UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): December 28, 2011
Cornerstone Therapeutics Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 000-50767 | 04-3523569 | ||
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) | ||
1255 Crescent Green Drive, Suite 250, Cary, NC | 27518 | |||
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code: (919) 678-6611
Not applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Explanatory Note
This Amendment No. 1 on Form 8-K/A for Cornerstone Therapeutics Inc., a Delaware corporation (the Company), amends our Current Report on Form 8-K initially filed with the Securities and Exchange Commission on January 4, 2012 disclosing the Companys acquisition of Cardiokine, Inc. (the Original Form 8-K). This amended Current Report on Form 8-K provides the financial information required under parts (a) and (b) of Item 9.01 of Form 8-K and amends Item 9.01 of the Original Form 8-K. Except as set forth above, the Original Form 8-K has not been amended, updated or otherwise modified.
Item 9.01 Financial Statements and Exhibits.
(a) Financial statements of business acquired
The audited consolidated financial statements of Cardiokine, Inc. as of and for the years ended December 31, 2008 and 2009 are filed as Exhibit 99.1 and incorporated by reference.
The audited consolidated financial statements of Cardiokine, Inc. as of and for the years ended December 31, 2009 and 2010 are filed as Exhibit 99.2 and incorporated by reference.
The unaudited consolidated financial statements of Cardiokine, Inc. as of September 30, 2011 and December 31, 2010 and for the nine months ended September 30, 2011 and 2010 are filed as Exhibit 99.3 and incorporated by reference.
(b) Pro forma financial information
The unaudited pro forma combined financial statements of the Company as of and for the nine months ended September 30, 2011 and the unaudited pro forma combined statement of income of the Company for the year ended December 31, 2010 are filed as Exhibit 99.4 and incorporated by reference.
(d) Exhibits
See the Exhibit Index attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Cornerstone Therapeutics Inc. | ||||||
March 16, 2012 | By: | /s/ Andrew K. W. Powell | ||||
Name: Andrew K. W. Powell | ||||||
Title: Executive Vice President, General Counsel and Secretary |
Exhibit Index
Exhibit |
Description | |
2.1* | Agreement and Plan of Merger among Cornerstone Therapeutics Inc., Cohesion Merger Sub, Inc., Cardiokine, Inc. and Shareholder Representative Services LLC dated December 28, 2011 | |
23.1 | Consent of Ernst & Young LLP | |
99.1 | Audited consolidated financial statements of Cardiokine, Inc. as of and for the years ended December 31, 2008 and 2009 | |
99.2 | Audited consolidated financial statements of Cardiokine, Inc. as of and for the years ended December 31, 2009 and 2010 | |
99.3 | Unaudited consolidated financial statements of Cardiokine, Inc. as of September 30, 2011 and December 31, 2010 and for the nine months ended September 30, 2011 and 2010 | |
99.4 | Unaudited pro forma combined financial statements of the Company as of and for the nine months ended September 30, 2011 and the unaudited pro forma combined statement of income of the Company for the year ended December 31, 2010 |
* | Filed with the Original Form 8-K, which was filed with the Securities and Exchange Commission on January 4, 2012. |
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration Statements:
(1) | Registration Statement (Form S-3 No. 333-166770) of Cornerstone Therapeutics Inc. and |
(2) | Registration Statements (Form S-8 Nos. 333-119409, 333-125892, 333-131037, 333-133867, 333-156293, 333-161326, and 333-168542) of Cornerstone Therapeutics Inc. |
of our reports dated May 12, 2011 and February 5, 2010, with respect to the consolidated financial statements of Cardiokine, Inc. for the years ended December 31, 2010, 2009, and 2008 included in this Current Report (Form 8-K/A) of Cornerstone Therapeutics Inc.
/s/ Ernst and Young LLP
Philadelphia, Pennsylvania
March 16, 2012
Exhibit 99.1
CONSOLIDATED FINANCIAL STATEMENTS | ||
Cardiokine, Inc. and Subsidiaries | ||
Years Ended December 31, 2009 and 2008 | ||
With Report of Independent Auditors |
Cardiokine, Inc. and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 2009 and 2008
Contents
Report of Independent Auditors |
1 | |||
Audited Consolidated Financial Statements |
||||
Consolidated Balance Sheets |
2 | |||
Consolidated Statements of Operations |
3 | |||
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders Deficit |
4 | |||
Consolidated Statements of Cash Flows |
5 | |||
Notes to Consolidated Financial Statements |
6 |
Report of Independent Auditors
The Board of Directors
Cardiokine, Inc.
We have audited the accompanying consolidated balance sheets of Cardiokine, Inc. and Subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, redeemable convertible preferred stock and stockholders deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the 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. We were not engaged to perform an audit of the Companys 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 Companys 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cardiokine, Inc. and Subsidiaries at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst and Young LLP
February 5, 2010
1
Cardiokine, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31 | ||||||||
2009 | 2008 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 20,595,998 | $ | 25,490,520 | ||||
Short-term investments |
14,170,135 | 738,106 | ||||||
Receivable from Partner |
12,962,784 | 7,016,279 | ||||||
Prepaid expenses and other current assets |
1,086,415 | 262,592 | ||||||
Deferred income taxes |
835,855 | | ||||||
|
|
|
|
|||||
Total current assets |
49,651,187 | 33,507,497 | ||||||
Property and equipment, net |
192,925 | 239,445 | ||||||
Other assets |
| 45,891 | ||||||
|
|
|
|
|||||
Total assets |
$ | 49,844,112 | $ | 33,792,833 | ||||
|
|
|
|
|||||
Liabilities, redeemable preferred stock, and stockholders deficit |
||||||||
Liabilities: |
||||||||
Notes payable |
$ | | $ | 45,957 | ||||
Accounts payable |
3,268,710 | 2,754,950 | ||||||
Accrued expenses |
13,036,760 | 7,337,533 | ||||||
Deferred revenue |
7,317,074 | 7,317,073 | ||||||
|
|
|
|
|||||
Total current liabilities |
23,622,544 | 17,455,513 | ||||||
Other liabilities |
299,621 | 23,953 | ||||||
Deferred revenue, net of current portion |
24,999,999 | 32,317,073 | ||||||
Series A redeemable convertible preferred stock, $.001 par value, 37,000,000 shares authorized, 37,000,000 shares issued and outstanding (liquidation preference of $42,920,000 at December 31, 2009) |
42,860,614 | 39,855,457 | ||||||
Series B redeemable convertible preferred stock, $.001 par value, 60,000,000 shares authorized, 50,000,000 shares issued and outstanding (liquidation preference of $58,000,000 at December 31, 2009) |
57,942,254 | 53,898,250 | ||||||
Series B1 redeemable preferred stock, $.001 par value, 60,000,000 shares authorized, none issued or outstanding at December 31, 2009 or 2008 |
| | ||||||
Stockholders deficit: |
||||||||
Common stock, $.0001 par value, 172,839,076 shares authorized, 7,599,533 and 7,564,793 shares issued and outstanding at December 31, 2009 and 2008 |
760 | 756 | ||||||
Other comprehensive loss |
(2,998 | ) | (4 | ) | ||||
Accumulated deficit |
(99,878,682 | ) | (109,758,165 | ) | ||||
|
|
|
|
|||||
Total stockholders deficit |
(99,880,920 | ) | (109,757,413 | ) | ||||
|
|
|
|
|||||
Total liabilities, redeemable preferred stock, and stockholders deficit |
$ | 49,844,112 | $ | 33,792,833 | ||||
|
|
|
|
See accompanying notes.
2
Cardiokine, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31 | ||||||||
2009 | 2008 | |||||||
Revenue: |
||||||||
Milestone revenue |
$ | 20,000,000 | $ | | ||||
Collaboration revenue |
7,317,073 | 7,317,073 | ||||||
Reimbursement of collaboration costs |
44,668,043 | 36,565,862 | ||||||
|
|
|
|
|||||
Total revenue |
71,985,116 | 43,882,935 | ||||||
|
|
|
|
|||||
Costs and expenses: |
||||||||
Research and development |
52,010,356 | 56,673,169 | ||||||
General and administrative |
3,331,878 | 2,460,127 | ||||||
|
|
|
|
|||||
Total operating expenses |
55,342,234 | 59,133,296 | ||||||
|
|
|
|
|||||
Income (loss) from operations |
16,642,882 | (15,250,361 | ) | |||||
Other income (expense): |
||||||||
Interest income |
107,774 | 802,153 | ||||||
Interest expense |
(318 | ) | (4,249 | ) | ||||
|
|
|
|
|||||
Total other income (expense) |
107,456 | 797,904 | ||||||
|
|
|
|
|||||
Income (loss) before tax |
16,750,338 | (14,452,457 | ) | |||||
Income tax expense |
(322,285 | ) | (4,459,985 | ) | ||||
|
|
|
|
|||||
Net income (loss) |
16,428,053 | (18,912,442 | ) | |||||
Deemed dividend and accretion to redemption value of preferred stock |
(7,049,161 | ) | (7,049,527 | ) | ||||
|
|
|
|
|||||
Net income (loss) attributable to common stockholders |
$ | 9,378,892 | $ | (25,961,969 | ) | |||
|
|
|
|
See accompanying notes.
3
Cardiokine, Inc. and Subsidiaries
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders Deficit
Series A Redeemable Convertible |
Series B Redeemable Convertible |
Common Stock | Additional Paid-in |
Other Comprehensive Income |
Accumulated | Total Stockholders |
||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Loss) | Deficit | Deficit | |||||||||||||||||||||||||||||||
Balance at December 31, 2007 |
37,000,000 | $ | 36,850,175 | 50,000,000 | $ | 49,854,005 | 7,564,793 | $ | 756 | $ | | $ | 1,601 | $ | (84,138,019 | ) | $ | (84,135,662 | ) | |||||||||||||||||||||
Compensation expense stock options |
| | | | | | 321,300 | | | 321,300 | ||||||||||||||||||||||||||||||
Tax benefit related to stock options |
| | | | | | 20,521 | | | 20,521 | ||||||||||||||||||||||||||||||
Accretion of Series A and Series B Preferred Stock and accrued dividends |
| 3,005,282 | | 4,044,245 | | | (341,821 | ) | | (6,707,704 | ) | (7,049,525 | ) | |||||||||||||||||||||||||||
Net loss |
| | | | | | | | (18,912,442 | ) | (18,912,442 | ) | ||||||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||||||
Unrealized loss on available-for-sale securities |
| | | | | | | (1,605 | ) | | (1,605 | ) | ||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||
Total comprehensive loss |
(18,914,047 | ) | ||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Balance at December 31, 2008 |
37,000,000 | 39,855,457 | 50,000,000 | 53,898,250 | 7,564,793 | 756 | | (4 | ) | (109,758,165 | ) | (109,757,413 | ) | |||||||||||||||||||||||||||
Compensation expense stock options |
| | | | | | 362,014 | | | 362,014 | ||||||||||||||||||||||||||||||
Tax benefit related to stock options |
| | | | | | 124,684 | | | 124,684 | ||||||||||||||||||||||||||||||
Stock issued upon exercise of stock options |
| | | | 34,740 | 4 | 13,893 | | | 13,897 | ||||||||||||||||||||||||||||||
Accretion of Series A and Series B Preferred Stock and accrued dividends |
| 3,005,157 | | 4,044,004 | | | (500,591 | ) | | (6,548,570 | ) | (7,049,161 | ) | |||||||||||||||||||||||||||
Net income |
| | | | | | | | 16,428,053 | 16,428,053 | ||||||||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||||||
Unrealized loss on available-for-sale securities |
| | | | | | | (2,994 | ) | (2,994 | ) | |||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||
Total comprehensive income |
16,425,059 | |||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Balance at December 31, 2009 |
37,000,000 | $ | 42,860,614 | 50,000,000 | $ | 57,942,254 | 7,599,533 | $ | 760 | $ | | $ | (2,998 | ) | $ | (99,878,682 | ) | $ | (99,880,920 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
Cardiokine, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31 | ||||||||
2009 | 2008 | |||||||
Operating activities |
||||||||
Net income (loss) |
$ | 16,428,053 | $ | (18,912,442 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
183,011 | 149,377 | ||||||
Stock-based compensation expense |
362,014 | 321,300 | ||||||
Deferred income taxes |
(835,855 | ) | | |||||
Changes in operating assets and liabilities: |
||||||||
Receivable from Partner |
(5,946,505 | ) | (2,565,788 | ) | ||||
Prepaid expenses |
(823,823 | ) | 325,243 | |||||
Other assets |
45,891 | (45,891 | ) | |||||
Accounts payable and accrued expenses |
6,212,987 | 4,753,823 | ||||||
Other current liabilities |
| (34,637 | ) | |||||
Other liabilities |
275,668 | (39,794 | ) | |||||
Deferred revenue |
(7,317,073 | ) | (7,317,073 | ) | ||||
|
|
|
|
|||||
Net cash provided by (used in) operating activities |
8,584,368 | (23,365,882 | ) | |||||
Investing activities |
||||||||
Maturities of marketable securities |
| 2,503,274 | ||||||
Purchase of short-term investments |
(13,435,023 | ) | (738,106 | ) | ||||
Purchase of property and equipment |
(136,491 | ) | (187,238 | ) | ||||
|
|
|
|
|||||
Net cash (used in) provided by investing activities |
(13,571,514 | ) | 1,577,930 | |||||
Financing activities |
||||||||
Excess tax benefit from stock option transactions |
124,684 | 20,521 | ||||||
Proceeds from exercise of stock options |
13,897 | | ||||||
Repayments of notes payable |
(45,957 | ) | (153,289 | ) | ||||
Release of restricted cash |
| 50,000 | ||||||
Borrowings under notes payable |
| 199,246 | ||||||
|
|
|
|
|||||
Net cash provided by financing activities |
92,624 | 116,478 | ||||||
|
|
|
|
|||||
Net decrease in cash and cash equivalents |
(4,894,522 | ) | (21,671,474 | ) | ||||
Cash and cash equivalents, beginning of year |
25,490,520 | 47,161,994 | ||||||
|
|
|
|
|||||
Cash and cash equivalents, end of year |
$ | 20,595,998 | $ | 25,490,520 | ||||
|
|
|
|
|||||
Supplemental disclosures of cash flow information |
||||||||
Cash paid for interest |
$ | 318 | $ | 4,249 | ||||
|
|
|
|
|||||
Cash paid for income taxes |
$ | 1,000,954 | $ | 3,709,000 | ||||
|
|
|
|
|||||
Accretion of preferred stock and accrued dividends |
$ | 7,049,161 | $ | 7,049,527 | ||||
|
|
|
|
See accompanying notes.
5
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
1. Organization and Nature of Operations
Organization
Cardiokine, Inc. (the Company) was incorporated in Delaware on May 13, 2003, and commenced operations in March 2004. The Company was formed to develop and market pharmaceuticals for the treatment and prevention of heart failure and related cardiovascular indications, initially based on intellectual property in-licensed from a third party. The Company has offices in Philadelphia, Pennsylvania.
On July 11, 2007, the Company formed a wholly-owned subsidiary, Cardiokine Biopharma, LLC (Cardiokine Biopharma), as a Delaware limited liability company. Cardiokine Biopharma began operations concurrent with the closing of the Collaboration and License Agreement (the Collaboration Agreement) between the Company and Biogen Idec MA, Inc. (Partner) on August 1, 2007. Cardiokine Biopharma, located in Philadelphia, Pennsylvania, operates with the purpose of developing lixivaptan and performing its obligations under the Collaboration Agreement.
The Company formed a wholly owned subsidiary in Ireland on June 23, 2006. There has been no significant activity in this subsidiary since its inception.
Nature of Operations
Under the terms of the Collaboration Agreement, the Company assigned, delegated and transferred, and Cardiokine Biopharma accepted and assumed, all of the Companys right, title and interest in and to various assets and liabilities associated with the Companys lixivaptan business. Cardiokine Biopharma, located in the same offices in Philadelphia, Pennsylvania, operates with the purpose of developing lixivaptan and performing under the obligations of the Collaboration Agreement. Most of the development costs of lixivaptan are shared between the Company and the Partner through reimbursement to Cardiokine Biopharma for the costs incurred. Additionally, the Company provides back office and administrative services as well as personnel, on a contract basis, to Cardiokine Biopharma.
Reclassifications
Certain amounts from prior periods have been reclassified to conform to the current periods presentation.
6
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany account balances and transactions have been eliminated in consolidation.
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 assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At December 31, 2009, the Company had substantially all of its operating cash in U.S. government agency funds and bank deposit accounts.
Short-Term Investments
The Company classifies investments as available-for-sale or held-to-maturity at the time of purchase and reevaluates such designation as of each balance sheet date in accordance with Financial Accounting Standards Board (FASB) accounting guidance for investments. Securities are classified as held-to-maturity when the Company has the positive intent and the ability to hold the securities until maturity. Held-to-maturity investments are recorded at amortized cost, adjusted for the accretion of discounts or premiums. Discounts or premiums are accreted into interest income over the life of the related investment using the straight-line method, which approximates the effective-yield method. Dividend and interest income are recognized when earned. Investments not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value with the unrealized gains or losses, included as a separate component of stockholders deficit.
7
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Restricted Cash
Restricted cash was $50,000 at December 31, 2007, attributable to a certificate of deposit pledged as collateral to the issuer of a letter of credit. The certificate of deposit matured in 2008 and the Company is no longer required to maintain the letter of credit.
Fair Value of Financial Instruments
The carrying values of financial instruments, including cash and cash equivalents, short-term investments, receivable from Partner, accounts payable, accrued expenses and related party receivables approximates their fair value due to the short-term nature of those instruments.
Accrued Expenses
Accrued expenses represent costs for materials and services, including clinical trials management and contract research, which have been provided to the Company but have not yet been invoiced.
Property and Equipment
Property and equipment include computers, office equipment, leasehold improvements, and purchased software. Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided over the estimated useful lives of the respective assets, generally two to five years, using the straight-line method. Leasehold improvements are amortized over the estimated useful lives of the assets or related lease terms, whichever is shorter.
Impairment of Long-Lived Assets
In accordance with FASB accounting guidance, long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. As of December 31, 2009 and 2008, management believes that no modification of the remaining useful lives or write-down of long-lived assets is required.
8
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition
License fees received under the Collaboration Agreement are deferred and recognized ratably over the period to the earliest patent expiration date. Milestone revenue is recognized when the milestone is achieved.
Revenues derived from reimbursements of costs associated with the Collaboration Agreement are recorded in accordance with FASB accounting guidance for reporting revenue gross versus net. In transactions where the Company acts as a principal, has discretion to choose suppliers, bears credit risk and performs part of the services required in the transaction, the Company believes it has met the criteria to record revenue for the gross amount of the reimbursements. The Company recognizes revenue for collaboration costs which will be reimbursed by the Partner as those costs are incurred.
Research and Development Costs
Costs to develop the Companys products are expensed as incurred. Assets acquired that are used for research and development and have no future alternative use are expensed as research and development. During 2008, the Company paid $15,000,000 for in-process research and development expense.
Concentration of Credit Risk
The Companys financial instruments that are exposed to concentration of credit risks consist primarily of cash and cash equivalents, marketable securities, and receivable from Partner. The Company maintains its cash and cash equivalents in bank accounts which, at times, exceed federally insured limits and investment accounts which are not insured. The Company has not experienced any losses in such accounts.
Income Taxes
Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
9
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
temporary differences are expected to be recovered or settled. 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 necessary to reduce deferred tax assets to the amounts that are more likely than not to be realized.
In June 2006, the FASB issued guidance related to accounting for uncertainty in income taxes. This authoritative interpretation clarified and standardized the manner by which companies are required to account for uncertain income tax positions. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount of the accrual for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that the Company believes is more likely than not to be realized upon ultimate settlement of the position. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. The Company adopted this guidance effective January 1, 2009. The adoption of this guidance did not have a material impact on the Companys financial position, results of operations or cash flows.
Comprehensive Income
In accordance with FASB accounting guidance, components of other comprehensive income, including unrealized gains and losses on available-for-sale securities, are included as part of total comprehensive income. To date, the Companys other comprehensive income has consisted of unrealized gains and losses on available-for-sale securities.
Stock-Based Compensation
The fair value of the Companys common stock, underlying stock options granted since inception, was determined by the board of directors. In the absence of a public trading market of the Companys common stock, the Company was required to estimate the fair value of the Companys common stock at each option grant date. The Companys board considers numerous objective and subjective factors to determine common stock fair market value at each option grant date, including but not limited to the following factors:
| Arms length private transactions involving the Companys preferred stock all with superior rights and preferences to the Companys common stock; |
10
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
| Financial and operating performance; |
| Market conditions; |
| Developmental milestones achieved; and |
| Business risks |
The Company measures and recognizes compensation expense for all employee stock-based payments at fair value, net of estimated forfeitures, over the vesting period of the underlying share-based awards. In addition, the Company accounts for stock-based compensation to nonemployees in accordance with the FASB accounting guidance for equity instruments that are issued to other than employees.
Determining the appropriate fair value of share-based payment awards requires the input of subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The Company uses the Black-Scholes option-pricing model to value its stock option awards. The assumptions used in calculating the fair value of share-based payment awards represent managements best estimates and involve inherent uncertainties and the application of managements judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different in the future. Since the Company is not public and it does not have sufficient historical volatility for the expected term of its options, it uses comparable public companies as a basis for its expected volatility to calculate the fair value of option grants.
The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Companys current estimates, such amounts will be recorded as an adjustment in the period in which estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards and historical experience.
Shares issued as a result of exercise of stock options are taken from those authorized but not yet issued.
11
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Recently Issued Accounting Pronouncements
In May 2009, the FASB issued new guidance on subsequent events. The standard provides guidance on managements assessment of subsequent events and incorporates this guidance into accounting literature. The standard is effective prospectively for interim and annual periods ending after June 15, 2009, and the Company adopted this guidance commencing with the issuance of the December 31, 2009 financial statements. The implementation of this standard did not have a material impact on the Companys financial position and results of operations. In accordance with this guidance, management has evaluated subsequent events through the date and time the financial statements were available to be issued on February 5, 2010.
In June 2009, FASB Accounting Standards Codification (Codification) was issued, effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification supersedes literature of the FASB, Emerging Issues Task Force and other sources. The Codification did not change U.S. generally accepted accounting principles. The implementation of this standard did not have an impact on the Companys financial position and results of operations.
In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010 (early adoption is permitted), modify the criteria for recognizing revenue in multiple-element arrangements and the scope of what constitutes a non-software deliverable. The impact of the adoption of these amendments will depend on the nature of the arrangements that the Company enters into subsequent to the date the Company adopts the amendments.
3. Collaboration Agreement
On August 1, 2007, the Company executed the Collaboration Agreement whereby the Company and the Partner agreed to collaborate in the development and commercialization of its compound known as lixivaptan which is currently in the clinical stage of development. As required under the Collaboration Agreement, the Company assigned, delegated and transferred, and Cardiokine Biopharma accepted and assumed, all of the Companys right, title and interest in and to various assets and liabilities associated with the Companys lixivaptan business. Pursuant to the terms of the Collaboration Agreement, Partner paid to the Company a nonrefundable license fee of $50 million. In August 2009, Partner paid to the Company a nonrefundable milestone of $20 million.
12
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Collaboration Agreement (continued)
Under the terms of the Collaboration Agreement, the Partner is responsible for the global commercialization of lixivaptan and Cardiokine Biopharma has an option for limited co-promotion in the United States. The Collaboration Agreement also provides for potential future payments to Cardiokine Biopharma upon the achievement of certain clinical and regulatory milestones, as well as royalties on commercial sales of lixivaptan if and when it is approved for commercial sale.
In connection with activities under the Collaboration Agreement, the Company receives reimbursements on a quarterly basis for development costs incurred by the Company so that the Company bears the requisite percentage of development costs specified in the Collaboration Agreement. Total reimbursements from the Partner in 2009 and 2008 were approximately $44.7 million and $36.6 million, respectively; and development costs of $1,617,127 and $675,000 in 2009 and 2008, respectively, were charged to the Company by the Partner.
4. Short-Term Investments and Financial Instruments
Short-term investments consisted of U.S. Treasury Bills and short-term certificates of deposit that individually are less than $250,000 each and are insured by the Federal Deposit Insurance Corporation. The Company has the ability and intent to hold these investments until maturity and therefore has classified the investments as held-to-maturity. Due to the designation of these investments as available-for-sale, unrealized gains and losses have been included as a component of other comprehensive income in the accompanying consolidated financial statements. Income generated from short-term investments is recorded as interest income. As of December 31, 2009, the investments are classified as short term as the dates to maturity of such instruments are less than one year.
Fair value measurements are required to be classified and disclosed in one of the following three categories:
| Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| Level 2 Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; |
| Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). |
13
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Short-Term Investments and Financial Instruments (continued)
The following fair value hierarchy table presents information about each major category of our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2009:
Fair Value Measurement at Reporting Date Using | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Balance as of December 31, 2009 |
|||||||||||||
Cash and cash equivalents |
$ | 19,951,979 | $ | 644,019 | $ | | $ | 20,595,998 | ||||||||
Short-term investments |
12,991,068 | 1,179,067 | | 14,170,135 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 32,943,047 | $ | 1,823,086 | $ | | $ | 34,766,133 | ||||||||
|
|
|
|
|
|
|
|
5. Property and Equipment
Property and equipment consist of the following:
Estimated | December 31 | |||||||||
Useful Lives | 2009 | 2008 | ||||||||
Furniture |
5 years | $ | 44,302 | $ | 39,921 | |||||
Office equipment |
2 years | 166,263 | 118,448 | |||||||
Computer equipment |
2 years | 148,740 | 98,056 | |||||||
Leasehold improvements |
3 years | 140,412 | 128,352 | |||||||
Software |
3 years | 141,923 | 120,372 | |||||||
|
|
|
|
|||||||
641,640 | 505,149 | |||||||||
Less accumulated depreciation and amortization |
(448,715 | ) | (265,704 | ) | ||||||
|
|
|
|
|||||||
$ | 192,925 | $ | 239,445 | |||||||
|
|
|
|
Depreciation and amortization expense was $183,011 and $149,377, for the years ended December 31, 2009 and 2008, respectively.
14
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Notes Payable
The Company financed certain insurance premiums over a term of one year at an interest rate of approximately 5%. At December 31, 2008, the notes payable were $45,957 and interest paid was $4,249. The notes were paid in full in February 2009.
7. Income Taxes
Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect for the year in which the differences are expected to affect taxable income.
The following table sets forth the components of the income tax provision:
Year Ended December 31 | ||||||||
2009 | 2008 | |||||||
Current: |
||||||||
Federal |
$ | 495,302 | $ | 689,295 | ||||
State |
662,838 | 3,770,690 | ||||||
Deferred: |
||||||||
Federal |
(835,855 | ) | | |||||
State |
| | ||||||
|
|
|
|
|||||
Total income tax provision |
$ | 322,285 | $ | 4,459,985 | ||||
|
|
|
|
The following table sets forth a reconciliation of the income tax provision at the federal statutory rate to the recorded income tax provision:
Year Ended December 31 | ||||||||
2009 | 2008 | |||||||
Income taxes at U.S. statutory rate |
35 | % | (35 | )% | ||||
State and local income tax, net of federal benefit |
11 | (11 | ) | |||||
Permanent differences |
(3 | ) | 1 | |||||
Research and development tax credits |
(1 | ) | | |||||
Change in valuation allowance |
(40 | ) | 76 | |||||
|
|
|
|
|||||
Total income tax provision |
2 | % | 31 | % | ||||
|
|
|
|
15
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
The following table sets forth the components of deferred income taxes:
December 31 | ||||||||
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | 1,700,000 | $ | 1,895,000 | ||||
Deferred revenue |
14,764,000 | 18,107,000 | ||||||
Research and development expense |
4,895,000 | 5,874,000 | ||||||
Research tax credits |
21,000 | 1,180,000 | ||||||
AMT credit |
| 541,000 | ||||||
Stock compensation expense |
71,000 | 49,000 | ||||||
Intangible assets |
106,000 | 118,000 | ||||||
Accruals |
86,000 | 19,000 | ||||||
Other |
15,000 | 1,000 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
21,658,000 | 27,784,000 | ||||||
Less valuation allowance |
(20,822,000 | ) | (27,784,000 | ) | ||||
|
|
|
|
|||||
Total net deferred tax asset |
$ | 836,000 | $ | | ||||
|
|
|
|
At December 31, 2009, the Company has net operating loss carryforwards for state income tax purposes of approximately $26.5 million, which begin to expire in 2025. The Company has research and development tax credit carryforwards at December 31, 2009 of approximately $0.02 million for state income tax purposes, which begin to expire in 2024.
Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The Company has performed an analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change. It was determined that a change in ownership occurred on March 16, 2004. However, the annual limitation imposed under Section 382 was greater than the pre-ownership change net operating loss carryforward, resulting in no effect to the Companys deferred tax assets.
At December 31, 2009, a valuation allowance of $20.8 million was recorded to partially offset the net deferred tax asset. The change in the valuation allowance for the year ended December 31, 2009 was approximately $7.0 million.
16
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
As of December 31, 2009, the total gross amount of reserves for income taxes, reported in the accompanying consolidated balance sheet, was $288,000. Any prospective adjustments to reserves for income taxes will be recorded as an increase or decrease to the provision for income taxes and would impact the Companys effective tax rate. In addition, the Company accrues interest related to reserves, and any associated penalties, for income taxes in the provision for income taxes. The gross amount of interest and penalties accrued is $4,000 as of December 31, 2009, all of which was recognized in 2009.
8. Redeemable Convertible Preferred Stock
The authorized, issued, and outstanding shares of the Companys convertible preferred stock are as follows:
December 31, 2009 | ||||||||||||||||
Shares Authorized |
Shares Issued and Outstanding |
Liquidation Preference Per Share |
Aggregate Liquidation Preference |
|||||||||||||
Series A Preferred Stock |
37,000,000 | 37,000,000 | $ | 1.00 | $ | 42,920,000 | ||||||||||
Series B Preferred Stock |
60,000,000 | 50,000,000 | $ | 1.00 | 58,000,000 | |||||||||||
Series B1 Preferred Stock |
60,000,000 | | | |||||||||||||
|
|
|
|
|
|
|||||||||||
157,000,000 | 87,000,000 | $ | 100,920,000 | |||||||||||||
|
|
|
|
|
|
The aggregate liquidation preference amount would not be affected by changes to the fair value of the preferred stock.
Series A Redeemable Convertible Preferred Stock
During 2005, the Company issued 26,428,571 shares of Series A redeemable convertible preferred stock (Series A) in accordance with the second and third closings of the Series A Preferred Stock Purchase Agreement for $26,416,447, net of issuance costs of $12,124. During 2004, the Company issued 10,571,429 shares of Series A for $10,207,216, net of issuance costs of $364,213. The carrying value of Series A is being accreted to its redemption value on a straight-line basis to its earliest redemption date.
17
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Redeemable Convertible Preferred Stock (continued)
Series B Redeemable Convertible Preferred Stock
The Company received an aggregate of $50,000,000 in exchange for the issuance of 50,000,000 shares of Series B redeemable convertible preferred stock (Series B) on April 26, 2006. The Series B preferred stock was recorded net of issuance costs of $220,017, and the carrying value is being accreted to its redemption value on a straight-line basis to its earliest redemption date.
Series B1 Redeemable Preferred Stock
Concurrent with the issuance of Series B, the Company authorized 60,000,000 shares of Series B1 Preferred Stock. No shares of this class have been issued.
Preferred Stock Voting
Preferred stockholders are entitled to the number of votes equal to the number of shares of common stock into which each share of preferred stock is convertible, subject to certain protective provisions and other class voting rights.
Preferred Stock Dividends
The holders of Series A and Series B preferred stock are entitled to receive cumulative dividends at the rate of 8% of the applicable purchase price per share per annum in preference to any dividends declared on the common stock. Dividends accrue quarterly regardless of whether the Board has declared a dividend or whether there are any profits, but are payable only when declared by the Board or upon an initial public offering, a liquidity event, redemption, or conversion. On December 31, 2007, the Board declared a dividend of $50 million. Dividends of $21,821,309 and $25,359,880, including cumulative dividends of $8,034,286 and $6,728,768, were paid to the Series A and Series B stockholders, respectively. At December 31, 2009, dividends totaling $5,920,000 and $8,000,000 have been accrued for Series A and Series B preferred stock, respectively.
18
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Redeemable Convertible Preferred Stock (continued)
Redemption Rights
At any time on or after April 26, 2011, the holders of a Special Majority, voting as a class, may require the Company to redeem all the outstanding shares of preferred stock for an amount equal to the original purchase price per share plus accrued but unpaid dividends. Special Majority is defined as a majority of all the preferred stockholders voting together as a single class, which majority includes at least one of the two larger Series A preferred stockholders and at least one of the two larger Series B preferred stockholders.
Liquidation Preference
In the event of a liquidity event (liquidation, winding up, or a sale, merger, or reorganization in which the shareholders of the Company do not remain in voting control of the successor entity), the holders of Series B preferred stock are entitled to receive, in preference to the Series A preferred stock or the common stock, an amount equal to the original purchase price per share plus any accrued but unpaid dividends thereon. After payment of the Series B preferred stock liquidation preference, the holders of Series A preferred stock are entitled to receive, in preference to the common stock, an amount equal to the original purchase price per share plus any accrued but unpaid dividends thereon. After payment of these preferential amounts, the Series A and Series B preferred stock shall participate on an as-converted basis with other holders of common stock.
Conversion
Each holder of preferred stock is entitled at any time to convert their preferred stock into common stock for that number of shares of common stock which is determined by dividing the original purchase price per share plus any accrued but unpaid dividends by the conversion price then in effect, which is currently equal to the original purchase price. If the Company issues additional stock at a price less than what was paid by the Series B stockholders, certain antidilution rights go into effect. Additionally, the preferred stock will convert automatically: (i) immediately prior to the closing of a public offering pursuant to an effective registration statement under the Securities Act of 1933 covering the offer and sale of common stock, which results in aggregate net proceeds to the Company of at least $40,000,000 and a per share price of at least $3.00 (appropriately adjusted for any stock dividend, stock split, or recapitalization); or (ii) the date specified by written consent or agreement of a Special Majority of the preferred stockholders.
19
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Common Stock and Stockholders Deficit
Common Stock
The Company is authorized to issue 172,839,076 shares of common stock. The Company is required, at all times, to reserve and keep available out of its authorized but unissued shares of common stock sufficient shares to effect the conversion of the shares of the preferred stock and the exercise of stock options.
Dividend
On December 31, 2007, the Board declared and the Company paid a dividend of $50 million. After payment of the cumulative and participating preferred stock dividends, holders of common stock received a dividend of $2,818,811.
Stock Option Plan
In March 2004, the Companys Board of Directors and stockholders approved the Companys 2004 Stock Incentive Plan (the 2004 Plan). The 2004 Plan provides for the granting of options to purchase shares of the Companys common stock, and the direct issuance of common stock, to key employees, advisors, and consultants at a price not less than the fair market value at the date of grant tied to the value of such common stock.
The 2004 Plan is intended to encourage ownership of stock by employees and consultants of the Company and to provide additional incentives for them to promote the success of the Companys business and is administered by the Board of Directors or a committee consisting of members of the Board. The maximum number of shares of common stock reserved for issuance under the 2004 Plan is 10,308,250. The maximum term of the options granted is 10 years.
Options granted pursuant to the 2004 Plan generally vest 25% after the first year, and the remaining 75% vest monthly over the next three years, or, for nonemployees, monthly over the term of the related agreement. Shares of common stock may be issued under the 2004 Plan either as fully vested shares or in accordance with a vesting schedule as specified by the Board.
In December 2009, the Company granted 1,028,835 performance-based stock options to employees. These performance options have exercise prices equal to the fair value of the Companys stock at the grant date. Vesting of the performance options is dependent upon certain performance conditions, including certain strategic transactions as defined in the option
20
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Common Stock and Stockholders Deficit (continued)
agreement. Stock-based compensation expense for these options will be recorded when management estimates that the vesting of these options is probable. Any change in these estimates will result in a cumulative adjustment in the period in which the estimate is changed, so that as of the end of a period, the cumulative compensation expense recognized for an award or grant equals the amount that would be recognized on a straight-line basis as if the current estimate had been utilized since the beginning of the service period.
Under FASB accounting guidance for stock compensation, the Company recorded stock-based compensation expense of $362,014 ($101,909 recorded in research and development expenses and $260,105 recorded in general and administrative expenses) for the year ended December 31, 2009.
The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The fair value of stock option awards is amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Expected volatility is based on reported data for selected reasonably similar (or guideline) publicly traded companies for which historical information was available. The Company continues to use the guideline peer group volatility information until historical volatility of the Company is relevant to measure expected volatility for future option grants. The Company has assumed a forfeiture rate of 25% based on historical experience, and will record additional expense if the actual forfeiture rate is lower than estimated or a recovery of prior expense if the actual forfeiture rate is higher than estimated.
The assumed dividend yield is based on the Companys expectation of not paying dividends in the foreseeable future. The risk-free interest rate is determined by reference to implied yields available from the three-year and five-year U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant. The assumptions used in the Black-Scholes option-pricing model are:
2009 | 2008 | |||||||
Risk-free interest rate |
1.8 | % | 3.06 | % | ||||
Dividend yield |
0.0 | % | 0.0 | % | ||||
Expected life |
4.0 years | 5.1 years | ||||||
Volatility |
154.1 | % | 121.9 | % |
21
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Common Stock and Stockholders Deficit (continued)
The following table summarizes stock option activity for the Company:
Options Outstanding | ||||||||||||||||
Shares Available for Grant |
Number of Shares |
Option Price Per Share Range |
Weighted- Average Exercise Price |
|||||||||||||
Balance at December 31, 2007 |
2,991,834 | 2,443,373 | $ | 0.13 $ 0.45 | $ | 0.32 | ||||||||||
Shares authorized |
1,000,000 | | ||||||||||||||
Options granted |
(3,065,000 | ) | 3,065,000 | $ 0.45 | $ | 0.45 | ||||||||||
Options exercised |
| | ||||||||||||||
Options forfeited |
788,135 | (788,135 | ) | $ | 0.13 $ 0.45 | $ | 0.28 | |||||||||
|
|
|
|
|||||||||||||
Balance at December 31, 2008 |
1,714,969 | 4,720,238 | ||||||||||||||
Shares authorized |
1,808,250 | | ||||||||||||||
Options granted |
(4,990,000 | ) | 4,990,000 | $ 0.45 | $ | 0.45 | ||||||||||
Options exercised |
| (34,740 | ) | $ 0.40 | $ | 0.40 | ||||||||||
Options forfeited |
1,757,812 | (1,757,812 | ) | $ | 0.15 $ 0.45 | $ | 0.42 | |||||||||
|
|
|
|
|||||||||||||
Balance at December 31, 2009 |
291,031 | 7,917,686 | ||||||||||||||
|
|
|
|
The following table summarizes information about vested stock options outstanding at December 31, 2009:
Vested stock options |
2,550,061 | |||
Weighted-average exercise price |
$ | 0.40 |
22
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Common Stock and Stockholders Deficit (continued)
The following table summarizes information about stock options outstanding at December 31, 2009:
Exercise Price |
Options Outstanding |
Options Vested |
Weighted- Average Remaining Contractual Life | |||||||
$0.125 |
47,916 | 47,916 | 4.3 years | |||||||
$0.150 |
42,708 | 42,708 | 4.7 years | |||||||
$0.300 |
315,105 | 315,105 | 5.3 years | |||||||
$0.350 |
242,708 | 242,708 | 5.7 years | |||||||
$0.400 |
603,625 | 518,500 | 6.4 years | |||||||
$0.450 |
6,665,625 | 1,383,125 | 9.4 years |
Unvested stock options at December 31, 2009 were 5,367,625.
The weighted-average fair value of options granted during 2009 and 2008 was approximately $0.39 per share and $0.37 per share, respectively. The weighted-average fair value of options forfeited during 2009 and 2008 was $0.33 per share and $0.19 per share, respectively. The total fair value of shares vested during the years ended December 31, 2009 and 2008 was $553,165 and $105,040, respectively.
The fair value of unvested options was approximately $2,102,000 and $1,199,000 at December 31, 2009 and 2008, respectively. The total remaining unrecognized compensation costs related to unvested stock options was approximately $1,250,000 as of December 31, 2009, and will be amortized over the weighted-average remaining service period of 3 years.
23
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies
License Arrangement
The Company entered into an exclusive license agreement on March 15, 2004, with Wyeth, acting through its Wyeth Pharmaceuticals Division, for the rights to research, develop, manufacture, and commercialize the compound known as lixivaptan. On February 6, 2008, the Company, through its wholly owned subsidiary Cardiokine Biopharma, entered into an amendment of its license agreement with Wyeth to buy out the royalty and milestone payments due in exchange for a $15 million nonrefundable payment, plus two future payments that are contingent upon the achievement of two milestone events. The first payment of $15 million was made in February 2008 and was included in research and development expense.
In the event the Company also pays both contingent payments to Wyeth, then the license granted to the Company by Wyeth shall be perpetual, irrevocable, nonterminable and fully paid-up, and no future milestone or royalty payments will be required.
11. Related Party Transactions
The Company has incurred fees to a founder, stockholder, and former director of approximately $140,000 for the year ended December 31, 2009 and $99,000 for the year ended December 31, 2008, under the provisions of a consulting agreement. At December 31, 2009, accounts payable includes approximately $49,500 for amounts due as a result of terminating the consulting agreement during 2009.
12. Leases
The Company entered into an operating lease in March 2005, and an amendment in October 2009 for the extension of the original space and for additional space for its corporate facilities in Philadelphia, Pennsylvania. The amended lease expires in 2011. Future minimum lease commitments are as follows:
2010 |
$ | 272,000 | ||
2011 |
161,000 | |||
|
|
|||
$ | 433,000 | |||
|
|
Rent expense was $191,281 and $165,976 for the years ended December 31, 2009 and 2008, respectively.
24
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Leases (continued)
During 2005, the Company was reimbursed approximately $72,000 by its landlord for tenant improvements comprising both leasehold improvements and certain allowable furniture. Under the lease, all tenant improvements become part of the leased premises. As such, tenant improvements (including the furniture reimbursed by the landlord) must be surrendered by the Company with the leased premises upon the expiration or early termination of the lease unless the landlord elects to have the Company remove the tenant improvements.
13. Benefit Plan
In October 2004, the Company established a 401(k) plan (the Plan) covering all eligible employees. As of December 31, 2009, the Company has elected not to match any of the employees contributions to the Plan.
25
Exhibit 99.2
CONSOLIDATED FINANCIAL STATEMENTS | ||
Cardiokine, Inc. and Subsidiaries Years Ended December 31, 2010 and 2009 With Report of Independent Auditors |
Cardiokine, Inc. and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 2010 and 2009
Contents
Report of Independent Auditors |
1 | |||
Audited Consolidated Financial Statements |
||||
Consolidated Balance Sheets |
2 | |||
Consolidated Statements of Operations |
3 | |||
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders Deficit |
4 | |||
Consolidated Statements of Cash Flows |
5 | |||
Notes to Consolidated Financial Statements |
6 |
Report of Independent Auditors
The Board of Directors
Cardiokine, Inc.
We have audited the accompanying consolidated balance sheets of Cardiokine, Inc. and Subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, redeemable convertible preferred stock and stockholders deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the 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. We were not engaged to perform an audit of the Companys 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 Companys 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cardiokine, Inc. and Subsidiaries at December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst and Young LLP
May 12, 2011
1
Cardiokine, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31 | ||||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 58,101,016 | $ | 20,595,998 | ||||
Short-term investments |
1,051,519 | 14,170,135 | ||||||
Receivable from Partner |
| 12,962,784 | ||||||
Prepaid expenses and other current assets |
787,172 | 1,086,415 | ||||||
Deferred income taxes |
2,191,435 | 835,855 | ||||||
|
|
|
|
|||||
Total current assets |
62,131,142 | 49,651,187 | ||||||
Property and equipment, net |
95,975 | 192,925 | ||||||
|
|
|
|
|||||
Total assets |
$ | 62,227,117 | $ | 49,844,112 | ||||
|
|
|
|
|||||
Liabilities, redeemable preferred stock, and stockholders deficit |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 3,106,645 | $ | 3,268,710 | ||||
Accrued expenses |
12,398,842 | 13,036,760 | ||||||
Deferred revenue |
| 7,317,074 | ||||||
|
|
|
|
|||||
Total current liabilities |
15,505,487 | 23,622,544 | ||||||
Other liabilities |
330,459 | 299,621 | ||||||
Deferred revenue, net of current portion |
| 24,999,999 | ||||||
Series A redeemable convertible preferred stock, $.001 par value, 37,000,000 shares authorized, 37,000,000 shares issued and outstanding (liquidation preference of $45,880,000 at December 31, 2010) |
45,865,772 | 42,860,614 | ||||||
Series B redeemable convertible preferred stock, $.001 par value, 60,000,000 shares authorized, 50,000,000 shares issued and outstanding (liquidation preference of $62,000,000 at December 31, 2010) |
61,986,257 | 57,942,254 | ||||||
Series B1 redeemable preferred stock, $.001 par value, 60,000,000 shares authorized, none issued or outstanding at December 31, 2010 or 2009 |
| | ||||||
Stockholders deficit: |
||||||||
Common stock, $.0001 par value, 172,839,076 shares authorized, 7,599,533 shares issued and outstanding at December 31, 2010 and 2009 |
760 | 760 | ||||||
Other comprehensive loss |
(100 | ) | (2,998 | ) | ||||
Accumulated deficit |
(61,461,518 | ) | (99,878,682 | ) | ||||
|
|
|
|
|||||
Total stockholders deficit |
(61,460,858 | ) | (99,880,920 | ) | ||||
|
|
|
|
|||||
Total liabilities, redeemable preferred stock, and stockholders deficit |
$ | 62,227,117 | $ | 49,844,112 | ||||
|
|
|
|
See accompanying notes.
2
Cardiokine, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31 | ||||||||
2010 | 2009 | |||||||
Revenue: |
||||||||
Milestone revenue |
$ | 25,000,000 | $ | 20,000,000 | ||||
Collaboration revenue |
32,317,073 | 7,317,073 | ||||||
Reimbursement of collaboration costs |
41,810,464 | 44,668,043 | ||||||
|
|
|
|
|||||
Total revenue |
99,127,537 | 71,985,116 | ||||||
|
|
|
|
|||||
Costs and expenses: |
||||||||
Research and development |
45,356,531 | 52,010,356 | ||||||
General and administrative |
2,793,247 | 3,331,878 | ||||||
|
|
|
|
|||||
Total operating expenses |
48,149,778 | 55,342,234 | ||||||
|
|
|
|
|||||
Income from operations |
50,977,759 | 16,642,882 | ||||||
Other income (expense): |
||||||||
Interest income |
272,348 | 107,774 | ||||||
Interest expense |
| (318 | ) | |||||
|
|
|
|
|||||
Total other income |
272,348 | 107,456 | ||||||
|
|
|
|
|||||
Income before income taxes |
51,250,107 | 16,750,338 | ||||||
Income tax expense |
(6,143,722 | ) | (322,285 | ) | ||||
|
|
|
|
|||||
Net income |
45,106,385 | 16,428,053 | ||||||
Deemed dividend and accretion to redemption value of preferred stock |
(7,049,161 | ) | (7,049,161 | ) | ||||
|
|
|
|
|||||
Net income attributable to common stockholders |
$ | 38,057,224 | $ | 9,378,892 | ||||
|
|
|
|
See accompanying notes.
3
Cardiokine, Inc. and Subsidiaries
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders Deficit
Series A Redeemable Convertible |
Series B Redeemable Convertible Preferred Stock |
Common Stock | Additional Paid-in |
Other Comprehensive Income |
Accumulated | Total Stockholders |
||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Loss) | Deficit | Deficit | |||||||||||||||||||||||||||||||
Balance at December 31, 2008 |
37,000,000 | $ | 39,855,457 | 50,000,000 | $ | 53,898,250 | 7,564,793 | $ | 756 | $ | | $ | (4 | ) | $ | (109,758,165 | ) | $ | (109,757,413 | ) | ||||||||||||||||||||
Compensation expense stock options |
| | | | | | 362,014 | | | 362,014 | ||||||||||||||||||||||||||||||
Tax benefit related to stock options |
| | | | | | 124,684 | | | 124,684 | ||||||||||||||||||||||||||||||
Stock issued upon exercise of stock options |
| | | | 34,740 | 4 | 13,893 | | | 13,897 | ||||||||||||||||||||||||||||||
Accretion of Series A and Series B Preferred Stock and accrued dividends |
| 3,005,157 | | 4,044,004 | | | (500,591 | ) | | (6,548,570 | ) | (7,049,161 | ) | |||||||||||||||||||||||||||
Net income |
| | | | | | | | 16,428,053 | 16,428,053 | ||||||||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||||||
Unrealized loss on available-for-sale securities |
| | | | | | | (2,994 | ) | (2,994 | ) | |||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||
Total comprehensive income |
16,425,059 | |||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Balance at December 31, 2009 |
37,000,000 | 42,860,614 | 50,000,000 | 57,942,254 | 7,599,533 | 760 | | (2,998 | ) | (99,878,682 | ) | (99,880,920 | ) | |||||||||||||||||||||||||||
Compensation expense stock options |
| | | | | | 359,940 | | | 359,940 | ||||||||||||||||||||||||||||||
Accretion of Series A and Series B Preferred Stock and accrued dividends |
| 3,005,158 | | 4,044,003 | | | (359,940 | ) | | (6,689,221 | ) | (7,049,161 | ) | |||||||||||||||||||||||||||
Net income |
| | | | | | | | 45,106,385 | 45,106,385 | ||||||||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||||||||||
Unrealized gain on available-for-sale securities |
| | | | | | | 2,898 | | 2,898 | ||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||
Total comprehensive income |
45,109,283 | |||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Balance at December 31, 2010 |
37,000,000 | $ | 45,865,772 | 50,000,000 | $ | 61,986,257 | 7,599,533 | $ | 760 | $ | | $ | (100 | ) | $ | (61,461,518 | ) | $ | (61,460,858 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
Cardiokine, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31 | ||||||||
2010 | 2009 | |||||||
Operating activities |
||||||||
Net income |
$ | 45,106,385 | $ | 16,428,053 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
123,893 | 183,011 | ||||||
Stock-based compensation expense |
359,940 | 362,014 | ||||||
Deferred income taxes |
(1,355,580 | ) | (835,855 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Receivable from Partner |
12,962,784 | (5,946,505 | ) | |||||
Prepaid expenses and other current assets |
299,243 | (777,932 | ) | |||||
Accounts payable and accrued expenses |
(799,983 | ) | 6,212,987 | |||||
Other liabilities |
30,838 | 275,668 | ||||||
Deferred revenue |
(32,317,073 | ) | (7,317,073 | ) | ||||
|
|
|
|
|||||
Net cash provided by operating activities |
24,410,447 | 8,584,368 | ||||||
Investing activities |
||||||||
Sale (purchase) of short-term investments |
13,121,514 | (13,435,023 | ) | |||||
Purchase of property and equipment |
(26,943 | ) | (136,491 | ) | ||||
|
|
|
|
|||||
Net cash provided by (used in) investing activities |
13,094,571 | (13,571,514 | ) | |||||
Financing activities |
||||||||
Excess tax benefit from stock option transactions |
| 124,684 | ||||||
Proceeds from exercise of stock options |
| 13,897 | ||||||
Repayments of notes payable |
| (45,957 | ) | |||||
|
|
|
|
|||||
Net cash provided by financing activities |
| 92,624 | ||||||
|
|
|
|
|||||
Net increase (decrease) in cash and cash equivalents |
37,505,018 | (4,894,522 | ) | |||||
Cash and cash equivalents, beginning of year |
20,595,998 | 25,490,520 | ||||||
|
|
|
|
|||||
Cash and cash equivalents, end of year |
$ | 58,101,016 | $ | 20,595,998 | ||||
|
|
|
|
|||||
Supplemental disclosures of cash flow information |
||||||||
Cash paid for interest |
$ | | $ | 318 | ||||
|
|
|
|
|||||
Cash paid for income taxes |
$ | 704,392 | $ | 1,000,954 | ||||
|
|
|
|
|||||
Accretion of preferred stock and accrued dividends |
$ | 7,049,161 | $ | 7,049,161 | ||||
|
|
|
|
See accompanying notes.
5
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010
1. Organization and Nature of Operations
Organization
Cardiokine, Inc. (the Company) was incorporated in Delaware on May 13, 2003, and commenced operations in March 2004. The Company was formed to develop and market pharmaceuticals for the treatment and prevention of heart failure and related cardiovascular indications, initially based on intellectual property in-licensed from a third party. The Company has offices in Philadelphia, Pennsylvania.
On July 11, 2007, the Company formed a wholly owned subsidiary, Cardiokine Biopharma, LLC (Cardiokine Biopharma), as a Delaware limited liability company. Cardiokine Biopharma began operations concurrent with the closing of the Collaboration and License Agreement (the Collaboration Agreement) between the Company and Biogen Idec MA, Inc. (Partner) on August 1, 2007. Cardiokine Biopharma, located in Philadelphia, Pennsylvania, operates with the purpose of developing lixivaptan.
The Company formed a wholly owned subsidiary in Ireland on June 23, 2006. There has been no significant activity in this subsidiary since its inception.
Nature of Operations
The Company assigned, delegated and transferred, and Cardiokine Biopharma accepted and assumed, all of the Companys right, title and interest in and to various assets and liabilities associated with the Companys lixivaptan business. Cardiokine Biopharma, located in the same offices in Philadelphia, Pennsylvania, operates with the purpose of developing lixivaptan. Until November 2010, most development costs of lixivaptan were shared between the Company and the Partner through reimbursement to Cardiokine Biopharma for a percentage of the shared costs incurred. Additionally, the Company provides back-office and administrative services as well as personnel, on a contract basis, to Cardiokine Biopharma.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany account balances and transactions have been eliminated in consolidation.
6
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
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 assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At December 31, 2010, the Company had substantially all of its operating cash in U.S. Treasuries, U.S. government agency funds, and bank deposit accounts.
Short-Term Investments
The Company classifies investments as available-for-sale or held-to-maturity at the time of purchase and reevaluates such designation as of each balance sheet date. Securities are classified as held-to-maturity when the Company has the positive intent and the ability to hold the securities until maturity. Held-to-maturity investments are recorded at amortized cost, adjusted for the accretion of discounts or premiums. Discounts or premiums are accreted into interest income over the life of the related investment using the straight-line method, which approximates the effective-yield method. Dividend and interest income are recognized when earned. Investments not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value with the unrealized gains or losses included as a separate component of stockholders deficit.
Fair Value of Financial Instruments
The carrying values of financial instruments, including cash and cash equivalents, short-term investments, receivable from Partner, accounts payable and accrued expenses approximate their fair value due to the short-term nature of those instruments.
7
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment include computers, office equipment, leasehold improvements, and purchased software. Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided over the estimated useful lives of the respective assets, generally two to five years, using the straight-line method. Leasehold improvements are amortized over the estimated useful lives of the assets or related lease terms, whichever is shorter.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. As of December 31, 2010 and 2009, management believes that no modification of the remaining useful lives or write-down of long-lived assets is required.
Revenue Recognition
License fees received under the Collaboration Agreement are deferred and recognized ratably over the period to the earliest patent expiration date. In conjunction with the termination of the Collaboration Agreement in October 2010, the remaining unamortized deferred collaboration revenue was recognized. Milestone revenue is recognized when the milestone is achieved.
Revenues derived from reimbursements of costs associated with the Collaboration Agreement were recorded in accordance with Financial Accounting Standards Board (FASB) accounting guidance for reporting revenue gross versus net. In transactions where the Company acted as a principal, had discretion to choose suppliers, bore credit risk and performed part of the services required in the transaction, the Company believes it has met the criteria to record revenue for the gross amount of the reimbursements. The Company recognized revenue for collaboration costs which were subsequently reimbursed by the Partner as those costs were incurred.
8
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Research and Development Costs
Costs to develop the Companys products are expensed as incurred. Assets acquired that are used for research and development and have no future alternative use are expensed as research and development.
The Company often contracts with clinical research organizations (CROs) to facilitate, coordinate and perform agreed-upon research and development services. To ensure that research and development costs are expensed as incurred, monthly accruals for clinical trials and preclinical testing costs are recorded based on the work performed under the contract.
CRO contracts generally include pass-through fees. Pass-through fees include, but are not limited to: regulatory expenses, investigator fees, travel costs, and other miscellaneous costs, including shipping and printing fees. The Company expenses the costs of pass-through fees under its CRO contracts as they are incurred, based on the best information available at the time. The estimates of the pass-through fees incurred are based on the amount of work completed for the clinical trial and are monitored through correspondence with the CROs, internal reviews and a review of contractual terms. The factors utilized to derive the estimates include the number of patients enrolled, duration of the clinical trial, estimated patient attrition, screening rate and length of the dosing regimen.
Concentration of Credit Risk
The Companys financial instruments that are exposed to concentration of credit risks consist primarily of cash and cash equivalents, marketable securities, and receivable from Partner. The Company maintains its cash and cash equivalents in bank accounts which, at times, exceed federally insured limits and investment accounts which are not insured. The Company has not experienced any losses in such accounts.
9
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 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 necessary to reduce deferred tax assets to the amounts that are more likely than not to be realized.
In June 2006, the FASB issued guidance related to accounting for uncertainty in income taxes. This authoritative interpretation clarified and standardized the manner by which companies are required to account for uncertain income tax positions. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount of the accrual for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that the Company believes is more likely than not to be realized upon ultimate settlement of the position. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. The Company adopted this guidance effective January 1, 2009. The adoption of this guidance did not have a material impact on the Companys consolidated financial position, results of operations, or cash flows.
Comprehensive Income
In accordance with FASB accounting guidance, components of other comprehensive income, including unrealized gains and losses on available-for-sale securities, are included as part of total comprehensive income. To date, the Companys other comprehensive income has consisted of unrealized gains and losses on available-for-sale securities.
10
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The fair value of the Companys common stock, underlying stock options granted since inception, was determined by the board of directors. In the absence of a public trading market of the Companys common stock, the Company was required to estimate the fair value of the Companys common stock at each option grant date. The Companys board considers numerous objective and subjective factors to determine common stock fair market value at each option grant date, including but not limited to the following factors:
| Arms length private transactions involving the Companys preferred stock all with superior rights and preferences to the Companys common stock; |
| Financial and operating performance; |
| Market conditions; |
| Developmental milestones achieved; and |
| Business risks |
The Company measures and recognizes compensation expense for all employee stock-based payments at fair value, net of estimated forfeitures, over the vesting period of the underlying share-based awards. In addition, the Company accounts for stock-based compensation to nonemployees in accordance with the FASB accounting guidance for equity instruments that are issued to other than employees.
Determining the appropriate fair value of share-based payment awards requires the input of subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The Company uses the Black-Scholes option-pricing model to value its stock option awards. The assumptions used in calculating the fair value of share-based payment awards represent managements best estimates and involve inherent uncertainties and the application of managements judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different in the future. Since the Company is not public and it does not have sufficient historical volatility for the expected term of its options, it uses comparable public companies as a basis for its expected volatility to calculate the fair value of option grants.
11
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Companys current estimates, such amounts will be recorded as an adjustment in the period in which estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards and historical experience.
Shares issued as a result of exercise of stock options are taken from those authorized but not yet issued.
Recently Issued Accounting Pronouncements
In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010 (early adoption is permitted), modify the criteria for recognizing revenue in multiple-element arrangements and the scope of what constitutes a non-software deliverable. The impact of the adoption of these amendments will depend on the nature of the arrangements that the Company enters into subsequent to the date the Company adopts the amendments.
In January 2010, an amendment to the FASB fair value guidance was issued. This amendment requires disclosures of transfers into and out of Levels 1 and 2, more detailed rollforward reconciliations of Level 3 recurring fair value measurements on a gross basis, fair value information by class of assets and liabilities, and descriptions of valuation techniques and inputs for Level 2 and Level 3 measurements. The Company adopted the amendment effective January 1, 2010, which had no impact on its consolidated financial statements as this change is disclosure-only in nature.
In April 2010, the FASB issued guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a study or achieving a specific result from the research or development efforts. The amendments provide guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. This guidance is effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Implementation of this standard is not expected to have a material impact on the Companys consolidated balance sheet and results of operations.
12
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Subsequent Events
Subsequent events have been evaluated through May 12, 2011, which is the date the financial statements were available to be issued. There were no subsequent events that required recognition or disclosure.
3. Collaboration Agreement
On August 1, 2007, the Company executed the Collaboration Agreement whereby the Company and the Partner agreed to collaborate in the development and commercialization of its compound known as lixivaptan which is currently in the clinical stage of development. As required under the Collaboration Agreement, the Company assigned, delegated and transferred, and Cardiokine Biopharma accepted and assumed, all of the Companys right, title and interest in and to various assets and liabilities associated with the Companys lixivaptan business. Pursuant to the terms of the Collaboration Agreement, the Partner paid to the Company a nonrefundable license fee of $50 million. In August 2009, the Partner paid to the Company a nonrefundable milestone of $20 million.
Under the terms of the Collaboration Agreement, the Partner was responsible for the global commercialization of lixivaptan and Cardiokine Biopharma had an option for limited co-promotion in the United States. The Collaboration Agreement also provided for potential future payments to Cardiokine Biopharma upon the achievement of certain clinical and regulatory milestones, as well as royalties on commercial sales of lixivaptan if and when it was approved for commercial sale.
In connection with activities under the Collaboration Agreement, the Company received reimbursements on a quarterly basis for development costs incurred by the Company so that the Company bore the requisite percentage of development costs specified in the Collaboration Agreement. Total reimbursements from the Partner in 2010 and 2009 were approximately $41.8 million and $44.7 million, respectively; and development costs of $614,114 and $1,617,127 in 2010 and 2009, respectively, were charged to the Company by the Partner.
13
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Collaboration Agreement (continued)
In October 2010, the Company and the Partner agreed to terminate the collaboration for the development of lixivaptan effective November 1, 2010. Under the terms of the agreement, the Partner funded its share of the development costs through the effective date and made a final payment of $25 million to the Company. The final payment is included in Milestone revenue on the consolidated statement of operations. The termination triggered the return of all rights to lixivaptan to the Company.
4. Short-Term Investments and Financial Instruments
Short-term investments consist of U.S. Treasury Bills and short-term certificates of deposit that individually are less than $250,000 each and are insured by the Federal Deposit Insurance Corporation. Due to the designation of these investments as available-for-sale, unrealized gains and losses have been included as a component of other comprehensive income in the accompanying consolidated financial statements. Income generated from short-term investments is recorded as interest income. As of December 31, 2010, the investments are classified as short term as the dates to maturity of such instruments are less than one year.
Fair value measurements are required to be classified and disclosed in one of the following three categories:
| Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| Level 2 Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; |
| Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). |
14
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Short-Term Investments and Financial Instruments (continued)
The following fair value hierarchy table presents information about each major category of the Companys financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010:
Fair Value Measurement at Reporting Date Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Balance as of December 31, 2010 |
|||||||||||||
Cash and cash equivalents |
$ | 57,638,437 | $ | 462,579 | $ | | $ | 58,101,016 | ||||||||
Short-term investments |
| 1,051,519 | | 1,051,519 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 57,638,437 | $ | 1,514,098 | $ | | $ | 59,152,535 | ||||||||
|
|
|
|
|
|
|
|
The following fair value hierarchy table presents information about each major category of the Companys financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2009:
Fair Value Measurement at Reporting Date Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Balance as of December 31, 2009 |
|||||||||||||
Cash and cash equivalents |
$ | 19,951,979 | $ | 644,019 | $ | | $ | 20,595,998 | ||||||||
Short-term investments |
12,991,068 | 1,179,067 | | 14,170,135 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 32,943,047 | $ | 1,823,086 | $ | | $ | 34,766,133 | ||||||||
|
|
|
|
|
|
|
|
15
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Property and Equipment
Property and equipment consist of the following:
Estimated | December 31 | |||||||||
Useful Lives |
2010 | 2009 | ||||||||
Office equipment |
5 years | $ | 44,302 | $ | 44,302 | |||||
Furniture |
2 years | 169,812 | 166,263 | |||||||
Computer equipment |
2 years | 162,658 | 148,740 | |||||||
Leasehold improvements |
3 years | 148,662 | 140,412 | |||||||
Software |
3 years | 143,149 | 141,923 | |||||||
|
|
|
|
|||||||
668,583 | 641,640 | |||||||||
Less accumulated depreciation and amortization |
(572,608 | ) | (448,715 | ) | ||||||
|
|
|
|
|||||||
$ | 95,975 | $ | 192,925 | |||||||
|
|
|
|
Depreciation and amortization expense was $123,893 and $183,011, for the years ended December 31, 2010 and 2009, respectively.
6. Income Taxes
Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect for the year in which the differences are expected to affect taxable income.
The following table sets forth the components of the income tax provision (benefit):
Year Ended December 31 | ||||||||
2010 | 2009 | |||||||
Current: |
||||||||
Federal |
$ | 5,060,931 | $ | 495,302 | ||||
State |
2,438,371 | 662,838 | ||||||
Deferred: |
||||||||
Federal |
(2,343,001 | ) | (835,855 | ) | ||||
State |
987,421 | | ||||||
|
|
|
|
|||||
Total income tax provision |
$ | 6,143,722 | $ | 322,285 | ||||
|
|
|
|
16
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
The following table sets forth a reconciliation of the income tax provision at the federal statutory rate to the recorded income tax provision:
Year Ended December 31 | ||||||||
2010 | 2009 | |||||||
Income taxes at U.S. statutory rate |
35 | % | 35 | % | ||||
State and local income tax, net of federal benefit |
11 | 11 | ||||||
Permanent differences |
| (3 | ) | |||||
Research and development tax credits |
| (1 | ) | |||||
Change in valuation allowance |
(34 | ) | (40 | ) | ||||
|
|
|
|
|||||
Total income tax provision |
12 | % | 2 | % | ||||
|
|
|
|
The following table sets forth the components of deferred income taxes:
December 31 | ||||||||
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | 1,482,000 | $ | 1,700,000 | ||||
Deferred revenue |
| 14,764,000 | ||||||
Research and development expense |
3,916,000 | 4,895,000 | ||||||
Research tax credits |
| 21,000 | ||||||
Stock compensation expense |
110,000 | 71,000 | ||||||
Intangible assets |
94,000 | 106,000 | ||||||
Accruals |
5,000 | 86,000 | ||||||
Other |
24,000 | 15,000 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
5,631,000 | 21,658,000 | ||||||
Less valuation allowance |
(3,440,000 | ) | (20,822,000 | ) | ||||
|
|
|
|
|||||
Total net deferred tax asset |
$ | 2,191,000 | $ | 836,000 | ||||
|
|
|
|
At December 31, 2010, the Company has net operating loss carryforwards for state income tax purposes of approximately $22.8 million, which begin to expire in 2025. Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended,
17
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
and similar state provisions. The Company has performed an analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change. It was determined that a change in ownership occurred on March 16, 2004. However, the annual limitation imposed under Section 382 was greater than the pre-ownership change net operating loss carryforward, resulting in no effect to the Companys deferred tax assets.
At December 31, 2010, a valuation allowance of $3.4 million was recorded to partially offset the net deferred tax asset. The change in the valuation allowance for the year ended December 31, 2010 was approximately $17.4 million.
As of December 31, 2010, the total gross amount of reserves for income taxes, reported in the accompanying consolidated balance sheet, was $330,000. Any prospective adjustments to reserves for income taxes will be recorded as an increase or decrease to the provision for income taxes and would impact the Companys effective tax rate. In addition, the Company accrues interest related to reserves, and any associated penalties, for income taxes in the provision for income taxes. The gross amount of interest and penalties accrued is $18,000 as of December 31, 2010, of which $4,000 was recognized in 2009 and $14,000 was recognized in 2010.
The Company is under audit by the Internal Revenue Service for tax years 2008 and 2009. With regard to these audits, there have been no major findings or results. The Company is continuing to respond to the Information Document Requests, but has not received any formal communications to date on any notices of proposed adjustments, nor is the Company aware of any pending adjustments to be issued. The Company remains subject to audit for the Commonwealth of Pennsylvania for tax years 2008 to 2010.
18
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Redeemable Convertible Preferred Stock
The authorized, issued, and outstanding shares of the Companys convertible preferred stock are as follows:
December 31, 2010 | ||||||||||||||||
Shares Authorized |
Shares Issued and Outstanding |
Liquidation Preference Per Share |
Aggregate Liquidation Preference |
|||||||||||||
Series A Preferred Stock |
37,000,000 | 37,000,000 | $ | 1.00 | $ | 45,880,000 | ||||||||||
Series B Preferred Stock |
60,000,000 | 50,000,000 | $ | 1.00 | 62,000,000 | |||||||||||
Series B1 Preferred Stock |
60,000,000 | | | |||||||||||||
|
|
|
|
|
|
|||||||||||
157,000,000 | 87,000,000 | $ | 107,880,000 | |||||||||||||
|
|
|
|
|
|
The aggregate liquidation preference amount would not be affected by changes to the fair value of the preferred stock.
Series A Redeemable Convertible Preferred Stock
During 2005, the Company issued 26,428,571 shares of Series A redeemable convertible preferred stock (Series A) in accordance with the second and third closings of the Series A Preferred Stock Purchase Agreement for $26,416,447, net of issuance costs of $12,124. During 2004, the Company issued 10,571,429 shares of Series A for $10,207,216, net of issuance costs of $364,213. The carrying value of Series A is being accreted to its redemption value on a straight-line basis to its earliest redemption date.
Series B Redeemable Convertible Preferred Stock
The Company received an aggregate of $50,000,000 in exchange for the issuance of 50,000,000 shares of Series B redeemable convertible preferred stock (Series B) on April 26, 2006. The Series B preferred stock was recorded net of issuance costs of $220,017, and the carrying value is being accreted to its redemption value on a straight-line basis to its earliest redemption date.
Series B1 Redeemable Preferred Stock
Concurrent with the issuance of Series B, the Company authorized 60,000,000 shares of Series B1 Preferred Stock. No shares of this class have been issued.
19
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Redeemable Convertible Preferred Stock (continued)
Preferred Stock Voting
Preferred stockholders are entitled to the number of votes equal to the number of shares of common stock into which each share of preferred stock is convertible, subject to certain protective provisions and other class voting rights.
Preferred Stock Dividends
The holders of Series A and Series B preferred stock are entitled to receive cumulative dividends at the rate of 8% of the applicable purchase price per share per annum in preference to any dividends declared on the common stock. Dividends accrue quarterly regardless of whether the Board has declared a dividend or whether there are any profits, but are payable only when declared by the Board or upon an initial public offering, a liquidity event, redemption, or conversion. On December 31, 2007, the Board declared a dividend of $50 million. Dividends of $21,821,309 and $25,359,880, including cumulative dividends of $8,034,286 and $6,728,768, were paid to the Series A and Series B stockholders, respectively. At December 31, 2010, dividends totaling $8,880,000 and $12,000,000 have been accrued for Series A and Series B preferred stock, respectively.
Redemption Rights
At any time on or after April 26, 2011, the holders of a Special Majority, voting as a class, may require the Company to redeem all the outstanding shares of preferred stock for an amount equal to the original purchase price per share plus accrued but unpaid dividends. Special Majority is defined as a majority of all the preferred stockholders voting together as a single class, which majority includes at least one of the two larger Series A preferred stockholders and at least one of the two larger Series B preferred stockholders.
On May 6, 2011, certain Series A and Series B preferred stockholders comprising a Special Majority waived their rights to exercise the redemption rights at any time prior to January 1, 2012.
20
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Redeemable Convertible Preferred Stock (continued)
Liquidation Preference
In the event of a liquidity event (liquidation, winding up, or a sale, merger, or reorganization in which the shareholders of the Company do not remain in voting control of the successor entity), the holders of Series B preferred stock are entitled to receive, in preference to the Series A preferred stock or the common stock, an amount equal to the original purchase price per share plus any accrued but unpaid dividends thereon. After payment of the Series B preferred stock liquidation preference, the holders of Series A preferred stock are entitled to receive, in preference to the common stock, an amount equal to the original purchase price per share plus any accrued but unpaid dividends thereon. After payment of these preferential amounts, the Series A and Series B preferred stock shall participate on an as-converted basis with other holders of common stock.
Conversion
Each holder of preferred stock is entitled at any time to convert their preferred stock into common stock for that number of shares of common stock which is determined by dividing the original purchase price per share plus any accrued but unpaid dividends by the conversion price then in effect, which is currently equal to the original purchase price. If the Company issues additional stock at a price less than what was paid by the Series B stockholders, certain antidilution rights go into effect. Additionally, the preferred stock will convert automatically: (i) immediately prior to the closing of a public offering pursuant to an effective registration statement under the Securities Act of 1933 covering the offer and sale of common stock, which results in aggregate net proceeds to the Company of at least $40,000,000 and a per share price of at least $3.00 (appropriately adjusted for any stock dividend, stock split, or recapitalization); or (ii) the date specified by written consent or agreement of a Special Majority of the preferred stockholders.
8. Common Stock and Stockholders Deficit
Common Stock
The Company is authorized to issue 172,839,076 shares of common stock. The Company is required, at all times, to reserve and keep available out of its authorized but unissued shares of common stock sufficient shares to effect the conversion of the shares of the preferred stock and the exercise of stock options.
21
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Common Stock and Stockholders Deficit (continued)
Dividend
On December 31, 2007, the Board declared and the Company paid a dividend of $50 million. After payment of the cumulative and participating preferred stock dividends, holders of common stock received a dividend of $2,818,811.
Stock Option Plan
In March 2004, the Companys Board of Directors and stockholders approved the Companys 2004 Stock Incentive Plan (the 2004 Plan). The 2004 Plan provides for the granting of options to purchase shares of the Companys common stock, and the direct issuance of common stock, to key employees, advisors, and consultants at a price not less than the fair market value at the date of grant tied to the value of such common stock.
The 2004 Plan is intended to encourage ownership of stock by employees and consultants of the Company and to provide additional incentives for them to promote the success of the Companys business and is administered by the Board of Directors or a committee consisting of members of the Board. The maximum number of shares of common stock reserved for issuance under the 2004 Plan is 10,308,250. The maximum term of the options granted is 10 years.
Options granted pursuant to the 2004 Plan generally vest 25% after the first year, and the remaining 75% vest monthly over the next three years, or, for nonemployees, monthly over the term of the related agreement. Shares of common stock may be issued under the 2004 Plan either as fully vested shares or in accordance with a vesting schedule as specified by the Board.
In December 2009, the Company granted 1,028,835 performance-based stock options to employees. These performance options have exercise prices equal to the fair value of the Companys stock at the grant date. Vesting of the performance options is dependent upon certain performance conditions, including certain strategic transactions as defined in the option agreement. Stock-based compensation expense for these options will be recorded when management estimates that the vesting of these options is probable. Any change in these estimates will result in a cumulative adjustment in the period in which the estimate is changed, so that as of the end of a period, the cumulative compensation expense recognized for an award or grant equals the amount that would be recognized on a straight-line basis as if the current estimate had been utilized since the beginning of the service period.
22
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Common Stock and Stockholders Deficit (continued)
Under FASB accounting guidance for stock compensation, the Company recorded stock-based compensation expense of $359,940 ($163,712 recorded in research and development expenses and $196,228 recorded in general and administrative expenses) for the year ended December 31, 2010.
The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The fair value of stock option awards is amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Expected volatility is based on reported data for selected reasonably similar (or guideline) publicly traded companies for which historical information was available. The Company continues to use the guideline peer group volatility information until historical volatility of the Company is relevant to measure expected volatility for future option grants. The Company has assumed a forfeiture rate of 25% based on historical experience, and will record additional expense if the actual forfeiture rate is lower than estimated or a recovery of prior expense if the actual forfeiture rate is higher than estimated.
The assumed dividend yield is based on the Companys expectation of not paying dividends in the foreseeable future. The risk-free interest rate is determined by reference to implied yields available from the one-year U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant. The assumptions used in the Black-Scholes option-pricing model are:
2010 | 2009 | |||||||
Risk-free interest rate |
0.21 | % | 1.8 | % | ||||
Dividend yield |
0.0 | % | 0.0 | % | ||||
Expected life |
1.0 years | 4.0 years | ||||||
Volatility |
57.1 | % | 154.1 | % |
23
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Common Stock and Stockholders Deficit (continued)
The following table summarizes stock option activity for the Company:
Options Outstanding | ||||||||||||||
Shares Available for Grant |
Number of Shares |
Option Price Per Share Range |
Weighted- Average Exercise Price |
|||||||||||
Balance at December 31, 2008 |
1,714,969 | 4,720,238 | ||||||||||||
Shares authorized |
1,808,250 | | ||||||||||||
Options granted |
(4,990,000 | ) | 4,990,000 | $0.45 | $ | 0.45 | ||||||||
Options exercised |
| (34,740 | ) | $0.40 | $ | 0.40 | ||||||||
Options forfeited |
1,732,821 | (1,732,821 | ) | $ 0.15 $ 0.45 | $ | 0.42 | ||||||||
|
|
|
|
|||||||||||
Balance at December 31, 2009 |
266,040 | 7,942,677 | ||||||||||||
Shares authorized |
| | ||||||||||||
Options granted |
(15,000 | ) | 15,000 | $0.45 | $ | 0.45 | ||||||||
Options exercised |
| | ||||||||||||
Options forfeited |
1,170,825 | (1,170,825 | ) | $ 0.15 $ 0.45 | $ | 0.37 | ||||||||
|
|
|
|
|||||||||||
Balance at December 31, 2010 |
1,421,865 | 6,786,852 | ||||||||||||
|
|
|
|
The following table summarizes information about vested stock options outstanding at December 31:
2010 | 2009 | |||||||
Vested stock options |
3,045,685 | 2,550,061 | ||||||
Weighted-average exercise price |
$ | 0.44 | $ | 0.40 |
24
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Common Stock and Stockholders Deficit (continued)
The following table summarizes information about stock options outstanding at December 31, 2010:
Exercise Price |
Options Outstanding |
Options Vested |
Weighted- Average Remaining Contractual Life |
|||||||||
$0.125 |
47,916 | 47,916 | 3.3 years | |||||||||
$0.350 |
100,000 | 100,000 | 4.7 years | |||||||||
$0.400 |
265,916 | 265,916 | 5.5 years | |||||||||
$0.450 |
6,373,020 | 2,631,853 | 8.4 years |
Unvested stock options at December 31, 2010 were 3,741,167.
The weighted-average fair value of options granted during 2010 and 2009 was approximately $0.10 per share and $0.39 per share, respectively. The weighted-average fair value of options forfeited during 2010 and 2009 was $0.28 per share and $0.33 per share, respectively. The total fair value of shares vested during the years ended December 31, 2010 and 2009 was $480,920 and $553,165, respectively.
The fair value of unvested options was approximately $1,466,000 and $2,102,000 at December 31, 2010 and 2009, respectively. The total remaining unrecognized compensation costs related to unvested stock options was approximately $809,000 as of December 31, 2010, and will be amortized over the weighted-average remaining service period of 1.9 years.
9. Commitments and Contingencies
License Arrangement
The Company entered into an exclusive license agreement on March 15, 2004, with Wyeth, acting through its Wyeth Pharmaceuticals Division, for the rights to research, develop, manufacture, and commercialize the compound known as lixivaptan. On February 6, 2008, the Company, through its wholly owned subsidiary Cardiokine Biopharma, entered into an
25
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Commitments and Contingencies (continued)
amendment of its license agreement with Wyeth to buy out the royalty and milestone payments due in exchange for a $15 million nonrefundable payment, plus two future payments that are contingent upon the achievement of two milestone events. The first payment of $15 million was made in February 2008 and was included in research and development expense.
In the event the Company also pays both contingent payments to Wyeth, then the license granted to the Company by Wyeth shall be perpetual, irrevocable, nonterminable and fully paid-up, and no future milestone or royalty payments will be required.
10. Related Party Transactions
The Company has incurred fees to a founder, stockholder, and former director of approximately $50,000 for the year ended December 31, 2010 and $140,000 for the year ended December 31, 2009, under the provisions of a consulting agreement.
11. Leases
The Company entered into an operating lease in March 2005, and an amendment in October 2009 for the extension of the original space and for additional space for its corporate facilities in Philadelphia, Pennsylvania. The amended lease expires in 2011. Future minimum lease commitments are as follows:
2011 |
$ | 161,000 | ||
|
|
|||
$ | 161,000 | |||
|
|
Rent expense was $256,676 and $191,281 for the years ended December 31, 2010 and 2009, respectively.
12. Benefit Plan
In October 2004, the Company established a 401(k) plan (the Plan) covering all eligible employees. As of December 31, 2009, the Company has elected not to match any of the employees contributions to the Plan.
26
Exhibit 99.3
CONSOLIDATED FINANCIAL STATEMENTS | ||
Cardiokine, Inc. and Subsidiaries | ||
As of September 30, 2011 and for the Nine Months Ended September 30, 2011 and 2010 |
Cardiokine, Inc. and Subsidiaries
Consolidated Financial Statements
As of September 30, 2011 and for the Nine Months Ended
September 30, 2011 and 2010
Contents
Consolidated Balance Sheets |
1 | |||
Consolidated Statements of Operations |
2 | |||
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders Deficit |
3 | |||
Consolidated Statements of Cash Flows |
4 | |||
Notes to Consolidated Financial Statements |
5 |
Cardiokine, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2011 |
December 31, 2010 |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 32,758,240 | $ | 58,101,016 | ||||
Short-term investments |
| 1,051,519 | ||||||
Prepaid expenses and other current assets |
82,921 | 100,809 | ||||||
Income tax receivable |
4,938,654 | 686,363 | ||||||
Deferred income taxes |
3,486,066 | 2,191,435 | ||||||
|
|
|
|
|||||
Total current assets |
41,265,881 | 62,131,142 | ||||||
Property and equipment, net |
32,258 | 95,975 | ||||||
|
|
|
|
|||||
Total assets |
$ | 41,298,139 | $ | 62,227,117 | ||||
|
|
|
|
|||||
Liabilities, redeemable preferred stock, and stockholders deficit |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 711,540 | $ | 3,106,645 | ||||
Accrued expenses |
1,370,332 | 12,398,842 | ||||||
|
|
|
|
|||||
Total current liabilities |
2,081,872 | 15,505,487 | ||||||
Other liabilities |
330,462 | 330,459 | ||||||
Series A redeemable convertible preferred stock, $.001 par value, 37,000,000 shares authorized, 37,000,000 shares issued and outstanding (liquidation preference of $48,093,918 at September 30, 2011) |
48,093,918 | 45,865,772 | ||||||
Series B redeemable convertible preferred stock, $.001 par value, 60,000,000 shares authorized, 50,000,000 shares issued and outstanding (liquidation preference of $64,991,901 at September 30, 2011) |
64,991,901 | 61,986,257 | ||||||
Series B1 redeemable preferred stock, $.001 par value, 60,000,000 shares authorized, none issued or outstanding at September 30, 2011 or December 31, 2010 |
| | ||||||
Stockholders deficit: |
||||||||
Common stock, $.0001 par value, 172,839,076 shares authorized, 7,599,533 shares issued and outstanding at September 30, 2011 and December 31, 2010 |
760 | 760 | ||||||
Other comprehensive loss |
(106 | ) | (100 | ) | ||||
Accumulated deficit |
(74,200,668 | ) | (61,461,518 | ) | ||||
|
|
|
|
|||||
Total stockholders deficit |
(74,200,014 | ) | (61,460,858 | ) | ||||
|
|
|
|
|||||
Total liabilities, redeemable preferred stock, and stockholders deficit |
$ | 41,298,139 | $ | 62,227,117 | ||||
|
|
|
|
See accompanying notes.
1
Cardiokine, Inc. and Subsidiaries
Consolidated Statements of Operations
Nine Months Ended September 30, |
||||||||
2011 | 2010 | |||||||
Revenue: |
||||||||
Collaboration revenue |
$ | | $ | 5,487,805 | ||||
Reimbursement of collaboration costs |
| 38,736,664 | ||||||
|
|
|
|
|||||
Total revenue |
| 44,224,469 | ||||||
|
|
|
|
|||||
Costs and expenses: |
||||||||
Research and development |
10,480,660 | 42,736,338 | ||||||
General and administrative |
2,729,098 | 1,595,664 | ||||||
|
|
|
|
|||||
Total operating expenses |
13,209,758 | 44,332,002 | ||||||
|
|
|
|
|||||
Loss from operations |
(13,209,758 | ) | (107,533 | ) | ||||
Interest income |
18,412 | 20,416 | ||||||
|
|
|
|
|||||
Loss before income taxes |
(13,191,346 | ) | (87,117 | ) | ||||
Income tax benefit |
(5,439,348 | ) | (25,179 | ) | ||||
|
|
|
|
|||||
Net loss |
(7,751,998 | ) | (61,938 | ) | ||||
Deemed dividend and accretion to redemption value of preferred stock |
(5,223,790 | ) | (5,272,386 | ) | ||||
|
|
|
|
|||||
Net loss attributable to common stockholders |
$ | (12,975,788 | ) | $ | (5,334,324 | ) | ||
|
|
|
|
See accompanying notes.
2
Cardiokine, Inc. and Subsidiaries
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders Deficit
Series A Redeemable Convertible |
Series B Redeemable Convertible Preferred Stock |
Common Stock |
Additional Paid-in |
Other Comprehensive |
Accumulated | Total Stockholders |
||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Loss) Income | Deficit | Deficit | |||||||||||||||||||||||||||||||
Balance at December 31, 2009 |
37,000,000 | $ | 42,860,614 | 50,000,000 | $ | 57,942,254 | 7,599,533 | $ | 760 | $ | | $ | (2,998 | ) | $ | (99,878,682 | ) | $ | (99,880,920 | ) | ||||||||||||||||||||
Compensation expense stock options |
359,940 | 359,940 | ||||||||||||||||||||||||||||||||||||||
Accretion of Series A and Series B Preferred Stock and accrued dividends |
3,005,158 | 4,044,003 | (359,940 | ) | (6,689,221 | ) | (7,049,161 | ) | ||||||||||||||||||||||||||||||||
Net income |
45,106,385 | 45,106,385 | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||||||||||
Unrealized gain on available-for-sale securities |
2,898 | 2,898 | ||||||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||
Total comprehensive income |
45,109,283 | |||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Balance at December 31, 2010 |
37,000,000 | 45,865,772 | 50,000,000 | 61,986,257 | 7,599,533 | 760 | | (100 | ) | (61,461,518 | ) | (61,460,858 | ) | |||||||||||||||||||||||||||
Compensation expense stock options |
246,638 | 246,638 | ||||||||||||||||||||||||||||||||||||||
Accretion of Series A and Series B Preferred Stock and accrued dividends |
2,228,146 | 3,005,644 | (246,638 | ) | (4,987,152 | ) | (5,233,790 | ) | ||||||||||||||||||||||||||||||||
Net loss |
(7,751,998 | ) | (7,751,998 | ) | ||||||||||||||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||||||||||
Unrealized gain on available-for-sale securities |
(6 | ) | (6 | ) | ||||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||
Total comprehensive income |
(7,752,004 | ) | ||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Balance at September 30, 2011 |
37,000,000 | $ | 48,093,918 | 50,000,000 | $ | 64,991,901 | 7,599,533 | $ | 760 | $ | | $ | (106 | ) | $ | (74,200,668 | ) | $ | (74,200,014 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
3
Cardiokine, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended September 30, |
||||||||
2011 | 2010 | |||||||
Operating activities |
||||||||
Net loss |
$ | (7,751,998 | ) | $ | (61,938 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
||||||||
Depreciation and amortization |
63,717 | 106,142 | ||||||
Stock-based compensation expense |
246,638 | 278,725 | ||||||
Deferred income taxes |
(1,294,631 | ) | (226,523 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Receivable from the Partner |
| 4,158,649 | ||||||
Prepaid expenses and other current assets |
17,888 | 565,869 | ||||||
Income tax receivable |
(4,252,291 | ) | | |||||
Accounts payable and accrued expenses |
(13,423,615 | ) | 1,568,083 | |||||
Other liabilities |
3 | (11,243 | ) | |||||
Deferred revenue |
| (5,487,805 | ) | |||||
|
|
|
|
|||||
Net cash (used in) provided by operating activities |
(26,394,289 | ) | 899,959 | |||||
Investing activities |
||||||||
Sale of short-term investments |
1,051,513 | 11,090,122 | ||||||
Purchase of property and equipment |
| (26,945 | ) | |||||
|
|
|
|
|||||
Net cash provided by investing activities |
1,051,513 | 11,063,177 | ||||||
Net (decrease) increase in cash and cash equivalents |
(25,342,776 | ) | 11,953,136 | |||||
Cash and cash equivalents, beginning of period |
58,101,016 | 20,595,998 | ||||||
|
|
|
|
|||||
Cash and cash equivalents, end of period |
$ | 32,758,240 | $ | 32,549,134 | ||||
|
|
|
|
|||||
Supplemental disclosures of cash flow information |
||||||||
Cash paid for income taxes |
$ | 7,418,000 | $ | 298,500 | ||||
|
|
|
|
|||||
Accretion of preferred stock and accrued dividends |
$ | 5,233,790 | $ | 5,272,386 | ||||
|
|
|
|
See accompanying notes.
4
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2011
1. Organization and Nature of Operations
Cardiokine, Inc. (the Company) was incorporated in Delaware on May 13, 2003, and commenced operations in March 2004. The Company was formed to develop and market pharmaceuticals for the treatment and prevention of heart failure and related cardiovascular indications, initially based on intellectual property in-licensed from a third party.
In July 2007, the Company formed a wholly owned subsidiary, Cardiokine Biopharma, LLC (Cardiokine Biopharma), as a Delaware limited liability company. Cardiokine Biopharma began operations concurrent with the closing of the Collaboration and License Agreement (the Collaboration Agreement) between the Company and Biogen Idec MA, Inc. (the Partner) on August 1, 2007. The Company assigned, delegated and transferred, and Cardiokine Biopharma accepted and assumed, all of the Companys right, title and interest in and to various assets and liabilities associated with the Companys lixivaptan business. Cardiokine Biopharma operates with the purpose of developing lixivaptan.
The Company formed a wholly owned subsidiary in Ireland on June 23, 2006. There has been no significant activity in this subsidiary since its inception.
On December 28, 2011, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Cornerstone Therapeutics Inc. (Cornerstone); Cohesion Merger Sub, Inc., a wholly owned subsidiary of Cornerstone; and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the indemnification representative of the Companys security holders. On December 30, 2011, the merger contemplated by the Merger Agreement (the Merger) was completed. See Note 14 for additional details regarding the Merger.
The Company previously had offices in Philadelphia, Pennsylvania which were closed in connection with the Merger.
5
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany account balances and transactions have been eliminated in consolidation.
Interim Financial Statements
The accompanying unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of these financial statements. The consolidated balance sheet at December 31, 2010 has been derived from the Companys audited consolidated financial statements for the year ended December 31, 2010, and these financial statements should be read in connection with those financial statements.
Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been omitted. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2010.
Operating results for the nine-month periods ended September 30, 2011 and 2010 are not necessarily indicative of the results for the full year.
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 assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At September 30, 2011, the Company had substantially all of its operating cash in U.S. government agency funds and bank deposit accounts.
6
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Short-Term Investments
The Company classifies investments as available-for-sale or held-to-maturity at the time of purchase and reevaluates such designation as of each balance sheet date. Securities are classified as held-to-maturity when the Company has the positive intent and the ability to hold the securities until maturity. Held-to-maturity investments are recorded at amortized cost, adjusted for the accretion of discounts or premiums. Discounts or premiums are accreted into interest income over the life of the related investment using the straight-line method, which approximates the effective-yield method. Dividend and interest income are recognized when earned. Investments not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value with the unrealized gains or losses included as a separate component of stockholders deficit.
Fair Value of Financial Instruments
The carrying values of financial instruments, including cash and cash equivalents, short-term investments, receivable from the Partner, accounts payable and accrued expenses approximate their fair value due to the short-term nature of those instruments.
Property and Equipment
Property and equipment include computers, office equipment, leasehold improvements, and purchased software. Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided over the estimated useful lives of the respective assets, generally two to five years, using the straight-line method. Leasehold improvements are amortized over the estimated useful lives of the assets or related lease terms, whichever is shorter.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. As of September 30, 2011 and December 31, 2010, management believes that no modification of the remaining useful lives or write-down of long-lived assets is required.
7
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Revenue Recognition
License fees received under the Collaboration Agreement are deferred and recognized ratably over the period to the earliest patent expiration date. Milestone revenue is recognized when the milestone is achieved.
Revenues derived from reimbursements of costs associated with the Collaboration Agreement were recorded in accordance with Financial Accounting Standards Board (FASB) accounting guidance for reporting revenue gross versus net. In transactions where the Company acted as a principal, had discretion to choose suppliers, bore credit risk and performed part of the services required in the transaction, the Company believes it has met the criteria to record revenue for the gross amount of the reimbursements. The Company recognized revenue for collaboration costs which were subsequently reimbursed by the Partner as those costs were incurred.
Research and Development Costs
Costs to develop the Companys products are expensed as incurred. Assets acquired that are used for research and development and have no future alternative use are expensed as research and development.
The Company has historically contracted with clinical research organizations (CROs) to facilitate, coordinate and perform agreed-upon research and development services. To ensure that research and development costs are expensed as incurred, monthly accruals for clinical trials and preclinical testing costs are recorded based on the work performed under the contract.
CRO contracts generally include pass-through fees. Pass-through fees include, but are not limited to: regulatory expenses, investigator fees, travel costs, and other miscellaneous costs, including shipping and printing fees. The Company expenses the costs of pass-through fees under its CRO contracts as they are incurred, based on the best information available at the time. The estimates of the pass-through fees incurred are based on the amount of work completed for the clinical trial and are monitored through correspondence with the CROs, internal reviews and a review of contractual terms. The factors utilized to derive the estimates include the number of patients enrolled, duration of the clinical trial, estimated patient attrition, screening rate and length of the dosing regimen.
Concentration of Credit Risk
The Companys financial instruments that are exposed to concentration of credit risks consist primarily of cash and cash equivalents, marketable securities, and receivables from the Partner. The Company maintains its cash and cash equivalents in bank accounts which, at times, exceed federally insured limits and investment accounts which are not insured. The Company has not experienced any losses in such accounts.
8
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Income Taxes
Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 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 necessary to reduce deferred tax assets to the amounts that are more likely than not to be realized.
Tax benefits from uncertain tax positions are recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.
Comprehensive Income
In accordance with FASB accounting guidance, components of other comprehensive income, including unrealized gains and losses on available-for-sale securities, are included as part of total comprehensive income. To date, the Companys other comprehensive income has consisted of unrealized gains and losses on available-for-sale securities.
Stock-Based Compensation
The fair value of the Companys common stock, underlying stock options granted since inception, was determined by the board of directors. In the absence of a public trading market of the Companys common stock, the Company was required to estimate the fair value of the Companys common stock at each option grant date. The Companys board considers numerous objective and subjective factors to determine common stock fair market value at each option grant date, including but not limited to the following factors:
| Arms length private transactions involving the Companys preferred stock all with superior rights and preferences to the Companys common stock; |
| Financial and operating performance; |
9
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
| Market conditions; |
| Developmental milestones achieved; and |
| Business risks |
The Company measures and recognizes compensation expense for all employee stock-based payments at fair value, net of estimated forfeitures, over the vesting period of the underlying share-based awards. In addition, the Company accounts for stock-based compensation to nonemployees in accordance with the FASB accounting guidance for equity instruments that are issued to other than employees.
Determining the appropriate fair value of share-based payment awards requires the input of subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The Company uses the Black-Scholes option-pricing model to value its stock option awards. The assumptions used in calculating the fair value of share-based payment awards represent managements best estimates and involve inherent uncertainties and the application of managements judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different in the future. Since the Company is not public and it does not have sufficient historical volatility for the expected term of its options, it uses comparable public companies as a basis for its expected volatility to calculate the fair value of option grants.
The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Companys current estimates, such amounts will be recorded as an adjustment in the period in which estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards and historical experience.
Shares issued as a result of exercise of stock options are taken from those authorized but not yet issued.
Recently Issued Accounting Pronouncements
In May 2011, the FASB issued guidance to achieve a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (IFRSs). This guidance is effective for fiscal years beginning after December 15, 2011. Implementation of this standard is not expected to have a material impact on the Companys consolidated balance sheet and results of operations.
10
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Collaboration Agreement
On August 1, 2007, the Company executed the Collaboration Agreement whereby the Company and the Partner agreed to collaborate in the development and commercialization of its compound known as lixivaptan which is currently in the clinical stage of development. As required under the Collaboration Agreement, the Company assigned, delegated and transferred, and Cardiokine Biopharma accepted and assumed, all of the Companys right, title and interest in and to various assets and liabilities associated with the Companys lixivaptan business. Pursuant to the terms of the Collaboration Agreement, the Partner paid to the Company a nonrefundable license fee of $50 million. In August 2009, the Partner paid to the Company a nonrefundable milestone of $20 million.
Under the terms of the Collaboration Agreement, the Partner was responsible for the global commercialization of lixivaptan and Cardiokine Biopharma had an option for limited co-promotion in the United States. The Collaboration Agreement also provided for potential future payments to Cardiokine Biopharma upon the achievement of certain clinical and regulatory milestones, as well as royalties on commercial sales of lixivaptan if and when it was approved for commercial sale.
In connection with activities under the Collaboration Agreement, the Company received reimbursements on a quarterly basis for development costs incurred by the Company so that the Company bore the requisite percentage of development costs specified in the Collaboration Agreement. Total reimbursements from the Partner in 2010 were approximately $38.7 million. Development costs of $560,759 were charged to the Company by the Partner in 2010. No reimbursements from the Partner or charges of development costs by the Partner occurred in 2011.
In October 2010, the Company and the Partner agreed to terminate the collaboration for the development of lixivaptan effective November 1, 2010. Under the terms of the agreement, the Partner funded its share of the development costs through the effective date and made a final payment of $25 million to the Company. The final payment was made in October 2010. The termination triggered the return of all rights to lixivaptan to the Company.
4. Short-Term Investments and Financial Instruments
Short-term investments consist of U.S. Treasury Bills and short-term certificates of deposit that individually are less than $250,000 each and are insured by the Federal Deposit Insurance Corporation. Due to the designation of these investments as available-for-sale, unrealized gains and losses have been included as a component of other comprehensive income in the accompanying consolidated financial statements. Income generated from short-term investments is recorded as interest income. As of September 30, 2011, the investments are classified as short term as the dates to maturity of such instruments are less than one year.
11
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Fair value measurements are required to be classified and disclosed in one of the following three categories:
| Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| Level 2 Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; |
| Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). |
The following fair value hierarchy table presents information about each major category of the Companys financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2011:
Fair Value Measurement at Reporting Date Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash and cash equivalents |
$ | 32,758,240 | $ | | $ | | $ | 32,758,240 | ||||||||
Short-term investments |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 32,758,240 | $ | | $ | | $ | 32,758,240 | ||||||||
|
|
|
|
|
|
|
|
The following fair value hierarchy table presents information about each major category of the Companys financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010:
Fair Value Measurement at Reporting Date Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash and cash equivalents |
$ | 57,638,437 | $ | 462,579 | $ | | $ | 58,101,016 | ||||||||
Short-term investments |
| 1,051,519 | | 1,051,519 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 57,638,437 | $ | 1,514,098 | $ | | $ | 59,152,535 | ||||||||
|
|
|
|
|
|
|
|
12
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Property and Equipment
Property and equipment consist of the following:
Estimated Useful Lives |
September 30, 2011 |
December 31, 2010 |
||||||||
Office equipment |
5 years | $ | 44,302 | $ | 44,302 | |||||
Furniture |
2 years | 169,812 | 169,812 | |||||||
Computer equipment |
2 years | 46,731 | 162,658 | |||||||
Leasehold improvements |
3 years | 148,662 | 148,662 | |||||||
Software |
3 years | 143,148 | 143,149 | |||||||
|
|
|
|
|||||||
552,655 | 668,583 | |||||||||
Less accumulated depreciation and amortization |
(520,397 | ) | (572,608 | ) | ||||||
|
|
|
|
|||||||
$ | 32,258 | $ | 95,975 | |||||||
|
|
|
|
Depreciation and amortization expense was $63,717 and $106,142 for the nine months ended September 30, 2011 and 2010, respectively.
6. Accrued Expenses
Accrued expenses consist of the following:
September 30, 2011 |
December 31, 2010 |
|||||||
Accrued compensation and benefits |
$ | 881,469 | $ | 1,385,114 | ||||
Accrued professional fees |
177,237 | 109,497 | ||||||
Accrued contract costs |
186,626 | 2,936,442 | ||||||
Income taxes payable |
| 7,229,591 | ||||||
Other accrued taxes |
| 253,313 | ||||||
Other accrued expenses |
125,000 | 484,885 | ||||||
|
|
|
|
|||||
Total accrued expenses |
$ | 1,370,332 | $ | 12,398,842 | ||||
|
|
|
|
13
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Income Taxes
Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect for the year in which the differences are expected to affect taxable income.
The following table sets forth the components of the income tax provision (benefit):
Nine Months Ended September 30 |
||||||||
2011 | 2010 | |||||||
Current: |
||||||||
Federal |
$ | (4,144,717 | ) | $ | | |||
State |
| | ||||||
Deferred: |
||||||||
Federal |
(1,294,631 | ) | (19,290 | ) | ||||
State |
| (5,889 | ) | |||||
|
|
|
|
|||||
Total income tax provision |
$ | (5,439,348 | ) | $ | (25,179 | ) | ||
|
|
|
|
The following table sets forth a reconciliation of the income tax provision at the federal statutory rate to the recorded income tax provision:
Nine Months Ended September 30 |
||||||||
2011 | 2010 | |||||||
Income taxes at U.S. statutory rate |
35.0 | % | 35.0 | % | ||||
State and local income tax, net of federal benefit |
6.5 | 6.5 | ||||||
Permanent differences |
(0.5 | ) | (12.6 | ) | ||||
Research and development tax credits |
1.7 | | ||||||
Change in valuation allowance |
(1.5 | ) | | |||||
|
|
|
|
|||||
Total income tax provision |
41.2 | % | 28.9 | % | ||||
|
|
|
|
14
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following table sets forth the components of deferred income taxes:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | 2,448,875 | $ | 1,482,126 | ||||
Deferred revenue |
3,181,704 | 3,915,943 | ||||||
Research tax credits |
960,966 | | ||||||
Stock compensation expense |
| 110,143 | ||||||
Intangible assets |
85,115 | 94,091 | ||||||
Other |
29,230 | 29,230 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
6,705,890 | 5,631,533 | ||||||
Less valuation allowance |
(3,219,824 | ) | (3,440,098 | ) | ||||
|
|
|
|
|||||
Total net deferred tax asset |
$ | 3,486,066 | $ | 2,191,435 | ||||
|
|
|
|
At September 30, 2011, the Company had net operating loss carryforwards for state income tax purposes of approximately $37.7 million, which begin to expire in 2025. Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The Company has performed an analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change. It was determined that a change in ownership occurred on March 16, 2004. However, the annual limitation imposed under Section 382 was greater than the pre-ownership change net operating loss carryforward, resulting in no effect to the Companys deferred tax assets.
In connection with the Merger (see Note 14), Cornerstone recorded a valuation allowance against certain of the Companys deferred tax assets in consideration of Section 382 and 383 of the Internal Revenue Code.
At September 30, 2011, a valuation allowance of $3.2 million was recorded to partially offset the net deferred tax asset. The change in the valuation allowance for the nine months ended September 30, 2011 was approximately $0.2 million.
As of September 30, 2011, the total gross amount of reserves for income taxes, reported in the accompanying consolidated balance sheet, was $330,000. Any prospective adjustments to reserves for income taxes will be recorded as an increase or decrease to the provision for income
15
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
taxes and would impact the Companys effective tax rate. In addition, the Company accrues interest related to reserves, and any associated penalties, for income taxes in the provision for income taxes.
The Company is subject to audit by the Commonwealth of Pennsylvania for tax years 2010.
8. Redeemable Convertible Preferred Stock
The authorized, issued, and outstanding shares of the Companys convertible preferred stock as of September 30, 2011 were as follows:
Shares Authorized |
Shares Issued and Outstanding |
Liquidation Preference Per Share |
Aggregate Liquidation Preference |
|||||||||||||
Series A Preferred Stock |
37,000,000 | 37,000,000 | $ | 1.00 | $ | 48,093,918 | ||||||||||
Series B Preferred Stock |
60,000,000 | 50,000,000 | $ | 1.00 | 64,991,901 | |||||||||||
Series B1 Preferred Stock |
60,000,000 | | ||||||||||||||
|
|
|
|
|
|
|||||||||||
157,000,000 | 87,000,000 | $ | 113,085,819 | |||||||||||||
|
|
|
|
|
|
The aggregate liquidation preference amount would not be affected by changes to the fair value of the preferred stock.
Series A Redeemable Convertible Preferred Stock
During 2005, the Company issued 26,428,571 shares of Series A redeemable convertible preferred stock (Series A) in accordance with the second and third closings of the Series A Preferred Stock Purchase Agreement for $26,416,447, net of issuance costs of $12,124. During 2004, the Company issued 10,571,429 shares of Series A for $10,207,216, net of issuance costs of $364,213. The carrying value of Series A is being accreted to its redemption value on a straight-line basis to its earliest redemption date.
Series B Redeemable Convertible Preferred Stock
The Company received an aggregate of $50,000,000 in exchange for the issuance of 50,000,000 shares of Series B redeemable convertible preferred stock (Series B) on April 26, 2006. The Series B preferred stock was recorded net of issuance costs of $220,017, with the carrying value being accreted to its redemption value on a straight-line basis to its earliest redemption date.
16
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Series B1 Redeemable Preferred Stock
Concurrent with the issuance of Series B, the Company authorized 60,000,000 shares of Series B1 Preferred Stock. No shares of this class have been issued.
Preferred Stock Voting
As of September 30, 2011, preferred stockholders were entitled to the number of votes equal to the number of shares of common stock into which each share of preferred stock was convertible, subject to certain protective provisions and other class voting rights.
Preferred Stock Dividends
As of September 30, 2011, the holders of Series A and Series B preferred stock were entitled to receive cumulative dividends at the rate of 8% of the applicable purchase price per share per annum in preference to any dividends declared on the common stock, with dividends accruing quarterly regardless of whether the Board has declared a dividend or whether there are any profits, but are payable only when declared by the Board or upon an initial public offering, a liquidity event, redemption, or conversion. On December 31, 2007, the Board declared a dividend of $50 million. Dividends of $21,821,309 and $25,359,880, including cumulative dividends of $8,034,286 and $6,728,768, were paid to the Series A and Series B stockholders, respectively. At September 30, 2011, dividends totaling $11,093,918 and $14,991,781 have been accrued for Series A and Series B preferred stock, respectively.
Redemption Rights
Based on the Companys certificate of incorporation in effect at September 30, 2011, at any time on or after April 26, 2011, the holders of a Special Majority, voting as a class, may require the Company to redeem all the outstanding shares of preferred stock for an amount equal to the original purchase price per share plus accrued but unpaid dividends. Special Majority is defined as a majority of all the preferred stockholders voting together as a single class, which majority includes at least one of the two larger Series A preferred stockholders and at least one of the two larger Series B preferred stockholders.
On May 6, 2011, certain Series A and Series B preferred stockholders comprising a Special Majority waived their rights to exercise the redemption rights at any time prior to January 1, 2012.
17
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Liquidation Preference
Based on the provisions of the Companys certificate of incorporation as in effect on September 30, 2011, in the event of a liquidity event (liquidation, winding up, or a sale, merger, or reorganization in which the stockholders of the Company do not remain in voting control of the successor entity), the holders of Series B preferred stock were entitled to receive, in preference to the Series A preferred stock or the common stock, an amount equal to the original purchase price per share plus any accrued but unpaid dividends thereon. After payment of the Series B preferred stock liquidation preference, the holders of Series A preferred stock were entitled to receive, in preference to the common stock, an amount equal to the original purchase price per share plus any accrued but unpaid dividends thereon. After payment of these preferential amounts, the Series A and Series B preferred stock would participate on an as-converted basis with other holders of common stock.
Conversion
Based on the provisions of the Companys certificate of incorporation as in effect on September 30, 2011, holders of preferred stock were entitled at any time to convert their preferred stock into common stock for that number of shares of common stock determined by dividing the original purchase price per share plus any accrued but unpaid dividends by the conversion price then in effect, which at September 30, 2011 was equal to the original purchase price. If the Company issues additional stock at a price less than what was paid by the Series B stockholders, certain antidilution rights would have gone into effect. Additionally, the preferred stock would have converted automatically: (i) immediately prior to the closing of a public offering pursuant to an effective registration statement under the Securities Act of 1933 covering the offer and sale of common stock, which results in aggregate net proceeds to the Company of at least $40,000,000 and a per share price of at least $3.00 (appropriately adjusted for any stock dividend, stock split, or recapitalization); or (ii) the date specified by written consent or agreement of a Special Majority of the preferred stockholders.
9. Common Stock and Stockholders Deficit
Common Stock
As of September 30, 2011, the Company was authorized to issue 172,839,076 shares of common stock.
18
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Dividend
On December 31, 2007, the Board declared and the Company paid a dividend of $50 million. After payment of the cumulative and participating preferred stock dividends, holders of common stock received a dividend of $2,818,811.
Stock Option Plan
In March 2004, the Companys Board of Directors and stockholders approved the Companys 2004 Stock Incentive Plan (the 2004 Plan). The 2004 Plan provides for the granting of options to purchase shares of the Companys common stock, and the direct issuance of common stock, to key employees, advisors, and consultants at a price not less than the fair market value at the date of grant tied to the value of such common stock.
The 2004 Plan is intended to encourage ownership of stock by employees and consultants of the Company and to provide additional incentives for them to promote the success of the Companys business and is administered by the Board of Directors or a committee consisting of members of the Board. The maximum number of shares of common stock reserved for issuance under the 2004 Plan is 10,308,250. The maximum term of the options granted is 10 years.
Options previously granted pursuant to the 2004 Plan generally vested 25% after the first year, with the remaining 75% vesting monthly over the next three years, or, for nonemployees, monthly over the term of the related agreement. Shares of common stock may be issued under the 2004 Plan either as fully vested shares or in accordance with a vesting schedule as specified by the Board.
In December 2009, the Company granted 1,028,835 performance-based stock options to employees. These performance options have exercise prices equal to the fair value of the Companys stock at the grant date. Vesting of the performance options is dependent upon certain performance conditions, including certain strategic transactions as defined in the option agreement. Stock-based compensation expense for these options was required to be recorded when management estimates that the vesting of these options is probable. Any change in these estimates would result in a cumulative adjustment in the period in which the estimate is changed, so that as of the end of a period, the cumulative compensation expense recognized for an award or grant equals the amount that would be recognized on a straight-line basis as if the current estimate had been utilized since the beginning of the service period.
Under FASB accounting guidance for stock compensation, the Company recorded stock-based compensation expense of $246,638 ($106,739 recorded in research and development expenses and $139,899 recorded in general and administrative expenses) and $278,725 ($128,857 recorded in research and development expenses and $149,868 recorded in general and administrative expenses) for the nine months ended September 30, 2011 and 2010, respectively.
19
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company has historically used the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The fair value of stock option awards is amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Expected volatility is based on reported data for selected reasonably similar (or guideline) publicly traded companies for which historical information was available. The Company will continue to use the guideline peer group volatility information until historical volatility of the Company is relevant to measure expected volatility for future option grants. The Company has assumed a forfeiture rate of 25% based on historical experience, and would record additional expense if the actual forfeiture rate is lower than estimated or a recovery of prior expense if the actual forfeiture rate is higher than estimated.
The assumed dividend yield is based on the Companys expectation of not paying dividends in the foreseeable future. The risk-free interest rate is determined by reference to implied yields available from the one-year U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant. The assumptions used in the Black-Scholes option-pricing model are:
2011 | 2010 | |||||||
Risk-free interest rate |
0.21 | % | 0.21 | % | ||||
Dividend yield |
0.00 | % | 0.00 | % | ||||
Expected life |
1.0 years | 1.0 years | ||||||
Volatility |
57.1 | % | 57.1 | % |
There were 134,000 stock options granted during the nine months ended September 30, 2011, with a weighted-average fair value of approximately $0.10 per share.
The total remaining unrecognized compensation costs related to unvested stock options was approximately $529,000 as of September 30, 2011, amortizable over the weighted-average remaining service period of 1 year.
20
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies
License Arrangement
The Company entered into an exclusive license agreement on March 15, 2004, with Wyeth, acting through its Wyeth Pharmaceuticals Division, for the rights to research, develop, manufacture, and commercialize the compound known as lixivaptan. On February 6, 2008, the Company, through its wholly owned subsidiary Cardiokine Biopharma, entered into an amendment of its license agreement with Wyeth to buy out the royalty and milestone payments due in exchange for a $15 million nonrefundable payment, plus two future payments that are contingent upon the achievement of two milestone events. The first payment of $15 million was made in February 2008 and was included in research and development expense.
In the event the Company also pays both contingent payments to Wyeth, then the license granted to the Company by Wyeth shall be perpetual, irrevocable, nonterminable and fully paid-up, and no future milestone or royalty payments will be required.
This license agreement was amended in connection with the transaction with Cornerstone on December 30, 2011. Purchase Consideration up to the first $20 million is payable to Wyeth in settlement for the buyout.
11. Related Party Transactions
The Company incurred fees to a founder, stockholder, and former director of approximately $50,000 for the nine months ended September 30, 2010, under the provisions of a consulting agreement. No fees were incurred for the nine months ended September 30, 2011.
12. Leases
The Company entered into an operating lease in March 2005 and amendments in October 2009 and August 2011 for the extension of the original space and for additional space for its corporate facilities in Philadelphia, Pennsylvania. The August 2011 amended lease expires in 2012. Future minimum lease commitments are $80,500 for the year ending December 31, 2012.
Rent expense was $170,379 and $190,566 for the nine months ended September 30, 2011 and 2010, respectively.
21
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Benefit Plan
In October 2004, the Company established a 401(k) plan (the Plan) covering all eligible employees. As of September 30, 2011, the Company had elected not to match any of the employees contributions to the Plan. The 401(k) plan was terminated in January 2012 in connection with the Merger.
14. Subsequent Events
Subsequent events have been evaluated through March 15, 2012, which is the date the financial statements were available to be issued.
On December 28, 2011, the Company entered into the Merger Agreement.
On December 29, 2011, the Company filed a new drug application (NDA) for its lixivaptan compound to be used, if approved, to treat hyponatremia. The application was accepted by the Food and Drug Administration on February 27, 2012.
On December 30, 2011, the Merger was completed. Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of the Companys common stock and preferred stock was converted into the right to receive the consideration payable or that may become payable to holders of the applicable class of stock under the Merger Agreement. In addition, each outstanding stock option issued under the 2004 Plan was canceled and converted into the right to receive the consideration that may become payable to option holders under the Merger Agreement. Following the completion of the Merger, the Company became a wholly owned subsidiary of Cornerstone, with Cornerstone owning all 100 shares of the Companys authorized, issued and outstanding common stock.
In connection with the completion of the Merger, the Companys stockholders received the remaining cash on hand at closing, less the amount of a $2.7 million escrow fund established by the Company out of its cash on hand to secure the Cornerstones indemnification rights pursuant to the Merger Agreement. Cornerstone assumed approximately $2.0 million of the Companys current liabilities.
In addition, pursuant to the Merger Agreement, Cornerstone agreed to pay consideration consisting of each of the following: (1) $1.0 million paid shortly following closing; (2) either $7.0 million or $8.5 million if the Companys pending NDA for its lixivaptan compound, CRTX 080, is approved for sale by the FDA; (3) up to $147.5 million based on the achievement of certain sales related milestones ($7.5 million at $75 million, $15 million at $150 million, $25 million at $250 million and $100 million at $500 million, each payable at the first time the annual sales reach the
22
Cardiokine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
relevant milestone); (4) quarterly earnout payments of 8% or 12% of net sales of the approved product, with such rate being dependent upon the scope of the labeling which the FDA may approve for the product; and (5) one-half of any proceeds realized from the license of the approved product outside the United States (collectively, the Purchase Consideration). Purchase Consideration paid by Cornerstone will be paid first to Wyeth, in satisfaction of the Companys license payment obligations to Wyeth, until Wyeth has been paid a total of $20,000,000. Thereafter, any further Purchase Consideration will be paid in accordance with the Merger Agreement to certain other parties for which obligations existed and then directly to the Companys former security holders.
23
Exhibit 99.4
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF CORNERSTONE THERAPUETICS INC.
On December 28, 2011, Cornerstone Therapeutics Inc. (Cornerstone) entered into an Agreement and Plan of Merger (the Merger Agreement) by and among Cornerstone; Cohesion Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of the Cornerstone; Cardiokine, Inc., a Delaware Corporation (Cardiokine); and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the indemnification representative of the Cardiokine security holders. On December 30, 2011, the merger contemplated by the Merger Agreement (the Merger) was completed. Pursuant to the Merger, Cornerstone acquired all of the outstanding shares of Cardiokine.
The accompanying unaudited pro forma combined financial statements present the pro forma consolidated financial position and results of operations of the combined company based upon Cornerstones and Cardiokines historical financial statements, after giving effect to Cornerstones acquisition of Cardiokine and adjustments described in the following footnotes, and are intended to reflect the impact of this acquisition on Cornerstone on a pro forma basis.
The unaudited pro forma combined balance sheet as September 30, 2011 reflects the acquisition of Cardiokine as if it had been consummated on that date and includes historical information as reported by the separate companies as well as adjustments that give effect to events that are directly attributable to the Merger and that are factually supportable.
The unaudited pro forma combined statement of operations for the nine months ended September 30, 2011 and statement of income for the year ended December 31, 2010 give effect to the Merger as if it had been consummated on January 1, 2010 and include historical information as reported by the separate companies as well as adjustments that give effect to events that are directly attributable to the Merger, are expected to have a continuing impact and are factually supportable.
The accompanying unaudited pro forma combined financial statements are presented for illustrative purposes only. They do not purport to represent what Cornerstones consolidated results of operations and financial position would have been had the Merger actually occurred as of the dates indicated, and they do not purport to project Cornerstones future consolidated results of operations or financial position. The unaudited pro forma combined statements of operations and income do not reflect any adjustments for the effect of non-recurring items that we may realize as a result of the Merger. The unaudited pro forma combined financial statements include certain reclassifications to conform the historical financial information of Cardiokine to the presentation of Cornerstone.
Pro forma adjustments are necessary to reflect the estimated purchase price and to reflect the amounts related to tangible and intangible assets and liabilities acquired at an amount equal to the preliminary estimate of their fair values. The pro forma adjustments reflecting the completion of the acquisition are based upon the acquisition method of accounting in accordance with Accounting Standards Codification 805, Business Combinations (ASC 805), and the assumptions set forth in the notes to the unaudited pro forma combined financial statements. The unaudited pro forma combined balance sheet has been adjusted to reflect the allocation of the estimated purchase price to identifiable assets and liabilities
acquired, including an amount for goodwill representing the difference between the purchase price and the fair value of the identifiable assets and liabilities. The estimated purchase price was calculated based upon identifying an intangible asset for in-process research and development as well as identifying a pre-acquisition contingency based upon future obligations. This calculation is highly subjective and is subject to change.
You should read this information in conjunction with:
| the separate historical audited consolidated financial statements of Cardiokine as of and for the years ended December 31, 2008 and 2009 included as Exhibit 99.1 to this Current Report on Form 8-K/A; |
| the separate historical audited consolidated financial statements of Cardiokine as of and for the years ended December 31, 2009 and 2010 included as Exhibit 99.2 to this Current Report on Form 8-K/A; |
| the separate historical unaudited consolidated financial statements of Cardiokine as of September 30, 2011 and for the nine months ended September 30, 2011 and 2010 included as Exhibit 99.3 to this Current Report on Form 8-K/A; |
| the separate historical audited consolidated financial statements of Cornerstone as of December 31, 2011 and 2010 and for the three years ended December 31, 2011 included in Cornerstones Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 6, 2012; |
| the separate unaudited financial statements of Cornerstone as of and for the nine months ended September 30, 2011 and 2010 included in Cornerstones Quarterly Report on Form 10-Q for the period ended September 30, 2011; and |
| Cornerstones Current Report on Form 8-K related to its acquisition of Cardiokine filed with the Securities and Exchange Commission on January 4, 2012, as amended. |
CORNERSTONE THEREAPEUTICS INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2011
(in thousands, except share and per share data)
Pro Forma | Pro Forma | |||||||||||||||
Cornerstone | Cardiokine | Adjustments | Combined | |||||||||||||
ASSETS |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 81,541 | $ | 32,758 | $ | (33,663 | ) a | $ | 80,636 | |||||||
Accounts receivable, net |
17,080 | | | 17,080 | ||||||||||||
Inventories, net |
12,295 | | | 12,295 | ||||||||||||
Prepaid and other current assets |
5,322 | 83 | 4,939 | b | 10,344 | |||||||||||
Income tax receivable |
2,204 | 4,939 | (4,939 | ) b | 2,204 | |||||||||||
Deferred income tax asset |
4,535 | 3,486 | (3,486 | ) b | 4,535 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current assets |
122,977 | 41,266 | (37,149 | ) | 127,094 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Property and equipment, net |
1,691 | 32 | (32 | ) c | 1,691 | |||||||||||
Product rights, net |
99,051 | | 11,500 | d | 110,551 | |||||||||||
Goodwill |
13,231 | | 1,987 | d | 15,218 | |||||||||||
Amounts due from related parties |
38 | | | 38 | ||||||||||||
Other assets |
834 | | | 834 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 237,822 | $ | 41,298 | $ | (23,694 | ) | $ | 255,426 | |||||||
|
|
|
|
|
|
|
|
|||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable |
$ | 9,674 | $ | 712 | $ | | $ | 10,386 | ||||||||
Accrued expenses |
43,395 | 1,370 | 1,727 | f | 46,492 | |||||||||||
Amounts payable to Cardiokine shareholders |
| | 4,939 | b | 4,939 | |||||||||||
License agreement liability |
1,489 | | | 1,489 | ||||||||||||
Current portion of capital lease |
88 | | | 88 | ||||||||||||
Current portion of deferred revenue |
2,338 | | | 2,338 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current liabilities |
56,984 | 2,082 | 6,666 | 65,732 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Capital lease, less current portion |
79 | | | 79 | ||||||||||||
Acquisition-related contingent liability |
| | 8,800 | d | 8,800 | |||||||||||
Deferred income tax liability |
3,838 | | 1,783 | d | 5,621 | |||||||||||
Other liabilities |
| 330 | (330 | ) b | | |||||||||||
|
|
|
|
|
|
|||||||||||
Total liabilities |
60,901 | 2,412 | 16,919 | 80,232 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Series A redeemable convertible preferred stock |
| 48,094 | (48,094 | ) e | | |||||||||||
Series B redeemable convertible preferred stock |
| 64,992 | (64,992 | ) e | | |||||||||||
Series B1 redeemable preferred stock |
| | | | ||||||||||||
Stockholders equity |
||||||||||||||||
Preferred stock - $0.001 par value, 5,000,000 shares authorized; no shares issued and outstanding |
| | | e | | |||||||||||
Common stock - $0.001 par value, 90,000,000 shares authorized; 25,796,934 and 25,472,963 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively |
26 | 1 | (1 | ) e | 26 | |||||||||||
Additional paid-in capital |
162,572 | | | 162,572 | ||||||||||||
Retained earnings |
14,323 | (74,201 | ) | 72,474 | e,f | 12,596 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stockholders equity |
176,921 | (74,200 | ) | 72,473 | 175,194 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities and stockholders equity |
$ | 237,822 | $ | 41,298 | $ | (23,694 | ) | $ | 255,426 | |||||||
|
|
|
|
|
|
|
|
CORNERSTONE THEREAPEUTICS INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2011
(in thousands, except share and per share data)
Pro Forma | Pro Forma | |||||||||||||||
Cornerstone | Cardiokine | Adjustments | Combined | |||||||||||||
Net revenues |
$ | 83,216 | $ | | $ | | $ | 83,216 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of product sales (exclusive of amortization of product rights) |
29,183 | | | 29,183 | ||||||||||||
Selling, general and administrative |
36,113 | 2,729 | (338 | ) g | 38,504 | |||||||||||
Research and development |
1,372 | 10,481 | | 11,853 | ||||||||||||
Amortization of product rights |
13,277 | | | 13,277 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total costs and expenses |
79,945 | 13,210 | (338 | ) | 92,817 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from operations |
3,271 | (13,210 | ) | 338 | (9,601 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other expenses: |
||||||||||||||||
Interest expense, net |
(121 | ) | 18 | (18 | ) h | (121 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other expenses |
(121 | ) | 18 | (18 | ) | (121 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
3,150 | (13,192 | ) | 320 | (9,722 | ) | ||||||||||
(Provision for) benefit from income taxes |
(1,094 | ) | 5,439 | (132 | ) i | 4,213 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 2,056 | $ | (7,753 | ) | $ | 188 | $ | (5,509 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) per share, basic |
$ | 0.08 | $ | (0.21 | ) | |||||||||||
|
|
|
|
|||||||||||||
Net income (loss) per share, diluted |
$ | 0.08 | $ | (0.21 | ) | |||||||||||
|
|
|
|
|||||||||||||
Weighted-average common shares, basic |
25,646,455 | 25,646,455 | ||||||||||||||
|
|
|
|
|||||||||||||
Weighted-average common shares, diluted |
26,223,317 | 25,646,455 | ||||||||||||||
|
|
|
|
CORNERSTONE THEREAPEUTICS INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2010
(in thousands, except share and per share data)
Pro Forma | Pro Forma | |||||||||||||||
Cornerstone | Cardiokine | Adjustments | Combined | |||||||||||||
Net revenues |
$ | 125,317 | $ | 99,128 | $ | | $ | 224,445 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of product sales (exclusive of amortization of product rights) |
45,015 | | | 45,015 | ||||||||||||
Selling, general and administrative |
53,198 | 2,793 | (175 | ) g | 55,816 | |||||||||||
Research and development |
4,488 | 45,357 | | 49,845 | ||||||||||||
Amortization of product rights |
14,728 | | | 14,728 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total costs and expenses |
117,429 | 48,150 | (175 | ) | 165,404 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from operations |
7,888 | 50,978 | 175 | 59,041 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other expenses: |
||||||||||||||||
Interest expense, net |
(85 | ) | 272 | (272 | ) h | (85 | ) | |||||||||
Other expense, net |
(25 | ) | | | (25 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other expenses, net |
(110 | ) | 272 | (272 | ) | (110 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
7,778 | 51,250 | (97 | ) | 58,931 | |||||||||||
Provision for income taxes |
(1,609 | ) | (6,144 | ) | 12 | i | (7,741 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 6,169 | $ | 45,106 | $ | (85 | ) | $ | 51,190 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Net income per share, basic |
$ | 0.24 | $ | 2.01 | ||||||||||||
|
|
|
|
|||||||||||||
Net income per share, diluted |
$ | 0.24 | $ | 1.97 | ||||||||||||
|
|
|
|
|||||||||||||
Weighted-average common shares, basic |
25,412,636 | 25,412,636 | ||||||||||||||
|
|
|
|
|||||||||||||
Weighted-average common shares, diluted |
26,036,544 | 26,036,544 | ||||||||||||||
|
|
|
|
CORNERSTONE THEREAPEUTICS INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. | Basis of Presentation |
The unaudited pro forma combined financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been omitted pursuant to such rules and regulations; accordingly, these pro forma forma financial statements should be read in connection with Cornerstones and Cardiokines historical audited and unaudited financial statements referred to above.
The acquisition method of accounting under U.S. GAAP requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values at the acquisition date. Fair value is defined under U.S. GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are assumed to be buyers and sellers in the principal (or most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. Fair value measurements can be highly subjective and it is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. Accordingly, the assets acquired and liabilities assumed were recorded at their respective fair values and added to those of Cornerstone.
2. | Acquisition of Cardiokine, Inc. |
Description of Transaction
On December 30, 2011, Cornerstone Therapeutics Inc. (Cornerstone) acquired Cardiokine, Inc., a specialty pharmaceutical company focused on developing hospital products for cardiovascular indications (Cardiokine), pursuant to an Agreement and Plan of Merger (the Merger Agreement) by and among Cornerstone; Cohesion Merger Sub, Inc., a wholly owned subsidiary of Cornerstone; and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the indemnification representative of the Cardiokine security holders. Cornerstone acquired Cardiokine primarily to obtain Cardiokines pending new drug application (NDA) for a lixivaptan compound to be used, if approved, to treat hyponatremia. In connection with the transaction, Cardiokines stockholders received Cardiokines cash on hand at closing, less the amount of a $2.7 million escrow fund established by Cardiokine out of its cash on hand to secure Cornerstones indemnification rights pursuant to the Merger Agreement, and Cornerstone assumed approximately $2.0 million of Cardiokines current liabilities. In addition, Cornerstone agreed to pay consideration consisting of each of the following: (1) $1.0 million paid shortly following closing; (2) either $7.0 million or $8.5 million if Cardiokines pending NDA for its lixivaptan compound, CRTX 080, is approved for sale by the U.S. Food and Drug Administration (the FDA); (3) up to $147.5 million based on the achievement of certain sales related milestones ($7.5 million at $75 million, $15 million at $150 million, $25 million at $250 million and $100 million at $500 million, each payable at the first time the annual sales reach the relevant milestone); (4) quarterly earnout payments of 8% or 12% of net sales of the approved product, with such rate being
dependent upon the scope of the labeling which the FDA may approve for the product; and (5) one-half of any proceeds realized from the license of the approved product outside the United States (collectively, the Purchase Consideration). The Purchase Consideration will be paid first to a subsidiary of Pfizer Inc. (Pfizer), the licensor of certain rights to the lixivaptan compound, in satisfaction of Cardiokines payment obligations to Pfizer, until Pfizer has been paid a total of $20,000,000. Thereafter, any further Purchase Consideration will be paid in accordance with the Merger Agreement to certain other parties for which obligations existed and then directly to Cardiokines former security holders.
Fair Value of Consideration Transferred
A summary of the purchase price is as follows (in thousands):
Cash consideration payable |
$ | 1,000 | ||
Contingent consideration |
8,800 | |||
|
|
|||
Total fair value of consideration |
$ | 9,800 | ||
|
|
Assets Acquired and Liabilities Assumed
The total purchase price was allocated to the acquired tangible and intangible assets and assumed liabilities of Cardiokine based on their estimated fair values as of December 30, 2011. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was allocated to goodwill.
The allocation of the total fair value of consideration transferred, as shown above, to the acquired tangible and intangible assets and assumed liabilities of Cardiokine based on their estimated fair values as of the closing date of the transaction is as follows (in thousands):
Prepaid and other assets |
5,682 | |||
Acquired in-process research and development |
11,500 | |||
Contingent liability |
(8,800 | ) | ||
Assumed liabilities |
(9,369 | ) | ||
|
|
|||
Total identifiable net assets |
$ | (987 | ) | |
Goodwill |
1,987 | |||
|
|
|||
Total cash consideration payable |
$ | 1,000 | ||
|
|
Prepaid and other assets consist primarily of an anticipated income tax refund related to NOL carryback claims and Cardiokines 2011 final tax return. The refund is classified in other current assets offset by a liability to Cardiokines former stockholders classified in accrued expenses.
The estimated fair value of in-process research and development related to the development program for lixivaptan, or CRTX 080, was determined using the excess-earning method under the income approach. Projected cash flows from the anticipated sales of the product were adjusted for the probabilities of approved labeling and commercialization of the product.
At the closing of the acquisition, Cornerstone recorded an $8.8 million contingent liability for contingent consideration potentially payable under the Merger Agreement. The initial fair value of this liability was determined using a discounted cash flow analysis incorporating the estimated future cash flows from potential milestones and royalty payments. The liability will be periodically assessed based on events and circumstances related to the underlying milestones, and any change will be recorded in Cornerstones consolidated statement of operations. The carrying amount of the liability may fluctuate significantly and actual amounts paid to Pfizer may be materially different from the carrying value of the liability.
Goodwill is calculated as the difference between the fair value of the consideration and the provisional values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes.
3. | Pro Forma Financial Statements |
The accompanying unaudited pro forma combined financial statements present the pro forma consolidated financial position and results of operations of the combined company based upon the historical financial statements of Cornerstone and Cardiokine, after giving effect to the Cardiokine acquisition and adjustments described in the following footnotes, and are intended to reflect the impact of this acquisition on Cornerstone on a pro forma basis.
The unaudited pro forma combined balance sheet reflects the acquisition of Cardiokine as if it has been consummated on September 30, 2011 and includes pro forma adjustments for preliminary valuations by Cornerstone management of certain tangible and intangible assets as of the acquisition date of December 30, 2011.
The unaudited pro forma combined statement of operations for the nine months ended September 30, 2011 and unaudited pro forma combined statement of income for the year ended December 31, 2010 combine Cornerstones historical results for the nine months ended September 30, 2011 and year ended December 31, 2010 with Cardiokine historical results for the same periods. The unaudited pro forma statement of operations and unaudited pro forma statement of income give effect to the acquisition as if it had taken place on January 1, 2010.
The accompanying unaudited pro forma combined financial statements are presented for illustrative purposes only.
4. | Pro Forma Adjustments |
Pro forma adjustments are necessary to reflect the estimated purchase price and to reflect amounts related to Cardiokines net tangible and intangible assets and liabilities at an amount equal to the preliminary estimate of the fair values. The only intangible asset identified was in-process research and development valued at $11.5 million. Under the guidance of ASC 805, the fair value of in-process research and development is capitalized on the balance sheet until the project is either abandoned and written off or successfully commercialized, at which time Cornerstone would begin amortizing the fair value over the estimated useful life.
The unaudited pro forma combined financial statements do not include any adjustments for liabilities that may result from integration activities related to the Cardiokine acquisition. Additional assets or liabilities may be recorded that could affect amounts in the unaudited pro forma combined financial statements. During the measurement period, any such adjustments to provisional amounts would increase or decrease goodwill. Adjustments that occur after the end of the measurement period will be recognized in the post-combination current period operations.
The pro forma adjustments included in the unaudited pro forma combined financial statements are as follows:
a. | To reflect Cardiokines cash on hand distributed to Cardiokine stockholders on the date of the acquisition reduced by assumed liabilities in excess of approximately $2.0 million ($32.7 million) and reflect cash consideration paid by Cornerstone at closing ($1.0 million). |
b. | To reclassify an anticipated income tax refund of $4.9 million related to NOL carryback claims and other tax refunds expected at the time of Closing which will be payable to the Cardiokine former stockholders when received and remove Cardiokines deferred tax assets and contingent tax liability as of September 30, 2011. |
c. | To adjust Cardiokines property and equipment to fair value. |
d. | To reflect the acquisition and valuation of the acquired in-process research and development of CRTX 080 ($11.5 million), contingent liability related to contingent consideration potentially payable under the Merger Agreement ($8.8 million), resulting deferred tax liability ($1.8 million) and goodwill ($2.0 million). |
The estimated fair value of in-process research and development related to the development program for lixivaptan, or CRTX 080, was determined using the excess-earning method under the income approach. Projected cash flows from the anticipated sales of the product were adjusted for the probabilities of approved labeling and commercialization of the product.
At the closing of the acquisition, Cornerstone recorded an $8.8 million contingent liability for contingent consideration potentially payable under the Merger Agreement. The initial fair value of this liability was determined using a discounted cash flow analysis incorporating the estimated future cash flows from potential milestones and royalty payments. The liability will be periodically assessed based on events and circumstances related to the underlying milestones, and any change will be recorded in Cornerstones consolidated statement of operations. The carrying amount of the liability may fluctuate significantly and actual amounts paid to Pfizer may be materially different from the carrying value of the liability.
Goodwill is calculated as the difference between the fair value of the consideration and the provisional values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes.
e. | To eliminate Cardiokines redeemable convertible preferred stock and stockholders equity. |
f. | To record acquisition-related transaction costs of approximately $1.7 million not previously reflected in the historical statements. |
g. | To eliminate non-recurring transaction-related costs associated with the acquisition which had been expensed by Cornerstone and/or Cardiokine. |
h. | To eliminate interest income associated with the reduction of the Cardiokines cash paid to the former stockholders on the date of the acquisition. |
i. | To tax effect the impact of pro forma adjustments (g) and (h). These adjustments were calculated using the income tax rate for the period for Cardiokine or Cornerstone depending on the origin of the adjustments made. |
5. | Pro Forma Net Income (Loss) per Share |
Shares used to calculate unaudited pro forma combined basic and diluted net income (loss) per share are based on the number of Cornerstone weighted-average shares used in computing historical net income (loss) per share, basic and diluted.