ALSERES PHARMA INC 10-K 2009
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 1
For the fiscal year ended December 31, 2008
For the transition period
Commission file number 0-6533
ALSERES PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Registrants telephone number, including area code (508) 497-2360
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
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 þ
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 þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 registrants 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Based on the last sales price of the registrants Common Stock as reported on the NASDAQ Capital Market on June 30, 2008 (the last business day of our most recently completed second fiscal quarter), the aggregate market value of the 20,807,645 outstanding shares of voting stock held by nonaffiliates of the registrant was $18,929,664.
As of April 15, 2009, there were 23,055,645 shares of the registrants Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
TABLE OF CONTENTS
This Amendment No. 1 on Form 10-K/A (the Amendment) amends the Annual Report on Form 10-K of Alseres Pharmaceuticals, Inc. (the Company, our or we) for the year ended December 31, 2008 that was originally filed with the Securities and Exchange Commission on March 31, 2009 and is being filed to provide the information required by Items 10, 11, 12, 13 and 14 of Part III. This Amendment also amends Item 9B of Part II to add information that would otherwise be required to be disclosed in a report on Form 8-K. In connection with the filing of this Amendment and pursuant to the rules of the SEC, we are including with this Amendment certain new certifications by our principal executive officer and principal financial officer; accordingly, Item 15 of Part IV has also been amended to reflect the filing of these new certifications. This Amendment does not otherwise modify or update disclosures in the original filing, or change our previously reported financial statements and other financial disclosure.
ITEM 9B. OTHER INFORMATION
We are party to a December 2006 license agreement, the CETHRIN License, with BioAxone Therapeutic Inc., a Canadian corporation, or BioAxone, pursuant to which we were granted an exclusive, worldwide license to develop and commercialize specified compounds including but not limited to CETHRIN® as further defined in the CETHRIN License. The terms of the CETHRIN License are described under the subheading CETHRIN License in the Certain Relationships and Related Transactions section of Item 13 of Part III of this 10-K/A. On April 24, 2009 we entered into an agreement, the Amendment Agreement, with BioAxone pursuant to which the CETHRIN License was amended to provide that during a specified period, the SubLicense Period, we will use reasonable commercial efforts to enter into a sublicense agreement for the technology licensed to us under the CETHRIN License. The Amendment Agreement further provides that all of the pre-commercial financial milestones, and the performance-related milestones contained in the CETHRIN License are eliminated and replaced with a formula-based approach to sharing any and all sublicense income with BioAxone. The Amendment Agreement provides that, in the event we execute a sublicense agreement within the SubLicense Period that meets certain specified minimum terms, we will be entitled to receive a fixed percentage of all sublicense consideration in any and all forms and the remainder will be paid to BioAxone. If we fail to execute a sublicense agreement during the SubLicense Period, the CETHRIN License and our right to sublicense it will terminate and we will instead be entitled to receive a lower fixed percentage of any and all income received by BioAxone if and when they enter into a future third party license agreement for the CETHRIN technology. The Amendment Agreement includes a mutual release of all of the claims described that each party had previously alleged against the other under the CETHRIN License. Certain terms of the Amendment Agreement for which we are seeking Confidential Treatment are not disclosed herein.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE
Our Board of Directors (the Board) currently consists of seven directors. Set forth below are the names of each current member of our Board, their ages, the year in which each first became a director and their principal occupations and business experience during the past five years.
The principal occupations and qualifications of each director are as follows:
Peter G. Savas. Mr. Savas has been the Chairman of the Board and our Chief Executive Officer since September 2004. From March 2004 to September 2004, Mr. Savas was the Managing Partner of Tughill Partners, a life sciences consulting firm. From September 2000 to March 2004, Mr. Savas served as Chief Executive Officer and President and, from April 2001 to March 2004, as Chairman, of Aderis Pharmaceuticals, Inc., a privately-held biopharmaceutical company. From 1992 to 2000, Mr. Savas served as President of Unisyn, Inc., a contract manufacturer of biologics, and was also Unisyns Chief Executive Officer from 1995 to 2000. Mr. Savas serves on the board of directors of pSivida Corp., a leading drug delivery company.
Robert S. Langer, Jr., Sc.D. Dr. Langer has been a member of our Board since June 2000. Dr. Langer is an Institute Professor at the Massachusetts Institute of Technology (MIT) and has been on the faculty of MIT since 1977. Dr. Langer serves on the boards of directors of Momenta Pharmaceuticals, Inc., a biotechnology company, Echo Therapeutics, Inc., a medical device and specialty pharmaceutical company, and Wyeth, a pharmaceutical company. In addition, Dr. Langer is on the board of directors of several private companies.
Michael J. Mullen, C.P.A. Mr. Mullen has been a member of our Board since June 2004. Mr. Mullen has been the Chief Financial Officer of Magellan Biosciences, Inc., a clinical diagnostics company, since July 2006. From March 2006 to July 2006, Mr. Mullen was an independent consultant. From February 2003 to March 2006, Mr. Mullen was the Chief Financial Officer of JMH Capital, a private equity firm. From September 2000 to December 2002, Mr. Mullen was the Chief Financial Officer of Magellan Discovery Technologies, a private equity sponsored buyout firm.
John T. Preston. Mr. Preston has been a member of our Board since June 2004. Mr. Preston has been a Partner of C Change Investments Since June 2008 and President and Chief Executive Officer of Continuum Energy Technologies since April 1999. He is also a Senior Lecturer at MIT. Mr. Preston serves on the board of directors of Clean Harbors, Inc., an environmental services and hazardous waste treatment company. In addition, Mr. Preston is on the board of directors of several private companies.
William Guinness. Mr. Guinness has been a member of our Board since July 2006. Mr. Guinness has been Chairman of Sibir Energy plc, a UK independent oil and gas production company, since March 1999, having previously been a Non-Executive Director of Pentex Energy plc and Pentex Oil plc. Since 1988, Mr. Guinness has been involved with various private venture capital operations, which cover areas as diverse as metal manufacturing, general aviation and fine art consultancy. Mr. Guinness is also a director of a number of private companies involved in a wide range of commercial activities. Mr. Guinness previously served on our Board of Directors from June 30, 2003 to September 20, 2003.
Henry Brem. Dr. Brem has been a member of our Board since February 2007. Dr. Brem is a professor at Johns Hopkins University School of Medicine and has been on the faculty since 1984. Dr. Brem serves as the Director of the Department of Neurosurgery, Harvey Cushing Professor of Neurosurgery, Ophthalmology, and Oncology. Dr. Brem is also Director of the Hunterian Neurosurgical Research Laboratory. Dr Brem trained in surgery at the Peter Bent Brigham Hospital of Harvard Medical School, and in neurosurgery at the Neurological Institute of New York at Columbia University. Dr. Brem has authored more than 150 articles in scientific journals and has developed FDA-approved therapies for neurological diseases.
Gary E. Frashier. Mr. Frashier has been a member of our Board since February 2007. Mr. Frashier, through his company Management Associates, has been a strategic consultant to emerging growth companies in the life sciences field since January 1999. Since June 2006, Mr. Frashier has served as a director and Executive Vice President, and since June 2007 as Chief Financial Officer and Secretary of Apex BioVentures Acquisition Corporation, a special purpose acquisition company. From 1990 until September 1998, Mr. Frashier served as Chief Executive Officer of OSI Pharmaceuticals, Inc., a biotechnology company, and, from January 1997 until September 2000, as its Chairman of the Board. From 1987 until 1990, Mr. Frashier served as President and CEO of Genex Corporation, a protein engineering company, and from 1984 until 1987, as Chairman and CEO of Continental Water Systems, Inc., a manufacturer and marketer of equipment to produce high purity water used by the pharmaceutical, medical, electronics and research industries. Previously, Mr. Frashier also served as Executive Vice President of Millipore Corporation, a provider of products and services to biopharmaceutical, manufacturing, clinical, analytical and research laboratories, and President of Millipores Waters Associates subsidiary. Mr. Frashier serves on the board of directors of Texmira Pharmaceuticals Corporation, a Canadian biopharmaceutical company, Apex BioVentures Acquisition Corp, a blank check company and Achillion Pharmaceuticals, Inc., a biopharmaceutical company.
Code of Business Conduct and Ethics
We have adopted a written Code of Business Conduct and Ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We amended and restated our Code of Business Conduct and Ethics in July 2005. We have posted the Amended and Restated Code of Business Conduct and Ethics on our website, which is located at www.alseres.com. In addition, we intend to disclose on our website all disclosures that are required by law or The NASDAQ Stock Market, Inc. listing standards concerning any amendments to, or waivers from, any provision of the Code.
The following is a list of our current executive officers and their principal positions:
Mark J. Pykett, V.M.D, Ph.D, M.B.A. Dr. Pykett was appointed President and Chief Operating Officer in February 2005. Dr. Pykett previously served as Executive Vice President and Chief Operating Officer when he joined us in November 2004. In 1996, Dr. Pykett founded Cytomatrix, LLC, a biotechnology company, and served as its President and Chief Executive Officer until 2003, when Cytomatrix merged with Cordlife, Pte. Ltd., a subsidiary of CyGenics, Ltd., a biotechnology company. Dr. Pykett served as President of Cordlife from 2003 to 2004 and as President of CyGenics from 2004 until joining us and as a director of CyGenics until 2005. Dr. Pykett serves on the board of directors of Adventrx Pharmaceuticals, Inc., a biotechnology company.
Kenneth L. Rice, Jr., J.D., LL.M., M.B.A. Mr. Rice was appointed Executive Vice President, Finance and Administration and Chief Financial Officer in July 2005. Mr. Rice was appointed Secretary in September 2005. In June 2005, Mr. Rice served as a part-time consultant to the Company. From April 2001 to June 2005, Mr. Rice served as Vice President, Chief Financial Officer, Chief Commercial Officer and Secretary of Aderis Pharmaceuticals, Inc., a privately-held biopharmaceutical company. From August 1999 through March 2001, Mr. Rice served as Vice President and Chief Financial Officer of MacroChem Corporation, a publicly-traded drug delivery company.
No family relationships exist between any of our executive officers and our directors. Our executive officers are elected annually by the board of directors and serve until their successors are duly elected and qualified.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers (including a person performing a principal policy-making function) and persons who own more than 10% of a registered class of our equity securities (10% Holders) to file with the Securities and Exchange Commission initial reports of ownership on a Form 3 and reports of changes in ownership of our common stock and our other equity securities on a Form 4 or Form 5. Directors, executive officers and 10% Holders are required by Securities and Exchange Commission regulations to furnish to us copies of all of the Section 16(a) reports they file. Based solely upon a review of the copies of the Forms 3, 4 and 5
(and any amendments thereto) furnished to us and the written representations made by the reporting persons to us, we believe that during fiscal 2008 each of our directors, officers and 10% Holders filed all of their respective reports required by Section 16(a) in a timely fashion, except as described herein. Robert Gipson, a 10% holder, failed to timely file Forms 4 with respect to the purchase of convertible promissory notes in March and June, 2008 and shares of common stock and warrants on November 20, 2008. Mr. Gipson filed such information on a Form 4 with the SEC on April 23, 2009.
Our Board has a standing Audit Committee that currently consists of Messrs. Mullen, Preston and Guinness. Our Board has determined that each of the members of the Audit Committee are independent as defined under the rules of the Nasdaq Stock Market and the independence requirements contemplated by Rule 10A-3 under the Exchange Act.
The Board has also determined that Mr. Mullen is an audit committee financial expert as defined in Item 407(d)(5) of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 2008
The following table sets forth information concerning compensation for services in all capacities earned by our Chief Executive Officer, our Chief Financial Officer and each other of our executive officers as of December 31, 2008, collectively referred to as the Named Executive Officers for the fiscal years indicated.
We have entered into employment agreements with each of our named executive officers, which are effective for one year terms and automatically renew for additional 12 month periods thereafter, unless either party notifies the other party in writing not less than 90 days prior to expiration. These agreements establish base salaries (subject to annual adjustment by the Compensation Committee), provide other benefits, and include confidentiality and non-competition provisions. Subject to certain contingencies, each Named Executive Officer is entitled to a severance allowance in the event that he is terminated in certain circumstances, as more fully described under the caption Potential Payments Upon Termination or Change-in-Control below.
Our Compensation Committee typically makes initial awards of stock options to new executives and additional grants as part of our overall compensation program annually thereafter in conjunction with the review of their individual performance. Historically, we have generally granted stock options subject to time-based vesting, typically over the first three to four years of the ten-year option term. However, in January 2006, the Compensation Committee granted option awards to each of our executive officers, subject to vesting upon the achievement of certain corporate milestones. These performance-based vesting stock options were all cancelled in January 2009 in connection with an option repricing program.
Vesting and exercise rights cease shortly after termination of employment except in the case of death or disability or as specifically set forth in the respective employment agreements. Prior to the exercise of an option, the holder has no rights as a stockholder with respect to the shares subject to such option, including voting rights and the right to receive dividends or dividend equivalents.
We set the exercise price of all stock options to be equal to or greater than the closing price of our common stock on the grant date. No option grants were awarded to our Named Executive Officers in 2008.
Outstanding Equity Awards at Fiscal Year-End 2008
The following table sets forth information regarding outstanding option awards held by our Named Executive Officers as of December 31, 2008.
Potential Payments Upon Termination or Change-in-Control
On March 31, 2006, we entered into employment agreements with each of Messrs. Savas, Pykett and Rice effective January 1, 2006 for a term of one year, and on April 16, 2007, we entered into an employment agreement with Mr. Bobe. These four agreements are collectively referred to as the Employment Agreements. Each Employment Agreement automatically renews for an additional 12 month period, unless either party notifies the other party in writing not less than 90 days prior to expiration.
In general, in the event of termination without cause (as defined in the Employment Agreements) or voluntarily by an executive within one year following a change in control (as defined below), the Employment Agreements provide for (i) a cash severance payment equal to the sum of 75% 100% of the sum of an executives highest base salary in effect during the preceding 12 month period and the average annual cash bonus paid during the preceding twenty-four month period, (ii) the continuation of health care benefits for a period of 9 to 12 months following termination of employment, and (iii) full acceleration of the vesting of all of the executives unvested equity awards. In the event of termination of employment by us for disability (as defined in the Employment Agreements), the Employment Agreements provide for a cash severance payment equal to the sum of 75% 100% of the sum of an executives highest base salary in effect during the preceding 12 month period and the average annual cash bonus paid during the preceding twenty-four month period.
A change in control means:
If the employment of any Named Executive Officer is terminated, unless employment is terminated without cause or after the occurrence of a change in control, such Named Executive Officer will remain subject to certain conditions regarding non-competition, non-solicitation and confidentiality, for a period of one year following the date of termination of employment.
Mr. Bobe was no longer an employee as of December 31, 2008, and is involved in a dispute with us regarding the terms of his separation.
Compensation of Directors
In 2008, our non-employee directors consisted of: (i) Robert S. Langer, Jr.; (ii) Michael J. Mullen; (iii) John T. Preston, (iv) William Guinness, (v) Henry Brem, and (vi) Gary E. Frashier.
Our non-employee director compensation is as follows:
(i) an annual retainer of $25,000;
(ii) a fee per meeting attended of $2,500; and
(iii) an annual fee of $10,000 for chairing each of the Nominating and Corporate Governance and Science and Technology committees and $20,000 for chairing each of the Audit and Compensation Committees.
Each new non-employee director is automatically granted an option to purchase 25,000 shares of our common stock, referred to as New Director Options, upon initial election or appointment, or the Automatic Grant Date. The exercise price of any New Director Options granted shall equal the fair market value of shares of our common stock subject thereto on the Automatic Grant Date. New Director Options immediately vest as to 1/3 of the shares with the remaining 2/3 of the shares subject to such New Director Options vesting in equal monthly installments over two years, or New Director Option Vesting.
Each non-employee director is automatically granted an option to purchase 25,000 shares of our common stock annually, or the Annual Director Options. The Annual Director Options are granted in the fourth quarter of each calendar year, or the Annual Grant Date. The exercise price of any Annual Director Options granted shall equal the fair market value of shares of our common stock subject thereto on the Annual Grant Date. Annual Director Options vest in equal monthly installments over two years, or Annual Director Option Vesting. Newly elected non-employee directors are eligible to receive the Annual Director Options in the fourth quarter of the second calendar year of service.
During 2008, the Company did not grant the Annual Director Options in accordance with the compensation plan as described above. The Annual Director Options were granted in January 2009.
As described more fully below, this table sets forth the compensation information for our non-employee directors in 2008:
As of December 31, 2008, the number of shares underlying options held by each non-employee director was as follows:
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information, as of March 31, 2009, regarding the beneficial ownership of our common stock by:
Unless otherwise indicated below, the address for each listed director and executive officer is c/o Alseres Pharmaceuticals, Inc., 239 South Street, Hopkinton, Massachusetts 01748. Beneficial ownership shown is determined in accordance with the rules of the Securities and Exchange Commission and, as a result, includes voting and investment power with respect to shares.
Equity Compensation Plan Information
This table shows information about our common stock that may be issued upon the exercise of options under all of our equity compensation plans as of December 31, 2008. As required by the Securities and Exchange Commission rules, we include in footnote (2) to this table a brief description of the material features of our option issuances that have not been approved by our stockholders.
On July 18, 2005, we granted an aggregate of 84,000 non-qualified options to purchase shares of our common stock to Noel Cusack, Senior Vice President of Preclinical Development, Pamela McDonough, our Corporate Controller, and Lee Summers, our former Director of Quality Systems, in connection with the commencement of their employment with us. These options were granted without stockholder approval pursuant to NASDAQ Marketplace Rule 4350(i)(1)(A)(iv) under the following terms: ten-year duration, an exercise price of $1.96 per share and equal monthly vesting over three years. As of December 31, 2005, 12,833 non-qualified options to purchase shares of our common stock were cancelled.
On July 18, 2005, we granted Kenneth L. Rice, Jr., our Executive Vice President Finance and Administration and Chief Financial Officer, an option to purchase shares of common stock in connection with the commencement of his employment with us. These options were granted without stockholder approval pursuant to NASDAQ Marketplace Rule 4350(i)(1)(A)(iv) under the following terms: 300,000 non-qualified stock options, ten-year duration, an exercise price of $3.25 per share, of which one-third immediately vested and the remaining two-thirds will vest in equal monthly installments over three years.
On September 10, 2004, we granted Peter G. Savas, our Chief Executive Officer, an option to purchase shares of common stock in connection with the commencement of his employment with us. These options were granted without stockholder approval pursuant to NASDAQ Marketplace Rule 4350(i)(1)(A)(iv) under the following terms: 400,000 non-qualified stock options, ten-year duration, an exercise price of $3.75 per share, of which one quarter immediately vested and the remaining three quarters will vest in equal monthly installments over four years.
On November 18, 2004, we granted Mark J. Pykett, our President and Chief Operating Officer, an option to purchase shares of common stock in connection with the commencement of his employment with us. These options were granted without stockholder approval pursuant to NASDAQ Marketplace Rule 4350(i)(1)(A)(iv) under the following terms: 100,000 non-qualified stock options, ten-year duration, an exercise price of $3.75 per share, of which one quarter immediately vested and the remaining three quarters will vest in equal monthly installments over four years.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Under applicable NASDAQ rules, a director will only qualify as an independent director if, in the opinion of our Board of Directors, that person does not have a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Our Board of Directors has determined that none of Messrs. Brem, Frashier, Guinness, Langer, Mullen, or Preston, each of whom serves on at least one of our Audit, Compensation, Nominating and Corporate Governance, Science and Technology and Finance Committees, has a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is independent as that term is defined under Rule 4200(a)(15) of the NASDAQ Stock Market Inc., Marketplace Rules.
Certain Relationships and Related Transactions
For information relating to a consulting agreement with Mr. Langer, who served during 2008 as a member of our Compensation Committee, see Corporate Governance Compensation of Directors. For information relating to our employment and severance arrangements with our Named Executive Officers, see EXECUTIVE COMPENSATION Potential Payments Upon Termination or Change-in-Control.
In November 2008, we completed a private placement with Robert Gipson of 543,478 shares of its common stock which raised $1,000,000 in gross proceeds. In connection with the November 2008 private placement, we also issued warrants (the November 2008 Warrants) to purchase 543,478 additional shares of common stock that were exercisable at $1.84 per share between six months and two years after the closing. In connection with the private placement, we agreed with Mr. Gipson (the Letter Agreement) that if we sold shares of its common stock at a price below $1.84, subject to certain exceptions, prior to December 31, 2009, Mr. Gipson would be entitled to receive, for no additional consideration, additional shares of common stock and warrants in accordance with a pre-determined formula.
In January 2009, we completed a private placement with Robert Gipson of 1,000,000 shares of its common stock which raised $1,000,000 in gross proceeds. In addition, we issued an additional 456,522 shares of its common stock to Mr. Gipson pursuant to a Letter Agreement. In connection with the January 2009 private placement, Mr. Gipson agreed to the cancellation of the November 2008 Warrants.
On March 18, 2008, we amended and restated our outstanding amended and restated unsecured convertible promissory note purchase agreement in favor of Robert L. Gipson, a holder of greater than 5% of our outstanding capital stock, or the March 2008 Amended Purchase Agreement, to (i) increase the amount we could borrow by $5,000,000 to $30,000,000 and (ii) provide that we may incur up to an additional $5,000,000 of indebtedness from the Purchasers upon the same terms and conditions pursuant to the March 2008 Amended Purchase Agreement. In March 2008, we issued a convertible promissory note to Robert Gipson in the aggregate principal amount of $5,000,000 pursuant to the March 2008 Amended Purchase Agreement.
The amounts borrowed by us under the March 2008 Amended Purchase Agreement bear interest at the rate of 5% per annum and may be converted, at the option of the Purchasers into (i) shares of our common stock at a conversion price per share of $2.50, (ii) the right to receive future royalty payments related to our molecular imaging products (including Altropane and Fluoratec) in amounts equal to 2% of our pre-commercial revenue related to such products plus 0.5% of future net sales of such products for each $1,000,000 of outstanding principal and interest that a Purchaser elects to convert into future payments, or (iii) a combination of (i) and (ii). Any outstanding notes that are not converted into our common stock or into the right to receive future payments will become due and payable by the earlier of December 31, 2010 or the date on which a Purchaser declares an event of default (as defined in the March 2008 Amended Purchase Agreement). However, each Purchaser is prohibited from effecting a conversion if at the time of such conversion the common stock issuable to such Purchaser, when taken together with all shares of common stock then held or otherwise beneficially owned by a Purchaser exceeds 19.9%, or 9.99% for Highbridge and ISVP, of the total number of issued and outstanding shares of our common stock immediately prior to such conversion unless and until our stockholders approve the conversion of all of the shares of common stock issuable thereunder.
In June 2008, we entered into a convertible promissory note purchase agreement, or the June 2008 Purchase Agreement, with Robert Gipson pursuant to which we could borrow up to $5,000,000. In June 2008, we issued a convertible promissory note to Robert Gipson, or the June 2008 RG Note, in the aggregate principal amount of $5,000,000 pursuant to the June 2008 Purchase Agreement. The terms of the June 2008 Purchase Agreement are consistent with those of the March 2008 Amended Purchase Agreement described above.
We are subject to certain debt covenants pursuant to the March 2008 Amended Purchase Agreement and the June 2008 Purchase Agreement, or Purchase Agreements. If we (i) fail to pay the principal or interest due under the Purchase Agreements, (ii) file a petition for action for relief under any bankruptcy or similar law or (iii) an involuntary petition is filed against us, all amounts borrowed under the Purchase Agreements may become immediately due and payable by us. In addition, without the consent of the Purchasers, we may not (i) create, incur or otherwise permit to be outstanding any additional indebtedness for money borrowed, (ii) declare or pay any cash dividend, or make a distribution on, repurchase, or redeem, any class of our stock, subject to certain exceptions or sell, lease, transfer or otherwise dispose of any of our material assets or property or (iii) dissolve or liquidate.
In February 2009, Neurobiologics, Inc., or the Subsidiary, issued to Robert Gipson an unsecured promissory note, pursuant to which the Subsidiary borrowed an aggregate principal amount of $1,000,000 (the Subsidiary Note). Interest on the Subsidiary Note accrues at the rate of 7% per annum and all principal and accrued interest is due and payable on demand of Mr. Gipson.
As of March 31, 2009, we had issued six promissory notes, including the note with the Subsidiary, for an aggregate principal amount of $35,880,000.
In March and April 2009, we entered into three Securities Purchase Agreements to sell 60,000 shares of our Series F Convertible Preferred Stock, $0.01 par value per share, or the Series F Preferred Stock, to Robert Gipson for gross proceeds of $1,500,000.
In December 2006, we entered into a license agreement, or the CETHRIN License, with BioAxone Therapeutic Inc., a Canadian corporation, or BioAxone, pursuant to which we were granted an exclusive, worldwide license to develop and commercialize specified compounds including but not limited to CETHRIN® as further defined in the CETHRIN License. The CETHRIN License calls for us to conduct development and commercialization activities of CETHRIN and , to pay certain pre-commercialization
milestones and on-going royalties on sales of CETHRIN when and if approved for marketing. The CETHRIN License includes a development plan with discrete development milestones which, if not met, could result in additional payments to BioAxone and/or loss of some or all of our license rights.
Under the CETHRIN License, we agreed to $10,000,000 in up-front payments of which we paid BioAxone $2,500,000 upon execution of the CETHRIN License and $7,500,000 in March 2007. We also agreed to pay BioAxone up to $25,000,000 upon the achievement of certain milestone events and royalties based on the worldwide net sales of licensed products, subject to specified minimums, in each calendar year until either the expiration of a valid claim covering a licensed product or a certain time period after the launch of a licensed product, in each case applicable to the specific country. The CETHRIN License provides for a series of performance milestones any of which, if not achieved by us in the timeframes agreed in the CETHRIN License, could form the basis of a claim for compensation to BioAxone and possibly the termination of some or all of our rights under the CETHRIN License. The CETHRIN License further provides us with relief from our performance obligations in the event that such performance is effectively rendered impossible due to safety or efficacy issues with CETHRIN during its development. Additionally, the CETHRIN License provides a warranty that all of the clinical materials provided to us by BioAxone in connection with the CETHRIN License were manufactured in accordance with cGMP.
On January 22, 2009, we received notice from BioAxone alleging that we failed to meet one of the performance milestones in the CETHRIN License that was required to have been met on or before January 1, 2009. This notice purported to terminate the CETHRIN License, sought payment of a $2,000,000 penalty from us to BioAxone for such purported failure and requested that we transfer to BioAxone its rights to the Master Cell Bank and all licensed intellectual property under the CETHRIN License.
We believe that the purported termination is without effect. Our performance obligations under the CETHRIN License are specifically excused in the event that a safety issue renders such performance impossible. Our prior discovery that the Master Cell Bank from which CETHRIN is manufactured may contain an unintended animal derived contaminant rendering it not in compliance with the requirements of cGMP, represents such a safety risk for CETHRIN. We have notified BioAxone of the contamination issue and its position that the purported termination and demand for payment is considered to be without effect. The CETHRIN License provides for all disputes arising out the CETHRIN License to be settled by binding arbitration. In the event we are unable to reach an agreement with BioAxone with respect to the licensing of CETHRIN, we intend to pursue arbitration.
We believe that BioAxone has not met the requirements of the CETHRIN License. We are working with BioAxone to address deficiencies related to BioAxones production of CETHRIN but there is no assurance that we will be able to do so. Any failure to address these deficiencies could delay future clinical development for CETHRIN. Current development for CETHRIN, including the manufacturing of additional CETHRIN drug product, has been suspended until such time that we have resolved its dispute with BioAxone, secured additional working capital and/or a strategic partnership, and discussed the future development plan with the regulatory authorities.
Frank Bobe, our former Executive Vice President and Chief Business Officer was a former Chairman and Chief Executive Officer at BioAxone.
On April 24, 2009 we entered into an agreement, the Amendment Agreement, with BioAxone pursuant to which the CETHRIN License was amended to provide that during a specified period, the SubLicense Period, we will use reasonable commercial efforts to enter into a sublicense agreement for the technology licensed to us under the CETHRIN License. The Amendment Agreement further provides that all of the pre-commercial financial milestones, and the performance-related milestones contained in the CETHRIN License are eliminated and replaced with a formula-based approach to sharing any and all sublicense income with BioAxone. The Amendment Agreement provides that, in the event we execute a sublicense agreement within the SubLicense Period that meets certain specified minimum terms, we will be entitled to receive a fixed percentage of all sublicense consideration in any and all forms and the remainder will be paid to BioAxone. If we fail to execute a sublicense agreement during the SubLicense Period, the CETHRIN License and our right to sublicense it will terminate and we will instead be entitled to receive a lower fixed percentage of any and all income received by BioAxone if and when they enter into a future third party license agreement for the CETHRIN technology. The Amendment Agreement includes a mutual release of all of the claims described that each party had previously alleged against the other under the CETHRIN License. Certain terms of the Amendment Agreement for which we are seeking Confidential Treatment are not disclosed herein.
We have entered into indemnity agreements with each of our directors and executive officers containing provisions that may require us, among other things, to indemnify those directors and officers against liabilities that may arise by reason of their status or service as directors and officers. The agreements also provide for us to advance to our directors and officers expenses that they expect to incur as a result of any proceeding against them related to their service as directors and officers.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Registered Public Accounting Firms Fees and Other Matters
The following table summarizes the fees billed to us for professional services rendered by McGladrey & Pullen, LLP and PricewaterhouseCoopers LLP, our prior independent registered public accounting firm, for each of the last two fiscal years:
Audit fees consist of fees for the audit of our consolidated annual financial statements, the review of the interim consolidated financial statements included in our quarterly reports on Form 10-Q and other professional services provided in connection with statutory and regulatory filings or engagements.
Audit-related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under Audit Fees. These services include consultations concerning financial accounting and reporting matters not classified as audits.
Tax fees consist of fees for tax compliance, tax advice and tax planning services.
All Other Fees
All other fees for 2008 consisted of fees relating to an accounting research tool.
Policy on Audit Committee Pre-approval of Audit and Permissible Non-audit Services of Independent Registered Public Accounting Firm
Consistent with policies of the SEC regarding independent registered public accounting firm independence and our Audit Committee Charter, our Audit Committee has the responsibility for appointing, retaining, setting compensation and overseeing the work of the independent registered public accounting firm. Our Audit Committees policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. Our Audit Committee presently pre-approves particular services on a case-by-case basis. In assessing requests for services by the independent registered public accounting firm, our Audit Committee considers whether such services are consistent with the independent registered public accounting firms independence, whether the independent registered public accounting firm is likely to provide the most effective and efficient service based upon their familiarity with us, and whether the service could enhance our ability to manage or control risk or improve audit quality.
All of the audit-related, tax and other services provided by McGladrey & Pullen, LLP and PricewaterhouseCoopers LLP in fiscal year 2008 and related fees were approved in advance by our Audit Committee. None of the services and fees were approved using the de-minimis exception under SEC rules.
Our Audit Committee believes that the provision of the non-audit services above is compatible with maintaining the independent registered public accounting firms independence.
PricewaterhouseCoopers LLP served as our independent registered public accounting firm for 2006. On April 18, 2007, the Audit Committee of the Board of Directors dismissed PricewaterhouseCoopers LLP as our independent registered public accounting firm. The reports of PricewaterhouseCoopers LLP on our consolidated financial statements as of and for the fiscal years ended December 31, 2005 and 2006 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that the reports of PricewaterhouseCoopers LLP included an explanatory paragraph regarding the existence of substantial doubt about our ability to continue as a going concern.
During our fiscal years ended December 31, 2005 and 2006 and through April 18, 2007 (the Relevant Period), (a) there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused them to make reference thereto in their reports on the financial statements for such years and (b) there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
On April 18, 2007, the Audit Committee selected McGladrey & Pullen, LLP to serve as our independent registered public accounting firm to audit our consolidated financial statements beginning with the fiscal year ending December 31, 2007.
During the Relevant Period, neither we nor anyone on behalf of us consulted with McGladrey & Pullen, LLP on any matter regarding: (1) either the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our consolidated financial statements, and neither a written report nor oral advice was provided to us that McGladrey & Pullen, LLP concluded was an important factor considered by us in reaching a decision as to an accounting, auditing or financial reporting issue; or (2) either a disagreement or a reportable event, as defined in Item 304(a)(1)(iv) and (v) of Regulation S-K, respectively.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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 this 30th day of April, 2009.