Organization and Summary of Significant Accounting Policies

Organization and Business Activity

La Jolla Pharmaceutical Company (the “Company”) is a biopharmaceutical company focused on the discovery and development of novel therapeutics for the treatment of chronic organ failure and cancer. The Company was incorporated in 1989 as a Delaware corporation. On June 7, 2012, the Company reincorporated in the State of California.

Basis of Presentation

The Company has a history of recurring losses from operations and, as of December 31, 2013, the Company had no revenue sources, an accumulated deficit of $465.3 million and available cash and cash equivalents of $8.6 million. Management believes that its current cash resources are sufficient to fund operations through December 31, 2014.

Reverse Split

The Board of Directors approved the reverse stock split (the "2014 Reverse Stock Split") of the Company’s Common Stock, which became effective on January 14, 2014, with an exchange ratio of 1-for-50. As a result of the 2014 Reverse Stock Split, each 50 shares of the Company’s issued and outstanding Common Stock were automatically reclassified as, and changed into, one share of the Company’s Common Stock. No fractional shares were issued in connection with the 2014 Reverse Stock Split. Stockholders who were entitled to fractional shares instead became entitled to receive a cash payment in lieu of receiving fractional shares (after taking into account and aggregating all shares of the Company’s Common Stock then held by such stockholder) equal to the fractional share interest. The 2014 Reverse Stock Split affected all of the holders of the Company’s Common Stock uniformly. Shares of the Company’s Common Stock underlying outstanding options were proportionately reduced and the exercise prices of outstanding options were proportionately increased in accordance with the terms of the agreements governing such securities. Shares of the Company’s Common Stock underlying outstanding convertible preferred stock were proportionately reduced and the conversion rates were proportionately decreased in accordance with the terms of the agreements governing such securities.

Significant 2013 Events

On September 24, 2013, the Company entered into a Securities Purchase Agreement with the purchasers set forth on thereto (the “Securities Purchase Agreement”), pursuant to which the Company agreed to sell, for an aggregate price of $10 million, approximately 1,928,620 shares of the Company’s Common Stock, par value $0.0001 per share (the “Common Stock”), at a price of $3.50 per share (the “Common Shares”) and approximately 3,250 shares of Series F Convertible Preferred Stock (the “Series F Preferred”) at a price of $1,000 per share (the “Preferred Shares” and, together with the Common Shares, the “Shares”) (the “Private Placement”). The Private Placement closed on September 27, 2013, subject to customary closing conditions. The estimated proceeds to the Company, net of commissions of approximately $300,000, was approximately $9.7 million.

Pursuant to the Securities Purchase Agreement, the Company designated a new series of preferred stock prior to the Closing: its Series F Convertible Preferred Stock. The Series F Preferred is convertible into Common Stock at a conversion price equal to $1,000 divided by 285, with the conversion right for each holder subject to a “blocker” with respect to such holders’ beneficial ownership, with each such “blocker” initially set at 9.99% . This blocker may be increased or decreased by a holder of Series F Preferred upon providing 61 days’ prior written notice to the Company. The Series F Preferred has no preferential dividend rights and is generally non-voting. The Series F Preferred has a liquidation preference that is senior to the Common Stock, but is pari passu with the Company’s Series C-1² Preferred (defined below). This liquidation preference entitles the holder of Series F Preferred stock to receive, in a merger, liquidation or certain other extraordinary transactions, cash or property in an amount up to the face value of the shares ($1,000 per share), as set forth in the Certificate of Determination for the Series F Preferred (the “Certificate of Determination”).

The Shares were issued in a private placement transaction that was exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and pursuant to Rule 506 under the Securities Act. Each of the purchasers represented that it is an accredited investor and that it is acquiring the Shares for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof.

As a condition to Closing, the holders of a majority of the issued and outstanding Common Stock and the holders of the Series C-1² Convertible Preferred Stock (the “Series C-1² Preferred”) approved the amendment and restatement of the Company’s Articles of Incorporation (the “Amended and Restated Articles”). Upon the filing of the Amended and Restated Articles, the following series of preferred stock were eliminated: Series C-2² Convertible Preferred Stock (the “Series C-2² Preferred”); Series D-1²Convertible Preferred Stock (the “Series D-1² Preferred”) and Series D-2² Convertible Preferred Stock (the “Series D-2² Preferred” and, together with the Series C-2² Preferred and Series D-1² Preferred, the “Existing Preferred”). As a result of the elimination of these series of preferred stock, only the Series C-1² Preferred and Series F Preferred remain designated as preferred stock of the Company.

Additionally, the Amended and Restated Articles, filed with the California Secretary of State: (i) increase the “Conversion Price” for the Series C-1² Preferred, resetting it to $1,000 divided by 1,724 from $1,000 divided by 4,261; and (ii) remove certain Series C-1² Preferred rights, preferences, privileges and restrictions originally contained in the Articles of Incorporation, including: (a) all rights of the Holders to dividends accruing under Article IV(d)(2) of the Company’s Articles of Incorporation, to the extent such dividends otherwise would have accrued on or after September 24, 2013; (b) certain protective provisions; and (c) limitations on conversion into Common Stock set forth in Article IV(d)(3)(C)(i) of the Articles of Incorporation.

The Company obtained approval of the Amended and Restated Articles by the holders of the Existing Preferred pursuant to the Consent Agreement (defined below) and obtained approval by the holders of the Common Stock by way of an action by written consent that was executed prior to Closing. After such approval, the Company filed the Amended and Restated Articles after an Information Statement on Schedule 14C was prepared and distributed to the Company’s shareholders, pursuant to the Securities Exchange Act of 1934, as amended, and the California General Corporation Law.

On September 24, 2013, the Company entered into a Consent and Waiver Agreement (the “Consent Agreement”) with the holders of the Existing Preferred (the “Holders”). Pursuant to the Consent Agreement, the Holders agreed to tender to the Company for nominal consideration shares of Series D-1²Preferred, as well as all warrants to purchase shares of Existing Preferred. As a result of this repurchase, and after giving effect to the transactions contemplated in the Exchange Agreement (described below), the Series C-1² Preferred will be the only series of preferred stock that remains outstanding prior to the Closing and, as of the Closing, no purchase rights will exist for the Existing Preferred.

Also in the Consent Agreement, the Holders consented to the transactions contemplated under the Securities Purchase Agreement and agreed to waive the following rights appurtenant to the Series C-1² Preferred: (i) all rights of the Holders to dividends accruing under Article IV(d)(2) of the Company’s Articles of Incorporation, to the extent such dividends otherwise would have accrued on or after September 24, 2013; (ii) the limitations on conversion set forth in Article IV(d)(3)(C)(i) of the Articles of Incorporation; and (iii) the protective provisions set forth in Article IV(d)(11) of the Articles of Incorporation, to the extent applicable .

Additionally, the Holders agreed in the Consent Agreement to increase the conversion price for the Series C-1² Preferred, notwithstanding the conversion price set forth in the Company’s Articles of Incorporation, such that the Conversion Price shall equal $1,000 divided by 1,724. This increase of the conversion price remained in effect until the Amended and Restated Articles were filed with the California Secretary of State, at which time the conversion price set forth in the Company’s charter documents again control the conversion of the Series C-1² Preferred.

On September 24, 2013, the Company also entered into an Exchange Agreement (the “Exchange Agreement”) with the Holders. Pursuant to the Exchange Agreement, the Holders exchanged a total of approximately 557 shares of Series C-2²Preferred for approximately 557 shares of Series C-1² Preferred Stock (the “Exchange Shares”). The terms of the Series C-1² Preferred are substantially similar in all respects to the Series C-2² Preferred and the exchange of the Series C-2² Preferred eliminated all outstanding shares and allows for the removal of this series of preferred stock.

The Company issued the Exchange Shares in a transaction exempt from the registration requirements of the Securities Act by virtue of the exemption provided for in Section 3(a)(9) of the Act for securities exchanged by the issuer with an existing security holder. No commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

Significant 2012 Events

On January 19, 2012, the Company entered into an Asset Purchase Agreement (the “Agreement”), dated as of January 19, 2012, with Solana Therapeutics, Inc., a Delaware corporation (“Solana”) (the “Strategic Transaction”). Pursuant to the Agreement, the Company agreed to acquire from Solana the global development and commercialization rights to an investigational new drug referred to as GCS-100 (“GCS-100”), which included patents and patent rights, regulatory registrations and study drug supplies (collectively, the “Purchased Assets”). The acquisition of the Purchased Assets was completed on January 19, 2012 (the “Closing”). In consideration for the Purchased Assets, the Company agreed to pay a nominal amount at the Closing and agreed to use commercially reasonable efforts to complete a Phase 2a clinical study of GCS-100. GCS-100 is a first-in-class inhibitor of galectin-3, a novel molecular target implicated in chronic organ failure and cancer.

On January 19, 2012, the Company entered into a Consent and Amendment Agreement (the “Third Amendment Agreement”) with certain of its Series C-1¹ Convertible preferred stockholders to amend the terms of the Securities Purchase Agreement, dated as of May 24, 2010 (“Securities Purchase Agreement”), and the forms of Cash Warrants and Cashless Warrants (as defined in the Securities Purchase Agreement), as well as to adopt the Certificate of Designations, Preferences and Rights of Series C-1² Convertible Preferred Stock (the “Series C-1² Stock”), Series C-2² Convertible Preferred Stock (the “Series C-2² Stock”), Series D-1² Convertible Preferred Stock (the “Series D-1² Stock”) and Series D-2² Convertible Preferred Stock (the “Series D-2² Stock”) (the “Series C/D Certificate”). Under the Third Amendment Agreement, the Termination Date (as defined in the Cash Warrants and Cashless Warrants) was amended to extend the Termination Date to the date that is three years following the Closing of the asset purchase.

As part of the Third Amendment Agreement, the Company designated four new series of preferred stock on January 19, 2012: its Series C-1² Stock, Series C-2² Stock, Series D-1² Stock, and Series D-2² Stock (collectively, the “2012 New Preferred Stock”). It exchanged on a one-for-one exchange ratio each share of its existing Series C-1¹ Convertible Preferred Stock that was outstanding for a new share of Series C-1² Stock. Each holder of 2012 New Preferred Stock may convert its 2012 New Preferred Stock shares into the Company’s common stock, par value $0.0001 per share (“Common Stock”), subject to a weekly conversion cap equal to the product of the face amount of the outstanding Series C-1² Stock held by the stockholder on the Closing multiplied by the Conversion Cap (as defined in the Series C/D Certificate) for such week. Depending on the Volume-Weighted Closing Price, or VWCP, for the last 3 Trading Days during the previous calendar week, the Conversion Cap can range from 0% to 3.76%. Each holder of the 2012 New Preferred Stock may only convert such preferred shares into Common Stock to the extent that after such conversion such holder owns less than 9.999% of the Company’s issued and outstanding Common Stock.

The Company’s Board of Directors, approved a reverse stock split effective on February 17, 2012, with such reverse stock split having an exchange ratio of 1-for-100 (the “2012 Reverse Stock Split”). No fractional shares were issued and, instead, stockholders received the cash value of any fractional shares that would have been issued. Share amounts in the consolidated financial statements are shown post-split and therefore have been retroactively adjusted to reflect the 2012 Reverse Stock Split.

On December 12, 2012, the Company entered into a Consent and Waiver Agreement (the “Waiver Agreement”), with its preferred stockholders. Pursuant to the Waiver Agreement, the preferred stockholders waived their 12-month redemption right and the requirement for the Company to keep net cash of $2.9 million.

Effective December 31, 2012, the Company entered into a Consent, Waiver and Amendment Agreement (the “Second Waiver Agreement”) with its preferred stockholders. Pursuant to the Second Waiver Agreement, the preferred stockholders waived their redemption rights for the Series C-1² Stock and Series C-2² Stock, removed the “full-ratchet” anti-dilution from the Series C-1² Stock, Series C-2² Stock and Series D-1² Stock and relinquished their right to receive warrants to purchase Series D-2² Stock (the “Series D-2² Warrants”) upon the exercise of the warrants to purchase Series C-2² Stock (the “Series C-2² Warrants”). The Company’s preferred stockholders also exercised a portion of their Series C-2² Warrants, which resulted in the Company receiving $500,000 in net proceeds and the preferred stockholders receiving 500 shares of Series C-2² Stock.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of La Jolla Pharmaceutical Company and its wholly-owned subsidiary, SL JPC Sub, Inc., which was incorporated in Delaware in December 2011. In September of 2013 SL JPC Sub, Inc. was dissolved because there had been never been any operations and no need for the entity.

Use of Estimates

The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in the accompanying notes to the consolidated financial statements. Actual results could differ materially from those estimates.

Property and Equipment

Property and equipment is stated at cost and has been depreciated using the straight-line method over the estimated useful lives of the assets (primarily five years). As of December 31, 2013 and 2012, property and equipment was comprised of $2,233,000 and $2,186,000 which included furniture, computer equipment and software, respectively. There was $5,000 and $0 depreciation expense for the years ended December 31, 2013 and 2012, respectively.

Patents

From January 2013 through March 2014, the Company has received issuance of 5 patents and allowance of a sixth set covering compositions and methods of preparing modified pectin that cover GCS-100. The Company filed a patent for LJPC-501 in May of 2013 and in February 2014 licensed patent rights for LJPC-501 from George Washington University. In February 2014 the Company licensed patents from INSERM for LJPC-401. The Company will file patent applications in the United States and in foreign countries for the protection of these and other proprietary technologies and drug candidates as deemed appropriate.

Share-Based Compensation

The Company records compensation expense associated with stock options and other share-based awards in accordance with the authoritative guidance for stock-based compensation. The cost of employee services received in exchange for an award of an equity instrument is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense on a straight-line basis, net of estimated forfeitures, over the requisite service period of the award. Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period and has been reduced for estimated forfeitures. The guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be 0% for employees in the years ended December 31, 2013 and 2012, based on the Company’s historical experience and expected future activities.

Total share-based compensation expense related to share-based awards for the years ended December 31, 2013 and 2012 was comprised of the following (in thousands):



	December 31,
	2013		2012
Research and development	$	992	$	805
General and administrative	11,381		7,799
Share-based compensation expense included in operating expenses	$	12,373	$	8,604
Share-based compensation expense from:
Stock options	$	7,762	$	7,640
Restricted stock awards and restricted stock units	4,611		964
Share-based compensation expense included in operating expenses	$	12,373	$	8,604

Reverse Stock Splits

The Board of Directors approved the 2014 Reverse Stock Split of the Company’s Common Stock, which became effective on January 14, 2014, with an exchange ratio of 1-for-50. The Board of Directors approved the 2012 Reverse Stock Split of the Company’s Common Stock, which became effective on February 17, 2012, with an exchange ratio of 1-for-100.

All Common Stock share and per share information in the accompanying consolidated financial statements and notes included in this report have been restated to reflect retrospective application of the two reverse stock splits for all periods presented, except for par value per share and the number of authorized shares, which were not affected by either the 2014 Reverse Stock Split or 2012 Reverse Stock Split.

Net Income (Loss) Per Share

Basic and diluted net income (loss) per share is computed using the weighted-average number of common shares outstanding during the periods. Basic earnings per share (“EPS”) is calculated by dividing the net income or loss by the weighted-average number of common shares outstanding for the period, without consideration for Common Stock equivalents. Diluted EPS is computed by dividing the net income or loss by the weighted-average number of common shares and Common Stock equivalents outstanding for the period issuable upon the conversion of preferred stock and exercise of stock options and warrants. These Common Stock equivalents are included in the calculation of diluted EPS only if their effect is dilutive. There is no difference between basic and diluted net loss per share for the year ended December 31, 2013 or December 31, 2012, as potentially dilutive securities have been excluded from the calculation of diluted net loss per common share because the inclusion of such securities would be antidilutive.

At December 31, 2013 and 2012, the potentially dilutive securities include approximately 17.5 million and 90.0 million shares, respectively, reserved for the conversion of convertible preferred stock, including accrued dividends, and the exercise of outstanding stock options and warrants.

Segment Reporting

Management has determined that the Company operates in one business segment, which is the development of pharmaceutical products.

Adoption of Recent Accounting Pronouncements

In July 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-11, Income Taxes (Topic 740). This update improves the reporting for unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The update is expected to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The update is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, which for us is January 1, 2014. We do not anticipate that adopting this update will have a material impact on our consolidated financial statements.