Neogenix Oncology, Inc. voluntarily filed for chapter 11 protection yesterday in the bankruptcy court in Greenbelt, Maryland. According to court filings, the company is “a clinical stage, pre-revenue generating, biotechnology company focused on therapeutic and diagnostic products for the early detection and treatment of cancer.” The Rockville, Maryland company reported total assets of $10,685,000 and total debts of only $640,649.
However, explanatory notes to these amounts report that the total assets figure is based upon “the estimated value of the stalking horse bid” (discussed further below). In addition, the notes relate that the total debt figure represents only the amount of the company’s prepetition secured debt and does not include “the (a) contingent, unliquidated and disputed claims for the Potential Rescission Liability [also discussed further below], (b) ontingent, unliquidated and disputed claims asserted in the lawsuit pending in the District Court for the Eastern District of New York, captioned Daniel J. Scher v. Neogenix Oncology, Inc., Civ. No.: 12-cv-03019-BMC, and (c) the [sic] contingent, unliquidated claims held by certain of the Debtor’s current and past directors and officers.” The company’s list of its largest unsecured creditors filed with the Bankruptcy Court lists only the contingent, unliquidated and disputed claims of Daniel J. Scher for alleged breach of contract. However, in a Form 10-K filed with the Securities and Exchange Commission on July 12, 2012, Neogenix listed assets of $6.34 million and liabilities of $2.34 million as of December 31, 2011. The company also estimated “the range of potential liability for rescission by investors as of July 10, 2012 is $0 to $31 million” in the same SEC filing.
Neogenix’s operations to date have been largely funded “with the net proceeds from the sale of common stock to various individuals in private placement transactions.” This funding strategy was implemented by the company by “paying finder fees to unlicensed brokers in connection with the sale of its stock” – a strategy which the company now states has led to significant problems. First, the transactions have resulted in “an estimated multi-million dollar contingent liability under the laws of various states for potential rescission liability to shareholders who purchased their shares through unlicensed, compensated finders.” Second, court filings state that “the Securities and Exchange Commission has initiated an inquiry into this practice.” As a result, as well as because of the large number of outstanding stock options the company has granted, “Neogenix has been and continues to be unable to raise sufficient equity capital outside of chapter 11 to ensure the long term viability of the company.”
Neogenix’s intention is to use the bankruptcy filing to effectuate a sale of its business and assets. According to court documents, Neogenix believes that such a sale “will allow the post-sale company to focus on developing the vital therapeutics and diagnostics without being burdened by the SEC Inquiry, the contingent rescission liability, or the highly dilutive stock option overhang, and instead provide a revitalized capital structure attractive to new stockholders and investors.”
To that end, the company filed a motion with the bankruptcy court today seeking approval to sell its assets to Precision Biologics, Inc., a corporation funded by a number of the company’s existing shareholders, pursuant to an asset purchase agreement, and subject to higher and better bids at auction. The motion reports that the sale is supported by an ad hoc committee of equity interest holders which is made up of “seven (7) of the Debtor’s largest shareholders that are not involved in either the ownership or the management of Precision Biologics” and has been represented by counsel. Pursuant to the stalking horse asset purchase agreement, Precision Biologics would provide the following consideration for Neogenix’s assets:
The Stalking Horse Bid is thus comprised of (a) $3,185,000 of cash to fund (1) the Debtor’s business operations through the closing of the Sale and (2) the bankruptcy process until the bankruptcy process is completed, (b) 5 million shares of Precision Biologics stock (which represents approximately 25%, but not less than 20%, of Precision Biologics total equity), and (3) rights to purchase an additional 5 million shares of Precision Biologics stock at $1.50 per share.
According to a declaration filed by the President, Chief Executive Officer, and Chief Medical Officer of Neogenix Oncology, Inc., Philip M. Arlen, the stalking horse agreement will provide sufficient consideration to allow for the debtor to “put in place a liquidating trust to satisfy all allowed claims against the Debtor in full and to distribute the 5 million shares of stock in Precision Biologics to current Neogenix shareholders on a pro rata basis.” In addition, Neogenix’s bankruptcy estate would also retain “the right to pursue certain causes of action against various third parties for claims resulting from the role of those third parties in any actionable conduct resulting in harm to Neogenix.” The liquidating trust would be created pursuant to the terms of a liquidating chapter 11 plan which the debtor states that it intends to propose following the closing of the asset sale.
Precision Biologics has also agreed to provide Neogenix with a debtor-in-possession loan facility to fund its operations through the sale. Neogenix is represented in the bankruptcy cases by Maria J. DiConza, Lawrence E. Rifken, and Thomas J. McKee, Jr. of the law firm of Greenberg Traurig, LLP. The chapter 11 petition filed by Neogenix is embedded below.