Case Doc 13 Filed 07/24/12 Page 1 of 24. IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MARYLAND Greenbelt Division

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1 Case Doc 13 Filed 07/24/12 Page 1 of 24 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MARYLAND Greenbelt Division ) In re: ) Chapter 11 ) NEOGENIX ONCOLOGY, INC., ) Case No. 12- ( ) ) Debtor. ) ) MOTION OF DEBTOR FOR INTERIM AND FINAL ORDERS (A) AUTHORIZING THE DEBTOR TO INCUR POSTPETITION DEBT ON AN EMERGENCY BASIS; (B) GRANTING CERTAIN LIENS, SECURITY INTERESTS, SUPERPRIORITY CLAIMS AND OTHER RELIEF TO PRECISION BIOLOGICS, INC. AS DIP LENDER; AND (C) GRANTING RELATED RELIEF The above-captioned debtor and debtor-in-possession (the Debtor ) in the abovecaptioned chapter 11 case hereby moves (the Motion ) the Court for the entry an Interim Order substantially in the form of the proposed order annexed hereto as Exhibit A (the Interim Order ) and a Final Order (the Final Order, and together with the Interim Order, the DIP Orders ) (A) authorizing the Debtor, pursuant to title 11 of the United States Code (the Code ), including sections 105, 361, 362, 363, 364(c)(1), 364(c)(2), 364(c)(3), 364(d) and 503(b) thereof, and the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ), including Rules 2002, 4001, and 9014, to: (i) obtain postpetition financing in the amount of $3,235, and enter into a secured, superpriority debtor-in-possession loan and security agreement, substantially in the form annexed hereto as Exhibit B (together with all schedules and exhibits thereto, the DIP Loan Agreement, and together with all security, pledge, and other lien and loan documents entered into in connection therewith and as further amended, restated, supplemented or otherwise modified from time to time, the DIP Loan Documents ), 1 by and among the Debtor as borrower, Precision Biologics, Inc., as lender (the DIP Lender ), 1 Unless otherwise defined herein, all capitalized terms used herein have the meanings ascribed to such terms in the DIP Loan Agreement and DIP Loan Documents. 1

2 Case Doc 13 Filed 07/24/12 Page 2 of 24 all in respect of the obligations set forth in the DIP Loan Documents and herein (the Obligations ); (ii) grant liens, security interests, superpriority claims and other relief for the benefit of the DIP Lender in respect of the Obligations as provided herein and in the DIP Loan Documents (defined below), including the payment in full of the Debtor s existing Prepetition Loan Obligations (defined below) upon entry of the Interim Order; (B) in accordance with Bankruptcy Rule 4001(c)(2), scheduling a final hearing on the Motion (the Final Hearing ), and approving notice with respect thereto; and (C) granting related relief. In support of the Motion, the Debtor relies upon the Declaration of Philip M. Arlen, M.D. in Support of the Debtor s Chapter 11 Petitions and Requests for First Day Relief (the First Day Declaration ) and submits as follows: Preliminary Statement 1. The Debtor has obtained a debtor-in-possession credit facility in a maximum principal amount of up to $3,235, (the DIP Loan ), which will ensure that it has the funds necessary to continue its operations and to honor its obligations related to its clinical trials during this case. As of the Petition Date, the Debtor had less than $10,000 in cash remaining in its bank accounts and therefore, the use of cash collateral alone would be insufficient to meet the Debtor s postpetition liquidity needs. The approval of the DIP Financing is vital to the Debtor s survival and is necessary so that the Debtor can continue to fund its obligations related to its clinical trials, thus protecting the health and welfare of the patients in those clinical trials and can provide assurances to its stakeholders and research, development, and clinical trial partners that it has sufficient resources to continue operating through the closing of the sale of its assets and liquidation of the remainder of its estate. 2

3 Case Doc 13 Filed 07/24/12 Page 3 of 24 Status of the Case 1. On the date hereof (the Petition Date ), the Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. 2. The Debtor has continued in possession of its properties and is operating and managing its business as debtor-in-possession pursuant to sections 1107(a) and 1108 of the Code. 3. No request has been made for the appointment of a trustee or examiner and no official committee has yet been appointed in this case. Jurisdiction, Venue and Statutory Predicates 4. The Court has jurisdiction over this Motion pursuant to 28 U.S.C. 157 and Venue is proper in this district pursuant to 28 U.S.C This matter is core within the meaning of 28 U.S.C. 157(b)(2). 5. The bases for the relief requested herein are sections 105(a), 361, 362, 363, 364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1), 364(e) and 503 of the Code, Rules 2002, 4001, 6004 and 9014 of the Bankruptcy Rules and Rule of the Local Bankruptcy Rules of the United States Bankruptcy Court for the District of Maryland (the Local Rules ). Background 6. The Debtor is a clinical stage, pre-revenue generating, biotechnology company focused on therapeutic and diagnostic products for the early detection and treatment of cancer. The Debtor s unique and proprietary therapeutic and diagnostic combination utilizes biomarkers to pre-select therapy-specific patients, resulting in better clinical trial design and patient response. The Debtor s antibody drug candidates and diagnostics are designed to detect and target tumors with minimal destruction to healthy cells. 3

4 Case Doc 13 Filed 07/24/12 Page 4 of The Debtor s business has principally been funded with the net proceeds from the sale of common stock to various individuals in private placement transactions. Based on the strategy implemented under the direction of prior management and the advice of the company s prior counsel and outside advisors, however, Neogenix for years engaged in the practice of paying finder fees to unlicensed brokers in connection with the sale of its stock. Because of this practice, Neogenix has 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 and the Securities and Exchange Commission (the SEC ) has initiated an inquiry into this practice (the SEC Inquiry ). Further, Neogenix currently has a large number of existing stock options that, if exercised, would be highly dilutive to both the current and future shareholders. As a result of the foregoing, 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. 8. In light of the continued deterioration of its cash position and the lack of realistic options for further investment, the Debtor s Board of Directors, in the exercise of its reasonable business judgment, ultimately determined that the most effective way to maximize the value of the Debtor s assets was to seek bankruptcy protection in order to sell the Debtor s business and assets through a sale pursuant to section 363 of the Bankruptcy Code to Precision Biologics, Inc. ( Precision Biologics ), a corporation funded by a number of the Debtor s shareholders, pursuant to an asset purchase agreement, and subject to higher and better bids at auction. The 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. 4

5 Case Doc 13 Filed 07/24/12 Page 5 of Through a combination of the Debtor s remaining working capital and the receipt of a bridge loan from Precision Biologics, the Debtor was able to continue to pay its debts as they became due prior to the Petition Date and the Debtor has very few, if any, unsecured creditors. As a result, the goal and the focus of this chapter 11 case is to maximize the value of the Debtor s assets for the benefit of the Debtor s equity interest holders. A group of seven (7) of the Debtor s largest shareholders that are not involved in either the ownership or the management of Precision Biologics organized pre-petition into an ad hoc committee of equity interest holders (the Ad Hoc Equity Committee ). The Ad Hoc Equity Committee, who is represented by counsel, has worked closely with the Debtor and its professionals on a confidential basis prior to the filing of this Chapter 11 bankruptcy case to review and comment on the proposed sale transaction with Precision Biologics and the various filings involved in this case. 10. A more detailed factual background of the Debtor s business and operations, as well as the events precipitating the commencement of this case, is fully set forth in the First Day Declaration, filed contemporaneously herewith and incorporated herein by reference. The Debtor s Prepetition Loan Obligations 11. Prior to the Petition Date, the Debtor entered into that certain Bridge Loan Note, Security Agreement, and IP Security Agreement, each dated July 19, 2012 (the Prepetition Loan Documents ), by and between the Debtor as borrower to Precision Biologics, Inc. as lender (the Prepetition Lender ) for a prepetition bridge loan in the stated principal amount of $640, plus interest and fees accruing thereon (the Prepetition Loan Obligations ). The full amount of the Prepetition Loan Obligations remain outstanding as of the Petition Date. 5

6 Case Doc 13 Filed 07/24/12 Page 6 of 24 The Proposed Sale Transaction 12. Due to the continued deterioration of the Debtor s cash position and lack of realistic restructuring options, the Debtor, in the exercise of its reasonable business judgment, has determined that the most effective way to maximize the value of its estate for the benefit of its stakeholders was to seek bankruptcy protection, in order to sell the Debtor s business and assets through a sale pursuant to section 363 of the Bankruptcy Code (the Sale ). The Sale is supported by Precision Biologics, in its capacity as the DIP Lender under the DIP Loan Agreement. The DIP Lender will serve as the stalking horse bidder for the acquisition of substantially all of the Debtor s rights, title, and interest in and to the assets of the Business, as defined in that certain asset purchase agreement (the APA ) between the Debtor, as seller, and Precision Biologics, as Purchaser, and will bid for such Acquired Assets upon the terms set forth in the APA, subject to higher and better bids, at a section 363 sale of substantially all of the Debtor s assets. The Debtor believes, in the exercise of its business judgment, that such Sale provides the best restructuring alternative for all of its constituencies and in particular its equity holders. 13. The Debtor must conduct its sale process expeditiously. The Debtor s business is a clinical stage biotherapeutic company focused on developing novel therapeutic and companion diagnostic products for detection and treatment of cancer. The Debtor is in the critical initial research and development phase of its business. Any disruption to its research and development projects could severely delay if not eliminate the progress it has made to date and could cause harm to patients currently involved in the Debtor s clinical trials. The Debtor believes that the Sale is the best means to ensure its viability. Securing immediate access to postpetition debtorin-possession financing is crucial to the continuation of the Debtor s business during this case, to 6

7 Case Doc 13 Filed 07/24/12 Page 7 of 24 ensure that the Sale is effectuated without any delay and to preserve value for the Debtor s equity holders. The Debtor s Liquidity Needs 14. The Debtor borrowed the maximum amount possible under the Prepetition Loan Agreement and has insufficient cash collateral available to continue to operate its business without the DIP Loan. Accordingly, an immediate and critical need exists for the Debtor to obtain funds in order to continue the operation of its business. With the assistance of its financial advisors and legal counsel, the Debtor has researched possible sources of postpetition financing and has determined in its business judgment that the terms offered by the DIP Lender provide the maximum value for its estate. 15. The Debtor is unable to obtain the required funds (i) in the forms of (a) unsecured credit or debt allowable under section 503(b)(1) of the Code, (b) an administrative expense pursuant to section 364(a) or (b) of the Code, (c) unsecured debt having the priority afforded by section 364(c)(l) of the Code or (d) debt secured only as described in section 364(c)(2) or (3) of the Code or (ii) on terms more favorable than those offered by the DIP Lender under the DIP Loan Agreement and the budget negotiated between the Debtor and the DIP Lender, annexed here to as Exhibit C (the Budget ). The Debtor has, with the assistance of its advisors, analyzed its cash needs to determine what is necessary to maintain its operations in chapter 11, consummate the sale and confirm a plan of liquidation post-sale. The Budget takes into account anticipated cash disbursements during the case, including professional fees, the costs of the chapter 11 filing, the cost of necessary goods and services and any payments for relief requested in various First-Day pleadings. The immediate availability of the DIP Loan is necessary to ensure payment of these needs and the Debtor believes that the Budget is sufficient to meet those needs. 7

8 Case Doc 13 Filed 07/24/12 Page 8 of The Debtor has requested that, pursuant to the terms of the DIP Loan Agreement, the DIP Lender make loans and advances and provide other financial accommodations to the Debtor. The ability of the Debtor to continue to operate its businesses depends upon the Debtor obtaining such financing. The DIP Lender is willing to make such loans and advances and provide such other financial accommodations on a secured basis, as more particularly described herein, pursuant to the terms and conditions of the DIP Loan Agreement. Accordingly, the relief requested in this Motion is necessary, essential and appropriate for the continued operation of the Debtor s business, the management and preservation of its assets and properties, the satisfaction of all regulatory requirements, and is in the best interests of the Debtor, its estate and stakeholders. 17. The terms of the DIP Loan Agreement have been negotiated at arms length and in good faith, as that term is used in section 364(e) of the Code, and are in the best interests of the Debtor and its stakeholders. The DIP Lender is extending financing to the Debtor in good faith and the DIP Lender is entitled to the benefits of the provisions of section 364(e) of the Code. 18. It is in the best interests of the Debtor s estate that it be allowed to finance its operations under the terms and conditions set forth herein. The relief requested by this Motion is necessary to avoid harm to the Debtor s estate, and good, adequate and sufficient cause has been shown to justify the granting of the relief requested herein, and the immediate entry of the Interim Order. The terms of the DIP Loan Agreement are fair and reasonable, reflect the Debtor s exercise of prudent business judgment consistent with its fiduciary duties and constitute reasonably equivalent value and fair consideration. 8

9 Case Doc 13 Filed 07/24/12 Page 9 of 24 Concise Statement Pursuant to Bankruptcy Rule 4001(c) 19. Pursuant to Bankruptcy Rule 4001(c), the Debtor submits this concise statement of the material terms of the DIP Loan Agreement and Interim Order. 2 Provision Amount of Borrowing See Preamble $3,235, Summary Description Interest Rate 2.6 Costs and Expenses 8.3 Fixed rate per annum rate of interest equal to five percent (5%). Calculation of interest shall be on the basis of the actual days elapsed in a year of 360 days and shall be paid for the actual number of days elapsed (including the first day but excluding the last day). All interest obligations shall be payable upon the Termination Date. During the continuance of an Event of Default, loans, interest, fees and other amounts due under the DIP Loan Agreement will bear interest at a fixed per annum rate of interest equal to eight percent (8%). Borrower agrees, whether or not any Advance is made hereunder, to pay to the DIP Lender upon demand all postpetition out-ofpocket costs and expenses and all postpetition fees and expenses of the DIP Lender s professionals incurred in connection with or reasonably arising out of or related to the chapter 11 case and this DIP Loan Agreement including (i) the preparation, documentation, negotiation, execution, amendment, modification, extension and/or renewal of the DIP Loan Documents, (ii) the preparation of any waiver or consent hereunder or under any DIP Loan Document, (iii) the enforcement of any rights or remedies of the DIP Lender to collect any of the Obligations, and (iv) any other matters related to any DIP Loan Document. Borrower further agrees to pay or reimburse the DIP Lender for any intangibles taxes, documentary stamp taxes or other taxes or costs which may be payable with respect to the execution, delivery, recording or filing of any of the DIP Loan Documents. All of the obligations of Borrower under Section 8.3 of the DIP Loan Agreement shall be coterminous with the DIP Loan Agreement and shall not survive satisfaction and payment of the Obligations and the termination of the DIP Loan Agreement. 2 This concise statement is qualified in its entirety by reference to the provisions of the DIP Loan Agreement and the Interim Order, as applicable. To the extent of any inconsistency between this concise statement and the provisions of the Postpetition Loan Agreement and the Interim Order, the Postpetition Loan Agreement and the Interim Order shall govern. 9

10 Case Doc 13 Filed 07/24/12 Page 10 of 24 Provision Termination Date 1.1 Advances of DIP Loan 2.1 and 2.3 Use of Proceeds Summary Description The earlier to occur of (i) the date that is twelve (12) weeks after the Petition Date, unless extended to December 31, 2012, pursuant to Section 2.7(b) of the DIP Loan Agreement, or (ii) the date upon which DIP Lender shall elect to terminate the Availability Period and accelerate the Obligations in accordance with Section 7.2 of the DIP Loan Agreement; provided however, that upon Borrower s request, DIP Lender may in its sole discretion elect to extend the period described in clause (i) above from twelve (12) weeks to sixteen (16) weeks. Subject to the terms and conditions set forth in the DIP Loan Agreement, and so long as no Default or Event of Default has occurred and is continuing, during the Availability Period Lender shall make Advances to Borrower from time to time in an aggregate principal amount at any one time outstanding not to exceed the Credit Amount. Borrower acknowledges and agrees that Lender s commitment to fund Advances shall at all times be subject to the condition precedent that no change resulting in a Material Adverse Effect shall have occurred since the Effective Date, as determined by Lender in its sole discretion. Notwithstanding any contrary provision set forth in the DIP Loan Agreement, Lender shall at all times have the right, but not the obligation, to fund Advances to or for the benefit of Borrower in excess of amounts required under the Approved Budget if deemed necessary or appropriate by Lender. Nothing herein shall limit the right of Lender to make such Advances as may from time to time be necessary for the protection and preservation of the Collateral. Borrower shall be entitled to not more than two (2) Advances each calendar month. Each request for an Advance shall be submitted to Lender in writing not less than three (3) Business Days prior to the date upon which funding of such Advance is sought by Borrower. Each Advance request shall be accompanied by such bills, invoices, receipts for payment or other supporting documentation as Lender may reasonably require in order to authenticate all costs included in such request, together with a recap of the Approved Budget showing the application of all sums previously disbursed, the application of sums to be disbursed in the requested Advance, and the remaining amounts available to be disbursed with respect to each line item in the Approved Budget. All such documentation shall be subject to the review and reasonable approval of Lender and Lender s Professionals prior to funding any Advance. Proceeds of the DIP Loan shall be available exclusively for the purpose of funding costs and expenses set forth in the Approved Budget including, without limitation (i) postpetition costs and expenses related to the continued operation of the Debtor s

11 Case Doc 13 Filed 07/24/12 Page 11 of 24 Provision Events of Default 7.1 Summary Description Business as set forth in the Approved Budget, and (ii) Administrative Expenses and other costs incurred by Borrower in connection with the Case, and (iii) repayment of the outstanding obligations of Borrower under the Prepetition Loan Documents as of the Petition Date. Any one or more of the following events shall constitute an event of default: (a) The Debtor shall fail to pay any of the Obligations when due and payable; (b) any representation or warranty of the Debtor made in the DIP Loan Agreement, in any other DIP Loan Document or in any certificate, agreement, instrument or statement furnished or made or delivered pursuant thereto shall proven to have been untrue or incorrect in any material respect when made or effected; (c) the Debtor shall fail to perform or observe any term, covenant, condition or agreement contained in DIP Loan Agreement or in any other DIP Loan Document, or if there shall at any time exist any event, occurrence, condition or state of facts which constitutes a breach or violation of any term, covenant, condition or agreement contained in the DIP Loan Agreement or in any other DIP Loan Document, and such failure or violation shall not have been cured within three (3) business days after the Debtor has become aware thereof; (d) if there shall occur or exist any Default or Event of Default under, and as defined in, any DIP Loan Document other than the DIP Loan Agreement; (e) the DIP Loan Agreement or any other DIP Loan Document shall at any time for any reason (other than cancellation by the DIP Lender) cease to be in full force and effect or shall be declared to be null and void by a court of competent jurisdiction, or if the validity or enforceability hereof or thereof shall be contested or denied by the Debtor, or if the transactions contemplated hereunder or thereunder shall be contested by the Debtor, or if the Debtor shall repudiate or deny any liability or obligation hereunder or thereunder; (f) if any enforcement action is brought against the Debtor with respect to any Indebtedness in excess of $50, owing to any other creditor, and such action is not effectively stayed by the automatic stay of the Debtor s chapter 11 case; (g) if any judgment, decree, arbitration award or ruling shall be entered against the Debtor involving in the aggregate a liability (not paid or covered by insurance) of $50, or more and such judgment, decree, award or ruling shall not have been vacated, paid, discharged, stayed or suspensively appealed within twenty (20) days from the entry thereof; (h) the Debtor s chapter 11 case shall be dismissed or converted to a case under chapter 7 of the Bankruptcy Code, or the Debtor shall file a motion or other pleading seeking the 11

12 Case Doc 13 Filed 07/24/12 Page 12 of 24 Provision Summary Description dismissal of the chapter 11 case under section 1112 of the Bankruptcy Code or otherwise; a trustee under chapter 7 or chapter 11 of the Bankruptcy Code, a responsible officer or an examiner with enlarged powers relating to the operation of the business (powers beyond those set forth in section 1106(a)(3) and (4) of the Bankruptcy Code) under section 1106(b) of the Bankruptcy Code shall be appointed in the case and the order appointing such trustee, responsible officer or examiner shall not be reversed or vacated within 30 days after the entry thereof; or an application shall be filed by the Debtor for the approval of any other Superpriority Claim (other than the Carve Out) in the Case which is pari passu with or senior to the claims of the DIP Lender with respect to the Collateral thereunder, or there shall arise or be granted any such pari passu or senior Superpriority Claim with respect to the Collateral (other than the Carve Out); (i) the Bankruptcy Court shall enter an order or orders granting relief from the automatic stay applicable under section 362 of the Bankruptcy Code to the holder or holders of any security interest to permit foreclosure (or the granting of a deed in lieu of foreclosure or the like) on any of the Collateral if the loss of such Collateral by the Debtor would have a Material Adverse Effect on the Debtor s Business, or an order of the Bankruptcy Court shall be entered reversing, amending, supplementing, staying, vacating or otherwise modifying the Interim Order or the Final Order, as applicable; (j) the Final Order shall not have been entered by the Bankruptcy Court on or before the date that is thirty (30) days after the Petition Date, or such later date as may be agreed to in writing by the DIP Lender in its sole discretion; (k) except as permitted by the Orders or the First Day Orders, Borrower shall make any Pre-Petition Payment other than Pre-Petition Payments or adequate protection payments authorized by the Bankruptcy Court; (l) other than as permitted by the Carve Out, the Debtor (or any successor in interest to the Debtor as borrower, including, without limitation, any trustee in the chapter 11 case) shall assert any claim for Administrative Expenses against any of the Collateral pursuant to section 506(c) of the Bankruptcy Code or otherwise; (m) any change having a Material Adverse Effect upon the Debtor shall have occurred since the Effective Date; (n) the Debtor shall be in material default of its obligations under the APA or any orders of the Bankruptcy Court in connection therewith; (o) the APA shall be rescinded, terminated, repudiated, declared to be null and void by a court of competent jurisdiction, or otherwise cease to be in full force and effect for any reason other than (i) cancellation or default thereunder by the DIP Lender as described in Section 2.7(b) of the DIP Loan Agreement, or (ii) failure by the DIP Lender to be the successful bidder at the section 363 sale 12

13 Case Doc 13 Filed 07/24/12 Page 13 of 24 Provision Priority of DIP Liens 3.6 Summary Description contemplated by the APA; (p) if the DIP Lender shall not be the successful bidder at the section 363 sale contemplated by the APA, and the sale transaction between the Debtor and the successful bidder at such section 363 sale shall fail to close in accordance with its terms as approved by order of the Bankruptcy Court. The granting of valid, binding, continuing, enforceable, fully automatically properly perfected and unavoidable first-priority security interests in and liens upon (collectively, the Postpetition Liens ) on the Collateral. The Postpetition Liens against the Collateral securing the Obligations shall, subject to the Carve Out: (a) be Superpriority Claims other than in respect of the Excluded Assets; (b) pursuant to section 364(d)(1) of the Code, constitute perfected first priority priming Postpetition Liens on all Collateral other than the Excluded Assets, subject in all events to any Priority Lien Claims existing on the Petition Date; and (c) pursuant to Section 364(d)(1) of the Code, constitute perfected first priority priming Postpetition Liens on the Prepetition Collateral, other than the Excluded Assets, which shall prime any Liens existing on the Petition Date other than Priority Lien Claims. Superpriority Administrative Claims 1.1 Pursuant to section 364(c)(1) of the Code, the obligations under the DIP Loan Agreement shall be entitled to allowed superpriority expense claim status in the chapter 11 case (the Postpetition Debt Superpriority Claims ) with priority over all other costs and expenses of the kinds specified in, or ordered pursuant to, sections 326, 330, 331, 364(d), 503(b), 506, 507(a), 507(b), 726 or any other provision of the Code, subject and subordinate to the Carve Out. 13

14 Case Doc 13 Filed 07/24/12 Page 14 of 24 Provision Carve Out 1.1 Summary Description The Carve Out equals an amount equal to the aggregate sum of (a) all Bankruptcy Court costs and trustee s fees from time to time incurred by Borrower prior to the Termination Date, (b) all of the reasonable hourly fees and expenses from time to time incurred by Professionals retained by the Borrower and any Official Committee of Equity Interest Holders appointed by the Office of the United States Trustee in the Case (the Committee ) that are incurred before the earlier of the Termination Date or receipt by Borrower of written notice of an Event of Default, and are included in an Approved Budget, and (c) a maximum of $150, for all of the reasonable hourly fees and expenses from time to time incurred by Professionals retained by the Borrower and the Committee that are incurred after the earlier of the Termination Date or receipt by Borrower of written notice of an Event of Default. Relief Requested 20. By this motion, the Debtor requests entry of the Interim Order and Final Order authorizing the Debtor to enter into the DIP Loan Agreement. 21. More specifically, the Debtor seeks authority to: a. permit the Debtor, pursuant to the Interim Order and before entry of the Final Order, to borrow up to $970,584 and to use a portion of the DIP Loan to repay the Prepetition Loan Obligations in full upon entry of the Interim Order and funding of the DIP Loan; b. grant first priority liens pursuant to section 364(d)(1) of the Bankruptcy Code and grant the Postpetition Debt Superpriority Claims pursuant to section 364(c)(1) of the Bankruptcy Code, subject and subordinate to the Carve Out; c. waive any applicable stay of effectiveness of the DIP Orders, including under Bankruptcy Rule 6004, to provide for immediate effectiveness of the Interim Order; and d. pursuant to Bankruptcy Rule 4001, set a date for a hearing to consider entry of the Final Order, authorizing and approving the transactions described herein on a final basis. 14

15 Case Doc 13 Filed 07/24/12 Page 15 of 24 Supporting Authority A. Financing Under Section 364 of the Code 22. Pursuant to section 364(c) of the Code, a court may authorize a debtor to incur debt that is: (a) entitled to a superpriority administrative expense status; (b) secured by a lien on otherwise unencumbered property; or (c) secured by a junior lien on encumbered property if the debtor cannot obtain postpetition credit on an unsecured basis, as an administrative expense priority or secured solely by junior liens on the Debtor s assets. See 11 U.S.C. 364(c). Additionally, section 364(d)(1) of the Code provides that a court may authorize a debtor to incur postpetition debt on a senior or priming basis if (a) the debtor is unable to obtain credit otherwise and (b) there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted. See 11 U.S.C. 364(d)(1). 23. The Debtor submits that entry into the DIP Loan is in the best interests of the Debtor s stakeholders, is necessary to preserve the value of estate assets and is an exercise of the Debtor s sound and reasonable business judgment. i. Entry into the DIP Loan is in the Best Interests of the Debtor s Estate, is Necessary to Preserve Estate Assets and is an Exercise of the Debtor s Sound and Reasonable Business Judgment 24. A debtor s decision to enter into a postpetition lending facility under section 364 of the Code is governed by the business judgment standard. See, e.g., Trans World Airlines, Inc. v. Travelers Int l AG (In re Trans World Airlines, Inc.), 163 B.R. 964, 974 (Bankr. D. Del. 1994) (approving postpetition loan and receivables facility because such facility reflect[ed] sound and prudent business judgment ); In re Ames Dep t Stores, 115 B.R. 34, 38 (Bankr. S.D.N.Y. 1990) (noting that financing decisions under section 364 of the Code must reflect a debtor s business judgment); In re Barbara K Enters., No (MG), 2008 WL , at *14 (Bankr. 15

16 Case Doc 13 Filed 07/24/12 Page 16 of 24 S.D.N.Y. June 16, 2008) (explaining that courts defer to a Debtor s business judgment so long as a request for financing does not leverage the bankruptcy process and unfairly cede control of the reorganization to one party in interest. ); Bray v. Shenandoah Fed. Sav. & Loan Ass n (In re Snowshoe Co., Inc.), 789 F.2d 1085, 1088 (4th Cir. 1986); In re Curlew Valley Assocs., 14 B.R. 506, (Bankr. D. Utah 1981); In re Simasko Prod. Co., 47 B.R. 444, 449 (D. Colo. 1985). 25. Generally, the business judgment standard requires that, absent evidence to the contrary, a debtor-in-possession is afforded discretion to act with regard to business decisionmaking. See Simasko Prod. Co., 47 B.R. at 449 ( [D]iscretion to act with regard to business planning activities is at the heart of the debtor s power. ) (citations omitted); see also In re Mastercraft Interiors, Ltd., Nos , (PM), 2006 WL (Bankr. Md. Aug. 10, 2006) (holding that terms of proposed financing reflected the debtors exercise of business judgment). 26. Specifically, to determine whether the business judgment standard is met, a court is required to examine whether a reasonable business person would make a similar decision under similar circumstances. In re Exide Techs., 340 B.R. 222, 239 (Bankr. D. Del. 2006); see also Ryan Inc. v. Circuit City Stores, Inc., No. 3:10CV496-HEH, 2010 WL (Bankr. E.D.Va. Nov. 15, 2010) ( Courts should not interfere with a debtor s decision unless that decision is so manifestly unreasonable that it could not be based upon sound business judgment, but only on bad faith, or whim or caprice. ); see also Curlew Valley Assocs., 14 B.R. at (noting that courts should not second guess a debtor s business decision when that decision involves a business judgment made in good faith, upon a reasonable basis, and within the scope of [the debtor s] authority under the [Bankruptcy] Code ) (citation omitted). 27. The Debtor s decision to incur the proposed DIP Loan satisfies this standard. Because the Debtor had no other viable financing alternative and the Debtor does not have cash 16

17 Case Doc 13 Filed 07/24/12 Page 17 of 24 collateral sufficient to fund its operations, if the Debtor rejected the DIP Loan, it would not be able to continue operating, resulting in the delay if not complete elimination of years of research and development, harm to the patients enrolled in the Debtor s clinical trials and a destruction of value. Given the Debtor s significantly constrained liquidity position, the DIP Loan is of critical importance to the Debtor s continued operations and to preserving going concern value. Thus, entry into the DIP Loan Agreement is an exercise of the Debtor s sound business judgment. ii. The Terms of the DIP Loan Agreement are Fair, Reasonable and Appropriate in Light of the Debtor s Needs and the Current Market Environment 28. Courts have long recognized that the appropriateness of a proposed postpetition financing facility and a Debtor s search for alternatives must be considered in light of current market conditions. See, e.g., In re Snowshoe Co. Inc., 789 F.2d 1085, 1088 (4th Cir. 1986) (noting that a debtor is not required to seek credit from every possible lender before determining such credit is unavailable); see also SunTrust Bank v. Den-Mark Const., Inc., 406 B.R. 683 (Bankr. N.C. 2009) (stating that a debtor must only show that it made a reasonable effort to obtain post-petition financing from other potential lenders on less onerous terms and that such financing was unavailable) (citing In re Ames Dept. Stores, 115 B.R. 34, 40 (Bankr. S.D.N.Y. 1990). Indeed, courts often recognize that where there are few lenders likely, able and willing to extend the necessary credit to a debtor, it would be unrealistic and unnecessary to require [a debtor] to conduct such an exhaustive search for financing. In re Sky Valley, Inc., 100 B.R. 107, 113 (Bankr. N.D. Ga. 1988), aff d, 99 B.R. 117 (N.D. Ga. 1989); see also In re Garland Corp., 6 B.R. 456, 461 (1st Cir. B.A.P. 1980) (authorizing secured credit under section 364(c)(2), after notice and a hearing, upon showing that unsecured credit was unobtainable); In re Stanley Hotel, Inc., 15 B.R. 660, 663 (D. Colo. 1981) (finding refusal of two national banks to grant unsecured loans was sufficient to support conclusion that requirements of section 364 requirement had been 17

18 Case Doc 13 Filed 07/24/12 Page 18 of 24 met); Ames, 115 B.R. at (holding that debtor must show that it made reasonable efforts to seek other sources of financing under section 364(a) and (b)). 29. Rather, a debtor must demonstrate that it made a reasonable effort to seek credit from other sources available under sections 364(a) and 364(b) of the Code. See Snowshoe, 789 F.2d at 1088; see also In re Plabell Rubber Prods., Inc., 137 B.R. 897, (Bankr. N.D. Ohio 1992). 30. The Debtor is a pre-revenue clinical stage company. Therefore, sources of financing are difficult to obtain. The Debtor s capital structure and the SEC Inquiry and resultant contingent recession liability have severely impaired the Debtor s efforts to obtain alternative financing. As discussed above and in the First Day Declaration, the DIP Loan was the only available financing that satisfied the Debtor s needs. Accordingly, the Debtor submits that the terms of the DIP Loan Agreement are reasonable and represent the best source of financing available to the Debtor under the circumstances. a. The Scope of the Carve Out is Appropriate 31. The proposed DIP Loan Agreement subjects the security interests and administrative expense claims of the DIP Lender to the Carve Out. Similar carveouts for professional fees have been found to be reasonable and necessary to ensure that a debtor s estate and any statutory committee can retain assistance from counsel. See Ames, 115 B.R. at 40. The DIP Loan does not directly or indirectly deprive the Debtor s estate or other parties in interest of possible rights and powers by restricting the services for which professionals may be paid in this chapter 11 case. See id. at 38 (observing that courts insist on carveouts for professionals representing parties-in-interest because [a]bsent such protection, the collective rights and expectations of all parties-in-interest are sorely prejudiced ). Additionally, the Carve Out protects against administrative insolvency during the course of this case by ensuring that assets 18

19 Case Doc 13 Filed 07/24/12 Page 19 of 24 remain for the payment of U.S. Trustee fees and professional fees, notwithstanding the grant of superpriority and administrative liens and claims under the DIP Loan Agreement. b. The Roll-Up of Prepetition Debt is Appropriate 32. The DIP Loan Agreement provides proceeds of the DIP Loan may be used by the Debtor to repay all of its outstanding obligations under the Prepetition Loan Agreement as of the Petition Date. Because the Debtor is non-revenue generating, there is no source of cash to provide the Prepetition Lender with any adequate protection. Thus, as a condition to providing the Debtor the funding it needs to operate its business, the DIP Lender insisted on the roll-up of the Debtor s obligations under the Prepetition Loan Documents into the obligations under the DIP Loan Agreement. Accordingly, the DIP Lender would not have agreed to provide the DIP Loan without a roll-up and deemed refinancing of the obligations due and owing under the Prepetition Loan Documents. 33. After careful consideration of the terms of the proposed roll-up, and after demanding that the DIP Lender subject the roll-up to challenge under the terms of the Interim and Final DIP Orders, the Debtor determined that the roll-up was appropriate and necessary under the circumstances. The financing contemplated under the DIP Loan Agreement is the Debtor s sole liquidity source and will offer the Debtor the much-needed funds to continue operating as a going concern. Therefore, the Debtor believes that the roll-up is a necessary component to the DIP Loan Agreement and will ensure the Debtor s access to sufficient liquidity for working capital and general corporate purposes to fund day-to-day operations. 34. The Code does not prohibit roll-ups, whether provided as adequate protection or otherwise. Indeed, recent cases suggest that roll-ups are becoming an increasingly common feature in debtor-in-possession financing arrangements and courts have approved full roll-ups in a variety of cases, with several courts permitting roll-ups of prepetition debt on the first day of 19

20 Case Doc 13 Filed 07/24/12 Page 20 of 24 the case. See, e.g., In re Real Mex Restaurants, Inc., et al., No (Bankr. D. Del. Nov. 9, 2011) (authorizing approximately $49 million DIP that included a full roll-up of approximately $37.5 million prepetition debt); In re Source Interlink Cos., No (Bankr. D. Del. Apr. 29, 2009) (authorizing approximately $139 million DIP that included roll-up of approximately $110 million prepetition debt pursuant to interim order granted on first day of case); In re Dayton Superior Corp., No (Bankr. D. Del. Apr. 19, 2009) (authorizing approximately $165 million DIP that included full roll-up of approximately $102 million prepetition debt pursuant to interim order granted on first day of case). 35. The Debtor has determined that no other credit was available on better terms or on terms that did not require the payoff of the Prepetition Loan Obligations. Further, the Debtor has few, if any unsecured creditors, virtually eliminating the likelihood that the roll-up of the Prepetition Loan Obligations will enhance the Lender s position vis a vis other stakeholders. Accordingly, the determination to enter into and seek approval of the DIP Loan Agreement, including the re-payment of the Prepetition Loan Obligations was in the Debtor s sound business judgment. B. The DIP Loan Agreement was Negotiated in Good Faith and Should be Afforded the Protection of Code 364(e) 36. Pursuant to Code 364(e), any reversal or modification on appeal of an authorization to obtain credit or incur debt or a grant of priority or a lien under Code 364 shall not affect the validity of that debt incurred or priority or lien granted as long as the entity that extended credit extended such credit in good faith. See 11 U.S.C. 364(e). 37. The terms of the DIP Loan Agreement were negotiated in good faith and at arm slength between the Debtor and the DIP Lender, and all of the DIP Loan obligations will be extended by the DIP Lender in good faith (as such term is used in Code 364(e)). No 20

21 Case Doc 13 Filed 07/24/12 Page 21 of 24 consideration is being provided to any party in connection with the DIP Loan Agreement other than as set forth herein. Moreover, the DIP Loan has been extended in express reliance upon the protections afforded by Code 364(e) and the DIP Lender should be entitled to the full protection of Code 364(e) in the event that the Interim Order or any provision thereof is vacated, reversed or modified on appeal or otherwise. See 11 U.S.C. 363(e). C. Approval of the DIP Loan Agreement on an Interim Basis is Necessary to Prevent Immediate and Irreparable Harm. 38. Bankruptcy Rule 4001(c)(2) governs the procedures for obtaining authorization to obtain postpetition financing and provides, in relevant part: The court may commence a final hearing on a motion for authority to obtain credit no earlier than 14 days after service of the motion. If the motion so requests, the court may conduct a hearing before such 14-day period expires, but the court may authorize the obtaining of credit only to the extent necessary to avoid immediate and irreparable harm to the estate pending a final hearing. Fed. R. Bankr. Proc. 4001(c)(2). 39. In examining requests for interim relief under the immediate and irreparable harm standard, courts apply the same business judgment standard applicable to other business decisions. See, e.g., Ames, 115 B.R. at 36; Simasko, 47 B.R. at 449. After the 14-day period, the request for financing is not limited to those amounts necessary to prevent the destruction of the Debtor s business, and the debtor is entitled to borrow those amounts that it believes are prudent to the operation of its business. Ames, 115 B.R. at Immediate and irreparable harm would result if the relief requested herein is not granted on an interim basis. As described in detail herein, the First Day Declaration the Debtor has an immediate need to obtain access to liquidity to, among other things, continue to pay its employees, clinical trial partners, vendors and suppliers and to continue to operate its businesses. Funding each of these expenditures is necessary to preserve and maintain the value of the Debtor s estate for the benefit of all parties in interest. The availability of sufficient working 21

22 Case Doc 13 Filed 07/24/12 Page 22 of 24 capital and liquidity is vital to the preservation and maintenance of the value of the Debtor s estate. 41. The crucial importance of a debtor s ability to secure postpetition financing to prevent immediate and irreparable harm to its estate has been repeatedly recognized. See, e.g., In re Knight Protective Serv., Inc., Case No (Bankr. D. Md. Feb. 15, 2012); In re Choice Communities, Inc., Case No (Bankr. D. Md. April 7, 2005); In re Taylor-Wharton Int l LLC, Case No (Bankr. D. Del. Nov. 20, 2009); In re Lazy Days R.V. Ctr. Inc., Case No (Bankr. D. Del. Nov. 6, 2009); In re Source Interlink Cos., Case No (Bankr. D. Del. May 28, 2009); In re Abitibi-Bowater Inc., Case No (Bankr. D. Del. Apr. 20, 2009); In re EZ Lube, LLC, Case No (Bankr. D. Del. Jan 14, 2009). Request For Final Hearing 42. Pursuant to Bankruptcy Rules 4001(b)(2) and (c)(2), the Debtor requests that the Court set a date for the final hearing that is as soon as practicable, but in no event later that thirty (30) days following the Petition Date, and fix the time and date prior to the final hearing for parties to file objections to this motion. Waiver of Bankruptcy Rules Regarding Notice and Stay of an Order 43. To implement the foregoing successfully, the Debtor seek a waiver of the notice requirements under Bankruptcy Rule 6004(a) and any stay of an order granting the relief requested herein pursuant to Bankruptcy Rule 6004(h), 7062, 9014 or otherwise. Notice 44. Notice of this Motion has been given to the following parties or, in lieu thereof, to their counsel, if known: (a) the Office of the United States Trustee for the District of Maryland; (b) counsel to Precision Biologics, Inc; (c) counsel to the ad hoc committee of equity security holders; (d) all other parties identified on the List of 20 Largest Unsecured Creditors; (e) those 22

23 Case Doc 13 Filed 07/24/12 Page 23 of 24 parties requesting notice pursuant to Rule 2002; and (f) the Securities and Exchange Commission. The Debtor submits that, in light of the nature of the relief requested, no other or further notice need be given. Statement Pursuant to Local Bankruptcy Rule Pursuant to Rule of the Local Bankruptcy Rules of the United States Bankruptcy Court for the District of Maryland, the Debtor states that, in lieu of submitting a memorandum in support of this motion, it will rely solely upon the grounds and authorities set forth herein. No Prior Request 46. No prior request for the relief sought in this Motion has been made to this or any other court. Conclusion WHEREFORE, for the reasons set forth herein, the First Day Declaration, the Debtor respectfully requests entry of the Orders: (A) authorizing the Debtor to (i) incur the DIP Loan of up to $3,235, and enter into the DIP Loan Agreement, (ii) grant security interests, liens, superpriority claims and other relief for the benefit of the DIP Lender in respect of the Obligations as provided herein and in the DIP Loan Documents, including the payment in full of the Prepetition Loan Obligations upon entry of the Interim Order, (B) in accordance with Bankruptcy Rule 4001(c)(2), scheduling the Final Hearing and approving notice with respect thereto; and (C) granting such other and further relief as may be appropriate. 23

24 Case Doc 13 Filed 07/24/12 Page 24 of 24 Dated: July 23, 2012 GREENBERG TRAURIG, LLP By: /s/ Thomas J. McKee, Jr. Lawrence E. Rifken, Esq. (Pro Hac Vice Pending) Thomas J. McKee, Jr., Esq. (MD Bar No ) Greenberg Traurig, LLP 1750 Tysons Boulevard, Suite 1200 McLean, Virginia Telephone: (703) Facsimile: (703) and - Maria J. DiConza (Pro Hac Vice Pending) Greenberg Traurig, LLP 200 Park Avenue New York, NY Telephone: (212) Facsimile: (212) diconzam@gtlaw.com Proposed Counsel for Debtor and Debtor-in-Possession 24

25 Case Doc 13-1 Filed 07/24/12 Page 1 of 15 Exhibit A Interim Order

26 Case Doc 13-1 Filed 07/24/12 Page 2 of 15 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MARYLAND Greenbelt Division ) In re: ) Chapter 11 ) NEOGENIX ONCOLOGY, INC., ) Case No. 12- ( ) ) Debtor. ) ) INTERIM ORDER (A) AUTHORIZING THE DEBTOR TO INCUR POSTPETITION FINANCING ON AN EMERGENCY BASIS; (B) GRANTING CERTAIN LIENS, SECURITY INTERESTS, AND SUPERPRIORITY CLAIMS AND OTHER RELIEF TO PRECISION BIOLOGICS, INC. AS DIP LENDER; (III) REPAY THE PREPETITION LOAN OBLIGATIONS IN FULL; AND (C) GRANTING RELATED RELIEF This matter came before this Court on the motion (the Motion ) 1 of the above-captioned debtor and debtor-in-possession (the Debtor ) requesting that this Court enter an order (A) authorizing the Debtor, pursuant to title 11 of the United States Code (the Code ), including sections 105, 361, 362, 363, 364(c)(1), 364(c)(2), 364(c)(3), 364(d) and 503(b) thereof, and the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ), including Rules 2002, 4001, and 9014, to: (i) obtain postpetition financing in the amount of $3,235, and enter into a secured, super-priority debtor-in-possession loan and security agreement, substantially in the 1 Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Motion and the DIP Agreement.