Cellectar Biosciences
NOVELOS THERAPEUTICS, INC. (Form: 10-K, Received: 03/28/2013 16:41:57)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

FORM 10-K

 

  

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended: December 31, 2012

 

¨ 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 333-119366

 

NOVELOS THERAPEUTICS, INC.
( Exact name of Registrant as specified in its Charter )

 

Delaware

( State or other jurisdiction

of incorporation or organization )

04-3321804

( I.R.S. Employer Identification No. )

 

 

One Gateway Center, Suite 504

Newton, Massachusetts 02458

( Address of principal executive offices and zip code )

 

Registrant’s telephone number: ( 617) 244-1616

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Class

 

Name of each exchange on which registered

None   Not Applicable

 

Securities Registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨      No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨      No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x      No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x      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. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer   ¨
     
Non-accelerated filer ¨ Smaller reporting company   x
(Do not check if a smaller reporting company)  

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨      No x

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2012 was $38,214,881.

 

As of March 25, 2013 there were 57,397,997 shares of the registrant’s $0.00001 par value common stock outstanding.

 

 

 

 
 

   

NOVELOS THERAPEUTICS, INC.

 

FORM 10-K

 

TABLE OF CONTENTS

 

PART I   3
Item 1. Business 3
Item 1A.   Risk Factors 17
Item 2. Properties 29
Item 3. Legal Proceedings 29
Item 4. Mine Safety Disclosures  
PART II   30
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 30
Item 6. Selected Financial Data 31
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Financial Statements 39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 65
Item 9A. Controls and Procedures 65
Item 9B. Other Information 66
PART III   66
Item 10. Directors, Executive Officers, and Corporate Governance 66
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 74
Item 13. Certain Relationships and Related Transactions, and Director Independence 77
Item 14. Principal Accounting Fees and Services 79
PART IV   80
Item 15. Exhibits 80

 

 

 

This annual report on Form 10-K of Novelos Therapeutics, Inc. (“the Company”, “we”, “us”, “our”) contains forward-looking statements, which involve risks and uncertainties, such as our plans, objectives, expectations and intentions. You can identify these statements by our use of words such as “may,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” “continue,” “plans,” or their negatives or cognates. Some of these statements include discussions regarding our future business strategy and our ability to generate revenue, income and cash flow. We wish to caution the reader that all forward-looking statements contained in this annual report on Form 10-K are only estimates and predictions. Our actual results could differ materially from those anticipated as a result of risks facing us or actual events differing from the assumptions underlying such forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this annual report on Form 10-K. We will not update these forward-looking statements unless the securities laws and regulations require us to do so.

 

 

 

This annual report on Form 10-K contains trademarks and service marks of Novelos Therapeutics, Inc. Unless otherwise provided in this annual report on Form 10-K, trademarks identified by ™ are trademarks of Novelos Therapeutics, Inc. All other trademarks are the properties of their respective owners.

 

 

 

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PART I

 

Item 1. Business.

 

Business of Novelos

 

Novelos Therapeutics, Inc. (Novelos or the Company) is a pharmaceutical company developing compounds for the treatment and diagnosis of cancer.  On April 8, 2011, Novelos entered into a business combination with Cellectar, Inc. (Cellectar), a privately held Wisconsin corporation that designed and developed products to detect, treat and monitor a wide variety of human cancers (the Acquisition). Following the Acquisition, we have been developing novel drugs for the treatment and diagnosis of cancer.

 

We believe our cancer-targeted compounds (referred to as LIGHT, HOT and GLOW2) are selectively taken up and retained in cancer cells, including cancer stem cells, versus normal cells. Thus, our therapeutic compounds appear to directly kill cancer cells while minimizing harm to normal cells. This offers the potential for a paradigm shift in cancer therapy by providing efficacy versus all three major drivers of mortality in cancer: primary tumors, metastases and stem cell-based relapse. I-124-CLR1404 (LIGHT) is a small-molecule, broad-spectrum, cancer-targeted positron emission tomography (PET) imaging agent. We believe LIGHT has the potential to be the first imaging agent to use phospholipid ether analogs (PLEs) to target cancer cells. Phase 1-2 clinical trials are ongoing across 11 solid tumor indications. I-131-CLR1404 (HOT) is a small-molecule, broad-spectrum, cancer-targeted molecular radiotherapeutic that delivers cytotoxic (cell-killing) radiation directly and selectively to cancer cells and cancer stem cells. We believe HOT also has first-in-class potential as the first therapeutic agent to use PLEs to target cancer cells. The HOT Phase 1b dose-escalation trial is ongoing as a monotherapy for solid tumors with significant unmet medical need. CLR1502 (GLOW2) is a preclinical, cancer-targeted, non-radioactive optical imaging agent for intraoperative tumor margin illumination and non-invasive tumor imaging. Together, we believe our compounds are able to “find, treat and follow” cancer anywhere in the body in a novel, effective and highly selective way.

 

Market Overview

 

Our target market is broad and represents the market for the treatment and diagnosis of cancer. The American Cancer Society estimates that approximately 1.66 million new cancer cases will be diagnosed in the US in 2013. According to the Society, about 6 million people worldwide will die of cancer in 2013, including approximately 580,000 in the US.

 

According to Cowen Therapeutic Categories Outlook (February 2013), c ancer is now the largest global pharmaceutical category with worldwide sales of $74 billion in 2011. Cowen estimates that targeted therapies are changing the landscape of cancer treatment and will likely be used in most cancer patients in 5 to 10 years. Furthermore, the worldwide sales of targeted cancer therapies could exceed $61 billion by 2017.  The National Institutes of Health (NIH) estimates the direct medical costs for treating cancer in 2008 (the latest figure available under the NIH’s new methodology) was $77.4 billion in the US. Furthermore, the US National Cancer Institute estimated in January 2011 that the overall cost of treating cancer in the US will increase to $158 billion by 2020 from $125 billion in 2010 .

 

According to a BCC Research report from April 2011, the total market for next-generation cancer diagnostics was $776 million in 2010 and was growing at a compound annual growth rate of 47%, and was forecasted to reach a market size of $5.3 billion in 2015.

 

Technology Overview

 

Our compounds are optimized PLEs that interact with lipid rafts, which are specialized microdomains within cell membranes. Importantly, the core chemical structure shared across all three products provides selective targeting of cancer cells, including cancer stem cells, in preference to normal cells (due to enrichment of lipid rafts in the former).  The cancer-targeting PLE carrier molecule was deliberately designed to be coupled to imaging or therapeutic molecules. For example, iodine can be attached via a very stable covalent bond resulting in two distinct products differing only with respect to the isotope of iodine they contain – HOT contains radioactive I-131 and LIGHT contains the shorter-lived radioactive I-124. Because of their chemical identity, LIGHT also represents an ideal biomarker that may be used to predict tumor sensitivity of HOT and, potentially, establish an efficacious dose in individual patients. Other, non-radioactive molecules can also be attached to the PLE core. In the case of GLOW2, this is an infrared emitting fluorophore (800 nm) whose signal can penetrate through up to approximately one centimeter of tissue. This may enable the use of GLOW2 to visualize tumor margins during cancer surgery (effectively acting as an adjunct therapeutic agent) and to non-invasively detect relatively superficial tumors. Thus, to date, three cancer-targeted product profiles have been generated from a single chemical core structure that is the foundation of our technology platform: – LIGHT, a diagnostic PET imaging agent, HOT, a molecular radiotherapeutic agent, and GLOW2, a non-radioactive optical imaging agent to increase the success of cancer surgery and non-invasively image certain tumors.

 

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Our core technology platform is based on research conducted by Cellectar’s founder and our Chief Scientific Officer, Dr. Jamey Weichert, beginning in 1994 at the University of Michigan (U. Mich.), where phospholipid ether analogs were initially designed, synthesized, radiolabeled, and evaluated. Since 1998, Dr. Weichert has continued his research at the University of Wisconsin (U. Wisc.) and subsequently founded Cellectar in 2002 to further develop and commercialize the technology. Cellectar obtained exclusive rights to the related technology patents owned by U. Mich. in 2003 and continued development of the platform while obtaining ownership of numerous additional patents and patent applications (lasting until 2025, 2028 and 2030 without extensions) prior to the Acquisition.

 

Products in Development

 

LIGHT

 

I-124-CLR1404 (LIGHT) is a small-molecule, broad-spectrum, cancer-targeted imaging agent that we believe has the potential to be the first of its kind for the selective detection of tumors and metastases in a broad range of cancers. LIGHT is comprised of a proprietary PLE, acting as a cancer-targeted delivery and retention vehicle, covalently labeled with iodine-124, a short-lived PET imaging radioisotope. PET imaging used in conjunction with CT scanning has now become the imaging method of choice in oncology. In studies to date, LIGHT selectively illuminated malignant tumors in 52 of 54 animal models of different cancer types, demonstrating broad-spectrum, cancer-selective uptake and retention. Investigator-sponsored Phase 1-2 trials of LIGHT as a PET imaging agent are ongoing at the University of Wisconsin across 11 solid tumor indications. The investigator-sponsored Investigational New Drug (IND) application for LIGHT was approved by the FDA in 2003. The IND is held by Dr. Lance Hall at the University of Wisconsin, who both initiates and conducts the investigation and under whose immediate direction the investigational drug is administered. Novelos, the National Cancer Institute or the University of Wisconsin Institute for Clinical and Translational Research provide funding for the trials and the data is shared with Novelos while the trials progress and at the conclusion of the trials. Initial positive imaging results have been established in patients with lung and brain cancers. These human trials, if successful, would likely provide proof-of-concept for LIGHT as a PET imaging agent with the potential to supplant the current “gold standard” agents, 18F-fluoro-deoxyglucose (FDG) for various solid tumors or MRI in the case of brain cancers, due to what we believe to be LIGHT’s superior cancer-specificity versus FDG and MRI, and more favorable logistics of clinical use versus FDG. As a chemically identical biomarker for HOT, we believe that LIGHT tumor uptake data could accelerate clinical development of HOT by guiding selection of indications for HOT Phase 2 trials and potentially be used in such trials to identify suitable patients and assess therapeutic efficacy. For the same reason, and in view of the quantitative nature of PET imaging, LIGHT imaging may be capable of estimating an efficacious dose of HOT in individual patients.

 

Chemically, LIGHT is comprised of our proprietary PLE, 18-(p-[I-124]iodophenyl) octadecyl phosphocholine, acting as a cancer-targeted delivery and retention vehicle, covalently labeled with iodine -124, a radioactive isotope with a radiation half-life of four days.

 

During 2006, we compared LIGHT and FDG side by side (24 hours apart) in the same tumor-bearing mouse (PC3 human prostate carcinoma) that was also treated with carrageenan to induce inflammation.  As expected, FDG demonstrated significant uptake into the inflammatory lesion and organs such as heart and bladder compared to the malignant tumors, which were poorly imaged.  LIGHT, on the other hand, showed no uptake into the inflammatory lesion and organs, yet clear and demonstrable uptake into the tumors.

 

Furthermore, the radioisotopic half-life of only 110 minutes for fluorine-18 labeled agents, such as FDG, severely limits their delivery range relative to the point of manufacture.  I-124 has a four-day half-life that permits worldwide distribution of LIGHT from one manufacturing location.  Additionally, the longer half-life affords a longer imaging window of up to seven days following injection. 

 

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The third part of an investigator-sponsored Phase 1-2 trial of LIGHT as a PET imaging agent for patients with advanced non-small cell lung cancer (NSCLC) was initiated in December 2011 at the University of Wisconsin Carbone Cancer Center (UWCCC) and the first patient was enrolled in February 2012. Dr. Anne M. Traynor at UWCCC is the principal investigator for this trial. Novelos provides funding for the trial and the data is shared with Novelos both as the study progresses and upon the conclusion of the study. A total of up to 9 patients will be enrolled across two dose levels (5 mCi and 3 mCi) in this Phase 1-2 trial. The first cohort comprising three patients dosed with LIGHT at 5mCi has been successfully completed. We saw clear and sustained uptake of LIGHT in cancerous tumors against low background and have not observed any adverse safety signals. Although still early and in a small number of subjects, there is some suggestion that LIGHT imaging was more tumor-selective than the comparator modality 18F-fluoro-deoxyglucose (18F-FDG) PET. In addition, in one patient, three brain metastases were detected with LIGHT that were not seen with FDG, which prompted an alteration of the treatment plan for this patient. Having observed initial cancer-specific uptake with LIGHT at 5 mCi dose in NSCLC patients, we continue exploration of dose and imaging time points in an effort to optimize dosing and results.

 

An investigator-sponsored Phase 1-2 trial of LIGHT as a PET imaging agent for brain cancer was initiated in December 2011 at UWCCC and first patient was enrolled in March 2012. Dr. Lance Hall at the UWCCC is the principal investigator for this trial. This trial is being funded by UWCCC and a UW Institute for Clinical and Translational Research (ICTR) grant, but the data is shared with Novelos while the study progresses and at the conclusion of the study. Up to 20 patients will be enrolled at a 5 mCi dose. In June 2012, we announced that three glioma patients were dosed with LIGHT at 5 mCi. The preliminary results from these three glioma patients showed strong and sustained uptake of LIGHT in cancerous tumors visible against very low background, and no adverse safety signals were observed. Patient enrollment is continuing.

 

An investigator-sponsored Phase 1-2 trial of LIGHT as a PET imaging agent for patients with multiple solid tumor types (triple negative breast, prostate, colorectal, gastric, ovarian, pancreatic, esophageal, soft tissue sarcoma, and head & neck cancer) was initiated in August 2012 at the UWCCC and the first patient was enrolled in October 2012.  Dr. Glenn Liu at UWCCC is the principal investigator for this trial.  Novelos provides funding for the trial and the data is shared with Novelos while the study progresses and at the conclusion of the study.  Up to 9 patients per tumor type will be enrolled across two dose levels (5 mCi and 3 mCi) in this Phase 1-2 trial.

 

An investigator-sponsored Phase 1-2 trial of LIGHT as a PET imaging agent for metastatic brain cancer was initiated in January 2012 at UWCCC and the clinical trial protocol is being amended to facilitate patient enrollment. Dr. Lance Hall at the UWCCC is the principal investigator for this clinical trial. Dr. Jamey Weichert is the primary principal investigator for the $1.2 million grant from the National Cancer Institute, which funds the trial.

 

LIGHT is currently manufactured by our collaborator, the University of Wisconsin in Madison. We are evaluating contract manufacturing options for larger scale production.

 

We plan to initiate Company-sponsored LIGHT Phase 2 trials in solid tumor indications, subject to additional funding, starting in the first quarter of 2014. The objectives of these Phase 2 trials will include comparison to standard-of-care cancer imaging with pathology confirmation, as well as optimization of dosing and imaging parameters. Meanwhile, we will continue exploration of dose and imaging time points, along with comparison to standard-of-care cancer imaging, in the ongoing investigator-sponsored LIGHT Phase 1-2 trials.

 

According to Bio-Tech Systems (November 2010), sales of FDG in the US in 2009 were approximately $300 million and projected to grow to approximately $900 million in 2017. FDG accumulates in any tissue having increased glucose metabolism compared to surrounding tissue. As a result and in contrast to LIGHT, FDG is not selective for malignant tumors. FDG localizes in certain normal tissue such as heart, kidney and brain tissues that also have high glucose metabolism. FDG is also known to localize in inflammatory sites. Other major limitations to the use of FDG are found in pelvic imaging due to the high renal (kidney) clearance of the compound. These characteristics of FDG, therefore, decrease its diagnostic specificity for certain malignancies. FDG is no longer covered by patent and is typically manufactured onsite at PET imaging medical facilities because of its limited (110 minute) half-life.

 

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HOT

 

I-131-CLR1404 (HOT) is a small-molecule, broad-spectrum, cancer-targeted molecular radiotherapeutic that we believe has the potential to be the first therapeutic agent to use PLEs to target cancer cells.  HOT is comprised of a proprietary PLE, acting as a cancer-targeted delivery and retention vehicle, covalently labeled with iodine-131, a cytotoxic radioisotope that is already in common use to treat thyroid and other cancer types. It is this “intracellular radiation” mechanism of cancer cell killing, coupled with delivery to a wide range of malignant tumor types that we believe imbues HOT with broad-spectrum anti-cancer activity.  Selective uptake and retention has also been demonstrated in cancer stem cells compared with normal cells, offering the prospect of longer lasting cancer remission. In 2009, we filed an IND with the FDA to study HOT in humans.  In early 2010, we successfully completed a Phase 1a dosimetry trial demonstrating initial safety, tumor imaging and pharmokinetic consistency and establishing a starting dose for a Phase 1b dose-escalation trial.  Radiation dosimetry measures how much radiation is absorbed by tumors and body organs in order to optimize delivery of radiation therapy. The ongoing Phase 1b dose-escalation trial is aimed at determining the Maximum Tolerated Dose of HOT. We expect to initiate HOT Phase 2 efficacy trials as a monotherapy for solid tumors with significant unmet medical need, such as glioma and lung cancer, as soon as a starting dose is established. We may determine such a dose based on acceptable safety profile in the Phase 1b trial. Selection of indications for Phase 2, as well as aspects of trial design, will be guided by ongoing PET imaging trials in cancer patients with LIGHT, a chemically identical biomarker for HOT. Preclinical experiments in in vivo (in animals) tumor models have demonstrated selective killing of cancer cells along with a benign safety profile. HOT’s anti-tumor/survival-prolonging activities have been demonstrated in more than a dozen xenograft models (human tumor cells implanted into animals) including breast, prostate, lung, glioma (brain), pancreatic, ovarian, uterine, renal and colorectal cancers and melanoma.   In all but two models, a single administration of a well-tolerated dose of HOT was sufficient to demonstrate efficacy.  In view of HOT’s selective uptake and retention in a wide range of solid tumors and in cancer stem cells, its single-agent efficacy in animal models and its non-specific mechanism of cancer-killing (radiation), we are first developing HOT as a monotherapy for solid tumors with significant unmet medical need.

 

Chemically, HOT is comprised of our proprietary PLE, 18-(p-[I-131]iodophenyl) octadecyl phosphocholine, acting as a cancer-targeted delivery and retention vehicle, covalently labeled with iodine-131, a cytotoxic radioisotope with a radiation half-life of eight days.

 

Single intravenous, well-tolerated doses of HOT administered therapeutically in animals (i.e., after primary tumors were established) have been observed to result in significant anti-tumor and/or survival benefit compared to control animals in mouse xenograft tumor models including ovarian, pancreatic, non-small cell lung, triple-negative breast, prostate, glioma, colorectal and kidney cancers. Survival benefit generally reflected the degree of tumor growth suppression.  Efficacy was also seen in a xenograft model employing human uterine sarcoma cells which over-express efflux pumps known to underlie resistance to many standard chemotherapeutic drugs. The broad in vivo efficacy profile of HOT across many tumor types is reflected in the fact that selective tumor localization of LIGHT (which uses the same cancer-targeting drug delivery and retention vehicle as HOT) has been demonstrated in over 50 xenograft, spontaneous and transgenic cancer models.  HOT was also tested in combination with a standard efficacious dose of gemcitabine in a pancreatic cancer xenograft model.  Single doses of HOT or gemcitabine given alone were equally efficacious while the combination therapy was significantly more efficacious than either treatment alone (additive).  In each xenograft study, the dose of HOT was ~100 µCi, which is approximately 50-fold less than the maximum tolerated dose of HOT determined in a six-month rat radiotoxicity study.

 

Extensive, IND-enabling, Good Laboratory Practices (GLP) in vivo and in vitro preclinical pharmacokinetic/distribution, toxicology and drug safety studies were successfully completed in 2007 through 2009 using non-pharmacological concentrations/doses of PLE consistent with its role as a delivery/retention vehicle in HOT.  Tissue distribution studies supported prediction of acceptable human organ exposures and body clearance for HOT.  Importantly, and in sharp distinction from biological products labeled with I-131, the small molecule HOT showed very minimal variation in excretion kinetics and tissue distribution among individuals within species or across a 500-fold variation in dose.  Single- and repeated-dose animal toxicology studies indicated very high margins of safety (80-200x) for the PLE carrier over the anticipated maximum human therapy dose of HOT.

 

In February 2010 we completed a Phase 1a dosimetry trial with a single intravenous dose of 10 mCi HOT in eight patients with relapsed or refractory advanced solid tumors.  Single doses of HOT were well tolerated.  The reported adverse events were all considered minimal, manageable and either not dose limiting or not related to HOT. There were no serious adverse events reported.  Analysis of total body imaging and blood and urine samples collected over 42 days following injection indicated that doses of HOT expected to be therapeutically effective can be administered without harming vital organs.  Two subjects (one with colorectal cancer metastasized to lung and another with prostate cancer) had tumors that were imaged with 3D nuclear scanning (SPECT/CT) on day 6 after administration of HOT.  Uptake of HOT into tumor tissue (but not adjacent normal tissue or bone marrow) was clearly demonstrated in both subjects.  Echoing animal studies, pharmacokinetic analyses demonstrated a prolonged terminal half-life of radioactivity in the plasma after HOT administration (approximately 200 hours) and that there was no significant variation in excretion or radiation dosimetry among subjects.  The trial established an initial dose of 12.5 mCi/m2 (for example, 20 mCi dose for a patient with 1.6m 2 body surface area) for the Phase 1b escalating dose trial that is ongoing.

 

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The primary objective of this multicenter Phase 1b dose-escalation trial in patients with a range of advanced solid tumors is to define the Maximum Tolerated Dose (MTD) of HOT.  In addition to determining the MTD, the Phase 1b trial is intended to evaluate overall tumor response (using standard RESIST 1.1 criteria) and safety. In September 2012, we announced that we had successfully completed the second cohort in this Phase 1b dose-escalation trial. The second two-patient cohort was successfully dosed with 25 mCi/m2 of HOT, triggering enrollment into the third cohort at 37.5 mCi/m2. Data from the second cohort indicated HOT was well-tolerated, without any dose limiting or sub-dose limiting toxicities, enabling enrollment of the first patient in the third cohort.

 

Concurrently, separate studies are expected to generate imaging data in cancer patients using LIGHT.  These imaging trials with LIGHT are expected to facilitate selection of indications and trial designs for HOT Phase 2 trials with an initial focus on solid tumors with significant unmet medical need. Based on its broad-spectrum mechanism of action and wide-ranging single agent activity in animal cancer models, HOT is anticipated to be used as monotherapy through proof-of-concept clinical trials, with subsequent exploration of combination with chemotherapeutic agents (a number of which are known to be radiosensitizers and thus with potential to enhance the efficacy of HOT).

 

Tumor treatment with radioactive isotopes has been used as a fundamental cancer therapeutic for decades.  The goals of targeted cancer therapy — selective delivery of effective doses of isotopes that destroy tumor tissue, sparing of surrounding normal tissue, and non-accumulation in vital organs such as the liver and kidneys — remain goals of novel therapies as well.  We believe our isotope delivery technology is poised to achieve these goals.  Because, to date, HOT has been shown to reliably and near-universally accumulate in cancer cells and because the therapeutic properties of the iodine-131 are well known, we believe the risk of non-efficacy in human clinical trials is less than that of other cancer therapies at this stage of development, although no assurance can be given.

 

Other targeted radiotherapies include the marketed drugs Zevalin® (90Y, Spectrum Pharmaceuticals) and Bexxar® (I-131, GSK).  In both cases, tumor-targeting is monoclonal antibody-based and limited to non-Hodgkins lymphoma, which is a type of cancer involving cells of the immune system.  Thus, these agents are not appropriate comparators for HOT because of their limited therapeutic utility (only one type of tumor) and because their target indication is often well-managed by other drugs (unlike HOT, which has potential to treat tumor types for which the current standard of care is associated with very poor outcomes). Notably, both Zevalin® and Bexxar® were approved on the basis of objective response rates (shrinking of tumors) without data to support improvement in survival, suggesting that regulatory approval of radiopharmaceuticals may be based on relatively shorter and smaller pivotal clinical trials than is often the case in oncology.

 

In conclusion, we believe that HOT is not subject to the full extent of development risk typically associated with early-stage cancer therapeutics for the following reasons:

 

· HOT is selectively taken up by and retained in cancer versus normal cells and its PLE delivery vehicle is intended to be given to patients in safe, sub-pharmacological doses.
· HOT does not rely on inhibition or enhancement of a specific pathway; it works by exposing cancer cells to sustained lethal radiation from within.
· To date, HOT (as demonstrated with LIGHT studies) has shown near-universal cancer-specific retention in more than 50 in vivo tumor models, making the molecule potentially effective in numerous cancer types (broad-spectrum) as compared to type-specific therapies.
· We believe we have completed all applicable preclinical safety, pharmacology and toxicology studies that are likely to be required for a New Drug Application (NDA) including both single-dose and multi-dose studies.
· HOT is a small molecule that is easily characterized and synthesized and is therefore not subject to scale-up and manufacturing risks typically associated with large molecules such as monoclonal antibodies.
· HOT exploits a new cancer-selective delivery and retention mechanism, but is paired with a proven and effective radioisotope (I-131) for therapy.

 

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GLOW2

 

GLOW2 is a small-molecule, broad-spectrum, cancer-targeted, non-radioactive optical imaging agent that we believe has the potential to be the first of its kind for intraoperative tumor margin illumination and non-invasive tumor imaging. GLOW2 is comprised of a proprietary PLE, acting as a cancer-targeted delivery and retention vehicle, covalently attached to a near-infrared (800nm) fluorophore. According to the American Cancer Society (2011), most cancer patients will have some type of surgery, and Cancer Facts and Figures indicated that approximately 1.3 million cancer patients were diagnosed with solid tumors in the U.S. alone in 2011. GLOW2 may facilitate and enable diagnostic, staging, debulking and curative cancer surgeries, intraoperatively in real time (i.e., during the actual surgical procedure) by defining tumor margins and regional lymph node involvement, resulting in more accurate tumor resectioning and improved outcome and prognosis. In this context, GLOW2 would effectively act as an adjunct therapeutic agent. In preclinical in vivo (in animals) tumor models, non-invasive optical imaging showed pronounced accumulation of GLOW2 in tumors versus normal organs and tissues in addition to successfully delineated tumor margins during tumor resection. Thus, GLOW2 may also have utility for non-invasive imaging of relatively superficial tumor types in man (e.g., melanoma, head & neck, colon, esophageal). Subject to additional funding, we expect to submit an IND for GLOW2 in the fourth quarter of 2013 and begin clinical trials shortly thereafter.

 

Other Pipeline Compounds

 

We have other preclinical compounds that are based on our proprietary cancer-targeting technology. For example, CLR1404 (COLD) is a cancer-targeted chemotherapy when used in high (100x) pharmacology relevant doses that, in preclinical experiments, has been observed to inhibit the phosphatidylinosotol 3-kinase (PI3K)/Akt survival pathway, which is overexpressed in many types of cancer.  As a result, in such preclinical experiments COLD has been observed to selectively inhibit Akt activity, induce apoptosis through caspase activation and inhibit cell proliferation in cancer cells versus normal cells.  COLD also exhibits significant in vivo efficacy in mouse xenograft tumor models, including non-small cell lung cancer and triple-negative breast cancers, producing long-lasting tumor growth suppression and significantly increased survival.  We believe COLD has the potential to be best-in-class versus other Akt inhibitors in development due to (a) cancer cell/cancer stem cell targeting, resulting in cancer-selective inhibition of Akt and cell proliferation or (b) suitability for intravenous administration that we believe offers the prospect of greater systemic exposure and hence Akt inhibition in cancer cells, which we believe would result in superior efficacy.

 

Technology

 

LIGHT, HOT and GLOW2 are optimized PLEs that interact with lipid rafts, which are specialized microdomains within cell membranes. Importantly, the core chemical structure shared across all three products provides selective targeting of cancer cells, including cancer stem cells, in preference to normal cells (due to enrichment of lipid rafts in the former).  The cancer-targeting PLE carrier molecule was deliberately designed to be coupled to imaging or therapeutic molecules. For example, iodine can be attached via a very stable covalent bond resulting in two distinct products differing only with respect to the isotope of iodine they contain – HOT contains short-lived radioactive I-131 and LIGHT contains the even more short-lived radioactive I-124. Because of their chemical identity, LIGHT also represents an ideal biomarker that can be used to predict tumor sensitivity to HOT and, potentially, establish an efficacious dose in individual patients. Other, non-radioactive molecules can also be attached to the PLE core. In the case of GLOW2, this is an infrared emitting fluorophore (800 nm) whose signal can penetrate up to approximately 1 cm of tissue. This may enable GLOW2’s use to visualize tumor margins during cancer surgery (effectively acting as an adjunct therapeutic agent) and to non-invasively detect relatively superficial tumors. Thus, to date, three cancer-targeted product profiles have been generated from a single chemical core structure that is the foundation of our technology platform – a diagnostic PET imaging agent, LIGHT, a molecular radiotherapeutic agent, HOT and a non-radioactive optical imaging agent to increase the success of cancer surgery and non-invasively image certain tumors, GLOW2.

 

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Using another fluorescent-labeled PLE (CLR1501 or GLOW1), selective uptake and retention has been demonstrated in cancer cells in vitro .  Twenty-four hours after treatment, a variety of human tumor cell types (melanoma, colorectal, uterine, pancreatic, ovarian, glioblastoma) show six- to ten-fold more staining with GLOW1 relative to  normal cells (e.g., skin fibroblasts).  Significantly, uptake/retention was also seen in cancer stem cells, which are known to be relatively resistant to both chemotherapy and radiation and may therefore contribute to eventual relapse of disease following conventional chemotherapy.

 

Malignant tumor targeting, including targeting of cancer stem cells, has also been demonstrated in vivo . For example, mice without intact immune systems, and inoculated with Panc-1 (pancreatic carcinoma), were injected with GLOW2 24 or 96 hours prior to imaging.  In vivo optical imaging showed pronounced accumulation of GLOW2 in tumors versus non-target organs and tissues.  Similarly, PET imaging of tumor-bearing animals administered the imaging agent LIGHT clearly showed selective uptake and retention by both primary tumors and metastases in 52 of 54 models including colon, glioma, triple negative breast and pancreatic tumor xenograft models. Furthermore, PET/CT analysis following co-injection of HOT (for therapy) and LIGHT (for imaging) revealed time-dependent tumor shrinkage and disappearance (over 9 days) in a cancer xenograft model.  Finally, we believe that the capability of our technology to target cancer stem cells in vivo was demonstrated by treating tumor-bearing mice with GLOW1 and then removing the tumor and isolating cancer stem cells, which continued to display GLOW1 labeling even after three weeks in cell culture.

 

The basis for selective tumor targeting of our compounds lies in differences between the plasma membranes of cancer cells as compared to those of most normal cells.  Specifically, cancer cell membranes are highly enriched in “lipid rafts”.  Lipid rafts are specialized regions of the membrane phospholipid bilayer that contain high concentrations of cholesterol and sphingolipids and serve to organize cell surface and intracellular signaling molecules (e.g., growth factor and cytokine receptors, the phophatidylinosotol 3-kinase (P13K)/Akt survival pathway). Data suggests that lipid rafts serve portals of entry for PLEs such as LIGHT, HOT and GLOW2.  The marked selectivity of our compounds for cancer cells versus non-cancer cells is due to the facts that phospholipid analogs such as PLEs have high affinity for cholesterol and that cancer cells have far more cholesterol-rich lipid rafts. In addition to accumulating in lipid rafts, LIGHT, HOT and GLOW2 are transported into the cytoplasm, where they distribute to organelle membranes (mitochondria, ER, lysosomes) but not the nucleus. The pivotal role played by lipid rafts is underscored by the fact that disruption of lipid raft architecture suppresses uptake of PLEs into cancer cells.

 

Legacy Products

 

Prior to the Acquisition, Novelos had been developing NOV-002, a small-molecule immunomodulating and anti-cancer compound based on a proprietary formulation of oxidized glutathione.  NOV-002 has been administered to approximately 1,000 cancer patients in clinical trials and was in Phase 3 development for solid tumors in combination with chemotherapy.

 

From November 2006 through January 2010, we conducted a Phase 3 trial of NOV-002 plus first-line chemotherapy in advanced non-small cell lung cancer (NSCLC) following three Phase 2 trials (two conducted in Russia and one conducted by us in the U.S.) that had demonstrated clinical activity and safety.  The Phase 3 trial enrolled 903 patients, 452 of whom received NOV-002.  In February 2010, we announced that the primary endpoint of improvement in overall survival compared to first-line chemotherapy alone was not met in this pivotal Phase 3 trial.  Following evaluation of the detailed trial data, we announced in March 2010 that the secondary endpoints also were not met in the trial and that adding NOV-002 to paclitaxel and carboplatin chemotherapy was not statistically or meaningfully different in terms of efficacy-related endpoints or recovery from chemotherapy toxicity versus chemotherapy alone. However, NOV-002 was safe and did not add to the overall toxicity of chemotherapy.  Based on the results from the Phase 3 trial, we discontinued development of NOV-002 for NSCLC in combination with first-line paclitaxel and carboplatin chemotherapy.  The aggregate costs incurred in connection with our development of NOV-002, including administrative overhead, were approximately $70 million.

 

Prior to the Acquisition, Novelos had also been developing NOV-205, a second oxidized glutathione-based compound. NOV-205 had been administered to approximately 200 hepatitis patients in clinical trials and was in Phase 2 development for chronic hepatitis C non-responders.  An IND for NOV-205 as a monotherapy for chronic hepatitis C was accepted by the FDA in 2006.  A U.S. Phase 1b clinical trial with NOV-205 in patients who previously failed treatment with pegylated interferon plus ribavirin was completed in December 2007.  Based on favorable safety results of that trial, in March 2010 Novelos initiated a multi-center U.S. Phase 2 trial evaluating NOV-205 as monotherapy in up to 40 chronic hepatitis C genotype 1 patients who previously failed treatment with pegylated interferon plus ribavirin.  Safety was established in twenty patients receiving either 30mg or 60mg of NOV-205 daily for 49 days; however, no viral load reduction was observed.

 

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Further development of NOV-002 and NOV-205 has been suspended.  At this time, we expect to devote our resources to the development and commercialization of the Cellectar compounds, and we do not expect to conduct any further development of the oxidized glutathione compounds. The IND for NOV-205 was withdrawn on July 5, 2011.  We anticipate that the IND for NOV-002 will be placed on inactive status. 

 

Manufacturing

 

We manufacture HOT at our current Good Manufacturing Practices compliant (cGMP) radiopharmaceutical manufacturing facility in Madison, Wisconsin.  This facility, consisting of approximately 19,500 square feet, contains offices, laboratories, a radiopharmaceutical research lab, a cGMP radiopharmaceutical manufacturing suite and a cGMP analytical laboratory for product release.  Our manufacturing facility holds a State of Wisconsin Department of Health Services Radioactive Materials License which authorizes the use and possession of radioactive material for both manufacturing and distribution activities. This license establishes a possession limit of 9 Curies of iodine-131. The facility also holds a State of Wisconsin DHS Radioactive Materials License which authorizes the use and possession of radioactive materials for research and development. The research and development license permits the use and possession of iodine-125, iodine-131 and iodine-124 in quantities sufficient to support in-house HOT manufacturing and other research needs. Each of these iodine isotopes is purchased from third-party vendors. LIGHT manufacturing is conducted by our collaborator, the University of Wisconsin in Madison, in connection with investigator-sponsored clinical trials, pursuant to a materials transfer agreement expiring in June 2013. The materials transfer agreement contains standard provisions for the protection of data and intellectual property and may be terminated by either party at any time before expiration. We are in the process of negotiating a fee-based arrangement with the University of Wisconsin covering the manufacture of LIGHT.  Under Novelos’ guidance, in the fall of 2011 the LIGHT manufacturing facility at the University of Wisconsin was made compliant with stricter FDA guidelines and requirements for cGMP PET agent production that officially went into effect in June 2012. We are evaluating contract manufacturing vendors that could accommodate larger scale production of LIGHT. The drug substance is identical for both products with the exception of the different iodine isotope used in each.  The base molecule is a dry powder produced via a six-step synthetic scheme.  The release specifications for drug substance have been established and validated.  The impurity levels at small scale are very low suggesting that larger scale production should be feasible.  We have also demonstrated 24-month stability for the drug substance in desiccated and refrigerated form.  We believe our laboratories are well equipped with the appropriate equipment for manufacturing pilot and small-scale batches in accordance with cGMP.  We believe we have adequate capacity for any Phase 2 trials of HOT and the potential for larger scale build-out for larger Phase 3 trials.  All investigational drug substance and product intended for human use during clinical studies will be manufactured according to the guidelines of the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use, FDA requirements (CFR part 211) and cGMP. GLOW2 is currently synthesized at a laboratory (gram) scale in our Madison facility via a non-cGMP process. This process is expected to increase in scale and cGMP compliance as part of IND-enabling studies over the coming year.

 

Sales and Marketing

 

We have not entered into any joint development or similar partnering agreements with respect to LIGHT, HOT, GLOW2 or COLD.  We plan to pursue and evaluate all available options to develop, launch and commercialize our compounds.  These options presently include, but are not limited to, entering into a partnering arrangement with a pharmaceutical company or various pharmaceutical companies with strong development and commercial expertise and infrastructure in the U.S, Europe and/or Japan.  While we currently do not plan to build our own sales force or utilize a contract sales organization for launch and commercialization of our compounds, we may reconsider in the future.

 

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Competition for Our Clinical-Stage Compounds

 

LIGHT

 

FDG is the current gold standard for cancer PET imaging.  According to Bio-Tech Systems (November 2010), sales of FDG in the US in 2009 were approximately $300 million and projected to grow to approximately $880 million in 2017.  FDG accumulates in any tissue having increased glucose metabolism compared to surrounding tissue.  As a result, and in contrast to LIGHT, FDG is not selective for malignant tumors.  FDG localizes in certain normal tissue such as heart, kidney and brain tissues that also have high glucose metabolism.  FDG is also known to localize in inflammatory sites.  Other major limitations to the use of FDG are found in pelvic imaging due to the high renal (kidney) clearance of the compound.  We believe these characteristics of FDG, therefore, limit its diagnostic specificity for certain malignancies. FDG is no longer covered by patent and is typically manufactured onsite at PET imaging medical facilities because of its limited (110 minute) half-life.

 

We compared LIGHT and FDG side by side (24 hours apart) in the same tumor-bearing mouse that was also treated with carageenan to induce inflammation.  As expected, FDG demonstrated significant uptake into the inflammatory lesion and organs such as heart and bladder compared to the malignant tumors, which were poorly imaged.  LIGHT, on the other hand, showed no uptake into the inflammatory lesion and organs, yet clear and demonstrable uptake into the tumors.

 

Additionally, the radioisotopic half-life of only 110 minutes for fluorine-18 labeled agents, such as FDG, severely limits their delivery range relative to the point of manufacture. I-124 has a four-day half-life that permits worldwide distribution of LIGHT from one manufacturing location.  Additionally, the longer half-life affords a longer imaging window of up to seven days following injection.

 

HOT

 

HOT’s “intracellular radiation” mechanism of cancer cell killing, coupled with delivery to a wide range of malignant tumor types, imbues HOT with broad-spectrum anti-cancer activity.  Selective uptake and retention has also been demonstrated in cancer stem cells compared with normal stem cells, offering a prospect of longer lasting cancer remission. Other targeted radiotherapies include the marketed drugs Zevalin® (manufactured by Spectrum Pharmaceuticals) and Bexxar® (manufactured by GlaxoSmithKline).  In both cases, tumor-targeting is monoclonal antibody-based and limited to non-Hodgkins lymphoma, which is a type of cancer involving cells of the immune system.  Thus, these agents are not appropriate comparators for HOT because of their limited therapeutic utility (only one type of tumor) and because their target indication is often well-managed by other drugs (unlike HOT which has potential to treat tumor types for which the current standard of care is associated with very poor outcomes). Notably, both Zevalin® and Bexxar® were approved on the basis of objective response rates (shrinking of tumors) without data to support improvement in survival, suggesting that regulatory approval of radiopharmaceuticals may be based on relatively shorter and smaller pivotal clinical trials than is often the case in oncology.  We do not believe Zevalin® or Bexxar® would be competing products of HOT in any material respect. Other cancer-targeted molecular radiotherapeutic agents are in various stages of development for solid tumors. These primarily utilize monoclonal antibodies for cancer cell targeting and are, therefore, each restricted to a relatively narrow range of tumor indications compared to HOT.

 

Intellectual Property

 

We have established a broad U.S. and international intellectual property rights portfolio around our proprietary cancer-targeting PLE technology platform including LIGHT, HOT and GLOW2.

 

Our proprietary rights include patents and patent applications that are either owned by us or exclusively licensed to us by the University of Michigan (the “Michigan patents”). LIGHT and HOT are covered by the Michigan patents that provide compound (composition of matter) coverage in the U.S. and Canada and expire in 2016.  Our patents and applications cover methods of use, composition and method of manufacture related to LIGHT, HOT, GLOW2 and other PLEs.  Many of these patents and applications are filed in key commercial markets worldwide.  These patents will generally expire between 2025 and 2030 unless extended.

 

In particular, LIGHT is covered by the Michigan patents as well as two of our U.S. patents, one of which is directed to its use for virtual colonoscopy (expiring 2025) and another of which is directed to its use for in vitro diagnostics (expiring 2025).  LIGHT is also covered by pending U.S., Japanese and European patent applications directed to its use for in vivo diagnostics and once issued should expire in 2025.  Lastly, the use of LIGHT for diagnostic purposes with cancer stem cells is pending in the U.S., Japan and Europe. Patents resulting from these applications are expected to expire in 2030.

 

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HOT is covered by two additional series of our patents and applications aside from the Michigan patents.  The first is directed to a method of use for cancer therapy and has also been filed in Europe and Japan, in addition to the U.S.  These are expected to expire in 2025.  Secondly, an application directed to cancer stem-cell therapy is pending in the U.S., Europe, Russia and Japan. Patents resulting from these applications are expected to expire in 2030. Some of these resulting patents may be extendable on a country-by-country basis.

 

GLOW2 is covered by patent applications directed to the compound, methods of use and method of manufacture that have been filed in U.S., Europe, Russia and Japan. Patents resulting from these applications are expected to expire in 2029. Some of these resulting patents may be extendable on a country-by-country basis.

 

Separate from any patent protection and following product approval by regulatory authorities, data exclusivity may be available for various compounds for up to 10 years on a country-by-country basis (e.g., up to 5 years in the U.S.).

  

The early termination of the University of Michigan license agreement would result in the loss of our rights to use the covered patents.

 

In addition to the above noted patents/applications directed to LIGHT, HOT and GLOW2, we own other patents/applications directed to different forms of phospholipid ethers and methods of manufacturing of phospholipid ethers.

 

We also own all intellectual property rights in the U.S and Europe related to our clinical-stage pipeline compound, NOV-002, and other preclinical compounds based on oxidized glutathione.  Issued composition-of-matter patents cover proprietary formulations of oxidized glutathione that do not expire until 2019, and these patents include methods of manufacture for oxidized glutathione formulated with various metals.

 

Licenses / Collaborations

 

In September 2003, Cellectar entered into a license agreement with the University of Michigan (the U. Mich. license), which granted Cellectar exclusive rights to the development, manufacture and marketing of products under several composition of matter patents in North America that expire at varying dates in 2016.  The U. Mich. license expires upon the expiration of the last covered patent.  We are responsible for an annual license fee of $10,000 and are required to pay costs associated with the maintenance of the patents covered by the U. Mich. license.  Additionally, we are required to make milestone payments of $50,000 upon the filing of an NDA for a licensed product intended for use in a therapeutic or diagnostic application (such milestone fees may be deferred and paid within twelve months of the first commercial sale of such product) and make certain milestone payments within a year following the first commercial sale of any licensed products.  The sales milestones range from $100,000 to $200,000, dependent upon whether the drug is for use in a diagnostic or therapeutic application, provided that if sales in the first 12 months are less than the amount of the milestone, then we are required to pay 50% of all sales until the milestone is satisfied. The milestone payments may total up to $400,000. The U. Mich. license provides that we pay a royalty equal to 3% of net sales of any licensed products sold by us or our sublicensees for such licensed products, provided however if the sublicense fee payable to us is between 4% and 5% of net sales, then the royalties payable to U. Mich. shall be equal to 50% of the sublicense fee.  Furthermore, the U. Mich. license provides for a reduction in the royalties owed by up to 50% if we are required to pay royalties to any third parties related to the sale of the licensed products.  If we receive any revenue in consideration of rights to the licensed technology that is not based on net sales, excluding any funded research and development, we are required to pay U. Mich. 10% of amounts received. During 2003, pursuant to the U. Mich. license, Cellectar paid approximately $54,000 of back patent costs and issued 203,483 shares of common stock to U. Mich. as partial consideration for the rights described above. U. Mich. may terminate the agreement if we cease operations, if we fail to make any required payment under the agreement, or if we otherwise materially breach the agreement, subject to applicable notice and cure periods.  To date, we have made all payments as they have become due, there have been no defaults under the U. Mich. license, nor have we ever been notified of a default by U. Mich. We may terminate the agreement with six months’ notice to U. Mich. and the return of licensed product and related data.  The U. Mich. license contained milestones that required certain development activities to be completed by specified dates. All such development milestones have been either completed or removed by subsequent amendment to the agreement.  U. Mich. has provided no warranties as to validity or otherwise with respect to the licensed technology.

 

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Employees

 

As of March 25, 2013 we had 24 full time employees. We believe our relationships with our employees are good.

 

Regulation

 

The production, distribution, and marketing of products employing our technology, and our development activities, are subject to extensive governmental regulation in the United States and in other countries.  In the United States, we are subject to the Federal Food, Drug, and Cosmetic Act, as amended, and the regulations of the FDA, as well as to other federal, state, and local statutes and regulations, including the federal, state and local laws and regulations governing the storage, use and disposal of hazardous materials, including radioactive isotopes.  These laws, and similar laws outside the United States, govern the clinical and preclinical testing, manufacture, safety, effectiveness, approval, labeling, distribution, sale, import, export, storage, record-keeping, reporting, advertising, and promotion of drugs.  Product development and approval within this regulatory framework, if successful, will take many years and involve the expenditure of substantial resources.  Violations of regulatory requirements at any stage may result in various adverse consequences, including the FDA’s and other health authorities’ delay in approving or refusal to approve a product.  Violations of regulatory requirements also may result in enforcement actions.

 

The following paragraphs provide further information on certain legal and regulatory issues with a particular potential to affect our operations or future marketing of products employing our technology.

 

Research, Development, and Product Approval Process

 

The research, development, and approval process in the United States and elsewhere is intensive and rigorous and generally takes many years to complete.  The typical process required by the FDA before a therapeutic drug may be marketed in the United States includes:

 

· preclinical laboratory and animal tests performed under the FDA’s Good Laboratory Practices regulations, referred to herein as GLP;
· submission to the FDA of an IND application, which must become effective before human clinical trials may commence;
· human clinical studies performed under the FDA’s Good Clinical Practices regulations, to evaluate the drug’s safety and effectiveness for its intended uses;
· FDA review of whether the facility in which the drug is manufactured, processed, packed, or held meets standards designed to assure the product’s continued quality; and
· submission of a marketing application to the FDA, and approval of the application by the FDA.

 

Preclinical Testing

 

During preclinical testing, studies are performed with respect to the chemical and physical properties of candidate formulations. These studies are subject to GLP requirements. Biological testing is typically done in animal models to demonstrate the activity of the compound against the targeted disease or condition and to assess the apparent effects of the new product candidate on various organ systems, as well as its relative therapeutic effectiveness and safety. An IND must be submitted to the FDA and become effective before studies in humans may commence.

 

Clinical Trials

 

Clinical trial programs in humans generally follow a three-phase process.  Typically, Phase 1 studies are conducted in small numbers of healthy volunteers or, on occasion, in patients afflicted with the target disease.  Phase 1 studies are conducted to determine the metabolic and pharmacological action of the product candidate in humans and the side effects associated with increasing doses, and, if possible, to gain early evidence of effectiveness.  In Phase 2, studies are generally conducted in larger groups of patients having the target disease or condition in order to validate clinical endpoints, and to obtain preliminary data on the effectiveness of the product candidate and optimal dosing. This phase also helps determine further the safety profile of the product candidate.  In Phase 3, large-scale clinical trials are generally conducted in patients having the target disease or condition to provide sufficient data for the statistical proof of effectiveness and safety of the product candidate as required by United States regulatory agencies.

 

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In the case of products for certain serious or life-threatening diseases, the initial human testing may be done in patients with the disease rather than in healthy volunteers. Because these patients are already afflicted with the target disease or condition, it is possible that such studies will also provide results traditionally obtained in Phase 2 studies. These studies are often referred to as “Phase 1-2” studies. However, even if patients participate in initial human testing and a Phase 1/2 study is carried out, the sponsor is still responsible for obtaining all the data usually obtained in both Phase 1 and Phase 2 studies.

 

Before proceeding with a study, sponsors may seek a written agreement from the FDA regarding the design, size, and conduct of a clinical trial. This is known as a Special Protocol Assessment (SPA). Among other things, SPAs can cover clinical studies for pivotal trials whose data will form the primary basis to establish a product’s efficacy. SPAs help establish upfront agreement with the FDA about the adequacy of a clinical trial design to support a regulatory approval, but the agreement is not binding if new circumstances arise. There is no guarantee that a study will ultimately be adequate to support an approval even if the study is subject to an SPA.

 

United States law requires that studies conducted to support approval for product marketing be “adequate and well controlled.” In general, this means that either a placebo or a product already approved for the treatment of the disease or condition under study must be used as a reference control. Studies must also be conducted in compliance with good clinical practice requirements, and informed consent must be obtained from all study subjects.

 

The clinical trial process for a new compound can take ten years or more to complete. The FDA may prevent clinical trials from beginning or may place clinical trials on hold at any point in this process if, among other reasons, it concludes that study subjects are being exposed to an unacceptable health risk. Trials may also be prevented from beginning or may be terminated by institutional review boards, who must review and approve all research involving human subjects. Side effects or adverse events that are reported during clinical trials can delay, impede, or prevent marketing authorization. Similarly, adverse events that are reported after marketing authorization can result in additional limitations being placed on a product’s use and, potentially, withdrawal of the product from the market.

 

Submission of NDA

 

Following the completion of clinical trials, the data is analyzed to determine whether the trials successfully demonstrated safety and effectiveness and whether a product approval application may be submitted. In the United States, if the product is regulated as a drug, an NDA must be submitted and approved before commercial marketing may begin. The NDA must include a substantial amount of data and other information concerning the safety and effectiveness of the compound from laboratory, animal, and human clinical testing, as well as data and information on manufacturing, product quality and stability, and proposed product labeling.

 

Each domestic and foreign manufacturing establishment, including any contract manufacturers we may decide to use, must be listed in the NDA and must be registered with the FDA.  The application generally will not be approved until the FDA conducts a manufacturing inspection, approves the applicable manufacturing process and determines that the facility is in compliance with cGMP requirements.

 

Under the Prescription Drug User Fee Act, as amended, the FDA receives fees for reviewing an NDA and supplements thereto, as well as annual fees for commercial manufacturing establishments and for approved products. These fees can be significant. For fiscal year 2012, the NDA review fee alone is $1,841,500, although certain limited deferral, waivers, and reductions may be available.

 

Each NDA submitted for FDA approval is usually reviewed for administrative completeness and reviewability within 45 to 60 days following submission of the application. If deemed complete, the FDA will “file” the NDA, thereby triggering substantive review of the application. The FDA can refuse to file any NDA that it deems incomplete or not properly reviewable. The FDA has established performance goals for the review of NDAs— six months for priority applications and 10 months for standard applications. However, the FDA is not legally required to complete its review within these periods and these performance goals may change over time.

 

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Moreover, the outcome of the review, even if generally favorable, typically is not an actual approval but an “action letter” that describes additional work that must be done before the application can be approved. The FDA’s review of an application may involve review and recommendations by an independent FDA advisory committee. Even if the FDA approves a product, it may limit the approved therapeutic uses for the product as described in the product labeling, require that warning statements be included in the product labeling, require that additional studies be conducted following approval as a condition of the approval, impose restrictions and conditions on product distribution, prescribing, or dispensing in the form of a risk management plan, or otherwise limit the scope of any approval.

 

Post NDA Regulation

 

Significant legal and regulatory requirements also apply after FDA approval to market under an NDA. These include, among other things, requirements related to adverse event and other reporting, product advertising and promotion and ongoing adherence to cGMPs, as well as the need to submit appropriate new or supplemental applications and obtain FDA approval for certain changes to the approved product labeling, or manufacturing process. The FDA also enforces the requirements of the Prescription Drug Marketing Act which, among other things, imposes various requirements in connection with the distribution of product samples to physicians.

 

The regulatory framework applicable to the production, distribution, marketing and/or sale of our product pipeline may change significantly from the current descriptions provided herein in the time that it may take for any of our products to reach a point at which an NDA is approved.

 

Overall research, development, and approval times depend on a number of factors, including the period of review at FDA, the number of questions posed by the FDA during review, how long it takes to respond to the FDA’s questions, the severity or life-threatening nature of the disease in question, the availability of alternative treatments, the availability of clinical investigators and eligible patients, the rate of enrollment of patients in clinical trials, and the risks and benefits demonstrated in the clinical trials.

 

Other United States Regulatory Requirements

 

In the United States, the research, manufacturing, distribution, sale, and promotion of drug and biological products are potentially subject to regulation by various federal, state, and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services (formerly the Heath Care Financing Administration), other divisions of the United States Department of Health and Human Services (e.g., the Office of Inspector General), the United States Department of Justice and individual United States Attorney offices within the Department of Justice, and state and local governments. For example, sales, marketing, and scientific/educational grant programs must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act, the privacy provision of the Health Insurance Portability and Accountability Act, and similar state laws, each as amended. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection, unfair competition, and other laws.

 

Our research and development, manufacturing and administration of our drugs involve the controlled use of hazardous materials, including chemicals and radioactive materials, such as radioactive isotopes. Therefore, we are subject to federal, state and local laws and regulations governing the storage, use and disposal of these materials and some waste products and are required to maintain both a manufacturer’s license and a radioactive materials license with State of Wisconsin agencies.

 

Moreover, we are now, and may become subject to, additional federal, state, and local laws, regulations, and policies relating to safe working conditions, laboratory practices, the experimental use of animals, and/or the use, storage, handling, transportation, and disposal of human tissue, waste, and hazardous substances, including radioactive and toxic materials and infectious disease agents used in conjunction with our research work.

 

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Foreign Regulatory Requirements

 

We and any future collaborative partners may be subject to widely varying foreign regulations, which may be quite different from those of the FDA, governing clinical trials, manufacture, product registration and approval, and pharmaceutical sales. Whether or not FDA approval has been obtained, we or any future collaboration partners must obtain a separate approval for a product by the comparable regulatory authorities of foreign countries prior to the commencement of product marketing in these countries. In certain countries, regulatory authorities also establish pricing and reimbursement criteria. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. In addition, under current United States law, there are restrictions on the export of products not approved by the FDA, depending on the country involved and the status of the product in that country.

 

Reimbursement and Pricing Controls

 

In many of the markets where we or any future collaborative partners would commercialize a product following regulatory approval, the prices of pharmaceutical products are subject to direct price controls by law and to drug reimbursement programs with varying price control mechanisms. Public and private health care payers control costs and influence drug pricing through a variety of mechanisms, including through negotiating discounts with the manufacturers and through the use of tiered formularies and other mechanisms that provide preferential access to certain drugs over others within a therapeutic class. Payers also set other criteria to govern the uses of a drug that will be deemed medically appropriate and therefore reimbursed or otherwise covered. In particular, many public and private health care payers limit reimbursement and coverage to the uses of a drug that are either approved by the FDA or that are supported by other appropriate evidence (for example, published medical literature) and appear in a recognized drug compendium. Drug compendia are publications that summarize the available medical evidence for particular drug products and identify which uses of a drug are supported or not supported by the available evidence, whether or not such uses have been approved by the FDA. For example, in the case of Medicare coverage for physician-administered oncology drugs, the Omnibus Budget Reconciliation Act of 1993, with certain exceptions, prohibits Medicare carriers from refusing to cover unapproved uses of an FDA-approved drug if the unapproved use is supported by one or more citations in the American Hospital Formulary Service Drug Information, the American Medical Association Drug Evaluations, or the United States Pharmacopoeia Drug Information. Another commonly cited compendium, for example under Medicaid, is the DRUGDEX Information System.

  

In recent years, there have been positive developments regarding medical reimbursement for therapeutic radiopharmaceuticals in the United States.  The Centers for Medicare and Medicaid Services have proposed that the reimbursement for radiopharmaceuticals shift from a cost-to-charge ratio (CCR) to an average selling price (ASP) plus 4% model.  There has been support expressed for this proposal by government agencies, key industry members and the industry consortium, The Council on Radionuclides and Radiopharmaceuticals.  The historical CCR model resulted in a reimbursement rate that was lower than the cost to purchase the drugs, thus creating a disincentive for hospitals to prescribe radiopharmaceuticals.  The current ASP proposal is a solution to this reimbursement problem.  Furthermore, there are proposals pending, which, if adopted, would decrease the physician reimbursement for chemotherapy and conventional radiation therapy.  The proposed reduction in physician reimbursement for chemotherapy could likely result in the movement of a large volume of cancer care from the physician’s office to the hospital environment.  The proposed reduction in physician reimbursement for radiation therapy would result in a gap in revenue for radiation oncologists.  Both proposed reductions favor an increase in opportunities to prescribe therapeutic radiopharmaceuticals.

 

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Item 1A. Risk Factors.

 

Risks Related to Our Business and Industry

 

We will require additional capital in order to continue our operations, and may have difficulty raising additional capital.

 

We expect that we will continue to generate significant operating losses for the foreseeable future. At December 31, 2012, our consolidated cash balance was approximately $4,678,000. On February 20, 2013, we completed a public offering (February Offering) of our common stock and warrants that generated gross proceeds of $5,500,000. We believe our cash balance at December 31, 2012 plus the proceeds from the February Offering would be adequate to fund operations through October 2013. This aggregate cash balance excludes $2,000,000 classified as restricted cash that is contractually designated for the construction of a clinical-stage manufacturing facility for LIGHT at our Madison, WI location, estimated to cost a total of $3,000,000. We will require additional funds to conduct research and development, establish and conduct clinical and preclinical trials, establish commercial-scale manufacturing arrangements and provide for the marketing and distribution of our products. Our ability to execute our operating plan depends on our ability to obtain additional funding via the sale of equity and/or debt securities, a strategic transaction or otherwise. We plan to actively pursue financing alternatives. However, there can be no assurance that we will obtain the necessary funding in the amounts we seek or that it will be available on a timely basis or upon terms acceptable to us. If we obtain capital by issuing debt or preferred stock, the holders of such securities would likely obtain rights that are superior to those of holders of our common stock.

 

Our capital requirements and our ability to meet them depend on many factors, including:

 

· the number of potential products and technologies in development;
· continued progress and cost of our research and development programs;
· progress with preclinical studies and clinical trials;
· the time and costs involved in obtaining regulatory clearance;
· costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
· costs of developing sales, marketing and distribution channels and our ability to sell our drugs;
· costs involved in establishing manufacturing capabilities for clinical trial and commercial quantities of our drugs;
· competing technological and market developments;
· market acceptance of our products;
· costs for recruiting and retaining management, employees and consultants;
· costs for educating physicians regarding the application and use of our products;
· whether or not we obtain listing on a national exchange and, if not, our prospects for obtaining such listing;
· uncertainty and economic instability resulting from terrorist acts and other acts of violence or war; and
· the condition of capital markets and the economy generally, both in the U.S. and globally.

 

We may consume available resources more rapidly than currently anticipated, resulting in the need for additional funding sooner than expected. We may seek to raise any necessary additional funds through the issuance of warrants, equity or debt financings or executing collaborative arrangements with corporate partners or other sources, which may be dilutive to existing stockholders or have a material effect on our current or future business prospects. In addition, in the event that additional funds are obtained through arrangements with collaborative partners or other sources, we may have to relinquish economic and/or proprietary rights to some of our technologies or products under development that we would otherwise seek to develop or commercialize by ourselves. If we cannot secure adequate financing when needed, we may be required to delay, scale back or eliminate one or more of our research and development programs or to enter into license or other arrangements with third parties to commercialize products or technologies that we would otherwise seek to develop ourselves and commercialize ourselves. In such event, our business, prospects, financial condition, and results of operations may be adversely affected.

 

We are a development stage company with a history of losses and can provide no assurance of our future operating results.

 

We are a development stage company and have incurred net losses and negative cash flows since inception. We currently have no product revenues, and may not succeed in developing or commercializing any products that will generate product or licensing revenues. We do not expect to have any products on the market for several years. Our primary activity to date has been research and development. In addition, development of our product candidates requires a process of preclinical and clinical testing, during which our product candidates could fail. We may not be able to enter into agreements with one or more companies experienced in the manufacturing and marketing of therapeutic drugs and, to the extent that we are unable to do so, we will not be able to market our product candidates. Whether we achieve profitability or not will depend on our success in developing, manufacturing, and marketing our product candidates. We have experienced net losses and negative cash flows from operating activities since inception and we expect such losses and negative cash flows to continue for the foreseeable future. As of December 31, 2012, we had working capital of $4,397,786 and stockholders’ equity of $10,158,375. For the period from Cellectar’s inception in November 2002 until the business combination with Novelos on April 8, 2011, and thereafter through December 31, 2012, Cellectar (and, from and after the business combination, Novelos) incurred aggregated net losses of $40,277,400. The net loss for the year ended December 31, 2012 was $8,796,974. We may never achieve profitability.

 

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At present, our success depends solely on the successful commercialization of our three compounds in development.  

 

Prior to the Acquisition, Novelos had for over ten years been developing oxidized glutathione-based compounds for the treatment of cancer, including NOV-002, an injectable small-molecule compound based on a proprietary formulation of oxidized glutathione that Novelos had been developing for use in combination with standard-of-care chemotherapies for the treatment of solid tumors, and NOV-205, a hepatoprotective agent with immunomodulating and anti-inflammatory properties.

 

Following the Acquisition, development of NOV-002 and NOV-205 was suspended and we are now focused on the development of novel drugs for the treatment and diagnosis of cancer based on the cancer-targeting technologies of Cellectar: I-124-CLR1404 (LIGHT, labeled with a short-lived radioisotope, iodine-124), I-131-CLR1404 (HOT, a radiolabeled compound) and CLR1502 (GLOW2, a preclinical, cancer-targeted, non-radioactive optical imaging agent). As a result, the successful commercialization of LIGHT, HOT and GLOW2 is crucial for our success. Our proposed products and their potential applications are in an early stage of clinical and manufacturing/process development and face a variety of risks and uncertainties. Principally, these risks include the following:

 

· future clinical trial results may show that our cancer-targeting technologies are not well tolerated by recipients at its effective doses or are not efficacious;
· future clinical trial results may be inconsistent with previous preliminary testing results and data from earlier studies may be inconsistent with clinical data;
· even if our cancer-targeting technologies are shown to be safe and effective for their intended purposes, we may face significant or unforeseen difficulties in obtaining or manufacturing sufficient quantities at reasonable prices or at all;
· our ability to complete the development and commercialization of our cancer-targeting technologies for their intended use is substantially dependent upon our ability to obtain and maintain experienced and committed partners to assist us with obtaining clinical and regulatory approvals for, and the manufacturing, marketing and distribution of, our products;
· even if our cancer-targeting technologies are successfully developed, commercially produced and receive all necessary regulatory approvals, there is no guarantee that there will be market acceptance of our products; and
· our competitors may develop therapeutics or other treatments which are superior or less costly than our own with the result that our product candidates, even if they are successfully developed, manufactured and approved, may not generate sufficient revenues to offset the development and manufacturing costs of our product candidates.

 

If we are unsuccessful in dealing with any of these risks, or if we are unable to successfully commercialize our cancer-targeting technologies for some other reason, our business, prospects, financial condition, and results of operations may be adversely affected.

 

We have a history of recurring losses and an accumulated deficit which, among other factors, raise substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.

 

Our financial statements as of December 31, 2012 were prepared under the assumption that we will continue as a going concern. The independent registered public accounting firm that audited our 2012 financial statements, in their report, included an explanatory paragraph referring to our recurring losses since inception and expressing substantial doubt in our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our ability to continue as a going concern depends on our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate revenue. 

 

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The failure to complete development of our technology, to obtain government approvals, including required FDA approvals, or to comply with ongoing governmental regulations could prevent, delay or limit introduction or sale of proposed products and result in failure to achieve revenues or maintain our ongoing business.

 

Our research and development activities and the manufacture and marketing of our intended products are subject to extensive regulation for safety, efficacy and quality by numerous government authorities in the U.S. and abroad. Before receiving clearance to market our proposed products by the FDA, we will have to demonstrate that our products are safe and effective for the patient population for the diseases that are to be treated. Clinical trials, manufacturing and marketing of drugs are subject to the rigorous testing and approval process of the FDA and equivalent foreign regulatory authorities. The Federal Food, Drug and Cosmetic Act and other federal, state and foreign statutes and regulations govern and influence the testing, manufacturing, labeling, advertising, distribution and promotion of drugs and medical devices. As a result, clinical trials and regulatory approval can take many years to accomplish and require the expenditure of substantial financial, managerial and other resources.

 

In order to be commercially viable, we must successfully research, develop, obtain regulatory approval for, manufacture, introduce, market and distribute our technologies. This includes meeting a number of critical developmental milestones including:

 

· demonstrating benefit from delivery of each specific drug for specific medical indications;
· demonstrating through preclinical and clinical trials that each drug is safe and effective; and
· demonstrating that we have established viable Good Manufacturing Practices suitable to application in commercial-scale manufacturing.

 

The timeframe necessary to achieve these developmental milestones may be long and uncertain, and we may not successfully complete these milestones for any of our intended products in development.

 

In addition to the risks previously discussed, our technology is subject to developmental risks that include the following:

 

· uncertainties arising from the rapidly growing scientific aspects of drug therapies and potential treatments;
· uncertainties arising as a result of the broad array of alternative potential treatments related to cancer and other diseases; and
· anticipated expense and time believed to be associated with the development and regulatory approval of treatments for cancer and other diseases.

 

In order to conduct the clinical trials that are necessary to obtain approval by the FDA to market a product, it is necessary to receive clearance from the FDA to conduct such clinical trials. The FDA can halt clinical trials at any time for safety reasons or because we or our clinical investigators do not follow the FDA’s requirements for conducting clinical trials. If we are unable to receive clearance to conduct clinical trials for a product, or the trials are halted by the FDA, we will not be able to achieve any revenue from such product in the U.S. as it is illegal to sell any drug for use in humans in the U.S. without FDA approval.

 

Even if we do ultimately receive FDA approval for any of our products, these products will be subject to extensive ongoing regulation, including regulations governing manufacturing, labeling, packaging, testing, dispensing, prescription and procurement quotas, record keeping, reporting, handling, shipment and disposal of any such drug. Failure to obtain and maintain required registrations or to comply with any applicable regulations could further delay or preclude development and commercialization of our drugs and subject us to enforcement action. 

 

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Clinical trials involve a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

 

In order to receive regulatory approval for the commercialization of our product candidates, we must conduct, at our own expense, extensive clinical trials to demonstrate safety and efficacy of these product candidates. Clinical testing is expensive, it can take many years to complete and its outcome is uncertain. Failure can occur at any time during the clinical trial process. For example, we incurred costs of over $35 million in clinical trial expenses over a period of 4 years in connection with the Phase 3 trial of NOV-002 for non-small cell lung cancer, and NOV-002 did not ultimately demonstrate efficacy for that indication.

 

We may experience delays in clinical testing of our product candidates. We do not know whether planned clinical trials will begin on time, will need to be redesigned or will be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays in obtaining regulatory approval to commence a trial, in reaching agreement on acceptable clinical trial terms with prospective sites, in obtaining institutional review board approval to conduct a trial at a prospective site, in recruiting patients to participate in a trial or in obtaining sufficient supplies of clinical trial materials. Many factors affect patient enrollment, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, competing clinical trials and new drugs approved for the conditions we are investigating. Prescribing physicians will also have to decide to use our product candidates over existing drugs that have established safety and efficacy profiles. Any delays in completing our clinical trials will increase our costs, slow down our product development and approval process and delay our ability to generate revenue.

 

In addition, the results of preclinical studies and early clinical trials of our product candidates do not necessarily predict the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through initial clinical testing. The data collected from clinical trials of our product candidates may not be sufficient to support the submission of a new drug application or to obtain regulatory approval in the United States or elsewhere. Because of the uncertainties associated with drug development and regulatory approval, we cannot determine if or when we will have an approved product for commercialization or achieve sales or profits.

 

Our clinical trials may not demonstrate sufficient levels of efficacy necessary to obtain the requisite regulatory approvals for our drugs, and our proposed drugs may not be approved for marketing. We suffered significant setbacks in the development of NOV-002 and NOV-205, as some of the promising results of earlier trials were not demonstrated in later stage trials. As a result, following the Acquisition, development of these compounds has been suspended.

 

We may be required to suspend or discontinue clinical trials due to unexpected side effects or other safety risks that could preclude approval of our product candidates.

 

Our clinical trials may be suspended at any time for a number of reasons. For example, we may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to the clinical trial patients. In addition, regulatory agencies may order the temporary or permanent discontinuation of our clinical trials at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements or that they present an unacceptable safety risk to the clinical trial patients.

 

Administering any product candidates to humans may produce undesirable side effects. These side effects could interrupt, delay or halt clinical trials of our product candidates and could result in the FDA or other regulatory authorities denying further development or approval of our product candidates for any or all targeted indications. Ultimately, some or all of our product candidates may prove to be unsafe for human use. Moreover, we could be subject to significant liability if any volunteer or patient suffers, or appears to suffer, adverse health effects as a result of participating in our clinical trials.

 

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We have limited in-house research and manufacturing capacity and will continue to rely, to some extent, on research and manufacturing facilities at various universities, hospitals, contract research organizations and contract manufacturers for a portion of our research, development, and manufacturing. In the event we exceed our in-house capacity or lose access to those facilities, our ability to gain FDA approval and commercialization of our drug delivery technology and products could be delayed or impaired.

 

We remain in the research and development and clinical and preclinical trial phase of product commercialization and have limited experience in establishing, supervising and conducting commercial manufacturing. Accordingly, if our products are approved for commercial sale, we will need to establish the capability, or engage a contract manufacturer that has the capability, to commercially manufacture our products in accordance with FDA and other regulatory requirements. There can be no assurance that we would be able to successfully establish any such capability, or identify a suitable manufacturing partner on acceptable terms.

 

At the present time, we have limited research, development or manufacturing capabilities within our facilities. Our manufacturing facility in Madison, Wisconsin has adequate capacity to supply drug product for Phase 2 studies of HOT, but we will need to expand for larger Phase 3 studies. LIGHT is currently manufactured by our collaborator, the University of Wisconsin at Madison, in small quantities, for use in investigator-sponsored clinical trials. We are evaluating contract manufacturing vendors that could accommodate larger scale production of LIGHT. We rely and expect to continue to rely, to some extent, on contracting with third parties to use their facilities to conduct research, development and manufacturing. The limited facilities we have to conduct research, development and manufacturing may delay or impair our ability to gain FDA approval and commercialization of our drug delivery technology and products.

 

We may rely on third-party contract research organizations, service providers and suppliers to support development and clinical testing of our products. This may expose us to the risks of not being able to directly oversee the production and quality of the manufacturing process. Furthermore, these contractors, whether foreign or domestic, may experience regulatory compliance difficulties, mechanical shutdowns, employee strikes or other unforeseeable acts that may delay production. Failure of any of these contractors to provide the required services in a timely manner or on commercially reasonable terms could materially delay the development and approval of our products, increase our expenses and materially harm our business, prospects, financial condition and results of operations.

 

We believe that we have a good working relationship with our contractors. However, should the situation change, we may be required to relocate these activities on short notice, and we do not currently have access to alternate facilities to which we could relocate our research, development and/or manufacturing activities. The cost and time to establish or locate an alternate research, development and/or manufacturing facility to develop our technology would be substantial and would delay obtaining FDA approval and commercializing our products.

 

We are exposed to product, clinical and preclinical liability risks that could create a substantial financial burden should we be sued.

 

Our business exposes us to potential product liability and other liability risks that are inherent in the testing, manufacturing and marketing of pharmaceutical products. In addition, the use, in our clinical trials, of pharmaceutical products that we or our current or potential collaborators may develop and then subsequently sell may cause us to bear a portion of or all product liability risks. While we carry an insurance policy covering up to $5,000,000 per occurrence and $5,000,000 in the aggregate of liability incurred in connection with such claims should they arise, there can be no assurance that our insurance will be adequate to cover all situations. Moreover, there can be no assurance that such insurance, or additional insurance, if required, will be available in the future or, if available, will be available on commercially reasonable terms. Furthermore, our current and potential partners with whom we have collaborative agreements or our future licensees may not be willing to indemnify us against these types of liabilities and may not themselves be sufficiently insured or have a net worth sufficient to satisfy any product liability claims. A successful product liability claim or series of claims brought against us could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

Acceptance of our products in the marketplace is uncertain and failure to achieve market acceptance will prevent or delay our ability to generate revenues.

 

Our future financial performance will depend, at least in part, on the introduction and customer acceptance of our proposed products. Even if approved for marketing by the necessary regulatory authorities, our products may not achieve market acceptance. The degree of market acceptance will depend on a number of factors including:

 

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· receiving regulatory clearance of marketing claims for the uses that we are developing;
· establishing and demonstrating the advantages, safety and efficacy of our technologies;
· pricing and reimbursement policies of government and third-party payers such as insurance companies, health maintenance organizations and other health plan administrators;
· our ability to attract corporate partners, including pharmaceutical companies, to assist in commercializing our intended products; and
· our ability to market our products.

 

Physicians, patients, payers or the medical community in general may be unwilling to accept, use or recommend any of our products. If we are unable to obtain regulatory approval or commercialize and market our proposed products as planned, we may not achieve any market acceptance or generate revenue.

 

We may face litigation from third parties who claim that our products infringe on their intellectual property rights, particularly because there is often substantial uncertainty about the validity and breadth of medical patents.

 

We may be exposed to future litigation by third parties based on claims that our technologies, products or activities infringe on the intellectual property rights of others or that we have misappropriated the trade secrets of others. This risk is exacerbated by the fact that the validity and breadth of claims covered in medical technology patents and the breadth and scope of trade-secret protection involve complex legal and factual questions for which important legal principles are unresolved. Any litigation or claims against us, whether or not valid, could result in substantial costs, could place a significant strain on our financial and managerial resources and could harm our reputation. The U. Mich. license does require, and license agreements that we may enter into in the future would likely require, that we pay the costs associated with defending this type of litigation. In addition, intellectual property litigation or claims could force us to do one or more of the following:

 

· cease selling, incorporating or using any of our technologies and/or products that incorporate the challenged intellectual property, which would adversely affect our ability to generate revenue;
· obtain a license from the holder of the infringed intellectual property right, which license may be costly or may not be available on reasonable terms, if at all; or
· redesign our products, which would be costly and time-consuming.

 

If we are unable to protect or enforce our rights to intellectual property adequately or to secure rights to third-party patents, we may lose valuable rights, experience reduced market share, assuming any, or incur costly litigation to protect our intellectual property rights.

 

Our ability to obtain licenses to patents, maintain trade-secret protection and operate without infringing the proprietary rights of others will be important to commercializing any products under development. Therefore, any disruption in access to the technology could substantially delay the development of our technology.

 

The patent positions of biotechnology and pharmaceutical companies, such as ours, that involve licensing agreements are frequently uncertain and involve complex legal and factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued or in subsequent legal proceedings. Consequently, our patent applications and any issued and licensed patents may not provide protection against competitive technologies or may be held invalid if challenged or circumvented. To the extent we license patents from third parties, as in the case of the U. Mich. license, the early termination of any such license agreement would result in the loss of our rights to use the covered patents, which could severely delay, inhibit or eliminate our ability to develop and commercialize compounds based on the licensed patents. Our competitors may also independently develop products similar to ours or design around or otherwise circumvent patents issued or licensed to us. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as U.S. law.

 

We also rely on trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. Although we generally require our employees, consultants, advisors and collaborators to execute appropriate confidentiality and assignment-of-inventions agreements, our competitors may independently develop substantially equivalent proprietary information and techniques, reverse engineer our information and techniques, or otherwise gain access to our proprietary technology. We may be unable to meaningfully protect our rights in trade secrets, technical know-how and other non-patented technology.

 

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We may have to resort to litigation to protect our rights for certain intellectual property or to determine their scope, validity or enforceability of our intellectual property rights. Enforcing or defending our rights is expensive, could cause diversion of our resources and may not prove successful. Any failure to enforce or protect our rights could cause us to lose the ability to exclude others from using our technology to develop or sell competing products.

 

Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may not adequately protect our intellectual property, which could limit our ability to compete.

 

We operate in the highly technical field of research and development of small molecule drugs, and rely in part on trade-secret protection in order to protect our proprietary trade secrets and unpatented know-how. However, trade secrets are difficult to protect, and we cannot be certain that our competitors will not develop the same or similar technologies on their own. We have taken steps, including entering into confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors, to protect our trade secrets and unpatented know-how. These agreements generally require that the other party keep confidential and not disclose to third parties all confidential information developed by the party or made known to the party by us during the course of the party’s relationship with us. We also typically obtain agreements from these parties which provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. Enforcing a claim that a party has illegally obtained and is using our trade secrets or know-how is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets or know-how. The failure to obtain or maintain trade-secret protection could adversely affect our competitive position.

 

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

 

As is common in the biotechnology and pharmaceutical industry, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that we or these employees have used or disclosed trade secrets or other proprietary information of their former employers, either inadvertently or otherwise. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

 

The use of hazardous materials, including radioactive materials, in our research and development imposes certain compliance costs on us and may subject us to liability for claims arising from the use or misuse of these materials.

 

Our research and development, manufacturing and administration of our drugs involve the controlled use of hazardous materials, including chemicals and radioactive materials, such as radioactive isotopes. We are subject to federal, state and local laws and regulations governing the storage, use and disposal of these materials and some waste products and are required to maintain both a manufacturer’s license and a radioactive materials license with State of Wisconsin agencies. We believe that our safety procedures for the storage, use and disposal of these materials comply with the standards prescribed by federal, state and local regulations. However, we cannot completely eliminate the risk of accidental contamination or injury from these materials. If there were to be an accident, we could be held liable for any damages that result, which could exceed our financial resources. We currently maintain insurance coverage, with limits of up to $2,500,000 depending on the nature of the claim, for damages resulting from the hazardous materials we use; however, future claims may exceed the amount of our coverage. Also, we do not have insurance coverage for pollution cleanup and removal. Currently the costs of complying with federal, state and local regulations are not significant, and consist primarily of waste disposal expenses and permitting fees. However, they could become expensive, and current or future environmental regulations may impair our research, development, production and commercialization efforts. If we are unable to maintain the required licenses and permits for any reason, it will negatively impact our research and development activities.

 

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Due to our limited marketing, sales and distribution experience, we may be unsuccessful in our efforts to sell our proposed products, enter into relationships with third parties or develop a direct sales organization.

 

We have not established marketing, sales or distribution capabilities for our proposed products. Until such time as our proposed products are further along in the development process, we will not devote any meaningful time and resources to this effort. At the appropriate time, we intend to develop our own sales and marketing capabilities or enter into agreements with third parties to sell our products.

 

We have limited experience in developing, training or managing a sales force. If we choose to establish a direct sales force, we may incur substantial additional expenses in developing, training and managing such an organization. We may be unable to build a sales force on a cost-effective basis or at all. Any such direct marketing and sales efforts may prove to be unsuccessful. In addition, we will compete with many other companies that currently have extensive marketing and sales operations. Our marketing and sales efforts may be unable to compete against these other companies. We may be unable to establish a sufficient sales and marketing organization on a timely basis, if at all.

 

If we choose to enter into agreements with third parties to sell our proposed products, we may be unable to establish or maintain third-party relationships on a commercially reasonable basis, if at all. In addition, these third parties may have similar or more established relationships with our competitors.

 

We may be unable to engage qualified distributors. Even if engaged, these distributors may:

 

· fail to adequately market our products;
· fail to satisfy financial or contractual obligations to us;
· offer, design, manufacture or promote competing products; or
· cease operations with little or no notice.

 

If we fail to develop sales, marketing and distribution channels, we would experience delays in product sales and incur increased costs, which would have a material adverse effect on our business, prospects, financial condition, and results of operation.

 

If we are unable to convince physicians of the benefits of our intended products, we may incur delays or additional expense in our attempt to establish market acceptance.

 

Achieving use of our products in the target market of cancer diagnosis and treatment may require physicians to be informed regarding these products and their intended benefits. The time and cost of such an educational process may be substantial. Inability to successfully carry out this physician education process may adversely affect market acceptance of our proposed products. We may be unable to timely educate physicians regarding our intended proposed products in sufficient numbers to achieve our marketing plans or to achieve product acceptance. Any delay in physician education may materially delay or reduce demand for our proposed products. In addition, we may expend significant funds towards physician education before any acceptance or demand for our proposed products is created, if at all.

 

The market for our proposed products is rapidly changing and competitive, and new therapeutics, new drugs and new treatments that may be developed by others could impair our ability to maintain and grow our business and remain competitive.

 

The pharmaceutical and biotechnology industries are subject to rapid and substantial technological change. Developments by others may render our technologies and intended products noncompetitive or obsolete, or we may be unable to keep pace with technological developments or other market factors. Technological competition from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase. Most of these entities have significantly greater research and development capabilities and budgets than we do, as well as substantially more marketing, manufacturing, financial and managerial resources. These entities represent significant competition for us. Acquisitions of, or investments in, competing pharmaceutical or biotechnology companies by large corporations could increase our competitors’ financial, marketing, manufacturing and other resources.

 

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Our resources are limited and we may experience management, operational or technical challenges inherent in such activities and novel technologies. Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competition. Some of these technologies may accomplish therapeutic effects similar to those of our technology, but through different means. Our competitors may develop drugs and drug delivery technologies that are more effective than our intended products and, therefore, present a serious competitive threat to us.

 

We do not know of any current or potential direct competitors for HOT and LIGHT. Marketed drugs Zevalin® (Spectrum Pharmaceuticals) and Bexxar® (Glaxo Smith Kline) provide examples of targeted radiotherapeutics specifically for lymphoma indication. FDG is the current standard for PET imaging for cancer and may be an alternative diagnostic imaging agent to LIGHT.

 

The potential widespread acceptance of therapies and diagnostics that are alternatives to ours may limit market acceptance of our products even if they are commercialized. Many of our targeted diseases and conditions can also be treated by other medication or drug delivery technologies. These treatments may be widely accepted in medical communities and have a longer history of use. The established use of these competitive drugs may limit the potential for our technologies and products to receive widespread acceptance if commercialized.

 

If users of our products are unable to obtain adequate reimbursement from third-party payers, or if additional healthcare reform measures are adopted, it could hinder or prevent our product candidates’ commercial success.

 

The continuing efforts of government and insurance companies, health maintenance organizations and other payers of healthcare costs to contain or reduce costs of healthcare may adversely affect our ability to generate future revenues and achieve profitability, including by limiting the future revenues and profitability of our potential customers, suppliers and collaborative partners. For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. The U.S. government is implementing, and other governments have shown significant interest in pursuing, healthcare reform. Any government-adopted reform measures could adversely affect the pricing of healthcare products and services in the U.S. or internationally and the amount of reimbursement available from governmental agencies or other third-party payers. The continuing efforts of the U.S. and foreign governments, insurance companies, managed care organizations and other payers of healthcare services to contain or reduce healthcare costs may adversely affect our ability to set prices for our products, should we be successful in commercializing them, and this would negatively affect our ability to generate revenues and achieve and maintain profitability.

 

New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, that relate to healthcare availability, methods of delivery or payment for healthcare products and services, or sales, marketing or pricing of healthcare products and services, also may limit our potential revenue and may require us to revise our research and development programs. The pricing and reimbursement environment may change in the future and become more challenging for several reasons, including policies advanced by the current or future executive administrations in the U.S., new healthcare legislation or fiscal challenges faced by government health administration authorities. Specifically, in both the U.S. and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. In the U.S., changes in federal healthcare policy were enacted in 2010 and are being implemented. Some reforms could result in reduced reimbursement rates for our product candidates, which would adversely affect our business strategy, operations and financial results. Our ability to commercialize our products will depend in part on the extent to which appropriate reimbursement levels for the cost of our products and related treatment are obtained by governmental authorities, private health insurers and other organizations, such as health maintenance organizations (HMOs). Third-party payers are increasingly challenging the prices charged for medical drugs and services. Also, the trend toward managed healthcare in the U.S. and the concurrent growth of organizations such as HMOs that could control or significantly influence the purchase of healthcare services and drugs, as well as legislative proposals to reform healthcare or change government insurance programs, may all result in lower prices for or rejection of our drugs. The cost containment measures that healthcare payers and providers are instituting and the effect of any healthcare reform could materially harm our ability to operate profitably.

 

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We depend on key personnel who may terminate their employment with us at any time, and our success will depend on our ability to hire additional qualified personnel.

 

Our success will depend to a significant degree on the continued services of our chief executive officer, Harry Palmin, Cellectar founder and our chief scientific officer, Dr. Jamey Weichert, and our senior vice president of research and development, Dr. Christopher Pazoles. There can be no assurance that these individuals will continue to provide services to us. In addition, our success may depend on our ability to attract and retain other highly skilled personnel. We may be unable to recruit such personnel on a timely basis, if at all. Our management and other employees may voluntarily terminate their employment with us at any time. The loss of services of key personnel, or the inability to attract and retain additional qualified personnel, could result in delays in development or approval of our products, loss of sales and diversion of management resources. To date, we have not experienced difficulties attracting and retaining highly qualified personnel, but there can be no assurance we will be successful in doing so in the future.

 

Our stock price has experienced fluctuations.

 

The market price of our common stock has fluctuated in the past and may be significantly affected by one or more of the following factors:

 

· announcements or press releases relating to the biopharmaceutical sector or to our own business or prospects;
· regulatory, legislative, or other developments affecting us or the healthcare industry generally;
· sales by holders of restricted securities pursuant to effective registration statements or exemptions from registration; and
· market conditions specific to biopharmaceutical companies, the healthcare industry and the stock market generally.

 

Eight of our stockholders beneficially own approximately 72% of our common stock, which limits the influence of other stockholders.

 

As of March 25, 2013, 72% of our common stock is beneficially owned by eight stockholders. The interests of these stockholders may differ from those of other stockholders. These stockholders will likely continue to have the ability to significantly affect the outcome of all corporate actions requiring stockholder approval, including the following actions:

 

· the election of directors;
· the amendment of charter documents; and
· the approval of certain mergers and other significant corporate transactions, including a sale of substantially all of our assets.

 

There may be a limited public market for our securities; we presently fail to qualify for listing on any national securities exchanges.

 

Our common stock currently does not meet all of the requirements for initial listing on a registered stock exchange. Specifically, our cash on hand is not sufficient to fund operations for twelve months and the bid price of our common stock is less than the minimum bid price required to obtain a listing. Trading in our common stock continues to be conducted in the over-the-counter market (currently the OTCQX). As a result, an investor may find it difficult to dispose of or to obtain accurate quotations as to the market value of our common stock, and our common stock may be less attractive for margin loans, or for investment by financial institutions, as consideration in future capital raising transactions or other contexts.

 

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Our common stock has historically been a “penny stock” under SEC rules. It may be more difficult to resell shares of common stock classified as “penny stock”.

 

Our common stock has historically been a “penny stock” under applicable SEC rules (generally defined as non-exchange traded stock with a per-share price below $5.00). These rules impose additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as “established customers” or “accredited investors.” For example, broker-dealers must determine the appropriateness for non-qualifying persons of investments in penny stocks. Broker-dealers must also provide, prior to a transaction in a penny stock not otherwise exempt from the rules, a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, disclose the compensation of the broker-dealer and its salesperson in the transaction, furnish monthly account statements showing the market value of each penny stock held in the customer’s account, provide a special written determination that the penny stock is a suitable investment for the purchaser, and receive the purchaser’s written agreement to the transaction.

 

Legal remedies available to an investor in "penny stocks" may include the following:

 

· if a "penny stock" is sold to the investor in violation of the requirements listed above, or other federal or states securities laws, the investor may be able to cancel the purchase and receive a refund of the investment.
· if a “penny stock” is sold to the investor in a fraudulent manner, the investor may be able to sue the persons and firms that committed the fraud for damages.

 

However, investors who have signed arbitration agreements may have to pursue their claims through arbitration.

 

These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of our securities. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect your ability to resell our common stock.

 

Many brokerage firms will discourage or refrain from recommending investments in penny stocks. Most institutional investors will not invest in penny stocks. In addition, many individual investors will not invest in penny stocks due, among other reasons, to the increased financial risk generally associated with these investments.

 

For these reasons, penny stocks may have a limited market and, consequently, limited liquidity. We can give no assurance at what time, if ever, our common stock will not be classified as a “penny stock” in the future.

 

If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.

 

Our internal control over financial reporting may have weaknesses and conditions that could require correction or remediation, the disclosure of which may have an adverse impact on the price of our common stock. We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.

 

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We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 and if we fail to continue to comply, our business could be harmed and our stock price could decline.

 

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls over financial reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting firm. The standards that must be met for management to assess the internal controls over financial reporting as effective are evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. It is difficult for us to predict how long it will take or costly it will be to complete the assessment of the effectiveness of our internal control over financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis. In addition, although attestation requirements by our independent registered public accounting firm are not presently applicable to us we could become subject to these requirements in the future and we may encounter problems or delays in completing the implementation of any resulting changes to internal controls over financial reporting. In the event that our Chief Executive Officer or Chief Financial Officer determine that our internal control over financial reporting is not effective as defined under Section 404, we cannot predict how regulators will react or how the market prices of our shares will be affected; however, we believe that there is a risk that investor confidence and share value may be negatively affected.

 

Our common stock could be further diluted as the result of the issuance of additional shares of common stock, convertible securities, warrants or options.

 

In the past, we have issued common stock, convertible securities (such as convertible preferred stock and notes) and warrants in order to raise money. We have also issued options and warrants as compensation for services and incentive compensation for our employees and directors. We have shares of common stock reserved for issuance upon the exercise of certain of these securities and may increase the shares reserved for these purposes in the future. Our issuance of additional common stock, convertible securities, options and warrants could affect the rights of our stockholders, could reduce the market price of our common stock or could result in adjustments to exercise prices of outstanding warrants (resulting in these securities becoming exercisable for, as the case may be, a greater number of shares of our common stock), or could obligate us to issue additional shares of common stock to certain of our stockholders.

 

Shares eligible for future sale may adversely affect the market.

 

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general, pursuant to amended Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), current public information, and notice requirements. Of the approximately 57 million shares of our common stock outstanding as of March 25, 2013, approximately 31 million shares are tradable without restriction, and approximately an additional 15.1 million shares that had been issued in unregistered transactions and are held by non-affiliates are tradable without time or volume limitations pursuant to Rule 144. We have registered the resale of an additional 4,000,000 shares of our common stock, pursuant to registration obligations. Given the limited trading of our common stock, resales of even a small number of shares of our common stock pursuant to Rule 144 or an effective registration statement may adversely affect the market price of our common stock.

 

Provisions of our charter, bylaws, and Delaware law may make an acquisition of us or a change in our management more difficult.

 

Certain provisions of our amended restated certificate of incorporation and bylaws could discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which an investor might otherwise receive a premium for their shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock or warrants, thereby depressing the market price of our common stock. Stockholders who wish to participate in these transactions may not have the opportunity to do so.

 

Furthermore, these provisions could prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions:

 

· provide for the division of our board into three classes as nearly equal in size as possible with staggered three-year terms and further limit the removal of directors and the filling of vacancies;

 

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· authorize our board of directors to issue without stockholder approval blank-check preferred stock that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that is not approved by our board of directors;
· require that stockholder actions must be effected at a duly called stockholder meeting and prohibit stockholder action by written consent;
· establish advance notice requirements for stockholder nominations to our board of directors or for stockholder proposals that can be acted on at stockholder meetings;
· limit who may call stockholder meetings; and
· require the approval of the holders of 75% of the outstanding shares of our capital stock entitled to vote in order to amend certain provisions of our restated certificate of incorporation and restated bylaws.

 

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a prescribed period of time.

 

We have not paid dividends in the past and do not expect to pay dividends for the foreseeable future. Any return on investment may be limited to the value of our common stock.

 

No cash dividends have been paid on Novelos common stock. We do not expect to pay cash dividends in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on an investor’s investment will only occur if our stock price appreciates.

 

Item 2.        Properties.

 

We lease our executive office in Newton, Massachusetts.  Our office consists of approximately 2,000 square feet and is rented for approximately $5,300 per month.  This lease may be terminated by either party with one month’s notice.

 

We lease office, laboratory and manufacturing space in Madison, Wisconsin.  The space consists of approximately 19,500 square feet and is rented for approximately $12,900 per month and expires on September 14, 2014.  The lease may be renewed for two-year periods through 2024 with an increase of 3% in annual rent.  We believe that our present facilities are adequate to meet our current needs.  If new or additional space is required, we believe that adequate facilities are available at competitive prices.

 

Item 3.        Legal Proceedings.

 

A putative federal securities class action complaint was filed on March 5, 2010 in the United States District Court for the District of Massachusetts by an alleged shareholder of Novelos, on behalf of himself and all others who purchased or otherwise acquired Novelos common stock in the period between December 14, 2009 and February 24, 2010, against Novelos and its President and Chief Executive Officer, Harry S. Palmin.  On October 1, 2010, the court appointed lead plaintiffs (Boris Urman and Ramona McDonald) and appointed lead plaintiffs’ counsel.  On October 22, 2010, an amended complaint was filed.  The amended complaint claimed, among other things, that Novelos violated Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder in connection with alleged misleading disclosures related to the progress of the Phase 3 clinical trial of NOV-002 for non-small cell lung cancer.  In December 2010, the defendants filed a motion to dismiss the complaint with prejudice.  On June 23, 2011, the motion to dismiss was granted and the case was dismissed without prejudice.  Because the dismissal was without prejudice, the plaintiffs could reinstitute the proceeding by filing an amended complaint.  In August 2011, the plaintiffs filed a second amended complaint realleging that the defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 in connection with alleged misleading disclosures related to the Phase 3 clinical trial for NOV-002 in non-small cell lung cancer. In September 2011, the defendants filed a motion to dismiss the second amended complaint. On June 11, 2012, the second amended complaint was dismissed with prejudice. The plaintiffs did not file a notice of appeal prior to the expiration of the deadline for such filing on July 13, 2012.

 

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From its inception through 2010, Novelos was primarily engaged in the development of certain oxidized glutathione-based compounds for application as therapies for disease, particularly cancer. These compounds were originally developed in Russia and in June 2000, Novelos acquired commercial rights from the Russian company (ZAO BAM) which owned the compounds and related Russian patents. In April 2005, Novelos acquired worldwide rights to the compounds (except for the Russian Federation) in connection with undertaking extensive development activities in an attempt to secure US Food and Drug Administration (FDA) approval of the compounds as therapies. These development activities culminated in early 2010 in an unsuccessful Phase 3 clinical trial of an oxidized glutathione compound (NOV-002) as a therapy for non-small cell lung cancer. After the disclosure of the negative outcome of the Phase 3 clinical trial in 2010, ZAO BAM claimed that Novelos modified the chemical composition of NOV-002 without prior notice to or approval from ZAO BAM, constituting a material breach of the June 2000 technology and assignment agreement. In September 2010, Novelos filed a complaint in Massachusetts Superior Court seeking a declaratory judgment by the court that the June 2000 agreement has been entirely superseded by the April 2005 agreement and that the obligations of the June 2000 agreement have been performed and fully satisfied. ZAO BAM answered the complaint and alleged counterclaims. In August 2011, Novelos filed a motion for judgment on the pleadings as to the declaratory judgment count and all counts of ZAO BAM’s amended counterclaims. On October 17, 2011, the court ruled in favor of Novelos on each of the declaratory judgment claims and dismissed all counts of ZAO BAM’s counterclaim. Judgment in favor of Novelos was entered on October 20, 2011. On November 14, 2011 ZAO BAM filed a notice of appeal.

 

We do not anticipate that these litigation matters will have a material adverse effect on the Company’s future financial position, results of operations or cash flows.

 

PART II

 

Item 5.        Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

MARKET FOR COMMON EQUITY

 

Market Information

 

Our common stock was quoted on the OTC Bulletin Board under the symbol NVLT beginning on June 14, 2005 and until February 16, 2012, since which time it has been quoted on the OTCQX platform. The following table provides, for the periods indicated, the high and low bid prices for our common stock. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

 

Fiscal Year 2011   High     Low  
First Quarter   $ 8.10     $ 1.52  
Second Quarter     3.82       0.95  
Third Quarter     1.55       1.13  
Fourth Quarter     1.39       0.33  

 

Fiscal Year 2012   High     Low  
First Quarter   $ 0.99     $ 0.40  
Second Quarter     2.20       0.75  
Third Quarter     1.20       0.91  
Fourth Quarter     1.07       0.66  

 

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The above share prices have been adjusted to give effect to a 1-for-153 reverse split of our common stock completed April 8, 2011 in connection with the Acquisition.

 

On March 25, 2013 there were 358 holders of record of our common stock. This number does not include stockholders for whom shares were held in a “nominee” or “street” name.

 

We have not declared or paid any cash dividends on our common stock and do not anticipate declaring or paying any cash dividends in the foreseeable future. We currently expect to retain future earnings, if any, for the development of our business.

 

Our transfer agent and registrar is American Stock Transfer and Trust Company, 59 Maiden Lane, New York, NY 10038.

 

Equity compensation plans

 

The following table provides information as of December 31, 2012 regarding shares authorized for issuance under our equity compensation plans, including individual compensation arrangements.

 

We have two equity compensation plans approved by our stockholders:  the 2000 Stock Option and Incentive Plan and the 2006 Stock Incentive Plan.  During 2004 and 2005, we also issued options to our directors and consultants that were not approved by our stockholders and during 2011 we issued options to certain consultants that were not approved by our stockholders.  These options are exercisable within a ten-year period from the date of the grant and vest at various intervals with all options being fully vested within three years of the date of grant.  The option price per share is not less than the fair market value of our common stock on the date of grant.

 

Equity compensation plan information

 

Plan category   Number of shares to
be issued upon
exercise of outstanding
options, warrants and
rights (#)
    Weighted-average
exercise price of
outstanding options,
warrants and rights ($)
    Number of shares
remaining available for
future issuance under
equity compensation plans
(excluding shares reflected
in column (a)) (#)
 
    (a)     (b)     (c)  
                   
Equity compensation plans approved by stockholders     6,329,050     $ 1.37       3,669,562  
                         
Equity compensation plans not approved by stockholders     110,138     $ 10.16       0  
                         
Total     6,439,188     $ 1.52       3,669,562  

 

Item 6.        Selected Financial Data.

 

Not applicable.

 

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Item 7.        Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward-Looking Statements

 

This annual report on Form 10-K includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. For this purpose, any statements contained herein regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management, other than statements of historical facts, are forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements. There are a number of important factors that could cause actual results or events to differ materially from those disclosed in the forward-looking statements we make. These important factors include our significant accounting estimates and the risk factors set forth above under the caption “Risk Factors”. Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this annual report.

 

Acquisition

 

On April 8, 2011, we completed the Acquisition.  Immediately prior to the Acquisition, we completed a 1-for-153 reverse split of our common stock. We then issued 17,001,596 shares of our common stock to the former shareholders of Cellectar as consideration for the Acquisition, constituting approximately 85% of our outstanding common stock after giving effect to the Acquisition.  Upon the closing of the Acquisition, we completed the private placement of 6,846,537 shares of our common stock and warrants to purchase an additional 6,846,537 shares of our common stock.  The Acquisition was accounted for as a reverse acquisition whereby Cellectar, Inc. was treated as the acquirer for accounting and financial reporting purposes. As such, references to the results of operations for the twelve months ended December 31, 2011 include the historical results of Cellectar from January 1, 2011 through April 8, 2011 and include the consolidated results of the combined company from April 9, 2011 through December 31, 2011.  References to the results of operations for the year ended December 31, 2012 include the consolidated results of the combined company for that period.

 

As a result of the Acquisition, we have implemented a revised business plan focused on the development of the Cellectar compounds.  We conduct our operations from Cellectar’s headquarters in Madison, Wisconsin and our executive offices are in Newton, Massachusetts. Further development of our other compounds (NOV-002 and NOV-205) has been suspended.

 

On April 8, 2011, immediately prior to the Acquisition, Cellectar paid approximately $627,000 in full settlement of a note payable to a bank.  The payment was made in order to avoid an event of default that would have occurred as a result of the change of control that occurred as a result of the Acquisition.  On April 8, 2011, the holders of Cellectar convertible notes converted outstanding principal of $2,720,985 and accrued unpaid interest into a total of 4,181,535 shares of common stock.

 

Overview

 

We are a pharmaceutical company developing novel drugs for the treatment and diagnosis of cancer. Our cancer-targeted compounds are selectively taken up and retained in cancer cells, including cancer stem cells, versus normal cells. Thus, our therapeutic compounds appear to directly kill cancer cells while minimizing harm to normal cells. This offers the potential for a paradigm shift in cancer therapy by providing efficacy versus all three major drivers of mortality in cancer: primary tumors, metastases and stem cell-based relapse. I-124-CLR1404 (LIGHT) is a small-molecule, broad-spectrum, cancer-targeted PET imaging agent. We believe LIGHT has the potential to be the first imaging agent to use PLEs to target cancer cells. Phase 1-2 clinical trials are ongoing across 11 solid tumor indications. I-131-CLR1404 (HOT) is a small-molecule, broad-spectrum, cancer-targeted molecular radiotherapeutic that delivers cytotoxic radiation directly and selectively to cancer cells and cancer stem cells. We believe HOT also has first-in-class potential as the first therapeutic agent to use PLEs to target cancer cells. The HOT Phase 1b dose-escalation trial is ongoing as a monotherapy for solid tumors with significant unmet medical need. CLR1502 (GLOW2) is a preclinical, cancer-targeted, non-radioactive optical imaging agent for intraoperative tumor margin illumination and non-invasive tumor imaging. Together, we believe our compounds are able to “find, treat and follow” cancer anywhere in the body in a novel, effective and highly selective way.

 

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LIGHT is a small-molecule, broad-spectrum, cancer-targeted imaging agent that we believe has the potential to be the first of its kind for selective detection of tumors and metastases in a broad range of cancers. LIGHT is comprised of a proprietary PLE, acting as a cancer-targeted delivery and retention vehicle, covalently labeled with iodine-124, a short-lived PET imaging radioisotope. PET imaging used in conjunction with CT scanning has now become the imaging method of choice in oncology. In studies to date, LIGHT selectively illuminated malignant tumors in 52 of 54 animal models of cancer, demonstrating broad-spectrum, cancer-selective uptake and retention. Investigator-sponsored Phase 1-2 trials of LIGHT as a PET imaging agent are ongoing across 11 solid tumor indications. Initial positive imaging results have been established in patients with lung and brain cancers. These human trials, if successful, would likely provide proof-of-concept for LIGHT as a PET imaging agent with the potential to supplant the current “gold standard” agent, 18F-fluoro-deoxyglucose (FDG), due to what we believe to be LIGHT’s superior cancer-specificity versus FDG and MRI, and more favorable logistics of clinical use versus FDG. As a chemically identical biomarker for HOT, we believe that LIGHT tumor uptake data could accelerate clinical development of HOT by guiding selection of indications for HOT Phase 2 trials and potentially be used in such trials to identify suitable patients and assess therapeutic efficacy. For the same reason, and in view of the quantitative nature of PET imaging, LIGHT imaging may be capable of estimating an efficacious dose of HOT in individual patients.

 

HOT is a small-molecule, broad-spectrum, cancer-targeted molecular radiotherapeutic that we believe has the potential to be the first therapeutic agent to use PLEs to target cancer cells. HOT is comprised of a proprietary PLE, acting as a cancer-targeted delivery and retention vehicle, covalently labeled with iodine-131, a cytotoxic (cell-killing) radioisotope that is already in common use to treat thyroid and other cancer types. The ongoing Phase 1b dose-escalation trial is aimed at determining the Maximum Tolerated Dose of HOT. We expect to initiate HOT Phase 2 efficacy trials as a monotherapy for solid tumors with significant unmet medical need as soon as a starting dose is established. We may determine such a dose based on an acceptable safety profile in the Phase 1b trial. Selection of indications for Phase 2, as well as aspects of trial design, will be guided by ongoing PET imaging trials in cancer patients with LIGHT, a chemically identical biomarker for HOT. Preclinical experiments in more than a dozen in vivo (in animals) tumor models have demonstrated selective killing of cancer cells along with a benign safety profile. In view of HOT’s selective uptake and retention in a wide range of solid tumors and in cancer stem cells, its single-agent efficacy in animal models and its non-specific mechanism of cancer-killing (radiation), we are first developing HOT as a monotherapy for solid tumors with significant unmet medical need.

 

GLOW2 is a small-molecule, broad-spectrum, cancer-targeted, non-radioactive optical imaging agent that we believe has the potential to be the first of its kind for intraoperative tumor margin illumination and non-invasive tumor imaging. GLOW2 is comprised of a proprietary PLE, acting as a cancer-targeted delivery and retention vehicle, covalently attached to a near-infrared (800nm) fluorophore. According to the American Cancer Society (2011), most cancer patients will have some type of surgery, and Cancer Facts and Figures indicated that approximately 1.3 million cancer patients were diagnosed with solid tumors in the U.S. alone in 2011. GLOW2 may facilitate and enable diagnostic, staging, debulking and curative cancer surgeries, intraoperatively in real time (i.e. during the actual surgical procedure) by defining tumor margins and regional lymph node involvement, resulting in more accurate tumor resectioning and improved outcome and prognosis. In this context, GLOW2 would effectively act as an adjunct therapeutic agent. In preclinical in vivo (in animals) tumor models, non-invasive optical imaging showed pronounced accumulation of GLOW2 in tumors versus normal organs and tissues in addition to successfully delineated tumor margins during tumor resection. Thus, GLOW2 may also have utility for non-invasive imaging of relatively superficial tumor types in man (e.g., melanoma, head & neck, colon, esophageal). Subject to additional funding, we expect to submit an IND for GLOW2 in the fourth quarter of 2013 and begin clinical trials shortly thereafter.

 

Prior to the Acquisition, for more than 10 years, Novelos had been developing oxidized glutathione-based compounds for the treatment of cancer, including NOV-002, an injectable small-molecule compound based on a proprietary formulation of oxidized glutathione that Novelos had been developing for use in combination with standard of care chemotherapies for the treatment of solid tumors. From 2005 through 2010 Novelos raised approximately $67 million in capital for the development of our compounds. From November 2006 through January 2010, Novelos conducted a Phase 3 trial of NOV-002 plus first-line chemotherapy in advanced non-small cell lung cancer which, when completed in February 2010, did not meet its primary and secondary efficacy endpoints. Following the completion of the Phase 3 trial during 2010, Novelos continued clinical development of NOV-002 in breast cancer and NOV-205 in hepatitis C, although further development of those compounds has been suspended. Novelos also explored strategic alternatives which resulted in the completion of the Acquisition in April 2011.

 

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Results of Operations

 

Research and development expense.   Research and development expense consists of costs incurred in identifying, developing and testing, and manufacturing product candidates, which primarily include salaries and related expenses for personnel, costs of our research and manufacturing facility, cost of manufacturing materials, fees paid to professional service providers for independent monitoring and analysis of our clinical trials, and costs to secure intellectual property. The Company analyzes its research and development expenses based on four categories as follows: clinical projects, preclinical projects, chemistry and manufacturing costs, and general fixed and overhead costs that are not allocated to the functional project costs, including personnel costs, manufacturing facility costs, related overhead costs and patent costs.

 

General and administrative expense.   General and administrative expense consists primarily of salaries and other related costs for personnel in executive, finance and administrative functions.  Other costs include insurance, costs for public company reporting and investor relations, directors’ fees and professional fees for legal and accounting services.

 

Twelve Months Ended December 31, 2012 and 2011

 

Research and Development.   Research and development expense for the year ended December 31, 2012 was approximately $5,123,000 (comprised of approximately $777,000 in clinical project costs, $329,000 of preclinical project costs, $488,000 of manufacturing and related costs and $3,529,000 in general unallocated research and development costs) compared to approximately $3,599,000 (comprised of approximately $166,000 in clinical project costs, $207,000 of preclinical project costs, $205,000 of manufacturing and related costs and $3,021,000 in general unallocated research and development costs) for 2011.  The approximately $1,524,000, or 42.3%, increase in research and development resulted from increases in all categories. The $611,000 increase in clinical projects and the $283,000 increase in manufacturing costs in the year ended December 31, 2012 versus 2011 was related to costs associated with the Phase 1-2 trials for LIGHT and the Phase 1b trial for HOT. The $122,000 increase in preclinical projects, for the year ended December 31, 2012 versus 2011 was related to contributions to the U.Wisc. towards unrestricted research activities and increased consulting to support preclinical research activities. The $508,000 increase in general unallocated research and development costs was principally related to an increase in salary and related costs from the addition of employees following the Acquisition; an increase in stock-based compensation associated with recognition of compensation expense over the vesting periods of stock option grants in May and December 2011 and increased travel costs.

 

General and Administrative.   General and administrative expense for the year ended December 31, 2012 was approximately $3,632,000 compared to approximately $2,692,000 in 2011.  The $940,000, or 34.9%, increase in general and administrative costs was primarily related to the following items: stock-based compensation increased approximately $423,000 resulting from the recognition of compensation expense over the vesting periods of stock options granted in May and December 2011 and December 2012; salary increased approximately $297,000 resulting principally from the addition of employees following the Acquisition; the cost of subcontracted services increased by approximately $242,000 as a result of increased investor relations activities and costs associated with public company reporting. Insurance costs increased approximately $78,000, rent increased approximately $14,000 associated with the addition of the Massac husetts location and travel costs increased approximately $23,000 due principally to an increase in travel between our Massachusetts and Wisconsin offices. These increases were offset by an approximately $137,000 decrease in expense primarily attributable to a $125,000 payment received from the Company’s directors and officers insurance carrier for retained expenses following the dismissal with prejudice on June 11, 2012 of the securities litigation described in Note 14. We recorded this payment as a reduction of legal fees in the twelve months ended December 31, 2012.

 

34
 

 

Merger Costs. We did not incur any merger-related costs during the year ended December 31, 2012. Merger costs during the year ended December 31, 2011 consisted of $450,000 in investment banking fees, approximately $286,000 in legal fees and approximately $10,000 in insurance costs.

 

Grant income.   Qualifying therapeutic discovery projects, among others, include those designed to treat or prevent diseases or conditions by conducting pre-clinical or clinical activities for the purpose of securing FDA approval of a product.  We received payments of approximately $44,000 in the year ended December 31, 2011 under a cash grant from the U.S. Internal Revenue Service as a qualifying therapeutic discovery project credit pursuant to Patient Protection and Affordable Care Act. The payments were recorded as a component of other income. No payments were received during the year ended December 31, 2012.

 

Loss on Derivative Warrants. We recorded a loss on derivative warrants of approximately $34,000 and $12,000 in the year ended December 31, 2012 and 2011, respectively. This amount represents the change in fair value, during the respective period, of outstanding warrants that contain “down-round” anti-dilution provisions whereby the number of shares for which the warrants are exercisable and/or the exercise price of the warrants is subject to change in the event of certain issuances of stock at prices below the then-effective exercise prices of the warrants.

 

Interest expense, net .  Interest expense, net, for the years ended December 31, 2012 and 2011 consists approximately of the following:

 

    Year Ended December 31,  
    2012     2011  
             
Interest expense, convertible notes   $     $ (159,000 )
Beneficial conversion feature, convertible notes           (258,000 )
Interest expense, bank note           (6,500 )
Interest expense, other     (9,000 )     (11,000 )
Interest income     1,000       4,500  
    $ (8,000 )   $ (430,000 )

 

Since the convertible notes were converted based on revised conversion terms that resulted in the issuance of an additional 343,963 shares of common stock than would have been issued if the convertible notes had been converted in accordance with their original terms, the value of these additional shares of approximately $258,000 was recorded as a component of interest expense at the date of conversion in 2011. The decrease in interest expense on the convertible notes and bank note was a result of the settlement of those obligations in connection with the Acquisition. The reduction of interest income in 2012 was a result of our excess cash balances being moved to non-interest-bearing accounts in late 2011 to take advantage of FDIC insurance protection.

 

Deemed Dividend on Warrant Amendment . During the year ended December 31, 2012, the Company amended the terms of its Class B Warrants with certain investors who held warrants to purchase 5,255,000 shares of our common stock to extend the expiration date for the exercise of such warrants until October 11, 2012. These warrants had been issued in connection with the June Offering, had an expiration date of September 11, 2012 and were exercisable at a price of $1.00 per share. The modification of the expiration date of the warrants resulted in a deemed dividend to warrant holders of approximately $543,000 which was calculated as the difference between the fair value of the warrants immediately before and after the modification using the Black-Scholes option pricing model.

 

The deemed dividends have been included in the calculation of net loss attributable to common stockholders of approximately $9,340,000 or $0.23 per share, for the year ended December 31, 2012. The deemed dividends are excluded from our net loss (from operating activities) of approximately $8,797,000, or $0.21 per share, for the year ended December 31, 2012.

 

No deemed dividend was recorded in the year ended December 31, 2011.

 

Liquidity and Capital Resources

 

We have financed our operations since inception primarily through the sale of equity securities and securities convertible into equity securities. To date, Cellectar and Novelos have raised capital aggregating approximately $126 million. Novelos has raised capital aggregating approximately $99 million, including proceeds from the February 2013 public offering. Since its inception and prior to the Acquisition, Cellectar had raised capital aggregating approximately $27 million.  As of December 31, 2012, we had approximately $4,678,000 in cash and cash equivalents which excludes $2,000,000 classified as restricted cash that is contractually designated towards the construction of a clinical-stage manufacturing facility for LIGHT at our Madison, WI location.

 

During the year ended December 31, 2012, approximately $6,585,000 in cash was used in operations. During this period we reported a net loss of approximately $8,797,000. However, this loss included the following non-cash items: an approximately $34,000 loss on derivative warrants, an approximately $1,503,000 in stock-based compensation, and an approximately $497,000 in depreciation and amortization expense. After adjustment for these non-cash items, the Company utilized approximately $72,000 in cash for the prepayment of certain items, including an annual renewal of its directors’ and officers’ insurance and general business insurance. Other changes in working capital provided cash of $250,000.

 

35
 

 

During the year ended December 31, 2012, we purchased approximately $98,000 in fixed assets.

 

In June 2012, we completed a public offering of our common stock and warrants for net proceeds of approximately $4,871,000. In November 2012, we completed a private placement of our common stock and warrants for proceeds of approximately $2,000,000 , which are contractually designated for use towards the estimated $3,000,000 cost of construction of an in-house manufacturing facility for our LIGHT compound. During the year ended December 31, 2012, we received approximately $1,088,000 in cash proceeds from warrant exercises. The proceeds of the November 2012 placement have been classified as restricted cash on the accompanying balance sheet. We are not currently pursuing the construction project and are evaluating contract manufacturers that may accommodate larger scale production of LIGHT.

 

The accompanying consolidated financial statements have been prepared on a basis that assumes that we will continue as a going concern and that contemplates the continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. We have incurred losses since inception in devoting substantially all of our efforts toward research and development and have an accumulated deficit of approximately $40,277,000 at December 31, 2012. During the year ended December 31, 2012, we generated a net loss of approximately $8,797,000 and we expect that we will continue to generate operating losses for the foreseeable future. At December 31, 2012, our consolidated cash balance, excluding the funds designated for use in the construction project, was approximately $4,678,000. We believe this cash balance, plus proceeds received from the February Offering, is adequate to fund operations through October 2013. Our ability to execute our operating plan beyond that time depends on our ability to obtain additional funding via the sale of equity and/or debt securities, a strategic transaction or otherwise. We have, in the past, successfully completed multiple rounds of financings, but, due to market conditions and other factors, including our development stage, the proceeds we have been able to secure have been less than the amounts we sought to obtain. We plan to actively pursue all available financing alternatives; however, we have not entered into negotiations for any such transactions and there can be no assurance that we will obtain the necessary funding. Other than the uncertainties regarding our ability to obtain additional funding, there are currently no known trends, demands, commitments, events or uncertainties that are likely to materially affect our liquidity.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States, or GAAP, requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. Management bases its estimates and judgments on historical experience, knowledge of current conditions and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. We review these estimates and assumptions periodically and reflect the effects of revisions in the period that they are determined to be necessary.

 

We believe that the following accounting policies reflect our more significant judgments and estimates used in the preparation of our financial statements.

 

Accrued Liabilities. As part of the process of preparing financial statements, we are required to estimate accrued liabilities. This process involves identifying services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date in our financial statements. Examples of estimated expenses for which we accrue include: contract service fees such as amounts paid to clinical research organizations and investigators in conjunction with clinical trials; fees paid to vendors in conjunction with the manufacturing of clinical materials; and professional service fees, such as for lawyers and accountants. In connection with such service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual levels of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs that have begun to be incurred, or we over- or underestimate the level of services performed or the costs of such services, our reported expenses for such period would be too high or too low. The date on which certain services commence, the level of services performed on or before a given date and the cost of such services are often determined based on subjective judgments. We make these judgments based on the facts and circumstances known to us, in accordance with GAAP.

 

36
 

 

Goodwill. As of December 31, 2012 and 2011 there was approximately $1,675,000 of goodwill recorded in connection with the Acquisition. We are required to evaluate goodwill for impairment annually or whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. The Company evaluates goodwill for impairment annually in the fourth fiscal quarter and additionally on an interim basis if an event occurs or circumstances change such as a decline in the Company’s stock price, or a material adverse change in the business climate, which would more likely than not reduce the fair value of the reporting unit below its carrying amount.

 

Stock-based Compensation . We account for stock-based compensation by measuring the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, using the Black-Scholes option-pricing model. The cost of non-performance based awards is recognized over the period during which an employee is required to provide service in exchange for the award, the requisite service period (usually the vesting period). For stock options with performance-based vesting provisions, recognition of compensation expense commences if and when the achievement of the performance criteria is deemed probable and is recognized over the relevant performance period. We account for transactions in which services are received from non-employees in exchange for equity instruments based on the fair value of such services received or of the equity instruments issued (using the Black-Scholes option-pricing model) whichever is more reliably measured. The measurement of stock-based compensation for non-employees is subject to periodic adjustments as the options vest, and the expense is recognized over the period during which a non-employee is required to provide services for the award (usually the vesting period).

 

Accounting for equity instruments granted or sold by us under accounting guidance requires fair-value estimates of the equity instrument granted or sold. If our estimates of the fair value of these equity instruments are too high or too low, our expenses may be over- or understated. For equity instruments granted or sold in exchange for the receipt of goods or services, we estimate the fair value of the equity instruments based on consideration of factors that we deem to be relevant at that time.

 

Derivative Warrants. Certain warrants to purchase common stock that do not meet the requirements for classification as equity, in accordance with the Derivatives and Hedging Topic of the FASB ASC, are classified as liabilities on our balance sheet. In such instances, net-cash settlement is assumed for financial reporting purposes, even when the terms of the underlying contracts do not provide for a net-cash settlement. These warrants are considered derivative instruments as the agreements contain “down-round” provisions whereby the number of shares for which the warrants are exercisable and/or the exercise price of the warrants is subject to change in the event of certain issuances of stock at prices below the then-effective exercise price of the warrants. The primary underlying risk exposure pertaining to the warrants is the change in fair value of the underlying common stock. Such financial instruments are initially recorded at fair value, or relative fair value when issued with other instruments, with subsequent changes in fair value recorded as a component of gain or loss on derivatives in each reporting period.

 

The fair value of the outstanding derivative warrants is estimated as of a reporting date. The Company uses valuation methods and assumptions that consider among others the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants considered to be derivative instruments. We estimate volatility based on an average of our historical volatility and volatility estimates of publicly held drug development companies with similar market capitalizations. If our estimates of the fair value of these derivative warrants are too high or too low, our expenses may be over- or understated.

 

Fair value measurements. We account for certain financial assets at fair value, defined as the price that would be received to sell an asset or pay to transfer a liability (i.e., exit price) in the principal, most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that is determined based on assumptions that market participant would use in pricing an asset or liability. If management made different assumptions or judgments, material differences in measurements of fair value could occur.

 

37
 

 

Contingencies. From time to time, we may become involved in legal disputes regarding our products in development, intellectual property rights, stockholder claims or other matters. We are currently involved in one such matter that is ongoing. We assess each matter to determine if a contingent liability should be recorded. In making this assessment, we may consult, depending on the nature of the matter, with external legal counsel and technical experts. Based on the information we obtain, combined with our judgment regarding all the facts and circumstances of each matter, we determine whether it is probable that a contingent loss may be incurred and whether the amount of such loss can be reasonably estimated. Should a loss be probable and reasonably estimable, we record a loss. In determining the amount of the loss, we consider advice received from experts in the specific matter, current status of legal proceedings, if any, prior case history and other factors. Should the judgments and estimates made by us be incorrect, we may need to record additional contingent losses that could materially adversely impact the results of operations and financial conditions.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

38
 

 

Item 8.    Financial Statements.

 

FINANCIAL STATEMENTS

 

INDEX TO FINANCIAL STATEMENTS FOR NOVELOS THERAPEUTICS, INC.

(a Development Stage Company)

 

    Page  
       
Report of Independent Registered Public Accounting Firm     40  
Consolidated Balance Sheets at December 31, 2012 and 2011     41  
Consolidated Statements of Operations for the Years Ended December 31, 2012 and 2011, and the Cumulative Development-Stage Period from November 7, 2002 (date of inception) to December 31, 2012     42  
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2012 and 2011, and the Cumulative Development-Stage Period from November 7, 2002 (date of inception) to December 31, 2012     43  
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012 and 2011, and the Cumulative Development-Stage Period from November 7, 2002 (date of inception) to December 31, 2012     44  
Notes to Consolidated Financial Statements     45  

 

39
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

Novelos Therapeutics, Inc.

 

We have audited the accompanying consolidated balance sheets of Novelos Therapeutics, Inc. (a Development Stage Company) (a Delaware corporation) and subsidiary (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2012 and the period from November 7, 2002 (date of inception) through December 31, 2012. 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 audit 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 financial position of Novelos Therapeutics, Inc. and subsidiary as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2012 and the period from November 7, 2002 (date of inception) through December 31, 2012, 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 1 to the financial statements, the Company has incurred losses since its inception and, as of December 31, 2012, had an accumulated deficit of $40,277,400. These conditions, along with other matters as set forth in Note 1, 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 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

 

/s/ Grant Thornton LLP 

 

Chicago, Illinois

March 28, 2013

 

40
 

 

  NOVELOS THERAPEUTICS, INC.

(a Development Stage Company)

CONSOLIDATED BALANCE SHEETS

    December 31,
2012
    December 31,
2011
 
ASSETS                
CURRENT ASSETS:                
Cash and cash equivalents   $ 4,677,545     $ 5,505,960  
Restricted cash     55,000       55,000  
Prepaid expenses and other current assets     327,393       254,967  
Deferred financing     70,539        
Total current assets     5,130,477       5,815,927  
RESTRICTED CASH     2,000,000        
FIXED ASSETS, NET     2,645,003       3,044,565  
GOODWILL     1,675,462       1,675,462  
OTHER ASSETS     27,222       27,222  
TOTAL ASSETS   $ 11,478,164     $ 10,563,176  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
CURRENT LIABILITIES:                
Accounts payable and accrued liabilities   $ 716,990     $ 478,041  
Derivative liability     13,304       23,305  
Capital lease obligations, current portion     2,397       2,235  
Total current liabilities     732,691       503,581  
LONG-TERM LIABILITIES:                
Notes payable     450,000       450,000  
Deferred rent     135,404       124,381  
Capital lease obligations, net of current portion     1,694       4,091  
Total long-term liabilities     587,098       578,472  
COMMITMENTS AND CONTINGENCIES (Notes 13 and 14)                
STOCKHOLDERS’ EQUITY:                
Preferred stock, $0.00001 par value; 7,000 shares authorized; none issued and outstanding as of December 31, 2012 and 2011            
Common stock, $0.00001 par value; 150,000,000 shares authorized; 46,397,997 and 36,907,824 shares issued and outstanding at December 31, 2012 and 2011, respectively     464       369  
Additional paid-in capital     50,435,311       40,961,180  
Deficit accumulated during the development stage     (40,277,400 )     (31,480,426 )
Total stockholders’ equity     10,158,375       9,481,123  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 11,478,164     $ 10,563,176  

 

See report of independent registered public accounting firm and accompanying notes to the consolidated
financial statements.

 

41
 

 

NOVELOS THERAPEUTICS, INC.

(a Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS

  

    Year Ended December, 31     Cumulative
Development-Stage
Period from
November 7, 2002
(date of inception)
through December 31,
 
    2012     2011     2012  
COSTS AND EXPENSES:                        
Research and development   $ 5,122,686     $ 3,599,080     $ 25,927,725  
General and administrative     3,632,099       2,692,433       13,294,710  
Merger costs           746,207       799,133  
Total costs and expenses     8,754,785       7,037,720       40,021,568  
                         
LOSS FROM OPERATIONS     (8,754,785 )     (7,037,720 )     (40,021,568 )
                         
OTHER INCOME (EXPENSE):                        
Grant income           44,479       244,479  
Loss on derivative warrants     (33,854 )     (12,158 )     (46,012 )
Interest expense, net     (8,335 )     (430,023 )     (455,460 )
Other income                 1,161  
Total other expense, net     (42,189 )     (397,702 )     (255,832 )
NET LOSS     (8,796,974 )     (7,435,422 )     (40,277,400 )
DEEMED DIVIDEND ON WARRANTS     (543,359 )           (543,359 )
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS   $ (9,340,333 )   $ (7,435,422 )   $ (40,820,759 )
BASIC AND DILUTED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON SHARE   $ (0.23 )   $ (0.31 )   $ (2.91 )
SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON SHARE     41,121,137       23,959,008       14,041,400  

 

See report of independent registered public accounting firm and accompanying notes to the consolidated
financial statements.

 

42
 

 

NOVELOS THERAPEUTICS, INC.

(a Development Stage Company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

    Common Stock     Additional
    Deficit
Accumulated
During the
    Total
 
    Shares     Par
Amount
    Paid-in
Capital
    Development
Stage
    Stockholders’
Equity
 
BALANCE AT NOVEMBER 7, 2002         $     $     $     $  
Issuance of common stock for cash     6,440,123       64       590,205             590,269  
Issuance of common stock in exchange for professional services     101,220       1       9,107             9,108  
Net loss                              
BALANCE AT DECEMBER 31, 2002     6,541,343       65       599,312             599,377  
Issuance of common stock for cash, net of issuance costs     37,958             4,937             4,937  
Issuance of common stock in exchange for licensed technology     203,483       2       80,410             80,412  
Net loss                       (295,790 )     (295,790 )
BALANCE AT DECEMBER 31, 2003     6,782,784       67       684,659       (295,790 )     388,936  
Net loss                       (342,761 )     (342,761 )
BALANCE AT DECEMBER 31, 2004     6,782,784       67       684,659       (638,551 )     46,175  
Issuance of common stock for cash, net of issuance costs     610,664       6       835,862             835,868  
Net loss                       (481,837 )     (481,837 )
BALANCE AT DECEMBER 31, 2005     7,393,448       73       1,520,521       (1,120,388 )     400,206  
Issuance of common stock for cash, net of issuance costs     2,202,179       22       7,097,050             7,097,072  
Common stock repurchased     (43,819 )           (31,667 )           (31,667 )
Stock-based compensation                 43,994             43,994  
Net loss                       (963,440 )     (963,440 )
BALANCE AT DECEMBER 31, 2006     9,551,808       95       8,629,898       (2,083,828 )     6,546,165  
Issuance of common stock for cash, net of issuance costs     60,250       1       249,999             250,000  
Exercise of warrant to purchase common stock     75,045       1       249,999             250,000  
Stock-based compensation                 570,392             570,392  
Net loss                       (5,090,325 )     (5,090,325 )
BALANCE AT DECEMBER 31, 2007     9,687,103       97       9,700,288       (7,174,153 )     2,526,232  
Issuance of common stock for cash, net of issuance costs     3,132,999       31       12,931,531             12,931,562  
Stock-based compensation                 477,488             477,488  
Net loss                       (6,090,715 )     (6,090,715 )
BALANCE AT DECEMBER 31, 2008     12,820,102       128       23,109,307       (13,264,868 )     9,844,567  
Stock-based compensation                 502,199             502,199  
Net loss                       (6,219,873 )     (6,219,873 )
BALANCE AT DECEMBER 31, 2009     12,820,102       128       23,611,506       (19,484,741 )     4,126,893  
Stock-based compensation                 353,340             353,340  
Intrinsic value of beneficial conversion feature associated with convertible debt issued in exchange for cash                 213,792             213,792  
Net loss                       (4,560,263 )     (4,560,263 )
BALANCE AT DECEMBER 31, 2010     12,820,102       128       24,178,638       (24,045,004 )     133,762  
Issuance of common stock upon conversion of convertible notes     4,181,535       42       3,184,665             3,184,707  
Issuance of common stock in a business combination     2,959,871       30       2,219,873             2,219,903  
Cash paid in lieu of fractional shares in a business combination     (41 )           (145 )           (145 )
Issuance of common stock and warrants, net of issuance costs     16,928,204       169       10,164,377             10,164,546  
Intrinsic value of beneficial conversion feature associated with the conversion of convertible debt                 257,973             257,973  
Issuance of common stock upon the cashless exercise of warrants and reclassification of derivative liability to additional paid-in-capital     18,153             48,339             48,339  
Stock-based compensation                 907,460             907,460  
Net loss                       (7,435,422 )     (7,435,422 )
BALANCE AT DECEMBER 31, 2011     36,907,824       369       40,961,180       (31,480,426 )     9,481,123  
Issuance of common stock upon cashless exercise of warrants and reclassification of derivative liability to additional paid-in-capital     981,073       10       43,845             43,855  
Issuance of common stock upon exercise of warrants     1,088,300       11       1,088,289             1,088,300  
Issuance of common stock and warrants, net of issuance costs     7,420,800       74       6,838,700             6,838,774  
Stock-based compensation                 1,503,297             1,503,297  
Net loss                       (8,796,974 )     (8,796,974 )
BALANCE AT DECEMBER 31, 2012     46,397,997     $ 464     $ 50,435,311     $ (40,277,400 )   $ 10,158,375  

 

See report of independent registered public accounting firm and accompanying notes to the consolidated
financial statements.

 

43
 

 

NOVELOS THERAPEUTICS, INC.

(a Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Year Ended
December 31,
    Cumulative
Development-Stage
Period from
November 7, 2002
through December
31,
 
    2012     2011     2012  
Net loss   $ (8,796,974 )   $ (7,435,422 )   $ (40,277,400 )
Adjustments to reconcile net loss to cash used in operating activities:                        
Depreciation and amortization     497,253       584,841       2,913,291  
Stock-based compensation     1,503,297       907,460       4,358,170  
Intrinsic value of beneficial conversion feature associated with convertible debt           257,973       471,765  
Issuance of stock for technology and services                 89,520  
Impairment of intangible assets                 19,671  
Loss on disposal of fixed assets           6,009       36,477  
Loss on derivative warrants     33,854       12,158       46,012  
Changes in:                        
Prepaid expenses and other current assets     (72,426 )     (175,883 )     (311,223 )
Accounts payable and accrued liabilities     238,949       (294,969 )     336,861  
Accrued interest           158,673       463,722  
Deferred rent     11,023       9,070       135,404  
Cash used in operating activities     (6,585,024 )     (5,970,090 )     (31,717,730 )
CASH FLOWS FROM INVESTING ACTIVITIES:                        
Cash acquired in a business combination           905,649       905,649  
Purchases of fixed assets     (97,691 )     (118,411 )     (5,584,283 )
Proceeds from sale of fixed assets                 7,000  
Purchases of short-term certificates of deposit                 (5,500,730 )
Proceeds from short-term certificates of deposit                 5,500,730  
Change in restricted cash     (2,000,000 )     500,000       (2,055,000 )
    Payment for intangible assets                 (19,671 )
Cash provided by (used in) investing activities     (2,097,691 )     1,287,238       (6,746,305 )
CASH FLOWS FROM FINANCING ACTIVITIES:                        
Proceeds from issuance of convertible notes                 2,720,985  
Proceeds from long-term obligations                 1,677,945  
Payments on long-term obligations           (675,743 )     (1,227,944 )
Payments on capital lease obligations     (2,235 )     (2,085 )     (6,883 )
Proceeds from issuance of common stock and warrants, net of issuance costs     6,838,774       10,164,546       38,713,028  
Proceeds from exercise of warrant     1,088,300             1,338,300  
Repurchase of common stock                 (31,667 )
Cash in lieu of fractional shares in a business combination           (145 )     (145 )
Change in deferred financing costs     (70,539 )     28,500       (42,039 )
Cash provided by financing activities     7,854,300       9,515,073       43,141,580  
INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS     (828,415 )     4,832,221       4,677,545  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     5,505,960       673,739        
CASH AND CASH EQUIVALENTS AT END OF PERIOD   $ 4,677,545     $ 5,505,960     $ 4,677,545  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                        
Interest paid   $     $ 13,716     $ 208,689  
Fair value of derivative warrants reclassified to additional paid-in capital upon cashless exercise   $ 43,855     $ 48,339     $ 92,194  
Issuance of common stock in connection with the conversion of notes payable and accrued interest   $     $ 3,184,707     $ 3,184,707  
Fair value of assets acquired in exchange for securities in a business combination   $     $ 78,407     $ 78,407  
Fair value of liabilities assumed in exchange for securities in a business combination   $     $ (439,615 )   $ (439,615 )
Goodwill resulting from a business combination   $     $ 1,675,462     $ 1,675,462  

 

See report of independent registered public accounting firm and accompanying notes to the consolidated
financial statements.

 

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NOVELOS THERAPEUTICS, INC.

(a Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. NATURE OF BUSINESS, ORGANIZATION AND GOING CONCERN

 

Novelos Therapeutics, Inc. (“Novelos” or the “Company”) is a pharmaceutical company developing novel drugs for the treatment and diagnosis of cancer. On April 8, 2011, Novelos completed a business combination with Cellectar, Inc. (“Cellectar”), a privately held Wisconsin corporation that designed and developed products to detect, treat and monitor a wide variety of human cancers, and Cell Acquisition Corp. (the “Merger Subsidiary”), a Wisconsin corporation and a wholly owned subsidiary of Novelos. Pursuant to the transaction Cellectar was merged into the Merger Subsidiary (the “Acquisition”, see Note 4). References in these financial statements and notes to “Cellectar” relate to the activities and financial information of Cellectar prior to the Acquisition, references to “Novelos” relate to the activities and financial information of Novelos prior to the Acquisition and references to “the Company” or “we” or “us” or “our” relate to the activities and obligations of the combined Company following the Acquisition.

 

Immediately prior to the Acquisition, Novelos completed a 1-for-153 reverse split of its common stock.  Novelos then issued to the shareholders of Cellectar at that date 17,001,596 shares of its common stock as consideration for the Acquisition, representing a ratio of 0.8435 shares of Novelos common stock in exchange for one share of Cellectar common stock (the “Exchange Ratio”) as set forth in the Agreement and Plan of Merger (the “Merger Agreement”) dated April 8, 2011.  The shares issued to Cellectar shareholders in the Acquisition constituted approximately 85% of Novelos’ outstanding common stock after giving effect to the Acquisition.  Upon the closing of the Acquisition, the Company completed the private placement of 6,846,537 shares of its common stock and warrants to purchase an additional 6,846,537 shares of its common stock for gross proceeds of approximately $5,135,000.

 

Accounting principles generally accepted in the United States require that a company whose security holders retain the majority voting interest in the combined business be treated as the acquirer for financial reporting purposes.  Accordingly, the Acquisition was accounted for as a reverse acquisition whereby Cellectar, Inc. was treated as the acquirer for accounting and financial reporting purposes. On April, 8, 2011, Cellectar was merged into the Merger Subsidiary a wholly owned subsidiary of Novelos; as such, the financial statements presented herein as of and for the twelve months ended December 31, 2011 include the historical results of Cellectar from January 1, 2011 through April 8, 2011, except for the capital structure which represents the historical amounts of Cellectar, retroactively adjusted to reflect the legal capital structure of Novelos by applying the Exchange Ratio, and include the consolidated results of the combined company from April 9, 2011 through December 31, 2011. The financial statements as of and for the twelve months ended December 31, 2012 include the consolidated results of the combined company for that period. All per-share amounts and outstanding shares, including all common stock equivalents, and stock options, have been retroactively restated in these financial statements and notes for all periods presented to reflect the capital structure of Novelos by applying the Exchange Ratio.  The cumulative capital activity from the date of inception (November 7, 2002) up to the closing of the Acquisition, as presented in the accompanying statement of stockholders’ equity, equals 17,001,596 shares of common stock, which represents the equity interests the legal parent (Novelos) issued to effect the Acquisition. The number of authorized shares of common stock disclosed on the balance sheet (150,000,000) represents the number of authorized shares of Novelos common stock following the Acquisition.  Additionally, on the accompanying statements of stockholders’ equity for the period from inception (November 7, 2002) to December 31, 2010 the aggregate par value of the issued common stock was reduced to reflect the $0.00001 par value of Novelos common stock associated with the shares of Cellectar common stock adjusted for the Exchange Ratio and the difference was reclassified to additional paid-in capital.

 

As a result of the Acquisition, the Company has implemented a revised business plan focused on the development of the Cellectar compounds.  Development of Novelos’ other compounds (NOV-002 and NOV-205) has been suspended.  The Company conducts its operations from Cellectar’s headquarters in Madison, Wisconsin and the Company’s executive offices are in Newton, Massachusetts.

 

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The Company is subject to a number of risks similar to those of other small pharmaceutical companies. Principal among these risks are dependence on key individuals, competition from substitute products and larger companies, the successful development and marketing of its products in a highly regulated environment and the need to obtain additional financing necessary to fund future operations.

 

The accompanying financial statements have been prepared on a basis that assumes that the Company will continue as a going concern and that contemplates the continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred losses since inception in devoting substantially all of its efforts toward research and development and has an accumulated deficit of $40,277,400 at December 31, 2012. During the year ended December 31, 2012, the Company generated a net loss of $8,796,974 and the Company expects that it will continue to generate operating losses for the foreseeable future.  On February 20, 2013, the Company completed a registered public offering of an aggregate of 11,000,000 shares of its common stock, warrants to purchase up to an aggregate of 11,000,000 shares of common stock at an exercise price of $0.50 per share which will be exercisable for five years from issuance, and warrants to purchase up to an aggregate of 5,500,000 shares of common stock at an exercise price of $0.50 per share which will be exercisable for one year from issuance, for gross proceeds of $5,500,000 (the “February Offering”) (see Note 18). The Company believes that its cash balance at December 31, 2012, augmented by the proceeds from the February Offering, is adequate to fund operations at budgeted levels through October 2013. The cash balance at December 31, 2012 excludes $2,000,000 contractually designated for use towards the $3,000,000 estimated cost of construction of an in-house manufacturing facility for the Company’s LIGHT compound. As an alternative to this project, the Company is evaluating contract manufacturers that may accommodate larger scale production of LIGHT. The Company’s ability to execute its operating plan beyond October 2013 depends on its ability to obtain additional funding via the sale of equity and/or debt securities, a strategic transaction or otherwise.  The Company plans to continue to actively pursue financing alternatives, but there can be no assurance that it will obtain the necessary funding.  The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying consolidated financial statements reflect the application of certain accounting policies, as described in this note and elsewhere in the accompanying notes to the consolidated financial statements.  The consolidated financial statements as of and for the twelve months ended December 31, 2012 are presented on a consolidated basis.

 

Principles of Consolidation — The consolidated financial statements include the accounts of the Company and the accounts of its wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.

 

Development Stage Company — The Company has been in the development stage since its inception.  The primary activities since inception have been organizational activities, research and development and raising capital.  No significant revenues have been generated from planned operations.  As of December 31, 2012, the Company remained in the development stage.

 

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its estimates including those related to unbilled vendor amounts and share-based compensation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from those estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.

 

Cash and Cash Equivalents — All short-term investments purchased with maturities of three months or less are considered to be cash equivalents.

 

Restricted Cash — The Company accounts for cash and claims to cash that are committed for other than current operations as restricted cash. Restricted cash (current) at December 31, 2012 consists of a certificate of deposit of $55,000 required under the Company’s lease agreement for its Madison, Wisconsin facility (see Note 13). Restricted cash (long-term) includes $2,000,000 of cash that has been contractually designated for use towards the construction of a clinical-stage manufacturing facility for LIGHT at the Company’s Madison, WI location .

 

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Deferred Financing Costs — Incremental direct costs associated with the issuance of the Company’s common stock is deferred and is recognized as a reduction of the gross proceeds upon completion of the related equity transaction. In the event that the equity transaction is not probable or is aborted, the Company expenses such costs. At December 31, 2012, the Company had recorded $70,539 of costs in connection with a public offering of stock. There were no deferred financing costs as of December 31, 2011.

 

Fixed Assets — Property and equipment are stated at cost. Depreciation on property and equipment is provided using the straight-line method over the estimated useful lives of the assets (5 years).  Due to the significant value of leasehold improvements purchased during the initial 3-year lease term and the economic penalty for not extending the building lease, leasehold improvements are depreciated over 17 years (their estimated useful life), which represents the full term of the lease, including all extensions (see Note 13).

 

Goodwill — Intangible assets at December 31, 2012 and 2011 consist of goodwill recorded in connection with the Acquisition. Goodwill is not amortized, but is required to be evaluated for impairment annually or whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. The Company evaluates goodwill for impairment annually in the fourth fiscal quarter and additionally on an interim basis if an event occurs or there is a change in circumstances, such as a decline in the Company’s stock price or a material adverse change in the business climate, which would more likely than not reduce the fair value of the reporting unit below its carrying amount.

 

Impairment of Long - Lived Assets — Long-lived assets other than intangible assets consist of fixed assets, which we periodically evaluate for potential impairment. Whenever events or circumstances change, an assessment is made as to whether there has been an impairment in the value of long-lived assets by determining whether projected undiscounted cash flows generated by the applicable asset exceed its net book value as of the assessment date.

 

Stock-Based Compensation — The Company uses the Black-Scholes option-pricing model to calculate the grant-date fair value of stock option awards. The resulting compensation expense, net of expected forfeitures, for awards that are not performance-based is recognized on a straight-line basis over the service period of the award, which is generally three years for stock options. For stock options with performance-based vesting provisions, recognition of compensation expense, net of expected forfeitures, commences if and when the achievement of the performance criteria is deemed probable. The compensation expense, net of expected forfeitures, for performance-based stock options is recognized over the relevant performance period. Non-employee stock-based compensation is accounted for in accordance with the guidance of Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 505, Equity.  As such, the Company recognizes expense based on the estimated fair value of options granted to non-employees over their vesting period, which is generally the period during which services are rendered and deemed completed by such non-employees.

 

Research and Development — Research and development costs are expensed as incurred.

 

Income Taxes — Income taxes are accounted for using the liability method of accounting.  Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement basis and tax basis of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Valuation allowances are established when it is more likely than not that some portion of the deferred tax assets will not be realized.  Management has provided a full valuation allowance against the Company’s gross deferred tax asset.  Tax positions taken or expected to be taken in the course of preparing tax returns are required to be evaluated to determine whether the tax positions are “more likely than not” to be sustained by the applicable tax authority.  Tax positions deemed not to meet a more-likely-than-not threshold would be recorded as tax expense in the current year.  There were no uncertain tax positions that require accrual to or disclosure in the financial statements as of December 31, 2012 and 2011.

 

Comprehensive Loss — There were no components of comprehensive loss other than net loss in all of the periods presented.

 

47
 

Grant Income — Cellectar received a cash grant of approximately $44,000 for the year ended December 31, 2011 from the U.S. Internal Revenue Service as a qualifying therapeutic discovery project credit pursuant to the Patient Protection and Affordable Care Act.  This grant has been recorded as a component of other income.

 

Fair Value of Financial Instruments — The guidance under FASB ASC Topic 825, Financial Instruments , requires disclosure of the fair value of certain financial instruments. Financial instruments in the accompanying financial statements consist of cash equivalents, accounts payable, convertible debt and long-term obligations.  The carrying amount of cash equivalents, investments and accounts payable approximate their fair value due to their short-term nature.  The carrying value of long-term obligations, including the current portion, approximates fair value because the fixed interest rate approximates current market rates of interest available in the market.

 

Derivative Instruments   – The Company generally does not use derivative instruments to hedge exposures to cash flow or market risks.  However, certain warrants to purchase common stock that do not meet the requirements for classification as equity, in accordance with the Derivatives and Hedging Topic of the FASB ASC, are classified as liabilities.  In such instances, net-cash settlement is assumed for financial reporting purposes, even when the terms of the underlying contracts do not provide for a net-cash settlement. These warrants are considered derivative instruments because the agreements contain “down-round” provisions whereby the number of shares for which the warrants are exercisable and/or the exercise price of the warrants are subject to change in the event of certain issuances of stock at prices below the then-effective exercise price of the warrants. The number of shares issuable under such warrants was 27,310 and 77,729 at December 31, 2012 and 2011, respectively. The primary underlying risk exposure pertaining to the warrants is the change in fair value of the underlying common stock.  Such financial instruments are initially recorded at fair value with subsequent changes in fair value recorded as a component of gain or loss on derivatives on the consolidated statements of operations in each reporting period. If these instruments subsequently meet the requirements for equity classification, the Company reclassifies the fair value to equity. At December 31, 2012 and 2011, these warrants represented the only outstanding derivative instruments issued or held by the Company.

 

Concentration of Credit Risk — Financial instruments that subject the Company to credit risk consist of cash and equivalents on deposit with financial institutions. The Company’s excess cash as of December 31, 2012 and 2011 is on deposit in a non-interest-bearing transaction account that is fully covered by FDIC deposit insurance.

 

New Accounting Pronouncements — In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”).  This standard updates accounting guidance to clarify the measurement of fair value to align the guidance and improve the comparability surrounding fair value measurement within GAAP and IFRS.  The standard also updates requirements for measuring fair value and expands the required disclosures.  The standard does not require additional fair value measurements and was not intended to establish valuation standards or affect valuation practices outside of financial reporting.  This standard became effective for the Company on January 1, 2012. The adoption of this standard on January 1, 2012 did not have a material impact on the Company’s financial statements or required disclosures.

 

In September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350) Testing Goodwill for Impairment.   This standard simplifies how an entity tests goodwill for impairment and allows an entity to first assess qualitative factors in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  This standard is effective for entities as of the beginning of a fiscal year that begins after December 15, 2011 and interim and annual periods thereafter.  Early adoption is permitted. The adoption of this standard on January 1, 2012 did not have a material impact on the Company’s financial statements or required disclosures.

 

In August 2012, the FASB issued ASU No. 2012-03, Technical Amendments and Corrections to SEC Section . This standard provides amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 339-9250, and Corrections Related to FASB Accounting Standards Update 2010-22. The adoption of this standard did not have a material impact on the Company’s financial statement or required disclosures.

 

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In October 2012, the FASB issued ASU No. 2012-04, Technical Improvements and Corrections . This standard provides changes and clarification to the codification through reference corrections and source literature amendments. This standard is effective for entities as of the beginning of a fiscal year that begins after December 15, 2012. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial statements or required disclosures.

 

3. FAIR VALUE

 

In accordance with Fair Value Measurements and Disclosures Topic of the FASB ASC 820, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

· Level 1: Input prices quoted in an active market for identical financial assets or liabilities.
· Level 2: Inputs other than prices quoted in Level 1, such as prices quoted for similar financial assets and liabilities in active markets, prices for identical assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
· Level 3: Input prices quoted that are significant to the fair value of the financial assets or liabilities which are not observable or supported by an active market.

 

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

    December 31, 2012  
    Level 1     Level 2     Level 3     Fair Value  
                         
Liabilities:                                
Warrants   $ -     $ 13,304     $ -     $ 13,304  

 

    December 31, 2011  
    Level 1     Level 2     Level 3     Fair Value  
                         
Liabilities:                                
Warrants   $ -     $ 23,305     $ -     $ 23,305  

 

The Company uses the Black-Scholes option pricing model and assumptions that consider, among other variables, the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants considered to be derivative instruments. Assumptions used are generally consistent with those disclosed for stock-based compensation (see Note 10).

 

  4. ACQUISITION

 

Merger Agreement

 

On April 8, 2011, Novelos acquired Cellectar through a merger with and into the Merger Subsidiary, pursuant to the Merger Agreement entered into on that date.  As a result of the Acquisition, the Merger Subsidiary, which was renamed Cellectar, Inc., owns all assets of and operates the business previously owned and operated by Cellectar.

 

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In the Acquisition, the former stockholders of Cellectar received an aggregate number of shares of Novelos common stock constituting approximately 85% of the outstanding shares of Novelos common stock, after giving effect to the Acquisition but before giving effect to the concurrent private placement of Novelos securities described below.  Prior to the Acquisition, Novelos amended and restated its certificate of incorporation and in connection therewith, among other things, effected a 1-for-153 reverse split of its common stock resulting in 2,959,871 shares of Novelos common stock outstanding. Novelos then issued 17,001,596 shares of Novelos common stock to the stockholders of Cellectar upon the effective date of the Acquisition.  Warrants and options to purchase Novelos common stock that were outstanding prior to the Acquisition remained outstanding following the Acquisition. These consisted of warrants to purchase a total of 315,164 shares of Novelos common stock with prices ranging from $16.07 to $191.25 and options to purchase a total of 49,159 shares of Novelos common stock with prices ranging from $1.53 to $1,072.53.

 

The financial advisor to Cellectar in the Acquisition, received a cash fee of $200,000 upon the completion of the Acquisition in consideration of their services.  The financial advisor to Novelos in the Acquisition, received a cash fee of $250,000 upon the completion of the Acquisition in consideration of their services.  These amounts were recorded as merger costs and expensed as incurred on the date of the Acquisition.  In addition to the investment banking fees, the Company also incurred an additional $296,207 of merger-related legal and other costs during the year ended December 31, 2011 which were included as a component of expense in the respective period.

 

The Acquisition was completed principally to leverage synergies between Novelos’ strategic focus and experience in developing and funding the development of cancer drugs and Cellectar’s portfolio of cancer-targeted compounds.

 

Purchase Accounting

 

The Acquisition was accounted for using the purchase method of accounting as a reverse acquisition.  In a reverse acquisition, the post-acquisition net assets of the surviving combined company includes the historical cost basis of the net assets of the accounting acquirer (Cellectar) plus the fair value of the net assets of the accounting acquiree (Novelos).  Further, under the purchase method, the purchase price is allocated to the assets acquired, liabilities assumed, and identifiable intangible assets based on their estimated fair values with the remaining excess purchase price over net assets acquired allocated to goodwill.

 

The fair value of the consideration transferred in the Acquisition was $2,219,903 and was calculated as the number of shares of common stock that Cellectar would have had to issue (adjusted for the Exchange Ratio) in order for Novelos shareholders to hold a 15% equity interest in the combined Company post-acquisition (but prior to the concurrent private placement), multiplied by the estimated fair value of the Company’s common stock on the acquisition date.  The estimated fair value of the Company’s common stock was based on the offering price of the common stock sold in the private placement which was both completed concurrently with and conditioned upon the closing of the Acquisition.  This price was determined to be the best indication of fair value on that date since the price was based on an arm’s length negotiation with a group consisting of both new and existing investors that had been advised of the pending Acquisition and assumed similar liquidity risk as those investors holding the majority of shares being valued as purchase consideration.

 

The following table summarizes the Company’s determination of fair values of the assets acquired and the liabilities as of the date of acquisition.

 

Consideration - issuance of securities   $ 2,219,903  
         
Prepaid expenses and other assets   $ 71,892  
Fixed assets     6,515  
Accrued liabilities     (380,130 )
Derivative liability     (59,485 )
Goodwill     1,675,462  
         
Total purchase price – net of cash acquired of $905,649   $ 1,314,254  

 

The Company determined that the acquired Novelos legacy technology had no value as of the date of the acquisition.

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Goodwill

 

Of the total purchase price of $2,219,903, $1,675,462 was allocated to goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. The goodwill includes the value of the Novelos work force (management team). None of the goodwill associated with the Acquisition is deductible for income tax purposes.

 

There were no changes in goodwill during the years ended December 31, 2012 or 2011, after the initial purchase accounting.

 

The Company is required to perform an annual impairment test related to goodwill which is performed in the fourth quarter of each year, or sooner if changes in circumstances suggest that the carrying value of an asset may not be recoverable. During the fourth quarter of 2012, the annual test was performed and it was determined that there had been no impairment to goodwill.

 

5. FIXED ASSETS

 

Fixed assets consisted of the following at December 31:

 

    2012     2011  
             
Office and laboratory equipment   $ 3,151,120     $ 3,069,889  
Computer software     4,000       4,000  
Leasehold improvements     2,337,935       2,324,672  
Total fixed assets     5,493,055       5,398,561  
Less accumulated depreciation and amortization     (2,848,052 )     (2,353,996 )
Fixed assets, net   $ 2,645,003     $ 3,044,565  

 

For the years ended December 31, 2012 and 2011, the Company incurred approximately $497,000 and $585,000 of depreciation and amortization expense, respectively.

 

6. LICENSE AGREEMENTS

 

2003 License Agreement with the University of Michigan

 

In September 2003, Cellectar entered into an exclusive license agreement (the “U. Mich. Agreement”) with the Regents of the University of Michigan, (“U. Mich.”) for the development, manufacture and marketing of products under several composition-of-matter patents in North America that expire at varying dates in 2016.  The U. Mich. Agreement expires upon the expiration of the last covered patent.  The Company is responsible for an annual license fee of $10,000 and is required to pay costs associated with the maintenance of the patents covered by the U. Mich. Agreement.  Additionally, the Company is required to make milestone payments of $50,000 upon the filing of a New Drug Application (“NDA”) for a licensed product intended for use in a therapeutic or diagnostic application (such milestone fees may be deferred and paid within 12 months of the first commercial sale of such products) and make certain milestone payments within a year following the first commercial sale of any licensed products.  The sales milestones range from $100,000 to $200,000, dependent upon whether the drug is for use in a diagnostic or therapeutic application, provided that if sales in the first 12 months are less than the amount of the milestone, then we are required to pay 50% of all sales until the milestone is satisfied. The milestone payments may total up to $400,000. The U. Mich. Agreement provides that the Company pay a royalty equal to 3% of net sales of any licensed products sold by the Company or its sublicensees for such licensed products, provided however if the sublicense fee payable to the Company is between 4% and 5% of net sales, then the royalties payable to U. Mich. Shall be equal to 50% of the sublicense fee.  Furthermore, the U. Mich. Agreement provides for a reduction in the royalties owed by up to 50% if the Company is required to pay royalties to any third parties related to the sale of the licensed products.  If the Company receives any revenue in consideration of rights to the licensed technology that is not based on net sales, excluding any funded research and development, the Company is required to pay U. Mich. 10% of amounts received.  U. Mich. may terminate the agreement if the Company ceases operations, if the Company fails to make any required payment under the agreement, or if the Company otherwise materially breaches the agreement, subject to the applicable notice and cure periods.  To date, the Company has made all payments as they have become due, there have been no defaults under the U. Mich. Agreement, nor has the Company been notified of a default by U. Mich. The Company may terminate the agreement with six months’ notice to U. Mich. and the return of licensed product and related data.  The U. Mich. Agreement contained milestones that required certain development activities to be completed by specified dates. All such development milestones have either been completed or have been removed by subsequent amendment to the agreement.  U. Mich. has provided no warranties as to validity or otherwise with respect to the licensed technology.

 

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The Company paid approximately $2,900 and $600 to U. Mich. for the reimbursement of patent maintenance fees during the years ended December 31, 2012 and 2011, respectively.  As of December 31, 2012 and 2011, all annual license fees have been paid in a timely manner.

 

Novelos Legacy License Agreements

 

During 2007, Novelos entered into a Collaboration Agreement with Lee’s Pharmaceutical (HK) Ltd. (“Lee’s Pharm”) whereby Lee’s Pharm obtained an exclusive license to develop, manufacture and commercialize NOV-002 and NOV-205 in China, Hong Kong, Taiwan and Macau.

 

During 2009, Novelos entered into a collaboration agreement with Mundipharma International Corporation Limited to develop, manufacture and commercialize, on an exclusive basis, Novelos legacy compounds in most of Europe, Asia and Australia.

 

The Company has suspended development of the products covered by these and does not anticipate that these agreements will have a material effect on its future results of operations, cash flows, and financial position.

 

7. CONVERTIBLE DEBT

 

On January 25, 2010, Cellectar issued nine convertible promissory notes (“Convertible Notes”) in an aggregate principal amount of $2,720,985.  The Convertible Notes provided for interest of 12% compounded annually with a maturity date of the earlier of (i) the date on which Cellectar’s cash reserves fall below $250,000 or (ii) January 20, 2011.  Upon an event of default, as defined, the interest rate increased by 10% to 22%.  The outstanding principal balance, together with any unpaid interest, was convertible immediately, by the lenders, into common stock of the Company at $0.82987 per share (giving effect to the Exchange Ratio).  Furthermore, the Convertible Notes were subject to an automatic conversion feature equal to 70% of the per share price of a qualified financing, should the Company complete a qualified financing transaction which raises at least $20,000,000 in proceeds to the Company.  Since the Convertible Notes were convertible into common stock at date of issuance at a per share price which was less than the estimated fair value of the Company’s common stock at that date, the Convertible Notes contained a beneficial conversion feature (“BCF”).  The estimated intrinsic value of the BCF of $213,792 was determined as the difference between the conversion price and the estimated fair value of Cellectar common stock on the date of issuance, multiplied by the 3,278,786 shares of common stock into which the Convertible Notes were convertible at issuance. This amount was recorded as a component of interest expense on the date of issuance.  The estimated per-share fair value of Cellectar common stock was determined by management based on a number of factors including an independent valuation, which was determined to be the best indication of the fair value as of the issuance date of the Convertible Notes.  Since the conversion price was subject to adjustment in the event of a qualified transaction, as defined, the Convertible Notes also contain a contingent beneficial conversion feature (“CBCF”).  This contingency did not materialize; therefore no intrinsic value was allocated to the CBCF.

 

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On January 20, 2011, the Convertible Notes matured but remained unpaid.  Following the maturity and default of the Convertible Notes, the holders of the Convertible Notes agreed that all of the outstanding Convertible Notes would be automatically converted simultaneous with the completion of an acquisition and financing (the “Conversion Time”), if completed.  The amount of shares issued upon such conversion would be dependent on the amount of investment made by the note holders at the Conversion Time and were negotiated based on outstanding principal and projected accrued interest based on an assumed closing date for the acquisition and financing.  Since the number of shares to be issued upon conversion could not be determined until the Conversion Time, the Convertible Notes contained a CBCF.  On April 1, 2011, Cellectar’s Board of Directors voted to accept the note holders consent to convert the Convertible Notes into 4,181,535 shares of common stock immediately prior to the Acquisition.  On April 8, 2011, immediately prior to the Acquisition, the principal and unpaid interest on the Convertible Notes was converted into the agreed total of 4,181,535 shares of common stock.  Upon conversion of the Convertible Notes, the Company reclassified the aggregate outstanding principal and interest totaling $3,184,707 to a component of additional paid-in capital.  The revised conversion terms resulted in the issuance of an additional 343,963 shares of common stock over the 3,837,572 shares of common stock that would have been issued if the unpaid principal and accrued interest on the Convertible Notes had been converted on that date in accordance with their original terms at the stated conversion price.  On the date of conversion, the Company determined that the value of these additional shares was $257,973, based on the $0.75 per share offering price of the common stock sold in the private placement completed concurrently with the Acquisition, which is the best indication of fair value on the date of conversion.  Since the conversion was not completed until April 8, 2011, the value of the additional shares of $257,973 was recorded as a component of interest expense during the second quarter of 2011.

 

As of December 31, 2012 and 2011, there was no obligation outstanding on the Convertible Notes.

 

8.  LONG-TERM NOTES PAYABLE

 

On January 11, 2008, Cellectar entered into a loan agreement with a bank to borrow up to $1,200,000.  The borrowing, evidenced by a note (the “Bank Note”), bore interest at a rate of 7.01% per annum, could be prepaid without penalty and was payable in 48 monthly principal and interest payments of $20,520 with a balloon payment of any remaining unpaid principal and interest on March 28, 2012.  In the event of default of payment, Cellectar would be required to pay a late charge equal to 5% of the delinquent payment and the interest rate on the unpaid principal would be increased by 3%.  The Bank Note was collateralized by substantially all assets of Cellectar and a deposit account in the amount of $500,000. On April 8, 2011, immediately prior to the Acquisition, Cellectar paid approximately $627,000 in full settlement of the Bank Note. The payment was made in order to avoid an event of default that would have occurred as a result of the change of control that occurred at the time of the Acquisition and therefore the Company’s obligation under the Bank Note was satisfied during the year ended December 31, 2011. As such, there were no amounts outstanding on the Bank Note as of December 31, 2012 or 2011.

 

On September 15, 2010, Cellectar entered into certain loan agreements with the Wisconsin Department of Commerce (“WDOC Notes”) to borrow a total of $450,000.  The WDOC Notes bear interest at 2% per annum beginning on the date of disbursement and allow for the deferral of interest and principal payments until April 30, 2015.  In the event of default of payment, interest on the delinquent payment is payable at a rate equal to 12% per annum.  Monthly payments of $20,665 for principal and interest commence on May 1, 2015 and continue for 23 equal installments with the final installment of any remaining unpaid principal and interest due on April 1, 2017.  As of December 31, 2012 and 2011, $450,000 is classified as a long-term note payable in the accompanying balance sheets.

 

As of December 31, 2012, long-term notes payable mature as follows:

 

Years ended December 31,        
2013   $  
2014      
2015     119,957  
2016     243,591  
2017     86,452  
    $ 450,000  

 

For the years ended December 31, 2012 and 2011, the Company recorded approximately $9,000 and $17,500 of interest expense related to these long-term notes payable.

 

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9. STOCKHOLDERS’ EQUITY

 

For the purpose of presentation in these financial statements, all amounts and disclosures related to equity issuances prior to the Acquisition have been retroactively restated by applying the Exchange Ratio in order to reflect the capital structure of Novelos.

 

From inception until the Acquisition on April 8, 2011, Cellectar issued 12,559,218 shares of common stock for net proceeds of approximately $21,710,000.

 

April 2011 Private Placement

 

Concurrently with and conditioned upon the execution of the Merger Agreement, the Company entered into a securities purchase agreement with certain accredited investors under which the Company sold an aggregate of 6,846,537 units, each unit consisting of one share of its common stock and a warrant to purchase one share of its common stock, at a price of $0.75 per unit, for gross proceeds of approximately $5,135,000 (the “April Private Placement”).  The warrants have an exercise price of $0.75 and expire on March 31, 2016.  The warrant exercise price and/or the common stock issuable pursuant to such warrant will be subject to adjustment only for stock dividends, stock splits or similar capital reorganizations so that the rights of the warrant holders after such event will be equivalent to the rights of warrant holders prior to such event.  The relative fair value of the warrants issued to the investors was $2,124,286 at issuance and has been included as a component of stockholders’ equity.  The Company uses the Black-Scholes option pricing model to value warrants and applies assumptions that consider, among other variables, the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants. Assumptions used are generally consistent with those disclosed for stock-based compensation (see Note 10).

 

The securities purchase agreement includes certain registration requirements which were subsequently extended by the consent of purchasers holding a majority of shares of the Company’s common stock issued in the April Private Placement, which holders constituted the requisite holders, as defined. The Company filed a registration statement with the SEC on July 17, 2012 covering the resale of 4,000,000 shares of common stock pursuant to the registration requirements and this registration statement was declared effective on July 26, 2012. The Company is required to keep the registration statement continuously effective under the Securities Act of 1933, as amended (the “Securities Act”), until the earlier of the date when all the registrable securities covered by the registration statement have been sold or such time as all the registrable securities covered by the registration statement can be sold under Rule 144 without any volume limitations. The Company will be allowed to suspend the use of the registration statement for not more than 30 consecutive days on not more than two occasions in any 12-month period (the “Allowed Delay”).  If the Company suspends the use of the registration for longer than the Allowed Delay, it may be required to pay to the purchasers liquidated damages equal to 1.5% per month (pro-rated on a daily basis for any period of less than a full month) of the aggregate purchase price of the units purchased until the use of the registration statement is no longer suspended, not to exceed 5% of the aggregate purchase price.  As of December 31, 2012, and through the date of this filing, the Company has not concluded that it is probable that damages will become due; therefore, no accrual for damages has been recorded.

 

The Company paid to the placement agent for the financing a cash fee equal to $200,000 and issued warrants to purchase 192,931 shares of its common stock (having an exercise price of $0.75 and which expire March 31, 2016) in consideration for their advisory services with respect to the financing pursuant to the placement agency agreement.  The cash fee was recorded as a reduction of gross proceeds received.  The estimated fair value of the warrants issued to the placement agent was $112,096 and was recorded as a component of stockholders’ equity.

 

December 2011 Underwritten Offering

 

On December 6, 2011, the Company completed an underwritten public offering of 10,081,667 shares of its common stock and warrants to purchase up to an aggregate of 10,081,667 shares of its common stock at an exercise price of $0.60 per share, expiring on December 6, 2016, for gross proceeds of $6,049,000 and net proceeds of $5,298,140 after deducting transaction costs (the “Underwritten Offering”). The warrant exercise price and the common stock issuable pursuant to such warrant are subject to adjustment only for stock dividends, stock splits and similar capital reorganizations so that the rights of the warrant holders after such event will be equivalent to the rights of the warrant holders prior to such event. The relative fair value of the warrants issued to the investors was $2,350,320 at issuance and has been included as a component of stockholders’ equity.  The Company uses the Black-Scholes option pricing model to value warrants and applies assumptions that consider, among other variables, the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants. Assumptions used are generally consistent with those disclosed for stock-based compensation (see Note 10). The Company paid the underwriter a cash fee of $302,000. The cash fee along with other legal and accounting costs associated with the offering were recorded as a reduction of the gross proceeds received.

 

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June 2012 Public Offering

 

On June 13, 2012, pursuant to securities purchase agreements entered into with investors on June 7, 2012, the Company completed a registered public offering of an aggregate of 5,420,800 shares of its common stock, warrants to purchase up to an aggregate of 5,420,800 at an exercise price of $1.00 per share, exercisable for 90 days from issuance (the “Class B Warrants”), and warrants to purchase up to an aggregate of 2,710,400 shares of its common stock at an exercise price of $1.25 per share, exercisable for five years from issuance, for total gross proceeds of $5,420,800 and net proceeds of $4,870,978 after deducting transaction costs (the “June Offering”). The warrant exercise price and the common stock issuable pursuant to such warrants are subject to adjustment only for stock dividends, stock splits and similar capital reorganizations, in which event the rights of the warrant holders would be adjusted as necessary so that they would be equivalent to the rights of the warrant holders prior to such event. The relative fair value of the warrants issued to the investors was $1,994,631 at issuance and has been included as a component of stockholders’ equity.  The Company uses the Black-Scholes option pricing model to value warrants and applies assumptions that consider, among other variables, the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants. Assumptions used are generally consistent with those disclosed for stock-based compensation (see Note 10). In the June Offering, the Company paid a cash fee of $379,456 and issued warrants to purchase 271,040 shares of its common stock at an exercise price of $1.25 per share expiring on June 13, 2017 to the placement agent. The cash fee along with other legal and accounting costs associated with the offering were recorded as a reduction of the gross proceeds received. The estimated fair value of the warrants issued to the placement agent was $255,703 and was recorded as a component of stockholders’ equity.

 

On September 10, 2012, the Company amended the terms of the Class B Warrants with investors who held warrants to purchase 5,255,000 shares of common stock to extend the expiration date for the exercise of such warrants until October 11, 2012. An investor who held Class B Warrants to purchase 15,000 shares of common stock did not elect to amend their agreement and such warrants expired on September 11, 2012. These warrants had been issued in connection with the June Offering, had an expiration date of September 11, 2012 and were exercisable at a price of $1.00 per share. The modification of the expiration date of the warrants resulted in a deemed dividend to warrant holders of $543,359 which was calculated as the difference between the fair value of the warrants immediately before and after the modification using the Black-Scholes option pricing model. The deemed dividend is reflected as an adjustment to net loss to arrive at net loss attributable to common stockholders in the twelve months ended December 31, 2012. Since the Company had an accumulated deficit at the time of the modification, there was no impact to the components of stockholders’ equity as a result of the recognition of the deemed dividend.

 

During the year ended December 31, 2012, Class B Warrants were exercised for an aggregate of 1,088,300 shares of common stock and the Company received aggregate cash proceeds of $1,088,300 in respect of those exercises. The balance of the Class B Warrants, exercisable for up to 4,332,500 shares of common stock, expired.

 

November 2012 Private Placement

 

On November 2, 2012, the Company completed a private placement of 2,000,000 shares of its common stock, warrants to purchase up to an aggregate of 2,000,000 shares of common stock at an exercise price of $1.00 per share, exercisable for 90 days from issuance, and warrants to purchase up to an aggregate of 1,000,000 shares of its common stock at an exercise price of $1.25 per share, exercisable for five years from issuance, for total gross proceeds of $2,000,000 (the “November Private Placement”). The warrant exercise price and the common stock issuable pursuant to such warrants are subject to adjustment only for stock dividends, stock spilts and similar capital reorganizations, in which event the rights of the warrant holders would be adjusted as necessary so that they would be equivalent to the rights of the warrant holders prior to such event. The relative fair value of the warrants issued to the investor was $742,491 at issuance and has been included as a component of stockholders’ equity. The Company uses the Black-Scholes option pricing model to value warrants and applies assumptions that consider, among other variables, the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants. Assumptions used are generally consistent with those disclosed for stock-based compensation (see Note 10). The proceeds from the November Private Placement are contractually designated for use towards the construction of a clinical-stage manufacturing facility for I-124-CLR1404 (LIGHT) at the Company’s Madison, WI location. The warrants to purchase 2,000,000 shares of common stock at $1.00 per share expired unexercised on January 31, 2013 (see Note 18). As a result of the contractual commitment to use the proceeds towards the construction project, the Company has classified the gross proceeds of $2,000,000 from this offering as a long-term restricted asset (see Note 2).

 

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Common Stock Warrants

 

The following table summarizes information with regard to outstanding warrants to purchase common stock as of December 31, 2012. 

 

Offering   Number of Shares
Issuable Upon
Exercise of
Outstanding
Warrants
    Exercise
Price
   

 

 

Expiration Date

                     
November 2012 Private Placement     2,000,000     $ 1.00     January 31, 2013
November 2012 Private Placement     1,000,000     $ 1.25     November 2, 2017
June 2012 Public Offering     2,981,440     $ 1.25     June 13, 2017
December 2011 Underwritten Offering     9,248,334     $ 0.60     December 6, 2016
April 2011 Private Placement     6,058,811     $ 0.75     March 31, 2016
Legacy warrants (1)     27,310     $ 0.60     July 27, 2015
Legacy warrants     105,040     $ 16.065     July 27, 2015
Legacy warrants     91,524     $ 99.45-100.98     December 31, 2015
                     
Total     21,512,459              

 

(1)  The exercise prices of these warrants are subject to adjustment for “down-rounds” and the warrants have been accounted for as derivative instruments as described in Note 3.

 

In February 2013, the Company issued warrants in connection with a public offering of common stock (see Note 18).

 

Reserved Shares

 

The following shares were reserved for future issuance upon exercise of stock options and warrants:

 

    December 31,  
    2012     2011  
             
Warrants     21,512,459       17,403,989  
Stock options     6,439,188       4,827,638  
                 
Total number of shares reserved for future issuance     27,951,647       22,231,627  

 

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10.  STOCK-BASED COMPENSATION

 

In connection with the Acquisition, the Company assumed options to purchase 49,159 shares of common stock at exercise prices ranging from $1.53 to $1,072.53.

 

2006 Novelos Stock Option Plan.   Following the Acquisition, option grants to directors and employees are made under the Novelos Therapeutics 2006 Stock Incentive Plan (the “Plan”).  A total of 10,000,000 shares of common stock are authorized for issuance under the Plan for grants of incentive or nonqualified stock options, rights to purchase restricted and unrestricted shares of common stock, stock appreciation rights and performance share grants.  A committee of the board of directors determines exercise prices, vesting periods and any performance requirements on the date of grant, subject to the provisions of the Plan.  Options are granted at or above the fair market value of the common stock at the grant date and expire on the tenth anniversary of the grant date.  Vesting periods are generally between one and four years.  Options granted pursuant to the Plan generally will become fully vested upon a termination event occurring within one year following a change in control, as defined.  A termination event is defined as either termination of employment or services other than for cause or constructive termination of employees or consultants resulting from a significant reduction in either the nature or scope of duties and responsibilities, a reduction in compensation or a required relocation.  As of December 31, 2012, there are an aggregate of 3,669,562 shares available for future grants under the Plan.

 

Accounting for Stock-Based Compensation

 

The Company uses the Black-Scholes option-pricing model to calculate the grant-date fair value of stock option awards. The resulting compensation expense, net of expected forfeitures, for non-performance based awards is recognized on a straight-line basis over the service period of the award, which is generally three years for stock options. For stock options with performance-based vesting provisions, recognition of compensation expense, net of expected forfeitures, commences if and when the achievement of the performance criteria is deemed probable. The compensation expense, net of expected forfeitures, for performance-based stock options is recognized over the relevant performance period. Evaluation of the probability of meeting performance targets is evaluated at the end of each reporting period. Non-employee stock-based compensation is accounted for in accordance with the guidance of FASB ASC Topic 505, Equity.  As such, the Company recognizes expense based on the estimated fair value of options granted to non-employees over their vesting period, which is generally the period during which services are rendered and deemed completed by such non-employees.

 

The following table summarizes amounts charged to expense for stock-based compensation related to employee and director stock option grants and stock-based compensation recorded in connection with stock options granted to non-employee consultants:

 

    Year Ended
December 31,
    Cumulative
Development-
Stage Period
from
November 7,
2002 through
December 31,
 
    2012     2011     2012  
Employee and director stock option grants:                        
Research and development   $ 319,703     $ 190,172     $ 808,261  
General and administrative     1,010,605       570,884       3,158,792  
      1,330,308       761,056       3,967,053  
Non-employee consultant stock option grants:                        
Research and development     79,879       36,157       116,036  
General and administrative     93,110       110,247       275,081  
      172,989       146,404       391,117  
                         
Total stock-based compensation   $ 1,503,297     $ 907,460     $ 4,358,170  

 

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On March 4, 2011, in contemplation of the Acquisition and in accordance with terms of the applicable option agreements, Cellectar accelerated the vesting on all outstanding and unvested options at that date and notified all option holders that any unexercised options as of March 17, 2011 would then be terminated.  On March 17, 2011, Cellectar terminated all outstanding options.  The remaining unamortized compensation expense of $58,000 was recorded related to the acceleration of outstanding options in the quarter ended March 31, 2011.  No additional compensation expense was recorded related to the acceleration of unvested shares as the acceleration did not represent a modification to the original terms of the options.

 

On May 18, 2011, the Company cancelled 100,000 options originally granted on April 25, 2011 with an exercise price of $3.00 per share and issued 100,000 replacement stock option awards with an exercise price of $1.40.  The cancellation and replacement constituted a modification to the terms of the award and additional stock-based compensation was measured as the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.  Accordingly, incremental stock-based compensation expense of $4,494 was recorded in connection with the modification.

 

During the years ended December 31, 2012 and 2011, the Company granted options to purchase 167,550 and 670,200 shares of common stock pursuant to performance-based awards to an employee, respectively. No compensation expense was recognized related to the performance-based awards as the Company did not determine that achievement of the milestones was probable. The milestones related to the 2011 performance-based awards were not met and the awards expired during 2011 and 2012. As of December 31, 2012, the 2012 award was outstanding; however the award expired in January 2013 when the milestones were not met.

 

Assumptions Used In Determining Fair Value

 

Valuation and amortization method . The fair value of each stock award is estimated on the grant date using the Black-Scholes option-pricing model.  The estimated fair value of employee stock options is amortized to expense using the straight-line method over the vesting period. The estimated fair value of the non-employee options is amortized to expense over the period during which a non-employee is required to provide services for the award (usually the vesting period).

 

Volatility. The Company estimates volatility based on an average of (1) the Company’s historical volatility since its common stock has been publicly traded and (2) review of volatility estimates of publicly held drug development companies with similar market capitalizations.

 

Risk-free interest rate . The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption.

 

Expected term . The expected term of stock options granted is based on an estimate of when options will be exercised in the future. The Company applied the simplified method of estimating the expected term of the options, as described in the SEC’s Staff Accounting Bulletins 107 and 110, as the Company has had a significant change in its business operations as result of the Acquisition and the historical experience is not indicative of the expected behavior in the future. The expected term, calculated under the simplified method, is applied to groups of stock options that have similar contractual terms. Using this method, the expected term is determined using the average of the vesting period and the contractual life of the stock options granted. The Company applied the simplified method to non-employees who have a truncation of term based on termination of service and utilizes the contractual life of the stock options granted for those non-employee grants which do not have a truncation of service.

 

Forfeitures.   Stock-based compensation expense is recorded only for those awards that are expected to vest.  FASB ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option.  An annual forfeiture rate of 0% was applied to all unvested options as of December 31, 2012 and 2011 as the historical experience of forfeitures is not representative of expected future forfeiture rates as a result of the significant changes in the business operations as a result of the Acquisition. Additionally, the majority of the 2012 and 2011 forfeitures were related to unmet milestones on performance-based options that are not representative of the expected future forfeiture rates for the Company’s service-based awards. This analysis will be re-evaluated semi-annually and the forfeiture rate will be adjusted as necessary.  Ultimately, the actual expense recognized over the vesting period will be for only those shares that vest.

 

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The following table summarizes weighted-average values and assumptions used for options granted to employees, directors and consultants in the periods indicated:

 

    Year Ended
December 31,
2012
    Year Ended
December 31,
2011
 
Volatility     109% -115 %     110% -115 %
Risk-free interest rate     0.7% - 0.925 %     0.89% – 3.17 %
Expected life (years)     5.06 - 6.25       5.5 – 6.25  
Dividend     0 %     0 %
Weighted-average exercise price   $ 0.75     $ 1.16  
Weighted-average grant-date fair value   $ 0.62     $ 0.98  

 

Stock Option Activity

 

A summary of stock option activity is as follows:

 

    Number of
Shares
Issuable Upon
Exercise of
Outstanding
Options
    Weighted
Average
Exercise Price
    Weighted
Average
Remaining
Contracted
Term in
Years
    Aggregate
Intrinsic
Value
 
Outstanding at November 7, 2002                              
Granted     1,013,583     $ 2.36                  
Canceled     (222,547 )   $ 2.63                  
Forfeited     (21,847 )   $ 2.91                  
Outstanding at December 31, 2010     769,189     $ 2.69                  
Canceled     (769,189 )   $ 2.69                  
Options acquired in connection with a business combination     49,159     $ 100.52                  
Granted     5,226,500     $ 1.16                  
Canceled     (9,992 )   $ 115.16                  
Forfeited     (438,029 )   $ 2.44                  
Outstanding at December 31, 2011     4,827,638     $ 1.82                  
Granted     1,956,650     $ 0.75                  
Canceled     (1,666 )   $ 0.45                  
Forfeited     (343,434 )   $ 1.38                  
Outstanding at December 31, 2012     6,439,188     $ 1.52                  
                                 
Vested, December 31, 2012     2,352,974     $ 2.63       8.47     $ 161,799  
Unvested, December 31, 2012     4,086,214     $ 0.88       9.26     $ 258,730  
Exercisable at December 31, 2012     2,352,974     $ 2.63       8.47     $ 161,799  

 

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Exercise prices for all grants made during the twelve months ended December 31, 2012 and 2011 were equal to the market value of the Company’s common stock on the date of grant. The aggregate intrinsic value of options outstanding is calculated based on the positive difference between the estimated per-share fair value of common stock at the end of the respective period and the exercise price of the underlying options. At December 31, 2011, the estimated fair-market value of common stock was less than the exercise price of the underlying options, as such, the aggregate intrinsic value is $0.  There have been no option exercises to date. Shares of common stock issued upon the exercise of options are from authorized but unissued shares.

 

The weighted-average grant-date fair value of options granted during the year ended December 31, 2012, December 31, 2011 and for the period from November 7, 2002 to December 31, 2012 was $0.62, $0.98 and $1.12, respectively.  The total fair value of shares vested during December 31, 2012 and 2011 and for the period November 7, 2002 to December 31, 2012 was $1,549,300, $756,400 and $4,355,700, respectively.   The weighted-average grant-date fair value of vested and unvested options outstanding at December 31, 2012 was $1.01 and $0.73, respectively. The weighted-average grant-date fair value of vested and unvested options outstanding at December 31, 2011 was $1.31 and $0.89, respectively. 

 

As of December 31, 2012, there was $2,733,590 of total unrecognized compensation cost related to unvested stock-based compensation arrangements.  Of this total amount, the Company expects to recognize $1,447,269, $876,455, $360,039 and $49,827 during 2013, 2014, 2015 and 2016, respectively.  The Company expects 3,918,664 in unvested options, excluding performance-based awards, to vest in the future.

 

11.  INCOME TAXES

 

    2012     2011  
             
Tax provision (benefit)                
Current                
Federal   $     $  
State            
Total current            
                 
Deferred                
Federal     (3,225,486 )     (944,333 )
State     2,291,913       (161,963 )
Total deferred     (933,573 )     (1,106,296 )
                 
Change in valuation allowance     933,573       1,106,296  
Total   $     $  

 

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Deferred tax assets consisted of the following at December 31:

 

    2012     2011  
             
Deferred tax assets                
Federal net operating loss   $ 22,343,084     $ 19,447,371  
Federal research and development tax credit carryforwards     1,969,426       1,956,146  
State net operating loss     2,252,566       2,444,816  
State research and development tax credit carryforwards     633,571       597,608  
Capitalized research and development expenses     11,068,868       13,007,013  
Capital loss carryforward (expires beginning in 2012)           340,000  
Stock-based compensation expense     842,174       333,206  
Intangible assets     440,556       555,198  
Charitable contribution carryforwards     43,350       44,370  
Accrued liabilities     25,199       35,314  
Total deferred tax assets     39,618,794       38,761,042  
                 
Deferred tax liabilities                
Depreciable assets     (271,049 )     (346,870 )
Total deferred tax liabilities     (271,049 )     (346,870 )
Net deferred tax assets     39,347,745       38,414,172  
Less valuation allowance     (39,347,745 )     (38,414,172 )
                 
Total deferred tax assets   $     $  

 

A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations is as follows:

 

    Year ended December 31,  
    2012     2011  
Income tax benefit using U.S. federal statutory rate     34.00 %     34.00 %
State income taxes     (17.20 )%     1.44 %
Permanent items     (0.17 )%     (5.21 )%
Change in valuation allowance     (10.61 )%     (14.88 )%
Other     (6.02 )%     (15.35 )%
Total     %     %

 

As of December 31, 2012, the Company had federal and state net operating loss carryforwards (“NOLs”) of approximately $65,715,000 and $42,854,000 respectively, which expire in 2018 through 2031 and 2013 through 2025, respectively.  In addition, the Company has federal and state research and development and investment tax credits of approximately $1,969,000 and $960,000, respectively which expire in 2018 through 2031 and 2015 through 2026, respectively.  The amount of NOLs and tax credit carryforwards which may be utilized annually in future periods will be limited pursuant to Section 382 of the Internal Revenue Code as a result of substantial changes in the Company’s ownership that have occurred or that may occur in the future.  The Company has not quantified the amount of such limitations.

 

Because of the Company’s limited operating history, continuing losses and uncertainty associated with the utilization of the NOLs in the future, management has provided a full allowance against the gross deferred tax asset.

 

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The Company did not have unrecognized tax benefits or accrued interest and penalties at any time during the years ended December 31, 2012 or 2011, and does not anticipate having unrecognized tax benefits over the next twelve months.  The Company is subject to audit by the IRS and state taxing authorities for tax periods commencing January 1, 2008. Additionally, the Company may be subject to examination by the IRS for years beginning prior to January 1, 2008 as a result of its NOLs. However, any adjustment related to these periods would be limited to the amount of the NOL generated in the year(s) under examination.

 

12.   NET LOSS PER SHARE

 

Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss, as adjusted, by the sum of the weighted average number of shares of common stock and the dilutive potential common stock equivalents then outstanding.  Potential common stock equivalents consist of stock options and warrants.  Since there is a net loss attributable to common stockholders for the years ended December 31, 2012 and 2011, the inclusion of common stock equivalents in the computation for those periods would be antidilutive. Accordingly, basic and diluted net loss per share is the same for all periods presented.

 

The following potentially dilutive securities have been excluded from the computation of diluted net loss per share since their inclusion would be antidilutive:

 

    Year Ended
December 31,
    Cumulative
Development-
Stage Period 
from  November
7, 2002
(inception)
through
December 31,
 
    2012     2011     2012  
Warrants     21,512,459       17,403,989       21,512,459  
Stock options     6,439,188       4,827,638       6,439,188  

 

13.  COMMITMENTS

 

Real Property Leases

 

On September 5, 2007, Cellectar entered into a 36-month lease for office and manufacturing space, commencing September 15, 2007.  The lease provides for the option to extend the lease under its current terms for seven additional two-year terms.  Rent is $8,050 per month for the first year and then escalates by 3% per year for the duration of the term including any lease extension terms.  The lease also requires the payment of monthly rent of $1,140 for approximately 3,400 square feet of expansion space.  The monthly rent for the expansion space is fixed until such time as the expansion space is occupied at which time the rent would increase to the current per square foot rate in effect under the original lease terms.  The Company is responsible for certain building-related costs such as property taxes, insurance, and repairs and maintenance.  Rent expense is recognized on a straight-line basis and accordingly the difference between the recorded rent expense and the actual cash payments has been recorded as deferred rent as of each balance sheet date.  Due to the significant value of leasehold improvements purchased during the initial 3-year lease term and the economic penalty for not extending the building lease, straight-line rent expense and the associated deferred rent has been calculated over 17 years, which represents the full term of the lease, including all extensions.

 

The Company is required to remove certain alterations, additions and improvements upon termination of the lease that altered a portion of the rentable space.  In no event shall the cost of such removal, at commercially reasonable rates, paid by the Company exceed $55,000 (“Capped Amount”). Any amount in excess of the Capped Amount shall be the obligation of the landlord.  The Company is required to maintain a certificate of deposit equal to the Capped Amount during the term of the lease, which amount is shown as restricted cash on the accompanying balance sheets.

 

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The lease has been extended, in accordance with its terms, through September 14, 2014. Future minimum lease payments under this non-cancelable lease are approximately as follows:

 

Years ended December 31,        
2013   $ 123,000  
2014     94,000  
2015      
Thereafter      
    $ 217,000  

 

The Company also leases office space in Newton, MA, which has a term that is month-to-month and requires monthly rental payments of $5,300.

 

Rent expense was approximately $227,000 and $197,000 for the years ended December 31, 2012 and 2011, respectively and approximately $1,368,000 from inception to December 31, 2012.

 

Equipment Lease

 

Certain equipment is leased under a capital lease.  The lease agreement requires monthly principal and interest payments of $217 and expires on September 3, 2014.  The outstanding obligation is being amortized using a 7% interest rate based on comparable borrowing rates.

 

The following table provides the estimated future minimum rental payments under all capital leases together with the present value of the net minimum lease payments as of December 31, 2012:

 

    Minimum
lease
payments
    Less interest     Present value
of net
minimum
lease
payments
 
2013   $ 2,608     $ 211     $ 2,397  
2014     1,739       45       1,694  
    $ 4,347     $ 256     $ 4,091  

 

The equipment recorded under capitalized leases is included in fixed assets as of December 31:

 

    2012     2011  
             
Office equipment   $ 10,973     $ 10,973  
Less accumulated amortization     (7,319 )     (5,123 )
    $ 3,654     $ 5,850  

 

14.  CONTINGENCIES

 

Litigation

 

The Company is party to certain legal matters that existed with Novelos prior to the Acquisition. The following summarizes the status of those matters.

 

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Class Action

 

A putative federal securities class action complaint was filed on March 5, 2010 in the United States District Court for the District of Massachusetts by an alleged shareholder of Novelos, on behalf of himself and all others who purchased or otherwise acquired Novelos common stock in the period between December 14, 2009 and February 24, 2010, against Novelos and its President and Chief Executive Officer, Harry S. Palmin.  On October 1, 2010, the court appointed lead plaintiffs (Boris Urman and Ramona McDonald) and appointed lead plaintiffs’ counsel.  On October 22, 2010, an amended complaint was filed.  The amended complaint claimed, among other things, that Novelos violated Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder in connection with alleged misleading disclosures related to the progress of the Phase 3 clinical trial of NOV-002 for non-small cell lung cancer.  In December 2010, the defendants filed a motion to dismiss the complaint with prejudice.  On June 23, 2011, the motion to dismiss was granted and the case was dismissed without prejudice.  Because the dismissal was without prejudice, the plaintiffs could reinstitute the proceeding by filing an amended complaint.  In August 2011, the plaintiffs filed a second amended complaint realleging that the defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 in connection with alleged misleading disclosures related to the Phase 3 clinical trial for NOV-002 in non-small cell lung cancer. In September 2011, the defendants filed a motion to dismiss the second amended complaint. On June 11, 2012, the second amended complaint was dismissed with prejudice. The plaintiffs did not file a notice of appeal prior to the expiration of the deadline for such filing on July 13, 2012.

 

BAM Dispute

 

From its inception through 2010, Novelos was primarily engaged in the development of certain oxidized glutathione-based compounds for application as therapies for disease, particularly cancer. These compounds were originally developed in Russia and in June 2000, Novelos acquired commercial rights from the Russian company (“ZAO BAM”) which owned the compounds and related Russian patents. In April 2005, Novelos acquired worldwide rights to the compounds (except for the Russian Federation) in connection with undertaking extensive development activities in an attempt to secure US Food and Drug Administration (“FDA”) approval of the compounds as therapies. These development activities culminated in early 2010 in an unsuccessful Phase 3 clinical trial of an oxidized glutathione compound (NOV-002) as a therapy for non-small cell lung cancer. After the disclosure of the negative outcome of the Phase 3 clinical trial in 2010, ZAO BAM claimed that Novelos modified the chemical composition of NOV-002 without prior notice to or approval from ZAO BAM, constituting a material breach of the June 2000 technology and assignment agreement. In September 2010, Novelos filed a complaint in Massachusetts Superior Court seeking a declaratory judgment by the court that the June 2000 agreement has been entirely superseded by the April 2005 agreement and that the obligations of the June 2000 agreement have been performed and fully satisfied. ZAO BAM answered the complaint and alleged counterclaims. In August 2011, Novelos filed a motion for judgment on the pleadings as to the declaratory judgment count and all counts of ZAO BAM’s amended counterclaims. On October 17, 2011, the court ruled in favor of Novelos on each of the declaratory judgment claims and dismissed all counts of ZAO BAM’s counterclaim. Judgment in favor of Novelos was entered on October 20, 2011. On November 14, 2011 ZAO BAM filed a notice of appeal.

 

We do not anticipate that these litigation matters will have a material adverse effect on the Company’s future financial position, results of operations or cash flows.

 

15.  EMPLOYEE RETIREMENT PLAN

 

Following the Acquisition, the Company has a defined contribution plan under Section 401(k) of the Internal Revenue Code which allows eligible employees who meet minimum age requirements to contribute a portion of their annual compensation on a pre-tax basis.  The Company has not made any matching contributions under this plan.

 

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16.  RELATED PARTY TRANSACTIONS

 

Jamey Weichert, the Company’s Chief Scientific Officer and principal founder of Cellectar, and a director and shareholder of the Company, is a faculty member at the University of Wisconsin-Madison (“UW”).  During the year ended December 31, 2012, the Company made contributions to UW totaling $269,000 for use towards unrestricted research activities and paid UW of approximately $349,000 for costs associated with clinical trial and other research agreements. The Company made contributions to UW of $206,500 for use towards unrestricted research activities during the year ended December 31, 2011. 

 

17. PROPOSED REVERSE STOCK SPLIT

 

On June 30, 2011, the Company held a special meeting of stockholders.  At the meeting, the stockholders approved, among other things, separate amendments to the certificate of incorporation that would effect a reverse split of the Company’s common stock within a range of 1:2 to 1:10, and authorized the Company’s board of directors to determine the ratio at which the reverse split will be effected by filing the appropriate amendment to the certificate of incorporation, or to determine not to proceed with the reverse split at all.  The purpose of the proposed reverse split was to increase the price per share of the Company’s common stock in order to exceed the minimum price per share required to secure a listing on a national securities exchange and was contemplated in connection with the Company’s underwritten public offering that closed on December 6, 2011 (see Note 9). The Company did not obtain the NASDAQ listing and did not effect the reverse split in connection with the offering. While the Company may effect a reverse split at a later date, it would not do so on the basis of the stockholder approval obtained at the June 30, 2011 special meeting and would instead seek further approval of its stockholders.

 

  18. SUBSEQUENT EVENTS

 

February 2013 Public Offering

 

On February 20, 2013, pursuant to securities purchase agreements entered into with investors on February 12, 2013, the Company completed a registered public offering of an aggregate of 11,000,000 shares of its common stock, warrants to purchase up to an aggregate of 11,000,000 shares of our common stock at an exercise price of $0.50 per share which will be exercisable for five years from issuance, and warrants to purchase up to an aggregate of 5,500,000 shares of our common stock at an exercise price of $0.50 per share which will be exercisable for one year from issuance, for gross proceeds of $5,500,000 and net proceeds of approximately $5,000,000 after deducting transaction costs, which include placement agent fees and legal and accounting costs associated with the offering (the “February Offering”). The warrant exercise price and the common stock issuable pursuant to such warrants are subject to adjustment for stock dividends, stock splits and similar capital reorganizations, in which event the rights of the warrant holders would be adjusted as necessary so that they would be equivalent to the rights of the warrant holders prior to such event. The exercise price of the warrants is also subject to adjustment for dilutive issuances. As such, the warrants will be recorded as a derivative liability due to the down-round protection and the Company is evaluating the amount of the liability. In the February Offering, the Company paid a cash fee of $385,000 and issued warrants to purchase 770,000 shares of its common stock at an exercise price of $0.625 per share expiring on February 4, 2018 to the placement agent.

 

Warrant Expiration

 

On January 31, 2013, warrants to purchase 2,000,000 shares of common stock at an exercise price of $1.00 per share expired unexercised.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

Management's report on internal control over financial reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

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Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's evaluation included such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2012. This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm, as allowed by the SEC.

 

Evaluation of disclosure controls and procedures . Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of December 31, 2012, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

 

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part on certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

Changes in internal control over financial reporting . Our management, in connection with its evaluation of internal controls (with the participation of our principal executive officer and principal financial officer), did not identify any change in internal control over the financial reporting process that occurred during our fourth fiscal quarter of 2012 that would have materially affected, or would have been reasonably likely to materially affect, our internal control over financial reporting.

 

Important Considerations. The effectiveness of our disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.

 

Item 9B. Other Information.

 

None.

PART III

 

I tem 10. Directors, Executive Officers and Corporate Governance.

 

Our current directors (1) and executive officers are:

 

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Name   Age   Position
         
Stephen A. Hill, B.M. B.Ch., M.A., F.R.C.S. (2)   54   Chairman of the Board and Director (Class II)
Harry S. Palmin   43   President, Chief Executive Officer and Director (Class III)
J. Patrick Genn   56   Vice President of Investor Relations
Kimberly A. Hawkins   41   Vice President of Clinical Development
Christopher J. Pazoles, Ph.D.   62   Senior Vice President of Research and Development
Joanne M. Protano   44   Vice President, Chief Financial Officer and Treasurer
Jamey P. Weichert, Ph.D.   57   Chief Scientific Officer and Director (Class III)
Thomas Rockwell Mackie, Ph.D. (3)   58   Director (Class I)
James S. Manuso, Ph.D. (3)(2)   63   Director (Class I)
John Neis (4)(3)   57   Director (Class II)
John E. Niederhuber, M.D. (4)(2)   74   Director (Class I)
Howard M. Schneider (4)   69   Director (Class III)
Michael F. Tweedle, Ph.D. (3)   62   Director (Class II)

 

(1) Our certificate of incorporation provides for the division of the Board into three classes, Class I, Class II and Class III, as nearly equal in size as possible with staggered three-year terms.  At each annual meeting of our stockholders, the terms of one such class expires.  The Class I directors were most recently re-elected in October 2012. Terms of the Class II directors expire at our 2013 annual meeting, or such later time at which their respective successors are duly elected and qualified.
(2) Member of the nominating and corporate governance committee.
(3) Member of the compensation committee.
(4) Member of the audit committee.

 

Our executive officers are appointed by, and serve at the discretion of, our board of directors.

 

Stephen A. Hill .  Dr. Hill was elected a director and chairman of the board of directors of Novelos in September 2007. Dr. Hill has served as CEO of Targacept Inc. (Nasdaq: TRGT) since December 2012. Dr. Hill was the President and CEO of 21CB, a nonprofit initiative of UPMC designed to provide the United States government with a domestic solution for its biodefense and infectious disease biologics portfolio, from March 2011 until December 2011.  Dr. Hill served as the President and Chief Executive Officer of Solvay Pharmaceuticals, Inc. from April 2008 until its acquisition by Abbott Laboratories (NYSE: ABT) in 2010.  Prior to joining Solvay, Dr. Hill had served as ArQule's (Nasdaq: ARQL) President and Chief Executive Officer since April 1999.  Prior to his tenure at ArQule, Dr. Hill was the Head of Global Drug Development at F. Hoffmann-La Roche Ltd. from 1997 to 1999.  Dr. Hill joined Roche in 1989 as Medical Adviser to Roche Products in the United Kingdom.  He held several senior positions at Roche, including Medical Director where he was responsible for clinical trials of compounds across a broad range of therapeutic areas, including CNS, HIV, cardiovascular, metabolic and oncology products.  Subsequently, he served as Head of International Drug Regulatory Affairs at Roche headquarters in Basel, Switzerland, where he led the regulatory submissions for seven major new chemical entities.  Dr. Hill also was a member of Roche's Portfolio Management, Research, Development and Pharmaceutical Division Executive Boards.  Prior to Roche, Dr. Hill served seven years with the National Health Service in the United Kingdom in General and Orthopedic Surgery.  Dr. Hill has served as the chairman of the board of directors of Audeo Oncology, Inc. since June 2012. Dr. Hill is a Fellow of the Royal College of Surgeons of England and holds his scientific and medical degrees from St. Catherine's College at Oxford University. Dr. Hill’s extensive experience in a broad range of senior management positions with companies in the life sciences sector make him a highly qualified member of our board of directors. 

 

Harry S. Palmin .   Mr. Palmin has served as president and a director of Novelos since 1998 and as its chief executive officer since January 2005. From 1998 to September 2005, he served as our acting chief financial officer. From 1996 to 1998, he was a vice president at Lehman Brothers and from 1993 to 1996, he was an associate at Morgan Stanley. Mr. Palmin earned a B.A. in economics and business and a M.A. in international economics and finance from the International Business School at Brandeis University. He has also studied at the London School of Economics and the Copenhagen Business School. Mr. Palmin’s experience managing the funding and development of our product candidates for 15 years and his knowledge of capital markets are strong qualifications to serve on the Board.

 

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J. Patrick Genn . Mr. Genn was appointed our vice president of investor relations in December 2011. He has 28 years of senior management experience in finance, banking and investment management. Mr. Genn was previously President of Continuum Investment Holdings, Inc. from 2006 through mid-2010 while serving on the board of directors of several biotech and technology companies including Cellectar, Inc. From 2001 through 2005, he was an advisor and consultant to several companies including Carmel Valley Ventures and Continuum Investment Partners. Mr. Genn held several senior management positions at Wells Fargo between 1987 and 2001. He was a member of the senior management team that launched its mortgage lending division in 1987 and its premier banking division in 1993. He was also a member of the core mergers and acquisitions integration team and managed private client services in San Diego, CA. Mr. Genn received a B.B.A. in Marketing and a M.S. in Product Management from the University of Wisconsin-Madison.

 

Kimberly A. Hawkins.  Ms. Hawkins has served as our vice president of clinical development since November 2010 and, prior to that, as our director of clinical development beginning in May 2006. She has worked for 19 years in the biopharmaceutical industry managing and overseeing clinical operations for multiple global Phase 1, 2 and 3 clinical studies. From 2001 to 2006, Ms. Hawkins was a senior manager in clinical development at Antigenics, Inc., (Nasdaq: AGEN) a cancer biotechnology company where she managed multiple Phase 1 and 2 studies. From 1994 to 2001 she was employed by Genzyme Corporation (Nasdaq: GENZ), Center for Clinical Research Practice, where she held the positions of clinical research associate, trainer of good clinical practice and study coordinator. From 1993 to 1994 she held the position of clinical research coordinator at Boston Medical Center. Ms. Hawkins has a B.S. degree in Human Physiology from Boston University and a Master’s Degree in Public Health from Boston University School of Public Health.

 

Christopher J. Pazoles .  Dr. Pazoles has served as our vice president of research and development since July 2005. He has 30 years of biopharmaceutical research and development and senior management experience. From May 2004 to June 2005, he held a senior research and development position at the Abbott Bioresearch Center, a division of Abbott Laboratories (NYSE: ABT). From October 2002 to January 2004, he served as chief operating officer and head of research and development at ALS Therapy Development Foundation. From 1994 to October 2002, Dr. Pazoles served as vice president of research for Phytera, Inc. From 1981 to 1994, he served as a researcher and senior manager with Pfizer. Dr. Pazoles holds a Ph.D. in microbiology from the University of Notre Dame.

 

Joanne M. Protano .  Ms. Protano was appointed our vice president, chief financial and accounting officer, and treasurer in December 2007. She has more than 20 years of finance and senior management experience. She previously held the position of Senior Director of Finance and Controller of Novelos from June 2006 to December 2007. From 1996 to 2006, she held various management and senior management positions with Ascential Software, Inc. and predecessor companies including Assistant Controller, Reporting for Ascential Software, Vice President and Chief Financial Officer for the Ascential Software Division of Informix Software, Inc. and Corporate Controller of Ardent Software, Inc. Prior to her tenure in the technology industry, from 1990 to 1996 she was employed by Deloitte and Touche LLP as an audit manager, serving technology and healthcare clients. Ms. Protano received a B.S. in business administration from Bryant College.

 

Jamey P. Weichert.  Dr. Weichert was the primary founder of Cellectar and served as Cellectar’s Chairman and Chief Scientific Officer beginning in 2002. He was appointed as the Chief Scientific Officer and a director of Novelos at the time of the Acquisition. Dr. Weichert is an Associate Professor of the Departments of Radiology, Medical Physics, Pharmaceutics and member of the Comprehensive Cancer Center at the University of Wisconsin, Madison. He has a bachelor’s degree in chemistry from the University of Minnesota and a doctorate in medicinal chemistry from U. Mich. His research interests include the design, synthesis and evaluation of biomimetic CT and MRI imaging agents and diapeutic radiopharmaceuticals. He has been involved in molecularly targeted imaging agent development his entire professional career and has developed or co-developed several imaging agents nearing clinical trial status. Dr. Weichert serves or has served on the editorial boards of numerous scientific journals and has authored more than 40 peer reviewed publications and 150 abstracts. He also has 20 issued or pending patents related to drug delivery, imaging and contrast agent development. Dr. Weichert’s experience founding and managing the development of our Cellectar product candidates and his knowledge of radiation technology are strong qualifications to serve on the Board. 

 

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Thomas Rockwell Mackie.   Dr. Mackie became a director of Novelos at the time of Novelos’s 2011 business combination with Cellectar, Inc. (the Acquisition). He had served as a director of Cellectar since December 2006. In 1997, he co-founded TomoTherapy Incorporated , a maker of advanced radiation therapy solutions for the treatment of cancer and other diseases and served as Chairman of its board of directors from 1999 until its acquisition by Accuray Incorporated (Nasdaq: ARAY) in June 2011. Dr. Mackie also served as President of TomoTherapy Inc. from 1997 until 1999 and as Treasurer from 1997 until 2000. From 2010 to the present, he has served as the Director, Medical Device Focus Area of the Morgridge Institute for Research at the University of Wisconsin, Madison and, since 1987, Dr. Mackie has been a professor in the departments of Medical Physics and Human Oncology at the University of Wisconsin, where he established the TomoTherapy research program. Dr. Mackie also co-founded Geometrics Corporation (now merged with ADAC Corp.), which developed a radiotherapy treatment planning system. Dr. Mackie currently serves as a director of Shine Medical Technologies and Bioionix Inc. and served on the management committee of Wisconsin Investment Partners from 2006 to 2009. Dr. Mackie has a B.Sc. in Physics from the University of Saskatchewan and a Ph.D. in Physics from the University of Alberta in Edmonton. Dr. Mackie’s qualifications to serve on the Board include his extensive senior management experience with radiation technology companies.

 

James S. Manuso .  Dr. Manuso has served as a director of Novelos since August 2007. Since January 2005, Dr. Manuso has served as Chairman and Chief Executive Officer of Astex Pharmaceuticals, Inc. (Nasdaq: ASTX) (f/k/a SuperGen, Inc.), served as President of SuperGen from January 2005 through July 2011 and has served as a director of SuperGen since February 2001. Dr. Manuso is co-founder and former president and chief executive officer of Galenica Pharmaceuticals, Inc. Dr. Manuso co-founded and, from 1998 to 2002, was general partner of PrimeTech Partners, a biotechnology venture management partnership, and Managing General Partner of The Channel Group LLC, an international life sciences corporate advisory firm. He was also president of Manuso, Alexander & Associates, Inc., management consultants and financial advisors to pharmaceutical and biotechnology companies. Dr. Manuso was a vice president and Director of Health Care Planning and Development for The Equitable Companies (now Group Axa), where he also served as Acting Medical Director. He currently serves on the board of directors of the Biotechnology Industry Organization (BIO) and its Health Section Governing Board and serves on the board of privately-held KineMed, Inc. He previously served on the boards of Merrion Pharmaceuticals Ltd. (Dublin, Ireland), Inflazyme Pharmaceuticals, Inc. (Vancouver, Canada), Symbiontics, Inc., (ZyStor, Inc., sold to BioMarin), Quark Biotech, Inc., Galenica Pharmaceuticals, Inc., Supratek Pharma, Inc., and EuroGen, Ltd. (London, UK). Dr. Manuso earned a B.A. in economics and chemistry from New York University, a Ph.D. in experimental psychophysiology from the Graduate Faculty of The New School University, a certificate in health systems management from Harvard Business School, and an executive M.B.A. from Columbia Business School. Dr. Manuso’s experience founding, leading and serving as a director for pharmaceutical companies makes him a highly qualified member of the Board.

 

John Neis.  Mr. Neis became a director of Novelos at the time of the Acquisition. He had served as director of Cellectar since February 2008. Mr. Neis has been Managing Director of Venture Investors LLC since 1986 and heads the firm’s Healthcare practice. He has over 23 years’ experience in the venture capital industry and has served on the Board of Directors of numerous companies from formation through initial public offering or sale. Mr. Neis currently serves on the boards of directors of Virent, Inc., Deltanoid Pharmaceuticals, Inc., and Inviragen, Inc. He is a former member of the Boards of Directors of several firms including TomoTherapy, Third Wave Technologies (acquired by Hologic) and NimbleGen Systems (acquired by Roche). Mr. Neis was appointed to the Board of the Wisconsin Technology Council and the Wisconsin Growth Capital Coalition. He also serves on the advisory boards for the Business School, the Weinert Applied Ventures Program and Tandem Press at the University of Wisconsin - Madison. Mr. Neis has a B.S. in Finance from the University of Utah, and a M.S. in Marketing and Finance from the University of Wisconsin, Madison. He is a Chartered Financial Analyst. Mr. Neis’ extensive experience leading emerging companies makes him a highly qualified member of the Board.

 

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John E. Niederhuber. Dr. Niederhuber became a director of Novelos at the time of the Acquisition. From August 2010 to the present, Dr. Niederhuber has served as executive vice president of Inova Health System and chief executive officer of the Inova Translational Medicine Institute. Since July 2011, he has been an adjunct Professor of Oncology at the Johns Hopkins University School of Medicine and Deputy Director of The Johns Hopkins Clinical Research Network. Since August 2010, Dr. Niederhuber has served as a Director on the Emergent Biosolutions Board. Dr. Niederhuber served as Director of the National Cancer Institute (NCI) from 2005 to 2010. He has also served as NCI's Chief Operating Officer and Deputy Director for Translational and Clinical Sciences. Dr. Niederhuber served as Chair of the National Cancer Advisory Board (NCAB) from 2002 to 2004. In addition to his management and advisory roles, Dr. Niederhuber has remained involved in research, through his laboratory on the National Institutes of Health (NIH) campus. Under his leadership, the Tumor and Stem Cell Biology Section, which is a part of the Cell and Cancer Biology Branch of NCI's Center for Cancer Research, is studying tissue stem cells as the cell-of-origin for cancer. Dr. Niederhuber also holds a clinical appointment on the NIH Clinical Center Medical Staff. As a surgeon, Dr. Niederhuber's clinical emphasis is on gastrointestinal cancer, hepatobiliary (liver, bile duct, and gall bladder) cancer, and breast cancer. He is recognized for his pioneering work in hepatic artery infusion chemotherapy and was the first to demonstrate the feasibility of totally implantable vascular access devices. Dr. Niederhuber is a graduate of Bethany College in West Virginia and the Ohio State University School of Medicine. He was an NIH Academic Trainee in Surgery at the University of Michigan from 1969 to 1970 and was a Visiting Fellow in the Division of Immunology at The Karolinska Institute in Stockholm, Sweden from 1970 to 1971. He completed his training in surgery at the University of Michigan in 1973 and was a member of the faculty of the University of Michigan from 1973 to 1987, being promoted to Professor of Microbiology/Immunology and Professor of Surgery in 1980. During 1986 and 1987, he was Visiting Professor in the Department of Molecular Biology and Genetics at The Johns Hopkins University School of Medicine in Baltimore, MD. Dr. Niederhuber’s qualifications to serve on the Board include his extensive experience with cancer research.

 

Howard M. Schneider .  Mr. Schneider has served as a director of Novelos since February 2005. Mr. Schneider is currently retired. From January to December 2003, he served as chief executive officer of Metrosoft, Inc., and had been an advisor to such company from July to December 2002. From May 2000 to May 2001, he served as president of Wofex Brokerage, Inc. and from 1965 to 1999, he served as an executive at Bankers Trust Company holding a variety of positions in the commercial banking and investment banking businesses. Mr. Schneider received a B.A. in economics from Harvard College and a M.B.A. from New York University. Mr. Schneider’s extensive senior management experience in the financial sector makes him a highly qualified member of our board of directors.

 

Michael F. Tweedle.    Dr. Tweedle became a director of Novelos at the time of the Acquisition. Since May 2009 he has served as Professor and Stefanie Spielman Chair in Cancer Imaging in Radiology and the James Comprehensive Cancer Center of Ohio State University, Director of the Wright Center Molecular Imaging (MI) Agents Laboratory of Ohio State University, and since May 2010, has had an adjunct appointment in the Chemistry Department of Ohio State University. Prior to joining Ohio State University, his academic appointments included Adjunct Associate Professor at University of Pennsylvania and the Science Advisory Board of New York University. Dr. Tweedle was the President of Bracco Research USA Inc. from 1995 to 2009 where he was the lead scientist and chief executive for creation of new molecular imaging pharmaceuticals. His industrial experience in drug discovery research also includes appointments at the Diagnostics Drug Discovery Division at Bristol-Myers Squibb, New England Nuclear, NEN/DuPont Pharmaceuticals, and The Squibb Institute for Medical Research. He has invented and led translational development of diagnostic imaging pharmaceuticals for nuclear medicine, one of the first gadolinium-based MRI agents (ProHance TM), X ray, Optical and US agents, and a radiotheranostic. In 2005 he won the Harry Fisher Medal. Dr. Tweedle holds a B.A from Knox College and a Ph.D. from Rice University and was a Stanford University NRS Fellow. Dr. Tweedle’s qualifications to serve on the Board of directors include his extensive experience with radiation and cancer research and drug discovery.

 

Code of Ethics

 

The board of directors has adopted a Code of Ethics applicable to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. A copy of the Code of Ethics is available at our website www.novelos.com.

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Item 11. Executive Compensation.

 

Compensation of Directors and Executive Officers

 

Summary Compensation: The following table sets forth certain information about the compensation we paid or accrued with respect to our principal executive officer and our two most highly compensated executive officers (other than our chief executive officer) who served as executive officers during the year ended December 31, 2012 and whose annual compensation exceeded $100,000 for that year.

 

Other annual compensation in the form of perquisites and other personal benefits has been omitted as the aggregate amount of those perquisites and other personal benefits was less than $10,000 for each person listed.

 

 

Name and Principal Position   Year     Salary
($)
    Bonus
($)
    Option
Awards ($)
(1)
    All other
compensation
($)
    Total ($)  
                                     
Harry S. Palmin (2)(3)     2012     $ 275,400     $ 0     $ 209,069     $ 0     $ 484,469  
President, Chief Executive Officer     2011     $ 270,000     $ 0     $ 917,570     $ 0     $ 1,187,570  
                                                 
Christopher J. Pazoles (2)     2012     $ 255,000     $ 0     $ 77,163     $ 0     $ 332,163  
Senior Vice President of Research and Development     2011     $ 246,250     $ 0     $ 271,470     $ 0     $ 517,720  
                                                 
J. Patrick Genn (2)(4)     2012     $ 195,840     $ 0     $ 92,595     $ 0     $ 288,435  
Vice President, Investor Relations     2011     $ 128,000     $ 0     $ 203,603     $ 12,555     $ 344,158  

  

 

 

  (1) The amounts shown in this column represent the aggregate grant date fair value of each stock award, without regard to the portion of the award that vested during the respective year and was estimated on the grant date using the Black-Scholes option-pricing model and the following ranges of assumptions: volatility ranging from 109% -115%; risk-free interest rates ranging from 0.915% – 2.175%; expected life of 6 - 6.25 years and a dividend yield of 0%.
  (2) Effective January 1, 2013, Mr. Palmin’s annual salary was increased to $300,000, Dr. Pazoles’ annual salary was increased to $265,200 and Mr. Genn’s salary was increased to $203,674.
  (3) The aggregate grant-date fair value for option awards granted to Mr. Palmin during 2011 excludes $772,305 related to performance-based awards because the awards were forfeited during 2012 when the milestones were not met. The aggregate grant-date fair value of option awards granted to Mr. Palmin during 2012 excludes $98,456 related to performance-based awards because the awards were forfeited in January 2013 when the milestones were not met.
  (4) Other compensation paid to Mr. Genn during 2011 represents consulting fees paid for investor relations services prior to his employment with the Company, which commenced in May 2011.

 

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Employment Agreements

On January 31, 2006, we entered into an employment agreement with Harry Palmin effective January 1, 2006, whereby he agreed to serve as our president and chief executive officer for an initial term of two years at an annual salary of $225,000.  The agreement is automatically renewed for successive one-year terms unless notice of termination is provided by either party at least 90 days prior to the end of such term.  The agreement was renewed for an additional one-year term on January 1, 2011 in accordance with its terms.  On December 17, 2007, the Board of Directors approved an increase in Mr. Palmin’s annual salary to $270,000 effective January 1, 2008.  He is eligible to receive an annual cash bonus at the discretion of the compensation committee and he is entitled to participate in our employee fringe benefit plans or programs generally available to our senior executives.  The agreement provides that in the event that we terminate Mr. Palmin without cause (as defined below) or he resigns for good reason (as defined below), we will (i) pay Mr. Palmin his pro rata share of the average of his annual bonus paid during the two fiscal years preceding his termination; (ii) pay Mr. Palmin his base salary for 11 months after the date of termination; (iii) continue to provide him benefits for 11 months after the date of termination; and (iv) fifty percent of his unvested stock options will vest.  The agreement provides for the vesting of unvested options upon a Change of Control, defined as the sale of all or substantially all of the assets or issued and outstanding capital stock of the Company, (ii) merger or consolidation involving the Company in which stockholders of the Company immediately before such merger or consolidation do not own immediately after such merger or consolidation capital stock or other equity interests of the surviving corporation or entity representing more than fifty percent (50%) in voting power of capital stock or other equity interests of such surviving corporation or entity outstanding immediately after such merger or consolidation, or (iii) a change, without the approval of the board of directors, in the composition of the board of directors such that directors who were serving as of the date of the agreement cease to constitute a majority of the board of directors. The agreement also contains a non-compete provision, which prohibits Mr. Palmin from competing with us for one year after termination of his employment with us.
 
“Cause” means (i) gross neglect of duties for which employed; (ii) committing fraud, misappropriation or embezzlement in the performance of duties as our employee; (iii) conviction or guilty or nolo plea of a felony or misdemeanor involving moral turpitude; or (iv) willfully engaging in conduct materially injurious to us or violating a covenant contained in the employment agreement.
 
“Good Reason” means (i) the failure of our board of directors to elect Mr. Palmin to the offices of president and chief executive officer; (ii) the failure by our stockholders to continue to elect Mr. Palmin to our board of directors; (iii) our failure to pay Mr. Palmin the compensation provided for in the employment agreement, except for across-the-board cuts applicable to all of our officers on an equal percentage basis, provided that such reduction is approved by our board of directors; (iv) relocation of Mr. Palmin’s principal place of employment to a location beyond 50 miles of Newton, Massachusetts; (v) a reduction of base salary or material reduction in other benefits or any material change by us to Mr. Palmin’s function, duties, authority, or responsibilities, which change would cause Mr. Palmin’s position with us to become one of lesser responsibility, importance, or scope; and (vi) our material breach of any of the other provisions of the employment agreement.
 
On June 1, 2011, the employment agreement between the Company and Harry Palmin dated January 31, 2006 was amended to remove the obligation of the Company to continue to pay Mr. Palmin’s salary and benefits for a period of 11 months following termination by the Company without Cause or termination by Mr. Palmin with Good Reason.  The Company may elect that the obligation of Mr. Palmin not to compete with the Company survive for a period of one year from his termination, provided however that Mr. Palmin would continue to receive his base salary during that one-year noncompetition period.
 

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Outstanding Equity Awards at Fiscal Year-End
 
The following table sets forth certain information regarding stock options held as of December 31, 2012 by the executive officers named in the summary compensation table. There were no option grants during 2010.


    Individual Grants  
Name   Year
of Grant
    Number of
securities
underlying
unexercised
options
(# exercisable)
    Number of
securities
underlying
unexercised
options
(# unexercisable)
    Exercise
or
base price
($/share)
    Expiration
date
 
                               
Harry S. Palmin     2012 (1)           335,100     $ 0.75       12/14/2022  
      2012 (2)           167,550       0.75       12/14/2022  
      2011 (1)     83,775       251,325       0.45       12/16/2021  
      2011 (1)     171,325       418,875       1.40       5/18/2021  
      2009 (3)     1,633             114.75       12/8/2019  
      2008 (4)     2,614             65.79       12/15/2018  
      2007 (4)     1,307             69.00       12/17/2017  
      2006 (4)     980             139.23       12/11/2016  
      2005 (5)     1,633             1.53       1/31/2015  
      2005 (5)     980             1.53       3/31/2015  
      2004 (6)     2,156             1.53       4/1/2014  
      2003 (7)     46             107.10       8/1/2013  
                                         
Christopher J. Pazoles     2012 (3)           125,000     $ 0.75       12/14/2022  
      2011 (3)     33,333       66,667       0.45       12/16/2021  
      2011 (3)     99,999       100,001       1.40       5/18/2021  
      2009 (3)     1,307             114.75       12/8/2019  
      2008 (4)     1,307             65.79       12/15/2018  
      2007 (4)     816             69.00       12/17/2017  
      2006 (4)     653             139.23       12/11/2016  
      2005 (8)     654             1.53       4/8/2015  
                                         
J. Patrick Genn     2012 (3)           150,000   $ 0.75       12/14/2022  
      2011 (3)     24,999       50,001       0.45       12/16/2021  
      2011 (3)     74,999       75,001       1.40       5/18/2021  

 

(1) These shares vest quarterly in increments of one-sixteenth over four years from the date of grant.  The exercise price equals the closing price on the date of grant.
(2) These shares vest based on the achievement of specified milestones.
(3) These shares vest quarterly in increments of one-twelfth over three years from the date of grant.  The exercise price equals the closing price on the date of grant.
(4) These shares vest annually in increments of one-third over three years from the date of grant.  The exercise price equals the closing price on the date of grant.
(5) These shares initially vested over a two-year period.  Pursuant to their terms, the shares fully vested upon the completion of a non-bridge loan financing, which occurred in the second quarter of 2005.  The exercise price equals the fair market value of our common stock on the date of grant as determined by our board of directors.
(6) These shares initially vested one-third upon grant and one-third annually over the following two years. Pursuant to their terms, one additional year of vesting occurred upon the completion of a non-bridge loan financing, which occurred in the second quarter of 2005.  The exercise price equals the fair market value of our common stock on the date of grant as determined by our board of directors.
(7) These shares vest annually in increments of one-third over three years from the date of grant. The exercise price equals the fair market value of our common stock on the date of grant as determined by our board of directors.
(8) These shares vested in increments of one-fourth every six months over two years from the date of grant. The exercise price equals the fair market value of our common stock on the date of grant as determined by our board of directors.


Options granted pursuant to the 2006 Stock Incentive Plan will become fully vested upon a termination event within one year following a change in control, as defined.  A termination event is defined as either termination of employment other than for cause or constructive termination resulting from a significant reduction in either the nature or scope of duties and responsibilities, a reduction in compensation or a required relocation.
 
Director Compensation
 
Summary Compensation:   The following table sets forth certain information about the compensation we paid or accrued with respect to our directors who served during the year ended December 31, 2012.
 

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Name and Principal Position   Year     Director
Fees
($) (2)
    Option
Awards
($) (3)
    All other
compensation
($)
    Total ($)  
                               
Stephen A. Hill, Chairman (1)     2012     $ 46,750     $ 45,773     $     $ 92,523  
T. Rockwell Mackie (1)     2012       30,250       30,515             60,765  
James S. Manuso, Director (1)     2012       26,750       30,515             57,265  
John Neis, Director (1)     2012       28,250       30,515             58,765  
John E. Niederhuber, Director (1)     2012       28,250       30,515             58,765  
Howard M. Schneider, Director (1)     2012       37,500       30,515             68,015  
Michael F. Tweedle, Director (1)     2012       25,250       30,515             55,765  

 

 

 

  (1) As of December 31, 2012, outstanding options to purchase common stock held by directors were as follows: Dr. Hill 302,285; Dr. Mackie 200,000; Dr. Manuso 201,958; Mr. Neis 200,000; Dr. Niederhuber 200,000; Mr. Schneider 201,629; Dr. Tweedle 200,000.
  (2) Director fees include all fees earned for director services including quarterly fees, meeting fees and committee chairman fees.
  (3) The amounts shown in this column represent the aggregate grant-date fair value of the stock awards during the year, without regard to the portion of the award that vested during the respective year and was estimated using the Black-Scholes option-pricing model and the following assumptions: volatility of 109%; a risk-free interest rate of 0.915%; expected life of 5.75 years and a dividend yield of 0%.

 

During 2012, we paid our non-employee directors a cash fee of $5,000 per quarter.  The non-employee directors also received a fee of $1,500 for any board or committee meeting attended and $750 for each telephonic board or committee meeting in which the director participated.  We also paid our chairman an additional annual fee in the amount of $15,000, our non-employee director who serves as the chair of the audit committee an additional annual fee of $10,000 and our non-employee directors who served as the chairman of the compensation and the nominating and corporate governance committees an additional annual fee of $5,000.  We reimbursed directors for reasonable out-of-pocket expenses incurred in attending board and committee meetings and undertaking certain matters on our behalf.  Directors who are our employees do not receive separate fees for their services as directors.  There has been no change to cash fees payable to non-employee directors for 2013.  

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

At the close of business on March 25, 2013, there were 57,397,997 shares of our common stock outstanding. The following table provides information regarding beneficial ownership of our common stock as of March 25, 2013:

 

  · Each person known by us to be the beneficial owner of more than five percent of our common stock;
  · Each of our directors;
  · Each executive officer named in the summary compensation table; and
  · All of our current directors and executive officers as a group.

 
The address of each executive officer and director is c/o Novelos Therapeutics, Inc., One Gateway Center, Suite 504, Newton, Massachusetts 02458. The persons named in this table have sole voting and investment power with respect to the shares listed, except as otherwise indicated. In these cases, the information with respect to voting and investment power has been provided to us by the security holder. The identification of natural persons having voting or investment power over securities held by a beneficial owner listed in the table below does not constitute an admission of beneficial ownership of any such natural person. Shares included in the “Right to Acquire” column consist of shares that may be purchased through the exercise of options or warrants that are exercisable within 60 days of March 25, 2013 .

 

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Name and Address of Beneficial Owner   Outstanding     Right to
Acquire
    Total     Percentage  
                         
Venture Investors LLC (1)
University Technology Park
505 S. Rosa Road; Suite 201
Madison, Wisconsin  53719
    7,274,308       5,157,500       12,431,808       19.9  
                                 
Greenway Properties Inc. (2)
725 Heartland Trail, Suite 102
Madison, Wisconsin  53707
    5,300,000       4,900,000       10,200,000       16.4  
                                 
Renova Industries Ltd. (3)
2nd Terrace West
Centreville; P.O. Box N-7755
Nassau, Bahamas
    4,000,000       4,000,000       8,000,000       13.0  
                                 
CLS Capital Holdings Limited (4)
Bordeaux Court, Les Echelons
St. Peter Port, Guernsey, GY13DR
Channel Islands
    3,819,201       3,583,334       7,402,535       12.1  
                                 
Sabby Management, LLC (5)
10 Mountainview Road, Suite 205
Upper Saddle River, NJ 07458
    4,062,400       1,857,000       5,919,400       9.99  
                                 
Deerfield Capital Management LLC (6)
250 Park Avenue
New York, New York 10177
    1,938,595       4,217,000       6,155,595       9.99  
                                 
Jamey P. Weichert (7)
c/o Novelos Therapeutics, Inc.
3301 Agriculture Drive
Madison, Wisconsin  53716
    4,706,730       129,415       4,836,145       8.4  
                                 
Fidelity Management and Research Co. (8)
82 Devonshire Street
Boston, Massachusetts 02109
    2,500,000       2,500,000       5,000,000       8.3  
                                 
Harry S. Palmin     3,576       392,110       395,686     *  
Christopher J. Pazoles     -       190,152       190,152     *  
J. Patrick Genn (9)     70,653       185,414       256,067     *  
Stephen A. Hill     -       208,535       208,535     *  
Thomas Rockwell Mackie     116,121       137,500       253,621     *  
James S. Manuso     -       139,458       139,458     *  
John Neis (1)     7,274,308       5,157,500       12,431,808       19.9  
John E. Niederhuber     -       137,500       137,500     *  
Howard M. Schneider     653       139,129       139,782     *  
Michael F. Tweedle     -       137,500       137,500     *  
All directors and officers as a group (13 persons)     12,172,041       7,239,220       19,411,261       30.0  

 

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(1) Ownership consists of shares of common stock held by Venture Investors Early Stage Fund IV Limited Partnership and Advantage Capital Wisconsin Partners I, Limited Partnership.  VIESF IV GP LLC is the general partner of Venture Investors Early Stage Fund IV Limited Partnership and Venture Investors LLC is the submanager and special limited partner of Advantage Capital Wisconsin Partners I, Limited Partnership. The investment decisions of VIESF IV GP LLC and Venture Investors LLC are made collectively by six managers, including Mr. Neis.  Each such manager and Mr. Neis disclaim such beneficial ownership except to the extent of his pecuniary interest therein.  The address of Mr. Neis is c/o Venture Investors LLC, 505 South Rosa Road, #201, Madison, Wisconsin 53719. Shares in the “Right to Acquire” column consist of warrants held by Venture Investors Early Stage Fund IV Limited to purchase 5,020,000 shares common stock at exercise prices ranging from $0.50 to $1.25 per share expiring between February 20, 2014 and February 20, 2018. Shares in the “Right to Acquire” column also include options to purchase 137,500 shares of common stock at exercise prices ranging from $0.45 to $1.40 per share, issued to Mr. Neis.
   
 (2) Shares in the “Outstanding” column include shares held by Jeffery Straubel.  Jeffrey Straubel is the President and principal owner of Greenway Properties, Inc. and has sole dispositive and voting power over shares held by Greenway Properties, Inc.  Shares in the “Right to Acquire” column consist of warrants to purchase shares common stock at exercise prices ranging from $0.50 to 1.25 per share expiring between February 20, 2014 and February 20, 2018. 
   
 (3) Dispositive and voting power for the shares is held by a majority vote of the board of directors of Renova Industries, Ltd. consisting of Carl Stadelhofer, Marco Montanari, and Oliver Chaponnier. Shares in the “Right to Acquire” column consist of warrants to purchase shares of common stock at exercise prices ranging from $0.50 to $1.25 per share expiring between February 20, 2014 and February 20, 2018.
   
(4) Shares in the “Right to Acquire” column consist of warrants to purchase shares of common stock at exercise prices ranging from $0.60 to $1.25 per share expiring between December 6, 2016 and June 13, 2017. Interlock Director Ltd. has sole dispositive and voting power over shares held by CLS Capital Holdings Limited. Interlock Director Ltd. exercises such power through Michael Kupenga and a combination of two directors of Virtus Directors Limited.  The Virtus directors consist of the following individuals: David Allison, Roderick Arthur, Nicholas Moss, Trevor Pinchemain, Stephen Kirk, Grada Hek, Martin LePage, Lesley Pinchemain, Cerisse Fisher, Pierre Renier and Jonathan Seymour.
   
(5) Shares in the “Outstanding” column c onsist of shares held by Sabby Healthcare Volatility Master Fund. Ltd. and Sabby Volatility Warrant Master Fund, Ltd.  Shares in the “Right to Acquire” column consist of warrants to purchase shares of common stock at exercise prices ranging from $0.50 per share to $1.25 per share expiring between February 20, 2014 and February 20, 2018.  The warrants beneficially owned by Sabby Management LLC provide that the number of shares of common stock to be obtained by each of the holders upon exercise cannot exceed the number of shares that, when combined with all other shares of our common stock and securities beneficially owned by them, would result in them owning more than 9.99% of our outstanding common stock, provided, however that this limitation may be revoked by the stockholder upon 61 days prior notice to us.  As such, warrants to purchase 4,268,000 shares of common stock have been omitted from the shares in the “Right to Acquire” column of this table as a result of these provisions.  Sabby Management, LLC shares voting and investment power with respect to these shares on behalf of this stockholder.  As manager of Sabby Management, LLC, Hal Mintz also shares voting and investment power on behalf of this stockholder.  Each of Sabby Management, LLC and Hal Mintz disclaim beneficial ownership over the securities owned except to the extent of their pecuniary interest therein.  Except as described herein, none of the selling stockholders has had, within the past three years, any position, office or other material relationship with the Company or any of our predecessors or affiliates.
   
(6) Shares in the “Outstanding” column c onsist of shares held by Deerfield Special Situations International Master Fund L.P. and Deerfield Special Situations Fund L.P.  Shares in the “Right to Acquire” column consist of warrants to purchase shares of common stock at exercise prices ranging from $0.50 per share to $1.25 per share expiring between February 20, 2014 and February 20, 2018.  The warrants beneficially owned by Deerfield Capital Management LLC provide that the number of shares of common stock to be obtained by each of the holders upon exercise cannot exceed the number of shares that, when combined with all other shares of our common stock and securities beneficially owned by them, would result in them owning more than 9.99% of our outstanding common stock, provided, however that this limitation may be revoked by the stockholder upon 61 days prior notice to us.  As such, warrants to purchase 8,000 shares of common stock have been omitted from the shares in the “Right to Acquire” column of this table as a result of these provisions.  Dispositive and voting power for the shares is held by James E. Flynn.

 

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(7) Dr. Weichert serves as a director and our Chief Scientific Officer. The shares beneficially owned by him have been included in the total of directors and officers as a group.
   
(8) Consists of shares held by Fidelity Select Portfolios: Biotechnology Portfolio and Fidelity Advisor Series VII: Fidelity Advisor.  Dispositive and voting power for the shares is held by the Fidelity Funds Board of Trustees. Shares in the “Right to Acquire” column consist of warrants to purchase shares of common stock at $0.60 per share expiring on December 6, 2016.

 

(9) Shares in the “Right to Acquire” column include warrants to purchase 41,667 shares of common stock at $0.60 per share, expiring on December 6, 2016.

 

Equity compensation plans

 

The following table provides information as of December 31, 2012 regarding shares authorized for issuance under our equity compensation plans, including individual compensation arrangements.

 

We have two equity compensation plans approved by our stockholders:  the 2000 Stock Option and Incentive Plan and the 2006 Stock Incentive Plan.  During 2004 and 2005, we also issued options to our directors and consultants that were not approved by our stockholders and during 2011 we issued options to certain consultants that were not approved by our stockholders.  These options are exercisable within a ten-year period from the date of the grant and vest at various intervals with all options being fully vested within three years of the date of grant.  The option price per share is not less than the fair market value of our common stock on the date of grant.

 

Equity compensation plan information

 

 

 

 

 

 

Plan category

 

 

Number of shares to
be issued upon
exercise of outstanding
options, warrants and
rights (#)

   

 

 

Weighted-average
exercise price of
outstanding options,
warrants and rights ($)

    Number of shares
remaining available for
future issuance under
equity compensation plans
(excluding shares reflected
in column (a)) (#)
 
    (a)     (b)     (c)  
                   
Equity compensation plans approved by stockholders     6,329,050     $ 1.37       3,669,562  
                         
Equity compensation plans not approved by stockholders     110,138     $ 10.16       0  
                         
Total                        
      6,439,188     $ 1.52       3,669,562  

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

We do not have a written policy for the review, approval or ratification of transactions with related parties or conflicted transactions.  When such transactions arise, they are referred to the Audit Committee for consideration or for referral to the Board of Directors for its consideration.

One of our directors, John Neis, is a managing director of Venture Investors LLC, which beneficially owns approximately 20% of our common stock.

 

77
 

 

Jamey Weichert, our Chief Scientific Officer and principal founder of Cellectar, and a director and shareholder of the Company, is a faculty member at the University of Wisconsin-Madison (U. Wisc.).  During the year ended December 31, 2012, the Company made contributions to UW totaling $269,000 for use towards unrestricted research activities and paid UW of approximately $349,000 for costs associated with clinical trial and other research agreements. The Company made contributions to the UW of $206,500 for use towards unrestricted research activities during the year ended December 31, 2011. 

 

Legacy Compounds – Transactions and Litigation

 

From its inception through 2010, Novelos was primarily engaged in the development of certain oxidized glutathione-based compounds for application as therapies for disease, particularly cancer. These compounds were originally developed in Russia. In June 2000, Novelos acquired commercial rights from the Russian company (ZAO BAM) which owned the compounds and related Russian patents. In April 2005, Novelos acquired worldwide rights to the compounds (except for the Russian Federation) in connection with undertaking extensive development activities in an attempt to secure US Food and Drug Administration (FDA) approval of the compounds as therapies. These development activities culminated in early 2010 in an unsuccessful Phase 3 clinical trial of an oxidized glutathione compound (NOV-002) as a therapy for non-small cell lung cancer. The principal equity owner of ZAO BAM, Mark Balazovsky, was a founder of Novelos and served as a director until November 2006. Pursuant to the April 2005 royalty and technology transfer agreement, Novelos is required to pay ZAO BAM royalties equal to 1.2% of net sales of oxidized glutathione products and $2,000,000 for each new oxidized glutathione drug following FDA approval of such drug. In the absence of royalty payments, Novelos is required to pay ZAO BAM 3% of all license revenues plus 9% of the amount by which Novelos’ license revenues exceed its total expenses. In 2008, Novelos paid $15,000 to ZAO BAM representing 3% of payment under a foreign license agreement. Novelos is also obligated to pay Oxford Group, Ltd., or its assignees, a royalty in the amount of 0.8% of our net sales of oxidized glutathione-based products. Simyon Palmin, a founder of Novelos, a director until August 15, 2008 and the father of Harry Palmin, is president of Oxford Group. At this time, Novelos does not expect to devote any substantial resources to the further development of its oxidized glutathione compounds.

 

After the disclosure of the negative outcome of the Phase 3 clinical trial in 2010, ZAO BAM claimed that Novelos modified the chemical composition of NOV-002 without prior notice to or approval from ZAO BAM, constituting a material breach of the June 2000 technology and assignment agreement. In September 2010, Novelos filed a complaint in Massachusetts Superior Court seeking a declaratory judgment by the court that the June 2000 agreement has been entirely superseded by the April 2005 agreement and that the obligations of the June 2000 agreement have been performed and fully satisfied. ZAO BAM answered the complaint and alleged counterclaims. In August 2011, Novelos filed a motion for judgment on the pleadings as to the declaratory judgment count and all counts of ZAO BAM’s amended counterclaims. On October 17, 2011, the court ruled in favor of Novelos on each of the declaratory judgment claims and dismissed all counts of ZAO BAM’s counterclaim. Judgment in favor of Novelos was entered on October 20, 2011. On November 14, 2011 ZAO BAM filed a notice of appeal.

 

Director Independence

 

Each member of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee and seven of our nine directors meet the independence requirements of the Nasdaq Stock Market for membership on the committees on which he serves.  The board of directors considered the information included in transactions with related parties as outlined above along with other information the board considered relevant, when considering the independence of each director. Harry S. Palmin and Jamey P. Weichert are not independent directors.

 

78
 

 

Item 14. Principal Accounting Fees and Services.

 

Aggregate fees for professional services rendered by our principal accountant for the following years were:

    2012     2011  
Audit   $ 158,940     $ 260,277  
Audit Related            
Tax     12,300       16,094  
All Other            
                 
Total   $ 171,240     $ 276,371  

 

Audit Fees: Audit fees were for professional services rendered for the audit of our annual financial statements, the review of quarterly financial statements and the preparation of statutory and regulatory filings. Note that the 2012 and 2011 amounts include approximately $55,400 and $58,000, respectively, in fees associated with work performed in connection with registration statements. The 2011 audit fees also include the fees associated with audit of the Cellectar financial statements for the year ended December 31, 2010, the review of the 2010 Cellectar quarterly financial statements and the review of the quarterly financial statements of Cellectar for the three months ended March 31, 2011.

 

Audit-Related Fees: Audit-related fees include fees for assurance and related services by the principal accountant that are reasonably related to the performance of audit and reviews but that are not included under “Audit Fees” above. No such services were provided.

 

Tax Fees: Tax fees consist of fees billed for professional services for tax compliance, tax planning and tax advice. These services include assistance regarding federal, state and international tax compliance and planning and mergers and acquisitions.

 

All Other Fees: All other fees include assistance with miscellaneous reporting requirements and interpretation of technical issues. No such services were provided.

 

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm

 

At present, our audit committee approves each engagement for audit and non-audit services before we engage GT to provide those services.

 

Our audit committee has not established any pre-approval policies or procedures that would allow our management to engage GT to provide any specified services with only an obligation to notify the audit committee of the engagement for those services. None of the services provided by GT for 2012 or 2011 were obtained in reliance on the waiver of the pre-approval requirement afforded in SEC regulations.

 

79
 

 

PART IV

 

Item 15. Exhibits.

 

            Incorporated by Reference

 Exhibit
No.

 

Description

  Filed with
this
Form 10-K
 

Form

 

Filing Date

 

 Exhibit
No.

2.1   Agreement and Plan of Merger by and among Novelos Therapeutics, Inc., Cell Acquisition Corp. and Cellectar, Inc. dated April 8, 2011        8-K   April 11, 2011   2.1
                     
3.1   Second Amended and Restated Certificate of Incorporation        8-K   April 11, 2011   3.1
                     
3.2   Amended and Restated By-laws        8-K   June 1, 2011   3.1
                     
4.1   Form of common stock certificate       S-1/A   November 9, 2011   4.1
                     
10.1   Employment Agreement with Harry S. Palmin dated January 31, 2006 *       8-K   February 6, 2006   99.1
                     
10.2   Second Amendment to Employment Agreement between the Company and Harry Palmin *       8-K   June 1, 2011   10.1
                     
10.3   2000 Stock Option and Incentive Plan *       SB-2   November 16, 2005   10.2
                     
10.4   Form of 2004 non-plan non-qualified stock option *       SB-2   November 16, 2005   10.3
                     
10.5   Form of non-plan non-qualified stock option used from February to May 2005 *       SB-2   November 16, 2005   10.4
                     
10.6   Form of non-plan non-qualified stock option used after May 2005 *       SB-2   November 16, 2005   10.5
                     
10.7   Consideration and new technology agreement dated April 1, 2005 with ZAO BAM        10-QSB   August 15, 2005   10.2
                     
10.8   2006 Stock Incentive Plan, as amended *       8-K   October 26, 2012   10.1
                     
10.9   Form of Incentive Stock Option under Novelos Therapeutics, Inc.’s 2006 Stock Incentive Plan*        8-K   December 15, 2006   10.1
                     
10.10   Form of Non-Statutory Stock Option under Novelos Therapeutics, Inc.’s 2006 Stock Incentive Plan*        8-K   December 15, 2006   10.2
                     
10.11   Form of Common Stock Purchase Warrant dated May 2, 2007 issued pursuant to the Agreement to Exchange and Consent dated May 2, 2007        10-QSB   May 8, 2007   4.2
                     
10.12   Collaboration Agreement dated February 11, 2009**       10-K   March 30, 2009   10.39
                     
10.13   Common Stock Purchase Warrant dated February 11, 2009       8-K   February 18, 2009   4.2
                     
10.14   Form of Common Stock Purchase Warrant issued pursuant to the Consent and Waiver of Holders of Series C Convertible Preferred Stock and Series E Convertible Preferred Stock dated July 6, 2010        S-1A   July 7, 2010   10.53
                     
10.15   Form of Common Stock Purchase Warrant dated April 8, 2011        8-K   April 11, 2011   4.3

 

80
 

 

10.16   Securities Purchase Agreement dated April 8, 2011       8-K   April 11, 2011   10.1
                     
10.17   Placement Agency Agreement dated April 1, 2011       8-K   April 11, 2011   99.1
                     
10.18   License Agreement between Cellectar, LLC and the Regents of the University of Michigan dated September 14, 2003, as amended through June 2010         S-1    July 1, 2011    10.31
                     
10.19   Lease Agreement between Cellectar, LLC and McAllen Properties LLC, as amended and extended to date         S-1    July 1, 2011    10.32
                     
10.20   Loan Agreement between the Wisconsin Department of Commerce and Cellectar, Inc. dated September 15, 2010         S-1    July 1, 2011    10.33
                     
10.21   General Business Security Agreement dated September 15, 2010         S-1    July 1, 2011    10.34
                     
10.22   Form of Warrant dated December 6, 2011       S-1/A   November 9, 2011   4.2
                     
10.23   Placement Agent Agreement dated April 9, 2012 between the Company and Rodman and Renshaw, LLC       S-1   April 9, 2012   10.31
                     
10.24   Securities Purchase Agreement dated June 7, 2012       8-K   June 11, 2012   10.1
                     
10.25   Amendment Agreement dated May 11. 2012 between the Company and Rodman and Renshaw, LLC       S-1/A   May 14, 2012   10.33
                     
10.26   Form of Common Stock Purchase Warrant dated June 13, 2012       8-K   June 11, 2012   4.1
                     
10.27   Form of Amendment to Class B Stock Purchase Warrant       8-K   September 12, 2012   10.1
                     
10.28   Securities Purchase Agreement between the Company and Renova Industries Ltd.       10-Q   November 6, 2012   10.2
                     
10.29   Form of Securities Purchase Agreement       8-K   February 14, 2013   10.1
                     
10.30   Form of Common Stock Purchase Warrant       8-K   February 14, 2013   4.1
                     
10.31   Amendment and restated Placement Agent Agreement dated January 8, 0213 between the Company and Burrill LLC       S-1/A   January 31, 2013   10.37
                     
21.1   List of Subsidiaries   X            
                     
31.1   Certification of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   X            

 

81
 

 

31.2   Certification of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   X            
                     
32.1   Certification of chief executive officer and chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   X            
                     
101   Interactive Data Files   X            

 

* Management contract or compensatory plan or arrangement.

** Portions of this exhibit have been omitted pursuant to a confidential treatment order.

 



82
 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  NOVELOS THERAPEUTICS, INC.
     
  By: /s/ Harry S. Palmin
  Harry S. Palmin
  Title:  President, Chief Executive Officer
     
  Date: March 28, 2013

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

  By: /s/ Harry S. Palmin
  Harry S. Palmin
  Title:  Chief Executive Officer and Director (Principal Executive Officer)
     
  Date: March 28, 2013
     
  By: /s/ Joanne M. Protano
  Joanne M. Protano
  Title:  Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
     
  Date: March 28, 2013
     
  By: /s/ Stephen A. Hill
  Stephen A. Hill
  Title:  Chairman of the Board of Directors
     
  Date: March 28, 2013
     
  By: /s/ Thomas Rockwell Mackie
  Thomas Rockwell Mackie
  Title:  Director
     
  Date: March 28, 2013
     
  By: /s/ James S. Manuso
  James S. Manuso
  Title:  Director
     
  Date: March 28, 2013

 

 
 

 

  By: /s/ John Neis
  John Neis
  Title:  Director
     
  Date: March 28, 2013
     
  By: /s/ John E. Niederhuber
  John E. Niederhuber
  Title:  Director
     
  Date: March 28, 2013
     
  By: /s/ Howard M. Schneider
  Howard M. Schneider
  Title:  Director
     
  Date: March 28, 2013
     
  By: /s/ Michael F. Tweedle
  Michael F. Tweedle
  Title:  Director
     
  Date: March 28, 2013
     
  By: /s/ Jamey P. Weichert
  Jamey P. Weichert
  Title:  Chief Scientific Officer and Director
     
  Date: March 28, 2013

 

 

 

EXHIBIT 21.1

 

NOVELOS THERAPEUTICS, INC.

LIST OF SUBSIDIARIES

  

Set forth below is a list of the subsidiaries of Novelos Therapeutics, Inc. as of December 31, 2012:

 

Subsidiary Name   Jurisdiction of Organization
     
Cellectar, Inc.   Wisconsin

 

 

 

 

  EXHIBIT 31.1

 

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Harry S. Palmin, Chief Executive Officer and President, Novelos Therapeutics, Inc., certify that:

 

1. I have reviewed this Annual Report on Form 10-K of Novelos Therapeutics, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed, under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

  /s/ HARRY S. PALMIN  
Date:  March 28, 2013 Harry S. Palmin
  Principal Executive Officer

 

 

 

 

EXHIBIT 31.2

 

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Joanne M. Protano, Chief Financial Officer, Novelos Therapeutics, Inc., certify that:

 

1. I have reviewed this Annual Report on Form 10-K of Novelos Therapeutics, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed, under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

  /s/ JOANNE M. PROTANO  
Date:  March 28, 2013 Joanne M. Protano
  Principal Financial Officer

 

 

 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Annual Report on Form 10-K of Novelos Therapeutics, Inc. (the “Company”) for the year ended December 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Harry S. Palmin, Chief Executive Officer and President of the Company, and I, Joanne M. Protano, Chief Financial Officer of the Company, certify, to the best of our knowledge and belief, pursuant to 18 U.S.C.§ 1350, adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

 

1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ HARRY S. PALMIN   /s/ JOANNE M. PROTANO
Harry S. Palmin   Joanne M. Protano
Principal Executive Officer   Principal Financial Officer

 

Dated: March 28, 2013

 

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Novelos Therapeutics, Inc. and will be retained by Novelos Therapeutics, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.