
|
161
|
|
|
127
|
|
|
Machinery
and equipment
|
|
|
2,324
|
|
|
3,425
|
|
|
Scientific
equipment
|
|
|
473
|
|
|
450
|
|
|
Computer
hardware and software
|
|
|
196
|
|
|
255
|
|
|
Office
equipment
|
|
|
42
|
|
|
174
|
|
|
Other
personal property
|
|
|
50
|
|
|
48
|
|
|
Construction
in progress
|
|
|
1
|
|
|
5
|
|
|
|
|
|
4,732
|
|
|
5,994
|
|
|
Less
accumulated depreciation and amortization (including $53 in 2005
and $35
in 2004 on capital leased assets)
|
|
|
(3,271
|
)
|
|
(4,301
|
)
|
|
|
|
|
1,461
|
|
|
1,693
|
|
|
Less
impairment reserve
|
|
|
(120
|
)
|
|
(138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,341
|
|
$
|
1,555
|
|
Equipment
of $146,000 is recorded under capitalized leases in categories of scientific
equipment and office equipment at December 31, 2005 and 2004.
Depreciation
and amortization expense for the years ended December 31, 2005, 2004 and
2003
was approximately $137,000, $291,000 and $811,000, respectively.
NOTE
E - ACCRUED EXPENSES
Accrued
expenses are summarized as follows (in thousands):
|
|
|
December
31,
|
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Bonus,
payroll, payroll taxes and benefits
|
|
$
|
50
|
|
$
|
573
|
|
|
Legal
fees
|
|
|
74
|
|
|
34
|
|
|
Audit
examination and tax preparation fees
|
|
|
65
|
|
|
85
|
|
|
Franchise
taxes
|
|
|
20
|
|
|
-
|
|
|
Property
taxes
|
|
|
52
|
|
|
30
|
|
|
Clinical,
regulatory, trademarks, and patent consulting fees
|
|
|
78
|
|
|
108
|
|
|
Directors
fees
|
|
|
2
|
|
|
-
|
|
|
Clinical
and laboratory testing services
|
|
|
-
|
|
|
47
|
|
|
Litigation
settlement
|
|
|
-
|
|
|
25
|
|
|
Medicaid
rebates
|
|
|
-
|
|
|
50
|
|
|
Other
fees and services
|
|
|
-
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
341
|
|
$
|
959
|
|
NOTE
F - TERM NOTE PAYABLE AND STOCK WARRANTS
At
December 31, 2005 and 2004, notes payable consisted of the following (in
thousands):
|
|
|
December
31,
|
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Term
note payable (a)
|
|
$
|
5,000
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
Bridge
loans (b)
|
|
$
|
2,550
|
|
$
|
-
|
|
|
Capital
lease obligations
|
|
|
63
|
|
|
93
|
|
|
|
|
|
2,613
|
|
|
93
|
|
|
Less:
Current maturities
|
|
|
(2,581
|
)
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32
|
|
$
|
64
|
|
|
(a)
|
The
Company was a party to a certain loan agreement with Watson
Pharmaceuticals, Inc. ("Watson") pursuant to which Watson made
term loans
to the Company (the "Watson Term Loan Agreement") in the aggregate
principal amount of $21.4 million as evidenced by two promissory
notes
(the "Watson Notes"). It was a condition to the completion of the
2004
Debenture Offering that simultaneous with the closing of the 2004
Purchase
Agreement, the Company shall have paid Watson the sum of approximately
$4.3 million (which amount was funded from the proceeds of the
2004
Debenture Offering) and conveyed to Watson certain Company assets
in
consideration for Watson's forgiveness of approximately $16.4 million
of
indebtedness under the Watson Notes, resulting in a $12.1 million
gain for
the Company. As part of such transaction, the Watson Notes were
amended to
extend the maturity date of such notes from March 31, 2006 to June
30,
2007, to provide for satisfaction of future interest payments under
the
Watson Notes in the form of the Company's Common Stock, to reduce
the
principal amount of the Watson Notes from $21.4 million to $5.0
million,
and to provide for the forbearance from the exercise of rights
and
remedies upon the occurrence of certain events of default under
the Watson
Notes (the Watson Notes as so amended, the "2004 Note"). Simultaneous
with
the issuance of the 2004 Note, each of Care Capital, Essex Woodland
Health
Ventures, Galen Partners and the other investors in the 2004 Debentures
as
of February 10, 2004 (collectively, the "Watson Note Purchasers")
purchased the 2004 Note from Watson in consideration for a payment
to
Watson of $1.0 million.
|
The
2004
Note in the principal amount of $5.0 million, as purchased by the Watson
Note
Purchasers, is secured by a lien on all of the Company's and its subsidiaries'
assets, carries a floating rate of interest equal to the prime rate plus
4.5%
and matures on June 30, 2007. The carrying interest rate at December 31,
2005
was 11.75% and increased to 12.0% on January 31, 2006.
The
2004
Note contains cross default provisions with each of the outstanding Bridge
Loans.
(b)
November
2005 Bridge Loan
The
Company is a party to a Loan Agreement, dated November 9, 2005 (the “November
2005 Bridge Loan Agreement”) by and among Essex Woodlands Health Ventures V,
L.P., Care Capital Investments II, LP, Care Capital Offshore Investments
II, LP,
Galen Partners III, L.P., Galen Partners International III, L.P., Galen Employee
Fund III, L.P. and certain other shareholders of the Company listed on the
signature page thereto (collectively, the “November 2005 Bridge Lenders”)
providing for bridge financing to the Company in the principal amount of
$1.05
million (the “November 2005 Bridge Loan”). The net proceeds from the November
2005 Bridge Loan, after the satisfaction of related expenses, are being used
by
the Company to continue the development of its Aversion® Technology and to fund
operating expenses. The terms of the November 2005 Bridge Loan are identical
to
the terms of the January 2006 Bridge Loan (See Note J), except that (i) the
lien
securing the November 2005 Bridge Loan is junior in right of payment and
lien
priority to the January 2006 Bridge Loan, and (ii) the funding event is $5.05
million.
September
2005
Bridge
Loan
The
Company is a party to a Loan Agreement, dated
September 16,
2005
(the “
September
2005
Bridge
Loan Agreement”) by and among Essex Woodlands Health Ventures V, L.P., Care
Capital Investments II, LP, Care Capital Offshore Investments II, LP, Galen
Partners III, L.P., Galen Partners International III, L.P., and Galen Employee
Fund III, L.P. (collectively, the “
September
2005
Bridge
Lenders”) providing for bridge financing to the Company in the principal amount
of $
0.5
million
(the “
September
2005
Bridge Loan”). The net proceeds from the
September
2005
Bridge Loan, after the satisfaction of related expenses, were used by the
Company to continue the development of its
Aversion®
Technology
and to fund operating expenses. The terms of the September 2005 Bridge Loan
are
identical to the terms of the January 2006 Bridge Loan (see Note J), except
that
(i) the September 2005 Bridge Loan required that the Company maintain minimum
cash reserves of $200,000, (ii) the lien securing the September 2005 Bridge
Loan
is junior in right of payment and lien priority to each of the January 2006
Bridge Loan and the November 2005 Bridge Loan, and (iii) the Funding Event
is
$4.0 million. On October 20, 2005, the September 2005 Bridge Lenders waived
the
requirement that the Company maintain minimum cash reserves of $200,000 until
such time as the Company receives additional financing providing net proceeds
to
the Company of at least $2.0 million.
June
2005 Bridge Loan
The
Company also is a party to a Loan Agreement, dated June 22, 2005 (the “June 2005
Bridge Loan Agreement”) by and among Essex Woodlands Health Ventures V, L.P.,
Care Capital Investments II, LP, Care Capital Offshore Investments II, LP,
Galen
Partners III, L.P., Galen Partners International III, L.P., and Galen Employee
Fund III, L.P. (collectively, the “June 2005 Bridge Lenders”) providing for
bridge financing to the Company in the principal amount of $1.0 million (the
“June 2005 Bridge Loan”). The net proceeds from the June 2005 Bridge Loan, after
the satisfaction of related expenses, were used by the Company to continue
the
development of its
Aversion®
Technology and to fund operating expenses. The terms of the June 2005 Bridge
Loan are identical to the terms of the January 2006 Bridge Loan (see Note
J),
except that (i) the June 2005 Bridge Loan required that the Company maintain
minimum cash reserves of $200,000, (ii) the lien securing the June 2005 Bridge
Loan is junior in right of payment and lien priority to each of the January
2006
Bridge Loan, the November 2005 Bridge Loan and the September 2005 Bridge
Loan
and (iii) the Funding Event amount is $3.5 million.
On
October 20, 2005, the June 30, 2005 Bridge Lenders waived the requirement
that
the Company maintain minimum cash reserves of $200,000 until such time as
the
Company receives additional financing providing net proceeds to the Company
of
at least $2.0 million.
Stock
Warrants
At
December 31, 2005, the Company had outstanding common stock purchase warrants
exercisable for an aggregate of 16,241,571 shares of common stock. Of such
warrants 5,390,906
were
issued in connection with the issuance of convertible debentures, bridge
loans
and financing commitments during the years 1998 through 2003, 10,700,665
were
issued to Watson in connection with their agreement to amend the Watson Loan
at
December 20, 2002, and 150,000 were issued in 2003 as part of the settlement
terms with a former executive officer of the Company. During 2005, approximately
16,635,000 warrants expired unexercised and approximately 197,000, 310,000,
154,000 and 15,581,000 warrants are scheduled to expire if unexercised during
the years 2006, 2007, 2008 and years thereafter, respectively.
The
following table summarizes information about common stock purchase warrants
outstanding at December 31, 2005 (shares in thousands):
|
Warrants
outstanding
|
|
|
Range
of
Exercise
Prices
|
|
Shares
|
|
Weighted
Average
Remaining
Life
in Years
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.13
to $0.66
|
|
|
16,242
|
|
|
6.37
|
|
$
|
0.34
|
|
NOTE
G - INCOME TAXES
Reconciliations
between the statutory federal income tax rate and the Company's effective
income
tax rate were as follows (in thousands):
|
|
|
Years
Ended December 31,
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
statutory rate
|
|
$
|
(4,105
|
)
|
|
(34
|
)
%
|
$
|
(23,798
|
)
|
|
(34
|
)
%
|
$
|
(15,966
|
)
|
|
(34
|
)
%
|
|
Loss
for which no benefit was provided
|
|
|
4,104
|
|
|
34
|
|
|
3,716
|
|
|
5.3
|
|
|
4,357
|
|
|
9.2
|
|
|
Non-deductible
financing costs
|
|
|
-
|
|
|
-
|
|
|
24,647
|
|
|
35.2
|
|
|
11,589
|
|
|
24.6
|
|
|
Federal
tax carryback refund
|
|
|
-
|
|
|
-
|
|
|
(122
|
)
|
|
(.2
|
)
|
|
-
|
|
|
-
|
|
|
Debt
forgiveness
|
|
|
-
|
|
|
-
|
|
|
(4,307
|
)
|
|
(6.1
|
)
|
|
-
|
|
|
-
|
|
|
Department
of Justice settlement
|
|
|
-
|
|
|
-
|
|
|
(137
|
)
|
|
(.2
|
)
|
|
11
|
|
|
.1
|
|
|
Other
|
|
|
1
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
9
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
tax benefit
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
The
Company has net operating loss carryforwards aggregating approximately
$135.9
million, expiring during the years 2009 through 2025.
The
tax
loss carryforwards of the Company and its subsidiaries may be subject to
limitation by Section 382 of the Internal Revenue Code with respect to the
amount utilizable each year. This limitation reduces the Company's ability
to
utilize net operating loss carryforwards included above each year. The amount
of
the limitation has not been quantified by the Company.
During
2004, the Company adjusted its net operating loss carryforward. Because a
full
valuation allowance was placed against the Company’s net deferred income tax
asset, this adjustment had no effect on the 2004 or prior year financial
statements.
The
components of the Company's deferred income tax assets (liabilities), pursuant
to SFAS No. 109, are summarized as follows (in thousands):
|
|
|
December
31,
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
57,748
|
|
$
|
55,178
|
|
$
|
55,998
|
|
|
Stock
compensation
|
|
|
3,555
|
|
|
843
|
|
|
-
|
|
|
Accrued
expenses
|
|
|
16
|
|
|
254
|
|
|
205
|
|
|
Accrued
shutdown costs
|
|
|
50
|
|
|
71
|
|
|
703
|
|
|
Debt
issue costs
|
|
|
12
|
|
|
-
|
|
|
-
|
|
|
Asset
reserves
|
|
|
-
|
|
|
-
|
|
|
1,016
|
|
|
Research
and development tax credit
|
|
|
-
|
|
|
-
|
|
|
29
|
|
|
Capital
loss carryforwards
|
|
|
-
|
|
|
-
|
|
|
212
|
|
|
Other
|
|
|
66
|
|
|
71
|
|
|
73
|
|
|
Depreciation
|
|
|
-
|
|
|
-
|
|
|
20
|
|
|
Gross
deferred tax assets
|
|
|
61,447
|
|
|
56,417
|
|
|
58,256
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(38
|
)
|
|
(26
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
before
valuation allowance
|
|
|
61,409
|
|
|
56,391
|
|
|
58,256
|
|
|
Valuation
allowance
|
|
|
(61,409
|
)
|
|
(56,391
|
)
|
|
(58,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
SFAS
No.
109 requires a valuation allowance against deferred tax assets if, based
on the
weight of available evidence, it is more likely than not that some or all
of the
deferred tax assets may not be realized. The valuation allowance at December
31,
2005, 2004 and 2003 primarily pertains to uncertainties with respect to future
utilization of net operating loss carryforwards.
NOTE
H - EMPLOYEE BENEFIT PLANS
|
1.
|
401(k)
and Profit-sharing Plan
|
Effective
October 1, 1998, the Company established a 401(k) and profit-sharing plan
for
all employees other than those covered under collective bargaining agreements.
Eligible employees may elect to make a basic contribution of up to 15% of
their
annual earnings. The plan provides that the Company can make discretionary
matching contributions equal to 25% of the first 6% of employee contributions
for an aggregate employee contribution of 1.5%, along with a discretionary
profit-sharing contribution. The Company incurred no expense under the plan
in
2005, 2004 and 2003.
In
September 1995, the stockholders of the Company approved the adoption of
a stock
option and restricted stock purchase plan (the "1995 Option Plan"). As of
December 31, 2005, incentive stock options to purchase 322,510 shares and
non-qualified options to purchase 106,390 shares were granted under the 1995
Stock Option Plan. In May 2005, the 1995 Stock Option Plan expired and the
remaining unissued shares allocated to the Plan were terminated. The average
per
share exercise price for all outstanding options under the 1995 Stock Option
Plan is approximately $1.64. At December 31, 2005, options to purchase
approximately 428,900
shares
remained outstanding.
In
June
1998, the stockholders of the Company approved the adoption of a stock option
plan (as amended to date, the "1998 Option Plan"). The 1998 Option Plan provides
for the granting of (i) nonqualified options to purchase the Company's common
stock at a price determined by the Stock Option Committee, and (ii) incentive
stock options to purchase the Company's common stock at not less than the
fair
market value on the date of the option grant. In June 2002, the shareholders
of
the Company approved a resolution to increase the total number of shares
which
may be sold pursuant to options and rights granted under the 1998 Option
Plan to
8,100,000. In August 2004, the shareholders of the Company approved a resolution
to increase this amount to 20,000,000. No option can be granted under the
1998
Option Plan after April 2008 and no option can be outstanding for more than
ten
years after its grant. At December 31, 2005, options to purchase approximately
19,326,095 shares remained outstanding and 616,655 were available for grant
under the 1998 Option Plan.
A
summary
of the Company's stock option plans as of December 31, 2005, 2004, and
2003, and for the years then ended consisted of the following (shares in
thousands):
|
|
Years
Ended December 31,
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning
|
|
17,499
|
|
$
|
0.44
|
|
|
3,525
|
|
$
|
1.83
|
|
|
5,009
|
|
$
|
1.80
|
|
|
Granted
|
|
4,000
|
|
|
0.13
|
|
|
14,475
|
|
|
0.13
|
|
|
45
|
|
|
0.96
|
|
|
Exercised
|
|
(35
|
)
|
|
0.13
|
|
|
(-
|
)
|
|
-
|
|
|
(-
|
)
|
|
-
|
|
|
Cancelled
|
|
(1,709
|
)
|
|
1.65
|
|
|
(501
|
)
|
|
1.85
|
|
|
(1,529
|
)
|
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
ending
|
|
19,755
|
|
$
|
0.27
|
|
|
17,499
|
|
$
|
0.44
|
|
|
3,525
|
|
$
|
1.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable,
end
of year
|
|
15,698
|
|
$
|
0.31
|
|
|
9,558
|
|
$
|
0.66
|
|
|
2,871
|
|
$
|
1.91
|
The
following table summarizes information about stock options outstanding at
December 31, 2005 (shares in thousands):
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Range
of Exercise Prices
|
|
Shares
|
|
Weighted
Average
Remaining
Life
in Years
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.13
to $1.00
|
|
18,294
|
|
8.36
|
|
$
|
0.14
|
|
14,239
|
|
$
|
0.15
|
|
$1.01
to $2.00
|
|
800
|
|
3.39
|
|
|
1.41
|
|
798
|
|
|
1.41
|
|
$2.01
to $4.38
|
|
661
|
|
2.77
|
|
|
2.40
|
|
661
|
|
|
2.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
19,755
|
|
7.99
|
|
$
|
36.05
|
|
15,698
|
|
$
|
0.31
|
3.
Restricted
Stock Unit Award Plan
On
December 22, 2005, the Board of Directors adopted the Company’s 2005 Restricted
Stock Unit Award Plan (the “2005 RSU Plan”) for its employees and non-employee
directors. A Restricted Stock Unit (“RSU”) represents the contingent obligation
of the Company to deliver a share of its common stock to the holder of the
RSU
on a distribution date. RSUs for up to 30 million shares of common stock
are
authorized for issuance under the 2005 RSU Plan. The Company believes that
the
2005 RSU Plan does not require shareholder approval. Nevertheless, the Company
intends to seek shareholder ratification for the 2005 RSU Plan at its next
Annual Shareholders’ Meeting.
The
RSU
Plan is administered by the Company’s Board of Directors or a Committee
appointed by the Board of Directors. RSUs granted under the 2005 RSU Plan
vest
on a schedule determined by the Board of Directors or such Committee as set
forth in a restricted stock unit award agreement. Unless otherwise set forth
in
such award agreement, the RSUs fully vest upon a change in control (as defined
in the 2005 RSU Plan) of the Company or upon termination of an employee’s
employment with the Company without cause or due to death or disability,
and in
the case of a non-employee director, such person’s death or disability or if
such person is not renominated as a director (other than for “cause” or refusal
to stand for re-election) or is not elected by the Company’s stockholders, if
nominated. Vesting of an RSU entitles the holder thereof to receive a share
of
common stock of the Company on a distribution date (after payment of the
$0.01
par value per share).
Absent
a
change of control, one-fourth of vested shares of common stock underlying
an RSU
award will be distributed (after payment of $0.01 par value per share) on
January 1 of each of 2011, 2012, 2013 and 2014. If a change in control occurs
(whether prior to or after 2011), the vested shares underlying the RSU award
will be distributed at or about the time of the change in control. No dividends
accrue on the shares underlying the RSUs prior to issuance by the Company.
The
recipients of RSU awards need not be employees or directors of the Company
on a
distribution date. RSUs may generally not be transferred, except recipients
of
RSUs may designate beneficiaries to inherit their RSU’s upon their death.
The
following table summarizes information about
restricted
stock unit awards
outstanding
at December 31, 2005 (in thousands):
|
Restricted
stock units outstanding
|
|
|
Shares
|
|
Number
vested
|
|
Number
issuable
|
|
|
|
|
|
|
|
|
|
27,500
|
|
|
9,167
|
|
|
-
|
|
Of
the
RSUs granted to date, one third vested upon grant and the other two thirds
vest
on a straight-line monthly basis through December 2007.
NOTE
I - COMMITMENTS AND CONTINGENCIES
The
following table presents the Company's expected cash payments on contractual
obligations
at
December 31, 2005 (in thousands):
|
|
|
Total
|
|
Due
in
2006
|
|
Due
in
2007
|
|
Due
in
2008
|
|
Due
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
7,550
|
|
$
|
2,550
|
|
$
|
5,000
|
|
$
|
-
|
|
$
|
-
|
|
|
Capital
leases
|
|
|
63
|
|
|
31
|
|
|
26
|
|
|
6
|
|
|
-
|
|
|
Operating
leases
|
|
|
35
|
|
|
30
|
|
|
5
|
|
|
-
|
|
|
-
|
|
|
Annual
interest on fixed rate debt
|
|
|
128
|
|
|
128
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Employment
agreements
|
|
|
740
|
|
|
740
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations
|
|
$
|
8,516
|
|
$
|
3,479
|
|
$
|
5,031
|
|
$
|
6
|
|
$
|
-
|
|
|
Expected
cash payments on contractual obligations entered into subsequent
to
December 31, 2005
|
|
Total
|
|
Due
in
2006
|
|
Due
in
2007
|
|
Due
in
2008
|
|
Due
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
750
|
|
$
|
750
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
Annual
interest on fixed rate debt
|
|
|
25
|
|
|
25
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
775
|
|
$
|
775
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Employment
Contracts
Andrew
D.
Reddick is employed pursuant to an Employment Agreement effective as of August
26, 2003, as amended, which provides that Mr. Reddick will serve as the
Company's Chief Executive Officer and President for a term expiring December
31,
2006. The term of the Employment Agreement provides for automatic one (1)
year
renewals in the absence of written notice to the contrary from the Company
or
Mr. Reddick at least ninety (90) days prior to the expiration of the initial
term or any subsequent renewal period. The Employment Agreement provides
for an
annual base salary of $300,000 plus the payment of annual bonus of up to
one
hundred percent (100%) of Mr. Reddick's base salary based on the achievement
of
such targets, conditions, or parameters as may be set from time to time by
the
Board of Directors or the Compensation Committee of the Board of Directors.
For
the Company’s 2006 fiscal year, the Employment Agreement provides for a cash
bonus equal to 100% of Mr. Reddick’s then current base salary (the “2006 Cash
Bonus”) upon the Company’s receipt of aggregate proceeds of at least $15.0
million on or before March 31, 2007 from an offering of the Company’s equity
securities and/or from license fees or milestone payments from third-party
licensing or similar transactions (subject to the payment of a pro-rata portion
of the 2006 Cash Bonus provided the Company receives aggregate gross proceeds
from such transactions of at least $11.0 million on or before March 31, 2007).
The Employment Agreement also provides for the Company’s grant of stock options
and restricted stock units to Mr. Reddick. The Employment Agreement contains
standard termination provisions, including upon death, disability, for Cause,
for Good Reason and without Cause, which in certain cases provides for severance
payments equal to one year’s salary and other termination benefits
Ron
J.
Spivey, Ph.D., is employed pursuant to an Employment Agreement effective
as of
April 5, 2004, as amended, which provides that Dr. Spivey will serve as the
Company's Senior Vice President and Chief Scientific Officer for term expiring
December 31, 2006 an annual base salary of $260,000 plus the payment of annual
bonus of up to one hundred percent (100%) of Dr. Spivey's base salary.
Peter
A.
Clemens is employed pursuant to an Employment Agreement effective as of March
10, 1998, as amended, which provides that Mr. Clemens will serve as the
Company's Senior Vice President and Chief Financial Officer for a term expiring
December 31, 2006 at an annual base salary of $180,000 plus the payment of
an
annual bonus of up to one hundred percent (100%) of Mr. Clemens base
salary.
The
terms
of the Employment Agreements with Dr. Spivey and Mr. Clemens are similar
to
those of Mr. Reddick.
Legal
Proceeding
In
May
2001, the Company was named as a defendant in an action entitled Alfred Kohn
v.
Halsey Drug Co. in the Supreme Court of New York, Bronx County. The plaintiff
sought, among other things, damages of $1.0 million for breach of an alleged
oral contract to pay a finder's fee for a business transaction involving
the
Company. In March 2005, the Company and the estate of Mr. Kohn agreed to
settle
this matter, pursuant to which in December 2005 the Company made a one-time
payment of $35,000.
NOTE
J - SUBSEQUENT EVENT
January
2006 Bridge Loan
The
Company is a party to a Loan Agreement, dated January 31, 2006 (the “January
2006 Bridge Loan Agreement”) by and among Essex Woodlands Health Ventures V,
L.P., Care Capital Investments II, LP, Care Capital Offshore Investments
II, LP,
Galen Partners III, L.P., Galen Partners International III, L.P., Galen Employee
Fund III, L.P. and such Additional Lenders as may become a party pursuant
to the
terms of the January 2006 Bridge Loan Agreement (collectively, the “January 2006
Bridge Lenders”). In accordance with the terms of the January 2006 Bridge Loan
Agreement, on January 31, 2006 the January 2006 Bridge Lenders provided a
bridge
loan to the Company in the aggregate principal amount of $750,000. The January
2006 Bridge Loan Agreement also permits the funding of additional loans in
the
principal amount of up to $250,000 and, with the consent of any two of Care
Capital Investments, Essex Woodlands Health Ventures and Galen Partners,
additional loan amounts mutually agreed to by the Company and the January
2006
Bridge Lenders (the “January 2006 Bridge Loan”). No assurance can be given that
additional loans will be made available to the Company under the January
2006
Bridge Loan Agreement. The net proceeds from the January 2006 Bridge Loan,
after
the satisfaction of related expenses, will be used by the Company to continue
the development of its Aversion® Technology and to fund operating expenses. The
January 2006 Bridge Loan is secured by a lien on all of the Company’s assets,
senior in right of payment and lien priority to all other indebtedness of
the
Company. The January 2006 Bridge Loan bears interest at the rate of ten percent
(10%) per annum and matures on June 1, 2006. The January 2006 Bridge Loan
is
subject to mandatory pre-payment by the Company upon the Company’s completion of
equity or debt financing or any sale, transfer, license or similar arrangement
pursuant to which the Company or any of its Subsidiaries sells, licenses
or
otherwise grant rights in any material portion of the Company’s intellectual
property to any third party, provided that the consummation of any such
transaction results in cash proceeds to the Company, net of all costs and
expenses, at least equal to the sum of (i) $5.05 million, plus (ii) the
aggregate principal amount of the January 2006 Bridge Loan (a “Funding Event”).
The January 2006 Bridge Loan Agreement restricts the Company’s ability to issue
any shares of its currently authorized Series A, B or C preferred stock without
the prior consent of the January 2006 Bridge Lenders, and grants the January
2006 Bridge Lenders preemptive rights relating to the issuance of the Company’s
Series A, B and C preferred stock. The January Bridge Loan contains cross
default provisions with the 2004 Note and each of the outstanding Bridge
Loans.
The
January 2006 Bridge Loan Agreement also contains normal and customary
affirmative and negative covenants, including restrictions on the Company’s
ability to incur additional debt or grant any lien on the assets of the Company
or its subsidiaries, subject to certain permitted exclusions.
NOTE
K - QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected
quarterly consolidated financial data is shown below (in thousands, except
per
share data):
|
|
|
For
the Three Month Period Ending
|
|
|
|
|
|
|
March
31,
2005
|
|
June
30,
2005
|
|
September
30,
2005
|
|
December
31,
2005
|
|
Annual
Year
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
product revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
Loss
from operations
|
|
|
(1,908
|
)
|
|
(1,266
|
)
|
|
(1,473
|
)
|
|
(
6,914
|
)
|
|
(11,561
|
)
|
|
Net
loss
|
|
|
(1,948
|
)
|
|
(1,382
|
)
|
|
(1,635
|
)
|
|
(7,110
|
)
|
|
(12,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share - basic and diluted
|
|
$
|
(.09
|
)
|
$
|
(.06
|
)
|
$
|
(.07
|
)
|
$
|
(.04
|
)
|
$
|
(.18
|
)
|
|
|
|
For
the Three Month Period Ending
|
|
|
|
|
|
|
March
31,
2004
|
|
June
30,
2004
|
|
September
30,
2004
|
|
December
31,
2004
|
|
Annual
Year
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
product revenues
|
|
$
|
628
|
|
$
|
210
|
|
$
|
-
|
|
$
|
-
|
|
$
|
838
|
|
|
Loss
from operations
|
|
|
(2,084
|
)
|
|
(2,120
|
)
|
|
(3,810
|
)
|
|
(1,951
|
)
|
|
(9,965
|
)
|
|
Amortization
and write-off of debt discount and deferred private debt offering
costs
|
|
|
(10,843
|
)
|
|
(13,812
|
)
|
|
(47,836
|
)
|
|
(-
|
)
|
|
(72,491
|
)
|
|
Gain
on debt restructuring
|
|
|
12,401
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
12,401
|
|
|
Gain
(loss) on asset disposals
|
|
|
1,754
|
|
|
1
|
|
|
633
|
|
|
(29
|
)
|
|
2,359
|
|
|
Net
income (loss)
|
|
$
|
680
|
|
$
|
(17,112
|
)
|
$
|
(51,480
|
)
|
$
|
(2,084
|
)
|
$
|
(69,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share - basic
|
|
$
|
.03
|
|
$
|
(.79
|
)
|
$
|
(2.35
|
)
|
$
|
(.09
|
)
|
$
|
(3.20
|
)
|
|
Earnings
(loss) per common share - diluted
|
|
$
|
.00
|
|
$
|
(.79
|
)
|
$
|
(2.35
|
)
|
$
|
(.09
|
)
|
$
|
(3.20
|
)
|
Effective
November 10, 2005, all of the issued and outstanding preferred shares of
the
Company were automatically and mandatorily converted into an aggregate of
approximately 305.4 million shares of the Company’s Common Stock, $.01 par value
per share in accordance with the terms of the Company’s Restated Certification
of Incorporation (see Note C). After giving effect to the conversion, the
Company had an aggregate of approximately 329.0 million shares of Common
Stock
issued and outstanding. The 4
th
Quarter
2005 loss per common share amount of ($.04) reflects the increased weighted
average common shares outstanding due to the preferred stock conversion during
the 4
th
Quarter
2005. The impact of the conversion causes the 2005 quarterly loss per share
amounts not to add up to and equal the 2005 annual loss per share amount.
EXHIBIT
INDEX
The
following exhibits are included as a part of this Annual Report on Form 10-K
or
incorporated herein by reference.
|
EXHIBIT
NUMBER
|
|
DOCUMENT
|
|
3.1
|
|
Certificate
of Incorporation and amendments (incorporated by reference to Exhibit
3.1
to the Registrant's Annual Report on 10-K for the year ended December
31,
1999).
|
|
3.2
|
|
Restated
Bylaws (incorporated by reference to Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1993).
|
|
3.3
|
|
Restated
By-Laws (incorporated by reference to Exhibit 3.3 to the Registrant's
Annual Report Form 10-K for the year ended December 31, 1998 (the
"1998
Form 10-K")).
|
|
4.1
|
|
Form
of 5% Convertible Senior Secured Debenture (incorporated by reference
to
Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated
December
20, 2002 (the "December 2002 Form 8-K")).
|
|
4.2
|
|
Form
of Convertible Senior Secured Debenture issued pursuant to the Debenture
and Share Purchase Agreement dated as of February 6, 2004 (incorporated
by
reference to Exhibit 4.1 of the Registrant's Current Report on Form
8-K
dated February 10, 2004 (the "February 2004 Form 8-K").
|
|
10.1
|
|
Credit
Agreement, dated as of December 22, 1992, among the Registrant and
The
Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit
10.1 to
the Registrant's Annual Report on Form 10-K for the year ended December
31, 1992 (the "1992 Form 10-K")).
|
|
10.2
|
|
Amendment
Two, dated as of January 12, 1994, to Credit Agreement among the
Registrant and The Chase Manhattan Bank, N.A., together with forms
of
Stock Warrant and Registration Rights Agreement (incorporated by
reference
to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for
the
year ended December 31, 1993 (the "1993 Form 10-K")).
|
|
10.3
|
|
Amendment
Three, dated as of May 31, 1994, to Credit Agreement among the Registrant
and The Chase Manhattan Bank, N.A. (incorporated by reference to
Exhibit
6(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994).
|
|
10.4
|
|
Amendment
Four, dated as of July 1994, to Credit Agreement among the Registrant
and
The Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit
6(a)
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended
June 30, 1994).
|
|
10.5
|
|
Amendment
Five, dated as of March 21, 1995, to Credit Agreement among the Registrant
and The Chase Manhattan Bank, N.A. (incorporated by reference to
Exhibit
10.7 to the Registrant's Current Report on Form 8-K dated March 21,
1995
(the "March 1995 8-K")).
|
|
10.5(1)
|
|
Form
of Warrants issued to The Bank of New York, The Chase Manhattan Bank,
N.A.
and the Israel Discount Bank (incorporated by reference to Exhibit
10.5(i)
to the Registrant's Annual Report on Form 10-K for the year ended
December
31, 1995 (the "1995 Form 10-K")).
|
|
10.5(2)
|
|
Letter
Agreement, dated July 10, 1995, among the Registrant, The Chase Manhattan
Bank, N.A., The Bank of New York and Israel Discount Bank of New
York
(incorporated by reference to Exhibit 6(a) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995 (the "June
1995
10-Q")).
|
|
10.5(3)
|
|
Letter
Agreement, dated November 16, 1995, among the Registrant, The Chase
Manhattan Bank, N.A., The Bank of New York and Israel Discount Bank
of New
York (incorporated by reference to Exhibit 10.25(iv) to the 1995
10-K).
|
|
10.5(4)
|
|
Amendment
6, dated as of August 6, 1996, to Credit Agreement among the Registrant,
The Chase Manhattan Bank, N.A., The Bank of New York and Israel Discount
Bank of New York (incorporated by reference to Exhibit 10.1 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996 (the "June 1996 10-Q").
|
|
10.5(5)
|
|
Letter
Agreement, dated March 25, 1997 among the Registrant, The Chase Manhattan
Bank, as successor in interest to The Chase Manhattan Bank (National
Association), The Bank of New York and Israel Discount
Bank.
|
|
10.6
|
|
Agreement
Regarding Release of Security Interests dated as of March 21,1995
by and
among the Registrant, Mallinckrodt Chemical Acquisition, Inc. and
The
Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit
10.9 of
the March 1995 8-K).
|
|
EXHIBIT
NUMBER
|
|
DOCUMENT
|
|
10.7
|
|
Consulting
Agreement dated as of September, 1993 between the Registrant and
Joseph F.
Limongelli (incorporated by reference to Exhibit 10.6 to the 1993
Form
10-K).
|
|
10.8
|
|
Employment
Agreement, dated as of January 1, 1993, between the Registrant and
Rosendo
Ferran (incorporated by reference to Exhibit 10.2 to the 1992 Form
10-K).
|
|
10.10(1)
|
|
Registrant’s
1984 Stock Option Plan, as amended (incorporated by reference to
Exhibit
10.3 to the 1992 Form 10-K).
|
|
10.10(2)
|
|
Registrant’s
1995 Stock Option and Restricted Stock Purchase Plan (incorporated
by
reference to Exhibit 4.1 to the Registrant's Registration Statement
on
Form S-8, File No. 33-98396).
|
|
10.10(3)
|
|
Registrant’s
Non-Employee Director Stock Option Plan.
|
|
10.11
|
|
Leases,
effective February 13, 1989 and January 1, 1990, respectively, among
the
Registrant and Milton J. Ackerman, Sue Ackerman, Lee Hinderstein,
Thelma
Hinderstein and Marilyn Weiss (incorporated by reference to Exhibits
10.6
and 10.7, respectively, to the Registrant's Annual Report on Form
10-K for
the year ended December 31, 1989).
|
|
10.12
|
|
Lease,
effective as of April 15, 1988, among the Registrant and Milton J.
Ackerman, Sue Ackerman, Lee Hinderstein, Thelma Hinderstein and Marilyn
Weiss, and Rider thereto (incorporated by reference to Exhibit 10.12
to
the Registrant's Annual Report on Form 10-K for the year ended December
31, 1987).
|
|
10.12(l)
|
|
Lease,
as of October 31, 1994, among Registrant and Milton J. Ackerman,
Sue
Ackerman, Lee Hinderstein, Thelma Hinderstein and Marilyn Weiss,
together
with Modification, Consolidation and Extension Agreement (incorporated
by
reference to Exhibit 10.12(i) to the 1995 Form 10-K).
|
|
10.13
|
|
Asset
Purchase Agreement dated as of March 21, 1995 among Mallinckrodt
Chemical
Acquisition, Inc. ("Acquisition"), Mallinckrodt Chemical, Inc., as
guarantor and the Registrant (incorporated by reference to Exhibit
10.1 to
the March 1995 8-K).
|
|
10.14
|
|
Toll
Manufacturing Agreement for APAP/Oxycodone Tablets dated as of March
21,
1995 between Acquisition and the Registrant (incorporated by reference
to
Exhibit 10.2 to the March 1995 8-K).
|
|
10.15
|
|
Capsule
ANDA Option Agreement dated as of March 21, 1995 between Acquisition
and
the Registrant (incorporated by reference to Exhibit 10.3 to the
March
1995 8-K).
|
|
10.16
|
|
Tablet
ANDA Non competition Agreement dated as of March 21, 1995 between
the
Registrant and Acquisition (incorporated by reference to Exhibit
10.4 to
the March 1995 8-K).
|
|
10.17
|
|
Subordinated
Non-Negotiable Promissory Term Note in the amount of $1,200,00 dated
March
21, 1995 issued by the Registrant to Acquisition (incorporated by
reference to Exhibit 10.5 to the March 1995 8-K).
|
|
10.18
|
|
Term
Note Security Agreement dated as of March 21, 1995 among the Company,
Houba, Inc. and Acquisition (incorporated by reference to Exhibit
10.6 to
the March 1995 8-K).
|
|
10.19
|
|
Amendment
dated March 21, 1995 to Subordination Agreement dated as of July
21, 1994
between Mallinckrodt Chemical, Inc., Acquisition, the Registrant,
The
Chase Manhattan Bank (National Association), Israel Discount Bank
of New
York, The Bank of New York, and The Chase Manhattan Bank (National
Association) (incorporated by reference to Exhibit 10.8 to the March
1995
8-K).
|
|
10.20
|
|
Agreement
dated as of March 30, 1995 between the Registrant and Zatpack, Inc.
(incorporated by reference to Exhibit 10.10 to the March
8-K).
|
|
10.21
|
|
Waiver
and Termination Agreement dated as of March 30, 1995 between Zuellig
Group, W.A., Inc. and Indiana Fine Chemicals Corporation (incorporated
by
reference to Exhibit 10.11 to the March 1995 8-K).
|
|
10.22
|
|
Convertible
Subordinated Note of the Registrant dated December 1, 1994 issued
to
Zatpack, Inc. (incorporated by reference to Exhibit 10.12 to the
March
8-K).
|
|
10.23
|
|
Agreement
dated as of March 30, 1995 among the Registrant, Indiana Fine Chemicals
Corporation, Zuellig Group, N.A., Inc., Houba Inc., Zetapharm, Inc.
and
Zuellig Botanical, Inc. (incorporated by reference to Exhibit 10.13
to the
March 1995 8-K).
|
|
10.24
|
|
Supply
Agreement dated as of March 30, 1995 between Houba, Inc. and ZetaPharm,
Inc. (incorporated by reference to Exhibit 10.14 to the March 1995
8-K).
|
|
EXHIBIT
NUMBER
|
|
DOCUMENT
|
|
10.25
|
|
Form
of 10% Convertible Subordinated Debenture (incorporated by reference
to
Exhibit 6(a) to the June 1995 10-Q).
|
|
10.26
|
|
Form
of Redeemable Common Stock Purchase Warrant (incorporated by reference
to
Exhibit 6(a) to the June 1995 10-Q).
|
|
10.27
|
|
Form
of 10% Convertible Subordinated Debenture (incorporated by reference
to
Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated
December
4, 1995 (the "December 1995 8-K")).
|
|
10.28
|
|
Form
of Redeemable Common Stock Purchase Warrant (incorporated by reference
to
Exhibit 4.2 to the December 1995 8-K).
|
|
10.29
|
|
Form
of 10% Convertible Subordinated Debenture (incorporated by reference
to
Exhibit 99 to the June 1996 10-Q).
|
|
10.30
|
|
Form
of Redeemable Common Stock Purchase Warrant (incorporated by reference
to
Exhibit 4.1 to Amendment No. 1 to the June 1996 10-Q).
|
|
10.31
|
|
Form
of 5% Convertible Senior Secured Debenture (incorporated by reference
to
Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated
March 24,
1998 (the "March 1998 8-K")).
|
|
10.32
|
|
Form
of Common Stock Purchase Warrant (incorporated by reference to Exhibit
4.2
to the March 1998 8-K).
|
|
10.33
|
|
Debenture
and Warrant Purchase Agreement dated March 10, 1998, by and among
the
Registrant, Galen Partners III, L.P. and the other Purchasers listed
on
the signature page thereto (incorporated by reference to Exhibit
10.1 to
the March 1998 8-K).
|
|
10.34
|
|
Form
of General Security Agreement of Registrant dated March 10, 1998
(incorporated by reference to Exhibit 10.2 to the March 1998
8-K).
|
|
10.35
|
|
Form
of Agreement of Guaranty of Subsidiaries of Registrant dated March
10,
1998 (incorporated by reference to Exhibit 10.3 to the March 1998
8-K).
|
|
10.36
|
|
Form
of Guarantor General Security Agreement dated March 10, 1998 (incorporated
by reference to Exhibit 10.4 to the March 1998 8-K).
|
|
10.37
|
|
Stock
Pledge Agreement dated March 10, 1998 by and between the Registrant
and
Galen Partners III, L.P., as agent (incorporated by reference to
Exhibit
10.5 to the March 1998 8-K).
|
|
10.38
|
|
Form
of Irrevocable Proxy Agreement (incorporated by reference to Exhibit
10.6
to the March 1998 8-K).
|
|
10.39
|
|
Agency
Letter Agreement dated March 10, 1998 by and among the purchasers
a party
to the Debenture and Warrant Purchase Agreement, dated March 10,
1998
(incorporated by reference to Exhibit 10.7 to the March 1998
8-K).
|
|
10.40
|
|
Press
Release of Registrant dated March 13, 1998 (incorporated by reference
to
Exhibit 99.1 to the March 1998 8-K).
|
|
10.41
|
|
Current
Report on Form 8-K as filed by the Registrant with the Securities
and
Exchange Commission on March 24, 1998.
|
|
10.42
|
|
Letter
Agreement between the Registrant and the U.S. Department of Justice
dated
March 27, 1998 relating to the restructuring of the fine assessed
by the
Department of Justice under the Plea Agreement dated June 21,
1993.
|
|
10.43
|
|
Employment
Agreement dated as of March 10, 1998 between the Registrant and Michael
K.
Reicher (incorporated by reference to Exhibit 10.43 to the Registrant's
Annual Report of Form 10-K for the year ended December 31, 1997 (the
"1997
Form 10-K")).
|
|
10.44
|
|
Employment
Agreement dated as of March 10, 1998 between the Registrant and Peter
Clemens (incorporated by reference to Exhibit 10.44 to the 1997 Form
10-K).
|
|
*10.44A
|
|
First
Amendment to Employment Agreement made as of June 28,
2000 between the Registrant and Peter Clemens
|
|
10.45
|
|
Second
Amendment to Executive Employment Agreement between Registrant and
Peter
A. Clemens, dated as of January 5, 2005 (incorporated by reference
to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated
January
28, 2005).
|
|
10.46
|
|
Third
Amendment to Executive Employment Agreement dated December 22, 2005
between Registrant and Peter A. Clemens (incorporated by reference
to
Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated December
22, 2005 (the “December 2005 Form
8-K”).
|
|
EXHIBIT
NUMBER
|
|
DOCUMENT
|
|
10.47
|
|
Amended,
Restated and Consolidated Bridge Loan Agreement dated as of December
2,
1998 between the Registrant, Galen Partners III, L.P., Galen Partners
International III, L.P., Galen Employee Fund III, L.P. and the other
signatures thereto (incorporated by reference to Exhibit 10.45 to
the 1998
Form 10-K).
|
|
10.48
|
|
First
Amendment to Amended, Restated and Consolidated Bridge Loan Agreement
dated December 7, 1998 between the Registrant and the lenders listed
on
the signature page thereto (incorporated by reference to Exhibit
10.46 to
the 1998 Form 10-K).
|
|
10.49
|
|
Second
Amendment to Amended, Restated and Consolidated Bridge Loan Agreement
dated March 8, 1999 between the Registrant and the lenders listed
on the
signature page thereto (incorporated by reference to Exhibit 10.47
to the
1998 Form 10-K).
|
|
10.50
|
|
Form
of 10% Convertible Secured Note due May 30, 1999 (incorporated by
reference to Exhibit 10.48 to the 1998 Form 10-K).
|
|
10.51
|
|
Form
of Common Stock Purchase Warrant issued pursuant to be Amended, Restated
and Consolidated Bridge Loan Agreement (incorporated by reference
to
Exhibit 10.49 to the 1998 Form 10-K).
|
|
10.52
|
|
Amended
and Restated General Security Agreement dated December 2, 1998 between
the
Company and Galen Partners III, L.P., as Agent (incorporated by reference
to Exhibit 10.50 to the 1998 Form 10-K).
|
|
10.53
|
|
Subordination
Agreement dated December 2, 1998 between the Registrant and Galen
Partners
III, L.P., as Agent (incorporated by reference to Exhibit 10.51 to
the
1998 Form 10-K).
|
|
10.54
|
|
Agency
Letter Agreement dated December 2, 1998 by and among the lenders
a party
to the Amended, Restated and Consolidated Bridge Loan Agreement,
as
amended (incorporated by reference to Exhibit 10.52 to the 1998 Form
10-K).
|
|
10.55
|
|
Lease
Agreement dated March 17, 1999 between the Registrant and Par
Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.53
to the
1998 Form 10-K).
|
|
10.56
|
|
Lease
Agreement dated September 1, 1998 between the Registrant and Crimson
Ridge
Partners (incorporated by reference to Exhibit 10.54 to the 1998
Form
10-K).
|
|
10.57
|
|
Manufacturing
and Supply Agreement dated March 17, 1999 between the Registrant
and Par
Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.55
to the
1998 Form 10-K).
|
|
10.58
|
|
Registrant’s
1998 Stock Option Plan (incorporated by reference to Exhibit 10.56
to the
1998 Form 10-K).
|
|
10.59
|
|
Loan
Agreement dated March 29, 2000 between the Registrant and Watson
Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.57
to the
Registrant's Current Report on Form 8-K dated March 29, 2000 (the
"March
2000 8-K")).+
|
|
10.60
|
|
Amendment
to Loan Agreement dated March 31, 2000 between the Registrant and
Watson
Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.58
to the
March 2000 8-K).
|
|
10.61
|
|
Secured
Promissory Note in the principal amount of $17,500,000 issued by
the
Registrant, as the maker, in favor of Watson Pharmaceuticals, Inc.
dated
March 31, 2000 (incorporated by reference to Exhibit 10.59 to the
March
2000 8-K).
|
|
10.62
|
|
Watson
Security Agreement dated March 29, 2000 between the Registrant and
Watson
Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.60
to the
March 2000 8-K).
|
|
10.63
|
|
Stock
Pledge Agreement dated March 29, 2000 between the Registrant and
Watson
Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.61
to the
March 2000 8-K).
|
|
10.64
|
|
Watson
Guarantee dated March 29, 2000 between Houba, Inc. and Watson
Pharmaceuticals, Inc., as the guarantors, in favor of Watson
Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.62
to the
March 2000 8-K).
|
|
10.65
|
|
Watson's
Guarantors Security Agreement dated March 29, 2000 between Halsey
Pharmaceuticals, Inc., Houba, Inc. and Watson Pharmaceuticals, Inc.
(incorporated by reference to Exhibit 10.63 to the March 2000
8-K).
|
|
10.66
|
|
Subordination
Agreement dated March 29, 2000 by and among the Registrant, Watson
Pharmaceuticals, Inc. and the holders of the Registrant's outstanding
5%
convertible debentures due March 10, 2003. (incorporated by reference
to
Exhibit 10.64 to the March 2000 8-K).+
|
|
10.67
|
|
Real
Estate Mortgage dated March 29, 2000 between Houba, Inc. and Watson
Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.65
to the
March 2000 8-K).
|
|
EXHIBIT
NUMBER
|
|
DOCUMENT
|
|
10.68
|
|
Subordination
Agreement by and among Houba, Inc., Galen Partners, III, L.P., Oracle
Strategic Partners, L.P. and Watson Pharmaceuticals, Inc. (incorporated
by
reference to Exhibit 10.66 to the March 2000 8-K).
|
|
10.69
|
|
Product
Purchase Agreement dated March 29, 2000 between the Registrant and
Watson
Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.67
to the
March, 2000 8-K).+
|
|
10.70
|
|
Finished
Goods Supply Agreement dated March 29, 2000 between the Registrant
and
Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit
10.68
to the March 2000 8-K).+
|
|
10.71
|
|
Active
Ingredient Supply Agreement dated March 29, 2000 between the Registrant
and Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit
10.69 to the March 2000 8-K).+
|
|
10.72
|
|
Right
of First Negotiation Agreement dated March 29, 2000 between the Registrant
and Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit
10.70 to the March 2000 8-K).+
|
|
10.73
|
|
Finished
Goods Supply Agreement (Core Products) dated March 29, 2000 between
the
Registrant and Watson Pharmaceuticals, Inc. (incorporated by reference
to
Exhibit 10.71 to the March 2000 8-K).+
|
|
10.74
|
|
Debenture
and Warrant Purchase Agreement dated May 26, 1999 by and among the
Registrant, Oracle Strategic Partners, L.P. and the other purchasers
listed on the signature page thereto (the "Oracle Purchase Agreement")
(incorporated by reference to Exhibit 10.72 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,1999 (the “1999 Form
10-K”)).
|
|
10.75
|
|
Form
of 5% Convertible Senior Secured Debenture issued pursuant to the
Oracle
Purchase Agreement (incorporated by reference to Exhibit 10.73 to
the 1999
Form 10-K.
|
|
10.76
|
|
Form
of Common Stock Purchase Warrant issued pursuant to the Oracle Purchase
Agreement (incorporated by reference to Exhibit 10.74 to the 1999
Form
10-K.
|
|
10.77
|
|
Lease
Termination and Settlement Agreement dated March 20, 2000 between
the
Registrant and Atlantic Properties Company in respect of the Registrant's
Brooklyn, New York leased facility (incorporated by reference to
Exhibit
10.75 to the 1999 Form 10-K).
|
|
10.78
|
|
Debenture
Purchase Agreement dated December 20, 2002 by and among the Registrant,
Care Capital Investments II, LP, Essex Woodlands Health Ventures
V, L.P.
and the other purchasers listed on the signature page thereto (the
"2002
Debentureholders") (incorporated by reference to Exhibit 10.1 to
the
Registrant’s current report on Form 8-K dated December 27, 2002 (the
“December 2002 Form 8-K”)).
|
|
10.79
|
|
Form
of General Security Agreement dated December 20, 2002 between the
Registrant and the 2002 Debentureholders (incorporated by reference
to
Exhibit 10.2 to the December 2002 Form 8-K).
|
|
10.80
|
|
Form
of Agreement of Guaranty of Subsidiaries of the Registrant dated
December
20, 2002 between Houba, Inc., Halsey Pharmaceuticals, Inc. and the
2002
Debentureholders (incorporated by reference to Exhibit 10.3 to the
December 2002 Form 8-K).
|
|
10.81
|
|
Form
of Guarantor General Security Agreement between the Guarantors and
the
2002 Debentureholders dated December 20, 2002 (incorporated by reference
to Exhibit 10.4 to the December 2002 Form 8-K).
|
|
10.82
|
|
Stock
Pledge Agreement dated December 20, 2002 by and between the Registrant
and
Galen Partners III, L.P., as agent (incorporated by reference to
Exhibit
10.5 to the December 2002 Form 8-K).
|
|
10.83
|
|
Voting
Agreement dated December 20, 2002 (incorporated by reference to Exhibit
10.6 to the December 2002 Form 8-K).
|
|
10.84
|
|
Debentureholders
Agreement dated December 20, 2002 (incorporated by reference to Exhibit
10.7 to the December 2002 Form 8-K).
|
|
10.85
|
|
Amendment
to Debenture and Warrant Purchase Agreement between the Registrant,
Galen
Partners III, L.P. and other signatories thereto, dated December
20, 2002,
amending the Debenture and Warrant Purchase Agreement dated March
10, 1998
between the Company, Galen Partners III, L.P. and the other signatories
thereto (incorporated by reference to Exhibit 10.8 to the December
2002
Form 8-K).
|
|
10.86
|
|
Amendment
to Debenture and Warrant Purchase Agreement between the Registrant,
Oracle
Strategic Partners, L.P. and the other signatories thereto, dated
December
20, 2002, amending the Debenture and Warrant Purchase Agreement dated
May
26, 1999 between the Company, Oracle Strategic Partners, L.P. and
the
other signatories thereto (incorporated by reference to Exhibit 10.9
to
the December 2002 Form 8-K).
|
|
EXHIBIT
NUMBER
|
|
DOCUMENT
|
|
10.87
|
|
Amended
and Restated 5% Convertible Senior Secured Debenture due March 31,
2006
(incorporated by reference to Exhibit 10.10 to the December 2002
Form
8-K).
|
|
10.88
|
|
Second
Amendment to Loan Agreement dated December 20, 2002, between the
Registrant and Watson Pharmaceuticals, Inc., amending the Loan Agreement
dated March 29, 2000 between the Registrant and Watson Pharmaceuticals,
Inc. (incorporated by reference to Exhibit 10.11 to the December
2002 Form
8-K).
|
|
10.89
|
|
Amended
and Restated Secured Promissory Note dated December 20, 2002, issued
by
the Registrant in favor of Watson Pharmaceuticals, Inc. in the principal
amount $17,500,000 (incorporated by reference to Exhibit 10.12 to
the
December 2002 Form 8-K).
|
|
10.90
|
|
Second
Amendment to Finished Goods Supply Agreement (Core Products) dated
December 20, 2002, between the Registrant and Watson Pharmaceuticals,
Inc.
amending the Finished Goods Supply Agreement (Core Products) dated
March
29, 2000 2008 (incorporated by reference to Exhibit 10.13 to the
December
2002 Form 8-K).
|
|
10.91
|
|
Watson
Common Stock Purchase Warrant dated December 20, 2002 (incorporated
by
reference to Exhibit 10.14 to the December 2002 Form
8-K).
|
|
10.92
|
|
Registration
Rights Agreement dated December 20, 2002 (incorporated by reference
to
Exhibit 10.15 to the December 2002 Form 8-K).
|
|
10.93
|
|
Warrant
Recapitalization Agreement dated December 20, 2002 (incorporated
by
reference to Exhibit 10.15 to the December 2002 Form
8-K).
|
|
10.94
|
|
Debenture
and Share Purchase Agreement dated as of February 6, 2004 by and
among the
Registrant, Care Capital Investments, II, LP, Essex Woodlands Health
Ventures V, L.P., Galen Partners III, L.P. and the other purchasers
listed
on the signature page thereto (incorporated by reference to Exhibit
10.1
of the February 2004 Form 8-K).
|
|
10.95
|
|
Debenture
Conversion Agreement dated as of February 6, 2004 by and among the
Registrant, Care Capital, Essex Woodlands, Galen Partners and the
other
signatories thereto (incorporated by reference to Exhibit 10.2 of
the
February 2004 Form 8-K).
|
|
10.96
|
|
Amended
and Restated Certificate of Incorporation of the Registrant (incorporated
by reference to Exhibit 10.3 of the February 2004 Form
8-K).
|
|
10.97
|
|
Investor
Rights Agreement dated as of February 6, 2004 by and among the Registrant,
Care Capital, Essex Woodlands, Galen Partners and the other signatories
thereto (incorporated by reference to Exhibit 10.4 of the February
2004
Form 8-K).
|
|
10.98
|
|
Amended
and Restated Voting Agreement dated as of February 6, 2004 by and
among
the Registrant, Care Capital, Essex Woodlands, Galen Partners and
the
other signatories thereto (incorporated by reference to Exhibit 10.5
of
the February 2004 Form 8-K).
|
|
10.99
|
|
Amended
and Restated Registration Rights Agreement dated as of February 6,
2004 by
and among the Registrant, Watson Pharmaceuticals, Care Capital, Essex
Woodlands, Galen Partners and the other signatories thereto (incorporated
by reference to Exhibit 10.6 of the February 2004 Form
8-K).
|
|
10.100
|
|
Amended
and Restated Subordination Agreement dated as of February 6, 2004
by and
among the Registrant, Care Capital, Essex Woodlands, Galen Partners
and
the other signatories thereto (incorporated by reference to Exhibit
10.7
of the February 2004 Form 8-K).
|
|
10.101
|
|
Company
General Security Agreement (incorporated by reference to Exhibit
10.8 of
the February 2004 Form 8-K).
|
|
10.102
|
|
Form
of Unconditional Agreement of Guaranty (incorporated by reference
to
Exhibit 10.9 of the February 2004 Form 8-K).
|
|
10.103
|
|
Form
of Guarantor Security Agreement (incorporated by reference to Exhibit
10.10 of the February 2004 Form 8-K).
|
|
10.104
|
|
Stock
Pledge Agreement dated as of February 6, 2004 by and between the
Registrant and Galen Partners, as agent (incorporated by reference
to
Exhibit 10.11 of the February 2004 Form
8-K).
|
|
EXHIBIT
NUMBER
|
|
DOCUMENT
|
|
10.105
|
|
Umbrella
Agreement dated as of February 6, 2004 by and among the Registrant,
Watson
Pharmaceuticals, Care Capital, Essex Woodlands, Galen Partners and
the
other signatories thereto (incorporated by reference to Exhibit 10.12
of
the February 2004 Form 8-K).
|
|
10.106
|
|
Third
Amendment to Loan Agreement dated as of February 6, 2004 by and among
the
Registrant and Watson Pharmaceuticals (incorporated by reference
to
Exhibit 10.13 of the February 2004 Form 8-K).
|
|
10.107
|
|
Amended
and Restated Promissory Note in the principal amount of $5,000,000
issued
by the Registrant in favor of Watson Pharmaceuticals (incorporated
by
reference to Exhibit 10.14 of the February 2004 Form
8-K).
|
|
10.108
|
|
Hydrocodone
API Supply Option Agreement dated as of February 6, 2004 between
the
Registrant and Watson Pharmaceuticals (incorporated by reference
to
Exhibit 10.15 of the February 2004 Form 8-K).
|
|
10.109
|
|
Noteholders
Agreement dated as of February 6, 2004 by and among the Registrant,
Care
Capital, Essex Woodlands, Galen Partners and the other signatories
thereto
(incorporated by reference to Exhibit 10.16 of the February 2004
Form
8-K).
|
|
10.110
|
|
Asset
Purchase Agreement dated March 19, 2004 by and among the Registrant,
Axiom
Pharmaceutical Corporation and IVAX Pharmaceuticals New York LLC
(incorporated by reference to Exhibit 2.1 of the Registrant's Form
8-K
filed March 25, 2004 (the "March 2004 Form 8-K")).
|
|
10.111
|
|
Voting
Agreement dated March 19, 2004 by and among the Registrant, IVAX
Pharmaceuticals New York LLC and certain holders of Halsey Drug Co.,
Inc.
voting securities (incorporated by reference to Exhibit 10.1 of the
March
2004 Form 8-K).
|
|
10.112
|
|
Use
and License Agreement dated March 19, 2004 by and among the Registrant,
Axiom Pharmaceutical Corporation and IVAX Pharmaceuticals New York
LLC
(incorporated by reference to Exhibit 10.2 of the March 2004 Form
8-K.)
|
|
10.113
|
|
Executive
Employment Agreement dated as of November 18, 2002 between the Registrant
and Vijai Kumar (incorporated by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2004 (the “June 2004 10-Q”)).
|
|
10.114
|
|
Executive
Employment Agreement dated as of August 26, 2003 between the Registrant
and Andrew D. Reddick (incorporated by reference to Exhibit 10.2
to June
2004 10-Q).
|
|
10.115
|
|
Amendment
to Executive Employment Agreement between the Registrant and Andrew
D.
Reddick, dated May 27, 2004 (incorporated by reference to Exhibit
10.4 to
the June 2004 10-Q).
|
|
*10.116
|
|
Second
Amendment to Executive Employment Agreement between the Registrant
and
Andrew D. Reddick, dated May 24, 2005.
|
|
10.117
|
|
Third
Amendment to Executive Employment Agreement between the Registrant
and
Andrew D. Reddick, dated December 22, 2005 (incorporated by reference
to
Exhibit 10.1 to the December 2005 Form 8-K).
|
|
10.118
|
|
Executive
Employment Agreement dated as of April 5, 2004 between the Registrant
and
Ron J. Spivey (incorporated by reference to Exhibit 10.3 to the June
2004
10-Q).
|
|
10.119
|
|
Amendment
to Executive Employment Agreement dated December 22, 2005 between
Registrant and Ron J. Spivey (incorporated by reference to Exhibit
10.2 to
the December 2005 Form 8-K).
|
|
10.120
|
|
Separation
Agreement and General Release dated September 18, 2003 between the
Registrant and Michael K. Reicher (incorporated by reference to Exhibit
10.5 to June 2004 10-Q).
|
|
10.121
|
|
First
Amendment to Separation Agreement and General Release between the
Registrant and Michael K. Reicher, December 4, 2003 (incorporated
by
reference to Exhibit 10.6 to June 2004 10-Q).
|
|
10.122
|
|
Asset
Purchase Agreement dated as of February 18, 2004 by and between the
Registrant and Mutual Pharmaceutical Company, Inc. (incorporated
by
reference to Exhibit 10.7 to June 2004 10-Q).
|
|
10.123
|
|
Amendment
to Debenture and Share Purchase Agreement by and among the Registrant,
Care Capital Investments II, LP, Essex Woodlands Health Ventures
V, L.P.
and other signatories thereto, dated as of June 1, 2004 (incorporated
by
reference to Exhibit 10.8 to June 2004 10-Q).
|
|
10.124
|
|
First
Amendment to Debenture Purchase Agreement by and among the Registrant,
Galen Partner III, L.P., Care Capital Investments II, LP, Essex Woodlands
Health Ventures V, L.P. and other signatories thereto, dated as of
August
11, 2004 (incorporated by reference to Exhibit 10.9 to June 2004
10-Q).
|
|
EXHIBIT
NUMBER
|
|
DOCUMENT
|
|
10.125
|
|
Letter
of Support from Galen Partner III, L.P., Care Capital Investments
II, LP,
and Essex Woodlands Health Ventures V, L.P. to the Registrant, dated
May
5, 2003 (incorporated by reference to Exhibit 10.10 to June 2004
10-Q).
|
|
10.126
|
|
Loan
Agreement dated June 22, 2005 between the Registrant, Essex Woodlands
Health Venture V, L.P., Care Capital Investments II, L.P., Care Capital
Offshore Investments II, L.P., Galen Partners III, L.P., Galen Partners
International III, L.P., and Galen Employee Fund III, L.P. (incorporated
by reference to Exhibit 10.1 to the Registrant's Current Report on
Form
8-K dated June 22, 2005 (the “June 2005 Form 8-K”)).
|
|
10.127
|
|
Subordination
Agreement dated June 22, 2005 between the Registrant, Essex Woodlands
Health Venture V, L.P., Care Capital Investments II, L.P., Care Capital
Offshore Investments II, L.P., Galen Partners III, L.P., Galen Partners
International III, L.P., Galen Employee Fund III, L.P., and the other
signatories thereto (incorporated by reference to Exhibit 10.3 of
the June
2005 Form 8-K).
|
|
10.128
|
|
Company
General Security Agreement dated June 22, 2005 by and between Registrant
and Galen Partners III, L.P., as Agent (incorporated by reference
to
Exhibit 10.4 of the June 2005 Form 8-K).
|
|
10.129
|
|
Guaranty
of Axiom Pharmaceutical Corporation dated June 22, 2005 (incorporated
by
reference to Exhibit 10.5 of the June 2005 Form 8-K).
|
|
10.130
|
|
Guaranty
of Acura Pharmaceutical Technologies, Inc. dated June 22, 2005
(incorporated by reference to Exhibit 10.6 of the June 2005 Form
8-K).
|
|
10.131
|
|
Guarantors
Security Agreement by and among Axiom Pharmaceutical Corporation,
Registrant, and Galen Partners III, L.P., as Agent, dated June 22,
2005
(incorporated by reference to Exhibit 10.7 of the June 2005 Form
8-K).
|
|
10.132
|
|
Stock
Pledge Agreement by and between Registrant and Galen Partners III,
L.P.,
as Agent, dated June 22, 2005 (incorporated by reference to Exhibit
10.8
of the June 2005 Form 8-K).
|
|
10.133
|
|
Loan
Agreement dated September 16, 2005 between the Registrant, Essex
Woodlands
Health Venture V, L.P., Care Capital Investments II, L.P., Care Capital
Offshore Investments II, L.P., Galen Partners III, L.P., Galen Partners
International III, L.P., and Galen Employee Fund III, L.P. (incorporated
by reference to Exhibit 10.1 to the Registrant's Current Report on
Form
8-K dated September 16, 2005 (the “September 2005 Form 8-K”)).
|
|
10.134
|
|
Subordination
Agreement dated September 16, 2005 between the Registrant, Essex
Woodlands
Health Venture V, L.P., Care Capital Investments II, L.P., Care Capital
Offshore Investments II, L.P., Galen Partners III, L.P., Galen Partners
International III, L.P., Galen Employee Fund III, L.P., and the other
signatories thereto (incorporated by reference to Exhibit 10.3 of
the
September 2005 Form 8-K).
|
|
10.135
|
|
Company
General Security Agreement dated September 16, 2005 by and between
Registrant and Galen Partners III, L.P., as Agent (incorporated by
reference to Exhibit 10.4 of the September 2005 Form 8-K).
|
|
10.136
|
|
Guaranty
of Axiom Pharmaceutical Corporation dated September 16, 2005 (incorporated
by reference to Exhibit 10.5 of the September 2005 Form 8-K).
|
|
10.137
|
|
Guaranty
of Acura Pharmaceutical Technologies, Inc. dated September 16, 2005
(incorporated by reference to Exhibit 10.6 of the September 2005
Form
8-K).
|
|
10.138
|
|
Guarantors
Security Agreement by and among Axiom Pharmaceutical Corporation,
Registrant, and Galen Partners III, L.P., as Agent, dated September
16,
2005 (incorporated by reference to Exhibit 10.7 of the September
2005 Form
8-K).
|
|
10.139
|
|
Stock
Pledge Agreement by and between Registrant and Galen Partners III,
L.P.,
as Agent, dated September 16, 2005 (incorporated by reference to
Exhibit
10.8 of the September 2005 Form 8-K).
|
|
10.140
|
|
Joinder
and Amendment to Amended and Restated Voting Agreement dated November
9,
2005 between the Registrant, GCE Holdings, Essex Woodlands Health
Venture
V, L.P., Care Capital Investments II, L.P., Care Capital Offshore
Investments II, L.P., Galen Partners III, L.P., Galen Partners
International III, L.P., and Galen Employee Fund III, L.P. (incorporated
by reference to Exhibit 10.1 to the Registrant's Current Report on
Form
8-K dated November 9, 2005 (the “November 2005 Form 8-K”)).
|
|
10.141
|
|
Loan
Agreement dated November 9, 2005 between the Registrant, Essex Woodlands
Health Venture V, L.P., Care Capital Investments II, L.P., Care Capital
Offshore Investments II, L.P., Galen Partners III, L.P., Galen Partners
International III, L.P., and Galen Employee Fund III, L.P. and the
Additional Lenders that become a party thereto (incorporated by reference
to Exhibit 10.2 of the November 2005 Form 8-K).
|
|
EXHIBIT
NUMBER
|
|
DOCUMENT
|
|
10.142
|
|
Subordination
Agreement dated November 9, 2005 between the Registrant, Essex Woodlands
Health Venture V, L.P., Care Capital Investments II, L.P., Care Capital
Offshore Investments II, L.P., Galen Partners III, L.P., Galen Partners
International III, L.P., Galen Employee Fund III, L.P., and the other
signatories thereto (incorporated by reference to Exhibit 10.4 of
the
November 2005 Form 8-K).
|
|
10.143
|
|
Company
General Security Agreement dated November 9, 2005 by and between
Registrant and Galen Partners III, L.P., as Agent (incorporated by
reference to Exhibit 10.5 of the November 2005 Form
8-K).
|
|
10.144
|
|
Guaranty
of Axiom Pharmaceutical Corporation dated November 9, 2005 (incorporated
by reference to Exhibit 10.6 of the November 2005 Form 8-K).
|
|
10.145
|
|
Guaranty
of Acura Pharmaceutical Technologies, Inc. dated November 9, 2005
(incorporated by reference to Exhibit 10.7 of the November 2005 Form
8-K).
|
|
10.146
|
|
Guarantors
Security Agreement by and among Axiom Pharmaceutical Corporation,
Registrant, and Galen Partners III, L.P., as Agent, dated November
9, 2005
(incorporated by reference to Exhibit 10.8 of the November 2005 Form
8-K).
|
|
10.147
|
|
Stock
Pledge Agreement by and between Registrant and Galen Partners III,
L.P.,
as Agent, dated November 9, 2005 (incorporated by reference to Exhibit
10.9 of the November 2005 Form 8-K).
|
|
*10.148
|
|
Voting
Agreement by and between Registrant and GCE Holdings, LLC dated as
of
December 22, 2005
|
|
10.149
|
|
Registrant’s
2005 Restricted Stock Unit Award Plan (incorporated by reference
to
Exhibit 10.4 to the December 2005 Form 8-K).
|
|
14
|
|
Code
of Ethics (incorporated by reference to Exhibit 14 of the Registrant’s
Form 10-K filed April 22, 2004 (the “2003 Form 10-K”).
|
|
*21
|
|
Subsidiaries
of the Registrant.
|
|
*23.1
|
|
Consent
of Grant Thornton LLP, independent registered public accounting firm,
dated February 16, 2006 to the incorporation by reference of its
report to
the consolidated financial statements of the Registrant for the year
ended
December 31, 2003 contained in its Form 10-K into the registrant's
Registration Statements on Form S-8 (Registration Nos. 333-63288
and
33-98356).
|
|
*23.2
|
|
Consent
of BDO Seidman LLP, independent registered public accounting firm,
to the
incorporation by reference of its report to the consolidated financial
statements of the Registrant for the years ended December 31, 2005
and
2004 contained in its Form 10-K into the Registrant’s Registration
Statements on Form S-8 (Registration Nos. 333-63288 and
33-98356).
|
|
*31.1
|
|
Certification
of Periodic Report by Chief Executive Officer pursuant to Rule 13a-14
and
15d-14 of the Securities Exchange Act of 1934.
|
|
*31.2
|
|
Certification
of Periodic Report by Chief Financial Officer pursuant to Rule 13a-14
and
15d-14 of the Securities Exchange Act of 1934.
|
|
*32.1
|
|
Certification
of Periodic Report by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
|
*32.2
|
|
Certification
of Periodic Report by Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
|
+
|
A
portion of this exhibit has been omitted pursuant to an application
for
confidential treatment pursuant to Rule 24b-2 of the Securities Exchange
Act of 1934, as amended.
|