2006/June/30 - 10Q
Cash - 2.5 million
Current Liabilities - 4.8 million
Shares Outstanding - 228,505,000
SEVERE EDIT
. Liquidity
Since 2004, the Company has undergone a significant recapitalization pursuant to which Toucan Capital Fund II, L.P. (“Toucan Capital”), has loaned it $6.75 million and Toucan Partners, LLC, an affiliate of Toucan Capital (“Toucan Partners”), has loaned the Company $950,000. On January 26, 2005, the Company entered into a securities purchase agreement with Toucan Capital pursuant to which they purchased 32.5 million shares of the Company’s Series A Preferred Stock at a purchase price of $0.04 per share, for a net purchase price of $1.267 million, net of offering related costs of approximately $24,000.
In April 2006, $6.75 million of the notes payable plus all accrued interest due to Toucan Capital were converted into shares of Series A-1 Preferred Stock.
These funds enabled the Company to continue to operate and advance programs, while attempting to raise additional capital.
On March 30, 2006, the Company entered into an equity financing (“PIPE Financing”) with unrelated investors pursuant to which aggregate gross proceeds of approximately $5.5 million was raised.
As of August 10, 2006, the Company had cash in the amount of $1.9 million which it believes, based on recurring operating and associated financing costs, will be sufficient to fund current operations for the next six months.
Approximately $3.9 million of the Company’s current liabilities at June 30, 2006 were payable to related parties, net of the related debt discount. During July 2006, the Company paid $200,000 of the remaining current related party liabilities recorded as of June 30, 2006.
For purposes of the Company’s assessment of its ability to fund its operations through the next six months, management has assumed that it would be able to refinance or otherwise defer the payment of the remaining $3.7 million of related party liabilities, net of the related debt discount.
These remaining liabilities consist primarily of $515,000 related to notes payable to Toucan Partners, net of the related debt discount, $2.6 million due to Cognate Therapeutics, Inc. for contract manufacturing as of June 30, 2006 and $639,000 related to expenses paid by Toucan Capital on behalf of the Company.
These parties have not yet agreed to any refinancing or deferral and may not do so. If these related party liabilities, the majority of which is currently due, are required to be repaid in the near term the Company’s cash is not considered sufficient to fund its current liabilities. Accordingly, the Company may not be able to continue meeting its obligations on an ongoing basis, if at all. The Company needs to raise significant additional funding to continue its operations, conduct research and development activities, pre-clinical studies and clinical trials necessary to bring its product candidates to market.
However, additional funding may not be available on terms acceptable to the Company or at all. The alternative of issuing additional equity or convertible debt securities also may not be available and, in any event, would result in additional dilution to the Company’s stockholders. For ongoing operating capital the Company intends to seek additional funds from Toucan Capital, Toucan Partners, or other third parties. Neither Toucan Capital, Toucan Partners, or any other third parties is obligated to provide the Company any additional funds. Any additional financing with Toucan Capital, Toucan Partners or any other third party is likely to be dilutive to stockholders, and any debt financing, if available, may include additional restrictive covenants. The Company does not believe that its assets would be sufficient to satisfy the claims of all of its creditors in full and to satisfy aggregate liquidation preferences of our preferred stock in full. Therefore, if the Company were to pursue a liquidation, it is highly unlikely that any proceeds would be received by the holders of the Company’s common stock. If the Company is unable to obtain significant additional capital in the near-term, it may cease operations at anytime.
There can be no assurance that the Company’s efforts to seek funding will be successful. If the Company’s capital raising efforts are unsuccessful, the Company’s inability to obtain additional cash as needed could have a material adverse effect on its financial position, results of operations and its ability to continue its existence. The Company’s independent auditors have indicated in their report on the financial statements, included in the December 31, 2005 annual report on Form 10-K, that there is substantial doubt about the Company’s ability to continue as a going concern.
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