form10k-fy08.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
______________
FORM
10-K
______________
(MARK
ONE)
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended September 30, 2008
OR
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from ____________ to__________
Commission
File Number 0-50481
______________
AEOLUS
PHARMACEUTICALS, INC.
(Exact
name of registrant as specified in its charter)
______________
Delaware
|
|
56-1953785
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
26361
Crown Valley Parkway, Suite 150
|
|
Mission
Viejo, California
|
92691
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
Registrant’s
telephone number, including area code: 949-481-9825
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $.01 par value per share
(Title
of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No ý
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 ¨ No ý
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 ý No ¨
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. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
|
Smaller
reporting company ý
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No ý
The
aggregate market value of the voting common stock held by non-affiliates of the
registrant based upon the average of the bid and asked price on the OTC Bulletin
Board as of March 31, 2008, the last business day of the registrant’s most
recently completed second fiscal quarter, was approximately
$4,369,000. Shares of common stock held by each executive officer and
director and by each other stockholder who owned 10% or more of the outstanding
common stock as of such date have been excluded in that such stockholder might
be deemed to be affiliates. This determination of affiliate status
might not be conclusive for other purposes.
As of
December 10, 2008, the registrant had outstanding 32,030,874 shares of common
stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Company’s definitive Proxy Statement to be filed pursuant to Regulation
14A for the registrant’s 2009 Annual Meeting of Stockholders to be held on or
about March 26, 2009 are incorporated herein by reference into Part III
hereof.
AEOLUS
PHARMACEUTICALS, INC.
ANNUAL
REPORT ON FORM 10-K
Table
of Contents
|
|
|
Page
|
|
|
PART
I
|
Item
1.
|
|
|
3
|
|
|
|
18
|
Item
1A.
|
|
|
19
|
Item
1B.
|
|
|
28
|
Item
2.
|
|
|
28
|
Item
3.
|
|
|
28
|
Item
4.
|
|
|
29
|
|
|
PART
II
|
Item
5.
|
|
|
29
|
Item
6.
|
|
|
32
|
Item
7.
|
|
|
33
|
Item
7A.
|
|
|
40
|
Item
8.
|
|
|
40
|
Item
9.
|
|
|
59
|
Item
9A.
|
|
|
59
|
Item
9B.
|
|
|
60
|
|
|
PART
III
|
Item
10.
|
|
|
60
|
Item
11.
|
|
|
60
|
Item
12.
|
|
|
60
|
Item
13.
|
|
|
60
|
Item
14.
|
|
|
61
|
|
|
PART
IV
|
Item
15.
|
|
|
61
|
PART
I
NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that relate to future
events or our future financial performance. You can identify
forward-looking statements by terminology such as “may,” “might,” “will,”
“could,” “should,” “would,” “expect,” “plan,” “anticipate,” “believe,”
“estimate,” “predict,” “intend,” “potential” or “continue” or the negative of
these terms or other comparable terminology. Our actual results might
differ materially from any forward-looking statement due to various risks,
uncertainties and contingencies, including but not limited to those identified
in Item 1A entitled “Risk Factors” beginning on page 19 of this report, as well
as those discussed in our other filings with the Securities and Exchange
Commission and the following:
|
·
|
our need for, and our ability
to obtain, additional funds;
|
|
·
|
uncertainties relating to
clinical trials and regulatory reviews and
approvals;
|
|
·
|
uncertainties relating to our
pre-clinical trials and regulatory reviews and
approvals;
|
|
·
|
our dependence on a limited
number of therapeutic
compounds;
|
|
·
|
the early stage of the product
candidates we are
developing;
|
|
·
|
the acceptance of any future
products by physicians and
patients;
|
|
·
|
competition with and
dependence on collaborative
partners;
|
|
·
|
loss of key consultants,
management or scientific
personnel;
|
|
·
|
our ability to obtain adequate
intellectual property protection and to enforce these rights;
and
|
|
·
|
our ability to avoid
infringement of the intellectual property rights of
others.
|
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. We disclaim any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
General
Aeolus
Pharmaceuticals, Inc. (“we” or the “Company”), a Southern California-based
biopharmaceutical company, is developing a new class of catalytic antioxidant
compounds for diseases and disorders of the central nervous system, respiratory
system, autoimmune system and oncology. Our initial target
indications are as a protective agent against the effects of mustard gas
exposure, as a protective agent against radiation exposure, cancer radiation
therapy, as a protective agent against the effects of chlorine gas exposure and
amyotrophic lateral sclerosis, also known as “ALS” or “Lou Gehrig’s
disease.” We have reported positive safety results from two Phase I
clinical trials of AEOL 10150, our lead drug candidate, with no serious adverse
events noted. We also have a long-term clinical trial underway in a
single patient with ALS to test the efficacy and further test the safety of AEOL
10150.
We were
incorporated in the State of Delaware in 1994. Our common stock
trades on the OTC Bulletin Board under the symbol “AOLS.” Our
principal executive offices are located at 26361 Crown Valley Parkway, Suite
150 Mission Viejo, California 92691, and our phone number at that
address is (949) 481-9825. Our website address is
www.aeoluspharma.com. However, the information on, or that can be
accessed through, our website is not part of this report. We also
make available free of charge through our website our most recent annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
any amendments to those reports, as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC.
Aeolus’
Catalytic Antioxidant Program
The
findings of research on natural antioxidant enzymes and antioxidant scavengers
support the concept of antioxidants as a broad new class of pharmaceuticals if
certain limitations noted below could be overcome. We established our
research and development program to explore and exploit the therapeutic
potential of small molecule catalytic antioxidants. We have achieved
our initial research objectives and have begun to extend our preclinical
accomplishments into our clinical trials and drug development
programs.
Our
catalytic antioxidant program is designed to:
|
·
|
retain
the catalytic mechanism and high antioxidant efficiency of the natural
enzymes, and
|
|
·
|
create
and develop stable and small molecule antioxidants without the limitations
of superoxide dismutase (“SOD”) so that
they:
|
|
o
|
have
broader antioxidant activity,
|
|
o
|
have
better tissue penetration,
|
|
o
|
have
a longer life in the body, and
|
|
o
|
are
not proteins, which are more difficult and expensive to
manufacture.
|
We have
created a class of small molecules that consume free radicals catalytically;
that is, these molecules are not themselves consumed in the
reaction. Our class of compounds is a group of manganoporphyrins (an
anti-oxidant containing manganese) that retain the benefits of antioxidant
enzymes, are active in animal models of disease and, unlike the body’s own
enzymes, have properties that make them suitable drug development
candidates. Our most advanced compound, AEOL 10150, has shown
efficacy in a variety of animal models, including mustard gas exposure, as a
protectant against radiation exposure, ALS, stroke, radiation injury, pulmonary
diseases, and diabetes. We filed an Investigational New Drug
Application (“IND”) for AEOL 10150 in April 2004 under which clinical
trials were conducted as more fully described below under the heading “AEOL
10150 Clinical Development Program.” For a more detailed description
of antioxidants see the section below titled “Background on
Antioxidants.”
AEOL
10150
Our lead
drug candidate is AEOL 10150 and is the first in our class of catalytic
antioxidant compounds to enter clinical evaluation. AEOL 10150 is a
small molecule catalytic antioxidant that has shown the ability to scavenge a
broad range of reactive oxygen species, or free radicals. As a
catalytic antioxidant, AEOL 10150 mimics and thereby amplifies the body’s
natural enzymatic systems for eliminating these damaging
compounds. Because oxygen-derived free radicals are believed to have
an important role in the pathogenesis of many diseases, we believe that Aeolus’
catalytic antioxidants and AEOL 10150 may have a broad range of potential
therapeutic uses. In particular, our catalytic antioxidants have been
shown to significantly reduce tissue damage in animal models of mustard gas
exposure, radiation exposure, radiation therapy, ALS, stroke and chronic
obstructive pulmonary disease for which we have focused on mustard gas exposure,
radiation exposure, radiation therapy, chlorine gas exposure and
ALS.
AEOL
10150 in Treatment of the Effects of Mustard Gas Exposure
Sulfur
mustards, of which mustard gas is a member, are a class of related cytotoxic,
vesicant chemical warfare agents with the ability to form large blisters on
exposed skin. In their pure form most sulfur mustards are colorless,
odorless, viscous liquids at room temperature. When used as warfare
agents they are usually yellow-brown in color and have an odor resembling
mustard plants, garlic or horseradish. Mustard agents, including
sulfur mustard, are regulated under the 1993 Chemical Weapons
Convention. Three classes of chemicals are monitored under this
Convention, with sulfur and nitrogen mustard grouped in the highest risk class,
"schedule 1". However, concerns about its use in a terrorist attack
have lead to resurgence in research to develop a protectant against
exposure.
The
increased risk of a terrorist attack in the United States involving chemical
agents has created new challenges for many departments and agencies across the
federal government. Within the Department of Health and Human
Services, the National Institutes of Health (“NIH”) is taking a leadership role
in pursuing the development of new and improved medical countermeasures designed
to prevent, diagnose, and treat the conditions caused by potential and existing
chemical agents of terrorism. In addition, many of the same chemicals
posing a threat as terrorist agents may also be released from transportation and
storage facilities by industrial accidents or during a natural
disaster. The NIH has developed a comprehensive Countermeasures
Against Chemical Threats (“CounterACT”) Research Network that includes Research
Centers of Excellence, individual research projects, SBIRs, contracts and other
programs. The CounterACT network will conduct basic, translational,
and clinical research aimed at the discovery and/or identification of better
therapeutic and diagnostic medical countermeasures against chemical threat
agents, and their movement through the regulatory process. The
overarching goal of this research program is to enhance our diagnostic and
treatment response capabilities during an emergency.
The goal
of the CounterACT program is to assist in the development of safe and effective
medical countermeasures designed to prevent, diagnose, and treat the conditions
caused by potential and existing chemical agents of terrorism which can be added
to the Nation’s Strategic National Stockpile (“SNS”). The SNS is
maintained by the Centers for Disease Control and Prevention
(“CDC”). The SNS now contains CHEMPACKS which are located in secure,
environmentally controlled areas throughout the United States available for
rapid distribution in case of emergency. The CDC has established a
diagnostic response network for the detection of nerve agents, mustard, cyanide
and toxic metals. The NIH will continue to research, develop and
improve medical products that include chemical antidotes, drugs to reduce
morbidity and mitigate injury, drugs to reduce secondary chemical exposure and
diagnostic tests and assessment tools to be used in mass casualty
situations.
Mustard
gas is a strong vesicant (blister-causing agent). Due to its
alkylating properties, it is also strongly mutagenic (causing damage to the DNA
of exposed cells) and carcinogenic (cancer causing). Those exposed
usually suffer no immediate symptoms. Within 4 to 24 hours the
exposure develops into deep, itching or burning blisters wherever the mustard
contacted the skin; the eyes (if exposed) become sore and the eyelids swollen,
possibly leading to conjunctivitis and blindness. At very high
concentrations, if inhaled, it causes bleeding and blistering within the
respiratory system, damaging the mucous membrane and causing pulmonary
edema. Blister agent exposure over more than 50% body surface area is
usually fatal.
Researchers
at National Jewish Medical & Research Center and the University of Colorado
Health Sciences in Denver, Colorado have been awarded a five year Center grant
from the NIH CounterACT Research Network to support the development of compounds
to protect and treat lung and skin injury associated with mustard gas
exposure. One of the lead compounds being tested in these studies is
AEOL 10150.
Research
in the area of mustard gas-mediated lung injury has provided experimental
evidence that the mechanisms of these injuries are directly linked to the
formation of reactive oxygen and nitrogen species and that superoxide dismutase
and catalase can ameliorate injury responses. This theory has led to
the hypothesis that the administration of catalytic antioxidant therapy can
protect against mustard gas-induced acute lung and dermal
injury. AEOL 10150 has already been shown to be well tolerated in
humans and could be rapidly developed as a drug candidate in this area pending
animal efficacy data.
Recent
studies have found that the chemical warfare agent analog, 2-chloroethyl ethyl
sulfide (“CEES”)-induced lung injury could be ameliorated by both exogenous
superoxide dismutase and catalase. Both of these natural enzymes are
important catalytic antioxidants and both of these reactions are exhibited by
metalloporphyrins. CEES-induced lung injury is dependent in part upon
blood neutrophils. Activated neutrophils are an important source of
reactive oxygen species that are known to contribute to lung injury
responses. Antioxidants have also been shown to protect against
CEES-induced dermal injury. Mustard exposure is often associated with
producing adult respiratory distress syndrome (“ARDS”) that requires
supplemental oxygen therapy to maintain adequate tissue
oxygenation.
Preliminary
studies suggest that AEOL 10150 at 5/mg/kg, sc dose can rescue acute lung injury
responses when dosed 1 hour after the sulfur mustard gas analog
exposure. The next steps are to determine whether this protective
effect still occurs with authentic mustard gas and whether the compound can also
provide protection against the chronic lung fibrotic effects of mustard gas
exposures. This data suggests that AEOL 10150 may provide an
effective countermeasure to mustard gas attacks that can be rapidly
developed. We expect to conduct the study of AEOL 10150 as a
protective agent against the effects on the lung of authentic mustard gas
exposure during fiscal 2009. If the results of this study are
positive, we would proceed to meet with the NIH and U.S. Food and Drug
Administration (“FDA”) regarding the filing of a New Drug Application (“NDA”)
for AEOL 10150 as a protectant against the exposure to mustard gas.
We are
also in the process of testing AEOL 10150 as a protectant to the skin against
exposure to mustard gas. Preliminary studies suggest that AEOL 10150
can reduce injury to the skin when dosed after the sulfur mustard gas analog
exposure. The next steps are to determine whether this protective
effect still occurs with authentic mustard gas. As with the study of
the effects on the lung, this data suggests that AEOL 10150 may provide an
effective countermeasure to mustard gas attacks that can be rapidly
developed. We expect to conduct the study of AEOL 10150 as protective
agent against the effects on the skin of authentic mustard gas exposure during
fiscal 2009 immediately following the conclusion of the similar study for the
lungs as described above.
AEOL
10150 as a Protectant against Radiation Exposure
During
recent years, the threat of nuclear attack on U.S. soil has
increased. The lack of efficient post-exposure treatments for victims
experiencing acute radiation toxicity presents a serious problem should an
attack with a radiological device occur. The most important
components of acute radiation sickness are the hematopoietic and
gastrointestinal syndrome. However, both lethal hematopoietic and
gastrointestinal syndromes are potentially avoidable with proper treatment and
complications to later responding tissues may subsequently become a major
problem. A nuclear incident is also likely to result in a wide
inhomogeneous distribution of radiation doses to the body that allows
hematological recovery but a higher exposure to the thorax leaves open the risk
of serious pulmonary complications. Research has shown that one of
the primary concerns associated with the exposure to upper half body irradiation
or total body irradiation is an acute but delayed onset of radiation pneumonitis
with an incidence that rises very steeply at relatively low radiation
doses. Experience points out that one of the primary complications
associated with the exposure to upper half body irradiation or total body
irradiation is pulmonary tissue toxicity. In situations of accidental
exposure, it was initially assumed that a whole-body dose exceeding 10 Gy was
inevitably fatal. However, experience with nuclear accident victims
suggests that when gastrointestinal and bone marrow syndromes are successfully
treated, respiratory failure due to radiation pneumonitis and lung fibrosis
later became the major cause of death. The goal of our research is to
complete the development of a safe and effective medical product to mitigate
radiation-induced pulmonary injury. AEOL 10150 has shown in
preliminary studies to mitigate radiation-induced lung injury when given 2
hours, and possibly up to 8 weeks after irradiation. Our current
research is aimed to determine the optimum dose level and duration of treatment
to optimize mitigation of lung injury and to determine the length of the window
of opportunity for initiation of treatment to achieve mitigation of lung
injury. We are currently looking to confirm the efficacy of AEOL
10150 in a second model of upper-body irradiation. We expect to able
to report the results of this study during the second half of fiscal
2009.
We are
also preparing to launch additional studies of AEOL 10150 to test the ability of
the compound to protect lungs from exposure to radiation in the context of a
nuclear accident or attack. This additional study will build on the
results from the ongoing study described above. This study is
designed to last 6 months and we are looking at the compound’s impact on acute
effects as well as pneumonitis and fibrosis. We expect to able to
report the results of this study in the first half of fiscal
2010.
Upon the
completion of these studies and based upon positive results, we expect to be
able to meet with representatives of the FDA to discuss the filing of an NDA for
AEOL 10150 as a protectant against radiation exposure as early as fiscal
2010.
AEOL
10150 in Treatment of the Effects of Chlorine Gas Exposure
Because
of the promise of AEOL 10150, and of our desire to find successful treatment of
toxic gas inhalation, we have sought another relevant established model in which
its efficacy can be tested immediately. Therefore we have considered
study of another toxic oxidant gas, as or more likely than mustard gas to be
used in military and civilian chemical warfare and/or terrorism
events. One such gas is chlorine.
Like
sulfur mustard, chlorine gas is a toxic gas that confers airway injury through
primary oxidative stress and secondary inflammation. Chlorine
inhalation was recently used in terrorist/insurgent attacks on military and
civilian populations, and has caused numerous industrial, transportation,
swimming pool, and household accidents, as well as deaths to members of the US
military in the past. Chlorine gas, also known as bertholite, was
first used as a weapon in World War I. Chlorine gas was also used against the
local population and coalition forces in the Iraq War in the form of Chlorine
bombs.
Worldwide,
independent of warfare and chemical terrorism, chlorine is the greatest single
cause of major toxic release incidents. In the US, there are about
5-6,000 exposures per year resulting in, on average, about one death, 10 major,
400-500 moderate, and 3-4,000 minor adverse outcomes. Like mustard,
chlorine causes damage to upper and lower respiratory tracts. While
chlorine is an irritant, its intermediate water solubility may delay emergence
of upper airway symptoms for several minutes. Aqueous decomposition
of chlorine gas forms hydrochloric acid and hypochlorous acid, itself also a
product of inflammation. Cell injury is thought to result from
oxidation of functional groups in cell components, from tissue formation of
hydrochloric acid and hypochlorous acid, and possibly from formation of other
reactive oxygen species (“ROS”). For treatment of acute exposures in
humans, decontamination, supplemental oxygen, treatment of bronchospasm and/or
laryngospasm, and supportive care are the only accepted therapies, while use of
nebulized sodium bicarbonate and parenteral and/or inhaled steroids remain quite
controversial. No specific beneficial therapies are
available. We expect that AEOL 10150 will decrease airway injury,
inflammation, oxidative damage, hyperreactivity, and cell proliferation after
acute chlorine gas inhalation in mice and therefore be a possible beneficial
therapy for chlorine gas inhalation injury to the airways. We are
preparing to launch a study to evaluate the potential efficacy of AEOL 10150 in
rescue therapy of chlorine gas inhalation injury to the airways.
AEOL
10150 in Radiation Therapy
According
to the American Cancer Society, cancer is the second leading cause of death by
disease representing one out of every four deaths in the United States with an
expected 566,000 Americans expected to die of cancer in 2008. In
2008, nearly 1.4 million new cancer cases are expected to be diagnosed in the
United States. The National Institutes of Health (“NIH”) estimates
overall costs of cancer in 2007 in the United States at $219.2 billion: $89.0
billion for direct medical costs, $18.2 billion for indirect morbidity costs
(costs of lost productivity due to illness) and $110.2 billion for indirect
mortality costs (cost of lost productivity due to premature death).
Combinations
of surgery, chemotherapy and radiation treatments are the mainstay of modern
cancer therapy. Success is often determined by the ability of
patients to tolerate the most aggressive, and most effective, treatment
regimens. Radiation therapy-induced toxicity remains a major factor which
limits the ability to escalate radiation doses in the treatment of
tumors. The ability to deliver optimal radiation therapy
for treatment of tumors without injury to surrounding normal tissue has
important implications in oncology because higher doses of radiation
therapy may improve both local tumor control and
patient survival. Advances in the tools of molecular and
cellular biology have enabled researchers to develop a better understanding
of the underlying mechanisms responsible for radiation
therapy-induced normal tissue injury. For decades ionizing
radiation has been known to increase production of free radicals, which is
reflected by the accumulation of oxidatively damaged
cellular macromolecules. As one example of radiation-induced
damage to adjacent normal tissue, radiation therapy may injure pulmonary tissue
either directly via generation of ROS or indirectly via the action on
parenchymal and inflammatory cells through biological mediators such as
transforming growth factor beta (TGF B) and pro-inflammatory
cytokines. Since the discovery of SOD, it has become clear that these
enzymes provide an essential line of defense against ROS. SODs and
SOD mimics, such as AEOL 10150, act by catalyzing the degradation of superoxide
radicals into oxygen and hydrogen peroxide. SODs are localized
intra/extracellularly, are widely expressed throughout the body, and are
important in maintenance of redox status (the balance between oxidation and
reduction). Previous studies have demonstrated that
treating irradiated animal models with SOD delivered by injection of the
enzyme through liposome/viral-mediated gene therapy or insertion of human
SOD gene can ameliorate radiation therapy-induced damage. For an
illustrative example of the radiation therapy reaction see Figure 1
below.
Figure 1 above shows the dual
mechanism of action of radiation therapy and the application of AEOL 10150 to
the process.
In vitro
studies have demonstrated that AEOL 10150 reduces the formation of lipid
peroxides and that it inactivates biologically important ROS molecules such
as superoxide, hydrogen peroxide, and peroxynitrite. AEOL 10150
inactivates these ROS by one or two electron oxidation or reduction
reactions in which the oxidation state of the manganese moiety in AEOL
10150 changes. AEOL 10150 is not consumed in the reaction and it
continues to inactivate such ROS molecules as long as it is present at the
target site.
A number
of preclinical studies by Zjelko Vujaskovic, MD, PhD; Mitchell Anscher, MD, et
al of Duke University have demonstrated the efficacy of AEOL 10150 in
radioprotection of normal tissue. Chronic administration of AEOL 10150 by
continuous, subcutaneous infusion for 10 weeks has demonstrated a significant
protective effect from radiation-induced lung injury in rats. Female
Fisher 344 rats were randomly divided into four different dose groups (0,
1, 10 and 30 mg/kg/day of AEOL 10150), receiving either short (one week) or
long-term (ten weeks) drug administration via osmotic
pumps. Animals received single dose radiation therapy of 28 Gray
(“Gy”) to the right hemithorax. Breathing rates, body weights,
histopathology and immunohistochemistry were used to assess lung
damage. For the long term administration, functional determinants of lung
damage 20 weeks post-radiation were significantly decreased by AEOL 10150.
Lung histology at 20 weeks revealed a significant decrease in
structural damage and fibrosis. Immunohistochemistry demonstrated a
significant reduction in macrophage accumulation, collagen deposition and
fibrosis, oxidative stress and hypoxia in animals receiving radiation
therapy along with AEOL 10150. There were no significant
differences between the irradiated controls, and the 3 groups receiving
short-term administration of AEOL 10150 and single dose radiation
therapy. Figure 2
below shows a semi-quantitative analyses of lung histology at 20 weeks which
revealed a significant decrease in structural damage and its severity in
animals receiving 10 and 30 mg/kg/day after radiation in comparison to
radiation therapy along with placebo group or radiation therapy along with 1
mg/kg of AEOL 10150 (p = 0.01).
Figure 2 above show that AEOL
10150 treatment decreases the severity of damage and increases the percentage of
lung tissue with no damage from radiation therapy in a study by Zjelko
Vujaskovic, MD, PhD; Mitchell Anscher, MD, et al of Duke
University.
Two
additional studies examining the effect of subcutaneous injections of AEOL 10150
on radiation-induced lung injury in rats have been completed. The
compound was administered subcutaneously by a bid dosing regime (i.e. 2.5 mg/kg
or 5.0 mg/kg) on the first day of radiation and daily for five consecutive
weeks. Radiation was fractionated rather than single dose, with
40 Gy divided in five 8 Gy doses. Preliminary immunohistologic
analyses of the lung tissue from these two studies showed a
dose dependent decrease in the inflammatory response quantified by the
number of activated macrophages or areas of cell damage.
These in
vivo studies employing subcutaneous administration of AEOL 10150, either
by continuous infusion via osmotic pump or BID injection, demonstrate that
AEOL 10150 protects healthy lung tissue from radiation injury delivered
either in a single dose or by fractionated radiation therapy
doses. AEOL 10150 mediates its protective effect(s) by inhibiting a
number of events in the inflammatory cascade induced by radiation
damage. Additional in vivo studies have been performed that provide support
for manganoporphyrin antioxidant protection of lung tissue from
radiation. Treatment with a related manganoporphyrin compound,
AEOL 10113 significantly improved pulmonary function, decreased
histopathologic markers of lung fibrosis, decreased collagen
(hydroxyproline) content, plasma levels of the profibrogenic cytokine, transforming
growth factor beta (TGF-β) and, as demonstrated by immunohistochemistry of
lung tissue, collagen deposition and TGF-β.
An
important consideration for the use of an antioxidant in radioprotection of
normal adjacent tissue is the potential interference with the efficacy of
tumor radiotherapy. A number of preclinical in vivo studies have
addressed this issue and have demonstrated that AEOL 10150 does not
negatively affect tumor radiotherapy.
In one
study (Vujaskovic, et al. of Duke University), human prostate tumors
(PC3) grown in nude mice to substantial size were fraction irradiated with
5 Gy per day for 3 days for a total of 15 Gy. AEOL 10150 at 7.5
mg/kg/bid was administered subcutaneously on the first day of radiation and
continued for either of two time courses: when tumor volume reached 5 times
the initial volume or for twenty days. The receding tumor volume
curves for irradiation only and for irradiation plus AEOL 10150 were
super-imposable. Therefore AEOL 10150 did not interfere with the
radiation effect on xenogenic prostate tumor.
Figure 3. Relative
tumor volumes of human prostate tumor implants in nude mice: Implants of
well-vascularized PC3 tumors were grown to substantial size prior to
receiving fractionated radiation (5 Gy daily for three
days). AEOL 10150 (7.5 mg/kg/bid) was administered
subcutaneously commencing on the first day of irradiation and continued for
20 days. Other groups of mice received either no irradiation,
irradiation only or AEOL 10150 without irradiation.
In
another study of prostate cancer tumors (Gridley, et al of Loma Linda
University), mouse prostate cancer cell line RM-9 was injected
subcutaneously into C57/Bl6 mice, followed by up to 16 days of AEOL 10150
delivered intraperitonealy at 6 mg/kg/day. On day seven, a
single non-fractionated dose of radiation (10 Gy) was
delivered. Therefore, the mice received compound for seven days
prior to radiation. The results of this study demonstrated that
AEOL 10150 does not protect the prostate tumor against radiation and
in fact AEOL 10150 showed a trend towards increasing the effectiveness of
the radiation treatment. The primary effect appears to be in
down-regulation of radiation induced HIF-1 expression and VEGF and
up-regulation of IL-4. Thus, AEOL 10150, through its down-regulation
of VEGF, may inhibit formation of blood vessels (i.e. angiogenisis)
required for tumor re-growth and protects normal tissues from damage induced by
radiation and chemotherapy.
Figure 4 above measures tumor
volume against time after implantation of RM-9 tumor cells and shows that AEOL
10150 treatment resulted in inhibition of tumor re-growth in a study performed
by Dr. Gridley of
Loma Linda University. Daily intraperitoneal
injections of AEOL 10150 were initiated on day 1. At 12 days,
approximately one half of each tumor-bearing group and control mice with no
tumor were euthanized for in vitro analyses; remaining mice/group were
followed for tumor growth and euthanized individually when maximum allowed
tumor volume was attained. Each point represents the mean +/-
standard error of the mean. Two-way analysis of the variance for days 8 to
14 revealed that group and time had highly significant main effects
(Ps<0.001) and a group x time interaction was noted
(P<0.001).
Figure 5 above shows the HIF-1
Expression in prostate tumors and the impact of the treatment of AEOL 10150 in a
study by Dr. Gridley of Loma Linda University.
In
summary, the data obtained in these preclinical studies suggest that the post
irradiation long term delivery of AEOL 10150 may be protective against
radiation-induced lung injury, as assessed by histopathology and
immunohistochemistry. Oxidative stress, inflammation and hypoxia,
which play important roles in the pathogenesis of radiation mediated fibrosis,
were also shown to be reduced in animals treated with higher doses of AEOL
10150. Studies have also shown that AEOL 10150 does not adversely affect
tumor response to radiation therapy. Thus, treatment with AEOL 10150
does not significantly protect tumors from the cell killing effects of radiation
therapy. This combined with other studies that have shown that AEOL
10150 significantly prevents radiation induced normal tissue injury suggests
that AEOL 10150 has the potential to achieve normal tissue protection without
protection of tumor tissue.
AEOL
10150 in ALS
ALS,
commonly referred to as “Lou Gehrig’s disease,” the most common motor neuron
disease, results from progressive degeneration of both upper and lower motor
neurons. According to the ALS Association (“ALSA”), the incidence of
ALS is two per 100,000 people. ALS occurs more often in men than
women, with typical onset between 40 and 70 years of age. ALS is a
progressive disease and approximately 80% of ALS patients die within five years
of diagnosis, with only 10% living more than 10 years. The average
life expectancy is two to five years after diagnosis, with death from
respiratory and/or bulbar muscle failure. The International Alliance
of ALS/MND Associations reports there are over 350,000 patients with ALS/MND
worldwide and 100,000 people die from the disease each year
worldwide. In the United States, ALSA reports that there are
approximately 30,000 patients with ALS with 5,600 new patients diagnosed each
year.
Sporadic
(i.e., of unknown origin) ALS is the most common form, accounting for
approximately 90% of cases. The cause of sporadic ALS is
unclear. Familial ALS comprises the remainder of cases and 5-10% of
these patients have a mutated superoxide dismutase 1 (“SOD1”)
gene. More than 90 point mutations have been identified, all of which
appear to associate with ALS, and result in motor neuron disease in
corresponding transgenic mice. SOD mutations have been observed in
both familial and sporadic ALS patients, although the nature of the dysfunction
produced by the SOD1 mutations remains unclear. The clinical and
pathological manifestations of familial ALS and sporadic ALS are
indistinguishable suggesting common pathways in both types of
disease.
John P.
Crow, Ph.D., and his colleagues at the University of Alabama at Birmingham
tested AEOL 10150 in an animal model of ALS (SOD1 mutant G93A transgenic
mice). The experiments conducted by Dr. Crow (now at the
University of Arkansas College of Medicine) were designed to be clinically
relevant by beginning treatment only after the onset of symptoms in the animals
is observed.
Twenty-four
confirmed transgenic mice were alternately assigned to either a control group or
AEOL 10150-treatment on the day of symptom onset, which was defined as a
noticeable hind-limb weakness. Treatment began on the day of symptom
onset. The initial dose of AEOL 10150 was 5 mg/kg, with continued
treatment at a dose of 2.5 mg/kg once a day until death or near
death.
Treatment
|
|
Age
at Symptom onset mean days + SD(range)
|
|
Survival
Interval mean days + SD(range)
|
|
P-value
Log-rank (v. control)
|
|
P-value
Wilcoxon (v. control)
|
|
|
|
|
|
|
|
|
|
Control
|
|
104.8
+ 1.43
|
|
12.8
+ 0.79
|
|
|
|
|
|
|
(100-112
|
)
|
(9-16
|
)
|
|
|
|
AEOL
10150
|
|
106.1
+ 1.5
|
|
32.2
+ 2.73
|
|
|
|
|
|
|
(100-115
|
)
|
(15-46
|
)
|
<
0.0001
|
|
0.0002
|
Table 1. Effect of AEOL 10150 on
survival of G93A transgenic mice
Figure 6.
Table 1
and Figure 6 above show that AEOL 10150 treatment resulted in a greater than 2.5
times mean survival interval, compared to control. AEOL 10150-treated
mice were observed to remain mildly disabled until a day or two before
death. In contrast, control mice experienced increased disability
daily.
Dr. Crow
has repeated the ALS preclinical experiment a total of four times, in each case
with similar results. The efficacy of AEOL 10150 in the G93A mouse
model of ALS has also been evaluated by two additional
laboratories. One of these laboratories
verified
an effect of AEOL 10150 in prolonging survival of the G93A mouse, while no
beneficial effect of the drug was identified in the other
laboratory.
In
November 2003, the U.S. Food and Drug Administration (the “FDA”) granted orphan
drug designation for our ALS drug candidate. Orphan drug designation
qualifies a product for possible funding to support clinical trials, study
design assistance from the FDA during development and for financial incentives,
including seven years of marketing exclusivity upon FDA approval.
AEOL
10150 Clinical Development Program
AEOL
10150 has been thoroughly tested for safety, tolerability and pharmacokinetics
with no serious or clinically significant adverse effects
observed. To date, 38 patients have received AEOL 10150 in three
clinical trials designed to test the safety and tolerability of the drug
candidate.
In
September 2005, we completed a multi-center, double-blind, randomized,
placebo-controlled, Phase I clinical trial. This escalating single
dose study was conducted to evaluate the safety, tolerability and
pharmacokinetics of AEOL 10150 administered by twice daily subcutaneous
injections in patients with ALS.
In the
Phase Ia study, 4-5 patients diagnosed with ALS were placed in a dosage cohort
(3 or 4 receiving AEOL 10150 and 1 receiving placebo). Each dose
cohort was evaluated at a separate clinical center. In total, seven
separate cohorts were evaluated in the study, and 25 ALS patients received AEOL
10150. Based upon an analysis of the data, it was concluded that
single doses of AEOL 10150 ranging from 3 mg to 75 mg were safe and well
tolerated. In addition, no serious or clinically significant adverse
clinical events were reported, nor were there any significant laboratory
abnormalities. Based upon extensive cardiovascular monitoring (i.e.,
frequent electrocardiograms and continuous Holter recordings for up to 48 hours
following dosing), there were no compound-related cardiovascular
abnormalities.
The most
frequently reported adverse events in this Phase I clinical trial were injection
site reactions, followed by dizziness and headache. Adverse events
were primarily mild in severity, and approximately one-half of the events were
considered to have a possible relationship to the study
medication. In addition, no clinically meaningful findings were noted
in the safety, laboratory, vital sign, the Unified Parkinson’s Disease Rating
Scale (“UPDRS”), functional ALS, or electro cardiogram (“ECG”)
data. All cohorts exhibited dose-related peak plasma drug
concentrations and consistent disappearance half-lives.
In
October 2006, we completed a multi-center, double-blind, randomized,
placebo-controlled, Phase Ib clinical trial. This multiple dose study
was conducted to evaluate the safety, tolerability and pharmacokinetics of AEOL
10150 administered by subcutaneous injection and infusion pump in patients with
ALS. Under the multiple dose protocol, three groups of six ALS
patients (four receiving AEOL 10150 and two receiving placebo) were enrolled,
based upon patients who meet the El Escorial criteria for Clinically Definite
ALS, Clinically Probable ALS, Clinically Probable-Laboratory Supported ALS, or
Definite Familial-Laboratory Supported ALS (i.e., Clinically Possible ALS with
an identified SOD gene mutation).
The first
two cohorts of the Phase Ib multiple dose study received a fixed daily dose of
AEOL 10150 twice a day by subcutaneous injection. In the first cohort, each
patient received twice daily subcutaneous injections of 40 mg of AEOL 10150 or
placebo, for six consecutive days, followed by a single subcutaneous injection
on the seventh day, for a total of 13 injections. In the second
cohort, each patient received twice daily subcutaneous injections of 60 mg of
AEOL 10150 or placebo, for six consecutive days, followed by a single
subcutaneous injection on the seventh day, for a total of 13
injections.
In
contrast, the third cohort received a weight adjusted dose (i.e. mg per kilogram
of body weight per day) delivered subcutaneously over twenty four hours by
continuous infusion pump. In the third cohort, each patient received AEOL
10150 via continuous infusion pump for six and one half consecutive days for a
total of 2.0 mg per patient kilogram per day. Each patient in all
three cohorts completed the study and follow-up evaluation at 14
days.
The Phase
Ib study was conducted at five academic clinical ALS centers. Male
and female ALS patients, 18 to 70 years of age, who were ambulatory (with the
use of a walker or cane, if needed) and capable of orthostatic blood pressure
assessments were enrolled in the study. Clinical signs/symptoms,
laboratory values, cardiac assessments, and pharmacokinetics (PK) were
performed.
Based
upon an analysis of the data, it was concluded that multiple doses of AEOL 10150
for a period of six and one half consecutive days in the amount of 40 mg per
day, 60 mg per day and 2 mg per kilogram per day were safe and well
tolerated. No serious or clinically significant adverse events were
reported or observed. The most frequent adverse events related to
study compound were injection site observations related to compound
delivery. There were no significant laboratory
abnormalities. Based upon extensive cardiovascular monitoring (i.e.,
frequent electrocardiograms and continuous Holter recordings throughout the six
and one half days of dosing), there were no compound-related cardiovascular
abnormalities.
Pharmacokinetic
findings from the Phase Ib study to data are as follows:
|
·
|
Increases
in Cmax and AUC(0-8) appear to correlate with increases in dose, but the
correlation is not strong.
|
|
·
|
The
mean Cmax for the 40 mg cohort was 1,735 ng/mL; 2,315 ng/mL for the 60 mg
cohort and 1,653 ng/ml for the 2 mg/kg
cohort.
|
|
·
|
There
were probable linear correlations between both Cmax and AUC(0-8) and dose
based on body weight.
|
|
·
|
The
terminal half life (a measurement of the time period for which a compound
stays in the body) as determined from Day 7 data was approximately 8 to 9
hours.
|
|
·
|
Steady-state
occurs within three days of multiple dosing. There was no
evidence for a third longer half life that would be associated with long
term accumulation. Thus, compound accumulation is not expected
beyond the third day with multiple
dosing.
|
|
·
|
From
48 hours to the end of the infusion, the plasma concentrations of AEOL
10150 during the infusion showed little variability, indicating a smoother
delivery of the drug than with twice-daily
injections.
|
In
September 2008, we launched a follow-on Phase I open label compassionate use
multiple dose study of AEOL 10150 in a patient diagnosed with progressive and
debilitating amyotrophic ALS. The study is being conducted at the
University of California, Los Angeles by Martina Wiedau-Pazos, M.D., and is
designed to evaluate the safety and efficacy of AEOL 10150 in an ALS patient
over an extended period of time. The patient will receive a
subcutaneous injection of 75mg of AEOL 10150 two times each day for up to 24
weeks. Efficacy and safety data will be monitored in real-time for
the duration of the study. The primary objective of this study is to
assess the clinical efficacy of AEOL 10150 with respect to the patient’s
baseline assessment of functional status. Secondary objectives
include the assessments of muscle strength, respiratory function, quality of
life and safety.
AEOL
11207
We have
selected AEOL 11207 as our second development candidate based upon results from
data obtained from our Pipeline Initiative discussed below. Because
of the wide-ranging therapeutic opportunities that the compound evidenced in
diverse pre-clinical models of human diseases, we have not yet ascertained what
the most robust therapeutic use of AEOL 11207 might be. However, data
collected to date suggest that AEOL 11207 may be useful as a potential
once-every-other-day oral therapeutic treatment option for central nervous
system (“CNS”) disorders, most likely Parkinson’s disease.
Parkinson’s
disease is a common neurodegenerative disorder, second in occurrence among these
disorders only to Alzheimer’s disease. According to the National
Parkinson Foundation, Parkinson’s affects as many as 1.5 million people in the
United States, with approximately 60,000 new cases diagnosed in the United
States each year. It is estimated by the National Parkinson Foundation
that each patient spends an average of $2,500 a year for
medications. After factoring in office visits, Social Security
payments, nursing home expenditures and lost income, the total cost to the
United States is estimated to be nearly $25 billion annually.
Parkinson’s
specifically involves the progressive destruction of the nerves that secrete
dopamine and control the basal ganglia, an area of the brain involved in the
regulation of movement. Dopamine turnover has been shown to elevate
the levels of ROS in the brain. In addition, a street-drug
contaminant has appeared that can cause parkinsonism in drug
abusers. The compound N-methyl-4-phenyl-1, 2, 3, 6tetrahydropyridine
(“MPTP”) has been identified in underground laboratory preparations of a potent
analog of meperidine (Demerol). MPTP-containing powder, sometimes
sold as a new “synthetic heroin,” can be dissolved in water and administered
intravenously or taken by the intranasal route. MPTP has been
documented to produce irreversible chronic Parkinson symptoms in drug
abusers. Agents such as MPTP overproduce ROS in the basal
ganglia. Therefore, ROS mediated neuronal dysfunction may play a key
role in the development of Parkinson’s disease. Symptoms of this
disease include tremors, rigidity and bradykinesia (i.e., slowness of
movement). In the more advanced stages, it can cause fluctuations in
motor function, sleep problems and various neuro-psychiatric disorders. A
biological hallmark of Parkinson’s disease is a reduction in brain dopamine
levels. Preventing or slowing the destruction of brain cells that
lead to the depletion of dopamine levels in the brain is an important
therapeutic approach for the treatment of this disease.
Data
developed by our scientists and Dr. Manisha Patel at University of Colorado
Health Sciences Center and Department of Medicine, indicate that when
administered orally, AEOL 11207 is greater than 80% bioavailable, meaning that
it is readily absorbed and reaches both the circulatory system and the brain in
sufficient amounts to demonstrate biological
activity. Data developed with AEOL 11207 in a widely used animal
model of Parkinson’s disease (the “MPTP model”) showed that when administered
orally, AEOL 11207 crosses the blood brain barrier and protected dopamine
neurons in a dose-dependent manner. Further data suggest that the
compound has a half life (a measurement of the time period for which a compound
stays in the body) of about 3 days in both the circulatory system and the brain,
and that prior to stopping administration of the compound, the levels of AEOL
11207 in both the circulatory system and brain reach a steady state (a valuable
measurement of when the levels of the drug in the body remain substantially
constant, neither increasing nor decreasing) after 2 days of
dosing. Data have also been developed that indicate that when dosing
of AEOL 11207 is stopped, the compound is excreted from the
body.
For this
and other reasons, we believe that the therapeutic rationale for developing AEOL
11207 as a neuroprotectant, may substantially change the course of therapeutic
treatment options for Parkinson’s disease if AEOL 11207 were to achieve
regulatory approval for commercialization. However, we are unable to
determine at this time that such regulatory approval for AEOL 11207 can be or
will be secured and we will not be able to further develop AEOL 11207 until
funding for this purpose is obtained.
AEOL
11207 is patent-protected and has the same chemical core structure as AEOL
10150. Because of this common structural feature, it is anticipated
that AEOL 11207 will evidence substantially the same safety profile in clinical
evaluations as observed with AEOL 10150, making clinical trial design and
testing of AEOL 11207 more robust and facile. Furthermore, all of the
Aeolus compounds evidence the ability to scavenge and decrease ROS and reactive
nitrogen species (RNS), all of which are implicated in a variety of CNS
diseases.
Aeolus
Pipeline
The
Aeolus Pipeline Initiative is an internal development initiative focused on
advancing several of the most promising catalytic antioxidant compounds from our
proprietary library of compounds. The initial therapeutic focus areas
for the Aeolus Pipeline Initiative are: Parkinson’s disease; Cystic Fibrosis;
Chronic Obstructive Lung Disease; colitis, biodefense/ radioprotection;
tumor suppression/bone marrow transplantation; and stroke. These
therapeutic focus areas were selected based upon preliminary data developed
using our catalytic antioxidant compounds.
In
addition to AEOL 11207, two Aeolus compounds from its Pipeline Initiative, AEOL
11203 and AEOL 11216, have shown very promising results in pre-clinical models
and we believe have the potential to be excellent drug candidates for non-CNS
indications. These compounds are also orally
bioavailable. However at this time, we do not have any plans to
further develop the Aeolus Pipeline compounds until funding for this purpose is
obtained.
AEOL
11203 and AEOL 11216, as with all of the Aeolus compounds, are patent-protected
and have the same chemical core structure as AEOL 10150. Because of
this common structural feature, it is anticipated that the Aeolus compounds that
are selected for clinical evaluation from the Pipeline Initiative will evidence
substantially the same safety profile in clinical evaluations as observed with
AEOL 10150, making clinical trial design and testing of the Aeolus compounds
more robust and facile. Furthermore, all of the Aeolus compounds
evidence the ability to scavenge and decrease ROS and RNS, all of which are
implicated in a variety of central nervous system diseases.
Background
on Antioxidants
Oxygen
Stress and Disease
Oxygen
plays a pivotal role in supporting life by enabling energy stored in food to be
converted to energy that living organisms can use. The ability of
oxygen to participate in key metabolic processes derives from its highly
reactive nature. This reactivity is necessary for life, but also
generates different forms of oxygen that can react harmfully with living
organisms. In the body, a small proportion of the oxygen we consume
is converted to superoxide, a free radical species that gives rise to hydrogen
peroxide, hydroxyl radical, peroxynitrite and various other
oxidants.
Oxygen-derived
free radicals can damage DNA, proteins and lipids resulting in inflammation and
both acute and delayed cell death. The body protects itself from the
harmful effects of free radicals and other oxidants through multiple antioxidant
enzyme systems such as superoxide dismutase (“SOD”). These natural
antioxidants convert the reactive molecules into compounds suitable for normal
metabolism. When too many free radicals are produced for the body’s
normal defenses to convert, “oxidative stress” occurs with a cumulative result
of reduced cellular function and, ultimately, disease.
Data also
suggests that oxygen-derived free radicals are an important factor in the
pathogenesis of a large variety of diseases, including neurological disorders
such as ALS, Parkinson’s disease, Alzheimer’s disease and stroke, and in
non-neurological disorders such as cancer radiation therapy damage, emphysema,
asthma and diabetes.
Antioxidants
as Therapeutics
Because
of the role that oxygen-derived free radicals play in disease, scientists are
actively exploring the possible role of antioxidants as a treatment for related
diseases. Preclinical and clinical studies involving treatment with
SOD, the body’s natural antioxidant enzyme, or more recently, studies involving
over-expression of SOD in transgenic animals, have shown promise of therapeutic
benefit in a broad range of disease therapies. Increased SOD function
improves outcome in animal models of conditions including stroke,
ischemia-reperfusion injury (a temporary cutoff of blood supply to tissue) to
various organs, harmful effects of radiation and chemotherapy for the treatment
of cancer, and in neurological and pulmonary diseases. Clinical
studies with bovine SOD, under the brand Orgotein, or recombinant human SOD in
several conditions including arthritis and protection from limiting side effects
of cancer radiation or chemotherapy treatment, have also shown promise of
benefit. The major
limitations
of enzymatic SOD as a therapeutic are those found with many proteins, most
importantly limited cell penetration and allergic reactions. Allergic
reactions have led to the withdrawal of Orgotein from almost every worldwide
market.
Catalytic
Antioxidants vs. Antioxidant Scavengers
From a
functional perspective, antioxidant therapeutics can be divided into two broad
categories, scavengers and catalysts. Antioxidant scavengers are
compounds where one antioxidant molecule combines with one reactive oxygen
molecule and both are consumed in the reaction. There is a one-to-one
ratio of the antioxidant and the reactive molecule. With catalytic
antioxidants, in contrast, the antioxidant molecule can repeatedly inactivate
reactive oxygen molecules, which could result in multiple reactive oxygen
molecules combining with each antioxidant molecule.
Vitamin
derivatives that are antioxidants are scavengers. The SOD enzymes
produced by the body are catalytic antioxidants. Catalytic
antioxidants are typically much more potent than antioxidant scavengers, in some
instances by a multiple of up to 10,000.
Use of
antioxidant scavengers, such as thiols or vitamin derivatives, has shown promise
of benefit in preclinical and clinical studies. Ethyol, a
thiol-containing antioxidant, is approved for reducing radiation and
chemotherapy toxicity during cancer treatment, and clinical studies have
suggested benefit of other antioxidants in kidney and neurodegenerative
diseases. However, large sustained doses of the compounds are
required as each antioxidant scavenger molecule is consumed by its reaction with
the free radical. Toxicities and the inefficiency of scavengers have
limited the utility of antioxidant scavengers to very specific
circumstances.
Collaborative
and Licensing Arrangements
Duke
Licenses
Through
our wholly owned subsidiary, Aeolus Sciences, Inc., we have obtained exclusive
worldwide rights from Duke University (“Duke”) to products using
antioxidant technology and compounds developed by Dr. Irwin Fridovich and
other scientists at Duke. Further discoveries in the field of
antioxidant research from these scientists’ laboratories at Duke also are
covered by the licenses from Duke. We must pay royalties to Duke on
net product sales during the term of the Duke licenses, and must make payments
upon the occurrence of development milestones. In addition, we are
obligated under the Duke licenses to pay patent filing, prosecution, maintenance
and defense costs. The Duke licenses are terminable by Duke in the
event of breach by us and otherwise expire when the last licensed patent
expires.
National
Jewish Medical and Research Center License
In
November 2000, we obtained an exclusive worldwide license from the National
Jewish Medical and Research Center (the “NJC”) to develop, make, use and
sell products using proprietary information and technology developed under a
previous Sponsored Research Agreement within the field of antioxidant compounds
and related discoveries. We must make milestone payments to the NJC upon
the occurrence of development milestones and pay royalties on net
sales. We are also obligated to pay patent filing, prosecution,
maintenance and defense costs. The NJC agreement is terminable by the
NJC in the event of breach and otherwise expires when the last licensed patent
expires.
Research
and Development Expenditures
Expenditures
for research and development activities related to our continuing operations
were $977,000, $1,381,000, and $3,480,000 during the years ended September 30,
2008, 2007 and 2006, respectively. Research and development expenses
for fiscal 2008 related primarily to the advancement of our lead compound,
AEOL 10150.
Manufacturing
We
currently do not have the capability to manufacture any of our product
candidates on a commercial scale. Assuming the successful development
of one or more of our catalytic antioxidant compounds, we plan to contract with
third parties to manufacture them.
Commercialization
Assuming
successful development and FDA approval of one or more of our compounds, to
successfully commercialize our catalytic antioxidant programs, we must seek
corporate partners with expertise in commercialization or develop this expertise
internally. However, we may not be able to successfully commercialize
our catalytic antioxidant technology, either internally or through collaboration
with others.
Marketing
Our
potential catalytic antioxidant products are being developed for large
therapeutic markets. We believe these markets are best approached by
partnering with established biotechnology or pharmaceutical companies that have
broad sales and marketing capabilities. We are pursuing
collaborations of this type as part of our search for development
partners. However, we may not be able to enter into any marketing
arrangements for any of our products on satisfactory terms or at
all.
Competition
General
Competition
in the pharmaceutical industry is intense and we expect it to
increase. Technological developments in our field of research and
development occur at a rapid rate and we expect competition to intensify as
advances in this field are made. We will be required to continue to
devote substantial resources and efforts to research and development
activities. Our most significant competitors, among others, are fully
integrated pharmaceutical companies and more established biotechnology
companies, which have substantially greater financial, technical, sales,
marketing, and human resources than we do. These companies may
succeed in developing and obtaining regulatory approval for competitive products
more rapidly than we can for our product candidates. In addition,
competitors may develop technologies and products that are, or are perceived as
being, cheaper, safer or more effective than those being developed by us or that
would render our technology obsolete.
We expect
that important competitive factors in our potential product markets will be the
relative speed with which we and other companies can develop products, complete
the clinical testing and approval processes, and supply commercial quantities of
a competitive product to the market. With respect to clinical
testing, competition might result in a scarcity of clinical investigators and
patients available to test our potential products, which could delay
development.
We are
aware of products in research or development by our competitors that address the
diseases and therapies being targeted by us. In addition, there may
be other competitors of whom we are unaware with products which might be more
effective or have fewer side effects than our products and those of our known
competitors. The following discussion is a summary of information
known to us and is not meant to be an exhaustive list of our competitors or
their products or product candidates.
Antioxidants
Several
companies have explored the therapeutic potential of antioxidant compounds in
numerous indications. Historically, most of these companies have
focused on engineered versions of naturally occurring antioxidant enzymes, but
with limited success, perhaps because the large size of these molecules makes
delivery into the cells difficult. Antioxidant drug research
continues at a rapid pace despite previous clinical setbacks.
Countermeasures
against Chemical Threat Agents
Our
biodefense drug candidates face significant competition for U.S. government
funding for both development and procurement of medical countermeasures for
biological, chemical and nuclear threats, diagnostic testing systems and other
emergency preparedness countermeasures. The U.S. federal government has
currently allocated a significant amount of research funding to the development
of countermeasures against bioterrorism. As a result, there are many
drugs candidates under development as a possible countermeasure against chemical
threat agents.
Countermeasures
against Radiation Exposure
Our drug
candidates face significant competition for U.S. government funding for both
development and procurement of medical countermeasures for biological, chemical
and nuclear threats, diagnostic testing systems and other emergency preparedness
countermeasures. The U.S. federal government has currently allocated a
significant amount of research funding to the development of countermeasures
against the effects of radiation exposure. As a result, there are
many drug candidates under development as a possible countermeasure against the
effects of radiation exposure.
Reduction
of Radiation Induced-Injury in Cancer Therapy
There are
currently three drugs approved for the treatment of the side effects of
radiation therapy. Amifostine (Ethyol®) is approved by the U.S. Food
and Drug Administration (“FDA”) as a radioprotector. Amifostine
(Ethyolâ) is
marketed by MedImmune, Inc. for use in reduction of chemotherapy-induced kidney
toxicity associated with repeated administration of cisplatin in patients with
advanced ovarian cancer and radiation-induced xerostomia (damage to the salivary
gland) in patients undergoing post-operative radiation treatment for head and
neck cancer. MedImmune is studying amifostine in other indications of
radiation therapy. KepivanceTM
(palifermin) is marketed by Amgen, Inc. for use in the treatment of
severe oral mucositis (mouth sores) in patients with hematologic (blood) cancers
who are undergoing high-dose chemotherapy followed by bone
transplant. Amgen is also studying Kepivance as an antimucositis
agent in patients with head and neck cancer, non small cell
lung
cancer
and colon cancer. Salagen Tablets (pilocarpine hydrochloride)
(“Salagen”) is marketed by MGI Pharma in the United States as a treatment for
the symptoms of xerostomia induced by radiation therapy in head and neck cancer
patients. In addition, there are many drugs under development to
treat the side effects of radiation therapy.
ALS
Rilutek®
(riluzole), marketed by Sanofi-Aventis SA, is the only commercially approved
treatment for ALS in the United States and the European
Union. Administration of Rilutek prolongs survival of ALS patients by
an average of 60-90 days, but has little or no effect on the progression of
muscle weakness, or quality of life. Rilutek was approved in the
United States in 1995, and in 2001 in the European Union. However,
there are at least twenty drug candidates reported to be in clinical development
for the treatment of ALS.
In
addition, ALS belongs to a family of diseases called neurodegenerative diseases,
which includes Alzheimer’s, Parkinson’s and Huntington’s disease. Due
to similarities between these diseases, a new treatment for one ailment
potentially could be useful for treating others. There are many
companies that are producing and developing drugs used to treat
neurodegenerative diseases other than ALS.
Patents
and Proprietary Rights
We
currently license rights to our potential products from third
parties. We generally seek patent protection in the United States and
other jurisdictions for the potential products and proprietary technology
licensed from these third parties. The process for preparing and
prosecuting patents is lengthy, uncertain and costly. Patents may not
issue on any of the pending patent applications owned by us or licensed by us
from third parties. Even if patents issue, the claims allowed might
not be sufficiently broad to protect our technology or provide us protection
against competitive products or otherwise be commercially
valuable. Patents issued to or licensed by us could be challenged,
invalidated, infringed, circumvented or held unenforceable. Even if
we successfully defend our patents for our products, the costs of defense can be
significant.
As of
December 10, 2008, our catalytic antioxidant small molecule technology base is
described in eleven issued United States patents and six United States
pending patent applications. These patents and patent applications
belong in whole or in part to Duke or the NJC and are licensed to
us. These patents and patent applications cover soluble manganic
porphyrins as antioxidant molecules as well as targeted compounds obtained by
coupling such antioxidant compounds to molecules that bind to specific
extracellular elements. The pending U.S. patent applications and
issued U.S. patents include composition of matter claims and method claims for
several series of compounds. Corresponding international patent
applications have been filed, 64 of which have issued as of December 10,
2008.
In
addition to patent protection, we rely upon trade secrets, proprietary know-how
and technological advances that we seek to protect in part through
confidentiality agreements with our collaborative partners, employees and
consultants. Our employees and consultants are required to enter into
agreements providing for confidentiality and the assignment of rights to
inventions made by them while in our service. We also enter into
non-disclosure agreements to protect our confidential information furnished to
third parties for research and other purposes.
Government
Regulation
Our
research and development activities and the manufacturing and marketing of our
future products are subject to regulation by numerous governmental agencies in
the United States and in other countries. The FDA and comparable
agencies in other countries impose mandatory procedures and standards for the
conduct of clinical trials and the production and marketing of products for
diagnostic and human therapeutic use. Before obtaining regulatory
approvals for the commercial sale of any of our products under development, we
must demonstrate through preclinical studies and clinical trials that the
product is safe and efficacious for use in each target
indication. The results from preclinical studies and early clinical
trials might not be predictive of results that will be obtained in large-scale
testing. Our clinical trials might not successfully demonstrate the
safety and efficacy of any products or result in marketable
products.
The
United States system of drug approvals is considered to be the most rigorous in
the world. It takes an average of 8.5 years for a drug candidate to
move through the clinical and approval phases in the United States according to
a November 2005 study by the Tufts Center for the Study of Drug
Development. Only five in 5,000 drug candidates that enter
preclinical testing make it to human testing and only one of those five is
approved for commercialization. On average it costs a company $897
million to get one new drug candidate from the laboratory to United States
patients according to a May 2003 report by Tufts Center for the Study
of Drug Development. A November 2006 study by Tufts Center for
the Study of Drug Development reported that the average cost of developing a new
biotechnology product was $1.2 billion and took on average slightly more than
eight years to be approved by the FDA.
The steps
required by the FDA before new drug products may be marketed in the United
States include:
|
·
|
completion
of preclinical studies;
|
|
·
|
the
submission to the FDA of a request for authorization to conduct clinical
trials on an investigational new drug (an “IND”), which must become
effective before clinical trials may
commence;
|
|
·
|
adequate
and well-controlled Phase I clinical trials which typically involves
normal, healthy volunteers. The test study a drug candidate’s
safety profile, including the safe dosage range. The studies
also determine how a drug is absorbed, distributed, metabolized and
excreted as well as the duration of its
action;
|
|
·
|
adequate
and well-controlled Phase II clinical trials which typically
involve treating patients with the targeted disease with the drug
candidate to assess a drug’s
effectiveness;
|
|
·
|
adequate
and well-controlled Phase III clinical trials involving a larger
population of patients with the targeted disease are treated with the drug
candidate to confirm efficacy of the drug candidate in the treatment of
the targeted indication and to identify adverse
events;
|
|
·
|
submission
to the FDA of an NDA; and
|
|
·
|
review
and approval of the NDA by the FDA before the product may be shipped or
sold commercially.
|
In
addition to obtaining FDA approval for each product, each product manufacturing
establishment must be registered with the FDA and undergo an inspection prior to
the approval of an NDA. Each manufacturing facility and its quality
control and manufacturing procedures must also conform and adhere at all times
to the FDA’s current good manufacturing practices (“cGMP”)
regulations. In addition to preapproval inspections, the FDA and
other government agencies regularly inspect manufacturing facilities for
compliance with these requirements. Manufacturers must expend
substantial time, money and effort in the area of production and quality control
to ensure full technical compliance with these standards.
Preclinical
testing includes laboratory evaluation and characterization of the safety and
efficacy of a drug and its formulation. Preclinical testing results
are submitted to the FDA as a part of an IND which must become effective prior
to commencement of clinical trials. Clinical trials are typically
conducted in three sequential phases following submission of an IND. Phase I
represents the initial administration of the drug to a small group of humans,
either patients or healthy volunteers, typically to test for safety (adverse
effects), dosage tolerance, absorption, distribution, metabolism, excretion and
clinical pharmacology, and, if possible, to gain early evidence of
effectiveness. Phase II involves studies in a small sample of the
actual intended patient population to assess the efficacy of the drug for a
specific indication, to determine dose tolerance and the optimal dose range and
to gather additional information relating to safety and potential adverse
effects. Once an investigational drug is found to have some efficacy
and an acceptable safety profile in the targeted patient population, Phase III
studies are initiated to further establish clinical safety and efficacy of the
therapy in a broader sample of the general patient population, in order to
determine the overall risk-benefit ratio of the drug and to provide an adequate
basis for any physician labeling. During all clinical studies, we
must adhere to good clinical practice (“GCP”) standards. The results
of the research and product development, manufacturing, preclinical studies,
clinical studies and related information are submitted in an NDA to the
FDA.
The
process of completing clinical testing and obtaining FDA approval for a new drug
is likely to take a number of years and require the expenditure of substantial
resources. If an application is submitted, there can be no assurance
that the FDA will review and approve the NDA. Even after initial FDA
approval has been obtained, further studies, including post-market studies,
might be required to provide additional data on safety and will be required to
gain approval for the use of a product as a treatment for clinical indications
other than those for which the product was initially tested and
approved. Also, the FDA will require post-market reporting and might
require surveillance programs to monitor the side effects of the
drug. Results of post-marketing programs might limit or expand the
further marketing of the products. Further, if there are any
modifications to the drug, including changes in indication, manufacturing
process, labeling or a change in manufacturing facility, an NDA supplement might
be required to be submitted to the FDA.
The rate
of completion of any clinical trials will be dependent upon, among other
factors, the rate of patient enrollment. Patient enrollment is a
function of many factors, including the size of the patient population, the
nature of the trial, the availability of alternative therapies and drugs, the
proximity of patients to clinical sites and the eligibility criteria for the
study. Delays in planned patient enrollment might result in increased
costs and delays, which could have a material adverse effect on us.
Failure
to comply with applicable FDA requirements may result in a number of
consequences that could materially and adversely affect us. Failure
to adhere to approved trial standards and GCPs in conducting clinical trials
could cause the FDA to place a clinical hold on one or more studies which would
delay research and data collection necessary for product
approval. Noncompliance with GCPs could also have a negative impact
on the FDA’s evaluation of an NDA. Failure to adhere to GMPs and
other applicable requirements could result in FDA enforcement action and in
civil and criminal sanctions, including but not limited to fines, seizure of
product, refusal of the FDA to approve product approval applications, withdrawal
of approved applications, and prosecution.
Whether
or not FDA approval has been obtained, approval of a product by regulatory
authorities in foreign countries must be obtained prior to the commencement of
marketing of the product in those countries. The requirements
governing the conduct of clinical trials and product approvals vary widely from
country to country, and the time required for approval might be longer or
shorter than that required for FDA approval. Although there are some
procedures for unified filings for some European countries, in general, each
country at this time has its own procedures and requirements. There
can be no assurance that any foreign approvals would be obtained.
In
addition to the regulatory framework for product approvals, we and our
collaborative partners must comply with laws and regulations regarding
occupational safety, laboratory practices, the use, handling and disposition of
radioactive materials, environmental protection and hazardous substance control,
and other local, state, federal and foreign regulation. The impact of
such regulation upon us cannot be predicted and could be material and
adverse.
CPEC,
LLC
We were
previously developing bucindolol for the treatment of heart failure, but
development was discontinued in 1999. Commercial rights to bucindolol
are owned by CPEC, LLC, a limited liability company, of which we own 35% and
Indevus Pharmaceuticals, Inc. owns 65%.
In July
1999, the Department of Veterans Affairs and the National Heart, Lung, and Blood
Institute, a division of the NIH, terminated the Phase III heart failure study
of bucindolol earlier than scheduled, based on an interim analysis that revealed
a reduction in mortality in subpopulations that had been reported in other
trials and who constituted the majority of patients in the trial, but no
efficacy in some other subpopulations that had not been previously investigated
in beta-blocker heart failure trials. As a result, we discontinued development
of bucindolol for heart failure in 1999.
ARCA
Biopharma, Inc. (“ARCA”) of Broomfield, Colorado, and its academic
collaborators, have reexamined this clinical trial data and have identified a
genetic marker that highly correlates with patients who did not respond to
bucindolol. ARCA believes that bucindolol’s unique pharmacology is
suitable for therapy of most heart failure patients who do not exhibit this
genetic marker, in other pharmacogenetically-identified subpopulations that are
ideally suited for bucindolol’s novel therapeutic action, and for the treatment
of ischemia in the setting of left ventricular dysfunction. In
October 2003, CPEC outlicensed bucindolol to ARCA. Terms of the
license call for future royalty and milestone payments to CPEC upon the
development and commercialization of bucindolol.
During
fiscal 2006, CPEC agreed to modify the license agreement between CPEC and ARCA
and received 400,000 shares of ARCA common stock as consideration for the
amendment. In addition, during fiscal 2006, CPEC received a milestone
payment of $1,000,000 as a result of ARCA completing a financing.
During
fiscal 2008, CPEC received a milestone payment from ARCA of
$500,000. The milestone payment was triggered by the acceptance by
the FDA of a New Drug Application for bucindolol. If approved by the
FDA, bucindolol could become the first genetically targeted cardiovascular
therapy. Future milestone payments and royalty payments to CPEC and
Aeolus, if any, while provided for under the agreement between CPEC and ARCA,
cannot be assured or guaranteed. Also as a result of the filing of
the New Drug Application with the US Food and Drug Administration, we are
obligated to pay $412,500 in the form of cash or stock at our election to the
majority owner of CPEC who will in turn pay the original licensors of bucindolol
per the terms of the 1994 Purchase Agreement of CPEC.. The obligation
is included in our financial statements under the heading “Accounts
Payable.”
ARCA
recently announced that it will merge with Nuvelo Inc., a biopharmaceutical
company, in early 2009. Under the disclosed terms of the merger
agreement between ARCA and Nuvelo Inc., ARCA’s shareholders will hold two-thirds
of the combined entity’s stock as of immediately following the
merger.
Employees
At
December 10, 2008, we had one employee, John L. McManus, our President and Chief
Executive Officer. Mr. McManus is not represented by a labor
union. Each of our other executive officers and service providers are
consultants.
Our
executive officers and their ages as of December 10, 2008 were as
follows:
|
|
|
|
|
Name
|
|
Age
|
|
Position(s)
|
|
|
|
|
|
John
L. McManus
|
|
44
|
|
President
and Chief Executive Officer
|
Brian
J. Day, Ph.D.
|
|
48
|
|
Chief
Scientific Officer
|
Michael
P. McManus
|
|
39
|
|
Chief
Financial Officer, Treasurer and
Secretary
|
John L. McManus. Mr. McManus
began as a consultant to the Company in June 2005 as President. He
became employed as our President and Chief Operating Officer in July 2006 and
was appointed President and Chief Executive Officer in March
2007. Mr. McManus, who received his degree in business
administration from the University of Southern California in 1986, is the
founder and president of McManus Financial Consultants, Inc. (“MFC”), which
provides strategic, financial and investor relations advice to senior
managements and boards of directors of public companies, including advice on
mergers and acquisitions. These companies have a combined value of
over $25 billion. He has served as president of MFC since
1997. In addition, Mr. McManus previously served as Vice President,
Finance and Strategic Planning to Spectrum Pharmaceuticals, Inc. where he had
primary responsibility for restructuring Spectrum’s operations and finances,
including the design of strategic and financial plans to enhance Spectrum’s
corporate focus, and leading the successful implementation of these
plans. The implementation of these plans led to an increase in
Spectrum’s market value from $1 million to more than $125 million at the time of
Mr. McManus’ departure.
Brian J. Day, Ph.D. Dr. Day
is a part-time consultant and was appointed Chief Scientific Officer of Aeolus
in September 2004. Dr. Day has extensive training in both
pharmacology and toxicology with over 14 years experience. Since 1994
he has helped guide the design and synthesis of metalloporphyrins and has
discovered a number of their novel activities in biological
systems. Dr. Day has authored over 70 original scientific
publications and served as a consultant to biotechnology companies for over 10
years. He is an active member of a number of scientific societies
including the American Chemical Society, Society for Free Radicals in Biology
and Medicine, and Society of Toxicology, where he served on the Board of
Publications. Dr. Day has been at the NJC since 1997 and currently is
a Professor in the Environmental and Occupational Health Sciences
Division. He is one of the scientific co-founders of Aeolus and an
inventor on a majority of the catalytic antioxidant program’s
patents.
Michael P.
McManus. Mr. McManus began as a consultant to the Company in
June 2005, serving as Chief Accounting Officer, Treasurer and
Secretary. In July 2006, Mr. McManus was appointed Chief Financial
Officer, Treasurer and Secretary. Mr. McManus has served as the
Executive Vice President of MFC since 1995. MFC is a leading provider
of financial, management and investor relations consulting and support services
to publicly traded companies. From 2001 to 2003, Mr. McManus also
served as Controller and Principal Accounting Officer of Spectrum
Pharmaceuticals, Inc., where he was responsible for restructuring Spectrum’s
accounting and administration functions. Prior to joining MFC, from
1991 to 1995, he worked at Price Waterhouse LLP (now PricewaterhouseCoopers LLP)
as an audit manager for healthcare and financial services
companies. Mr. McManus is a retired Certified Public Accountant and
holds a B.S. in Accounting from the University of Southern
California.
You
should carefully consider the following information about risks described below,
together with the other information contained in this annual report on
Form 10-K and in our other filings with the SEC, before you decide to buy or
maintain an investment in our common stock. We believe the risks
described below are the risks that are material to us as of the date of this
annual report. If any of the following risks actually occur, our
business, financial condition, results of operations and future growth prospects
would likely be materially and adversely affected. In these
circumstances, the market price of our common stock could decline, and you may
lose all or part of the money you paid to buy our capital stock.
Risks
Related to Our Business
We
have operated at a loss and will likely continue to operate at a loss for the
foreseeable future.
We have
incurred significant losses over the past five years, including net losses of
$3.0 million, $3.0 million and $5.8 million for the years ended September 30,
2008, 2007 and 2006, respectively, and we had an accumulated deficit of
approximately $158.9 million as of September 30, 2008. Our operating
losses have been due primarily to our expenditures for research and development
on our product candidates and for general and administrative expenses and our
lack of significant revenues. We are likely to continue to incur
operating losses until such time, if ever, that we generate significant
recurring revenues. We anticipate it will take a minimum of two years
(and possibly longer) for us to generate recurring revenues, since we expect
that it will take at least that long before the development of any of our
licensed or other current potential products is completed, marketing approvals
are obtained from the FDA and commercial sales of any of these products can
begin.
We
need substantial additional funding to continue our operations and may be unable
to raise capital when needed, or at all, which would force us to delay, curtail
or eliminate our clinical programs and our product development
programs.
We need
to raise substantial additional capital to fund our operations and clinical
trials and continue our research and development. In addition, we may
need to raise substantial additional capital to enforce our proprietary rights,
defend, in litigation or otherwise, any claims that we infringe third party
patents or other intellectual property rights; and commercialize any of our
products that may be approved by the FDA or any international regulatory
authority.
As of
September 30, 2008, we had cash of approximately $399,000. We expect
to use these funds, including any additional
funds
received pursuant to the issuance of additional Senior Convertible Notes and the
exercise of outstanding warrants to purchase our capital stock, to continue the
development of our product candidates, to expand the development of our drug
pipeline and for working capital.
We
believe we have adequate financial resources to fund our current operations
through the second quarter of fiscal year 2009. However, in order to
fund on-going cash requirements beyond that point, or to further accelerate or
expand our programs, we will need to raise additional funds. We are
considering strategic and financial options available to us, including public or
private equity offerings, debt financings and collaboration
arrangements. If we raise additional funds by issuing securities, our
stockholders will experience dilution of their ownership
interest. Debt financings, if available, may involve restrictive
covenants and require significant interest payments. If we do not
receive additional financing to fund our operations beyond the second quarter of
fiscal 2009, we would have to discontinue some or all of our activities, merge
with or sell some or all of our assets to another company, or cease operations
entirely, and our stockholders might lose all or part of their
investments.
In
addition, if our catalytic antioxidant program shows scientific progress, we
will need significant additional funds to move therapies through the preclinical
stages of development and clinical trials. If we are unable to raise
the amount of capital necessary to complete development and reach
commercialization of any of our catalytic antioxidant products, we will need to
delay or cease development of one or more of these products or partner with
another company for the development and commercialization of these
products.
Our
independent registered public accounting firm has expressed substantial doubt
about our ability to continue as a going concern.
In its
audit opinion issued in connection with our consolidated balance sheets as of
September 30, 2008 and 2007 and our consolidated statements of operations,
stockholder’s equity and cash flows for the years ended September 30, 2008, 2007
and 2006, our independent registered public accounting firm has expressed
substantial doubt about our ability to continue as a going concern given our
recurring net losses, negative cash flows from operations and working capital
deficiency. The accompanying financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of
business. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts of liabilities that might be necessary should we be unable to continue
in existence.
We
have a limited operating history, have a history of operating losses, expect to
continue to incur substantial losses and may never become
profitable.
We have a
limited operating history and no products approved for commercialization in the
United States or abroad. Our product candidates are still being
developed, and all but our AEOL 10150 candidate are still in early stages of
development. Our product candidates will require significant
additional development, clinical trials, regulatory clearances or approvals by
the FDA and additional investment before they can be commercialized in the
United States.
As of
September 30, 2008, we had an accumulated deficit of $158.9 million from our
research, development and other activities. We have not generated
material revenues from product sales and do not expect to generate product
revenues sufficient to support us for at least several more years.
Our
research and development (“R&D”) activities are at an early stage and
therefore might never result in viable products.
Our
catalytic antioxidant program is in the early stages of development, involves
unproven technology, requires significant further R&D and regulatory
approvals and is subject to the risks of failure inherent in the development of
products or therapeutic procedures based on innovative
technologies. These risks include the possibilities
that:
|
·
|
any
or all of these proposed products or procedures are found to be unsafe or
ineffective or otherwise fail to receive necessary regulatory
approvals;
|
· the
proposed products or procedures are not economical to market or do not achieve
broad market acceptance;
· third
parties hold proprietary rights that preclude us from marketing the proposed
products or procedures; and
· third
parties market a superior or equivalent product.
Further,
the timeframe for commercialization of any product is long and uncertain because
of the extended testing and regulatory review process required before marketing
approval can be obtained. There can be no assurance that we will be
able to successfully develop or market any of our proposed products or
procedures.
If
our products are not successfully developed and eventually approved by the FDA,
we may be forced to reduce or terminate our operations.
All of
our product candidates are at various stages of development and must be approved
by the FDA or similar foreign
governmental
agencies before they can be marketed. The process for obtaining FDA
approval is both time-consuming and costly, with no certainty of a successful
outcome. This process typically requires extensive preclinical and
clinical testing, which may take longer or cost more than we anticipate, and may
prove unsuccessful due to numerous factors. Product candidates that
may appear to be promising at early stages of development may not successfully
reach the market for a number of reasons. The results of preclinical
and initial clinical testing of these product candidates may not necessarily
indicate the results that will be obtained from later or more extensive
testing. Companies in the pharmaceutical and biotechnology industries
have suffered significant setbacks in advanced clinical trials, even after
obtaining promising results in earlier trials.
Numerous
factors could affect the timing, cost or outcome of our drug development
efforts, including the following:
· Difficulty
in securing centers to conduct trials;
· Difficulty
in enrolling patients in conformity with required protocols or projected
timelines;
· Unexpected
adverse reactions by patients in trials;
· Difficulty
in obtaining clinical supplies of the product;
· Changes
in the FDA’s requirements for our testing during the course of that
testing;
· Inability
to generate statistically significant data confirming the efficacy of the
product being tested;
· Modification
of the drug during testing; and
· Reallocation
of our limited financial and other resources to other clinical
programs.
It is
possible that none of the products we develop will obtain the regulatory
approvals necessary for us to begin commercializing them. The time
required to obtain FDA and other approvals is unpredictable but often can take
years following the commencement of clinical trials, depending upon the nature
of the drug candidate. Any analysis we perform of data from clinical
activities is subject to confirmation and interpretation by regulatory
authorities, which could delay, limit or prevent regulatory
approval. Any delay or failure in obtaining required approvals could
have a material adverse effect on our ability to generate revenues from the
particular drug candidate and we may not have the financial resources to
continue to develop our product candidates and, as a result, may have to
terminate our operations.
If
we do not reach the market with our products before our competitors offer
products for the same or similar uses, or if we are not effective in marketing
our products, our revenues from product sales, if any, will be
reduced.
We face
intense competition in our development activities. Many of our
competitors are fully integrated pharmaceutical companies and more established
biotechnology companies, which have substantially greater financial, technical,
sales and marketing and human resources than we do. These companies
might succeed in obtaining regulatory approval for competitive products more
rapidly than we can for our products. In addition, competitors might
develop technologies and products that are less expensive and perceived to be
safer or more effective than those being developed by us, which could impair our
product development and render our technology obsolete.
We
are and expect to remain dependent on collaborations with third parties for the
development of new products, and adverse events involving these collaborations
could prevent us from developing and commercializing our product candidates and
achieving profitability.
We
currently license from third parties, and do not own, rights under patents and
certain related intellectual property for the development of our product
candidates. In addition, we expect to enter into agreements with
third parties both to license rights to our product candidates and to develop
and commercialize new products. We might not be able to enter into or
maintain these agreements on terms favorable to us, if at
all. Further if any of our current licenses were to expire or
terminate, our business, prospects, financial condition and results of
operations could be materially and adversely affected.
Our
research and development activities rely on technology licensed from third
parties, and termination of any of those licenses would result in loss of
significant rights to develop and market our products, which would impair our
business, prospects, financial condition and results of operations.
We have
exclusive worldwide rights to our antioxidant small molecule technology through
license agreements with Duke University and the National Jewish Medical and
Research Center. Each license generally may be terminated by the
licensor if we fail to perform our obligations under the agreement, including
obligations to develop the compounds and technologies under
license. If terminated, we would lose the right to develop the
products, which could adversely affect our business, prospects, financial
condition and results of operations. The license agreements also
generally require us to meet specified milestones or show reasonable diligence
in development of the technology. If disputes arise over the
definition of these requirements or whether we have satisfied the requirements
in a timely manner, or if any other obligations in the license agreements are
disputed by the other party, the other party could terminate the agreement, and
we could lose our rights to develop the licensed technology.
If new
technology is developed from these licenses, we may be required to negotiate
certain key financial and other terms, such as royalty payments, for the
licensing of this future technology with these research institutions, and it
might not be possible to obtain any such license on terms that are satisfactory
to us, or at all.
We
now rely, and will continue to rely, heavily on third parties for product and
clinical development, manufacturing, marketing and distribution of our
products.
We
currently depend heavily and will depend heavily in the future on third parties
for support in product development, clinical development, manufacturing,
marketing and distribution of our products. The termination of some
or all of our existing collaborative arrangements, or our inability to establish
and maintain collaborative arrangements, could have a material adverse effect on
our ability to continue or complete clinical development of our
products.
We rely
on contract clinical research organizations (“CROs”) for various aspects of our
clinical development activities including clinical trial monitoring, data
collection and data management. As a result, we have had and continue
to have less control over the conduct of clinical trials, the timing and
completion of the trials, the required reporting of adverse events and the
management of data developed through the trial than would be the case if we were
relying entirely upon our own staff. Although we rely on CROs to
conduct our clinical trials, we are responsible for confirming that each of our
clinical trials is conducted in accordance with the investigational plan and
protocol. Moreover, the FDA and foreign regulatory agencies require
us to comply with good clinical practices (“GCPs”) for conducting, recording and
reporting the results of clinical trials to assure that the data and results are
credible and accurate and that the trial participants are adequately
protected. Our reliance on third parties does not relieve us of these
responsibilities and requirements.
The third
parties on which we rely may have staffing difficulties, may undergo changes in
priorities or may become financially distressed, adversely affecting their
willingness or ability to conduct our trials. We may experience
unexpected cost increases that are beyond our control. Any failure of
such CROs to successfully accomplish clinical trial monitoring, data collection
and data management and the other services they provide for us in a timely
manner and in compliance with regulatory requirements could have a material
adverse effect on our ability to complete clinical development of our products
and obtain regulatory approval. Problems with the timeliness or
quality of the work of a CRO may lead us to seek to terminate the relationship
and use an alternate service provider. However, making such changes
may be costly and would likely delay our trials, and contractual restrictions
may make such a change difficult or impossible. Additionally, it may
be difficult to find a replacement organization that can conduct our trials in
an acceptable manner and at an acceptable cost.
The
current disruptions in the financial markets could affect our ability to obtain
additional debt financing on favorable terms (or at all) and have other adverse
effects on us.
The
United States credit markets have recently experienced historic dislocations and
liquidity disruptions which have caused financing to be unavailable in many
cases and even if available caused spreads on prospective debt financings to
widen considerably. These circumstances have materially impacted
liquidity in the debt markets, making financing terms for borrowers able to find
financing less attractive, and in many cases have resulted in the unavailability
of certain types of debt financing. Continued uncertainty in the
credit markets may negatively impact our ability to access additional debt
financing on favorable terms or at all. In addition, Federal
legislation to deal with the current disruptions in the financial markets could
have an adverse affect on our financial condition and results of
operations.
We
will need to enter into collaborative arrangements for the manufacturing and
marketing of our product candidates, or we will have to develop the expertise,
obtain the additional capital and invest the resources to perform those
functions internally.
We do not
have the staff or facilities to manufacture or market any of the product
candidates being developed in our catalytic antioxidant program. As a
result, we will need to enter into collaborative arrangements to develop,
commercialize, manufacture and market products that we expect to emerge from our
catalytic antioxidant program, or develop the expertise within the
company. We might not be successful in entering into such third party
arrangements on terms acceptable to us, if at all. If we are unable
to obtain or retain third-party manufacturing or marketing on acceptable terms,
we may be delayed in our ability to commercialize products, which could have a
material adverse effect on our business, prospects, financial condition and
results of operations. Substantial additional funds and personnel
would be required if we needed to establish our own manufacturing or marketing
operations. We may not be able to obtain adequate funding or
establish these capabilities in a cost-effective or timely manner, which could
have a material adverse effect on our business, prospects, financial condition
and results of operations.
A
failure to obtain or maintain patent and other intellectual property rights
would allow others to develop and sell products similar to ours, which could
impair our business, prospects, financial condition and results of
operations.
The
success of our business depends, in part, on our ability to establish and
maintain adequate protection for our intellectual property, whether owned by us
or licensed from third parties. We rely primarily on patents in the
United States and in other key markets to protect our intellectual
property. If we do not have adequate patent protection, other
companies could develop and sell products that compete directly with ours,
without incurring any liability to us. Patent prosecution,
maintenance and enforcement on a global basis are time-consuming and expensive,
and many of these costs must be incurred before we know whether a product
covered by the claims can be successfully developed or
marketed.
Even if
we expend considerable time and money on patent prosecution, a patent
application may never issue as a patent. We can never be certain that
we were the first to invent the particular technology or that we were the first
to file a patent application for the technology because patent applications in
the United States and elsewhere are not typically published for public
inspection for at least 18 months from the date when they are
filed. It is always possible that a competitor is pursuing a patent
for the same invention in the United States as we are and has an earlier
invention date. Outside the United States in some jurisdictions,
priority of invention is determined by the earliest effective filing date, not
the date of invention. Consequently, if a third party pursues the
same invention and has an earlier filing date, patent protection outside the
United States would be unavailable to us. Also, outside the United
States, an earlier date of invention cannot overcome a date of publication that
precedes the earliest effective filing date. Accordingly, the
patenting of our proposed products would be precluded outside the United States
if a prior publication anticipates the claims of a pending application, even if
the date of publication is within a year of the filing of the pending
application.
Even if
patents issue, the patent claims allowed might not be sufficiently broad to
offer adequate protection for our technology against competitive
products. Patent protection differs from country to country, giving
rise to increased competition from other products in countries where patent
coverage is either unavailable, weak or not adequately enforced, if enforced at
all. Once a patent issues, we still face the risk that others will
try to design around our patent or will try to challenge the validity of the
patent. The cost of defending against a challenge to one or more of
our patents could be substantial and even if we prevailed, there could be no
assurance that we would recover damages.
If
a third party were to bring an infringement claim against us, we would incur
significant costs in our defense; if the claim were successful, we would need to
develop non-infringing technology or obtain a license from the successful patent
holder, if available.
Our
business also depends on our ability to develop and market products without
infringing on the proprietary rights of others or being in breach of our license
agreements. The pharmaceutical industry is characterized by a large
number of patents, patent filings and frequent and protracted litigation
regarding patent and other intellectual property rights. Many
companies have numerous patents that protect their intellectual property
rights. Third parties might assert infringement claims against us
with respect to our product candidates and future products. If
litigation were required to determine the validity of a third party’s claims, we
could be required to spend significant time and financial resources, which could
distract our management and prevent us from furthering our core business
activities, regardless of the outcome. If we did not prevail in the
litigation, we could be required to pay damages, license a third party’s
technology, which may not be possible on terms acceptable to us, or at all, or
discontinue our own activities and develop non-infringing technology, any of
which could prevent or significantly delay pursuit of our development
activities.
Protection
of trade secret and confidential information is difficult, and loss of
confidentiality could eliminate our competitive advantage.
In
addition to patent protection, we rely on trade secrets, proprietary know-how
and confidential information to protect our technology. We use
confidentiality agreements with our employees, consultants and collaborators to
maintain the proprietary nature of this technology. However,
confidentiality agreements can be breached by the other party, which would make
our trade secrets and proprietary know-how legally available for use by
others. There is generally no adequate remedy for breach of
confidentiality obligations. In addition, the competitive advantage
afforded by trade secrets is limited because a third party can independently
discover or develop something identical to our own trade secrets or know-how,
without incurring any liability to us.
If our
current or former employees, consultants or collaborators were to use
information improperly obtained from others (even if unintentional), we may be
subject to claims as to ownership and rights in any resulting know-how or
inventions.
If
we cannot retain or hire qualified personnel or maintain our collaborations, our
programs could be delayed and may be discontinued.
As of
December 10, 2008, we had one full-time employee, our President and Chief
Executive Officer. We utilize consultants to assist with our
operations and are highly dependent on the services of our executive
officers. We also are dependent on our collaborators for our research
and development activities. The loss of key executive officers or
collaborators could delay progress in our research and development activities or
result in their termination entirely.
We
believe that our future success will depend in large part upon our ability to
attract and retain highly skilled scientific and managerial
personnel. We face intense competition for these kinds of personnel
from other companies, research and academic institutions, government entities
and other organizations. If we fail to identify, attract and retain
personnel, we may be unable to continue the development of our product
candidates, which would have a material adverse effect on our business,
prospects, financial condition and results of operations.
We
face the risk of product liability claims which could exceed our insurance
coverage and deplete our cash resources.
The
pharmaceutical and biotechnology industries expose us to the risk of product
liability claims alleging that use of our product candidates caused an injury or
harm. These claims can arise at any point in the development,
testing, manufacture, marketing or sale of pharmaceutical products and may be
made directly by patients involved in clinical trials of our products, by
consumers or healthcare providers or by organizations selling our
products. Product liability claims can be expensive to defend, even
if the product did not actually cause the alleged injury or harm.
Insurance
covering product liability claims becomes increasingly expensive as a product
candidate moves through the development pipeline to
commercialization. We have limited product liability insurance
coverage for our clinical trials and this coverage may not be sufficient to
cover us against some or all potential losses due to liability, if any, or to
the expenses associated with defending against liability claims. A
product liability claim successfully asserted against us could exceed our
insurance coverage, require us to use our own cash resources and have a material
adverse effect on our business, financial condition and results of
operations.
In
addition, some of our licensing and other agreements with third parties require
or might require us to maintain product liability insurance. If we
cannot maintain acceptable amounts of coverage on commercially reasonable terms
in accordance with the terms set forth in these agreements, the corresponding
agreements would be subject to termination.
The
costs of compliance with environmental, safety and similar laws could increase
our cost of doing business or subject us to liability in the event of
noncompliance.
Our
business is subject to regulation under state and federal laws regarding
occupational safety, laboratory practices, environmental protection and the use,
generation, manufacture, storage and disposal of hazardous
substances. We may be required to incur significant costs in the
future to comply with existing or future environmental and health and safety
regulations. Our research activities involve the use of hazardous
materials, chemicals and radioactive compounds. Although we believe
that our procedures for handling such materials comply with applicable state and
federal regulations, we cannot eliminate the risk of contamination or injury
from these materials. In the event of contamination, we could be
liable for any resulting damages, which could have a material adverse effect on
our business, financial condition and results of operations.
We
are subject to intense competition that could materially impact our operating
results.
We may be
unable to compete successfully against our current or future
competitors. The pharmaceutical, biopharmaceutical and biotechnology
industry is characterized by intense competition and rapid and significant
technological advancements. Many companies, research institutions and
universities are working in a number of areas similar to our primary fields of
interest to develop new products. There also is intense competition
among companies seeking to acquire products that already are being
marketed. Many of the companies with which we compete have or are
likely to have substantially greater research and product development
capabilities and financial, technical, scientific, manufacturing, marketing,
distribution and other resources than at least some of our present or future
strategic partners or licensees.
As a
result, these competitors may:
· Succeed
in developing competitive products sooner than us or our strategic partners or
licensees;
· Obtain
FDA and other regulatory approvals for their products before approval of any of
our products;
· Obtain
patents that block or otherwise inhibit the development and commercialization of
our product candidates;
· Develop
products that are safer or more effective than our products;
· Devote
greater resources to marketing or selling their products;
· Introduce
or adapt more quickly to new technologies or scientific advances;
· Introduce
products that render our products obsolete;
· Withstand
price competition more successfully than us or our strategic partners or
licensees;
· Negotiate
third-party strategic alliances or licensing arrangements more effectively;
or
· Take
advantage of other opportunities more readily.
Currently,
there are three drugs approved as radiation protection
agents. Amifostine (Ethyol®) is marketed by MedImmune, Inc. for use
in reduction of chemotherapy-induced kidney toxicity and radiation-induced
xerostomia (damage to the salivary gland). KepivanceTM (palifermin)
is marketed by Amgen, Inc. for use in the treatment of severe oral mucositis
(mouth sores) in patients with hematologic (blood) cancers. Salagen
Tablets (pilocarpine hydrochloride) is marketed by MGI Pharma in the United
States as a treatment for the symptoms of xerostomia induced by radiation
therapy in head and neck cancer patients. However, there are also
many companies working to develop pharmaceuticals that act as a radiation
protection agent.
Currently,
Rilutek®, which was developed by Aventis Pharma AG, is the only drug of which we
are aware that has been approved by the FDA for the treatment of
ALS. However, there are many companies are working to develop
pharmaceuticals to
treat
ALS. In addition, ALS belongs to a family of diseases called
neurodegenerative diseases, which includes Alzheimer’s disease, Parkinson’s
disease and Huntington’s disease. Due to similarities between these
diseases, a new treatment for one disease potentially could be useful for
treating others. There are many companies that are producing and
developing drugs used to treat neurodegenerative diseases other than
ALS.
Acceptance
of our products in the marketplace is uncertain, and failure to achieve market
acceptance will harm our business.
Even if
approved for marketing, our products may not achieve market
acceptance. The degree of market acceptance will depend upon a number
of factors, including:
|
·
|
the
receipt of regulatory approvals for the indications that we are
studying;
|
|
·
|
the
establishment and demonstration in the medical community of the safety,
clinical efficacy and cost-effectiveness of our products and their
potential advantages over existing therapeutic
products;
|
|
·
|
marketing
and distribution support;
|
|
·
|
the
introduction, market penetration and pricing strategies of competing and
future products; and
|
|
·
|
coverage
and reimbursement policies of governmental and other third-party payors
such as insurance companies, health maintenance organizations and other
plan administrators.
|
Physicians,
patients, payors or the medical community in general may be unwilling to accept,
purchase, utilize or recommend any of our products.
We
may be required to pay milestone and other payments relating to the
commercialization of our products.
Our
agreements by which we acquired rights to our drug candidates provide for
milestone payments by us upon the occurrence of certain regulatory filings and
approvals related to the acquired products. In the event that we
successfully develop our drug candidates, these milestone payments could be
significant. In addition, our agreements require us to pay a royalty
interest on worldwide sales. Also, any future license, collaborative
or other agreements we may enter into in connection with our development and
commercialization activities may require us to pay significant milestone,
license and other payments in the future.
We
are exposed to risks if we are unable to comply with changes to laws affecting
public companies, including the Sarbanes-Oxley Act of 2002, and also to
increased costs associated with complying with such laws.
Laws and
regulations affecting public companies, including the provisions of the
Sarbanes-Oxley Act of 2002 in the U.S., will cause us to incur increased costs
as we evaluate the implications of new rules and respond to new
requirements. Delays or a failure to comply with the new laws, rules
and regulations could result in enforcement actions, the assessment of other
penalties and civil suits. These laws and regulations make it more
expensive for us under indemnities provided by the Company to our officers and
directors and may make it more difficult for us to obtain certain types of
insurance, including liability insurance for directors and officers; as such, we
may be forced to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more
difficult for us to attract and retain qualified persons to serve on our Board
of Directors, or as executive officers. We may be required to hire
additional personnel and utilize additional outside legal, accounting and
advisory services — all of which could cause our general and administrative
costs to increase beyond what we currently have planned.
We
have reported a material weakness in the effectiveness of our internal control
over financial reporting, and if we cannot maintain effective internal controls
or provide reliable financial and other information, investors may lose
confidence in our SEC reports.
In
this Annual Report, we are reporting a material weakness in the effectiveness of
our internal control over financial reporting related to adequate segregation of
duties, which are described in more detail below under the heading “Controls and
Procedures.” Based on the material weakness, we are also reporting in this
Annual Report that our disclosure controls and procedures were not effective as
of September 30, 2008.
Effective
internal control over financial reporting and disclosure controls and procedures
are necessary for us to provide reliable financial and other reports and
effectively prevent fraud. If we cannot maintain effective internal
control or disclosure controls and procedures, or provide reliable financial or
SEC reports or prevent fraud, investors may lose confidence in our SEC reports,
our operating results and the trading price of our common stock could suffer and
we may become subject to litigation.
Our
corporate compliance program cannot guarantee that we are in compliance with all
potentially applicable regulations.
The
development, manufacturing, pricing, sales, coverage and reimbursement of our
products, together with our general operations, are subject to extensive
regulation by federal, state and other authorities within the United States and
numerous entities outside of the United States. While we have
developed and instituted a corporate compliance program based on what we believe
are the current best practices, we cannot provide any assurance that
governmental authorities will find that our business practices
comply
with current or future administrative or judicial interpretations of potentially
applicable laws and regulations. If we fail to comply with any of
these laws and regulations, we could be subject to a range of regulatory
actions, including suspension or termination of clinical trials, the failure to
approve a product candidate, restrictions on our products or manufacturing
processes, withdrawal of products from the market, significant fines, or other
sanctions or litigation.
We
may be unable to repay our substantial indebtedness and other
obligations.
Under
the terms of the indentures governing our debt instruments, we are obligated to
repay in cash the aggregate principal balance of any such notes upon maturity
and in some cases upon demand. As of the filing date of this report,
we do not have available cash, cash equivalents and investments sufficient to
repay all of the notes, if presented. In addition, there are no
restrictions on our use of this cash and the cash available to repay
indebtedness may decline over time. If we do not have sufficient
funds available to repay the principal balance of notes, we will be required to
raise additional funds. Because the financing markets may be
unwilling to provide funding to us or may only be willing to provide funding on
terms that we would consider unacceptable, we may not have cash available or be
able to obtain funding to permit us to meet our repayment obligations, thus
adversely affecting the market price for our securities.
We
are involved in, and may become involved in the future in additional, legal
proceedings that, if adversely adjudicated or settled, could materially impact
our financial condition.
As
a pharmaceutical company, we are or may become a party to litigation in the
ordinary course of our business, including, among others, matters alleging
product liability, patent or other intellectual property rights infringement,
patent invalidity or breach of commercial contract. In general,
litigation claims can be expensive and time consuming to bring or defend against
and could result in settlements or damages that could significantly impact
results of operations and financial condition. We currently are
vigorously pursuing the claims as more fully disclosed in Part I, Item 3 of this
Annual Report on Form 10-K. While we currently do not believe that
the settlement or adverse adjudication of this litigation matter would
materially impact our results of operations or financial condition, the final
resolution of this matter and the impact, if any, on our results of operations,
financial condition or cash flows is unknown but could be material.
We
invest in securities that are subject to market risk and the recent issues in
the financial markets could adversely affect the value of our
assets.
At
September 30, 2008, $440,000 of our marketable securities portfolio is invested
in AA and AAA rated investments in auction-rate debt
securities. Auction-rate securities are long-term variable rate bonds
tied to short-term interest rates. After the initial issuance of the
securities, the interest rate on the securities is reset periodically, at
intervals established at the time of issuance (e.g., every seven, twenty-eight,
or thirty-five days; every six months; etc.), based on market demand for a reset
period. Auction-rate securities are bought and sold in the
marketplace through a competitive bidding process often referred to as a “Dutch
auction”. If there is insufficient interest in the securities at the
time of an auction, the auction may not be completed and the rates may be reset
to predetermined “penalty” or “maximum” rates. Following such a
failed auction, we would not be able to access our funds that are invested in
the corresponding auction-rate securities until a future auction of these
investments is successful or new buyers express interest in purchasing these
securities in between reset dates.
In
February 2008, auctions for our auction-rate securities failed rendering these
securities illiquid through the normal auction process. At the time
of our initial investment and through the date of this Report, all of our
auction-rate securities in which we invest remain AA and AAA
rated. The underlying assets of our auction-rate securities are
student loans. Student loans are insured by either the Federal Family
Education Loan Program (FFELP), a combination of FFELP and other monoline
insurers such as Ambac Assurance Corp. (“AMBAC”) and MBIA Insurance Corp. (MBIA)
or AMBAC. As of September 30, 2008, AMBAC was rated A3 by Moody’s and
A by Standard and Poor’s. Although these insurers are highly rated,
they are reported to be experiencing financial difficulty, which could
negatively affect their ratings and thus the ratings of the auction-rate
securities that we hold. If the underlying issuers are unable to
successfully clear future auctions or if their credit rating deteriorates and
the deterioration is deemed to be other-than-temporary, we would be required to
adjust the carrying value of the auction-rate securities through an impairment
charge to earnings. Any of these events could materially affect our
results of operations and our financial condition. In the event we
need to access these funds, we could be required to sell these securities at an
amount below our original purchase value. In October 2008, we entered
into an agreement with UBS Financial Services, Inc. (“UBS”) in which UBS has
agreed to repurchase our auction-rate securities anytime after January 2, 2009
at the original purchase price. Based on the agreement with UBS and
our ability to access our cash and cash equivalents, our existing financing
arrangements and our expected operating cash flows, we do not expect to be
required to sell these securities at a loss.
Risks
Related to Owning Our Stock
Our
principal stockholders own a significant percentage of our outstanding common
stock and are, and will continue to be, able to exercise significant influence
over our affairs.
As of
December 10, 2008, Xmark Opportunity Partners, LLC (“Xmark”) possessed voting
power over 15,247,323 shares, or 47.6%, of our common stock outstanding, through
its management of Goodnow Capital, L.L.C. (“Goodnow”), Xmark Opportunity Fund,
L.P., Xmark Opportunity Fund, Ltd. and Xmark JV Investment Partners, LLC
(collectively, the “Xmark Funds”), and through a voting trust agreement by and
among Biomedical Value Fund, L.P., Biomedical Value Fund, Ltd., Xmark
Opportunity Partners, LLC and the Company (the “Xmark Voting Trust”)
with respect to 1,000,000 shares. In addition, the Xmark Funds own $1,000,000 of
our Senior Convertible Notes which are convertible into 2,857,142 shares of our
common stock at the election of Xmark. As a result, Xmark is able to
determine a significant part of the composition of our board of directors, holds
significant voting power with respect to matters requiring stockholder approval
and is able to exercise significant influence over our
operations. The interests of Xmark may be different than the
interests of other stockholders on these and other matters. This
concentration of ownership also could have the effect of delaying or preventing
a change in our control or otherwise discouraging a potential acquirer from
attempting to obtain control of us, which could reduce the price of our common
stock.
Also as
of December 10, 2008, Efficacy Capital Ltd. (“Efficacy Capital”) owned 9,800,000
shares, or 30.6%, of our outstanding common stock, through its management of
Efficacy Biotech Master Fund Ltd. As a result, Efficacy Capital is
able to determine a significant part of the composition of our board of
directors, holds significant voting power with respect to matters requiring
stockholder approval and is able to exercise significant influence over our
operations. The interests of Efficacy Capital may be different than
the interests of other stockholders on these and other matters. This
concentration of ownership could also have the effect of delaying or preventing
a change in our control or otherwise discouraging a potential acquirer from
attempting to obtain control of us, which could reduce the price of our common
stock.
We
may need to sell additional shares of our common stock, preferred stock or other
securities to meet our capital requirements. If we need to sell
additional shares of our common stock, preferred stock or other securities to
meet our capital requirements, or upon conversion of our preferred stock and
exercises of currently outstanding options and warrants, the ownership interests
of our current stockholders could be substantially diluted. The
possibility of dilution posed by shares available for future sale could reduce
the market price of our common stock and could make it more difficult for us to
raise funds through equity offerings in the future.
As of
December 10, 2008, we had 32,030,874 shares of common stock
outstanding. We may grant to our employees, directors and consultants
options to purchase shares of our common stock under our 2004 Stock Option
Plan. In addition, as of December 10, 2008, options to purchase
4,285,281 shares were outstanding at exercise prices ranging from $0.32 to
$51.25 per share, with a weighted average exercise price of $2.48 per share, and
2,524,895 shares were reserved for issuance under the 2004 Stock Option
Plan. In addition, as of December 10, 2008, warrants to purchase
15,988,668 shares of common stock were outstanding at exercise prices ranging
from $0.35 to $4.00 per share, with a weighted exercise price of $0.99 per
share. The Company also has $1,000,000 in Senior Convertible Notes
outstanding which, as of December 10, 2008, were convertible into 2,857,142
shares of our common stock. In addition, we have reserved 30,500,000
shares of our common stock for any future issuances of Senior Convertible Notes,
the payment of interest on the Senior Convertible Notes and a reserve for any
future adjustments. We have also reserved 475,087 shares of common
stock for the conversion of our outstanding Series B Preferred
stock.
In
connection with prior collaborations and financing transactions, we also have
issued Series B preferred stock and a promissory note convertible into Series B
preferred stock to affiliates of Elan Corporation, plc
(“Elan”). These securities generally are exercisable and convertible
at the option of the Elan affiliates. The exercise or conversion of
all or a portion of these securities would dilute the ownership interests of our
stockholders.
Our
common stock is not listed on a national exchange, is illiquid and is
characterized by low and/or erratic trading volume, and the per share price of
our common stock has fluctuated from $0.25 to $1.50 during the last two
years.
Our
common stock is quoted on the OTC Bulletin Board under the symbol
“AOLS.” An active public market for our common stock is unlikely to
develop as long as we are not listed on a national securities
exchange. Even if listed, the market for our stock may be impaired
because of the limited number of investors, the significant ownership stake of
Efficacy Capital and Xmark (through its management of Goodnow and the Xmark
Funds), and our small market capitalization, which is less than that authorized
for investment by many institutional investors.
Historically,
the public market for our common stock has been characterized by low and/or
erratic trading volume, often resulting in price volatility. The
market price of our common stock is subject to wide fluctuations due to factors
that we cannot control, including the results of preclinical and clinical
testing of our products under development, decisions by collaborators regarding
product development, regulatory developments, market conditions in the
pharmaceutical and biotechnology industries, future announcements concerning our
competitors, adverse developments concerning proprietary rights, public concern
as to the
safety or
commercial value of any products and general economic conditions.
Furthermore,
the stock market has experienced significant price and volume fluctuation
unrelated to the operating performance of particular companies. These
market fluctuations can adversely affect the market price and volatility of our
common stock.
If
registration rights that we have previously granted are exercised, or if we
grant additional registration rights in the future, the price of our common
stock may be adversely affected.
Upon
receiving notice from Elan, we are obligated to register with the SEC shares of
common stock underlying the Series B preferred stock, warrants to purchase
Series B preferred stock and a promissory note held by the Elan
affiliates. If these securities are registered with the SEC, they may
be sold in the open market. We expect that we also will be required
to register any securities sold in future private financings. The
sale of a significant amount of shares in the open market, or the perception
that these sales may occur, could cause the trading price of our common stock to
decline or become highly volatile.
Anti-takeover
provisions in our charter documents and under Delaware law could make an
acquisition of us, which may be beneficial to our stockholders, more difficult
and may prevent attempts by our stockholders to replace or remove our current
management.
Provisions
in our amended and restated certificate of incorporation and bylaws may delay or
prevent an acquisition of us or a change in our management. These
provisions include a prohibition on actions by written consent of our
stockholders and the ability of our board of directors to issue preferred stock
without stockholder approval. In addition, because we are
incorporated in Delaware, we are governed by the provisions of Section 203 of
the Delaware General Corporation Law, which prohibits stockholders owning in
excess of 15% of our outstanding voting stock from merging or combining with
us. These provisions may frustrate or prevent any attempts by our
stockholders to replace or remove our current management by making it more
difficult for stockholders to replace members of our board of directors, which
is responsible for appointing the members of our management.
Future
sales of our common stock could adversely affect its price.
Sales of
substantial amounts of common stock, or the perception that such sales could
occur, could adversely affect the prevailing market price of the common stock
and our ability to raise capital. We may issue additional common
stock in future financing transactions or as incentive compensation for our
executive management and other key personnel, consultants and
advisors. Issuing any equity securities would be dilutive to the
equity interests represented by our then-outstanding shares of common
stock. The market price for our common stock could decrease as the
market takes into account the dilutive effect of any of these
issuances.
We
do not expect to pay cash dividends on our common stock for the foreseeable
future.
We have
never paid cash dividends on our common stock and do not anticipate that any
cash dividends will be paid on the common stock for the foreseeable
future. The payment of any cash dividend by us will be at the
discretion of our board of directors and will depend on, among other things, our
earnings, capital, regulatory requirements and financial
condition. Furthermore, the terms of some of our financing
arrangements directly limit our ability to pay cash dividends on our common
stock.
None.
None.
In June
2008, we filed an arbitration and mediation claim against UBS Financial
Services, Inc., UBS Securities, LLC and UBS International, Inc. (collectively
“UBS”) with the Financial Industry Regulatory Authority. The claim
seeks recession of the purchase transactions of our four auction-rate
securities, reimbursement for lost interest income and lost revenue due to
delays in the development of its drug candidates and punitive
damages. UBS did not agree to mediation and the request for mediation
was dismissed. In regards to the arbitration claim, UBS requested and
we agreed to two extensions to the UBS’ deadline to file a response to the
arbitration claim. In October 2008, UBS filed a response to our
arbitration claim denying all allegations and seeking recovery of legal fees and
costs. Also in October 2008, we received notification from UBS that
it has entered into a settlement agreement with the New York Attorney General in
which UBS agreed to repurchase certain auction-rate securities of certain of its
clients at par value for which all of our auction-rate securities are included
in the settlement with the New York
Attorney
General. UBS indicated that we can exercise the option for UBS to
repurchase for a two year period beginning January 2, 2009. We have
submitted the required documentation and intend to exercise our option to sell
the four auction-rate securities to UBS on January 2, 2009. We are
currently in the discovery phase of the arbitration proceeding. We
intend to pursue the arbitration claim vigorously; however there can be no
assurance as to the ultimate outcome of this claim.
No
matters were submitted to us by a vote of the security holders during the
quarter ended September 30, 2008.
PART
II
(a)
Price Range of Common Stock
Our
common stock is traded on the OTC Bulletin Board under the symbol
“AOLS.” The following sets forth the quarterly high and low trading
prices as reported by the OTC Bulletin Board for the periods
indicated. These prices are based on quotations between dealers,
which do not reflect retail mark-up, markdown or commissions, and do not
necessarily represent actual transactions.
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended September 30, 2007
|
|
|
|
|
|
|
October
1, 2006 through December 31, 2006
|
|
$ |
0.85 |
|
|
$ |
0.51 |
|
January
1, 2007 through March 31, 2007
|
|
$ |
0.75 |
|
|
$ |
0.34 |
|
April
1, 2007 through June 30, 2007
|
|
$ |
1.50 |
|
|
$ |
0.51 |
|
July
1, 2007 through September 30, 2007
|
|
$ |
1.01 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended September 30, 2008
|
|
|
|
|
|
|
|
|
October
1, 2007 through December 31, 2007
|
|
$ |
0.55 |
|
|
$ |
0.33 |
|
January
1, 2008 through March 31, 2008
|
|
$ |
0.40 |
|
|
$ |
0.31 |
|
April
1, 2008 through June 30, 2008
|
|
$ |
0.48 |
|
|
$ |
0.32 |
|
July
1, 2008 through September 30, 2008
|
|
$ |
0.45 |
|
|
$ |
0.25 |
|
(b)
Approximate Number of Equity Security Holders
As of
December 10, 2008, the number of record holders of our common stock was 179
and we estimate that the number of beneficial owners was approximately
2,100.
(c)
Dividends
We have
never paid a cash dividend on our common stock and we do not anticipate paying
cash dividends on our common stock in the foreseeable future. If we
pay a cash dividend on our common stock, we also must pay the same dividend on
an as converted basis on our Series B preferred stock. Moreover, any
additional preferred stock to be issued and any future credit facilities might
contain restrictions on our ability to declare and pay dividends on our common
stock. We plan to retain all earnings, if any, for the foreseeable
future for use in the operation of our business and to fund future
growth.
In
addition, we cannot pay a dividend on our common stock without the prior
approval of Goodnow Capital pursuant to the terms of the Debenture and Warrant
Purchase Agreement dated September 16, 2003 between us and
Goodnow. This restriction will expire on the earliest
of:
|
·
|
the
date that Goodnow owns less than 20% of our outstanding common stock on an
as converted basis;
|
|
·
|
the
completion, to the absolute satisfaction of Goodnow, of initial clinical
safety studies of AEOL 10150 and analysis of the data developed based upon
such studies with the results satisfactory to Goodnow, in its absolute
discretion, to initiate efficacy studies of AEOL 10150 in humans;
or
|
|
·
|
the
initiation of dosing of the first human patient in an efficacy-based study
of AEOL 10150.
|
In
addition, we cannot pay a dividend on our common stock without the prior
approval of Xmark Opportunity Fund, L.P. and Xmark Opportunity Fund, Ltd.
(collectively, the “Xmark Funds”) pursuant to the terms of the Senior
Convertible Notes dated
August 1,
2008, September 4, 2008, November 3, 2008 and December 1, 2008 between us and
the Xmark Funds. This restriction will expire on the conversion or
repayment of all outstanding Senior Convertible Notes.
(d)
Equity Compensation Plan and Additional Equity Information as of September 30,
2008
Plan
category
|
|
(a)Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
|
|
(b)Weighted-average
exercise price of outstanding options, warrants and rights
|
|
|
(c)Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by our stockholders:
|
|
|
|
|
|
|
|
|
|
2004
Stock Option Plan
|
|
|
2,258,441 |
|
|
$ |
0.70 |
|
|
|
2,574,895 |
|
1994
Stock Option Plan
|
|
|
1,976,840 |
|
|
$ |
4.57 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans and securities not approved by our
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
to Purchase Common Stock Issued to Brookstreet Securities
Corporation
|
|
|
250,000 |
|
|
$ |
1.50 |
|
|
Not
applicable
|
|
Warrant
to Purchase Common Stock Issued to TBCC Funding Trust II
(1)
|
|
|
1,759 |
|
|
$ |
19.90 |
|
|
Not
applicable
|
|
Total
– Common Stock
|
|
|
4,487,040 |
|
|
|
|
|
|
|
2,574,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Promissory Note convertible into shares of Series B Preferred Stock Issued
to Elan Pharma International Limited (as of September 30,
2008)(2)(3)
|
|
|
59,316 |
|
|
$ |
9.00 |
|
|
|
2,151 |
|
Total
– Series B Preferred Stock
|
|
|
59,316 |
|
|
|
|
|
|
|
2,151 |
|
——————
(1) This
Warrant expired unexercised on October 30, 2008.
(2) As
of September 30, 2008, each share of Series B preferred stock was convertible
into one share of common stock.
(3) The
conversion value of the note will increase by its 10% interest rate until its
maturity on February 8, 2009.
Description
of Equity Compensation Plans and Equity Securities Not Approved by Our
Stockholders
The
warrants to purchase shares of our common stock issued to Brookstreet Securities
Corporation (“Brookstreet”) have not been approved by our
stockholders. In May 2006, we entered into an agreement with
Brookstreet to provide us with financial advisory services for a one-year
period. For these services, we issued five warrants each to purchase
up to 50,000 shares of our common stock with an exercise price of $0.50, $1.00,
$1.50, $2.00 and $2.50 and vest on May 24, 2006, August 22, 2006, November 20,
2006, February 18, 2007 and May 19, 2007, respectively. The warrants
are exercisable for five years.
The
warrant to purchase shares of our common stock issued to TBCC Funding Trust II
has not been approved by our stockholders. This warrant was issued in
October 2001 in connection with the execution of a Master Loan and Security
Agreement with Transamerica Technology Finance Corporation. We
borrowed $565,000 from Transamerica in October 2001. The warrant
expired unexercised on October 30, 2008.
(e)
Stock Performance Graph
The
following graph shows a five-year comparison of cumulative total stockholder
returns for Aeolus, the Nasdaq Stock Market (U.S.) Index and the Nasdaq Biotech
Index. The graph and data below assume that $100 was invested on
September 30, 2003 in each of Aeolus’ Common Stock, the stocks in the Nasdaq
Stock Market (U.S.) Index and the stocks in the Nasdaq Biotech Index, and
further assumes the reinvestment of all dividends.
|
|
9/30/03
|
|
|
9/30/04
|
|
|
9/30/05
|
|
|
9/30/06
|
|
|
9/30/07
|
|
|
9/30/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeolus
Pharmaceuticals, Inc.
|
|
$ |
100.00 |
|
|
$ |
50.67 |
|
|
$ |
37.33 |
|
|
$ |
26.67 |
|
|
$ |
17.00 |
|
|
$ |
15.00 |
|
Nasdaq
Stock Market (U.S.)
|
|
$ |
100.00 |
|
|
$ |
106.69 |
|
|
$ |
121.83 |
|
|
$ |
128.92 |
|
|
$ |
155.36 |
|
|
$ |
121.35 |
|
Nasdaq
Biotech Index
|
|
$ |
100.00 |
|
|
$ |
99.20 |
|
|
$ |
109.01 |
|
|
$ |
104.80 |
|
|
$ |
118.78 |
|
|
$ |
116.65 |
|
(f)
Recent Sales of Unregistered Securities
On August
1, 2008, the Company entered into a Securities Purchase Agreement (the "Purchase
Agreement") with three accredited institutional investors (the
"Investors") pursuant to which the Company agreed to sell to the Investors units
comprised of senior unsecured convertible notes of the Company (the "Notes"), in
an aggregate principal amount of up to $5,000,000, which shall bear interest at
a rate of 7% per year and mature on the 30-month anniversary of their date of
issuance, and warrants to purchase up to an aggregate of 10,000,000 additional
shares of Common Stock (the "Warrant Shares"), each with an initial exercise
price of $0.50 per share, subject to adjustment pursuant to the warrants (the
"Warrants") (collectively the “SCN Financing”). Each unit (collectively, the
"Units") is comprised of $1,000 in Note principal and Warrants to purchase up to
2,000 shares of the Company's common stock, par value $0.01 per share (the
"Common Stock"), and has a purchase price of $1,000.
On August
1, 2008, the Company sold and issued to the Investors 500 Units comprised of
Notes in the aggregate principal amount of $500,000 and Warrants to purchase up
to 1,000,000 shares of Common Stock for an aggregate purchase price of $500,000
(the "Financing").
The
Investors have also agreed and completed the purchase of an additional 125 Units
on each of September 4, 2008, October 1, 2008, November 3, 2008 and December 1,
2008 (the "Subsequent Financing"), in each case for an aggregate purchase price
of $125,000. Each of the Subsequent Closings has occurred in
accordance with the terms of the Purchase Agreement. The Notes issued in the
Financing, the Subsequent Financing and at the Subsequent Closings have an
initial conversion price of $0.35 per share, subject to adjustment pursuant to
the Notes. In addition, the Investors have the option to purchase up
to an additional 4,000 Units, in one or more closings (each, an "Election
Closing"), and at their sole option at any time on or before February 1,
2010. Any additional Units sold at an Election Closing would also be
sold by the Company at a purchase price of $1,000 per Unit, except that the
initial conversion price of the Notes issued in an Election Closing will equal
the volume weighted average closing sale price for the Common Stock for the
sixty consecutive trading day period ending on the trading day immediately
preceding such Election Closing, provided that such initial conversion price may
not be less than $0.20 per share or greater than $0.75 per share, in each case
subject to adjustment pursuant to the Note.
The Notes
are and will be convertible, at the Investors' sole election, into shares of
Common Stock at any time and from time to time. The conversion price
of the Notes (including the $0.20 floor and $0.75 ceiling price with respect to
Notes issued at Election Closings) and the exercise price of the Warrants are
subject to adjustment in the event of a stock dividend or split, reorganization,
recapitalization or similar event. Additionally, the conversion price
of the Notes and the exercise price of the
Warrants
may be reduced in the event the Company issues securities at a price per share
lower than the then current conversion price of the Notes. The Notes
are due and payable in cash at the aggregate principal value plus accrued
interest 30 months from the date of issuance if not converted earlier by the
Investors.
Interest
on the Notes accrues at the rate of 7.0% per annum from the date of issuance,
and is payable semi-annually, on January 31 and July 31 of each
year. Interest shall be payable, at the Company's sole election, in
cash or shares of Common Stock, to holders of Notes on the record date for such
interest payments, with the record dates being each January 15 and July 15
immediately preceding an interest payment date.
The
Warrants are exercisable for a five year period from the date of issuance and
contain a "cashless exercise" feature that allows the Investors to exercise the
Warrants without a cash payment to the Company under certain
circumstances.
These
securities were offered and sold in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933, as amended (the
"Securities Act"), and Rule 506 promulgated thereunder. The
agreements executed in connection with the Financing contain representations to
support the Company’s reasonable belief that each Investor had access to
information concerning the Company’s operations and financial condition, each
Investor acquired the securities for its own account and not with a view to the
distribution thereof in the absence of an effective registration statement or an
applicable exemption from registration, and that each Investor is sophisticated
within the meaning of Section 4(2) of the Securities Act and an "accredited
investor" (as defined by Rule 501 under the Securities Act). In addition, the
issuances did not involve any public offering; the Company made no solicitation
in connection with the Financing other than communications with the Investors;
the Company obtained representations from each Investor regarding its investment
intent, experience and sophistication; and each Investor either received or had
access to adequate information about the Company in order to make informed
investment decisions. At the time of their issuance, the securities
were deemed to be restricted securities for purposes of the Securities Act, and
the certificates representing the securities bear legends to that
effect.
(g)
Purchase of Equity Securities by the Issuer and Affiliated
Purchases
None.
You
should read the following selected financial data in conjunction with our
consolidated financial statements and the notes to those statements and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this Form 10-K. We derived the
consolidated statements of operations data for the five fiscal years ended
September 30, 2008 and the related consolidated balance sheet data at those
dates from our audited consolidated financial statements. Except for
the consolidated statements of operations for the fiscal years ended September
30, 2005 and 2004 and the consolidated balance sheet data at September 30, 2006,
2005 and 2004, each of these consolidated financial statements are included
elsewhere in this Form 10-K. All common stock amounts have been
adjusted for a one-for-ten reverse stock split effected in July
2004.
Statement
of Operations Data:
|
Year
Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant
income and contract revenue
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92
|
|
|
$
|
252
|
|
|
$
|
305
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
977
|
|
|
|
1,381
|
|
|
|
3,480
|
|
|
|
4,515
|
|
|
|
8,295
|
|
General
and administrative
|
|
1,540
|
|
|
|
1,919
|
|
|
|
2,216
|
|
|
|
2,674
|
|
|
|
3,987
|
|
Total
costs and expenses
|
|
2,517
|
|
|
|
3,300
|
|
|
|
5,696
|
|
|
|
7,189
|
|
|
|
12,282
|
|
Loss
from operations
|
|
(2,517
|
)
|
|
|
(3,300
|
)
|
|
|
(5,604
|
)
|
|
|
(6,937
|
)
|
|
|
(11,977
|
)
|
Other
income (expenses), net
|
|
(405)
|
|
|
|
225
|
|
|
|
(118)
|
|
|
|
63
|
|
|
|
23
|
|
Interest
income (expense), net
|
|
(51
|
)
|
|
|
51
|
|
|
|
(6
|
)
|
|
|
(31
|
)
|
|
|
(5,213
|
)
|
Net
loss
|
|
(2,973
|
)
|
|
|
(3,024
|
)
|
|
|
(5,728
|
)
|
|
|
(6,905
|
)
|
|
|
(17,167
|
)
|
Preferred
stock dividend and accretion
|
|
—
|
|
|
|
—
|
|
|
|
(81
|
)
|
|
|
—
|
|
|
|
(135
|
)
|
Net
loss attributable to common stockholders
|
$
|
(2,973
|
)
|
|
$
|
(3,024
|
)
|
|
$
|
(5,809
|
)
|
|
$
|
(6,905
|
)
|
|
$
|
(17,302
|
)
|
Basic
net loss per share attributable to common stockholders
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(2.06
|
)
|
Diluted
net loss per share attributable to common stockholders |
$ |
(0.11 |
)
|
|
$ |
(0.10 |
)
|
|
$ |
(0.31 |
)
|
|
$ |
(0.49 |
)
|
|
$ |
(2.06 |
)
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
31,953
|
|
|
|
30,239
|
|
|
|
18,926
|
|
|
|
13,976
|
|
|
|
8,388
|
|
Diluted |
|
32,217 |
|
|
|
30,239 |
|
|
|
18,926 |
|
|
|
13,976 |
|
|
|
8,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and marketable securities
|
$
|
399
|
|
|
$
|
1,727
|
|
|
$
|
3,324
|
|
|
$
|
626
|
|
|
$
|
7,381
|
|
Working
capital (deficiency)
|
$
|
(1,336
|
)
|
|
$
|
1,538
|
|
|
$
|
1,581
|
|
|
$
|
(73
|
)
|
|
$
|
6,093
|
|
Total
assets
|
$
|
1,120
|
|
|
$
|
1,931
|
|
|
$
|
3,554
|
|
|
$
|
937
|
|
|
$
|
7,856
|
|
Long-term
portion of capital lease obligations and notes payable
|
$
|
534
|
|
|
$
|
483
|
|
|
$
|
—
|
|
|
$
|
867
|
|
|
$
|
787
|
|
Total
liabilities
|
$
|
2,157
|
|
|
$
|
751
|
|
|
$
|
1,847
|
|
|
$
|
1,869
|
|
|
$
|
2,324
|
|
Total
stockholders’ equity (deficit)
|
$
|
(1,037
|
)
|
|
$
|
1,180
|
|
|
$
|
1,707
|
|
|
$
|
(932
|
)
|
|
$
|
5,532
|
|
Introduction
You
should read the following discussion in conjunction with our consolidated
financial statements and the notes appearing elsewhere in this Form
10-K. The following discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of various factors, including those discussed in “Item 1A. Risk
Factors” and elsewhere in this Form 10-K.
Overview
We are
developing a series of catalytic antioxidant molecules to protect against the
damaging effects of reactive oxygen derived molecules, commonly referred to as
free radicals. Free radicals cause damage in a broad group of
diseases and conditions. Our initial target indications are as a
protective agent against the effects of mustard gas exposure, as a protective
agent against radiation exposure, cancer radiation therapy, as a protective
agent against the effects of chlorine gas exposure and amyotrophic lateral
sclerosis, also known as “ALS” or “Lou Gehrig’s disease.” We have
reported positive safety results from two Phase I clinical trials of AEOL 10150,
our lead drug candidate, with no serious adverse events noted. We
also have a long-term clinical trial underway in a single patient with ALS to
test the efficacy and further test the safety of AEOL 10150. However,
further development of AEOL 10150 for the treatment of ALS and cancer radiation
therapy, if any, will be dependent upon future specific financing for this
development or a partnership and the results of our ongoing studies of AEOL
10150 for the treatment of mustard gas exposure and chlorine gas
exposure.
We do not
have any recurring revenue and therefore we must rely on public or private
equity offerings, debt financings, collaboration arrangements or grants to
finance our operations.
We had
net losses attributable to common stockholders of $2,973,000 and $3,024,000 for
the fiscal years ended September 30, 2008 and 2007, respectively. We
had an accumulated deficit of $158,899,000 at September 30, 2008. We
have not yet generated any revenue from product sales and do not expect to
receive any product revenue in the foreseeable future, if at all.
Corporate
Matters
On
November 21, 2005, we completed a private placement of an aggregate of 1,250,000
shares of our Series A Convertible Preferred Stock and warrants to purchase up
to an aggregate of 2,500,000 shares of common stock for aggregate net proceeds
of approximately $2,400,000 (the “2005 Financing”). Each share of the
Series A preferred stock, which had a stated value of $2.00 per share, was
initially convertible into two shares of common stock at any time at the
election of the holders thereof. The warrants had an initial exercise
price of $1.00 per share.
On June
5, 2006, we completed a private placement of 10,000,000 shares of our Common
Stock, warrants to purchase up to an aggregate of 7,000,000 shares of common
stock with an exercise price of $0.75 per share and a five year term and
warrants to purchase up to an aggregate of 4,000,000 shares of common stock with
an exercise price of $0.50 per share and a one year term (which
expired on June 5, 2007 without being exercised) for aggregate net proceeds of
approximately $4,754,000 (the “2006 Financing”).
In
connection with the 2006 Financing, all outstanding shares of the Series A
Preferred Stock were converted into an aggregate of 5,000,000 shares of common
stock. In addition, the exercise price of the warrants to purchase up
to an aggregate of 2,500,000 shares of common stock issued in the 2005 Financing
were lowered from $1.00 per share to $0.50 per share in accordance with the
terms of the warrants.
On May
22, 2007, we completed a private placement of 2,666,667 shares of our Common
Stock, warrants to purchase up to an aggregate of 2,000,001 shares of common
stock with an exercise price of $0.75 per share and a five year term for
aggregate net proceeds of approximately $1,761,000 (the “ 2007
Financing”.
On August
1, 2008, we completed a private placement pursuant to which the Company agreed
to sell to the Investors units comprised of senior unsecured convertible notes
of the Company (the "Notes"), in an aggregate principal amount of up to
$5,000,000, which shall bear interest at a rate of 7% per year and mature on the
30-month anniversary of their date of issuance, and warrants to purchase up to
an aggregate of 10,000,000 additional shares of Common Stock, each with an
initial exercise price of $0.50 per share, subject to adjustment pursuant to the
warrants. Each unit (collectively, the "Units") is comprised of
$1,000 in Note principal and Warrants to purchase up to 2,000 shares of the
Company's common stock, par value $0.01 per share (the "Common Stock"), and has
a purchase price of $1,000. On August 1, 2008, the Company sold and issued
to the Investors 500 Units comprised of Notes in the aggregate principal amount
of $500,000 and Warrants to purchase up to 1,000,000 shares of Common Stock for
an aggregate purchase price of $500,000 (the "Financing"). On
September 4, 2008, the Company sold and issued to the Investors 125 Units
comprised of Notes in the aggregate principal amount of $125,000 and Warrants to
purchase up to 250,000 shares of Common Stock for an aggregate purchase price of
$125,000 (the "Subsequent Financing").
Results
of Operations
Fiscal
Year Ended September 30, 2008 Compared to Fiscal Year Ended September 30,
2007
We had a
net loss attributable to common stockholders of $2,973,000 for the fiscal year
ended September 30, 2008, versus a net loss attributable to common stockholders
of $3,024,000 for fiscal 2007.
We did
not generate any revenues through the sale of our drug candidates or grants
during fiscal 2008 or fiscal 2007.
Research
and Development
Research
and development (“R&D”) expenses decreased $404,000, or 29%, to $977,000 for
fiscal 2008 from $1,381,000 for fiscal 2007. The lower level of
R&D expenses during the current period reflects a lower amount of
employment, consulting and manufacturing expenses offset by a higher level of
pre-clinical and patent expenses. Employment and consulting expenses
were $152,000 during fiscal 2008 versus $434,000 during fiscal
2007. The decline in employment and consulting expenses reflects that
we were completing our multiple dose clinical trail and were in the process of
manufacturing bulk quantities of our lead drug candidate, AEOL 10150, during
fiscal 2007, whereas during the current year we had restructured our research
program to utilize outside research institutions and grants to perform our
research activities and therefore had a lower level of employment and consulting
expenses. During fiscal 2008, manufacturing costs were $136,000
compared to $526,000 during fiscal 2007. Offsetting these declines
was an increase of $335,000 in outside research services as a result of our
transition to outsourcing of research activities during the current period and
$130,000 in patent fees as a result of an increase in patent filing
activity.
R&D
expenses for our antioxidant program have totaled $34,511,000 from inception
through September 30, 2008. Because of the uncertainty of our
research and development and clinical studies, we are unable to predict the
total level of spending on the program or the program completion
date. However, we expect R&D expenses during fiscal year 2009
will be higher than fiscal 2008 as we may initiate additional studies of AEOL
10150. Our ongoing cash requirements will also depend on numerous
factors, particularly the progress of our R&D programs and our ability to
negotiate and complete collaborative agreements.
General
and Administrative
General
and administrative expenses include corporate costs required to support our
company, our employees and consultants and our stockholders. These
costs include personnel and outside costs in the areas of legal, human
resources, investor relations and finance. Additionally, we include
in general and administrative expenses such costs as rent, repair and
maintenance of equipment, depreciation, utilities, information technology and
procurement costs that we need to support the corporate functions listed
above.
General
and administrative (“G&A”) expenses decreased $379,000, or 20%, to
$1,540,000 for fiscal year 2008 from $1,919,000 for fiscal year
2007. G&A expenses were lower during fiscal year 2008 versus
fiscal year 2007 due to a decline in employment costs, stock compensation
expense and investor relations expense. Employment costs declined by
$156,000 during fiscal 2008 compared to fiscal 2007, as the current year
reflects employment costs of our sole employee, our Chief Executive Officer,
whereas the prior year includes employment costs of two additional executive
officers as well as severance and bonus costs to three executive
officers. Stock compensation expense decreased by $216,000 as a
result of the lower headcount during the current year. Investor
relations expenses declined by $54,000, as a result of a decrease in the level
of activity for our investor relations program. Offsetting these
declines were increased consulting expenses in the amount of $65,000 for market
analysis and out-licensing analysis for our drug candidates.
During
fiscal 2008, CPEC LLC (“CPEC”) received a milestone payment from ARCA Biopharma,
Inc., a privately held cardiovascular-focused company (“ARCA”). In
2003, CPEC, of which we own 35%, out-licensed all rights to a potential
therapeutic compound referred to as “bucindolol” to ARCA. During
fiscal 2008, CPEC received a milestone payment of $500,000 as a result of ARCA
filing a New Drug Application for bucidnolol. We recorded $175,000 of
income during fiscal 2008 as a result of our equity ownership of CPEC
LLC. Also as a result of the filing of the New Drug Application with
the US Food and Drug Administration, we are obligated to pay $413,000 in the
form of cash or stock at our election to the majority owner of CPEC who will in
turn pay the original licensors of bucindolol per the terms of the 1994 Purchase
Agreement of CPEC. The obligation is included in our financial
statements under the heading “Accounts Payable.”
We
incurred net interest expense of $51,000 during fiscal year 2008 compared to net
interest income of $51,000 for fiscal year 2007. The change reflects
higher interest expense as a result of the issuance of the Senior Convertible
Note which bear interest at a rate of 7% as well as the related amortization of
debt issuance costs and a note issuance discount. Interest expense
also increased as a result of a higher average balance of our note payable with
Elan and the draws on our margin loan with UBS Financial Services,
Inc. Interest income on our investments also decreased due
to a lower level of investable assets as well as a lower level of interest rates
during fiscal 2008 versus fiscal 2007.
During fiscal
2008 as a result of the issuance of Senior Convertible Notes, we were required
to lower the exercise price of 4,687,000 warrants previously issued in our
November 2005 Financing and in our 2007 Financing to $0.35 per share, the
conversion price of the Senior Convertible Notes issued on August 1,
2008. As a result of the change in the exercise price, these warrants
were revalued resulting in an increase in the value of $118,000 which was
charged to the statement of operations.
During
fiscal 2008, we recorded an “other-than-temporary” impairment charge of $49,000
based upon reduced market values of our auction-rate securities as determined
based upon investment statements received from UBS Financial Services,
Inc. During fiscal 2008, the auction rate securities which the
Company has invested in have experienced auction failures as a result of the
current disruptions in the credit markets. This is the first time the
Company has experienced this type of event for its holdings of auction-rate
securities and the Company believes that prior to February 13, 2008, the
Company’s investment advisor, UBS, had not had a failed auction. The
Company understands that the failure of auctions is broad based and not limited
to those securities held by the Company. As a result of the failed
auctions, our auction-rate securities are currently not
liquid. Furthermore, the Company cannot predict how long they will
remain illiquid.
During
fiscal 2007, we recognized $225,000 in income as a result of the forgiveness of
a portion of the principal balance of a note payable from Elan Corporation,
plc. (“Elan”). In connection with the termination of a
note payable and issuance of a new note payable, we paid $300,000 in cash to
Elan, Elan and the Company entered into a new note payable in the amount of
$453,000 for a period of two years under substantially the same terms as the
original note and Elan forgave $225,000 of the original note
payable.
Fiscal
Year Ended September 30, 2007 Compared to Fiscal Year Ended September 30,
2006
We had a
net loss attributable to common stockholders of $3,024,000 for the fiscal year
ended September 30, 2007, versus a net loss attributable to common stockholders
of $5,809,000 for fiscal 2006.
In August
2003, we were awarded a $100,000 Small Business Innovation and Research (“SBIR”)
Phase I grant from the National Cancer Institute, a division of the
NIH. In March 2004, we were awarded up to $375,000 for the first year
of a SBIR Phase II grant and received approval for a second year of the Phase II
grant program in January 2005. Pursuant to the grants, we are
studying the antitumor and radiation-protective effects of our catalytic
antioxidants. The study is a collaboration between us and the
Department of Radiation Oncology at
Duke University Medical Center. We recognized zero and
$92,000 of grant income during fiscal year 2007 and 2006, respectively from our
SBIR grant from the National Cancer Institute. We do not expect to
earn further grant revenues as work under our SBIR grant has been
completed.
Research
and Development
Research
and development (“R&D”) expenses decreased $2,099,000, or 60%, to $1,381,000
for fiscal 2007 from $3,480,000 for fiscal 2006. Our primary operational
focus and R&D spending during fiscal year 2007 was on finalizing our Phase I
multiple dose clinical trail for the treatment of ALS, planning the future
clinical and development plan for AEOL 10150 and AEOL 11207 as well as advancing
additional drug candidates in our pipeline, while our primary operational focus
and R&D spending during fiscal year 2006 was on conducting our Phase I
multiple dose clinical trial for the treatment of ALS and the advancement of the
Aeolus Pipeline Initiative. Clinical trial expenses for fiscal year
2007 were $64,000 compared to $1,233,000 during fiscal year
2006. Preclinical expenses primarily related to the development of
additional drug candidates in our pipeline for fiscal year 2007 were $72,000,
whereas preclinical expenses during fiscal year 2006 were $585,000. Patent
fees also decreased by $629,000 during the current year as we were in the
process of validating several patents internationally during fiscal 2006 while
no such activity occurred during fiscal 2007. Offsetting these
declines was an increase of $400,000 in contract manufacturing and chemistry
costs.
General
and Administrative
General
and administrative expenses include corporate costs required to support our
company, our employees and consultants and our stockholders. These
costs include personnel and outside costs in the areas of legal, human
resources, investor relations and finance. Additionally, we include
in general and administrative expenses such costs as rent, repair and
maintenance of buildings and equipment, depreciation, utilities, information
technology and procurement costs that we need to support the corporate functions
listed above.
General
and administrative (“G&A”) expenses decreased $297,000, or 13%, to
$1,919,000 for fiscal year 2007 from $2,216,000 for fiscal year
2006. G&A expenses were lower during fiscal year 2007 versus
fiscal year 2006 due to our efforts to decrease the level of services
provided by consultants resulting in a decline of $160,000 in legal and
professional fees and a decline of $135,000 in employee
compensation. Offsetting these decline were increased non-cash stock
expenses in the amount of $132,000.
During
fiscal 2007, we recognized $225,000 in income as a result of the forgiveness of
a portion of the principal balance of a note payable from Elan Corporation,
plc. (“Elan”). In connection with the termination of a
note payable and issuance of a new note payable, we paid $300,000 in cash to
Elan, Elan and the Company entered into a new note payable in the amount of
$453,000 for a period of two years under substantially the same terms as the
original note and Elan forgave $225,000 of the original note
payable.
During
fiscal 2006, CPEC LLC, received a milestone payment and equity consideration
from ARCA Discovery, Inc., a privately held cardiovascular-focused company
(“ARCA”). In 2003, CPEC LLC (“CPEC”), of which we own 35%,
out-licensed all rights to a potential therapeutic compound referred to as
“bucindolol” to ARCA. During fiscal 2006, CPEC agreed to modify the
license agreement between CPEC and ARCA and received 400,000 shares of ARCA
common stock as consideration for the amendment. In addition, during
fiscal 2006, CPEC received a milestone payment of $1,000,000 as a result of ARCA
completing a financing. We recorded $433,000 of income during fiscal
2006 as a result of our equity ownership of CPEC LLC.
In
accordance with EITF 00-19, “Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled In a Company’s Own Stock,” and the terms of
the warrants and the transaction documents in our 2005 Financing and 2006
Financing, at the closing dates, November 21, 2005 and June 5, 2006,
respectively, the fair value of the warrants issued in the financings were
initially accounted for as liabilities until the date the applicable
registration statement registering the shares underlying the warrants was
declared effective by the Securities and Exchange Commission. The
warrant liabilities were revalued at each balance sheet date until the EITF
00-19 equity classification requirements were satisfied and changes in fair
value were charged to the statement of operations. Between November
21, 2005 and March 1, 2006, the fair value of the 2005 Financing warrants
decreased by $401,000 which was credited to the statement of
operations. On March 1, 2006, the Securities and Exchange Commission
declared the registration statement registering the shares underlying the
warrants in the 2005 Financing effective and
accordingly
the warrant liability was reclassified to additional paid in
capital. During the period from June 5, 2006 to July 31, 2006, the
fair value of the 2006 Financing warrants increased by $901,000 which was
charged to the statement of operations. On July 31, 2006, the
Securities and Exchange Commission declared the registration statement
registering the shares underlying the warrants issued in the 2006 Financing
effective and accordingly the warrant liability was reclassified to additional
paid in capital. No such liability was required during the current
year for the May 2007 financing. The warrant liability and
revaluations have not and will not have any impact on the Company’s working
capital, liquidity, or business operations.
In
connection with the 2006 Financing, we were required to reduce the exercise
price of the 2005 Financing warrants to purchase 2,500,000 shares of common
stock from $1.00 per share to $0.50 per share, the purchase price of the common
stock issued in the 2006 Financing. As a result of the change in the
exercise price, these warrants were revalued resulting in an increase in their
value of $105,000 which was charged to the statement of operations.
We
accreted $81,000 of dividends on our Series A preferred stock during fiscal
2006. All of the outstanding Series A Convertible Preferred Stock was
converted into common stock in fiscal 2006 and we no longer accrete dividends on
the Series A Convertible Preferred Stock.
Liquidity
and Capital Resources
At
September 30, 2008, we had $399,000 of cash, a decrease of $1,328,000 from
September 30, 2007. The decrease in cash from September 30, 2007 to
2008 was primarily due to our fiscal 2008 operating expenses offset by the
Senior Convertible Note financing. During fiscal 2008, we sold
$625,000 senior convertible notes with an additional $375,000 issued between
October 1, 2008 and December 1, 2008. The investors also have an
option to invest an additional $4.0 million over the next eighteen
months. We believe we have adequate financial resources (not
including any possible additional investments of $4.0 million which are at the
option of the investors) to conduct operations into the second quarter of fiscal
year 2009. This raises substantial doubt about our ability to
continue as a going concern, which will be dependent on our ability to generate
sufficient cash flows to meet our obligations on a timely basis, to obtain
additional financing and, ultimately, to achieve operating profit.
We
incurred operational losses of $2,517,000 during fiscal 2008. Our
ongoing cash requirements will depend on numerous factors, particularly the
progress of our catalytic antioxidant program and clinical trials and our
ability to negotiate and complete collaborative agreements or out-licensing
arrangements. In order to help fund our on-going operating cash
requirements, we intend to seek new collaborations for our antioxidant research
program that include initial cash payments and on-going research
support. In addition, we will need to raise additional funds and
explore other strategic and financial alternatives, including a merger with
another company and the establishment of new collaborations for current research
programs that include initial cash payments and ongoing research support, or the
out-licensing of our compounds for development by a third party.
There are
significant uncertainties as to our ability to access potential sources of
capital. We may not be able to enter into any collaboration on terms
acceptable to us, or at all, due to conditions in the pharmaceutical industry or
in the economy in general or based on the prospects of our catalytic antioxidant
program. Even if we are successful in obtaining a collaboration for
our antioxidant program, we may have to relinquish rights to technologies,
product candidates or markets that we might otherwise develop
ourselves. These same risks apply to any attempt to out-license our
compounds.
Similarly,
due to market conditions, the illiquid nature of our stock and other possible
limitations on equity offerings, we may not be able to sell additional
securities or raise other funds on terms acceptable to us, if at
all. It generally is difficult for small biotechnology companies like
us to raise funds in the equity markets. Any additional equity
financing, if available, would likely result in substantial dilution to existing
stockholders.
Our
forecast of the period of time through which our financial resources will be
adequate to support our operations is forward-looking information, and actual
results could vary.
Contractual
Obligations
Our
contractual obligations (in thousands) as of September 30, 2008 were as
follows:
|
|
|
|
|
Payments
due by period
|
|
Contractual
Obligations
|
|
Total
|
|
|
Less
than 1 Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
than 5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
1,544 |
|
|
$ |
919 |
|
|
$ |
625 |
|
|
$ |
— |
|
|
$ |
— |
|
Capital
lease obligations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Operating
leases
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Purchase
obligations
|
|
|
1,682 |
|
|
|
1,682 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
|
|
$ |
3,226 |
|
|
$ |
2,601 |
|
|
$ |
625 |
|
|
$ |
— |
|
|
$ |
— |
|
Off
Balance Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources as defined under the rules of SEC Release No.
FR-67. We do have operating leases, which are generally for office
and laboratory space. In accordance with accounting principles
generally accepted in the United States, operating leases are not reflected in
the accompanying consolidated balance sheets. We do not have any
capital leases.
Relationship
with Goodnow Capital and Xmark Opportunity Partners, LLC
In July
2003, we initiated a series of transactions that led to our corporate
reorganization and recapitalization. We obtained an aggregate of $8.0
million in secured bridge financing in the form of convertible promissory notes
we issued to Goodnow Capital, L.L.C. A portion of this financing
allowed us to pay our past due payables and become current. We used
the remainder for our operations, including a toxicology study for our catalytic
antioxidant compounds under development as a treatment for ALS.
We
completed our corporate reorganization on November 20, 2003. The
reorganization involved the merger of our former parent company into one of its
wholly owned subsidiaries. Upon consummation of the merger, a $3.0
million note held by Goodnow, including accrued interest, converted into
3,060,144 shares of our common stock. On April 19, 2004, we sold
$10.26 million of our common stock in a private placement. In
conjunction with the private placement, Goodnow voluntarily converted a $5.0
million debenture, including accrued interest thereon, into 5,046,875 shares of
our common stock, which, along with the 3,060,144 shares issued in the merger
and the 20 shares that Goodnow owned before the consummation of the merger,
represented 58.1% of the shares of our common stock outstanding on November 30,
2004. As of December 10, 2008, Xmark Opportunity Partners, LLC,
through its management of Goodnow and the Xmark Funds, and through the Xmark
Voting Trust, had beneficial ownership over 57.0% of our outstanding common
stock. As a result of this significant ownership, Goodnow is able to
significantly influence, if not control, future actions voted on by stockholders
of our company.
As part
of the $8.0 million financing from Goodnow, we agreed:
|
·
|
to
secure the $8.0 million debt with liens on all of our assets, which liens
expired on April 19, 2004 when the remaining debt converted to shares of
common stock;
|
|
·
|
to
spend the financing proceeds only in accordance with a budget and
development plan agreed to by
Goodnow;
|
|
·
|
to
not enter into any arrangement with a party other than Goodnow in which we
would raise capital through the issuance of our securities other than the
raising of up to an aggregate of $20,000,000 through the issuance of
shares of our common stock at a price of greater than $3.00 per share and
which would represent 25% or less of our then outstanding common stock on
an as-converted to common and fully diluted basis. If we agree
to or consummate a financing transaction with someone other than Goodnow
that exceeds these limitations, we will pay Goodnow a break-up fee of
$500,000. Goodnow approved the April 2004 private placement,
which exceeded these limitations, and waived the fee. However,
the $20,000,000 limitation was lowered to $9,740,000 and the 25%
limitation was reduced to zero. Goodnow also approved the 2005
Financing, the 2006 Financing, the 2007 Financing and the SCN Financing,
each of which exceeded these limitations and waived the fee;
and
|
|
·
|
to
allow Goodnow to appoint one director to our board of directors, provided
Goodnow owns at least 10%, but less than 20%, of our outstanding common
stock, on an as-converted to common and fully diluted basis, and two
directors if Goodnow owns more than 20% of our outstanding common
stock.
|
In
addition, without Goodnow’s prior approval, we have agreed to not:
|
·
|
make
any expenditure or series of related expenditures in excess of $25,000,
except (i) expenditures pursuant to the SBIR grant from the U.S. Small
Business Administration, (ii) specified in a budget approved in writing in
advance by Goodnow and our Board, and (iii) directly relating to the
development of AEOL 10150 for the treatment of
ALS;
|
|
·
|
change
our business or operations;
|
|
·
|
merge
with or sell or lease a substantial portion of our assets to any
entity;
|
|
·
|
incur
debt from any third party or place a lien on any of our
properties;
|
|
·
|
amend
our certificate of incorporation or
bylaws;
|
|
·
|
increase
the compensation we pay our
employees;
|
|
·
|
pay
dividends on any class of our capital
stock;
|
|
·
|
cancel
any debt except for full value; or
|
|
·
|
issue
any capital stock except pursuant to agreements with or as agreed to by
Goodnow.
|
The
affirmative covenants expire on the earliest of:
|
·
|
the
date that Goodnow owns less than 20% of our outstanding common stock on an
as converted basis;
|
|
·
|
the
completion, to the absolute satisfaction of Goodnow, of initial clinical
safety studies of AEOL 10150, and analysis of the data developed based
upon such studies with results satisfactory to Goodnow, in its absolute
discretion, to initiate
|
efficacy
studies of AEOL 10150; or
|
·
|
the
initiation of dosing of the first human patient in an efficacy-based study
of AEOL 10150.
|
On August
1, 2008, we also entered into a Securities Purchase Agreement with the Xmark
Funds pursuant to which we agreed to sell to the Xmark Funds units comprised of
senior unsecured convertible notes of the Company (the "Notes"), in an aggregate
principal amount of up to $5,000,000 and warrants to purchase up to an aggregate
of 10,000,000 additional shares of Common Stock (collectively the “SCN
Financing”). On August 1, 2008, the Company sold and issued to the
Investors 500 Units comprised of Notes in the aggregate principal amount of
$500,000 and Warrants to purchase up to 1,000,000 shares of Common Stock for an
aggregate purchase price of $500,000 (the "Financing"). On September
4, 2008, the Company sold and issued to the Investors 125 Units comprised of
Notes in the aggregate principal amount of $125,000 and Warrants to purchase up
to 250,000 shares of Common Stock for an aggregate purchase price of $125,000
(the "Subsequent Financing").
The Notes
also provide that the Company shall not perform issue any equity securities
other than certain exempt securities as defined in the Notes, incur any
indebtedness other than certain exempt indebtedness as defined in the Notes,
allow the incurrence of any liens on its assets, repay any indebtedness other
than the Notes, pay a dividend on its common stock or make an investment other
than ordinary investing activities without the consent of the holders of Notes
representing a majority of the then-outstanding principal subject to the
Notes.
Critical
Accounting Policies and Estimates
Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
require us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosure of contingent
assets and liabilities. We evaluate our estimates, judgments and the
policies underlying these estimates on a periodic basis as the situation
changes, and regularly discuss financial events, policies, and issues with our
independent registered public accounting firm and members of our audit
committee. We routinely evaluate our estimates and policies regarding
revenue recognition; clinical trial, preclinical, manufacturing and patent
related liabilities; license obligations; inventory; intangible assets;
share-based payments; and deferred tax assets.
We
generally enter into contractual agreements with third-party vendors to provide
clinical, preclinical and manufacturing services in the ordinary course of
business. Many of these contracts are subject to milestone-based
invoicing and the contract could extend over several years. We record
liabilities under these contractual commitments when we determine an obligation
has been incurred, regardless of the timing of the
invoice. Patent-related liabilities are recorded based upon various
assumptions or events that we believe are the most reasonable to each individual
circumstance, as well as based upon historical experience. License
milestone liabilities and the related expense are recorded when the milestone
criterion achievement is probable. We have not recognized any assets
for inventory, intangible items or deferred taxes as we have yet to receive
regulatory approval for any of our compounds. Any potential asset
that could be recorded in regards to any of these items is fully
reserved. In all cases, actual results may differ from our estimates
under different assumptions or conditions.
New
Accounting Pronouncements
In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“FAS
157”). FAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. FAS 157 codifies the definition
of fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The standard clarifies the principle that fair
value should be based on the assumptions market participants would use when
pricing the asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. For
non-financial assets and liabilities, FAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2008. For
financial assets and liabilities, FAS 157 was effective for financial statements
issued for fiscal years beginning after November 15, 2007. The
Company does not expect the adoption of FAS 157 to significantly affect its
financial condition or results of operations.
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of SFAS 115 (“FAS 159”). FAS 159
permits companies to choose to measure many financial instruments and certain
other items at fair value. It also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. FAS 159 requires companies to provide additional
information that will help investors and other users of financial statements to
more easily understand the effect of a company’s choice to use fair value on its
earnings. It also requires entities to display the fair value of
those assets and liabilities for which a company has chosen to use fair value on
the face of the balance sheet. FAS 159 is effective for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. The Company does not expect the adoption of FAS 159 to
significantly affect its financial condition or results of
operations.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“FAS
160”). FAS
160 is an amendment of Accounting Research Bulletin (“ARB”) No. 51 and was
issued to improve the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated
financial statements. This Statement applies to all entities that
prepare consolidated financial statements, except not-for-profit organizations,
but will affect only those entities that have an outstanding noncontrolling
interest in one or more subsidiaries. FAS 160 clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements and that a parent company must recognize a gain or loss in
net income when a subsidiary is deconsolidated. FAS 160 is effective
for fiscal years beginning after December 15, 2008 and early adoption is
prohibited. The Company is currently evaluating the potential impact
on its statement of financial position and results of operations.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“FAS
141R”), which establishes principles and requirements for the reporting entity
in a business combination, including recognition and measurement in the
financial statements of the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree. FAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, and interim periods within those fiscal years. The Company
must adopt SFAS 141R on September 1, 2009, the beginning of its fiscal year
2010. The Company does not expect the application of FAS 141R to have
a material effect on the financial statements.
We are
exposed to market risk related to changes in interest rates. Our
current investment policy is to maintain an investment portfolio consisting of
U.S. government treasury and agency notes, corporate debt obligations, municipal
debt obligations, auction rate securities and money market funds, directly or
through managed funds. Our cash is deposited in and invested through
highly rated financial institutions in North America. Our investments
are subject to interest rate risk and will fall in value if market interest
rates increase. We could be exposed to losses related to these
securities should one of our counterparties default. We attempt to
mitigate this risk through credit monitoring procedures. At September
30, 2008, we held approximately $525,000 in auction rate securities with a AAA
credit rating upon purchase. In February 2008, we were informed that
there was insufficient demand at auction for these securities. As a
result, this amount is currently not liquid and may not become liquid unless the
issuer is able to refinance it. We have classified our investment in
auction rate securities as a long-term investment and included the investment in
other assets on our balance sheet.
At
September 30, 2008, we had two fixed-rate notes payable and one variable
rate note payable.
INDEX
TO FINANCIAL STATEMENTS
|
|
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
41
|
Consolidated
Balance Sheets – As of September 30, 2008 and 2007
|
42
|
Consolidated
Statements of Operations – For the fiscal years ended September 30, 2008,
2007 and 2006
|
43
|
Consolidated
Statements of Stockholders’ Equity (Deficit) – For the fiscal years ended
September 30, 2008, 2007 and 2006
|
44
|
Consolidated
Statements of Cash Flows – For the fiscal years ended September 30, 2008,
2007 and 2006
|
45
|
Notes
to Consolidated Financial Statements
|
46
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Aeolus
Pharmaceuticals, Inc.
We have
audited the accompanying consolidated balance sheets of Aeolus Pharmaceuticals,
Inc. (the “Company”) as of September 30, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity (deficit), and cash
flows for each of the years ended September 30, 2008, 2007 and
2006. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our 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 consolidated financial position of Aeolus
Pharmaceuticals, Inc. as of September 30, 2008 and 2007, and the consolidated
results of its operations and its cash flows for each of the years ended
September 30, 2008, 2007 and 2006, 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. As discussed in Note B
of the consolidated financial statements, the Company has suffered recurring
losses, negative cash flows from operations and does not currently possess
sufficient working capital to fund its operations throughout the next fiscal
year. These matters 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 consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Haskell & White
LLP
HASKELL & WHITE LLP
Irvine,
California
December
11, 2008
AEOLUS
PHARMACEUTICALS, INC.
CONSOLIDATED
BALANCE SHEETS
(Dollars
in thousands, except per share data)
|
September
30,
|
|
|
2008
|
|
2007
|
|
ASSETS
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
399 |
|
|
$ |
1,727 |
|
Prepaids
and other current assets
|
|
|
156 |
|
|
|
79 |
|
Total
current assets
|
|
|
555 |
|
|
|
1,806 |
|
|
|
|
|
|
|
|
|
|
Investments,
available for sale
|
|
|
440 |
|
|
|
— |
|
Investment
in CPEC LLC
|
|
|
125 |
|
|
|
125 |
|
Total
assets
|
|
$ |
1,120 |
|
|
$ |
1,931 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
991 |
|
|
$ |
268 |
|
Margin
loan (Note F)
|
|
|
366 |
|
|
|
— |
|
Current
maturity of long-term note payable
|
|
|
534 |
|
|
|
— |
|
Total
current liabilities
|
|
|
1,891 |
|
|
|
268 |
|
|
|
|
|
|
|
|
|
|
Senior
convertible notes to related parties, net (redemption value of
$625,000 as of September 30, 2008 (Note F)
|
|
|
266 |
|
|
|
— |
|
Long-term
note payable
|
|
|
— |
|
|
|
483 |
|
Total
liabilities
|
|
|
2,157 |
|
|
|
751 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note E and J)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value per share, 10,000,000 shares
authorized:
|
|
|
|
|
|
|
|
|
Series
B nonredeemable convertible preferred stock, 600,000 shares
authorized; 475,087 shares issued and outstanding as of
September 30, 2008 and 2007
|
|
|
5 |
|
|
|
5 |
|
Common
stock, $.01 par value per share, 150,000,000 shares authorized; 31,952,749
shares issued and outstanding at September 30, 2008 and
2007
|
|
|
320 |
|
|
|
320 |
|
Additional
paid-in capital
|
|
|
157,573 |
|
|
|
156,781 |
|
Unrealized
losses on investments, available for sale
|
|
|
(36
|
) |
|
|
— |
|
Accumulated
deficit
|
|
|
(158,899
|
) |
|
|
(155,926
|
) |
Total
stockholders' equity (deficit)
|
|
|
(1,037
|
) |
|
|
1,180 |
|
Total
liabilities and stockholders' equity (deficit)
|
|
$ |
1,120 |
|
|
$ |
1,931 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
AEOLUS
PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
Fiscal
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
Grant
income
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
977
|
|
|
|
1,381
|
|
|
|
3,480
|
|
General
and administrative
|
|
1,540
|
|
|
|
1,919
|
|
|
|
2,216
|
|
Total
costs and expenses
|
|
2,517
|
|
|
|
3,300
|
|
|
|
5,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
(2,517
|
)
|
|
|
(3,300
|
)
|
|
|
(5,604
|
)
|
Equity
in income of CPEC LLC ($175 and $315 dividend
received
in 2008 and 2006, respectively)
|
|
175
|
|
|
|
—
|
|
|
|
433
|
|
Interest
expense
|
|
(93
|
)
|
|
|
(51)
|
|
|
|
(89
|
)
|
Interest
income
|
|
42
|
|
|
|
102
|
|
|
|
83
|
|
Deemed
dividend on issuance of Senior Convertible Notes and repricing of
warrants
|
|
(118
|
)
|
|
|
—
|
|
|
|
—
|
|
Collaboration
expense
|
|
(413
|
)
|
|
|
—
|
|
|
|
—
|
|
Other
than temporary impairment on marketable investments
|
|
(49
|
)
|
|
|
—
|
|
|
|
—
|
|
Increase
in fair value of common stock warrants
|
|
—
|
|
|
|
—
|
|
|
|
(604
|
)
|
Other
income
|
|
—
|
|
|
|
225
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
(2,973
|
)
|
|
|
(3,024
|
)
|
|
|
(5,728
|
)
|
Preferred
stock dividend and accretion
|
|
—
|
|
|
|
—
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
$
|
(2,973
|
)
|
|
$
|
(3,024
|
)
|
|
$
|
(5,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net loss per common share attributable to common
stockholders
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.31
|
)
|
Diluted
net loss per common share attributable to common stockholders |
$ |
(0.11 |
)
|
|
$ |
(0.10 |
)
|
|
$ |
(0.31 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
31,953
|
|
|
|
30,239
|
|
|
|
18,926
|
|
Diluted |
|
32,217 |
|
|
|
30,239 |
|
|
|
18,926 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
AEOLUS
PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars
in thousands)
|
Series
B Preferred Stock
|
|
Common
Stock
|
|
Additional
Paid-in Capital
|
|
Unrealized
Losses
|
|
Accumulated
Deficit
|
|
Total
Stockholders’ Equity (Deficit)
|
|
|
Number
of Shares
|
|
Par
Value
|
|
Number
of Shares
|
|
Par
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2005
|
475,087
|
|
$ |
5
|
|
14,038,259
|
|
$ |
140
|
|
$
|
146,016
|
|
|
—
|
|
$
|
(147,093
|
)
|
$ |
(932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of Series A Preferred Stock, net of issuance costs of
$87,000
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
(87
|
)
|
|
—
|
|
|
—
|
|
|
(87
|
)
|
Conversion
of Series A Preferred Stock
|
|
|
|
|
|
5,000,000
|
|
|
50
|
|
|
304
|
|
|
—
|
|
|
—
|
|
|
354
|
|
Sale
of common stock pursuant to stock offering, net of issuance costs of
$46,000
|
—
|
|
|
—
|
|
10,000,000
|
|
|
100
|
|
|
43
|
|
|
—
|
|
|
—
|
|
|
143
|
|
Common
stock issued pursuant to a license agreement
|
—
|
|
|
—
|
|
25,000
|
|
|
1
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
13
|
|
Exercise
of common stock options
|
—
|
|
|
—
|
|
83,332
|
|
|
1
|
|
|
82
|
|
|
—
|
|
|
—
|
|
|
83
|
|
Stock-based
compensation and amortization of warrants
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
500
|
|
|
—
|
|
|
—
|
|
|
500
|
|
Reclassification
of common stock warrant liabilities
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
7,361
|
|
|
—
|
|
|
—
|
|
|
7,361
|
|
Series
A preferred stock dividends and accretion
|
—
|
|
|
—
|
|
118,658
|
|
|
1
|
|
|
80
|
|
|
—
|
|
|
(81
|
)
|
|
—
|
|
Net
loss for the fiscal year ended September 30, 2006
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,728
|
)
|
|
(5,728
|
)
|
Balance
at September 30, 2006
|
475,087
|
|
|
5
|
|
29,265,249
|
|
|
293
|
|
|
154,311
|
|
|
—
|
|
|
(152,902
|
)
|
|
1,707
|
|
Sale
of common stock pursuant to stock offering, net of issuance costs of
$239,000
|
—
|
|
|
—
|
|
2,666,667
|
|
|
27
|
|
|
1,734
|
|
|
—
|
|
|
—
|
|
|
1,761
|
|
Exercise
of common stock options
|
—
|
|
|
—
|
|
20,833
|
|
|
—
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
Stock-based
compensation and amortization of warrants
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
716
|
|
|
—
|
|
|
—
|
|
|
716
|
|
Net
loss for the fiscal year ended September 30, 2007
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,024
|
)
|
|
(3,024
|
)
|
Balance
at September 30, 2007
|
475,087
|
|
|
5
|
|
31,952,749
|
|
|
320
|
|
|
156,781
|
|
|
—
|
|
|
(155,926
|
)
|
|
1,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of Senior convertible notes and warrants, net of issuance costs of
$156,000
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
451
|
|
|
—
|
|
|
—
|
|
|
451
|
|
Stock-based
compensation
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
341
|
|
|
—
|
|
|
—
|
|
|
341
|
|
Unrealized
loss on marketable securities held for sale
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(36
|
)
|
|
—
|
|
|
(36
|
)
|
Net
loss for the fiscal year ended September 30, 2008
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,973
|
)
|
|
(2,973
|
)
|
Balance
at September 30, 2008
|
475,087
|
|
$
|
5
|
|
31,952,749
|
|
$
|
320
|
|
$
|
157,573
|
|
$
|
(36
|
)
|
$
|
(158,899
|
)
|
$
|
(1,037
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
AEOLUS
PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended September 30,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$
|
(2,973
|
)
|
|
$
|
(3,024
|
)
|
|
$
|
(5,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
compensation
|
|
341
|
|
|
|
716
|
|
|
|
500
|
|
Noncash
interest and financing costs
|
|
89
|
|
|
|
52
|
|
|
|
89
|
|
Noncash
deemed dividend on warrant repricing
|
|
118
|
|
|
|
—
|
|
|
|
—
|
|
Equity
income in CPEC LLC
|
|
(175
|
)
|
|
|
—
|
|
|
|
—
|
|
Noncash
consulting and license fee
|
|
—
|
|
|
|
—
|
|
|
|
13
|
|
Other
than temporary impairment on investments available for
sale
|
|
49
|
|
|
|
—
|
|
|
|
—
|
|
(Gain)
on forgiveness of note payable
|
|
—
|
|
|
|
(225
|
)
|
|
|
—
|
|
Increase
in fair value of common stock warrants
|
|
—
|
|
|
|
—
|
|
|
|
604
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
—
|
|
|
|
1
|
|
|
|
13
|
|
Prepaid
expenses and other assets
|
|
15
|
|
|
|
24
|
|
|
|
(247
|
)
|
Accounts
payable and accrued expenses
|
|
723
|
|
|
|
(623
|
)
|
|
|
(111
|
)
|
Net
cash used in operating activities
|
|
(1,813
|
)
|
|
|
(3,079
|
)
|
|
|
(4,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from dividend from CPEC LLC
|
|
175
|
|
|
|
—
|
|
|
|
315
|
|
Purchase
of investments available for sale
|
|
(525
|
)
|
|
|
—
|
|
|
|
—
|
|
Net
cash (used in) provided by investing activities
|
|
(350
|
)
|
|
|
—
|
|
|
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Repayment
of Note Payable
|
|
—
|
|
|
|
(300
|
)
|
|
|
—
|
|
Proceeds
from the issuance of Senior Convertible Notes and Warrants
|
|
625
|
|
|
|
—
|
|
|
|
—
|
|
Costs
related to the issuance of Senior Convertible Notes and
Warrants
|
|
(156
|
)
|
|
|
—
|
|
|
|
—
|
|
Proceeds
from short term note payable
|
|
372
|
|
|
|
—
|
|
|
|
—
|
|
Repayments
of short term note payable
|
|
(6
|
)
|
|
|
—
|
|
|
|
—
|
|
Proceeds
from the issuance of Series A Preferred Stock
|
|
—
|
|
|
|
—
|
|
|
|
2,500
|
|
Costs
related to the issuance of Series A Preferred Stock
|
|
—
|
|
|
|
—
|
|
|
|
(87
|
)
|
Proceeds
from issuance of common stock and warrants
|
|
—
|
|
|
|
2,000
|
|
|
|
5,000
|
|
Costs
related to the issuance of common stock and warrants
|
|
—
|
|
|
|
(239
|
)
|
|
|
(246
|
)
|
Proceeds
from exercise of stock options
|
|
—
|
|
|
|
21
|
|
|
|
83
|
|
Net
cash provided by financing activities
|
|
835
|
|
|
|
1,482
|
|
|
|
7,250
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
(1,328
|
)
|
|
|
(1,597
|
)
|
|
|
2,698
|
|
Cash
and cash equivalents at beginning of year
|
|
1,727
|
|
|
|
3,324
|
|
|
|
626
|
|
Cash
and cash equivalents at end of year
|
$
|
399
|
|
|
$
|
1,727
|
|
|
$
|
3,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
payments of interest
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued in exchange for Series A preferred stock
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
354
|
|
Preferred
stock dividend accreted
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
81
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
AEOLUS
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2008
A.
Nature of the Business
Aeolus
Pharmaceuticals, Inc. is a biopharmaceutical company that is developing a new
class of catalytic antioxidant compounds for diseases and disorders of the
central nervous system, respiratory system, autoimmune system and
oncology. The Company’s initial target indications are as a
protective agent against the effects of mustard gas exposure, as a protective
agent against radiation exposure, cancer radiation therapy, as a protective
agent against the effects of chlorine gas exposure and amyotrophic lateral
sclerosis, also known as “ALS” or “Lou Gehrig’s disease.”
The
“Company” or “Aeolus” refers collectively to Aeolus Pharmaceuticals, Inc., a
Delaware corporation (“Aeolus”) and its wholly owned subsidiary, Aeolus
Sciences, Inc., a Delaware corporation (“Aeolus Sciences”). As of
September 30, 2008, Aeolus also owned a 35.0% interest in CPEC LLC, a Delaware
limited liability company (“CPEC”). The Company’s primary operations
are located in Laguna Niguel, California.
B.
Liquidity
The
Company has incurred significant operating losses and cash outflows from
operations of $2,517,000 and $1,813,000 for the fiscal year ended September 30,
2008, respectively. The Company expects to incur additional losses
and negative cash flow from operations in fiscal 2009 and for several more
years. Management believes the Company has adequate financial
resources to conduct operations into the second quarter of fiscal year
2009. This raises substantial doubt about our ability to continue as
a going concern, which will be dependent on our ability to generate sufficient
cash flows to meet our obligations on a timely basis, to obtain additional
financing and, ultimately, to achieve operating profit.
The
Company intends to explore strategic and financial alternatives, including a
merger with another company, the sale of shares of stock, the establishment of
new collaborations for current research programs that include initial cash
payments and on-going research support and the out-licensing of our compounds
for development by a third party. The Company believes that without
additional investment capital it will not have sufficient cash to fund its
activities in the near future, and will not be able to continue
operating. As such, the Company’s continuation as a going concern is
dependent upon its ability to raise additional financing. The Company
is actively pursuing additional equity financing to provide the necessary funds
for working capital and other planned activities.
If the
Company is unable to obtain additional financing to fund operations beyond the
second quarter of fiscal year 2009, it will need to eliminate some or all of its
activities, merge with another company, sell some or all of its assets to
another company, or cease operations entirely. There can be no
assurance that the Company will be able to obtain additional financing on
favorable terms or at all, or that the Company will be able to merge with
another Company or sell any or all of its assets.
C.
Summary of Significant Accounting Policies
Basis
of Presentation
The
consolidated financial statements include the accounts of Aeolus and its wholly
owned subsidiary. All significant intercompany accounts and
transactions have been eliminated. The Company uses the equity method
to account for its 35.0% ownership interest in CPEC.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
The
Company invests available cash in short-term bank deposits, money market funds,
commercial paper and U.S. Government securities. Cash and cash
equivalents include investments with maturities of three months or less at the
date of purchase. The carrying value of cash and cash equivalents
approximate their fair market value at September 30, 2008 and 2007 due to their
short-term nature.
Investments
Investments
consist of auction rate securities, each of investment-grade quality, which have
an original maturity dates greater than 90 days. These investments are
recorded at fair value and accounted for as available-for-sale
securities. The unrealized gain (loss) during the period is recorded
within accumulated other comprehensive loss unless it is determined to be
other-than-temporary. During the year ended September 30, 2008, the
Company recorded a net unrealized loss on investments of
$36,000. During the year ended September 30, 2008, the Company also
recorded an other than temporary impairment on the auction-rate securities of
$49,000.
Revenue
Recognition
Grant
income is recognized as revenue as work under the grant is performed and the
related expenses are incurred.
Research
and Development
Research
and development costs are expensed in the period incurred. Payments
related to the acquisition of in-process research and development are expensed
due to the stage of development of the acquired compound or technology at the
date of acquisition.
Income
Taxes
Deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary
to reduce net deferred tax assets to the amounts expected to be
realized.
Net
Loss Per Common Share
The
Company computes basic net loss per weighted share attributable to common
stockholders using the weighted average number of shares of common stock
outstanding during the period. The Company computes diluted net loss
per weighted share attributable to common stockholders using the weighted
average number of shares of common and dilutive potential common shares
outstanding during the period. Potential common shares consist of
stock options, convertible debt, warrants and convertible preferred stock using
the treasury stock method and are excluded if their effect is
anti-dilutive. Diluted weighted average common shares included
incremental shares issuable upon conversion of the Senior Convertible Notes and
shares expected to be issued to satisfy a payable. Diluted weighted
average shares excluded incremental shares of approximately 21,796,000,
18,428,000 and 19,439,000 as of September 30, 2008, 2007 and 2006, respectively,
related to stock options, convertible debt, convertible preferred stock and
warrants to purchase common stock. These shares are excluded due to
their anti-dilutive effect as a result of the Company’s net loss.
Accounting
for Stock-Based Compensation
Beginning
October 1, 2005, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123(R), “Share-Based Payments” (“SFAS No. 123(R)”) on a modified
prospective transition method to account for its employee stock
options. Under the modified prospective transition method, fair value
of new and previously granted but unvested equity awards are recognized as
compensation expense in the income statement, and prior period results are not
restated.
Segment
Reporting
The
Company currently operates in only one segment.
New
Accounting Pronouncements
In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“FAS
157”). FAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. FAS 157 codifies the definition
of fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The standard clarifies the principle that fair
value should be based on the assumptions market participants would use when
pricing the asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. For
non-financial assets and liabilities, FAS 157 is effective for financial
statements issued for fiscal years beginning after November 15,
2008. For financial assets and liabilities, FAS 157 was effective for
financial statements issued for fiscal years beginning after November 15,
2007. The Company does not expect the adoption of FAS 157 to
significantly affect its financial condition or results of
operations.
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of SFAS 115 (“FAS 159”). FAS 159
permits companies to choose to measure many financial instruments and certain
other items at fair value. It also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types
of assets
and liabilities. FAS 159 requires companies to provide additional
information that will help investors and other users of financial statements to
more easily understand the effect of a company’s choice to use fair value on its
earnings. It also requires entities to display the fair value of
those assets and liabilities for which a company has chosen to use fair value on
the face of the balance sheet. FAS 159 is effective for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. The Company does not expect the adoption of FAS 159 to
significantly affect its financial condition or results of
operations.
In December 2007, the FASB issued SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements (“FAS
160”). FAS 160 is an amendment of Accounting Research Bulletin
(“ARB”) No. 51 and was issued to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements. This Statement applies to all
entities that prepare consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an outstanding
noncontrolling interest in one or more subsidiaries. FAS 160
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements and that a parent company must recognize a
gain or loss in net income when a subsidiary is deconsolidated. FAS
160 is effective for fiscal years beginning after December 15, 2008 and early
adoption is prohibited. The Company is currently evaluating the
potential impact on its statement of financial position and results of
operations.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“FAS
141R”), which establishes principles and requirements for the reporting entity
in a business combination, including recognition and measurement in the
financial statements of the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree. FAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, and interim periods within those fiscal years. The Company
must adopt SFAS 141R on October 1, 2009, the beginning of its fiscal year
2010. The Company does not expect the application of FAS 141R to have
a material effect on the financial statements.
D. Investments
Investments
in Auction-Rate Securities
The
Company has invested in auction-rate securities with a par value of $525,000.
The auction-rate securities are debt obligations secured by student loans,
which loans are generally guaranteed by the U.S. Government under the Federal
Family Education Loan Program (FFELP). In addition to the U.S.
Government guarantee on such student loans, many of the securities also have
separate insurance policies guaranteeing both the principal and accrued
interest. Liquidity for these securities has historically been
provided by an auction process that resets the applicable interest rate at
pre-determined intervals for up to 35 days. In the past, the auction
process has generally allowed investors to obtain immediate liquidity if so
desired by selling the securities at their face amounts. However, as
has been recently reported in the financial press, the current disruptions in
the credit markets have adversely affected the auction market for these types of
securities. From February 26, 2008 to September 30, 2008, all
auctions scheduled with respect to the Company’s auction-rate securities failed
to close. This is the first time the Company has experienced this
type of event for its holdings of auction-rate securities and the Company
believes that prior to February 13, 2008, the Company’s investment advisor, UBS
Financial Services, Inc. (“UBS”), had not had a failed auction. The
Company understands that the failure of auctions is broad based and not limited
to those securities held by the Company. The auction-rate securities
continue to pay interest.
As a
result of the failed auctions, these auction-rate securities held by the Company
are currently not liquid. Furthermore, the Company cannot predict how
long they will remain illiquid. As such, at least in the near term,
the Company believes it may not be able to liquidate some or all of its
remaining auction-rate securities prior to their maturities at prices
approximating their face amounts. The final maturity dates of the
auction-rate securities which the Company owns is between 2029 and
2038.
The
Company has taken an “other-than-temporary” impairment charge during the fiscal
year ended September 30, 2008 of $49,000 based upon reduced market values as
determined based upon investment statements received from UBS. The
Company also holds these investments as available for sale and accordingly
records its value on the balance at market value as determined by investments
statements provided by UBS. Our auction-rate securities had an
estimated fair value of approximately $440,000 as of September 30,
2008. The estimated fair value of the auction-rate securities could
decrease or increase significantly in the future based on market
conditions. Management will continue to assess the fair value of the
auction-rate securities based on analysis of account statements and other
correspondence from UBS.
In June
2008, the Company filed arbitration and mediation claims against UBS seeking
recession of the purchase transactions of its four auction-rate securities,
reimbursement for lost interest income and lost revenue due to delays in the
development of its drug candidates and punitive damages. UBS did not
agree to mediation and the request for mediation was dismissed. In
October 2008, UBS filed a response to our arbitration claim denying all
allegations and seeking recovery of legal fees and costs. Also in
October 2008, we received notification from UBS that it has entered into a
settlement agreement with the
New York
Attorney General in which UBS agreed to repurchase certain auction-rate
securities of certain of its clients at par value for which all of our
auction-rate securities are included in the settlement with the New York
Attorney General. UBS indicated that we can exercise the option for
UBS to repurchase the auction-rate securities for a two year period beginning
January 2, 2009. We have submitted the required documentation and
intend to exercise our option to sell the four auction-rate securities to UBS on
January 2, 2009. We are currently in the discovery phase of the
arbitration proceeding. However there can be no assurance as to
the ultimate outcome of these claims.
The
current market for the auction-rate securities held by the Company is uncertain
and management will continue to monitor and evaluate the market for these
securities to determine if further impairment of the carrying value of the
securities has occurred due to the loss of liquidity or for other
reasons. If the credit ratings of the security issuers deteriorate or
if normal market conditions do not return in the near future, the Company may be
required to further reduce the value of these securities through an impairment
charge against net income.
Investments
in ARCA Biopharma, Inc.
The
Company also holds an investment in equity securities of a privately held
company, ARCA BioPharma, Inc. (“ARCA”). The aggregate carrying amount
of the holdings in ARCA was $93,000 as of September 30,
2008. The Company accounts for the investment on cost basis and
reviews the investment for impairment whenever there are identified events or
changes in circumstances that may have a significant adverse effect on the fair
value of the investment. During fiscal years ended September 30,
2008, 2007 and 2006, the Company did not record an impairment on the investment
in ARCA.
Investments
in CPEC LLC
The
Company uses the equity method to account for its 35.0% ownership interest in
CPEC. During fiscal 2003, CPEC licensed bucindolol, a drug previously
under development by the Company for the treatment of heart failure, to ARCA in
return for possible future royalty and milestone payments. During
fiscal 2006, CPEC agreed to modify the license agreement between CPEC and ARCA
and received 400,000 shares of ARCA common stock as consideration for the
amendment. In addition, during fiscal 2006, CPEC received a milestone
payment of $1,000,000 as a result of ARCA completing a
financing. During fiscal 2006, CPEC declared and paid a dividend of
which the Company received $315,000. During fiscal 2008, CPEC
declared and paid a dividend of which the Company received
$175,000. The dividend was paid upon receipt of a milestone payment
by CPEC from ARCA which was triggered upon the filing of a New Drug Application
for bucidndolol. Also as a result of the filing of the New Drug
Application with the US Food and Drug Administration, the Company is obligated
to pay $413,000 in the form of cash or stock at the Company’s election to the
majority owner of CPEC who will in turn pay the original licensors of bucindolol
per the terms of the 1994 Purchase Agreement of CPEC. The obligation
is included in our financial statements under the heading “Accounts
Payable.”.
CPEC had
$91,000 of net assets at September 30, 2008 and 2007. Aeolus’ share
of CPEC’s net assets is included in other assets and the Company has no
operations or activities unrelated to the out licensing of
buicndolol.
E.
Commitments
The
Company acquires assets still in development and enters into research and
development arrangements with third parties that often require milestone and
royalty payments to the third party contingent upon the occurrence of certain
future events linked to the success of the asset in
development. Milestone payments may be required, contingent upon the
successful achievement of an important point in the development life-cycle of
the pharmaceutical product (e.g., approval of the product for marketing by a
regulatory agency). If required by the arrangement, the Company may
have to make royalty payments based upon a percentage of the sales of the
pharmaceutical product in the event that regulatory approval for marketing is
obtained. Because of the contingent nature of these payments, they
are not included in the table of contractual obligations.
These
arrangements may be material individually, and in the unlikely event that
milestones for multiple products covered by these arrangements were reached in
the same period, the aggregate charge to expense could be material to the
results of operations in any one period. In addition, these
arrangements often give Aeolus the discretion to unilaterally terminate
development of the product, which would allow Aeolus to avoid making the
contingent payments; however, Aeolus is unlikely to cease development if the
compound successfully achieves clinical testing objectives.
F.
Notes Payable
The
Company has three debt obligations outstanding as of September 30,
2008. The combined aggregate amounts of maturities for all three debt
obligations as of September 30, 2008 are as follows (in thousands):
Fiscal
year ending
September
30,
|
|
Redemption
Amount
|
|
|
|
|
|
2009
|
|
$ |
919 |
|
2010
|
|
|
--- |
|
2011
|
|
|
625 |
|
Total
|
|
$ |
1,544 |
|
Senior
Convertible Notes to Related Parties
On August
1, 2008, the Company entered into a Securities Purchase Agreement (the "SCN
Purchase Agreement") with three accredited institutional
investors (the "Investors") pursuant to which the Company agreed to
sell to the Investors units comprised of senior unsecured convertible notes of
the Company (the "Notes"), in an aggregate principal amount of up to $5,000,000,
which shall bear interest at a rate of 7% per year and mature on the 30-month
anniversary of their date of issuance, and warrants to purchase up to an
aggregate of 10,000,000 additional shares of Common Stock (the "Warrant
Shares"), each with an initial exercise price of $0.50 per share, subject to
adjustment pursuant to the warrants (the "Warrants") (collectively the “SCN
Financing”). Each unit (collectively, the "Units") is comprised of $1,000 in
Note principal and Warrants to purchase up to 2,000 shares of the Company's
common stock, par value $0.01 per share (the "Common Stock"), and has a purchase
price of $1,000.
On August
1, 2008, the Company sold and issued to the Investors 500 Units comprised of
Notes in the aggregate principal amount of $500,000 and Warrants to purchase up
to 1,000,000 shares of Common Stock for an aggregate purchase price of $500,000
(the "Financing").
On
September 4, 2008, the Company sold and issued to the Investors 125 Units
comprised of Notes in the aggregate principal amount of $125,000 and Warrants to
purchase up to 250,000 shares of Common Stock for an aggregate purchase price of
$125,000 (the "Subsequent Financing").
The
Investors have also agreed, upon the satisfaction of certain conditions by the
Company pursuant to the Amended Purchase Agreement, to purchase an additional
125 Units on each of October 1, 2008, November 3, 2008 and December 1, 2008 (the
"Subsequent Closings"), in each case for an aggregate purchase price of
$125,000. The Notes issued in the Financing, the Subsequent Financing
and at the Subsequent Closings have, or will have, an initial conversion price
of $0.35 per share, subject to adjustment pursuant to the Notes. In
addition, the Investors have the option to purchase up to an additional 4,000
Units, in one or more closings (each, an "Election Closing"), and at their sole
option at any time on or before February 1, 2010. The additional
Units sold at an Election Closing would also be sold by the Company at a
purchase price of $1,000 per Unit, except that the initial conversion price of
the Notes issued in an Election Closing will equal the volume weighted average
closing sale price for the Common Stock for the sixty consecutive trading day
period ending on the trading day immediately preceding such Election Closing,
provided that such initial conversion price may not be less than $0.20 per share
or greater than $0.75 per share, in each case subject to adjustment pursuant to
the Note.
The Notes
will be convertible, at the Investors' sole election, into shares of Common
Stock at any time and from time to time. As of September 30, 2008,
the Notes would be convertible into 1,786,000 shares of Common Stock with a fair
value of $804,000. The conversion price of the Notes (including the
$0.20 floor and $0.75 ceiling price with respect to Notes issued at Election
Closings) and the exercise price of the Warrants are subject to adjustment in
the event of a stock dividend or split, reorganization, recapitalization or
similar event. Additionally, the conversion price of the Notes and
the exercise price of the Warrants may be reduced in the event the Company
issues securities at a price per share lower than the then current conversion
price of the Notes. The Notes are due and payable in cash at the
aggregate principal value plus accrued interest 30 months from the date of
issuance if not converted earlier by the Investors.
Interest
on the Notes accrues at the rate of 7.0% per annum from the date of issuance,
and is payable semi-annually, on January 31 and July 31 of each
year. Interest shall be payable, at the Company's sole election, in
cash or shares of Common Stock, to holders of Notes on the record date for such
interest payments, with the record dates being each January 15 and July 15
immediately preceding an interest payment date.
The
Warrants are exercisable for a five year period from the date of issuance and
contain a "cashless exercise" feature that allows the Investors to exercise the
Warrants without a cash payment to the Company under certain
circumstances.
The net
proceeds to the Company from the sale of 625 Units in the Financing and
Subsequent Financing, after deducting for expenses, were approximately
$469,000. The Company intends to use the net proceeds to fund the
development of AEOL 10150 and to fund ongoing operations of the Company.
Offering costs of the private placement were $156,000 and were allocated
to the Notes and Warrants based upon their respective fair
values. The offering costs attributed to the Notes in the amount of
$100,000 were capitalized as Debt Issuance Costs and are included in Prepaid and
other current assets in the Consolidated Balance Sheet. The Debt
Issuance Costs are being amortized over the 30-month life of the Notes in the
Financing.
As of
September 30, 2008, the carrying value of the Notes was $266,000 and the
redemption value was $625,000. In connection with the SCN Financing,
the Company recorded a note discount in the amount of $218,000 as a result of
the difference between the value attributed to the Notes and the redemption
value of the Notes. In addition, the Company determined that the
Notes contained an embedded conversion feature with a fair value of $171,000
which was also recorded as a discount to the Notes The note discounts are being
amortized to interest expense over the thirty-month term of the
Notes. The effective interest rate of the Note including the effect
of the amortization of the embedded conversion feature and the note discount is
38.3 percent.
The
maturity of the Notes may be accelerated upon the occurrence of an event of
default, which includes, subject to certain grace periods, exceptions and
qualifications as set forth in the Notes, the failure by the Company to maintain
the listing of the Common Stock, the failure of the Company to deliver shares
Common Stock in a timely manner following a conversion, the failure of the
Company to have reserved a sufficient number shares of Common Stock to issue
upon conversion of the Notes, the failure by the Company to make payments on the
Notes in a timely manner, payment defaults by the Company or any of its
significant subsidiaries on debt or other obligations in excess of $100,000, the
occurrence of certain bankruptcy events with respect to the Company or its
significant subsidiaries, judgments rendered against the Company or its
significant subsidiaries in excess of $100,000 and breaches of material
representations, warranties or covenants by the Company under the Amended
Purchase Agreement or the Notes. Upon the occurrence of an event of default
related to a bankruptcy of the Company, the Notes shall immediately become due
and payable. Upon the occurrence of any event default other than a
bankruptcy event of default, any holder of the Notes, in its sole discretion,
may declare this Note to be immediately due and payable and the Company shall
pay to the holder in cash the sum of all outstanding principal multiplied by
115%, plus accrued and unpaid interest and late charges, if any,
thereon. The Notes are unsubordinated obligations of the Company and
all payments due under the Notes rank pari passu with the Elan Note and shall
not be subordinated to any other Indebtedness of the Company.
The Notes
also provide that the Company shall not issue any equity securities other than
certain exempt securities as defined in the Notes, incur any indebtedness other
than certain exempt indebtedness as defined in the Notes, allow the incurrence
of any liens on its assets, repay any indebtedness other than the Notes, pay a
dividend on its common stock or make an investment other than ordinary investing
activities without the consent of the holders of Notes representing a majority
of the then-outstanding principal subject to the Notes.
Affiliates
of Xmark Opportunity Partners, LLC are the sole investors in the SCN Financing.
Together with its affiliates, Xmark Opportunity Partners, LLC beneficially owned
approximately 52% of the Company's outstanding common stock prior to the
Financing. Xmark Opportunity Partners, LLC is the sole manager of Goodnow
Capital, L.L.C. and possesses sole power to vote and direct the disposition of
all securities of the Company held by Goodnow. Goodnow has the right to
designate up to two directors for election to the Company's Board of Directors
pursuant to the terms of a purchase agreement between Goodnow and the Company.
David C. Cavalier, a current director of the Company, is President of
Goodnow. The transaction was evaluated by Management and the Board of
Directors for fairness to ensure the terms were reasonable given the related
party nature of the SCN Financing by providing an option for non-related party
investors to participate in the transaction.
Elan
Note Payable
In August
2002, Aeolus borrowed from Elan Corporation, plc. (“Elan”)
$638,000. The note payable accrued interest at 10% compounded
semi-annually. The note was convertible at the option of Elan into shares of the
Company’s Series B non-voting convertible preferred stock (“Series B Stock”) at
a rate of $43.27 per share. The original note matured on December 21,
2006. However, in February 2007, the Company and Elan terminated the
note, the Company paid $300,000 in cash to Elan, Elan forgave $225,000 of the
note payable and Elan and the Company entered into a new two-year note payable
in the amount of $453,000 under substantially the same terms as the original
note.
The
remaining principal plus accrued interest will be due and payable in February
2009. During the term of the note payable, Elan has the option to
convert the note into shares of Series B Preferred Stock at a rate of $9.00 per
share. Upon the maturity of the note payable, Aeolus has the option
to repay the note either in cash or in shares of Series B Stock and warrants
having a then fair market value of the amount due; provided that the fair market
value used for calculating the number of shares to be issued will not be less
than $13.00 per share. As of September 30, 2008, the outstanding balance,
including interest, on the note payable to Elan was $534,000.
Margin
Loan with UBS Financial Services, Inc.
Aeolus
has entered into a secured credit agreement (the “Margin Agreement”) with UBS
Financial Services, Inc and subsequently drew $368,000 under the Margin
Agreement. The Margin Agreement bears interest at the per annum rate
of LIBOR plus 0.25 percent. The weighted average interest rate for
the loan was 2.4% during the period the loan was outstanding in the fiscal year
ended September 30, 2008. The average balance of the loan and the
total interest paid on the loan during the period the loan was outstanding in
the fiscal year ended September 30, 2008 was $351,000 and $4,000,
respectively.
Availability
of the line of credit is subject to the Company’s compliance with certain
financial and other covenants. Borrowings under the Margin
Agreement are secured by the Company’s investments held by UBS (Note
D). In June 2008, UBS notified the Company that it is in violation of
the Margin Agreement and has requested repayment of $20,000. The
Company has not made such payment and informed UBS that no such payment will be
made pending the outcome of the arbitration claim as more fully discussed in
Note D.
G.
Stockholders’ Equity (Deficit)
Preferred
Stock
The
Certificate of Incorporation of Aeolus authorizes the issuance of up to
10,000,000 shares of Preferred Stock, at a par value of $.01 per share. The
Board of Directors has the authority to issue Preferred Stock in one or more
series, to fix the designation and number of shares of each such series, and to
determine or change the designation, relative rights, preferences, and
limitations of any series of Preferred Stock, without any further vote or action
by the stockholders of the Company.
In
January 2001, Aeolus issued to Elan 28,457 shares of Series B Stock. In February
2002, the Company issued 58,883 shares of Series B Stock and 480,000 shares of
common stock to Elan in exchange for the retirement of a $1,400,000 note payable
to Elan. In May 2002, the Company sold 416,204 shares of Series B Stock to Elan
for $3,000,000. On January 14, 2005, Elan converted 28,457 shares of the Series
B Stock into 28,457 shares of common stock. As of September 30, 2008, 475,087
shares of Series B Stock were outstanding. Each share of Series B Stock is
convertible into one share of common stock.
On November 21, 2005, the Company
completed a private placement whereby the Company issued to certain accredited
investors an aggregate of 1,250,000 shares of Series A Convertible Preferred
Stock (the “Series A Preferred Stock”) at a stated price of $2.00 per share and
warrants to purchase up to an aggregate of 2,500,000 shares of common stock at
an exercise price of $1.00 per share and a five year term resulting in net
proceeds of $2,413,000. The Series A Preferred Stock accrued
dividends at the rate of 6% of the stated price annually, which were paid in our
common stock and were accreted to earnings available to common stockholders on a
quarterly basis. Each convertible preferred share was convertible
into two shares of our common stock which was subsequently increased to four
shares of our common stock and had a liquidation preference of $3.00 per
share. The warrants contain a “cashless exercise” feature that allows
the holders, under certain circumstances, to exercise the warrants without
making a cash payment to the Company.
The fair value of the warrants on
November 21, 2005 was estimated to be $2,146,000 using the Black-Scholes option
pricing model with the following assumptions: dividend yield of 0%; expected
volatility of 112%; risk free interest rate of 4.4%; and an expected life of
five years. The proceeds from the private placement were first
allocated to the fair value of the warrants and the remaining proceeds were
attributed to the value of the preferred stock, resulting in a carrying value of
the Series A Preferred Stock of $354,000. The carrying value of the
Series A Preferred Stock was not accreted to its redemption value as the
occurrence of the redemption event was not considered probable.
Offering costs of the private placement
were $87,000 which was charged to additional paid in capital.
Pursuant to the terms of the
registration rights agreement entered into in connection with the transaction,
the Company filed a registration statement with Securities and Exchange
Commission which was declared effective on March 1, 2006. The
registration rights agreement further provides that if a registration statement
is not filed or declared effective within specified time periods, the Company
would be required to pay each holder an amount in cash, as liquidated damages,
equal to 1.5% per month of the aggregate purchase price paid by such holder in
the private placement for the common stock and warrants then held. In
accordance with EITF 00-19, “Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled In a Company’s Own Stock,” and the terms of
the warrants and the transaction documents, at the closing date for the
financing, November 21, 2005, the fair value of the warrants issued in the
private placement were accounted for as a liability. The warrant
liability was reclassified to equity when the Securities and Exchange Commission
declared the registration statement effective on March 1,
2006. Through March 1, 2006, the warrant liability was revalued at
each balance sheet date and the change in fair value was charged to the
statement of operations. Between November 21, 2005 and March 1, 2006, the fair
value of the warrant decreased by $401,000 which was credited to the statement
of operations.
In connection with the June 5, 2006
financing, all outstanding shares of the Series A Preferred Stock were converted
into an aggregate of 5,000,000 shares of common stock. In addition,
the exercise price of the warrants to purchase up to an aggregate of 2,500,000
shares of common stock issued in the November 2005 financing was lowered from
$1.00 per share to $0.50 per share in accordance with the terms of the
warrants. As a result of the change of the conversion terms of the
Series A Preferred Stock from two shares of common stock to four shares of
common stock, the Company recognized a dividend in the amount of
$900,000. Such amount was determined as the incremental intrinsic
value of the beneficial conversion feature that was triggered upon conversion of
the Series A Preferred stock and was recorded as additional paid-in
capital.
Common
Stock
On June
5, 2006, Aeolus completed a private placement of 10,000,000 shares of the
Company’s Common Stock at a purchase price of $0.50 per share for aggregate
gross proceeds of $5,000,000, issued to the certain investors in the private
placement warrants (the “2006 Investor Warrants”) to purchase up to an aggregate
of 7,000,000 shares of common stock of the Company with an exercise price of
$0.75 per share and issued to Efficacy Biotech Master Fund Ltd. a warrant (the
“Efficacy Warrant”) to purchase up to an aggregate of 4,000,000
shares of common stock with an exercise price of $0.50 per share (collectively
the “2006 Financing”). The 2006 Investor Warrants are exercisable until June 5,
2011 and may be exercised by the holder only pursuant to a cash
payment. The Efficacy Warrant expired unexercised on June 5,
2007. The aggregate net proceeds to the Company from this financing,
after deducting for expenses, were approximately $4,754,000.
The fair
value of the warrants issued on June 5, 2006 was estimated to be $4,716,000
using the Black-Scholes option pricing model with the following assumptions:
dividend yield of 0%; risk free interest rate of 5.0%; expected volatility of
120% for the Investor Warrants and 124% for Efficacy Warrant; and an expected
life of five years for the 2006 Investor Warrants and one year for the Efficacy
Warrant. The proceeds from the private placement were first allocated
to the fair value of the warrants and the remaining proceeds were attributed to
the value of the common stock.
Pursuant
to the terms of the Subscription Agreement for the 2006 Financing, the Company
filed a registration statement with the Securities and Exchange Commission which
was declared effective on July 31, 2006. The Subscription Agreement
further provides that if a registration statement is not filed or declared
effective within specified time periods, the Company would be required to pay
each holder an amount in cash, as liquidated damages, equal to 1.0% per month of
the aggregate purchase price paid by such holder in the private placement for
the common stock and warrants then held. In accordance with EITF
00-19, “Accounting for Derivative Financial Instruments Indexed To, and
Potentially Settled In a Company’s Own Stock,” and the terms of the warrants and
the transaction documents, at the closing date, June 5, 2006, the fair value of
the warrants issued in the private placement were accounted for as a
liability. The warrant liability was reclassified to equity when the
Securities and Exchange Commission declared the registration statement
effective. From June 5, 2006 to July 31, 2006, the date in which a
registration statement registering the shares underlying the warrants was
declared effective, the warrant liability was revalued at each balance sheet
date and changes in fair value were charged to the statement of operations.
Between June 5, 2006 and July 31, 2006, the fair value of the warrant increased
by $901,000 which was charged to the statement of operations. The
warrant liability and revaluations have not and will not have any impact on the
Company’s working capital, liquidity, or business operations.
On May
22, 2007, Aeolus Pharmaceuticals, Inc. entered into a Securities Purchase
Agreement with certain accredited investors (the “Investors”) pursuant to which
the Company sold to the Investors an aggregate of 2,666,667 shares of the
Company’s common stock at a purchase price of $0.75 per share for aggregate
gross proceeds of $2,000,000 and issued to the Investors warrants (the “2007
Investor Warrants”) to purchase up to an aggregate of 2,000,001 shares of common
stock of the Company with an exercise price of $0.75 per share (collectively,
the “May 2007 Private Placement”). The 2007 Investor Warrants are exercisable
until May 22, 2012. In addition, the Company issued to a placement
agent a warrant to purchase up to an aggregate of 186,667 shares of common stock
with an exercise price of $0.75 per share.
The
aggregate net proceeds to the Company from the May 2007 Private Placement, after
deducting for expenses related to finders fees, legal and accounting fees, were
approximately $1,761,000.
The fair
value of the 2007 Investor Warrants on May 22, 2007 was estimated to be
$1,428,000 using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%; risk free interest rate of 4.8%; expected
volatility of 132%; and an expected life of five years.
Pursuant
to the terms of the Securities Purchase Agreement, the Company filed a
registration statement which was declared effective on July 19,
2007. The Securities Purchase Agreement further provides that if a
registration statement is not filed, declared effective within specified time
periods or its effectiveness maintained, the Company is required to pay each
holder an amount in cash, as liquidated damages, equal to 1.5% per month of the
aggregate purchase price paid by such holder in the private placement for the
common stock and warrants then held.
Dividends
The
Company has never paid a cash dividend on its common stock and does not
anticipate paying cash dividends on its common stock in the foreseeable future.
If the Company pays a cash dividend on its common stock, it also must pay the
same dividend on an as converted basis on our Series B preferred
stock. In addition, Aeolus cannot pay a dividend on its common stock
without the prior approval of Goodnow Capital pursuant to the terms of the
Debenture and Warrant Purchase Agreement dated September 16, 2003 between the
Company and Goodnow and Xmark Opportunity Partners, LLC pursuant to the SCN
Purchase Agreement.
Warrants
In
connection with the SCN Financing (Note F), Aeolus issued warrants to purchase
1,250,000 shares at an exercise price of $0.50 per share with a five year
term. The fair value of the warrants on August 1, 2008 was estimated
to be $282,000 using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%; expected volatility of 128% risk free
interest rate of 3.2%; and an expected life of five years. The fair
value of the warrants on September 4, 2008 was estimated to be $53,000 using the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0%; expected volatility of 130% risk free interest rate of 3.0%; and an
expected life of five years.
In
addition, as a result of the SCN Financing, the Company was required to lower
the exercise price of 4,687,000 warrants previously issued in the November 2005
Financing and in the 2007 Financing to $0.35 per share, the conversion price of
the Notes issued in the SCN Financing. As a result of the
change in the exercise price, these warrants were revalued resulting in an
increase in the value of $118,000 which was charged to the statement of
operations.
In
connection with the private placement in June 2006, Aeolus issued to the 2006
Investor Warrants to purchase up to an aggregate of 7,000,000 shares of common
stock of the Company with an exercise price of $0.75 per share and issued the
Efficacy Warrant to purchase up to an aggregate of 4,000,000 shares of common
stock with an exercise price of $0.50 per share. The 2006 Investor Warrants are
exercisable until June 5, 2011 and may be exercised by the holder only pursuant
to a cash payment. The Efficacy Warrant expired on June 5,
2007.
In
connection with the 2005 Financing, Aeolus issued warrants to purchase 2,500,000
shares at an exercise price of $1.00 per share. In accordance with the terms of
the Certificate of Designations, Preferences and Rights of Series A Convertible
Preferred Stock, the conversion price of the Company’s Series A Convertible
Preferred Stock (the “Series A Preferred Stock”) and the exercise price of the
warrants previously issued to the Series A Preferred Stock holders in November
2005 were each automatically reduced to $0.50 per share, the purchase price of
the common stock issued in the 2006 Financing. As a result of
the change in the exercise price, these warrants were revalued resulting in an
increase in the value of $105,000 which was charged to the statement of
operations.
During
fiscal 2006, Aeolus issued to an accredited investor a warrant to purchase up to
an aggregate of 250,000 shares of common stock with an exercise price ranging
from $0.50 to $2.50 per share in accordance with the terms of a consulting
agreement. The Company incurred $28,000 and $76,000 of expense related to
warrants issued in fiscal 2007 and 2006, respectively. No warrant expense was
incurred in fiscal 2008.
As of
September 30, 2008, warrants for common stock outstanding were as
follows:
Number
of Shares
|
|
Exercise
Price
|
|
Expiration
Date
|
|
|
|
|
|
|
50,000
|
|
$
|
0.35
|
|
May
2011
|
2,500,000
|
|
$
|
0.35
|
|
November
2010
|
2,186,668
|
|
$
|
0.35
|
|
May
2012
|
1,000,000
|
|
$
|
0.50
|
|
August
2013
|
250,000
|
|
$
|
0.50
|
|
September
2013
|
7,000,000
|
|
$
|
0.75
|
|
June
2011
|
50,000
|
|
$
|
1.00
|
|
May
2011
|
50,000
|
|
$
|
1.50
|
|
May
2011
|
50,000
|
|
$
|
2.00
|
|
May
2011
|
50,000
|
|
$
|
2.50
|
|
May
2011
|
410,400
|
|
$
|
2.50
|
|
April
2009
|
1,641,600
|
|
$
|
4.00
|
|
April
2009
|
1,759
|
|
$
|
19.90
|
|
October
2008
|
15,240,427
|
|
$
|
1.02
|
|
|
H.
Stock Compensation Plans
Stock
Option Plans
As an
integral component of a management and employee retention program designed to
motivate, retain and provide incentive to the Company’s management, employees
and key consultants, the Board of Directors approved the 2004 Stock Option Plan
(the “2004 Plan”) and reserved 5,000,000 shares of common stock for issuance
under the 2004 Plan. As of September 30, 2008, 2,574,895 shares were available
to be granted under the 2004 Plan. The exercise price of the incentive stock
options (“ISOs”) granted under the 2004 Plan must not be less than the fair
market value of the common stock as determined on the date of the grant. The
options may have a term up to 10 years. Options typically vest immediately or up
to one year following the date of the grant.
Under the
Company’s 1994 Stock Option Plan (the “1994 Plan”), incentive stock options or
non-qualified stock options to purchase 2,500,000 shares of Aeolus’ common stock
may be granted to employees, directors and consultants of the Company. As of
September 30, 2008, there were no shares available to be granted under the 1994
Plan. The exercise price of the ISOs granted under the 1994 Plan must
not be less than the fair market value of the common stock as determined on the
date of the grant. The options may have a term up to 10 years. Options typically
vest over three years following the date of the grant.
Stock
option activity under the 2004 Plan and 1994 Plan were as follows:
|
|
Shares
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Contractual Life
|
|
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2005
|
|
2,394,091
|
|
$
|
4.05
|
|
8.0
years
|
|
$
|
92
|
Granted
|
|
777,641
|
|
$
|
0.81
|
|
10.0
years
|
|
|
---
|
Exercised
|
|
(83,332
|
)
|
$
|
1.00
|
|
9.2
years
|
|
|
(13)
|
Cancelled
|
|
(16,594
|
)
|
$
|
16.84
|
|
|
|
|
|
Outstanding
at September 30, 2006
|
|
3,071,806
|
|
$
|
3.25
|
|
7.7
years
|
|
$
|
22
|
Granted
|
|
1,315,000
|
|
$
|
0.68
|
|
10.0
years
|
|
|
---
|
Exercised
|
|
(20,833
|
)
|
$
|
1.00
|
|
8.6
years
|
|
|
(8)
|
Cancelled
|
|
(492,356
|
)
|
$
|
0.65
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
3,873,617
|
|
$
|
2.72
|
|
7.3
years
|
|
$
|
2
|
Granted
|
|
475,000
|
|
$
|
0.35
|
|
10.0
years
|
|
|
---
|
Exercised
|
|
----
|
|
|
|
|
|
|
|
|
Cancelled
|
|
(113,336
|
)
|
$
|
0.87
|
|
|
|
|
|
Outstanding
at September 30, 2008
|
|
4,235,281
|
|
$
|
2.50
|
|
6.7
years
|
|
$
|
46
|
Exercisable
at September 30, 2008
|
|
3,924,448
|
|
$
|
2.67
|
|
6.4
years
|
|
$
|
11
|
Stock
options granted to consultants during fiscal year 2008, 2007 and 2006 were fully
vested when issued or vested over a twelve month period. Stock option
expense for stock options granted to consultants was $77,000, $248,000 and
$199,000 for fiscal year 2008, 2007 and 2006, respectively. For the
fiscal years ended September 30, 2008, 2007 and 2006, all stock options were
issued at or above the fair market value of a share of common
stock. The weighted-average grant-date fair value of options granted
during the fiscal years 2008, 2007 and 2006 was $0.35, $0.68 and $0.81,
respectively.
A summary
of the status of nonvested shares during the three years ended September 30,
2008 was:
|
|
Shares
|
|
|
|
|
|
Nonvested
at September 30, 2005
|
|
112,917
|
|
Granted
|
|
777,641
|
|
Vested
|
|
(350,972
|
)
|
Nonvested
at September 30, 2006
|
|
539,586
|
|
Granted
|
|
1,315,000
|
|
Forfeited
|
|
(450,000
|
)
|
Vested
|
|
(867,086
|
)
|
Nonvested
at September 30, 2007
|
|
537,500
|
|
Granted
|
|
475,000
|
|
Vested
|
|
(701,667
|
)
|
Nonvested
at September 30, 2008
|
|
310,833
|
|
The total
deferred compensation expense for outstanding stock options was $56,000 as of
September 30, 2008, which will be recognized over a weighted average period of
five months. The total fair value of shares vested during fiscal
years 2008, 2007 and 2006 was $341,000, $689,000 and $424,000,
respectively.
The
details of stock options outstanding at September 30, 2008 were as
follows:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
Range
of Exercise Prices
|
|
Number
Outstanding at September 30, 2008
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life
|
|
Number
Exercisable at September 30, 2008
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.32
- $0.40
|
|
425,000
|
|
$
|
0.34
|
|
9.7
years
|
|
118,334
|
|
$
|
0.36
|
$0.45
- $0.60
|
|
476,050
|
|
$
|
0.56
|
|
8.5
years
|
|
471,883
|
|
$
|
0.56
|
$0.68
- $0.80
|
|
464,161
|
|
$
|
0.75
|
|
7.8
years
|
|
464,161
|
|
$
|
0.75
|
$0.81
- $0.90
|
|
780,085
|
|
$
|
0.88
|
|
7.6
years
|
|
780,085
|
|
$
|
0.88
|
$0.91
- $1.45
|
|
224,500
|
|
$
|
1.04
|
|
7.6
years
|
|
224,500
|
|
$
|
1.04
|
$1.50
|
|
1,256,015
|
|
$
|
1.50
|
|
4.8
years
|
|
1,256,015
|
|
$
|
1.50
|
$1.52
- $12.85
|
|
461,418
|
|
$
|
4.24
|
|
5.3
years
|
|
461,418
|
|
$
|
4.24
|
$14.50
- $31.88
|
|
99,253
|
|
$
|
25.97
|
|
2.1
years
|
|
99,253
|
|
$
|
25.97
|
$50.9375
|
|
2,999
|
|
$
|
50.94
|
|
1.5
years
|
|
2,999
|
|
$
|
50.94
|
$51.25
|
|
45,800
|
|
$
|
51.25
|
|
1.5
years
|
|
45,800
|
|
$
|
51.25
|
$0.32
- $51.25
|
|
4,235,281
|
|
$
|
2.50
|
|
6.7
years
|
|
3,924,448
|
|
$
|
2.67
|
Under the
principles of APB No. 25, the Company did not recognize compensation expense
associated with the grant of stock options to employees unless an option was
granted with an exercise price at less than fair market value. SFAS 123 requires
the use of option valuation models to recognize as expense stock option grants
to consultants and to provide supplemental information regarding options granted
to employees.
Beginning
October 1, 2005, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123(R), “Share-Based Payments” (“SFAS No. 123(R)”) on a modified
prospective transition method to account for its employee stock
options. Under the modified prospective transition method, fair value
of new and previously granted but unvested equity awards are recognized as
compensation expense in the income statement, and prior period results are not
restated. As a result of the adoption, the Company’s net loss
increased by $224,000 or $0.01 per share for fiscal 2006.
For
fiscal 2008, 2007 and 2006, stock-based compensation expense recognized in the
income statement is as follows (in thousands):
|
|
For
the fiscal year ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Research
and development expenses
|
|
$ |
45 |
|
|
$ |
177 |
|
|
$ |
43 |
|
General
and administrative expenses
|
|
|
296 |
|
|
|
539 |
|
|
|
457 |
|
Total
stock-based compensation expense
|
|
$ |
341 |
|
|
$ |
716 |
|
|
$ |
500 |
|
The fair
value of the options associated with the above compensation expense for fiscal
2008, 2007 and 2006, was determined at the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
|
|
For
the fiscal year ended September 30,
|
|
|
2008
|
|
2007
|
|
2006
|
Dividend
yield
|
|
0%
|
|
0%
|
|
0%
|
Expected
volatility
|
|
197%
- 198%
|
|
191%
- 195%
|
|
189%
- 191%
|
Risk-free
interest rate
|
|
3.8%
- 4.6%
|
|
4.5%
- 5.1%
|
|
4.3%
- 5.2%
|
Expected
option life after shares are vested
|
|
10
years
|
|
10
years
|
|
10
years
|
I.
Income Taxes
As of
September 30, 2008 and 2007, the Company had federal net operating loss (“NOL”)
carryforwards of $104,015,000 and $103,008,000, respectively and state operating
loss carryforwards of $27,429,000 and $26,424,000, respectively. The
use of these federal NOL carryforwards might be subject to limitation under the
rules regarding a change in stock ownership as determined by the Internal
Revenue Code (the “Code”). The Company may have had a change of control under
Section 382 of the Code during fiscal 2004 and 2006; however, a complete
analysis of the limitation of the NOL carryforwards will not be completed until
the time the Company projects it will be able to utilize such NOLs. The
federal net operating losses will begin to expire in 2010. The state net
operating losses begin to expire in fiscal year 2009. Additionally, the Company
had federal research and development carryforwards as of September 30, 2008 and
2007 of $3,060,000 and $3,027,000, respectively. The Company had
state research and development carryforwards as of September 30, 2008 and 2007
of $350,000 and $315,000, respectively.
Significant
components of the Company’s deferred tax assets at September 30, 2008 and 2007
consisted of the following (in thousands):
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
$
|
37,790
|
|
|
$
|
36,846
|
|
AMT
credit carryforwards
|
|
—
|
|
|
|
37
|
|
Research
and development credit carryforwards
|
|
3,410
|
|
|
|
3,342
|
|
Accrued
payroll related liabilities
|
|
2,420
|
|
|
|
2,172
|
|
Note
discount
|
|
10
|
|
|
|
—
|
|
Impairment
on marketable securities
|
|
21
|
|
|
|
—
|
|
Charitable
contribution carryforwards
|
|
—
|
|
|
|
1,109
|
|
Total
deferred tax assets
|
|
43,651
|
|
|
|
43,506
|
|
Deferred
tax liabilities
|
|
—
|
|
|
|
—
|
|
Valuation
allowance for deferred assets
|
|
(43,651
|
)
|
|
|
(43,506
|
)
|
Net
deferred tax asset
|
$
|
—
|
|
|
$
|
—
|
|
Due to
the uncertainty surrounding the realization of the favorable tax attributes in
future tax returns, all of the deferred tax assets have been fully offset by a
valuation allowance. The change in the valuation allowance is primarily a
result of the net operating loss carryforwards.
Taxes
computed at the statutory federal income tax rate of 34% are reconciled to the
provision for income taxes as follows (dollars in thousands):
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
United
States Federal income tax at statutory rate
|
$
|
(1,011
|
)
|
$
|
(1,028
|
)
|
$
|
(1,975
|
)
|
State
income taxes (net of federal benefit)
|
|
(142
|
)
|
|
(170
|
)
|
|
(277
|
)
|
Warrant
expense
|
|
40
|
|
|
—
|
|
|
—
|
|
Change
in valuation reserves
|
|
1,145
|
|
|
1,244
|
|
|
2,351
|
|
Other
|
|
(32)
|
|
|
(46)
|
|
|
(99
|
)
|
Provision
for income taxes
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
On
October 1, 2007, the Company adopted the Financial Accounting Standards Board
(“FAS”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(“FIN 48”), which alters the framework for recognizing income tax contingencies.
Previously, under Statement FAS No. 5, Accounting for Contingencies, the focus
was on the subsequent liability recognition for estimated losses from tax
contingencies where such losses were probable and the related amounts could be
reasonably estimated. Under this new interpretation, a contingent tax asset
(i.e., an uncertain tax position) may only be recognized if it is more likely
than not that it will ultimately be sustained upon audit. The Company has
evaluated its tax positions for all jurisdictions and all years for which the
statute of limitations remains open and, in accordance with the provisions of
FIN 48 determined that no additional liability for unrecognized tax benefits and
interest was necessary.
J.
Agreements
Duke
Licenses
Aeolus
has obtained exclusive worldwide licenses (the “Duke Licenses”) from
Duke University (“Duke”) to develop, make, have made, use and sell products
using certain technology in the field of free radical and antioxidant research,
developed by certain scientists at Duke. Future discoveries in the
field of antioxidant research from these scientists’ laboratories at Duke are
also covered by the Duke Licenses. The Duke Licenses require Aeolus to use its
best efforts to pursue development of products using the licensed technology and
compounds. These efforts are to include the manufacture or production
of products for testing, development and sale. Aeolus is also obligated to use
its best efforts to have the licensed technology cleared for marketing in the
United States by the U.S. Food and Drug Administration and in other countries in
which Aeolus intends to sell products using the licensed
technology. Aeolus will pay royalties to Duke on net product sales
during the terms of the Duke Licenses, and milestone payments upon certain
regulatory approvals and annual sales levels. In addition, Aeolus is obligated
under the Duke Licenses to pay all or a portion of patent prosecution,
maintenance and defense costs. Unless earlier terminated, the Duke
Licenses continue until the expiration of the last to expire issued patent on
the licensed technology.
National
Jewish Medical and Research Center Agreements
Aeolus
has an exclusive worldwide license (“NJC License”) from National Jewish Medical
and Research Center (“NJC”) to develop, make, have made, use and sell
products using certain technology developed by certain scientists at
NJC. The NJC License requires Aeolus to use commercially reasonable
efforts to diligently pursue the development and government approval of products
using the licensed technology. Aeolus will pay royalties to NJC on
net product sales during the term of the NJC License and a milestone payment
upon regulatory approval. In addition, Aeolus is obligated under the
NJC License to pay all or a portion of patent prosecution, maintenance and
defense costs. Unless earlier terminated, the NJC License continues
until the expiration of the last to expire issued patent on the licensed
technology. Aeolus also had a sponsored research agreement with NJC
that grants Aeolus an option to negotiate a royalty-bearing exclusive license
for certain technology, patents and inventions resulting from research by
certain individuals at NJC within the field of antioxidant, nitrosylating and
related areas. Aeolus terminated this agreement effective June 30,
2005.
Elan
Corporation, plc
In May
2002, the Company entered into a collaboration transaction with affiliates of
Elan Corporation, plc for the development of our catalytic antioxidant compounds
as a treatment for tissue damage from cancer radiation and
chemotherapy. Although Elan and the Company terminated this
collaboration in January 2003, the Company will pay Elan a royalty on net sales
of our catalytic antioxidant products sold, if any, for the prevention and
treatment of radiation-induced and chemotherapy-induced tissue
damage.
K.
Quarterly Financial Data (unaudited)
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total
Year
|
|
|
|
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Net
loss attributable to common stockholders
|
|
$ |
(641 |
) |
|
$ |
(697 |
) |
|
$ |
(580 |
) |
|
$ |
(1,055 |
) |
|
$ |
(2,973 |
) |
Basic
net loss per common share attributable to common
stockholders
|
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.09 |
) |
Diluted
net loss per common share attributable to common
stockholders
|
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Net
loss attributable to common stockholders
|
|
$ |
(949 |
) |
|
$ |
(544 |
) |
|
$ |
(509 |
) |
|
$ |
(1,022 |
) |
|
$ |
(3,024 |
) |
Net
loss per common share (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L.
Subsequent Events
Subsequent
to September 30, 2008, the Company sold and issued to the Investors an
additional 375 Units comprised of Notes in the aggregate principal amount of
$375,000 and Warrants to purchase up to 750,000 shares of Common Stock for an
aggregate purchase price of $375,000. The Notes have an initial
conversion price of $0.35 per share, subject to adjustment pursuant to the
Notes, and are convertible, at the Investors' sole election, into shares of
Common Stock at any time and from time to time. The conversion price
of the Notes and the exercise price of the Warrants are subject to adjustment in
the event of a stock dividend or split, reorganization, recapitalization or
similar event. Additionally, the conversion price of the Notes and
the exercise price of the Warrants may be reduced in the event the Company
issues securities at a price per share lower than the then current conversion
price of the Notes. The Notes are due and payable in cash at the
aggregate principal value plus accrued interest 30 months from the date of
issuance if not converted earlier by the Investors.
Interest
on the Notes accrues at the rate of 7.0% per annum from the date of issuance,
and is payable semi-annually, on January 31 and July 31 of each
year. Interest shall be payable, at the Company's sole election, in
cash or shares of Common Stock, to holders of Notes on the record date for such
interest payments, with the record dates being each January 15 and July 15
immediately preceding an interest payment date.
The
Warrants are exercisable for a five year period from the date of issuance and
contain a "cashless exercise" feature that allows the Investors to exercise the
Warrants without a cash payment to the Company under certain
circumstances.
None
(a) As
of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company’s
management, including the Company’s President and Chief Executive Officer (the
Company’s Principal Executive Officer) and Chief Financial Officer (the
Company’s Principal Financial and Accounting Officer), of the effectiveness of
the Company’s disclosure controls and procedures required by Exchange Act Rule
13a-15. Based upon that evaluation, the Company’s Principal Executive
Officer and Principal Financial and Accounting Officer have concluded that the
Company’s disclosure controls and procedures were not effective as of
September 30, 2008 to provide reasonable assurance that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms because of the material weakness discussed
below.
(b) During
the most recent fiscal quarter, there were no significant changes in the
Company’s internal control over financial reporting or in other factors that
materially affected or are reasonably likely to materially affect the Company’s
internal control over financial reporting.
(c) Management’s Report on Internal
Control over Financial Reporting
Management
of Aeolus Pharmaceuticals, Inc. (“Aeolus” or the “Company”) is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13A-15 (f) and 15d-15 (f) of the
Securities and Exchange Act of 1934, as amended. The Company’s
internal control over financial reporting is a process designed to provide
reasonable assurance to the Company’s Management and Board of Directors
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes policies and procedures that:
|
·
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements, errors or fraud. Also, projections
of any evaluations of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may
deteriorate.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of September 30, 2008. In making this assessment,
management used criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in an Internal Control Integrated
Framework. As a result of the lack of segregation of duties,
management has determined that a material weakness in internal control
over financial reporting related to the segregation of duties existed
as
of
September 30, 2008, and based on the criteria set forth by COSO, concluded that
the Company’s internal control over financial reporting was not effective as of
September 30, 2008.
A
“material weakness,” as defined by the Public Company Accounting Oversight Board
(PCAOB) is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of the Company’s annual or interim financial statements
will not be prevented or detected on a timely basis. This material
weakness has not resulted in an adjustment or misstatements to the financial
statements.
To
address the material weakness, management has established mitigating controls to
minimize the potential for material misstatements in the financial
statements. Management has determined that given the Company’s size,
level of operations and financial resources, it is not practicable for the
Company to eliminate the segregation of controls weakness and therefore
management has established mitigating controls to minimize the impact of the
lack of segregation of duties.
This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report.
None.
PART
III
Certain
information required by Part III is omitted from this report because the
Registrant expects to file a definitive proxy statement for its 2009 Annual
Meeting of Stockholders (the “Proxy Statement”) within 120 days after the end of
its fiscal year pursuant to Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended, and the information included therein is
incorporated herein by reference to the extent provided below.
The
information set forth under the headings "Proposal No. 1: Election of
Directors," "Corporate Governance" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in our definitive Proxy Statement for the 2009 Annual
Meeting of Stockholders is incorporated herein by reference. The
information required by this Item 10 concerning the Registrant’s executive
officers is set forth under the heading “Executive Officers” located at the end
of Part I Item 1 of this Form 10-K.
Code
of Ethics.
We have
adopted a code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer and persons performing
similar functions. We have posted the text of Code of Ethics on our
Internet website at www.aeoluspharma.com. A
copy of the Code of Ethics can also be obtained free of charge by writing to
Michael P. McManus, Corporate Secretary, Aeolus Pharmaceuticals, Inc., 26361
Crown Valley Parkway, Suite 150 Mission Viejo, CA 92691.
The
information set forth under the headings "Compensation Discussion and Analysis,"
"Compensation Committee Report," "Compensation Committee Interlocks and Insider
Participation," "Executive Compensation" and "Director Compensation" in our
definitive Proxy Statement for the 2009 Annual Meeting of Stockholders is
incorporated herein by reference.
The
information set forth under the headings “Other Information — Principal
Stockholders” and "Equity Compensation Plan Information" in our definitive Proxy
Statement for the 2009 Annual Meeting of Stockholders is incorporated herein by
reference.
The
information set forth under the headings "Information Concerning the Board of
Directors and its Committees" and "Certain Related Transactions” in our
definitive Proxy Statement for the 2009 Annual Meeting of Stockholders is
incorporated herein by reference.
The information set forth under the
heading “Independent Registered Public Accounting Firm — Fees” in our definitive
Proxy Statement for the 2009 Annual Meeting of Stockholders is incorporated
herein by reference.
PART
IV
(a) The
following financial statement schedules and exhibits are filed as part of this
report or incorporated herein by reference:
(1) Financial
Statement Schedules.
All
financial statement schedules for which provision is made in Regulation S-X are
omitted because they are not required under the related instructions, are
inapplicable, or the required information is given in the financial statements,
including the notes thereto.
(2) Exhibits.
|
|
|
|
Incorporated
by Reference To
|
|
|
|
Exhibit
Number
|
|
Description
of Document
|
|
Registrant’s
Form
|
|
Dated
|
|
Exhibit
Number
|
|
Filed
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger and Reorganization dated September 16, 2003 between
Incara, Inc. and Incara Pharmaceuticals Corporation
|
|
S-4
|
|
09/19/03
|
|
2.1
|
|
|
|
3.1
|
|
Certificate
of Incorporation, as amended
|
|
10-Q
|
|
06/30/04
|
|
3.1
|
|
|
|
3.2
|
|
Certificate
of Amendment of Amended and Restated Certificate of
Incorporation
|
|
8-K
|
|
3/27/06
|
|
3.1
|
|
|
|
3.3
|
|
Certificate
of Amendment of Amended and Restated Certificate of
Incorporation
|
|
8-K
|
|
10/27/06
|
|
3.1
|
|
|
|
3.4
|
|
Bylaws,
as amended
|
|
8-K
|
|
10/25/05
|
|
3.1
|
|
|
|
3.5
|
|
Certificate
of Designations, Preferences and Rights of Series A Convertible Preferred
Stock of the Company dated November 18, 2005
|
|
8-K
|
|
11/23/05
|
|
3.1
|
|
|
|
4.1
|
|
Form
of Common Stock Certificate
|
|
10-Q
|
|
06/30/04
|
|
4.1
|
|
|
|
4.2
|
|
Form
of Series B Preferred Stock Certificate
|
|
S-4
|
|
09/19/03
|
|
4.8
|
|
|
|
4.3
|
|
Form
of Warrant to Purchase Common Stock of Incara Pharmaceuticals Corporation
dated April 19, 2004 issued to investors in April 2004
|
|
8-K
|
|
04/21/04
|
|
4.9
|
|
|
|
4.4
|
|
Warrant
to Purchase Common Stock of Incara Pharmaceuticals Corporation dated April
19, 2004 issued to SCO Securities LLC
|
|
8-K
|
|
04/21/04
|
|
4.10
|
|
|
|
4.5
|
|
Registration
Rights Agreement dated November 21, 2005 by and among the Company and each
of the Purchasers whose names appear on the Schedule attached
thereto
|
|
8-K
|
|
11/23/05
|
|
4.1
|
|
|
|
4.6
|
|
Form
of Warrant to Purchase Common Stock dated November 21,
2005
|
|
8-K
|
|
11/23/05
|
|
10.2
|
|
|
|
4.7
|
|
Form
of Warrant to Purchase Common Stock dated June 5, 2006.
|
|
8-K
|
|
6/5/06
|
|
10.3
|
|
|
|
4.8
|
|
Warrant
to Purchase Common Stock dated June 5, 2006 issued to Efficacy Biotech
Master Fund Ltd.
|
|
8-K
|
|
6/5/06
|
|
10.4
|
|
|
|
4.9
|
|
Registration
Rights Agreement dated May 22, 2007 by and among the Company and each of
the Purchasers whose names appear on the Schedule attached
thereto.
|
|
8-K
|
|
5/22/07
|
|
4.1
|
|
|
|
4.10
|
|
Form
of Warrant to Purchase Common Stock dated May 22, 2007.
|
|
8-K
|
|
5/22/07
|
|
10.2
|
|
|
10.1*
|
|
License
Agreement between Duke University and Aeolus Pharmaceuticals, Inc.,
dated July 21, 1995
|
|
S-1
|
|
12/08/95
|
|
10.4
|
|
|
|
10.2
|
|
Amended
and Restated Limited Liability Company Agreement of CPEC LLC dated July
15, 1999, among CPEC LLC, Intercardia, Inc. and Interneuron
Pharmaceuticals, Inc.
|
|
8-K
|
|
07/23/99
|
|
10.42
|
|
|
|
10.3
|
|
Assignment,
Assumption and License Agreement dated July 15, 1999, between CPEC LLC and
Intercardia, Inc.
|
|
8-K
|
|
07/23/99
|
|
10.43
|
|
|
10.4*
|
|
License
Agreement dated January 19, 2001 between Incara Pharmaceuticals
Corporation and Incara Development, Ltd.
|
|
10-Q
|
|
12/31/00
|
|
10.59
|
|
|
10.5*
|
|
License
Agreement dated January 19, 2001 between Elan Corporation, plc, Elan
Pharma International Ltd. and Incara Development, Ltd.
|
|
10-Q
|
|
12/31/00
|
|
10.60
|
|
|
10.6
|
|
Registration
Rights Agreement dated December 21, 2000 among Incara Pharmaceuticals
Corporation, Elan International Services, Ltd. and Elan Pharma
International Ltd.
|
|
10-Q
|
|
12/31/00
|
|
10.62
|
|
|
10.7
|
|
Agreement
and Amendment, effective as of January 22, 2001, by and among Incara
Pharmaceuticals Corporation, Elan International Services, Ltd. and Elan
Pharma International Limited
|
|
10-Q
|
|
03/31/01
|
|
10.64
|
|
|
10.8
|
|
Second
Agreement and Amendment, effective as of January 22, 2001, by and among
Incara Pharmaceuticals Corporation, Elan International Services, Ltd. and
Elan Pharma International Limited
|
|
10-Q
|
|
03/31/01
|
|
10.65
|
|
|
10.9
|
|
Third
Agreement and Amendment, effective as of January 22, 2001, by and among
Incara Pharmaceuticals Corporation, Elan International Services, Ltd. and
Elan Pharma International Limited
|
|
8-K
|
|
06/01/01
|
|
10.66
|
|
|
10.10
|
|
Agreement
and Fourth Amendment, effective February 13, 2002, by and among Incara
Pharmaceuticals Corporation, Elan International Services, Ltd., Elan
Pharma International Limited and Elan Pharmaceutical Investments III,
Ltd.
|
|
10-Q
|
|
12/31/01
|
|
10.75
|
|
|
10.11*
|
|
License
Agreement dated June 25, 1998 between Duke University and Aeolus
Pharmaceuticals, Inc.
|
|
10-Q
|
|
03/31/02
|
|
10.82
|
|
|
10.12*
|
|
License
Agreement dated May 7, 2002 between Duke University and Aeolus
Pharmaceuticals, Inc.
|
|
10-Q
|
|
03/31/02
|
|
10.83
|
|
|
10.13*
|
|
License
Agreement dated November 17, 2000 between National Jewish Medical and
Research Center and Aeolus Pharmaceuticals, Inc.
|
|
10-Q
|
|
12/31/00
|
|
10.56
|
|
|
10.14*
|
|
Securities
Purchase Agreement dated as of May 15, 2002, among Incara Pharmaceuticals
Corporation, Aeolus Pharmaceuticals, Inc., Elan Pharma International
Limited and Elan International Services, Ltd.
|
|
8-K
|
|
07/03/02
|
|
10.84
|
|
|
10.15*
|
|
Development
and Option Agreement dated May 15, 2002, among Elan Pharma International
Limited, Incara Pharmaceuticals Corporation and Aeolus Pharmaceuticals,
Inc.
|
|
8-K
|
|
07/03/02
|
|
10.85
|
|
|
10.16
|
|
Amended
and Restated Registration Rights Agreement dated as of May 15, 2002, among
Incara Pharmaceuticals Corporation, Elan International Services, Ltd. and
Elan Pharma International Limited
|
|
8-K
|
|
07/03/02
|
|
10.86
|
|
|
10.17
|
|
Amendment
No. 1 to License Agreement dated May 14, 2002, between Aeolus
Pharmaceuticals, Inc. and Duke University (amending License Agreement
dated July 21, 1995)
|
|
8-K
|
|
07/03/02
|
|
10.87
|
|
|
10.18
|
|
Amendment
No. 1 to License Agreement dated May 14, 2002, between Aeolus
Pharmaceuticals, Inc. and Duke University (amending License Agreement
dated June 25, 1998)
|
|
8-K
|
|
07/03/02
|
|
10.88
|
|
|
10.19
|
|
Amendment
No. 1 to License Agreement dated May 14, 2002, between Aeolus
Pharmaceuticals, Inc. and National Jewish Medical and Research Center
(amending License Agreement dated November 17, 2000)
|
|
8-K
|
|
07/03/02
|
|
10.89
|
|
|
10.20
|
|
Convertible
Secured Promissory Note dated July 28, 2003 issued by Incara, Inc. to
Goodnow Capital, Inc.
|
|
10-Q
|
|
06/30/03
|
|
10.97
|
|
|
10.21
|
|
Guaranty
dated July 28, 2003 issued by Incara Pharmaceuticals Incorporation to
Goodnow Capital, Inc.
|
|
10-Q
|
|
06/30/03
|
|
10.98
|
|
|
10.22
|
|
Security
Agreement dated July 28, 2003 issued by Incara Pharmaceuticals
Incorporation to Goodnow Capital, Inc.
|
|
10-Q
|
|
06/30/03
|
|
10.90
|
|
|
10.23
|
|
Debenture
and Warrant Purchase Agreement dated September 16, 2003 among Incara
Pharmaceuticals Corporation, Incara, Inc. and Goodnow Capital,
L.L.C.
|
|
S-4
|
|
09/19/03
|
|
10.100
|
|
|
10.24
|
|
Registration
Rights Agreement dated September 16, 2003 among Incara Pharmaceuticals
Corporation, Incara, Inc. and Goodnow Capital, L.L.C.
|
|
S-4
|
|
09/19/03
|
|
10.101
|
|
|
10.25
|
|
Registration
Rights Agreement dated April 19, 2004 among Incara Pharmaceuticals
Corporation, certain investors and SCO Securities LLC
|
|
8-K
|
|
04/21/04
|
|
10.103
|
|
|
10.26
|
|
Amendment
No. 1 to Debenture and Warrant Purchase Agreement dated September 16, 2003
among Incara Pharmaceuticals Corporation, Incara, Inc. and Goodnow
Capital, L.L.C.
|
|
8-K
|
|
04/21/04
|
|
10.104
|
|
|
10.27
|
|
Letter
dated May 17, 2004 from Elan International Services, Limited and Elan
Pharma International Limited to Incara Pharmaceuticals
Corporation
|
|
10-Q
|
|
06/30/04
|
|
10.106
|
|
|
10.28+
|
|
Aeolus
Pharmaceuticals, Inc. 1994 Stock Option Plan, as amended
|
|
10-Q
|
|
06/30/04
|
|
10.109
|
|
|
10.29+
|
|
Aeolus
Pharmaceuticals, Inc. Amended and Restated 2004 Stock Incentive
Plan
|
|
S-8
POS
|
|
3/31/08
|
|
99.1
|
|
|
10.30+
|
|
Employment
Agreement dated July 14, 2006 between Aeolus Pharmaceuticals, Inc. and
John L. McManus
|
|
8-K
|
|
7/14/06
|
|
10.1
|
|
|
10.31+
|
|
Letter
Agreement dated July 10, 2006 between Aeolus Pharmaceuticals, Inc. and
McManus & Company, Inc.
|
|
8-K
|
|
7/10/06
|
|
10.2
|
|
|
10.32+
|
|
Form
of Indemnity Agreement
|
|
8-K
|
|
2/18/05
|
|
10.118
|
|
|
10.33
|
|
Terms
of Outside Director Compensation
|
|
10-K
|
|
12/17/04
|
|
10.114
|
|
|
10.34+
|
|
Form
of Incentive Stock Option Agreement
|
|
10-Q
|
|
2/8/05
|
|
10.115
|
|
|
10.35+
|
|
Form
of Nonqualified Stock Option Agreement
|
|
10-Q
|
|
2/8/05
|
|
10.116
|
|
|
10.36
|
|
Purchase
Agreement dated November 21, 2005 by and among the Company and the
investors whose names appear on the signature pages
thereof
|
|
8-K
|
|
11/23/05
|
|
10.1
|
|
|
10.37
|
|
Subscription
Agreement dated June 5, 2006 by and between the Company and the investors
whose names appear on the signature pages thereof.
|
|
8-K
|
|
6/5/06
|
|
10.1
|
|
|
10.38
|
|
Right
of First Offer Agreement dated June 5, 2006 by and among the Company and
Efficacy Biotech Master Fund Ltd.
|
|
8-K
|
|
6/5/06
|
|
10.5
|
|
|
10.39
|
|
Board
Observer Letter dated June 5, 2006 by and among the Company and Efficacy
Biotech Master Fund Ltd.
|
|
8-K
|
|
6/5/06
|
|
10.6
|
|
|
10.40
|
|
Securities
Purchase Agreement dated May 22, 2007 by and among the Company and the
investors whose names appear on the signature pages
thereof.
|
|
8-K
|
|
5/22/07
|
|
10.1
|
|
|
10.41
|
|
Letter
Agreement dated April 30, 2007 by and between the Company and Rodman and
Renshaw, LLC
|
|
8-K
|
|
5/22/07
|
|
10.3
|
|
|
10.42
|
|
Convertible
Promissory Note dated February 7, 2007 issued by Aeolus Pharmaceuticals,
Inc. to Elan Pharma International Ltd.
|
|
S-1
|
|
6/4/07
|
|
10.43
|
|
|
10.43
|
|
Securities
Purchase Agreement dated August 1, 2008 by and among the Company and the
investors whose names appear on the signature pages thereof, as amended by
Amendment No. 1 thereto dated August 4, 2008 by and among the Company and
the investors whose names appear on the signature pages
thereof.
|
|
8-KA
|
|
8/1/08
|
|
10.1
|
|
|
10.44
|
|
Form
of Senior Convertible Note issued by the Company on August 1,
2008
|
|
8-K
|
|
8/1/08
|
|
10.2
|
|
|
10.45
|
|
Form
of Warrant to Purchase Common Stock
|
|
8-KA
|
|
8/1/08
|
|
10.3
|
|
|
10.46
|
|
Form
of Senior Convertible Note
|
|
8-KA
|
|
8/1/08
|
|
10.4
|
|
|
10.47+
|
|
Form
of Restricted Share Award Agreement
|
|
S-8
POS
|
|
3/31/08
|
|
99.2
|
|
|
14.1
|
|
Aeolus
Pharmaceuticals, Inc. Code of Ethics for Chief Executive Officer and
Senior Financial Officers, as amended on December 13, 2004
|
|
8-K
|
|
12/14/04
|
|
10.113
|
|
|
21.1
|
|
List
of Subsidiaries
|
|
|
|
|
|
|
|
X
|
23.1
|
|
Consent
of Haskell & White, LLP, Independent Registered Public Accounting
Firm
|
|
|
|
|
|
|
|
X
|
31.1
|
|
Certification
of the Principal Executive Officer pursuant to Rule 13a-14(a)
and 15d-14(a)
|
|
|
|
|
|
|
|
X
|
31.2
|
|
Certification
of the Principal Financial and Accounting Officer pursuant to Rule
13a-14(a) and 15d-14(a)
|
|
|
|
|
|
|
|
X
|
32.1
|
|
Certification
by the Principal Executive Officer and Principal Financial and Accounting
Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
X
|
——————
* The
Company has received confidential treatment of certain portions of this
agreement which have been omitted and filed separately with the U.S. Securities
and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934.
+ Indicates
management contract or compensatory plan or arrangement.
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.
|
|
AEOLUS
PHARMACEUTICALS, INC.
|
|
|
|
|
By:
|
/s/
John L. McManus
|
|
|
John
L. McManus
President
and Chief Executive Officer
|
Date:
December 12, 2008
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.
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
John L. McManus
|
|
President
and Chief Executive Officer
|
|
December
12, 2008
|
John
L. McManus
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
Michael P. McManus
|
|
Chief
Financial Officer, Treasurer and Secretary
|
|
December
12, 2008
|
Michael
P. McManus
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/
David C. Cavalier
|
|
Chairman
of the Board of Directors
|
|
December
12, 2008
|
David
C. Cavalier
|
|
|
|
|
|
|
|
|
|
/s/
John M. Farah, Jr.
|
|
Director
|
|
December
12, 2008
|
John
M. Farah, Jr., Ph.D.
|
|
|
|
|
|
|
|
|
|
/s/
Joseph J. Krivulka
|
|
Director
|
|
December
12, 2008
|
Joseph
J. Krivulka
|
|
|
|
|
|
|
|
|
|
/s/
Amit Kumar
|
|
Director
|
|
December
12, 2008
|
Amit
Kumar, Ph.D.
|
|
|
|
|
|
|
|
|
|
/s/
Michael E. Lewis
|
|
Director
|
|
December
12, 2008
|
Michael
E. Lewis, Ph.D.
|
|
|
|
|
|
|
|
|
|
/s/
Chris A. Rallis
|
|
Director
|
|
December
12, 2008
|
Chris
A. Rallis
|
|
|
|
|
|
|
|
|
|
/s/
Peter D. Suzdak
|
|
Director
|
|
December
12, 2008
|
Peter
D. Suzdak, Ph.D.
|
|
|
|
|