UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2010
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number 0-27264
VIA Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
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DELAWARE
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33-0687976
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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750 Battery Street, Suite 330
San Francisco, CA 94111
(Address of principal executive offices)
(415) 283-2200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
þ
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes
o
No
þ
As of November 9, 2010, there were 20,558,446 shares of common stock, par value $0.001 per
share, outstanding.
VIA PHARMACEUTICALS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
VIA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED BALANCE SHEETS
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September 30,
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December 31,
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2010
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2009
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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277,924
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$
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2,189,742
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Prepaid expenses and other current assets
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147,792
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155,361
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Total current assets
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425,716
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2,345,103
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Property and equipment-net
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31,802
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170,617
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Other non-current assets
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32,289
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40,374
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Total
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$
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489,807
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$
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2,556,094
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LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
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Current liabilities:
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Accounts payable
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$
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964,030
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$
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705,887
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Accrued expenses and other liabilities
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1,300,891
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2,226,720
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Accrued restructuring costs
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122,650
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Interest payable affiliate
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2,207,466
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789,041
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Notes payable affiliate net of discount of
$491,565 at September 30, 2010 and $4,374 at
December 31, 2009
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12,508,435
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9,995,626
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Total current liabilities
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17,103,472
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13,717,274
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Accrued expenses and other liabilities long-term
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52,763
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Accrued restructuring costs net of current portion
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11,207
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Deferred rent
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10,323
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37,450
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Total liabilities
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17,177,765
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13,754,724
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Commitments and contingencies
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Stockholders equity (deficit):
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Common stock, $0.001 par value-200,000,000 shares
authorized at September 30, 2010 and December 31,
2009, respectively; 20,558,446 and
20,646,374 shares issued and outstanding at
September 30, 2010 and December 31, 2009,
respectively
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20,559
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20,646
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Preferred stock Series A, $0.001 par
value-5,000,000 shares authorized at September 30,
2010 and December 31, 2009, respectively; 0 shares
issued and outstanding at September 30, 2010 and
December 31, 2009, respectively
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Convertible preferred stock Series C, $0.001 par
value-17,000 shares authorized at September 30,
2010 and December 31, 2009, respectively;
2,000 shares issued and outstanding at September
30, 2010 and December 31, 2009, respectively;
liquidation preference of $2,000,000
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2
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2
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Additional paid-in capital
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72,026,760
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70,385,287
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Deficit accumulated in the development stage
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(88,735,279
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)
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(81,604,565
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)
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Total stockholders equity (deficit)
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(16,687,958
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)
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(11,198,630
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)
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Total
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$
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489,807
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$
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2,556,094
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See accompanying notes
1
VIA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
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Period From
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June 14, 2004
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(Date of
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Three Months Ended
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Nine Months Ended
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Inception) to
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September 30,
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September 30,
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September 30,
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September 30,
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September 30,
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2010
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2009
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2010
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2009
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2010
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Revenue
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$
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$
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$
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$
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$
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Operating costs and expenses:
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Research and development
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449,908
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1,306,309
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1,818,599
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4,949,118
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42,724,777
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General and administration
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757,996
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1,697,476
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3,209,947
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5,491,380
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32,256,000
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Merger transaction costs
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3,824,090
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Restructuring costs
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106,959
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106,959
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Total operating costs and expenses
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1,207,904
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3,003,785
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5,135,505
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10,440,498
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78,911,826
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Operating loss
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(1,207,904
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)
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(3,003,785
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)
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(5,135,505
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)
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(10,440,498
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)
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(78,911,826
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)
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Other income (expense):
|
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Interest income
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914,628
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Interest expense
|
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(901,028
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)
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(5,033,598
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)
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(1,979,460
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)
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(6,299,768
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)
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(10,717,943
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)
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Other income (expense)-net
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(9,391
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)
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(663
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)
|
|
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(15,749
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)
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8,893
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|
|
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(20,138
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)
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|
|
|
|
|
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Total other income (expense)
|
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(910,419
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)
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(5,034,261
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)
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|
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(1,995,209
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)
|
|
|
(6,290,875
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)
|
|
|
(9,823,453
|
)
|
|
|
|
|
|
|
|
|
|
|
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|
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Net Loss
|
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$
|
(2,118,323
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)
|
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$
|
(8,038,046
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)
|
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$
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(7,130,714
|
)
|
|
$
|
(16,731,373
|
)
|
|
$
|
(88,735,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Loss per share of common
stockbasic and diluted
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$
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(0.10
|
)
|
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$
|
(0.40
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Weighted average shares
outstandingbasic and diluted
|
|
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20,452,332
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|
|
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20,014,457
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|
|
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20,358,351
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|
|
|
19,875,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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See accompanying notes
2
VIA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
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|
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Period from
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|
|
|
|
|
|
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June 14, 2004
|
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|
|
|
|
|
|
|
|
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(Date of
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Nine Months Ended
|
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Inception) to
|
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September 30,
|
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September 30,
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September 30,
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2010
|
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2009
|
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2010
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
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Net loss
|
|
$
|
(7,130,714
|
)
|
|
$
|
(16,731,373
|
)
|
|
$
|
(88,735,279
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
66,437
|
|
|
|
103,653
|
|
|
|
596,310
|
|
Amortization of discount on notes payable affiliate
|
|
|
561,035
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|
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|
5,888,810
|
|
|
|
7,505,384
|
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Excess facility lease costs
|
|
|
133,222
|
|
|
|
|
|
|
|
133,222
|
|
Lease abandonment costs
|
|
|
173,712
|
|
|
|
|
|
|
|
173,712
|
|
Disposal of property and equipment
|
|
|
72,378
|
|
|
|
450
|
|
|
|
76,991
|
|
Stock compensation expense
|
|
|
592,631
|
|
|
|
980,560
|
|
|
|
4,550,213
|
|
Deferred rent
|
|
|
(27,127
|
)
|
|
|
5,961
|
|
|
|
10,323
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
15,654
|
|
|
|
327,108
|
|
|
|
(205,081
|
)
|
Accounts payable
|
|
|
258,143
|
|
|
|
(423,439
|
)
|
|
|
960,541
|
|
Accrued expenses and other liabilities
|
|
|
(1,046,778
|
)
|
|
|
(22,056
|
)
|
|
|
1,279,943
|
|
Accrued restructuring costs
|
|
|
635
|
|
|
|
|
|
|
|
635
|
|
Interest payable affiliate
|
|
|
1,418,425
|
|
|
|
410,959
|
|
|
|
3,200,188
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(4,912,347
|
)
|
|
|
(9,459,367
|
)
|
|
|
(70,452,898
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
|
|
|
|
(16,155
|
)
|
|
|
(664,175
|
)
|
Sale of property and equipment
|
|
|
|
|
|
|
532
|
|
|
|
532
|
|
Cash provided in the Merger
|
|
|
|
|
|
|
|
|
|
|
11,147,160
|
|
Capitalized merger transaction costs
|
|
|
|
|
|
|
|
|
|
|
(350,069
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
|
|
|
|
(15,623
|
)
|
|
|
10,133,448
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible promissory notes affiliate
|
|
|
|
|
|
|
|
|
|
|
24,425,000
|
|
Proceeds from notes payable affiliate
|
|
|
3,000,000
|
|
|
|
10,000,000
|
|
|
|
13,000,000
|
|
Capital lease payments
|
|
|
|
|
|
|
|
|
|
|
(11,973
|
)
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
23,141,360
|
|
Exercise of stock options for the issuance of common stock
|
|
|
1,292
|
|
|
|
1,933
|
|
|
|
49,550
|
|
Repurchase and retirement of common stock
|
|
|
(763
|
)
|
|
|
|
|
|
|
(6,563
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,000,529
|
|
|
|
10,001,933
|
|
|
|
60,597,374
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(1,911,818
|
)
|
|
|
526,943
|
|
|
|
277,924
|
|
Cash and cash equivalents-beginning of period
|
|
|
2,189,742
|
|
|
|
4,064,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents-end of period
|
|
$
|
277,924
|
|
|
$
|
4,591,488
|
|
|
$
|
277,924
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrant and related discount on notes payable affiliate
|
|
$
|
1,048,226
|
|
|
$
|
6,948,723
|
|
|
$
|
7,996,949
|
|
|
|
|
|
|
|
|
|
|
|
Interest on convertible debt converted to notes payable affiliate
|
|
$
|
|
|
|
$
|
|
|
|
$
|
992,722
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of notes to preferred stock Series A affiliate
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25,517,722
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation converted to notes payable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
Stock issuance for license acquisition
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,856
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid
|
|
$
|
770
|
|
|
$
|
116
|
|
|
$
|
37,385
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
3
VIA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION
Overview
VIA Pharmaceuticals, Inc. (VIA, the Company, we, our, or us),
incorporated in Delaware in June 2004 and headquartered in San Francisco, California, is a
development stage biotechnology company focused on the development of compounds for the treatment
of cardiovascular and metabolic disease. The Company is building a pipeline of small molecule drugs
that target the underlying causes of cardiovascular and metabolic disease, including vascular
inflammation, high cholesterol, high triglycerides and insulin sensitization/diabetes. During 2005,
the Company in-licensed a small molecule compound, VIA-2291, which targets an unmet medical need of
reducing atherosclerotic plaque inflammation, an underlying cause of atherosclerosis and its
complications, including heart attack and stroke. Atherosclerosis, depending on its severity and
the location of the artery it affects, may result in major adverse cardiovascular events (MACE),
such as heart attack and stroke. During 2006, the Company initiated two Phase 2 clinical trials of
VIA-2291 in patients undergoing a carotid endarterectomy (CEA), and in patients at risk for acute
coronary syndrome (ACS). During 2007, the Company initiated a third Phase 2 clinical trial where
ACS patients undergo Positron Emission Tomography with flurodeoxyglucose tracer (FDG-PET), an
experimental non-invasive imaging technique to measure the effect of treatment of VIA-2291 on
uptake of FDG into the vascular wall. Effective during the first quarter of 2009, the Company
licensed from Hoffman-LaRoche Inc. and Hoffmann-LaRoche Ltd. (collectively Roche) the exclusive
worldwide rights to two sets of compounds. The first license is for Roches thyroid hormone
receptor beta agonist, a clinically ready candidate for the control of cholesterol, triglyceride
levels and potential in insulin sensitization/diabetes. The second license is for multiple
compounds from Roches preclinical diacylglycerol acyl transferase 1 metabolic disorders program.
Through September 30, 2010, the Company has been primarily engaged in developing initial
procedures and product technology, screening and in-licensing of target compounds, clinical trial
activity, and raising capital. To fund operations, VIA has been raising cash through debt, a merger
and equity financings. The Company is organized and operates as one operating segment.
Merger
On June 5, 2007, Corautus completed a merger (the Merger) with privately-held VIA
Pharmaceuticals, Inc. pursuant to the Agreement and Plan of Merger and Reorganization (the Merger
Agreement), dated February 7, 2007, by and among Corautus, Resurgens Merger Corp., a Delaware
corporation and a wholly owned subsidiary of Corautus (Resurgens), and privately-held VIA
Pharmaceuticals, Inc. Pursuant to the Merger Agreement, Resurgens merged with and into
privately-held VIA Pharmaceuticals, Inc., which continued as the surviving company as a
wholly-owned subsidiary of Corautus. Immediately following the effectiveness of the Merger on June
5, 2007, privately-held VIA Pharmaceuticals, Inc. merged (the Parent-Subsidiary Merger) with and
into Corautus, pursuant to which Corautus continued as the surviving corporation. Immediately
following the Parent-Subsidiary Merger, Corautus changed its corporate name from Corautus Genetics
Inc. to VIA Pharmaceuticals, Inc. Unless otherwise specified, as used throughout these unaudited
condensed financial statements, the Company, we, us, and our refers to the business of the
combined company after the merger (the Merger) with Corautus Genetics Inc. (Corautus) on June
5, 2007 and the business of privately-held VIA Pharmaceuticals, Inc. prior to the Merger. Unless
specifically noted otherwise, as used throughout these unaudited condensed financial statements,
Corautus Genetics Inc. or Corautus refers to the business of Corautus prior to the Merger.
Going Concern
From inception, the Company has incurred expenses in research and development
activities without generating any revenues to offset those expenses and the Company does not expect
to generate revenues in the near future. The Company has incurred losses and negative cash flow
from operating activities from inception, and as of September 30, 2010, the Company had an
accumulated net deficit of approximately $88.7 million. Until the Company can establish profitable
operations to finance its cash requirements, the Companys ability to meet its obligations in the
ordinary course of business is dependent upon its ability to raise substantial additional capital
through public or private equity or debt financings, the establishment of credit or other funding
facilities, collaborative or other strategic arrangements with corporate sources or other sources
of financing, the availability of which cannot be assured. On June 5, 2007, the Company raised
$11.1 million through the Merger with Corautus to cover existing obligations and provide operating
cash flows. In July 2007, the Company entered into a securities purchase agreement that provided
for issuance of 10,288,065 shares of common stock for approximately $25.0 million in gross
proceeds.
4
As more fully described in Note 6 in the notes to the unaudited condensed financial
statements, in March 2009, the Company entered into a Note and Warrant Purchase Agreement (the
Loan Agreement) with its principal stockholder and one of its affiliates (the Lenders) whereby
the Lenders agreed to lend to the Company in the aggregate up to $10.0 million. The Company secured
the loan with all of its assets, including the Companys intellectual property. On March 12, 2009,
the Company borrowed the initial $2.0 million available under the Loan Agreement. Subsequently, the
Company made $2.0 million borrowings under the Loan Agreement on May 19, 2009, June 29, 2009,
August 14, 2009, respectively, and the Company borrowed the final $2.0 million available under the
Loan Agreement on September 11, 2009. According to the terms of the original Loan Agreement, the
debt was due to the Lenders on September 14, 2009. The parties agreed to extend the repayment terms
on various dates in 2009, and on February 26, 2010, the Lenders agreed to modify the Loan Agreement
to further extend the repayment terms to April 1, 2010. The Lenders did not modify the interest
rate or offer any concessions in the amendments to the Loan Agreements. The Company failed to repay
the debt and all related interest to the Lenders due on April 1, 2010.
As more fully described in Note 6 in the notes to the unaudited condensed financial
statements, in March 2010, the Company entered into a second Note and Warrant Purchase Agreement
(the 2010 Loan Agreement) with its principal stockholder and one of its affiliates (the
Lenders) whereby the Lenders agreed to lend to the Company in the aggregate up to $3.0 million,
pursuant to the terms of promissory notes (collectively, the 2010 Notes) delivered under the 2010
Loan Agreement. The Company secured the loan with all of its assets, including the Companys
intellectual property. On March 29, 2010, the Company borrowed the initial $1.25 million available
under the 2010 Loan Agreement. Subsequently, the Company made $100,000, $200,000, $300,000,
$100,000, and $750,000 borrowings under the 2010 Loan Agreement on May 26, 2010, June 4, 2010, June
29, 2010, July 15, 2010, July 27, 2010, respectively, and the Company borrowed the final $300,000
available under the 2010 Loan Agreement on September 28, 2010.
As more fully described in Note 14 in the notes to the unaudited condensed financial
statements, on November 15, 2010, the Company entered into an amendment to the 2010 Loan Agreement
(2010 Loan Amendment) to enable the Company to borrow up to an additional aggregate principal
amount of $3,000,000, pursuant to the terms of amended and restated promissory notes (collectively,
the 2010 Amended and Restated Notes) delivered under the 2010 Loan Amendment. According to the
terms of the 2010 Loan Amendment, the debt is due to the Lenders on December 31, 2010. The 2010
Amended and Restated Notes are secured by a lien on all of the assets of the Company. Amounts
borrowed under the 2010 Amended and Restated Notes accrue interest at the rate of 15% per annum,
which increases to 18% per annum following an event of default. Unless earlier paid in accordance
with the terms of the 2010 Amended and Restated Notes, all unpaid principal and accrued interest
shall
become fully due and payable on the earlier to occur of (i) December 31, 2010, (ii) the closing of
a debt, equity or combined debt/equity financing resulting in gross proceeds or available credit to
the Company of not less than $20,000,000, and (iii) the closing of a transaction in which the
Company sells, conveys, licenses or otherwise disposes of a majority of its assets or is acquired
by way of a merger, consolidation, reorganization or other transaction or series of transactions
pursuant to which stockholders of the Company prior to such acquisition own less than 50% of the
voting interests in the surviving or resulting entity.
The Company had $278,000 in cash at September 30, 2010. Management believes that, under normal
continuing operations, this amount of cash will enable the Company to meet only a portion of its
current obligations. Management does not believe that existing cash resources will be sufficient to
enable the Company to meet its ongoing working capital requirements for the next twelve months and
the Company will need to raise substantial additional funding in the near term to repay amounts
owed under the Loan Agreement and 2010 Loan Agreement, and to meet its ongoing working capital
requirements. As a result, there are substantial doubts that the Company will be able to continue
as a going concern and, therefore, may be unable to realize its assets and discharge its
liabilities in the normal course of business. The unaudited condensed financial statements do not
include any adjustments relating to the recoverability and classification of recorded asset amounts
or to amounts and classifications of liabilities that may be necessary should the Company be unable
to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of
America (GAAP) for interim financial information, in accordance with the instructions to Form
10-Q of Regulations S-X, with accounting guidance for the accounting and reporting by development
stage enterprises and assume the Company will continue as a going concern. Accordingly, they do not
include all of the information and notes required by GAAP for complete financial statements. The
unaudited condensed financial statements have been prepared on the same basis as the annual
financial statements as discussed below. The financial information for the three and nine months
ended September 30, 2010 and 2009 is unaudited but includes all adjustments (consisting of only
normal recurring adjustments), which the Company considers necessary for a fair presentation of the
results of operations for those periods. Interim results are not necessarily indicative of results
for the full fiscal year.
The unaudited condensed financial statements and related disclosures have been prepared with
the presumption that users of the unaudited condensed financial statements have read or have access
to the audited financial statements of the preceding fiscal year. Accordingly, these unaudited
condensed financial statements should be read in conjunction with the audited financial statements
and
notes thereto for the year ended December 31, 2009 on Form 10-K filed by the Company with the
Securities and Exchange Commission (SEC) on March 31, 2010, and on Form 10-K/A filed by the
Company with the SEC on April 30, 2010.
5
On March 21, 2006, the Company formed VIA Pharma UK Limited, a private corporation, in the
United Kingdom to enable clinical trial activities in Europe. VIA Pharma UK Limited did not engage
in operations from June 14, 2004 (date of inception) to September 30, 2010. The Company has a
wholly-owned subsidiary Vascular Genetics Inc. (VGI) that was involved in Corautus clinical
trials. VGI has not been active since the Corautus clinical trials ceased in 2006.
Use of Estimates
The preparation of the unaudited condensed financial statements in
conformity with GAAP requires management to make judgments, assumptions and estimates that affect
the amounts reported in our unaudited condensed financial statements and accompanying notes. Actual
results could differ materially from those estimates.
Cash and Cash Equivalents
Cash equivalents are included with cash and consist of short term,
highly liquid investments with original maturities of three months or less.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is calculated using the straight-line method over the estimated useful
lives of the assets, ranging from three to five years. Computers, lab and office equipment have
estimated useful lives of three years; office furniture and equipment have estimated useful lives
of five years; and leasehold improvements are amortized using the straight-line method over the
shorter of the useful lives or the lease term.
Long-Lived Assets
Long-lived assets include property and equipment and certain purchased
licensed patent rights that are included in other assets in the balance sheet. The Company reviews
long-lived assets, including property and equipment, for impairment annually or whenever events or
changes in circumstances indicate that the carrying amount of the assets may not be recoverable. As
more fully discussed in Note 12 in the notes to the unaudited condensed financial statements, on
March 31, 2010, the Company wrote-off $110,000 of certain computer equipment and leasehold
improvements associated with the March 2010 restructuring resulting in $65,000 in losses on the
disposal of property and equipment, which are included in restructuring costs in the Unaudited
Condensed Statement of Operations. Through September 30, 2010, there have been no other such
impairments.
Incentive Award Accruals
The Company accrues for liabilities under discretionary employee
and executive incentive award plans. These estimated liabilities are based upon progress against
corporate objectives approved by the Board of Directors, compensation levels of eligible
individuals, and target bonus percentage level of employees. The Board of Directors and the
Compensation Committee of the Board of Directors review and evaluate the performance against these
objectives and ultimately determine what discretionary payments are made. At September 30, 2010 and
December 31, 2009, the Company has accrued $767,185 and $1,308,043, respectively, for liabilities
associated with these employee and executive incentive award plans. As described in Note 12 in the
notes to the unaudited condensed financial statements, in March 2010, the Company reversed
approximately $531,000 of previously recorded incentive award accruals related to the restructuring
of the Company and reduction in workforce.
Research and Development Expenses
Research and development (R&D) expenses are charged to
operations as incurred in accordance with accounting guidance for the accounting for research and
development costs. R&D expenses include salaries, contractor and consultant fees; external clinical
trial expenses performed by contract research organizations (CROs) and contracted investigators,
licensing fees and facility allocations. In addition, the Company funds R&D at third-party research
institutions under agreements that are generally cancelable at the Companys option. Research costs
typically consist of applied research, preclinical and toxicology work. Pharmaceutical
manufacturing development costs consist of product formulation, chemical analysis and the transfer
and scale-up of manufacturing at our contract manufacturers. Clinical costs include the costs of
Phase 2 clinical trials. These costs, along with the manufacturing scale-up costs, are a
significant component of R&D expenses.
The Company accrues costs for clinical trial activities performed by CROs and other third
parties based upon the estimated amount of work completed on each study as provided by the vendors.
These estimates may or may not match the actual services performed by the organizations as
determined by patient enrollment levels and related activities. The Company monitors patient
enrollment levels and related activities using available information; however, if the Company
underestimates activity levels associated with various studies at a given point in time, the
Company could record significant R&D expenses in future periods when the actual activity level
becomes known. The Company charges all such costs to R&D expenses.
6
Fair Value of Financial and Derivative Instruments
The Company values its financial
instruments in accordance with new accounting guidance on fair value measurements which, for
certain financial assets and liabilities, requires that assets and liabilities carried at fair
value be classified and disclosed in one of the following three categories:
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
Level 2 Inputs other than quoted prices included in Level 1, such as quoted prices for
similar assets and liabilities in active markets; quoted prices for identical or similar
assets and liabilities in markets that are not active; or other inputs that are observable
or can be corroborated by observable market data.
|
|
|
|
Level 3 Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities. This includes certain
pricing models, discounted cash flow methodologies and similar techniques that use
significant unobservable inputs.
|
In March 2009, the Company entered into a $10.0 million Loan Agreement with the Lenders, as
more fully described in Note 6 in the notes to the unaudited condensed financial statements. At the
date of each borrowing under the Loan Agreement, the Company valued and reported the freestanding
warrants issued in connection with the financing of notes payable to affiliates as paid-in-capital
in the Stockholders Equity (Deficit) section of the Companys balance sheets in accordance with
the following accounting guidance:
|
|
|
Derivative financial instruments indexed to and potentially settled in a companys own
stock;
|
|
|
|
Accounting for derivative instruments and hedging activities; and
|
|
|
|
Accounting for convertible debt and debt issued with stock purchase warrants.
|
The Company made separate $2.0 million borrowings under the $10.0 million Loan Agreement on
March 12, 2009, May 19, 2009, June 29, 2009, August 14, 2009, and a final borrowing on September
11, 2009, with warrants vesting at the time of each draw as described more fully in Note 6 in the
notes to the unaudited condensed financial statements. The Company estimated the fair value of the
warrants issued on the date of each draw using the Black-Scholes pricing model methodology. This
methodology requires significant judgments in the estimation of fair value based on certain
assumptions, including the market value and the estimated volatility of the Companys common stock,
a risk-free interest rate applicable to the facts and circumstances of the transaction, and the
estimated life of the warrant. The freestanding warrant is classified within Level 3 of the fair
value hierarchy.
In March 2010, the Company entered into the 2010 Loan Agreement with the Lenders, as more
fully described in Note 6 in the notes to the unaudited condensed financial statements, whereby the
Lenders agreed to lend to the Company in the aggregate up to $3.0 million. At the date of each
borrowing under the 2010 Loan Agreement, the Company valued and reported the freestanding warrants
issued in connection with the financing of notes payable to affiliates as paid-in-capital in the
Stockholders Equity (Deficit) section of the Companys balance sheets in accordance with the
following accounting guidance:
|
|
|
Derivative financial instruments indexed to and potentially settled in a companys own
stock;
|
|
|
|
Accounting for derivative instruments and hedging activities; and
|
|
|
|
Accounting for convertible debt and debt issued with stock purchase warrants.
|
The Company made separate borrowings of $1.25 million on March 29, 2010, $100,000 on May 26,
2010, $200,000 on June 4, 2010, $300,000 on June 29, 2010, $100,000 on July 15, 2010, $750,000 on
July 27, 2010, and a final $300,000 borrowing on September 28, 2010 under the 2010 Loan Agreement,
with warrants vesting at the time of the draw as described more fully in Note 6 in the notes to the
unaudited condensed financial statements. The Company estimated the fair value of the warrants
issued on the date of each draw using the Black-Scholes pricing model methodology. This methodology
requires significant judgments in the estimation of fair value based on certain assumptions,
including the market value and the estimated volatility of the Companys common stock, a risk-free
interest rate applicable to the facts and circumstances of the transaction, and the estimated life
of the warrant. The freestanding warrant is classified within Level 3 of the fair value hierarchy.
7
Changes in Level 3 Recurring Fair Value Measurements
The following is a rollforward of
balance sheet amounts as of September 30, 2010 (including the change in fair value when
applicable), for financial instruments classified as Level 3. The
Company has no financial instruments classified as Level 1 and Level 2 as of September 30,
2010. When a determination is made to classify a financial instrument within Level 3, the
determination is based upon the significance of the unobservable parameters to the overall fair
value measurement. However, Level 3 financial instruments typically include, in addition to the
unobservable components, observable components (that is, components that are actively quoted and
can be validated to external sources). Accordingly, the gains and losses in the table below include
changes in fair value (when applicable) due in part to observable factors that are part of the
methodology.
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
|
2010
|
|
Fair value December 31, 2009
|
|
$
|
6,948,723
|
|
Warrants (1)
|
|
|
1,048,226
|
|
Change in unrealized gains related to financial instruments at September 30, 2010 (2)
|
|
|
|
|
|
|
|
|
Fair value September 30, 2010
|
|
$
|
7,996,949
|
|
|
|
|
|
Total unrealized gains (losses) (2)
|
|
$
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Warrants are included in additional paid in capital in the Stockholders Equity section
of the Balance Sheet.
|
|
(2)
|
|
The Warrants are not revalued at the reporting dates and do not result in gains and losses.
|
Income Taxes
The Company accounts for income taxes using an asset and liability approach.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes, and operating loss and tax credit carryforwards measured by applying currently
enacted tax laws. A valuation allowance is provided to reduce net deferred tax assets to an amount
that is more likely than not to be realized. The amount of the valuation allowance is based on the
Companys best estimate of the recoverability of its deferred tax assets. On January 1, 2007, the
Company adopted new accounting guidance for the accounting for uncertainty in income tax positions.
This guidance seeks to reduce the diversity in practice associated with certain aspects of
measurement and recognition in accounting for income taxes and provide guidance on de-recognition,
classification, interest and penalties, and accounting in interim periods and requires expanded
disclosure with respect to the uncertainty in income taxes. The accounting guidance requires that
the Company recognize in its unaudited condensed financial statements the impact of a tax position
if that position is more likely than not to be sustained on audit, based on the technical merits of
the position.
Segment Reporting
Accounting guidance on disclosures about segments of an enterprise and
related information requires the use of a management approach in identifying segments of an
enterprise. Management has determined that the Company operates in one business segment
scientific research and development activities.
Earnings (Loss) Per Share of Common Stock
Basic earnings (loss) per share of common stock is
computed by dividing net income (loss) by the weighted-average number of common shares outstanding
for the period. Diluted earnings (loss) per share of common stock is computed by dividing net
income (loss) by the weighted-average number of shares of common stock and potentially dilutive
shares of common stock equivalents outstanding during the period.
The following table presents the calculation of basic and diluted net loss per common share
for the three and nine months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net loss
|
|
$
|
(2,118,323
|
)
|
|
$
|
(8,038,046
|
)
|
|
$
|
(7,130,714
|
)
|
|
$
|
(16,731,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding
|
|
|
20,558,446
|
|
|
|
20,646,374
|
|
|
|
20,580,460
|
|
|
|
20,630,382
|
|
Less: Weighted-average shares of common stock
subject to repurchase
|
|
|
(106,114
|
)
|
|
|
(631,917
|
)
|
|
|
(222,109
|
)
|
|
|
(754,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing basic
net loss per share
|
|
|
20,452,332
|
|
|
|
20,014,457
|
|
|
|
20,358,351
|
|
|
|
19,875,482
|
|
Dilutive effect of common share equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing diluted
net loss per share
|
|
|
20,452,332
|
|
|
|
20,014,457
|
|
|
|
20,358,351
|
|
|
|
19,875,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Diluted earnings (loss) per share of common stock reflects the potential dilution that could
occur if options or warrants to purchase shares of common stock were exercised, or shares of
preferred stock were converted into shares of common stock. The following table details potentially
dilutive shares of common stock equivalents that have been excluded from diluted net loss per share
for the three and nine months ended September 30, 2010 and 2009 because their inclusion would be
anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Common stock equivalents (in shares):
|
|
|
|
|
|
|
|
|
Shares of common stock subject to outstanding options
|
|
|
1,847,872
|
|
|
|
2,740,733
|
|
Shares of common stock subject to outstanding warrants
|
|
|
101,050,407
|
|
|
|
83,503,348
|
|
Shares of common stock subject to conversion from series C preferred stock
|
|
|
13,986,013
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares of common stock equivalents
|
|
|
116,884,292
|
|
|
|
86,244,081
|
|
|
|
|
|
|
|
|
As described in Note 7 in the notes to the unaudited condensed financial statements, the
Series C Preferred Stock became convertible on June 13, 2010 and shares are convertible upon
delivery of notice of conversion. The number of shares of common stock into which Series C
Preferred Stock will be converted is based in part on the fair market value (as defined in the
Amended and Restated Certificate of Designation of Preferences and Rights of Series C Preferred
Stock of the Company) of the Companys common stock on June 13, 2010. Accordingly, we have not
included any Series C Preferred Stock in the table above for the three and nine month period ended
September 30, 2009.
Comprehensive Income (Loss)
Comprehensive income (loss) generally represents all changes in
stockholders equity except those resulting from investments or contributions by stockholders.
Amounts reported in other comprehensive income (loss) include derivative financial instruments
designated and effective as hedges of underlying foreign currency denominated transactions.
The following table presents the calculation of total comprehensive income (loss) for the
three and nine months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net loss
|
|
$
|
(2,118,323
|
)
|
|
$
|
(8,038,046
|
)
|
|
$
|
(7,130,714
|
)
|
|
$
|
(16,731,373
|
)
|
Changes in unrealized gain (loss)
on foreign currency cash flow
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(2,118,323
|
)
|
|
$
|
(8,038,046
|
)
|
|
$
|
(7,130,714
|
)
|
|
$
|
(16,731,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
From time to time, the Company uses derivatives to manage its market
exposure to fluctuations in foreign currencies. The Company records these derivatives on the
balance sheet at fair value in accordance with accounting guidance for derivatives. To receive
hedge accounting treatment, all hedging relationships are formally documented at the inception of
the hedge and the hedges must be highly effective in offsetting changes to future cash flows on
hedged transactions. For derivative instruments that are designated and qualify as a cash flow
hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable
to a particular risk), the effective portion of the gain or loss on the derivative instrument is
reported as a component of other comprehensive income (loss) and in the Companys statement of
operations in the same period or periods during which the hedged transaction affects earnings. The
gain or loss on the derivative instruments in excess of the cumulative change in the present value
of future cash flows of the hedged transaction, if any, is recognized in the Companys statement of
operations during the period of change. The Company does not use derivative instruments for
speculative purposes.
As of September 30, 2010, December 31, 2009 and September 30, 2009, the Company does not have
any outstanding forward foreign exchange contracts. All foreign currency purchased under forward
foreign exchange contracts has been expended in the purchase of clinical trial services and, as a
result, the Company does not have any outstanding unrealized gains or losses on forward foreign
exchange contracts and also does not have any related accumulated other comprehensive income on the
Companys September 30, 2010, December 31, 2009 and September 30, 2009 Balance Sheets.
New Accounting Pronouncements
In October 2009, the FASB issued ASU No. 2009-13, Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB
Emerging Issues Task Force), which amends ASC 605-25, Revenue Recognition: Multiple-Element
Arrangements. ASU No. 2009-13 addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting and how to allocate consideration to each
unit of accounting in the arrangement. This ASU replaces all references to fair value as the
measurement criteria with the term selling price and establishes a hierarchy for determining the
selling price of a deliverable. ASU No. 2009-13 also eliminates the use of the residual
value method for determining the allocation of arrangement consideration. Additionally, ASU
No. 2009-13 requires expanded disclosures. This ASU will become effective for revenue arrangements
entered into or materially modified after the fiscal year 2010. Earlier application is permitted
with required transition disclosures based on the period of adoption. The Company is currently
evaluating the application date and does not believe this standard will have a material impact on
our unaudited condensed financial statements.
9
3. STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted new accounting guidance for accounting for stock-based
compensation. Under the fair value recognition provisions of this accounting guidance, stock-based
compensation cost is measured at the grant date based on the fair value of the award and is
recognized as expense on a straight-line basis over the requisite service period, which is the
vesting period. The Company elected the modified-prospective method, under which prior periods are
not revised for comparative purposes. The valuation provisions of the accounting guidance apply to
new grants and to grants that were outstanding as of the effective date and are subsequently
modified. Estimated compensation for grants that were outstanding as of the effective date of this
new guidance are now being recognized over the remaining service period using the compensation cost
estimated for the required pro forma disclosures.
The Company uses the Black-Scholes option pricing model to estimate the fair value of
stock-based awards. The determination of the fair value of stock-based awards on the date of grant
using an option-pricing model is affected by the value of the Companys stock price as well as
assumptions regarding a number of complex and subjective variables. These variables include
expected stock price volatility over the term of the awards, actual and projected employee stock
option exercise behaviors, risk-free interest rate and expected dividends.
Prior to June 5, 2007, the Company was a privately-held company and its common stock was not
publicly traded. The fair value of stock options granted from January 2006 through June 5, 2007
(date of completion of the Merger with Corautus), and related stock-based compensation expense,
were determined based upon quoted stock prices of Corautus, the exchange ratio of shares in the
Merger, and a private company 10% discount for grants prior to March 31, 2007, as this represented
the best estimate of market value to use in measuring compensation. Subsequent to the Merger, the
Company, now publicly held, uses the closing stock price of the Companys common stock on the date
the options are granted to determine the fair market value of each option. The Company revalues
each non-employee option quarterly based on the closing stock price of the Companys common stock
on the last day of the quarter. The Company also revalues options when there is a change in
employment status.
The Company estimates the expected term of options granted by taking the average of the
vesting term and the contractual term of the option. As of September 30, 2010, the Company
estimates common stock price volatility using a hybrid approach consisting of the weighted-average
of actual historical volatility using a look back period of approximately three years, representing
the period of time the Companys stock has been publicly traded, blended with an average of
selected peer group volatility for approximately six years, consistent with the expected life from
grant date. The volatility for the Company and the selected peer group was approximately 128% and
105%, respectively, as of September 30, 2010, and 132% and 93%, respectively as of September 30,
2009. The blended volatility rate was approximately a range from 114% to 118% as of September 30,
2010 and 107% as of September 30, 2009. The Company will continue to incrementally increase the
look back period of the Companys common stock and percent of actual historical volatility until
historical data meets or exceeds the estimated term of the options. Prior to the year ended
December 31, 2009, the Company used peer group calculated volatility as the Company is a
development stage company with limited stock price history from which to forecast stock price
volatility. The risk-free interest rates used in the valuation model are based on U.S. Treasury
issues with remaining terms similar to the expected term on the options. The Company does not
anticipate paying any dividends in the foreseeable future and therefore used an expected dividend
yield of zero.
The Company calculated an annualized forfeiture rate of 4.77% and 2.98% as of September 30,
2010 and 2009, respectively, using the Companys historical data. These rates were used to exclude
future forfeitures in the calculation of stock-based compensation expense as of September 30, 2010
and 2009, respectively.
10
The assumptions used to value option and restricted stock award grants for the three and nine
months ended September 30, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
|
2010
|
|
2009
|
|
Expected life from grant date
|
|
6.16-7.21
|
|
|
|
|
|
6.16-7.21
|
|
|
6.08
|
|
Expected volatility
|
|
114%-118%
|
|
|
|
%
|
|
114%-118%
|
|
|
105
|
%
|
Risk free interest rate
|
|
1.64%-1.95%
|
|
|
|
%
|
|
1.64%-1.95%
|
|
|
2.89
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes stock-based compensation expenses related to stock options and
warrants for the three and nine months ended September 30, 2010 and 2009, and for the period from
June 14, 2004 (date of inception) to September 30, 2010, which were included in the statements of
operations in the following captions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Research and development expense
|
|
$
|
43,453
|
|
|
$
|
19,115
|
|
|
$
|
122,250
|
|
|
$
|
228,110
|
|
|
$
|
1,201,676
|
|
General and administrative expense
|
|
|
110,034
|
|
|
|
232,121
|
|
|
|
436,035
|
|
|
|
705,206
|
|
|
|
3,240,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
153,487
|
|
|
$
|
251,236
|
|
|
$
|
558,285
|
|
|
$
|
933,316
|
|
|
$
|
4,442,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If all of the remaining non-vested and outstanding stock option awards that have been granted
became vested, we would recognize approximately $616,000 in compensation expense over a weighted
average remaining period of 1.0 year. However, no compensation expense will be recognized for any
stock option awards that do not vest.
The following table summarizes stock-based compensation expenses related to employee
restricted stock awards for the three and nine months ended September 30, 2010 and 2009, and for
the period from June 14, 2004 (date of inception) to September 30, 2010, which were included in the
statements of operations in the following captions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Research and development expense
|
|
$
|
3,588
|
|
|
$
|
3,934
|
|
|
$
|
10,695
|
|
|
$
|
11,754
|
|
|
$
|
27,063
|
|
General and administrative expense
|
|
|
6,314
|
|
|
|
12,024
|
|
|
|
23,651
|
|
|
|
35,490
|
|
|
|
73,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,902
|
|
|
$
|
15,958
|
|
|
$
|
34,346
|
|
|
$
|
47,244
|
|
|
$
|
100,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If all of the remaining non-vested restricted stock awards that have been granted became
vested, we would recognize approximately $8,000 in compensation expense over a weighted average
remaining period of 0.25 years. However, no compensation expense will be recognized for any stock
option awards that do not vest.
4. RESEARCH AND DEVELOPMENT
The Companys research and development expenses include expenses related to Phase 2 clinical
development of the Companys lead compound VIA-2291, regulatory activities, and preclinical
development costs for additional assets in the Companys product pipeline. R&D expenses include
salaries, contractor and consultant fees, external clinical trial expenses performed by CROs and
contracted investigators, licensing fees and facility allocations. In addition, the Company funds
R&D at third-party research institutions under agreements that are generally cancelable at the
Companys option. Research costs typically consist of applied research, preclinical and toxicology
work. Pharmaceutical manufacturing development costs consist of product formulation, chemical
analysis and the transfer and scale-up of manufacturing at our contract manufacturers. Clinical
costs include the costs of Phase 2 clinical trials. These costs, along with the manufacturing
scale-up costs, are a significant component of research and development expenses.
11
The following reflects the breakdown of the Companys research and development expenses
generated internally versus externally for the three and nine months ended September 30, 2010 and
2009, and for the period from June 14, 2004 (date of inception) to September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Externally generated R&D expense
|
|
$
|
85,729
|
|
|
$
|
732,162
|
|
|
$
|
474,366
|
|
|
$
|
2,985,635
|
|
|
$
|
29,179,557
|
|
Internally generated R&D expense
|
|
|
364,179
|
|
|
|
574,147
|
|
|
|
1,344,233
|
|
|
|
1,963,483
|
|
|
|
13,545,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
449,908
|
|
|
$
|
1,306,309
|
|
|
$
|
1,818,599
|
|
|
$
|
4,949,118
|
|
|
$
|
42,724,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Externally generated research and development expenses consist primarily of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
In-licensing expenses
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
400,000
|
|
|
$
|
5,270,000
|
|
CRO and investigator expenses
|
|
|
1,204
|
|
|
|
221,030
|
|
|
|
19,868
|
|
|
|
909,296
|
|
|
|
10,769,207
|
|
Consulting expenses
|
|
|
43,718
|
|
|
|
211,893
|
|
|
|
166,439
|
|
|
|
916,097
|
|
|
|
6,585,108
|
|
Other
|
|
|
40,807
|
|
|
|
299,239
|
|
|
|
288,059
|
|
|
|
760,242
|
|
|
|
6,555,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85,729
|
|
|
$
|
732,162
|
|
|
$
|
474,366
|
|
|
$
|
2,985,635
|
|
|
$
|
29,179,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internally generated research and development expenses consist primarily of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Payroll and payroll related expenses
|
|
$
|
235,542
|
|
|
$
|
459,266
|
|
|
$
|
804,362
|
|
|
$
|
1,380,281
|
|
|
$
|
9,311,521
|
|
Stock-based compensation
|
|
|
47,041
|
|
|
|
23,050
|
|
|
|
132,945
|
|
|
|
239,864
|
|
|
|
1,228,739
|
|
Travel and entertainment expenses
|
|
|
11,724
|
|
|
|
29,799
|
|
|
|
55,005
|
|
|
|
134,815
|
|
|
|
1,210,624
|
|
Other
|
|
|
69,872
|
|
|
|
62,032
|
|
|
|
351,921
|
|
|
|
208,523
|
|
|
|
1,794,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
364,179
|
|
|
$
|
574,147
|
|
|
$
|
1,344,233
|
|
|
$
|
1,963,483
|
|
|
$
|
13,545,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. PROPERTY AND EQUIPMENT
Property and equipment net, at September 30, 2010 and December 31, 2009 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Property and equipment at cost:
|
|
|
|
|
|
|
|
|
Computer equipment and software
|
|
$
|
281,822
|
|
|
$
|
308,467
|
|
Furniture and fixtures
|
|
|
113,363
|
|
|
|
113,363
|
|
Office equipment
|
|
|
21,048
|
|
|
|
38,282
|
|
Leasehold Improvements
|
|
|
24,794
|
|
|
|
129,740
|
|
|
|
|
|
|
|
|
Total property and equipment at cost
|
|
|
441,027
|
|
|
|
589,852
|
|
Less: accumulated depreciation
|
|
|
(409,225
|
)
|
|
|
(419,235
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,802
|
|
|
$
|
170,617
|
|
|
|
|
|
|
|
|
12
Depreciation expense on property and equipment was $14,076 and $34,158 in the three months
ended September 30, 2010 and 2009, respectively, $66,437 and $103,653 in the nine months ended
September 30, 2010 and 2009, respectively, and $570,310 for the period from June 14, 2004 (date of
inception) to September 30, 2010, and was included in the statements of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Research and development expense
|
|
$
|
2,729
|
|
|
$
|
5,865
|
|
|
$
|
10,923
|
|
|
$
|
17,730
|
|
|
$
|
142,851
|
|
General and administrative expense
|
|
|
11,347
|
|
|
|
28,293
|
|
|
|
55,514
|
|
|
|
85,923
|
|
|
|
427,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,076
|
|
|
$
|
34,158
|
|
|
$
|
66,437
|
|
|
$
|
103,653
|
|
|
$
|
570,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. NOTES PAYABLE
AFFILIATES
Notes Payable Affiliates consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Issued March 12, 2009 18% due April 1, 2010 (Loan Agreement)
|
|
$
|
10,000,000
|
|
|
$
|
10,000,000
|
|
Less: Unamortized discount
|
|
|
|
|
|
|
(4,374
|
)
|
|
|
|
|
|
|
|
Balance
|
|
$
|
10,000,000
|
|
|
$
|
9,995,626
|
|
|
|
|
|
|
|
|
Issued March 26, 2010 15% due December 31, 2010 (2010 Loan Agreement)
|
|
|
3,000,000
|
|
|
|
|
|
Less: Unamortized discount
|
|
|
(491,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
2,508,435
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,508,435
|
|
|
$
|
9,995,626
|
|
|
|
|
|
|
|
|
Notes Payable Issued March 12, 2009 due April 1, 2010 (Loan Agreement)
In March 2009, the Company entered into the Loan Agreement whereby the Lenders agreed to lend
to the Company in the aggregate up to $10.0 million, pursuant to the terms of promissory notes
(collectively, the Notes) delivered under the Loan Agreement.
On March 12, 2009, the Company borrowed an initial amount of $2.0 million under the Loan
Agreement. During the three months ended June 30, 2009, the Company borrowed $2.0 million on May
19, 2009, and another $2.0 million on June 29, 2009. During the three months ended September 30,
2009, the Company borrowed $2.0 million on August 14, 2009, and borrowed the final $2.0 million on
September 11, 2009. The Notes are secured by a first priority lien on all of the assets of the
Company, including the Companys intellectual property. Amounts borrowed under the Notes accrue
interest at the rate of 15% per annum, which increases to 18% per annum following an event of
default. Unless earlier paid in accordance with the terms of the Notes, all unpaid principal and
accrued interest became fully due and payable on April 1, 2010. While the Lenders have not
declared an event of default, the Company failed to repay the debt and all related interest to the
Lenders due on April 1, 2010. As a result, the Company is now accruing interest at the higher 18%
per annum beginning April 1, 2010. On September 11, 2009, the Lenders agreed to extend the
repayment terms from September 14, 2009 to October 31, 2009; on October 30, 2009, the Lenders
agreed to further extend the repayment terms from October 31, 2009 to December 31, 2009; on
December 22, 2009, the Lenders agreed to again further extend the repayment terms from December 31,
2009 to February 28, 2010; and on February 26, 2010, the Lenders agreed to further extend the
repayment terms from February 28, 2010 to April 1, 2010. There were no other significant changes to
any of the terms and conditions of the original Notes in the September 11, 2009, October 30, 2009,
December 22, 2009 or February 26, 2010 amendments and the Lenders did not give any loan
concessions. As a result of the loan amendments, and because the Company did not repay the debt on
April 1, 2010, total interest expense on the note and the note discount amortization increased
$1,681,644 from anticipated interest expense based on the original due date of the Notes of
$7,328,449 to actual interest after the loan amendments of $9,010,093 from the inception of the
Notes to September 30, 2010.
Pursuant to the terms of the Loan Agreement, the Company issued to the Lenders warrants (the
Warrants) to purchase an aggregate of up to 83,333,333 shares (the Warrant Shares) of common
stock at $0.12 per share as more fully described below. The number of Warrant Shares is equal to
the $10.0 million maximum aggregate principal amount that may be borrowed under the Loan Agreement,
divided by the $0.12 per share exercise price of the Warrants. The Warrant Shares vest based on the
amount of borrowings under the Notes and based on the passage of time. For each $2.0 million
borrowing, 8,333,333 Warrant Shares vested and became exercisable immediately on the date of grant,
and 8,333,333 vested and became exercisable 45 days thereafter as the Company meets certain
conditions provided for in the Warrants, including that the Company did not complete a $20.0
million financing, as defined in the Loan Agreement, within 45 days of the borrowing. Based on the
aggregate $10.0 million of borrowings at September
30, 2010, all 83,333,333 Warrant Shares are vested and are exercisable at September 30, 2010.
The Warrant Shares are exercisable at any time until March 12, 2014.
13
On March 12, 2009, the fair value of the note and of the 16,666,666 Warrant Shares related to
the $2.0 million borrowed under the Loan Agreement was $2.0 million and approximately $1.6 million,
respectively. This resulted in the Company allocating the relative fair value of approximately $1.1
million of the $2.0 million in proceeds to the note and approximately $900,000 to the Warrants. The
Company has recorded the $900,000 freestanding Warrants as permanent equity under accounting
guidance for accounting for derivative financial instruments indexed to, and potentially settled
in, a companys own stock, and accounting guidance for determining whether an instrument (or
embedded feature) is indexed to an entitys own stock
.
The $900,000 discount on the note payable
affiliate is netted against the $2.0 million note and is being amortized to interest expense using
the interest method from March 12, 2009 through April 1, 2010, the maturity date of the note
payable. At September 30, 2010, the balance of notes payable affiliate net of discount was
$2,000,000 and the unamortized discount was $0.
Interest expenses on the $2.0 million March 12, 2009 borrowing for the three and nine months
ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September
30, 2010 were included in the statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
March 12, 2009 Borrowing
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Interest expense
|
|
$
|
90,740
|
|
|
$
|
75,616
|
|
|
$
|
254,466
|
|
|
$
|
166,849
|
|
|
$
|
496,932
|
|
Discount amortization
|
|
|
|
|
|
|
354,211
|
|
|
|
36
|
|
|
|
891,334
|
|
|
|
900,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90,740
|
|
|
$
|
429,827
|
|
|
$
|
254,502
|
|
|
$
|
1,058,183
|
|
|
$
|
1,396,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of the Warrants of approximately $1.6 million at March
12, 2009 using the Black-Scholes pricing model methodology with assumptions outlined below. The
assumptions used to value the Warrants at March 12, 2009 (date of inception) are:
|
|
|
|
|
|
|
March 12, 2009
|
|
Expected life from grant date in years
|
|
|
5.0
|
|
Expected volatility
|
|
|
116.79
|
%
|
Risk free interest rate
|
|
|
2.10
|
%
|
Dividend yield
|
|
|
|
|
On May 19, 2009, the Company borrowed an additional $2.0 million under the Loan Agreement and
the fair value of the note and of the 16,666,666 Warrant Shares related was $2.0 million and
approximately $6.6 million, respectively. This resulted in the Company allocating the relative fair
value of approximately $500,000 of the $2.0 million in proceeds to the note and approximately $1.5
million to the Warrants. The Company has recorded the $1.5 million freestanding Warrants as
permanent equity under accounting guidance for accounting for derivative financial instruments
indexed to, and potentially settled in, a companys own stock, and accounting guidance for
determining whether an instrument (or embedded feature) is indexed to an entitys own stock. The
$1.5 million discount on the note payable affiliate is netted against the $2.0 million note and
is being amortized to interest expense using the interest method from May 19, 2009 through April 1,
2010, the maturity date of the note payable. At September 30, 2010, the balance of notes payable
affiliate net of discount was $2,000,000 and the unamortized discount was $0.
Interest expenses on the $2.0 million May 19, 2009 borrowing for the three and nine months
ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September
30, 2010 were included in the statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
May 19, 2009 Borrowing
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Interest expense
|
|
$
|
90,740
|
|
|
$
|
75,617
|
|
|
$
|
254,466
|
|
|
$
|
110,959
|
|
|
$
|
441,041
|
|
Discount amortization
|
|
|
|
|
|
|
950,913
|
|
|
|
96
|
|
|
|
1,509,509
|
|
|
|
1,532,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90,740
|
|
|
$
|
1,026,530
|
|
|
$
|
254,562
|
|
|
$
|
1,620,468
|
|
|
$
|
1,973,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
The Company estimated the fair value of the Warrants of approximately $1.5 million at May 19,
2009 using the Black-Scholes pricing model methodology with assumptions outlined below. The
assumptions used to value the Warrants at May 19, 2009 (date of inception) are:
|
|
|
|
|
|
|
May 19, 2009
|
|
Expected life from grant date in years
|
|
|
4.81
|
|
Expected volatility
|
|
|
108.63
|
%
|
Risk free interest rate
|
|
|
2.05
|
%
|
Dividend yield
|
|
|
|
|
On June 29, 2009, the Company borrowed an additional $2.0 million under the Loan Agreement and
the fair value of the note and of the 16,666,666 Warrant Shares related was $2.0 million and
approximately $8.7 million, respectively. This resulted in the Company allocating the relative fair
value of approximately $400,000 of the $2.0 million in proceeds to the note and approximately $1.6
million to the Warrants. The Company has recorded the $1.6 million freestanding Warrants as
permanent equity under accounting guidance for accounting for derivative financial instruments
indexed to, and potentially settled in, a companys own stock, and accounting guidance for
determining whether an instrument (or embedded feature) is indexed to an entitys own stock. The
$1.6 million discount on the note payable affiliate is netted against the $2.0 million note and
is being amortized to interest expense using the interest method from June 29, 2009 through April
1, 2010, the maturity date of the note payable. At September 30, 2010, the balance of notes
payable affiliate net of discount was $2,000,000 and the unamortized discount was $0.
Interest expenses on the $2.0 million June 29, 2009 borrowing for the three and nine months
ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September
30, 2010 were included in the statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
June 29, 2009 Borrowing
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Interest expense
|
|
$
|
90,740
|
|
|
$
|
75,616
|
|
|
$
|
254,466
|
|
|
$
|
77,260
|
|
|
$
|
407,343
|
|
Discount amortization
|
|
|
|
|
|
|
1,545,694
|
|
|
|
157
|
|
|
|
1,587,926
|
|
|
|
1,625,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90,740
|
|
|
$
|
1,621,310
|
|
|
$
|
254,623
|
|
|
$
|
1,665,186
|
|
|
$
|
2,033,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of the Warrants of approximately $1.6 million at June 29,
2009 using the Black-Scholes pricing model methodology with assumptions outlined below. The
assumptions used to value the Warrants at June 29, 2009 (date of inception) are:
|
|
|
|
|
|
|
June 29, 2009
|
|
Expected life from grant date in years
|
|
|
4.7
|
|
Expected volatility
|
|
|
112.03
|
%
|
Risk free interest rate
|
|
|
2.40
|
%
|
Dividend yield
|
|
|
|
|
On August 14, 2009, the Company borrowed an additional $2.0 million under the Loan Agreement
and the fair value of the note and of the 16,666,666 Warrant Shares related was $2.0 million and
approximately $4.4 million, respectively. This resulted in the Company allocating the relative fair
value of approximately $600,000 of the $2.0 million in proceeds to the note and approximately $1.4
million to the Warrants. The Company has recorded the $1.4 million freestanding Warrants as
permanent equity under accounting guidance for accounting for derivative financial instruments
indexed to, and potentially settled in, a companys own stock, and accounting guidance for
determining whether an instrument (or embedded feature) is indexed to an entitys own stock. The
$1.4 million discount on the note payable affiliate is netted against the $2.0 million note and
is being amortized to interest expense using the interest method from August 14, 2009 through April
1, 2010, the maturity date of the note payable. At September 30, 2010, the balance of notes
payable affiliate net of discount was $2,000,000 and the unamortized discount was $0.
15
Interest expenses on the $2.0 million August 14, 2009 borrowing for the three and nine months
ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September
30, 2010 were included in the statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
August 14, 2009 Borrowing
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Interest expense
|
|
$
|
90,740
|
|
|
$
|
39,452
|
|
|
$
|
254,466
|
|
|
$
|
39,452
|
|
|
$
|
369,534
|
|
Discount amortization
|
|
|
|
|
|
|
1,293,316
|
|
|
|
329
|
|
|
|
1,293,316
|
|
|
|
1,373,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90,740
|
|
|
$
|
1,332,768
|
|
|
$
|
254,795
|
|
|
$
|
1,332,768
|
|
|
$
|
1,742,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of the Warrants of approximately $1.4 million at August
14, 2009 using the Black-Scholes pricing model methodology with assumptions outlined below. The
assumptions used to value the Warrants at August 14, 2009 (date of inception) are:
|
|
|
|
|
|
|
August 14, 2009
|
|
Expected life from grant date in years
|
|
|
4.58
|
|
Expected volatility
|
|
|
115.22
|
%
|
Risk free interest rate
|
|
|
2.32
|
%
|
Dividend yield
|
|
|
|
|
On September 11, 2009, the Company borrowed the final $2.0 million under the Loan Agreement
and the fair value of the note and of the 16,666,666 Warrant Shares related was $2.0 million and
approximately $6.3 million, respectively. This resulted in the Company allocating the relative fair
value of approximately $500,000 of the $2.0 million in proceeds to the note and approximately $1.5
million to the Warrants. The Company has recorded the $1.5 million freestanding Warrants as
permanent equity under accounting guidance for accounting for derivative financial instruments
indexed to, and potentially settled in, a companys own stock, and accounting guidance for
determining whether an instrument (or embedded feature) is indexed to an entitys own stock
.
The
$1.5 million discount on the note payable affiliate is netted against the $2.0 million note and
is being amortized to interest expense using the interest method from September 11, 2009 through
April 1, 2010, the maturity date of the note payable. At September 30, 2010, the balance of notes
payable affiliate net of discount was $2,000,000 and the unamortized discount was $0.
Interest expenses on the $2.0 million September 11, 2009 borrowing for the three and nine
months ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to
September 30, 2010 were included in the statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
September 11, 2009 Borrowing
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Interest expense
|
|
$
|
90,739
|
|
|
$
|
16,439
|
|
|
$
|
254,465
|
|
|
$
|
16,439
|
|
|
$
|
346,520
|
|
Discount amortization
|
|
|
|
|
|
|
606,724
|
|
|
|
3,756
|
|
|
|
606,724
|
|
|
|
1,516,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90,739
|
|
|
$
|
623,163
|
|
|
$
|
258,221
|
|
|
$
|
623,163
|
|
|
$
|
1,863,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of the Warrants of approximately $1.5 million at
September 11, 2009 using the Black-Scholes pricing model methodology with assumptions outlined
below. The assumptions used to value the Warrants at September 11, 2009 (date of inception) are:
|
|
|
|
|
|
|
September 11, 2009
|
|
Expected life from grant date in years
|
|
|
4.50
|
|
Expected volatility
|
|
|
115.41
|
%
|
Risk free interest rate
|
|
|
2.07
|
%
|
Dividend yield
|
|
|
|
|
16
Interest expenses on the aggregate $10.0 million Loan Agreement for the three and nine months
ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September
30, 2010 were included in the statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Interest expense
|
|
$
|
453,699
|
|
|
$
|
282,740
|
|
|
$
|
1,272,329
|
|
|
$
|
410,959
|
|
|
$
|
2,061,370
|
|
Discount amortization
|
|
|
|
|
|
|
4,750,858
|
|
|
|
4,374
|
|
|
|
5,888,809
|
|
|
|
6,948,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
453,699
|
|
|
$
|
5,033,598
|
|
|
$
|
1,276,703
|
|
|
$
|
6,299,768
|
|
|
$
|
9,010,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010 the aggregate balance of the notes payable affiliate net of discount
was $10,000,000 and the aggregate unamortized discount was $0. The Company has accrued interest of
$2,061,370 and $410,959 as of September 30, 2010 and December 31, 2009, respectively, which is
included in the Balance Sheet.
Notes Payable Issued March 26, 2010 15% due December 31, 2010 (2010 Loan Agreement)
In March 2010, the Company entered into the 2010 Loan Agreement whereby the Lenders agreed to
lend to the Company in the aggregate up to $3.0 million, pursuant to the terms of the 2010 Notes.
On March 29, 2010, the Company borrowed an initial amount of $1,250,000. During the three
months ended June 30, 2010, the Company borrowed $100,000 on May 26, 2010, $200,000 on June 4,
2010, and another $300,000 on June 29, 2010. During the three months ended September 30, 2010, the
Company borrowed $100,000 on July 15, 2010, $750,000 on July 27, 2010 and a final $300,000 on
September 28, 2010. The 2010 Notes are secured by a lien on all of the assets of the Company.
Amounts borrowed under the 2010 Notes accrue interest at the rate of 15% per annum, which increases
to 18% per annum following an event of default. Unless earlier paid in accordance with the terms of
the 2010 Notes, all unpaid principal and accrued interest shall become fully due and payable on the
earlier to occur of (i) December 31, 2010, (ii) the closing of a debt, equity or combined
debt/equity financing resulting in gross proceeds or available credit to the Company of not less
than $20,000,000, and (iii) the closing of a transaction in which the Company sells, conveys,
licenses or otherwise disposes of a majority of its assets or is acquired by way of a merger,
consolidation, reorganization or other transaction or series of transactions pursuant to which
stockholders of the Company prior to such acquisition own less than 50% of the voting interests in
the surviving or resulting entity.
Pursuant to the 2010 Loan Agreement, the Company issued to the Lenders warrants (the 2010
Warrants) to purchase an aggregate of 17,647,059 shares (the 2010 Warrant Shares) of common
stock at $0.17 per share. The number of 2010 Warrant Shares is equal to the $3,000,000 maximum
aggregate principal amount that may be borrowed under the 2010 Loan Agreement, divided by the $0.17
per share exercise price of the 2010 Warrants. The 2010 Warrant Shares vest based on the amount of
borrowings under the 2010 Notes. Based on the $3,000,000 borrowings as of September 30, 2010, all
17,647,059 of the 2010 Warrant Shares are vested and are exercisable at September 30, 2010. The
Warrant Shares are exercisable at any time until March 26, 2015.
On March 29, 2010, the fair value of the 2010 Notes and of the 7,352,941 2010 Warrant Shares
related to the $1.25 million borrowed under the 2010 Loan Agreement was $1.25 million and
approximately $904,000, respectively. This resulted in the Company allocating the relative fair
value of approximately $726,000 of the $1.25 million in proceeds to the 2010 Notes and
approximately $524,000 to the 2010 Warrants. The Company has recorded the $524,000 freestanding
2010 Warrants as permanent equity under accounting guidance for accounting for derivative financial
instruments indexed to, and potentially settled in, a companys own stock, and accounting guidance
for determining whether an instrument (or embedded feature) is indexed to an entitys own stock.
The $524,000 discount on the note payable affiliate is netted against the $1.25 million 2010
Notes and is being amortized to interest expense using the interest method from March 29, 2010
through December 31, 2010, the maturity date of the note payable. At September 30, 2010, the
balance of notes payable affiliate net of discount was $1,077,693 and the unamortized discount
was $172,307.
17
Interest expenses on the $1.25 million March 29, 2010 borrowing for the three and nine months
ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September
30, 2010 were included in the statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
March 29, 2010 Borrowing
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Interest expense
|
|
$
|
47,260
|
|
|
$
|
|
|
|
$
|
95,548
|
|
|
$
|
|
|
|
$
|
95,548
|
|
Discount amortization
|
|
|
174,201
|
|
|
|
|
|
|
|
352,189
|
|
|
|
|
|
|
|
352,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
221,461
|
|
|
$
|
|
|
|
$
|
447,737
|
|
|
$
|
|
|
|
$
|
447,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of the 2010 Warrants of approximately $524,000 at March
29, 2010 using the Black-Scholes pricing model methodology with assumptions outlined below. The
assumptions used to value the 2010 Warrants at March 29, 2010 (date of inception) are:
|
|
|
|
|
|
|
March 29, 2010
|
|
Expected life from grant date in years
|
|
|
4.99
|
|
Expected volatility
|
|
|
119.82
|
%
|
Risk free interest rate
|
|
|
2.60
|
%
|
Dividend yield
|
|
|
|
|
On May 26, 2010, the Company borrowed an additional $100,000 under the 2010 Loan Agreement and
the fair value of the note and of the 588,235 Warrant Shares related was $100,000 and approximately
$71,000, respectively. This resulted in the Company allocating the relative fair value of
approximately $58,000 of the $100,000 in proceeds to the 2010 Notes and approximately $42,000 to
the 2010 Warrants. The Company has recorded the $42,000 freestanding 2010 Warrants as permanent
equity under accounting guidance for accounting for derivative financial instruments indexed to,
and potentially settled in, a companys own stock, and accounting guidance for determining whether
an instrument (or embedded feature) is indexed to an entitys own stock. The $42,000 discount on
the note payable affiliate is netted against the $100,000 note and is being amortized to interest
expense using the interest method from May 26, 2010 through December 31, 2010, the maturity date of
the note payable. At September 30, 2010, the balance of notes payable affiliate net of discount
was $82,705 and the unamortized discount was $17,295.
Interest expenses on the $100,000 May 26, 2010 borrowing for the three and nine months ended
September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September 30,
2010 were included in the statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
May 26, 2010 Borrowing
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Interest expense
|
|
$
|
3,781
|
|
|
$
|
|
|
|
$
|
5,260
|
|
|
$
|
|
|
|
$
|
5,260
|
|
Discount amortization
|
|
|
17,484
|
|
|
|
|
|
|
|
24,326
|
|
|
|
|
|
|
|
24,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,265
|
|
|
$
|
|
|
|
$
|
29,586
|
|
|
$
|
|
|
|
$
|
29,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of the 2010 Warrants of approximately $42,000 at May 26,
2010 using the Black-Scholes pricing model methodology with assumptions outlined below. The
assumptions used to value the 2010 Warrants at May 26, 2010 (date of inception) are:
|
|
|
|
|
|
|
May 26, 2010
|
|
Expected life from grant date in years
|
|
|
4.83
|
|
Expected volatility
|
|
|
119.48
|
%
|
Risk free interest rate
|
|
|
1.99
|
%
|
Dividend yield
|
|
|
|
|
On June 4, 2010, the Company borrowed an additional $200,000 under the 2010 Loan Agreement and
the fair value of the note and of the 1,176,471 Warrant Shares related was $200,000 and
approximately $101,000, respectively. This resulted in the Company allocating the relative fair
value of approximately $133,000 of the $200,000 in proceeds to the 2010 Notes and approximately
$67,000 to the 2010 Warrants. The Company has recorded the $67,000 freestanding 2010 Warrants as
permanent equity under accounting guidance for accounting for derivative financial instruments
indexed to, and potentially settled in, a companys own stock, and accounting guidance for
determining whether an instrument (or embedded feature) is indexed to an entitys own stock. The
$67,000 discount on the note payable affiliate is netted against the $100,000 note and is being
amortized to interest expense using the interest
method from June 4, 2010 through December 31, 2010, the maturity date of the note payable. At
September 30, 2010, the balance of notes payable affiliate net of discount was $170,998 and the
unamortized discount was $29,002.
18
Interest expenses on the $200,000 June 4, 2010 borrowing for the three and nine months ended
September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September 30,
2010 were included in the statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
June 4, 2010 Borrowing
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Interest expense
|
|
$
|
7,562
|
|
|
$
|
|
|
|
$
|
9,781
|
|
|
$
|
|
|
|
$
|
9,781
|
|
Discount amortization
|
|
|
29,322
|
|
|
|
|
|
|
|
37,927
|
|
|
|
|
|
|
|
37,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,884
|
|
|
$
|
|
|
|
$
|
47,708
|
|
|
$
|
|
|
|
$
|
47,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of the 2010 Warrants of approximately $67,000 at June 4,
2010 using the Black-Scholes pricing model methodology with assumptions outlined below. The
assumptions used to value the 2010 Warrants at June 4, 2010 (date of inception) are:
|
|
|
|
|
|
|
June 4, 2010
|
|
Expected life from grant date in years
|
|
|
4.81
|
|
Expected volatility
|
|
|
119.88
|
%
|
Risk free interest rate
|
|
|
1.90
|
%
|
Dividend yield
|
|
|
|
|
On June 29, 2010, the Company borrowed an additional $300,000 under the 2010 Loan Agreement
and the fair value of the note and of the 1,764,706 Warrant Shares related was $300,000 and
approximately $135,000, respectively. This resulted in the Company allocating the relative fair
value of approximately $207,000 of the $300,000 in proceeds to the 2010 Notes and approximately
$93,000 to the 2010 Warrants. The Company has recorded the $93,000 freestanding 2010 Warrants as
permanent equity under accounting guidance for accounting for derivative financial instruments
indexed to, and potentially settled in, a companys own stock, and accounting guidance for
determining whether an instrument (or embedded feature) is indexed to an entitys own stock. The
$93,000 discount on the note payable affiliate is netted against the $300,000 note and is being
amortized to interest expense using the interest method from June 29, 2010 through December 31,
2010, the maturity date of the note payable. At September 30, 2010, the balance of notes payable
affiliate net of discount was $254,286 and the unamortized discount was $45,714.
Interest expenses on the $300,000 June 29, 2010 borrowing for the three and nine months ended
September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September 30,
2010 were included in the statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
June 29, 2010 Borrowing
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Interest expense
|
|
$
|
11,342
|
|
|
$
|
|
|
|
$
|
11,589
|
|
|
$
|
|
|
|
$
|
11,589
|
|
Discount amortization
|
|
|
46,217
|
|
|
|
|
|
|
|
47,221
|
|
|
|
|
|
|
|
47,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
57,559
|
|
|
$
|
|
|
|
$
|
58,810
|
|
|
$
|
|
|
|
$
|
58,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of the 2010 Warrants of approximately $93,000 at June 29,
2010 using the Black-Scholes pricing model methodology with assumptions outlined below. The
assumptions used to value the 2010 Warrants at June 29, 2010 (date of inception) are:
|
|
|
|
|
|
|
June 29, 2010
|
|
Expected life from grant date in years
|
|
|
4.74
|
|
Expected volatility
|
|
|
120.12
|
%
|
Risk free interest rate
|
|
|
1.68
|
%
|
Dividend yield
|
|
|
|
|
19
On July 15, 2010, the Company borrowed an additional $100,000 under the 2010 Loan Agreement
and the fair value of the note and of the 588,235 Warrant Shares related was $100,000 and
approximately $30,000, respectively. This resulted in the Company
allocating the relative fair value of approximately $77,000 of the $100,000 in proceeds to the
2010 Notes and approximately $23,000 to the 2010 Warrants. The Company has recorded the $23,000
freestanding 2010 Warrants as permanent equity under accounting guidance for accounting for
derivative financial instruments indexed to, and potentially settled in, a companys own stock, and
accounting guidance for determining whether an instrument (or embedded feature) is indexed to an
entitys own stock. The $23,000 discount on the note payable affiliate is netted against the
$100,000 note and is being amortized to interest expense using the interest method from July 15,
2010 through December 31, 2010, the maturity date of the note payable. At September 30, 2010, the
balance of notes payable affiliate net of discount was $87,668 and the unamortized discount was
$12,332.
Interest expenses on the $100,000 July 15, 2010 borrowing for the three and nine months ended
September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September 30,
2010 were included in the statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
July 15, 2010 Borrowing
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Interest expense
|
|
$
|
3,206
|
|
|
$
|
|
|
|
$
|
3,206
|
|
|
$
|
|
|
|
$
|
3,206
|
|
Discount amortization
|
|
|
10,570
|
|
|
|
|
|
|
|
10,570
|
|
|
|
|
|
|
|
10,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,776
|
|
|
$
|
|
|
|
$
|
13,776
|
|
|
$
|
|
|
|
$
|
13,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of the 2010 Warrants of approximately $23,000 at July 15,
2010 using the Black-Scholes pricing model methodology with assumptions outlined below. The
assumptions used to value the 2010 Warrants at July 15, 2010 (date of inception) are:
|
|
|
|
|
|
|
July 15, 2010
|
|
Expected life from grant date in years
|
|
|
4.70
|
|
Expected volatility
|
|
|
120.71
|
%
|
Risk free interest rate
|
|
|
1.64
|
%
|
Dividend yield
|
|
|
|
|
On July 27, 2010, the Company borrowed an additional $750,000 under the 2010 Loan Agreement
and the fair value of the note and of the 4,411,765 Warrant Shares related was $750,000 and
approximately $259,000, respectively. This resulted in the Company allocating the relative fair
value of approximately $557,000 of the $750,000 in proceeds to the 2010 Notes and approximately
$193,000 to the 2010 Warrants. The Company has recorded the $193,000 freestanding 2010 Warrants as
permanent equity under accounting guidance for accounting for derivative financial instruments
indexed to, and potentially settled in, a companys own stock, and accounting guidance for
determining whether an instrument (or embedded feature) is indexed to an entitys own stock. The
$193,000 discount on the note payable affiliate is netted against the $750,000 note and is being
amortized to interest expense using the interest method from July 27, 2010 through December 31,
2010, the maturity date of the note payable. At September 30, 2010, the balance of notes payable
affiliate net of discount was $638,282 and the unamortized discount was $111,718.
Interest expenses on the $750,000 July 27, 2010 borrowing for the three and nine months ended
September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September 30,
2010 were included in the statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
July 27, 2010 Borrowing
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Interest expense
|
|
$
|
20,342
|
|
|
$
|
|
|
|
$
|
20,342
|
|
|
$
|
|
|
|
$
|
20,342
|
|
Discount amortization
|
|
|
81,026
|
|
|
|
|
|
|
|
81,026
|
|
|
|
|
|
|
|
81,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
101,368
|
|
|
$
|
|
|
|
$
|
101,368
|
|
|
$
|
|
|
|
$
|
101,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
The Company estimated the fair value of the 2010 Warrants of approximately $193,000 at July
27, 2010 using the Black-Scholes pricing model methodology with assumptions outlined below. The
assumptions used to value the 2010 Warrants at July 27, 2010 (date of inception) are:
|
|
|
|
|
|
|
July 27, 2010
|
|
Expected life from grant date in years
|
|
|
4.66
|
|
Expected volatility
|
|
|
120.64
|
%
|
Risk free interest rate
|
|
|
1.69
|
%
|
Dividend yield
|
|
|
|
|
On September 28, 2010, the Company borrowed the final $300,000 under the 2010 Loan Agreement
and the fair value of the note and of the 1,764,706 Warrant Shares related was $300,000 and
approximately $165,000, respectively. This resulted in the Company allocating the relative fair
value of approximately $193,000 of the $300,000 in proceeds to the 2010 Notes and approximately
$107,000 to the 2010 Warrants. The Company has recorded the $107,000 freestanding 2010 Warrants as
permanent equity under accounting guidance for accounting for derivative financial instruments
indexed to, and potentially settled in, a companys own stock, and accounting guidance for
determining whether an instrument (or embedded feature) is indexed to an entitys own stock. The
$107,000 discount on the note payable affiliate is netted against the $300,000 note and is being
amortized to interest expense using the interest method from September 28, 2010 through December
31, 2010, the maturity date of the note payable. At September 30, 2010, the balance of notes
payable affiliate net of discount was $196,804 and the unamortized discount was $103,196.
Interest expenses on the $300,000 September 28, 2010 borrowing for the three and nine months
ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September
30, 2010 were included in the statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
September 28, 2010 Borrowing
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Interest expense
|
|
$
|
370
|
|
|
$
|
|
|
|
$
|
370
|
|
|
$
|
|
|
|
$
|
370
|
|
Discount amortization
|
|
|
3,402
|
|
|
|
|
|
|
|
3,402
|
|
|
|
|
|
|
|
3,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,772
|
|
|
$
|
|
|
|
$
|
3,772
|
|
|
$
|
|
|
|
$
|
3,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of the 2010 Warrants of approximately $107,000 at
September 28, 2010 using the Black-Scholes pricing model methodology with assumptions outlined
below. The assumptions used to value the 2010 Warrants at September 28, 2010 (date of inception)
are:
|
|
|
|
|
|
|
September 28, 2010
|
|
Expected life from grant date in years
|
|
|
4.49
|
|
Expected volatility
|
|
|
123.90
|
%
|
Risk free interest rate
|
|
|
1.09
|
%
|
Dividend yield
|
|
|
|
|
Aggregate interest expenses on the $3,000,000 2010 Loan Agreement debt for the three and nine
months ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to
September 30, 2010 were included in the statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Interest expense
|
|
$
|
93,863
|
|
|
$
|
|
|
|
$
|
146,096
|
|
|
$
|
|
|
|
$
|
146,096
|
|
Discount amortization
|
|
|
362,222
|
|
|
|
|
|
|
|
556,661
|
|
|
|
|
|
|
|
556,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
456,085
|
|
|
$
|
|
|
|
$
|
702,757
|
|
|
$
|
|
|
|
$
|
702,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010 the aggregate balance of the 2010 notes payable affiliate net of
discount was $2,508,435 and the aggregate unamortized discount was $491,565. The Company has
accrued interest of $146,096 as of September 30, 2010, which is included in the Balance Sheet.
21
Interest expenses in aggregate on the outstanding $13,000,000 debt for the three and nine
months ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to
September 30, 2010 were included in the statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Interest expense
|
|
$
|
547,562
|
|
|
$
|
282,740
|
|
|
$
|
1,418,425
|
|
|
$
|
410,959
|
|
|
$
|
2,207,466
|
|
Discount amortization
|
|
|
362,222
|
|
|
|
4,750,858
|
|
|
|
561,035
|
|
|
|
5,888,809
|
|
|
|
7,505,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
909,784
|
|
|
$
|
5,033,598
|
|
|
$
|
1,979,460
|
|
|
$
|
6,299,768
|
|
|
$
|
9,712,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010 the aggregate balance of the notes payable affiliate net of discount
was $12,508,435 and the aggregate unamortized discount was $491,565. At September 30, 2010, the
Company has accrued interest of $2,207,466 which is included in the Balance Sheet.
7. EQUITY
On June 5, 2007, in connection with the Merger, the Certificate of Incorporation of Corautus
became the Certificate of Incorporation of the Company, and the Company further amended and
restated its Certificate of Incorporation to increase the number of authorized shares of common
stock from 100,000,000 shares to 200,000,000 shares. The Certificate of Incorporation of the
Company provides that the total number of authorized shares of preferred stock of the Company is
5,000,000 shares. Significant components of the Companys stock are as follows:
Common Stock
The Companys authorized common stock was 200,000,000 shares at September 30,
2010 and December 31, 2009. Common stockholders are entitled to dividends if and when declared by
the Board of Directors, subject to preferred stockholder dividend rights.
At September 30, 2010 and December 31, 2009, the Company had reserved the following shares of
common stock for issuance:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
2007 Incentive Award Plan outstanding and available to grant
|
|
|
3,916,326
|
|
|
|
3,328,398
|
|
Shares of common stock subject to outstanding warrants
|
|
|
101,050,407
|
|
|
|
83,403,348
|
|
Shares of common stock subject to conversion from series C preferred stock
|
|
|
13,986,013
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares of common stock equivalents
|
|
|
118,952,746
|
|
|
|
86,731,746
|
|
|
|
|
|
|
|
|
As noted below, the Series C Preferred Stock became convertible on June 13, 2010 and shares
are convertible upon delivery of notice of conversion. The number of shares of common stock into
which Series C Preferred Stock will be converted is based in part on the fair market value (as
defined in the Amended and Restated Certificate of Designation of Preferences and Rights of Series
C Preferred Stock of the Company) of the Companys common stock. Accordingly, we have not included
any Series C Preferred Stock in the table above for the period ended December 31, 2009.
Preferred Stock
The Companys authorized Series A Preferred Stock was 5,000,000 shares at
September 30, 2010 and December 31, 2009. There were no issued and outstanding shares of Series A
Preferred Stock at September 30, 2010 and December 31, 2009.
The Companys authorized Series C Preferred Stock was 17,000 shares at September 30, 2010 and
December 31, 2009. There were 2,000 shares of Series C Preferred Stock issued and outstanding at
September 30, 2010 and December 31, 2009. The Series C Preferred Stock is not entitled to receive
dividends, has a liquidation preference amount of one thousand dollars ($1,000.00) per share, and
has no voting rights, except as to the issuance of additional Series C Preferred Stock. Each share
of Series C Preferred Stock became convertible into common stock on June 13, 2010. The Series C
Preferred Stock is convertible into common stock in an amount equal to (a) the quotient of (i) the
liquidation preference (adjusted for recapitalizations), divided by (ii) one hundred and ten
percent (110%) of the per share fair market value (as defined in the Amended and Restated
Certificate of Designation of Preferences and Rights of Series C Preferred Stock of the Company) of
the Companys common stock multiplied by (b) the number of shares of converted Series C Preferred
Stock. As of September 30, 2010, the Series C Preferred Stock is convertible into 13,986,013
shares of the Companys Common Stock.
22
2002 Stock Option Plans
In November 2002, the Corautus Board of Directors adopted the 2002
Stock Plan, which was approved by Corautus stockholders in February 2003 and was amended by
Corautus stockholder approval in May 2004. Under the
2002 Stock Plan, the Board of Directors or a committee of the Board of Directors has the
authority to grant options and rights to purchase common stock to officers, key employees,
consultants and certain advisors to the Company. Options granted under the 2002 Stock Plan may be
either incentive stock options or non-qualified stock options, as determined by the Board of
Directors or a committee. The 2002 Stock Plan, as amended in May 2004, reserved an additional
233,333 shares for issuance under the 2002 Stock Plan plus (a) any shares of common stock which
have been reserved but not issued under the 1999 Stock Plan, the 1995 Stock Plan and the 1995
Directors Option Plan as of the date of stockholder approval of the 2002 Stock Plan, (b) any
shares of common stock returned to the 1999 Stock Plan, the 1995 Stock Plan and the 1995 Directors
Option Plan as a result of the termination of options or repurchase of shares of common stock
issued under those plans and (c) an annual increase on the first day of each year by the lesser of
(i) 20,000 shares, (ii) the number of shares equal to two percent of the total outstanding common
shares or (iii) a lesser amount determined by the Board of Directors. Generally, options are
granted with vesting periods from one to two years and expire ten years from date of grant or three
months after termination of employment or service, if sooner. Under the 2002 Stock Plan, the
Company had 0 shares available for future grant as of December 31, 2007. In December 2007, the
Company incorporated the outstanding options and shares available for grant into the 2007 Incentive
Award Plan.
2004 Stock Option Plans
In 2004, the Companys Board of Directors adopted the 2004 Stock
Plan. Under the 2004 Stock Plan, up to 427,479 shares of the Companys common stock, in the form of
both incentive and non-qualified stock options, may be granted to eligible employees, directors,
and consultants. In September 2006, the Companys Board of Directors authorized an increase of
743,442 shares to the 2004 Stock Plan for a total of 1,170,921 authorized shares available for
grant from the 2004 Stock Plan. The 2004 Stock Plan provides that grants of incentive stock options
will be made at no less than the estimated fair value of the Companys common stock, as determined
by the Board of Directors at the date of grant. If, at the time the Company grants an option, the
holder owns more than ten percent of the total combined voting power of all the classes of stock of
the Company, the option price shall be at least 110% of the fair value. Vesting and exercise
provisions are determined by the Board of Directors at the time of grant. Option vesting ranges
from immediate and full vesting to five year vesting (twenty percent of the shares one year after
the options vesting commencement date and the remainder vesting ratably each month). Options
granted under the 2004 Stock Plan have a maximum term of ten years. Options can only be exercised
upon vesting, unless the option specifies that the shares can be early exercised. The Company
retains the right to repurchase exercised and unvested shares. Under the 2004 Stock Plan, the
Company had 0 shares available for future grant as of December 31, 2007. In December of 2007, the
Company incorporated the outstanding options and shares available for grant into the 2007 Incentive
Award Plan.
2007 Incentive Award Plan
In December 2007, the Companys Board of Directors adopted the
2007 Incentive Award Plan. The Company combined the 2002 and 2004 Stock Plan into the 2007
Incentive Award Plan, and added 2.0 million shares available for grant in the form of both
incentive and non-qualified stock options which may be granted to eligible employees, directors,
and consultants. Only employees are entitled to receive grants of incentive stock options. The 2007
Incentive Award Plan provides that grants of incentive stock options will be made at no less than
the estimated fair market value of the Companys common stock on the date of grant. If, at the time
the Company grants an option, the holder owns more than ten percent of the total combined voting
power of all the classes of stock of the Company, the option price shall be at least 110% of the
fair value. Vesting and exercise provisions are determined by the Board of Directors at the time of
grant. Option vesting ranges from immediate and full vesting to five year vesting (twenty percent
of the shares one year after the options vesting commencement date and the remainder vesting
ratably each month). Options granted under the 2007 Incentive Award Plan have a maximum term of ten
years. Options can only be exercised upon vesting, unless the option specifies that the shares can
be early exercised. The Company retains the right to repurchase exercised and unvested shares.
Under the 2007 Incentive Award Plan, the Company had 2,068,454 and 587,712 shares available for
future grant at September 30, 2010 and December 31, 2009, respectively. Under the 2007 Incentive
Award Plan, there is an annual evergreen provision which provides that the plan shares are
increased by the lesser of 500,000 shares or 3% of total common shares outstanding at the Companys
year-end. Effective January 1, 2010 and 2009, the Company added an additional 500,000 shares to the
plan pursuant to this provision of the plan.
A summary of stock option award activity from December 31, 2009 to September 30, 2010 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
Option Shares
|
|
|
Exercise
|
|
Stock Option Awards
|
|
Outstanding
|
|
|
Price
|
|
2007 Incentive Award Plan Options Outstanding December 31, 2009
|
|
|
2,740,686
|
|
|
$
|
6.90
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(43,057
|
)
|
|
$
|
0.03
|
|
Canceled
|
|
|
(849,757
|
)
|
|
$
|
2.22
|
|
|
|
|
|
|
|
|
2007 Incentive Award Plan Options Outstanding September 30, 2010
|
|
|
1,847,872
|
|
|
$
|
9.07
|
|
|
|
|
|
|
|
|
23
As of September 30, 2010, a total of 229,955 shares of stock options were early exercised
before the shares were vested pursuant to provisions of the share grants under the 2007 Incentive
Award Plan, of which 7,373 shares remain unvested and subject to repurchase by the Company in the
event of employee termination.
The following table summarizes information concerning outstanding and exercisable options
outstanding at September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Vested or Expected to Vest
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Number
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Range of
|
|
Number of
|
|
|
Remaining
|
|
|
Average
|
|
|
Exercisable or
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Exercise
|
|
Options
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Expected to
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Prices
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Vest
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$0.03
|
|
|
124,897
|
|
|
|
4.66
|
|
|
$
|
0.03
|
|
|
|
124,897
|
|
|
|
4.66
|
|
|
$
|
0.03
|
|
|
|
124,897
|
|
|
$
|
0.03
|
|
$0.14
|
|
|
70,992
|
|
|
|
6.03
|
|
|
$
|
0.14
|
|
|
|
70,981
|
|
|
|
6.03
|
|
|
$
|
0.14
|
|
|
|
70,759
|
|
|
$
|
0.14
|
|
$0.15
|
|
|
40,000
|
|
|
|
8.21
|
|
|
$
|
0.15
|
|
|
|
40,000
|
|
|
|
8.21
|
|
|
$
|
0.15
|
|
|
|
40,000
|
|
|
$
|
0.15
|
|
$2.38
|
|
|
810,000
|
|
|
|
7.21
|
|
|
$
|
2.38
|
|
|
|
798,820
|
|
|
|
7.21
|
|
|
$
|
2.38
|
|
|
|
575,624
|
|
|
$
|
2.38
|
|
$2.90
|
|
|
235,000
|
|
|
|
7.29
|
|
|
$
|
2.90
|
|
|
|
231,263
|
|
|
|
7.29
|
|
|
$
|
2.90
|
|
|
|
156,666
|
|
|
$
|
2.90
|
|
$3.48
|
|
|
219,400
|
|
|
|
6.84
|
|
|
$
|
3.48
|
|
|
|
217,002
|
|
|
|
6.84
|
|
|
$
|
3.48
|
|
|
|
169,119
|
|
|
$
|
3.48
|
|
$5.10
|
|
|
16,725
|
|
|
|
6.68
|
|
|
$
|
5.10
|
|
|
|
16,725
|
|
|
|
6.68
|
|
|
$
|
5.10
|
|
|
|
16,725
|
|
|
$
|
5.10
|
|
$5.55
|
|
|
18,586
|
|
|
|
6.68
|
|
|
$
|
5.55
|
|
|
|
18,586
|
|
|
|
6.68
|
|
|
$
|
5.55
|
|
|
|
18,586
|
|
|
$
|
5.55
|
|
$11.25$1023.75
|
|
|
312,272
|
|
|
|
4.15
|
|
|
$
|
42.36
|
|
|
|
312,272
|
|
|
|
4.15
|
|
|
$
|
42.36
|
|
|
|
312,272
|
|
|
$
|
42.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,847,872
|
|
|
|
6.46
|
|
|
$
|
9.07
|
|
|
|
1,830,546
|
|
|
|
6.46
|
|
|
$
|
9.13
|
|
|
|
1,484,648
|
|
|
$
|
10.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No options were granted in the nine months ended September 30, 2010. The weighted average
fair value of options granted was $0.1478 in the nine months ended September 30, 2009. The total
intrinsic value of stock options exercised was $897 and $11,865 in the nine months ended September
30, 2010 and 2009, respectively.
See also Note 8 for stock options with Related Parties.
Restricted Stock
In December 2008, under the provisions of the 2007 Incentive Award Plan,
the Company granted employees restricted stock awards for 852,750 shares of the Companys common
stock with a weighted-average fair value of $0.15 per share that vest monthly over a two year
period, with acceleration of vesting in the event of a defined partnering transaction related to
the development of VIA-2291. The Company recognized $9,902 and $15,958 in stock-based compensation
expense in the three months ended September 30, 2010 and 2009, respectively, $34,346 and $47,244 in
the nine months ended September 30, 2010 and 2009, respectively, and $100,262 in stock-based
compensation expense in the period from June 14, 2004 (date of inception) to September 30, 2010. As
the restricted stock awards vest through December 17, 2010, the Company will recognize the related
stock-based compensation expense over the vesting period. If all of the outstanding restricted
stock awards at September 30, 2010 fully vest, the Company will recognize $8,183 in the period from
September 30, 2010 through December 17, 2010. However, no compensation expense will be recognized
for stock awards that do not vest. Restricted stock awards are shares of common stock which are
forfeited if the employee leaves the Company prior to vesting. These stock awards offer employees
the opportunity to earn shares of our stock over time. In contrast, stock options give the employee
the right to purchase stock at a set price.
A summary of restricted stock activity from December 31, 2009 to September 30, 2010 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
Restricted Stock Awards
|
|
Shares
|
|
|
Fair Value
|
|
Unvested at December 31, 2009
|
|
|
423,875
|
|
|
$
|
0.15
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(233,653
|
)
|
|
$
|
0.15
|
|
Forfeited
|
|
|
(125,534
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2010
|
|
|
64,688
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
24
Warrants
Affiliates
Pursuant to the terms of the Loan Agreement as more fully discussed in
Note 6 in the notes to the unaudited condensed financial statements, the Company issued to the
Lenders Warrants to purchase an aggregate of up to 83,333,333 shares of common stock at $0.12 per
share, which will become fully exercisable to the extent that the entire $10.0 million is drawn.
The number of Warrant Shares is equal to the $10.0 million maximum aggregate principal amount that
may be borrowed under the Loan Agreement, divided by the $0.12 per share exercise price of the
Warrants, which is fixed on the date of the Loan Agreement. The Warrant Shares vest based on the
amount of borrowings under the Notes and based on the passage of time. For each $2.0 million
borrowing, 8,333,333 Warrant Shares vested and are exercisable immediately on the date of grant,
and 8,333,333 vested and are
exercisable 45 days thereafter as the Company had met certain conditions provided for in the
Warrants, including that the Company did not complete a $20.0 million financing, as defined in the
Loan Agreement, within 45 days of the borrowing. At each subsequent closing, the Warrants will vest
with respect to additional shares in proportion to the additional amount borrowed by the Company at
the same coverage ratio as the initial closing and at the same vesting schedule, such that one-half
of such additional shares will vest on the date of the subsequent closing and the remaining
one-half of such shares will vest 45 days after such closing if certain conditions are met as
provided for in the Warrants. The Warrant Shares, to the extent they are vested and exercisable,
are exercisable at any time until March 12, 2014. Based on the $10.0 million of borrowings, all
83,333,333 Warrant Shares are vested and are exercisable on September 30, 2010.
As described more fully in Note 6 in the notes to the unaudited condensed financial
statements, at September 30, 2010, the Company computed the fair value of the 83,333,333 Warrant
Shares related to the aggregate $10.0 million of borrowings under the Loan Agreement utilizing the
Black-Scholes pricing model. In accordance with the provisions of derivative financial instruments
indexed to and potentially settled in a Companys own stock, accounting for derivative instruments
and hedging activities, and accounting for convertible debt and debt issued with stock purchase
warrants, the relative fair value assigned to the Warrants of approximately $6.9 million was
recorded as permanent equity in additional paid-in capital in the Stockholders Equity (Deficit)
section of the Balance Sheet.
Pursuant to the terms of the 2010 Loan Agreement as more fully discussed in Note 6 in the
notes to the unaudited condensed financial statements, the Company issued to the Lenders the 2010
Warrants to purchase an aggregate of up to 17,647,059 shares of common stock at $0.17 per share,
which will become fully exercisable to the extent that the entire $3.0 million is drawn. The number
of 2010 Warrant Shares is equal to the $3.0 million maximum aggregate principal amount that may be
borrowed under the 2010 Loan Agreement, divided by the $0.17 per share exercise price of the 2010
Warrants, which is fixed on the date of the 2010 Loan Agreement. The 2010 Warrant Shares vest based
on the amount of borrowings under the 2010 Notes. The 2010 Warrant Shares, to the extent they are
vested and exercisable, are exercisable at any time until March 26, 2015. Based on the $3.0 million
of borrowings, 17,647,059 2010 Warrant Shares are vested and are exercisable on September 30, 2010.
As described more fully in Note 6 in the notes to the unaudited condensed financial
statements, at September 30, 2010, the Company computed the fair value of the 17,647,059 2010
Warrant Shares related to the $3.0 million of borrowings under the 2010 Loan Agreement utilizing
the Black-Scholes pricing model. In accordance with the provisions of derivative financial
instruments indexed to and potentially settled in a Companys own stock, accounting for derivative
instruments and hedging activities, and accounting for convertible debt and debt issued with stock
purchase warrants, the relative fair value assigned to the 2010 Warrants of approximately
$1,048,226 was recorded as permanent equity in additional paid-in capital in the Stockholders
Equity (Deficit) section of the Balance Sheet.
Warrants Other
The Company assumed obligations for certain warrants issued by Corautus in
connection with previous financings and consulting engagements. As of September 30, 2010,
outstanding warrants to purchase approximately 16,429 shares of common stock at exercise prices of
$10.05-$67.50 will expire at various dates through February 2013.
In July 2007 the Company granted warrants to its investor relations firm to purchase 18,586
shares of the Companys common stock at a fixed purchase price of $3.95 per share. The warrants
began vesting 30 days after the issuance date and vested over a twelve month contracted service
period. The warrant expires July 31, 2017. The warrants were fully expensed in 2008.
In December 2007, the Company granted warrants to a management consultant to purchase 10,000
shares of the Companys common stock at a fixed purchase price of $2.38 per share. The warrants are
expensed as stock-based compensation expense over the vesting period in the statements of
operations. The warrants expire December 17, 2012. The warrants were fully expensed in 2007.
In March 2008, the Company granted warrants to a financial communications and investor
relations firm to purchase 125,000 shares of the Companys common stock at a fixed purchase price
of $3.00 per share. As of March 1, 2008, 25,000 shares immediately vested, 50,000 will vest
immediately upon attaining a Share Price Goal (as defined in the warrant) of $5.00, 25,000 shares
will vest immediately upon attaining a Share Price Goal of $7.50, and 25,000 shares will vest
immediately upon attaining a Share Price Goal of $10.00. The contractual service period and vesting
period within which to attain the performance vesting ended December 31, 2008 and June 30, 2009,
respectively. The 100,000 performance based warrants expired unvested on June 30, 2009. The
remaining vested 25,000 shares expire August 31, 2013. The warrants were fully expensed in 2008.
25
8. RELATED PARTIES
As more fully described in Note 6 in the notes to the unaudited condensed financial
statements, in March 2009, the Company entered into the Loan Agreement with its principal
stockholder and one of its affiliates, as the Lenders, whereby the Lenders agreed to lend to the
Company in the aggregate up to $10.0 million. In March 2010, the Company entered into the 2010
Loan Agreement with its principal stockholder and one of its affiliates, as the Lenders, whereby
the Lenders agreed to lend to the Company in the aggregate up to $3.0 million.
The Company terminated its licensing agreement with Leland Stanford Junior University
(Stanford) effective February 2009. The Companys founding Chief Scientific Officer (Founder)
was an affiliate of Stanford and is a stockholder of the Company. The Company paid consulting fees
to the Founder of $0 and $3,500 in the three months ended September 30, 2010 and 2009,
respectively, and $0 and $6,500 in the nine months ended September 30, 2010 and 2009, respectively.
While the Company did not issue any stock options in three and nine months ended September 30,
2010, the Company did issue 10,000 and 42,300 stock options to the Founder in the years ended
December 31, 2008 and 2007, respectively. Using the Black-Scholes pricing model, the Company valued
the 10,000 option shares granted in 2008 at a fair value of $0.0973 per share or $973 using an
expected life of 5.0 years, a 1.5% risk free interest rate, an 81% volatility rate, and the grant
date fair market value of $0.15 per share. The options were fully vested at the grant date,
December 17, 2008, and expire December 17, 2018. The warrants were fully expensed in 2008. Using
the Black-Scholes pricing model, the Company valued the 42,300 option shares granted in 2007 as of
September 30, 2010 at fair values ranging from $0.052 per share to $0.0587 per share or an
aggregate of $2,334 using an expected life ranging from 6.84 to 7.21 years, a risk free interest
rate ranging from 1.85% to 1.95%, a volatility rate ranging from 114% 115%, and the fair market
value stock price at September 30, 2010 of $0.10 per share. The options become fully vested in the
period from August 2, 2011 through December 17, 2011 and expire in the period from August 2, 2017
through December 17, 2017. The Company expensed the options as stock-based compensation expense
over the vesting period in the statements of operations, resulting in expense of ($1,483) and
($571) in the three months ended September 30, 2010 and 2009, respectively, and $140 and $4,407 in
the nine months ended September 30, 2010 and 2009, respectively. The Company revalues non-employee
options quarterly based on the closing stock price of the Companys common stock on the last day of
the quarter, and does a final valuation on the last option vesting date based on the closing stock
price of the Companys common stock on the last vesting date.
During 2006, the Company used the services of an employee of the Companys primary investor to
act as Chief Financial Officer (CFO) and granted 18,586 stock option shares to the acting CFO as
compensation for services rendered. The options were fully vested on March 8, 2008, and expire
September 8, 2016. The options were fully expensed in 2008.
From the Companys inception through February 4, 2010, the Companys Chief Development Officer
(Officer) was also an employee of the Companys primary investor. The Company paid the Officer
compensation of $0 and $15,000 in the three months ended September 30, 2010 and 2009, respectively
and $44,384 and $45,000 in the nine months ended September 30, 2010 and 2009, respectively. The
Company did not grant any options to the Officer in the three or nine months ended September 30,
2010, nor in the fiscal years ended December 31, 2009 and 2008. However, the Company granted
26,921, 35,685, and 15,611 shares of stock options to the Officer in 2007, 2006, and 2005,
respectively. The options granted in 2005 became fully vested in the period from June 1, 2005
through June 1, 2006 and expire on June 29, 2015. The Company expensed the options as stock-based
compensation expense over the vesting period in the statements of operations resulting in no
expense in the three and nine months ended September 30, 2010 and 2009, respectively, as the
options were fully vested in 2006. The options granted in 2006 became fully vested in the period
from November 29, 2006 through November 29, 2007 and expire on November 29, 2016. The Company
expensed the options as stock-based compensation expense over the vesting period in the statements
of operations resulting in no expense in the three and nine months ended September 30, 2010 and
2009, respectively, as the options were fully vested in 2007. Using the Black-Scholes pricing
model, the Company valued the 2007 options at fair values ranging from $2.43 to $5.78 per share or
an aggregate fair value of $95,284 using an expected life of from 5.27 to 6.02 years, a 4.20% to
4.639% risk-free interest rate, a 67% to 77% volatility rate and the fair market value stock prices
of the Companys common stock on the grant dates ranging from $3.48 to $5.89 per share. The options
become fully vested in the period from November 29, 2007 through August 2, 2011 and expire in the
period from January 23, 2017 through August 2, 2017. The Company expensed the options as
stock-based compensation expense over the vesting period in the statements of operations resulting
in expense of $0 and $2,754 in the three months ended September 30, 2010 and 2009, respectively,
and $1,135 and $8,380 in the nine months ended September 30, 2010 and 2009, respectively.
26
Effective July 1, 2009, the Company sub-leased property in the Companys office facilities in
its headquarters in San Francisco, California on a month-to-month basis to an affiliate of the
Companys primary investor for $279 per month. Effective May 17, 2010, the Company sub-leased
additional space within the same premises to the affiliate and the lease was amended to increase
the rent to
$907 per month through June 30, 2010 and $930 from July 1, 2010 through June 30, 2011. The
Company received rent from the tenant in the amount of $2,790 and $5,396 in the three and nine
months ended September 30, 2010, which were included as a reduction to rent expenses in the
statement of operations for the three and nine months ended September 30, 2010.
Effective September 15, 2010, the Company sub-leased property in the Companys office
facilities in its headquarters in San Francisco, California for one year to an additional affiliate
of the Companys primary investor for $5,241 per month. The Company received rent from the tenant
in the amount of $2,795 in the three and nine months ended September 30, 2010, which were included
as a reduction to rent expenses in the statement of operations for the three and nine months ended
September 30, 2010.
9. COMMITMENTS
Operating Leases
The Company leases its office facilities for various terms under long-term,
non-cancelable operating lease agreements. The leases expire at various dates through 2013. The
Company recognizes rent expense on a straight-line basis over the lease period, and accrues for
rent expense incurred but not paid. As more fully discussed in Note 13 in the notes to the
unaudited condensed financial statements, on June 1, 2010, the Company abandoned its office space
leased in Princeton, New Jersey. As a result, the Company recorded rent expense of $165,904, which
reflects the fair value of net continuing lease costs for which the Company will no longer receive
any economic benefit. As of September 30, 2010, the Company increased the amount of the Princeton
lease abandonment costs and related liability from $165,904 to $173,712 due to the passage of time
and $7,808, the amount of the increase, is included in rent expense in the three and nine months
ended September 30, 2010.
Rent expense, including lease abandonment costs, for the three and nine months ended September
30, 2010 and 2009, respectively, and for the period from June 14, 2004 (date of inception) to
September 30, 2010, was included in the unaudited statements of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
$
|
26,967
|
|
|
$
|
30,496
|
|
|
$
|
240,797
|
|
|
$
|
91,489
|
|
|
$
|
758,521
|
|
General and administrative expense
|
|
|
51,552
|
|
|
|
77,724
|
|
|
|
173,491
|
|
|
|
234,846
|
|
|
|
1,090,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
78,519
|
|
|
$
|
108,220
|
|
|
$
|
414,288
|
|
|
$
|
326,335
|
|
|
$
|
1,849,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future minimum lease payments under non-cancelable operating leases, including lease
commitments entered into subsequent to September 30, 2010 are as follows:
|
|
|
|
|
|
|
Amount
|
|
October through December 2010
|
|
$
|
110,251
|
|
2011
|
|
|
445,777
|
|
2012
|
|
|
362,468
|
|
2013
|
|
|
139,742
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
1,058,238
|
|
|
|
|
|
Operating lease obligations reflect contractual commitments for the Companys office
facilities for its headquarters in San Francisco, California and its clinical operations location
in Princeton, New Jersey. In January 2008, the Company expanded and extended both leases to ensure
adequate facilities for current activities. The San Francisco headquarter lease has been extended
through May 2013 and has been expanded to a total of 8,180 square feet. The lease amendment
resulted in an increase of approximately $1.5 million in future rent. The lease amendment to the
Princeton, New Jersey facility extends the lease through April 2, 2012 and has been expanded to a
total of 4,979 square feet. The lease amendment resulted in an increase of approximately $330,000
in future rent. As more fully described in Note 13 to the unaudited condensed financial
statements, on June 1, 2010, the Company abandoned its office space leased in Princeton, New
Jersey.
27
10. INCOME TAXES
There is no income tax provision (benefit) for federal or state income taxes as the Company
has incurred operating losses since inception. Deferred income taxes reflect the net tax effects of
net operating loss and tax credit carryovers and temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes.
Utilization of the net operating loss and tax credit carryforwards 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 may have experienced a
change of control which could result in a substantial reduction to the previously reported net
operating losses at December 31, 2008; however, the Company has not performed a change of control
study and therefore has not determined if such change has taken place and if such a change has
occurred the related reduction to the net operating loss carryforwards. As of September 30, 2010,
the net operating loss carryforwards continue to be fully reserved and any reduction in such
amounts as a result of this study would also reduce the related valuation allowances resulting in
no net impact to the financial results of the Company.
As of September 30, 2010, there have been no material changes to the Companys uncertain tax
positions disclosures as provided in Note 10 to the Financial Statements in the Companys Annual
Report on Form 10-K and Form 10-K/A for the year ended December 31, 2009.
11. EMPLOYEE BENEFIT PLANS
The Company established a defined contribution plan qualified under Section 401(k) of the
Internal Revenue Code. Employees of the Company are eligible to participate in the Companys 401(k)
plan. Employees participating in the plan are permitted to contribute up to the maximum amount
allowable by law. Company contributions are discretionary and only safe-harbor contributions were
made in 2010 and 2009. The Company made safe-harbor contributions to certain plan participants in
the aggregate amount of $58,869 and $35,355 in the nine months ended September 30, 2010 and 2009,
respectively, and $208,523 for the period from June 14, 2004 (date of inception) to September 30,
2010.
12. RESTRUCTURING COSTS
On March 26, 2010 the Companys Board of Directors approved a restructuring of the Company to
reduce its workforce and operating costs effective March 31, 2010. The reduction in workforce
decreased total employees by approximately 63% to a total of six employees and increased the focus
of future operating expense on research and development activities. This decision resulted in
recording a charge to operating expenses of approximately $0 and $106,959 in the three and nine
months ended September 30, 2010. This charge includes cash costs of restructuring, principally
related to severance and related medical costs for terminated employees, of approximately $411,000,
and non-cash charges of $227,000 primarily related to costs associated with excess facilities at
the Companys corporate headquarters, offset by approximately $531,000 related to the reversal of
previously recorded incentive award accruals recorded as of December 31, 2009. In addition to this
restructuring charge, the Company paid terminated employees $178,000 for amounts accrued for unused
vacation and sick pay. The total cash cost of the restructuring costs, and amounts for accrued
COBRA, vacation and sick pay, was $589,000, of which $635 has not been paid and is included in
accrued restructuring costs on the unaudited condensed balance sheet as of September 30, 2010. As
of September 30, 2010, the Company had accrued non-cash restructuring costs of $133,222 which
consisted of excess facility lease costs, of which $122,650 is a current obligation and $11,207 is
a long-term obligation on the unaudited condensed balance sheet.
13. LEASE ABANDONMENT COSTS
On June 1, 2010, the Company abandoned its office space leased in Princeton, New Jersey.
Previously, the Company had leased approximately 4,979 square feet in Princeton, New Jersey, where
its Senior Vice President, Research and Development, was located. This lease was to have expired on
April 2, 2012. In addition, the Company had been subleasing a portion of the space. The sublease
was to have expired on January 15, 2012. As a result, the Company recorded a liability and a
research and development operating expense of $165,904, which reflects the fair value of net
continuing lease costs for which the Company will no longer receive any economic benefit. On
September 30, 2010, the balance of the liability was $173,712 which reflects increases of $7,808 of
accretive expense due to the passage of time. The current portion of the liability, $120,949, was
included in accrued expenses and other liabilities on the balance sheet, and the long term portion
of the liability, $52,763, was included in long-term accrued expenses and other liabilities on the
balance sheet.
28
14. SUBSEQUENT EVENTS
Bridge Note
On October 29, 2010, the Company executed a secured promissory note (the Bridge Note) in
favor of Bay City Capital Fund IV, L.P., a Delaware limited partnership in the principal sum of
$200,000 for general corporate purposes. By the terms of the Bridge Note, upon execution of the
2010 Loan Amendment (as defined below) the unpaid principal amount and accrued and unpaid interest
under the Bridge Note automatically converted into obligations of the Company under the 2010 Loan
Amendment as advances under the 2010 Amended and Restated Notes (as defined below).
2010 Loan Amendment
On November 15, 2010, the Company entered into an amendment to the 2010 Loan Agreement (2010
Loan Amendment) to enable the Company to borrow up to an additional aggregate principal amount of
$3,000,000, pursuant to the terms of amended and restated promissory notes (collectively, the 2010
Amended and Restated Notes) delivered under the 2010 Loan Amendment. Subject to the Lenders
approval, the Company may borrow in the aggregate up to an additional $2,800,000 at subsequent
closings pursuant to the terms of the 2010 Loan Amendment and 2010 Amended and Restated Notes.
The 2010 Amended and Restated Notes are secured by a lien on all of the assets of the Company.
Amounts borrowed under the 2010 Amended and Restated Notes accrue interest at the rate of fifteen
percent (15%) per annum, which increases to eighteen percent (18%) per annum following an event of
default. Unless earlier paid in accordance with the terms of the 2010 Amended and Restated Notes,
all unpaid principal and accrued interest shall become fully due and payable on the earlier to
occur of (i) December 31, 2010, (ii) the closing of a debt, equity or combined debt/equity
financing resulting in gross proceeds or available credit to the Company of not less than
$20,000,000, and (iii) the closing of a transaction in which the Company sells, conveys, licenses
or otherwise disposes of a majority of its assets or is acquired by way of a merger, consolidation,
reorganization or other transaction or series of transactions pursuant to which stockholders of the
Company prior to such acquisition own less than 50% of the voting interests in the surviving or
resulting entity.
Pursuant to the 2010 Loan Amendment, the Company issued to the Lenders additional warrants
(the 2010 Additional Warrants) to purchase an aggregate
of 42,253,521 shares (the 2010 Additional
Warrant Shares) of common stock at $0.071 per share. The number of 2010 Additional Warrant Shares
is equal to the $3,000,000 maximum aggregate principal amount that may be borrowed under the 2010
Loan Amendment, divided by the $0.071 per share exercise price of the 2010 Additional Warrants. The
2010 Additional Warrant Shares vest based on the amount of borrowings under the 2010 Amended and
Restated Notes. Based on the $201,397 initial borrowing, which amount
includes accrued and unpaid interest under the Bridge Note, 2,836,577 of the 2010 Warrant Shares vested
immediately on the date of grant. At each subsequent closing, the 2010 Additional Warrants will
vest with respect to the additional amount borrowed by the Company. The 2010 Additional Warrant
Shares, to the extent they are vested and exercisable, are
exercisable at any time until November 15,
2015.
Qualifying Therapeutic Discovery Project
In November 2010, the Company was notified by the Internal Revenue Service that it has been
awarded $244,479 in grants under the Qualifying Therapeutic Discovery Project (QTDP) program
established under Section 48D of the Internal Revenue Code as part of the Patient Protection and
Affordable Care Act of 2010. The Company submitted the grant application in July 2010 for qualified
2009 and 2010 investments in the VIA-2291 program. The grant is not taxable for federal income tax
purposes. The Company expects to receive the full amount of the grant before the end of 2010.
29
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Companys financial condition and results of
operations should be read in conjunction with the Companys financial statements and related notes
appearing elsewhere in this Quarterly Report on
Form 10-Q
. In addition to historical information,
this discussion and analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. The Companys actual results may differ materially from those anticipated in these
forward-looking statements as a result of risks and uncertainties that exist in our operations,
development efforts and business environment, including but not limited to those set forth under
the Section entitled Risk Factors in our Annual Report on
Form 10-K
for the year ended December
31, 2009 and elsewhere in this Quarterly Report on
Form 10-Q
and in other documents we file with
the Securities and Exchange Commission. All forward-looking statements included in this report are
based on information available to us as of the date hereof, and, unless required by law, we assume
no obligation to update any such forward-looking statement.
Management Overview
VIA Pharmaceuticals, Inc., incorporated in Delaware in June 2004 and headquartered in San
Francisco, California, is a development stage biotechnology company focused on the development of
compounds for the treatment of cardiovascular and metabolic disease. The Company is building a
pipeline of small molecule drugs that target the underlying causes of cardiovascular and metabolic
disease, including atherosclerotic plaque inflammation, high cholesterol, high triglycerides and
insulin sensitization/diabetes.
During 2005, the Company in-licensed a small molecule compound, VIA-2291, which targets an
unmet medical need of reducing atherosclerotic plaque inflammation, an underlying cause of
atherosclerosis and its complications, including heart attack and stroke. Atherosclerosis,
depending on its severity and the location of the artery it affects, may result in major adverse
cardiovascular events (MACE), such as heart attack and stroke. During 2006, the Company initiated
two Phase 2 clinical trials of VIA-2291 in patients undergoing a carotid endarterectomy (CEA),
and in patients at risk for acute coronary syndrome (ACS). During 2007, the Company initiated a
third Phase 2 clinical trial where ACS patients undergo Positron Emission Tomography with
flurodeoxyglucose tracer (FDG-PET), an experimental non-invasive imaging technique to measure the
effect of treatment of VIA-2291 on atherosclerotic plaque inflammation.
On November 9, 2008, the Company announced the results of its ACS and CEA Phase 2 clinical
trials of its lead product candidate, VIA-2291, at the American Heart Association (AHA) 2008
Scientific Sessions conference in New Orleans, Louisiana (the AHA Conference). The Company
completed enrollment of 52 patients in the FDG-PET Phase 2 clinical trial in May 2009.
On May 1, 2009, the Company announced results of a sub-study of the ACS Phase 2 clinical trial
of VIA-2291 at the AHA Arteriosclerosis, Thrombosis and Vascular Biology Annual Conference 2009 in
Washington D.C. The Company found that in 64 slice multi-detector computed tomography (MDCT)
scans of patients with low density plaques demonstrated statistically significant, lower plaque
volumes in combined VIA-2291 treated groups compared to placebo. A publication describing these
results was published on-line February 27, 2010 by Circulation, Cardiovascular Imaging (Jean-Claude
Tardif, Philippe L. LAllier, Reda Ibrahim, Jean C. Grégoire, Anna Nozza, Mariève Cossette, Simon
Kouz, Marc-André Lavoie, Janie Paquin, Tilmann M. Brotz, Rebecca Taub, and Josephine Pressacco
Treatment with 5-Lipoxygenase Inhibitor VIA-2291 (Atreleuton) in Patients with Recent Acute
Coronary Syndrome
Circ Cardiovasc Imaging first published on February 27, 2010 as
doi:10.1161/CIRCIMAGING.110.937169, and the final publication was in the May 2010 issue
Circ
Cardiovasc Imaging
. 2010;3:298-307
. Together the results of the CEA and ACS-MDCT studies suggest
that VIA-2291 may reduce the coronary plaques that lead to heart attacks and stroke.
On May 14, 2009, the Company announced it had completed patient enrollment in the FDG-PET
Phase 2 clinical trial. On December 3, 2009, the Company announced the last patient clinical visit.
In the Companys FDG-PET study, VIA-2291 was well-tolerated and demonstrated highly significant
leukotriene inhibition similar to the other Phase 2 studies. As FDG-PET is an experimental
technique in vascular disease, currently not validated for image analysis end points, it is not
possible to interpret the imaging analyses of the study at this time, nor was it the Companys
intention to use the imaging results of the FDG-PET study in determining the future clinical plans
for VIA-2291.
In December 2008, the Company expanded its drug development pipeline with preclinical
compounds that target additional underlying causes of cardiovascular and metabolic disease,
including high cholesterol, high triglycerides and insulin sensitization/diabetes.
30
The Companys clinical development strategy integrates several technologies to provide
clinical proof-of-concept as early as possible in the clinical development process. These
technologies include the measurement of biomarkers (specific biochemicals in the body with a
particular molecular feature that makes them useful for measuring the progress of a disease or the
effects of treatment), medical imaging of the coronary and carotid vessel walls to evaluate the
plaque characteristics, and atherosclerotic plaque bioassays (measurements of indicators of
atherosclerotic plaque inflammation believed to promote MACE). Once the Company has established
proof-of-concept, the Company plans to consider business collaborations with larger biotechnology
or pharmaceutical companies for the late-stage clinical development and commercialization of its
compounds.
Background
In March 2005, the Company entered into an exclusive license agreement (the Stanford
License) with Leland Stanford Junior University (Stanford) to use a comprehensive gene
expression database and analysis tool to identify novel, and prioritize known, molecular targets
for the treatment of vascular inflammation and to study the impact of candidate therapeutic
interventions on the molecular mechanisms underlying atherosclerosis (the Stanford Platform). One
of the Companys founders, Thomas Quertermous, M.D., developed the Stanford Platform at Stanford
during the course of a four-year, $30.0 million research study (the Stanford Study). The Stanford
Study initially utilized human tissue samples made available from the Stanford heart transplant
program to characterize human plaque at the level of gene expression and identify the inflammatory
genes and pathways involved in the development of atherosclerosis and associated complications in
humans. To develop the Stanford Platform, the Stanford Study performed similar experiments on
vascular tissue samples from mice prone to developing atherosclerosis and identified genes and
pathways associated with the development of atherosclerosis that mice and humans have in common
(the Overlap Genes). The Stanford Platform allowed us to analyze the expression of the Overlap
Genes following the administration of candidate drugs to atherosclerotic-prone mice, and thus
provided a useful tool for studying the effects of therapeutic intervention in the development of
cardiovascular disease. This platform also gave us useful insight into the molecular pathways that
we believe to be most relevant to the cardiovascular disease process. In January 2009, the Company
advised Stanford that it was terminating its exclusive license agreement effective February 14,
2009.
VIA-2291
In 2005, the Company identified 5-Lipoxygenase (5-LO) as a key target of interest for
treating atherosclerosis. 5-LO is a key enzyme in the biosynthesis of leukotrienes, which are
important mediators of inflammation and are involved in the development and progression of
atherosclerosis. In addition, cardiovascular-related literature has also identified 5-LO as a key
target of interest for treating atherosclerosis and preventing heart attack and stroke. Following
such identification, the Company identified a number of late-stage 5-LO inhibitors that had been in
clinical trials conducted by large biotechnology and pharmaceutical companies primarily for
non-cardiovascular indications, including ABT-761, a compound developed by Abbott Laboratories
(Abbott) for use in treatment of asthma. Abbott abandoned its ABT-761 clinical program in 1996
after the U.S. Food and Drug Administration (FDA) approved a similar Abbott compound for use in
asthma patients. Abbott made no further developments to ABT-761 from 1996 to 2005. In August 2005,
the Company entered into an exclusive, worldwide license agreement (the Abbott License) with
Abbott to develop and commercialize ABT-761 for any indication. The Company subsequently renamed
the compound VIA-2291.
VIA-2291 is a potent, selective and reversible inhibitor of 5-LO that the Company is
developing as a once-daily, oral drug to treat inflammation in the blood vessel wall. In March
2006, the Company filed an Investigational New Drug (IND) application with the FDA outlining the
Companys Phase 2 clinical program, which initially consisted of two trials for VIA-2291. Each of
these clinical trials was initiated during 2006 to study the safety and efficacy of VIA-2291 in
patients with existing cardiovascular disease. Using biomarkers of inflammation, medical imaging
techniques and bioassays of plaque, the Company is evaluating and determining VIA-2291s ability to
reduce vascular inflammation in atherosclerotic plaque. The Company enrolled 50 patients in a Phase
2 study of VIA-2291 at clinical sites in Italy for patients who had a CEA procedure. In addition,
the Company enrolled 191 patients in a second Phase 2 study at 15 clinical sites in the United
States and Canada for patients with ACS who experienced a recent heart attack.
In October 2007, the Companys Data Safety Monitoring Board (DSMB) performed a review of
both safety and efficacy data related to the Companys CEA and ACS clinical trials to determine the
progress in the clinical program and the patient safety of VIA-2291. Based on this review, the DSMB
observed a continued acceptable safety profile and evidence of a consistent pharmacological effect
of VIA-2291 as would be predicted given its proposed mechanism of action. The DSMB recommended the
studies continue as planned.
31
Following the results of the DSMB review, the Company began enrolling patients in a third
Phase 2 clinical trial that utilized an experimental non-invasive imaging technique, Positron
Emission Tomography with FDG-PET to measure the impact of VIA-2291 on
reducing FDG uptake in vascular sites in treated patients. The Company enrolled 52 patients
following an acute coronary syndrome event, such as heart attack or stroke, into the 24 week,
randomized, double blind, placebo-controlled study, which was run at five clinical sites in the
United States and Canada. Endpoints in the study included FDG uptake into vascular sites as
measured by serial FDG-PET scans.
On November 9, 2008, the Company announced the results of its ACS and CEA Phase 2 clinical
trials at the AHA conference in New Orleans, Louisiana. In both the ACS trial and the CEA trial,
VIA-2291 effectively inhibited production of leukotrienes. The ACS trial met its primary endpoint
by demonstrating a significant change from baseline in Leukotriene B4 (LTB4) production at all
doses tested (p<0.001). The CEA trial missed its primary endpoint of percentage reduction in
macrophage inflammatory cells in plaque tissue, but met key secondary endpoints including reduction
of high sensitivity C-reactive protein (hs-CRP) (p<0.01). VIA-2291 was generally
well-tolerated in both trials.
In May 2009, the Company announced results of a sub-study of the ACS Phase 2 clinical trial of
VIA-2291 at the AHA Arteriosclerosis, Thrombosis and Vascular Biology Annual Conference 2009 in
Washington D.C. The purpose of the sub-study was to evaluate the effect of VIA-2291 25mg, 50mg and
100mg doses relative to placebo from baseline in patients dosed with VIA-2291 for 24 weeks. After
completion of the initial 12 weeks of dosing, more than 85 of the 191 total ACS patients continued
on to receive an additional 12 weeks of dosing on top of current standard medical care and received
a 64 slice MDCT scan at baseline and 24 weeks. Evaluable scans from patients treated with placebo
showed significantly more evidence of new plaque lesions from VIA-2291 treated patients. MDCT scans
of patients with low density plaques demonstrated statistically significant, lower plaque volumes
in combined VIA-2291 treated groups compared to placebo. Together these results suggest that
VIA-2291 may reduce the atherosclerotic plaques that lead to heart attacks and stroke.
In June 2009, the Company announced that it held an end of Phase 2a meeting with the FDA. The
Company reviewed safety and biologic activity data from the VIA-2291 CEA and ACS trials with the
FDA and received guidance, including suggestions from the FDA on the Companys potential Phase 3
trial design.
The Company completed enrollment and last patient clinical visit in the FDG-PET Phase 2
clinical trial. In the Companys FDG-PET study, VIA-2291 was well-tolerated and demonstrated highly
significant leukotriene inhibition similar to the other Phase 2 studies. As FDG-PET is an
experimental technique in vascular disease, currently not validated for image analysis end points,
it is not possible to interpret the imaging analyses of the study at this time, nor was it the
Companys intention to use the imaging results of the FDG-PET study in determining the future
clinical plans for VIA-2291.
A publication describing the results of the ACS/MDCT study was published on-line February 27,
2010 by Circulation, Cardiovascular Imaging (Jean-Claude Tardif, Philippe L. LAllier, Reda
Ibrahim, Jean C. Grégoire, Anna Nozza, Mariève Cossette, Simon Kouz, Marc-André Lavoie, Janie
Paquin, Tilmann M. Brotz, Rebecca Taub, and Josephine Pressacco
Treatment with 5-Lipoxygenase
Inhibitor VIA-2291 (Atreleuton) in Patients with Recent Acute Coronary Syndrome
Circ Cardiovasc
Imaging first published on February 27, 2010 as doi:10.1161/CIRCIMAGING.110.937169), and the final
publication was in the May 2010 issue
Circ Cardiovasc Imaging
. 2010;3:298-307
. Together the results
of the CEA and ACS-MDCT studies suggest that VIA-2291 may reduce the coronary plaques that lead to
heart attacks and stroke.
The Company plans to consider business collaborations with large biotechnology or
pharmaceutical companies to conduct additional clinical trials required for regulatory approval.
Roche Licensed Assets
In December 2008, the Company entered into two exclusive, worldwide Research, Development and
Commercialization agreements with Hoffmann LaRoche Inc. and Hoffmann LaRoche Ltd. (collectively,
Roche) for two sets of compounds that we believe represent novel potential drugs for treatment of
cardiovascular and metabolic disease. The first license is for Roches THR beta agonist, a
clinically ready candidate for the control of cholesterol, triglyceride levels and potential in
insulin sensitization/diabetes. The second license is for multiple compounds from Roches
preclinical DGAT1 metabolic disorders program. Under the terms of the agreements, the Company
assumes control of all development and commercialization of the compounds, and will own exclusive
worldwide rights for all potential indications.
Roche will receive up to $22.8 million in upfront and milestone payments, the majority of
which is tied to the achievement of product development and regulatory milestones. In addition,
once products containing the compounds are approved for marketing, Roche will receive single-digit
royalties based on net sales, subject to certain reductions.
32
The Company must use commercially reasonable efforts to conduct clinical and commercial
development programs for products containing the compounds. Under the license for the THR beta
agonist, if the Company has not completed a Phase 1 clinical trial with respect to a lead product
containing this compound within three years, then either the Company must commit to developing
another of Roches compounds or Roche may terminate the license for that compound.
If the Company determines that it is not reasonable to continue clinical trials or other
development of the compounds, it may elect to cease further development and Roche may terminate the
licenses. If the Company determines not to pursue the development or commercialization of the
compounds in the United States, Japan, the United Kingdom, Germany, France, Spain, or Italy, Roche
may terminate the licenses for such territories.
The Roche license will expire, unless earlier terminated pursuant to other provisions of the
licenses, on the last to occur of (i) the expiration of the last valid claim of a licensed patent
covering the manufacture, use or sale of products containing the compounds, or (ii) ten years after
the first sale of a product containing the compounds.
The THR beta agonist is an orally administered, small-molecule beta-selective thyroid hormone
receptor agonist designed to specifically target receptors in the liver involved in metabolism and
cholesterol regulation, and avoid side effects associated with thyroid hormone receptor activation
outside the liver. Roche has completed preclinical studies of the THR beta agonist. These studies
demonstrated a rapid reduction of non-HDL cholesterol and the drug was shown to be synergistic with
statins in animal studies. The Company will investigate the possibility of using the THR beta
agonist in combination with statins for the treatment of hypercholesterolemia. In addition, in
animal studies insulin sensitization and glucose lowering were observed making this compound a
possible treatment of patients with type 2 diabetes in combination with other diabetes medications.
DGAT1 is an enzyme that catalyzes triglyceride synthesis and fat storage. Triglycerides are
the principal component of fat, which is the major repository for storage of metabolic energy in
the body. Overweight and obese individuals have significantly greater triglyceride levels, making
them more prone to diabetes and its associated metabolic complications. DGAT1 inhibitors are
believed to be an innovative class of compounds that modify lipid metabolism. In studies of obese
animals, DGAT1 inhibitors have been shown to induce weight loss and improve insulin sensitization,
glucose tolerance and lipid levels. These observations suggest DGAT1 inhibitors may have the
potential to treat obesity, diabetes and dyslipidemia. The Company intends to identify potential
clinical candidates from the compounds in this program and determine which compounds may be moved
into further preclinical development.
Going Concern
To further expand the Companys product candidate pipeline, the Company continues to engage in
discussions regarding the purchase or license of additional preclinical or clinical compounds that
the Company believes may be of interest in treating cardiovascular and metabolic disease.
Through September 30, 2010, the Company has been primarily engaged in developing initial
procedures and product technology, screening and in-licensing of target compounds, clinical trial
activity, and raising capital. The Company is organized and operates as one operating segment.
The Company has incurred losses since inception as it has devoted substantially all of its
resources to research and development, including early-stage clinical trials. As of September 30,
2010, the Companys accumulated deficit was approximately $88.7 million. The Company expects to
incur substantial and increasing losses for the next several years as it continues to expend
substantial resources seeking to successfully research, develop, manufacture, obtain regulatory
approval for, and commercialize its product candidates.
On March 26, 2010, the Companys Board of Directors approved a restructuring of the Company to
reduce its workforce and operating costs effective March 31, 2010. The reduction in workforce
decreased total employees by approximately 63% to a total of six employees and increased the focus
of future operating expense or research and development activities.
The Company has not generated any revenues to date, and does not expect to generate any
revenues from licensing, achievement of milestones or product sales until it is able to
commercialize product candidates or execute a collaboration agreement. The Company cannot estimate
the actual amounts necessary to successfully complete the successful development and
commercialization of its product candidates or whether, or when, it may achieve profitability.
33
Until the Company can establish profitable operations to finance its cash requirements, the
Companys ability to meet its obligations in the ordinary course of business is dependent upon its
ability to raise substantial additional capital through public or
private equity or debt financings, the establishment of credit or other funding facilities,
collaborative or other strategic arrangements with corporate sources or other sources of financing,
the availability of which cannot be assured. On June 5, 2007, the Company raised $11.1 million
through a merger (the Merger) with Corautus Genetics, Inc. (Corautus) to cover existing
obligations and provide operating cash flows. In July 2007, the Company entered into a securities
purchase agreement that provided for issuance of 10,288,065 shares of common stock for
approximately $25.0 million in gross proceeds.
As more fully described in Note 6 in the notes to the unaudited condensed financial
statements, in March 2009, the Company entered into a Note and Warrant Purchase Agreement (the
Loan Agreement) with its principal stockholder and one of its affiliates (the Lenders) whereby
the Lenders agreed to lend to the Company in the aggregate up to $10.0 million, pursuant to the
terms of promissory notes (collectively, the Notes) delivered under the Loan Agreement. The
Company secured the loan with all of its assets, including the Companys intellectual property. On
March 12, 2009, the Company borrowed the initial $2.0 million available under the Loan Agreement.
Subsequently, the Company made $2.0 million borrowings under the Loan Agreement on May 19, 2009,
June 29, 2009, August 14, 2009, and the Company borrowed the final $2.0 million available under the
Loan Agreement on September 11, 2009. According to the terms of the original Loan Agreement, the
debt was due to the Lenders on September 14, 2009. The parties agreed to extend the repayment terms
and the Lenders agreed to modify the Loan Agreement to further extend the repayment terms to April
1, 2010. The Lenders did not modify the interest rate or offer any concessions in the amended Loan
Agreement. The Company failed to repay the debt and all related interest to the Lenders due on
April 1, 2010.
In March 2010, the Company entered into the 2010 Loan Agreement whereby the Lenders agreed to
lend to the Company in the aggregate up to $3.0 million, pursuant to the terms of promissory notes
(collectively, the 2010 Notes) delivered under the 2010 Loan Agreement. On March 29, 2010, the
Company borrowed an initial amount of $1,250,000. Subsequently, the Company made $100,000,
$200,000, $300,000, $100,000, $750,000 and $300,000 borrowings under the Loan Agreement on May 26,
2010, June 4, 2010, June 29, 2010, July 15, 2010, July 27, 2010 and September 28, 2010,
respectively. As more fully described in Note 14 in the notes to the unaudited condensed financial
statements, on November 15, 2010, the Company entered into an amendment to the 2010 Loan Agreement
(2010 Loan Amendment) to enable the Company to borrow up to an additional aggregate principal
amount of $3,000,000, pursuant to the terms of amended and restated promissory notes (collectively,
the 2010 Amended and Restated Notes) delivered under the 2010 Loan Amendment. According to the
terms of the 2010 Loan Amendment, the debt is due to the Lenders on December 31, 2010. The 2010
Amended and Restated Notes are secured by a lien on all of the assets of the Company. Amounts
borrowed under the 2010 Amended and Restated Notes accrue interest at the rate of 15% per annum,
which increases to 18% per annum following an event of default. Unless earlier paid in accordance
with the terms of the 2010 Amended and Restated Notes, all unpaid principal and accrued interest
shall
become fully due and payable on the earlier to occur of (i) December 31, 2010, (ii) the closing of
a debt, equity or combined debt/equity financing resulting in gross proceeds or available credit to
the Company of not less than $20,000,000, and (iii) the closing of a transaction in which the
Company sells, conveys, licenses or otherwise disposes of a majority of its assets or is acquired
by way of a merger, consolidation, reorganization or other transaction or series of transactions
pursuant to which stockholders of the Company prior to such acquisition own less than 50% of the
voting interests in the surviving or resulting entity.
The Company had $278,000 in cash at September 30, 2010. Management believes that, under normal
continuing operations, this amount of cash will enable the Company to meet only a portion of its
current obligations. Management does not believe that existing cash resources will be sufficient to
enable the Company to meet its ongoing working capital requirements for the next twelve months and
the Company will need to raise substantial additional funding in the near term to repay amounts
owed under the Loan Agreement and 2010 Loan Agreement, and to meet its ongoing working capital
requirements. As a result, there are substantial doubts that the Company will be able to continue
as a going concern and, therefore, may be unable to realize its assets and discharge its
liabilities in the normal course of business. The unaudited condensed financial statements do not
include any adjustments relating to the recoverability and classification of recorded asset amounts
or to amounts and classifications of liabilities that may be necessary should the Company be unable
to continue as a going concern.
The Company cannot guarantee to its stockholders that the Companys efforts to raise
additional private or public funding will be successful. If adequate funds are not available in the
near term, the Company may be required to:
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terminate or delay clinical trials or studies of VIA-2291;
|
|
|
|
terminate or delay the preclinical development of one or more of its other preclinical
candidates;
|
|
|
|
curtail its licensing activities that are designed to identify molecular targets and
small molecules for treating cardiovascular disease;
|
|
|
|
relinquish rights to product candidates, development programs, or discovery development
programs that it may otherwise seek to develop or commercialize on its own; and
|
|
|
|
delay, reduce the scope of, or eliminate one or more of its research and development
programs, or ultimately cease operations.
|
34
All outstanding principal and accrued interest under the Loan Agreement was due on April 1,
2010. The company was not able to repay the loan on April 1, 2010. As such, the Lenders may
terminate the loan, demand immediate payment of all amounts borrowed by the Company and take
possession of all collateral securing the loan, which consists of all of our assets, including our
intellectual property rights. All outstanding principal and accrued interest under the 2010 Loan
Agreement is due on the earlier to occur of (i) December 31, 2010, (ii) the closing of a debt,
equity or combined debt/equity financing resulting in gross proceeds or available credit to the
Company of not less than $20,000,000, and (iii) the closing of a transaction in which the Company
sells, conveys, licenses or otherwise disposes of a majority of its assets or is acquired by way of
a merger, consolidation, reorganization or other transaction or series of transactions pursuant to
which stockholders of the Company prior to such acquisition own less than 50% of the voting
interests in the surviving or resulting entity.
Revenue
The Company has not generated any revenue to date and does not expect to generate any revenue
from licensing, achievement of milestones or product sales until the Company is able to
commercialize product candidates or execute a collaboration arrangement.
Research and Development Expenses
The Company is focused on the development of compounds for the treatment of cardiovascular and
metabolic disease. The Company completed the ACS and CEA Phase 2 clinical trials for VIA-2291, and
has completed enrollment and the last patient visit in the ongoing FDG-PET Phase 2 clinical trial
for VIA-2291. In November 2008, the Company announced the results of its ACS and CEA Phase 2
clinical trials at the AHA Conference, and the Company reported results from an MDCT sub-study of
its ACS Phase 2 clinical trial in May of 2009. In June 2009, the Company announced that it held an
end of Phase 2a meeting with the FDA. The Company reviewed safety and biologic activity data from
the VIA-2291 CEA and ACS trials with the FDA and received guidance, including suggestions from the
FDA on the Companys potential Phase 3 trial design. In December 2009, the Company announced its
last patient visit and as FDG-PET is an experimental technique in vascular disease, currently not
validated for image analysis end points, it is not possible to interpret the imaging analysis of
the study at this time, nor was it the Companys intention to use the imaging results of the
FDG-PET study in determining the future clinical plans for VIA-2291. In addition to the VIA-2291
compound, the Companys pipeline consists of the THR beta agonist, a clinically ready candidate for
the control of cholesterol, triglyceride levels and potential in insulin sensitization/diabetes,
and DGAT1, a set of preclinical compounds for the treatment of metabolic disorders and
dyslipidemia.
Research and development (R&D) expense represented 38% and 43% of total operating expense
for the three months ended September 30, 2010 and 2009, respectively, 36% and 47% for the nine
months ended September 30, 2010 and 2009, respectively, and 54% for the period from June 14, 2004
(date of inception) to September 30, 2010. The Company expenses research and development costs as
incurred. Research and development expenses are those incurred in identifying, in-licensing,
researching, developing and testing product candidates. These expenses primarily consist of the
following:
|
|
|
compensation of personnel associated with research and development activities, including
consultants, investigators, and contract research organizations (CROs);
|
|
|
|
laboratory supplies and materials;
|
|
|
|
costs associated with the manufacture of product candidates for preclinical testing and
clinical studies;
|
|
|
|
preclinical costs, including toxicology and carcinogenicity studies;
|
|
|
|
fees paid to professional service providers for independent monitoring and analysis of
the Companys clinical trials;
|
|
|
|
depreciation and equipment; and
|
|
|
|
allocated costs of facilities and infrastructure.
|
35
The following reflects the breakdown of the Companys research and development expenses
generated internally versus externally for the three and nine months ended September 30, 2010 and
2009, and for the period from June 14, 2004 (date of inception) to September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Externally generated R&D expense
|
|
$
|
85,729
|
|
|
$
|
732,162
|
|
|
$
|
474,366
|
|
|
$
|
2,985,635
|
|
|
$
|
29,179,557
|
|
Internally generated R&D expense
|
|
|
364,179
|
|
|
|
574,147
|
|
|
|
1,344,233
|
|
|
|
1,963,483
|
|
|
|
13,545,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
449,908
|
|
|
$
|
1,306,309
|
|
|
$
|
1,818,599
|
|
|
$
|
4,949,118
|
|
|
$
|
42,724,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Externally generated research and development expenses consist primarily of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
In-licensing expenses
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
400,000
|
|
|
$
|
5,270,000
|
|
CRO and investigator expenses
|
|
|
1,204
|
|
|
|
221,030
|
|
|
|
19,868
|
|
|
|
909,296
|
|
|
|
10,769,207
|
|
Consulting expenses
|
|
|
43,718
|
|
|
|
211,893
|
|
|
|
166,439
|
|
|
|
916,097
|
|
|
|
6,585,108
|
|
Other
|
|
|
40,807
|
|
|
|
299,239
|
|
|
|
288,059
|
|
|
|
760,242
|
|
|
|
6,555,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85,729
|
|
|
$
|
732,162
|
|
|
$
|
474,366
|
|
|
$
|
2,985,635
|
|
|
$
|
29,179,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internally generated research and development expenses consist primarily of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Payroll and payroll related expenses
|
|
$
|
235,542
|
|
|
$
|
459,266
|
|
|
$
|
804,362
|
|
|
$
|
1,380,281
|
|
|
$
|
9,311,521
|
|
Stock-based compensation
|
|
|
47,041
|
|
|
|
23,050
|
|
|
|
132,945
|
|
|
|
239,864
|
|
|
|
1,228,739
|
|
Travel and entertainment expenses
|
|
|
11,724
|
|
|
|
29,799
|
|
|
|
55,005
|
|
|
|
134,815
|
|
|
|
1,210,624
|
|
Other
|
|
|
69,872
|
|
|
|
62,032
|
|
|
|
351,921
|
|
|
|
208,523
|
|
|
|
1,794,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
364,179
|
|
|
$
|
574,147
|
|
|
$
|
1,344,233
|
|
|
$
|
1,963,483
|
|
|
$
|
13,545,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company does not presently segregate total research and development expenses by individual
project because our research is focused on atherosclerosis and cardiometabolic disease as a unitary
field of study. Although the Company has a mix of preclinical and clinical research and
development, personnel working on the programs are combined, financial expenditures are combined,
and reporting has not matured to the point where they are separate and distinct projects. The
Company cannot reliably allocate the personnel costs, consulting costs, and other resources
dedicated to these efforts to individual projects, as we are conducting our research on an
integrated basis.
Assuming the Company is able to raise additional financing, it is expected that there will be
significant research and development expenses for the foreseeable future. Clinical trial activity
in the CEA and ACS Phase 2 clinical trials and related expenses have decreased as a result of
completing the studies, and expenses for the ongoing FDG-PET trial have decreased and will continue
to decrease as the last patient visit was reported in December 2009. The Company began the
development of its preclinical metabolic assets in 2009 and the Company expects expenses to
increase substantially over the next several years. The ultimate level and timing of research and
development spending is difficult to predict due to the uncertainty inherent in the timing of
raising additional financing, the timing and extent of progress in our research programs, and
initiation and progress of clinical trials. In addition, the results from the Companys preclinical
and clinical research and development activities, as well as the results of trials of similar
therapeutics under development by others, will influence the number, size and duration of planned
and unplanned trials. As the Companys research efforts mature, we will continue to review the
direction of our research based on an assessment of the value of possible future compounds emerging
from these efforts. Based on this continuing review, the Company expects to establish discrete
research programs and evaluate the cost and potential for cash inflows from commercializing
products, partnering with others in the biotechnology or pharmaceutical industry, or licensing the
technologies associated with these programs to third parties.
36
The Company believes that it is not possible at this time to provide a meaningful estimate of
the total cost to complete our ongoing projects and to bring any proposed products to market. The
potential use of compounds targeting atherosclerotic plaque inflammation as a therapy is an
emerging area. Costs to complete current or future development programs could vary substantially
depending upon the projects selected for development, the number of clinical trials required and
the number of patients needed for each study. It is possible that the completion of these studies
could be delayed for a variety of reasons, including difficulties in enrolling patients, incomplete
or inconsistent data from the preclinical or clinical trials, difficulties evaluating the trial
results and delays in manufacturing. Any delay in completion of a trial would increase the cost of
that trial, which would harm our results of operations. Due to these uncertainties, the Company
cannot reasonably estimate the size, nature or timing of the costs to complete, or the amount or
timing of the net cash inflows from our current activities. Until the Company obtains further
relevant preclinical and clinical data, and progresses further through the FDA regulatory process,
the Company will not be able to estimate our future expenses related to these programs or when, if
ever, and to what extent we will receive cash inflows from resulting products.
General and Administrative
General and administrative expense consists primarily of personnel costs, including salaries,
incentive and other compensation, travel and entertainment expenses, for personnel in executive,
finance, accounting, business development, information technology and human resource functions.
Other costs include facility costs not otherwise included in research and development expense,
professional fees for legal and accounting services, and public company expenses, including
investor relations, transfer agent fees and printing expenses.
Interest Income, Interest Expense and Other Expenses
Interest income consists of interest earned on cash and cash equivalents. Interest expense
consists primarily of interest due on secured notes payable and on capital leases, and amortization
of discount on notes payable affiliate. Other expenses consist of net realized and unrealized
gains and losses associated with foreign currency transactions, and unrealized gains and losses
associated with the warrant obligation.
Results of Operations
Comparison of the three months ended September 30, 2010 and 2009
The following table summarizes the Companys results of operations with respect to the items
set forth in such table for the three months ended September 30, 2010 and 2009 together with the
change in such items in dollars and as a percentage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Research and development expense
|
|
|
449,908
|
|
|
|
1,306,309
|
|
|
|
(856,401
|
)
|
|
|
(66
|
)%
|
General and administrative expense
|
|
|
757,996
|
|
|
|
1,697,476
|
|
|
|
(939,480
|
)
|
|
|
(55
|
)%
|
Interest expense
|
|
|
901,028
|
|
|
|
5,033,598
|
|
|
|
(4,132,570
|
)
|
|
|
(82
|
)%
|
Other expense
|
|
|
9,391
|
|
|
|
663
|
|
|
|
8,728
|
|
|
|
1,316
|
%
|
Revenue.
The Company did not generate any revenue in the three months ended September 30,
2010 and 2009, respectively, and does not expect to generate any revenue from licensing,
achievement of milestones or product sales until the Company is able to commercialize product
candidates or execute a collaboration arrangement.
Research and Development Expense.
Research and development expense decreased 66%, or $856,000
from $1,306,000 in the three months ended September 30, 2009 to $450,000 in the three months ended
September 30, 2010. Clinical trial and preclinical related CRO and investigator clinical trial
related expenses decreased $220,000 from $221,000 in the three months ended September 30, 2009 to
$1,000 in the three months ended September 30, 2010 primarily due to the completion of the ACS and
CEA Phase 2 clinical trials in 2008, and the completion of the FDG-PET Phase 2 clinical trial in
2009. Lab data analysis and other R&D expenses decreased $258,000 from $299,000 in the three months
ended September 30, 2009 to $41,000 in the three months ended September 30, 2010. The $258,000
decrease consisted a decrease of $13,000 in the ACS, CEA and FDG-PET Phase II clinical trial
expenses, a decrease of $58,000 in VIA-2291 general development expenses, a decrease of $57,000 in
expenses associated with the DNA isolation
and genotyping study associated with the development of VIA-2291, and a decrease of $130,000
in drug development expenses for one of the Roche compounds. Employee related expenses including
salary, benefits, stock-based compensation, travel and entertainment expense, information
technology and facilities expenses, decreased $210,000 from $574,000 in the three months ended
September 30, 2009 to $364,000 in the three months ended September 30, 2010 primarily due to a
reduction in the number of employees that resulted from the March 2010 restructuring. Consulting
expenses decreased $168,000 from $212,000 in the three months ended September 30, 2009 to $44,000
in the three months ended September 30, 2010 primarily due to the completion of the Phase 2
clinical trials.
37
General and Administrative Expense.
General and administrative expense decreased 55%, or
$939,000, from $1,697,000 in the three months ended September 30, 2009 to $758,000 in the three
months ended September 30, 2010. Employee related expenses, including salary and benefits,
stock-based compensation and travel and entertainment expenses decreased $732,000 from $1,041,000
in the three months ended September 30, 2009 to $309,000 in the three months ended September 30,
2010, primarily due to a reduction in the number of employees that resulted from the March 2010
restructuring. Corporate and facilities general and administrative expenses decreased $204,000
from $518,000 in the three months ended September 30, 2009 to $314,000 in the three months ended
September 30, 2010 primarily due to the March 2010 restructuring. The $204,000 decrease consisted
of a $1,000 increase in audit expense, net of a decrease of $91,000 in legal expense, a $51,000
decrease in board fees, investor relations expenses, SEC printing expenses and other public company
expenses, and a $63,000 decrease in facilities, IT and depreciation expenses. Consulting expenses
decreased $3,000 from $138,000 in the three months ended September 30, 2009 to $135,000 in the
three months ended September 30, 2010 due primarily to the use of strategic consulting services
necessary as a result of the March 2010 restructuring.
Interest Expense.
Interest expense decreased 82% or $4,133,000 from $5,034,000 in the three
months ended September 30, 2009 to $901,000 in the three months ended September 30, 2010. Interest
on the notes payable increased $264,000 from $283,000 in the three months ended September 30, 2009
to $547,000 in the three months ended September 30, 2010. Interest from the amortization of notes
payable discounts decreased $4,389,000 from $4,751,000 in the three months ended September 30, 2009
to $362,000 in the three months ended September 30, 2010 due primarily to a decrease in the amount
of amortizable discount on notes payable. Interest on excess lease facility costs was $6,000 in
the three months ended June 30, 2010 was reclassified as operating expense in the three months
ended September 30, 2010. Interest on the abandonment of the leased Princeton office space of
$2,000 in the three months ended June 30, 2010 was also reclassified as operating expense in the
three months ended September 30, 2010.
Other Expense.
Other expense increased $8,000 from $1,000 in the three months ended September
30, 2009 to $9,000 in the three months ended September 30, 2010. Unrealized losses on foreign
exchange transactions increased $7,000 from $0 in the three months ended September 30, 2009 to
$7,000 in the three months ended September 30, 2010. Realized losses on foreign exchange
transactions were $1,000 in both the three months ended June 30, 2010 and the three months ended
September 30, 2010. Losses on the disposal of fixed assets increased $1,000 from $0 in the three
months ended September 30, 2009 to $1,000 in the three months ended September 30, 2010.
Income Tax Expense.
There is no income tax provision (benefit) for federal or state income
taxes as the Company has incurred operating losses since inception and a full valuation allowance
has also been in place since inception.
Comparison of the Nine months ended September 30, 2010 and 2009
The following table summarizes the Companys results of operations with respect to the items
set forth in such table for the nine months ended September 30, 2010 and 2009 together with the
change in such items in dollars and as a percentage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
Revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Research and development expense
|
|
|
1,818,599
|
|
|
|
4,949,118
|
|
|
|
(3,130,519
|
)
|
|
|
(63
|
)%
|
General and administrative expense
|
|
|
3,209,947
|
|
|
|
5,491,380
|
|
|
|
(2,281,433
|
)
|
|
|
(42
|
)%
|
Restructuring costs
|
|
|
106,959
|
|
|
|
|
|
|
|
106,959
|
|
|
|
|
|
Interest expense
|
|
|
1,979,460
|
|
|
|
6,299,768
|
|
|
|
(4,320,308
|
)
|
|
|
(69
|
)%
|
Other income/(expense)
|
|
|
(15,749
|
)
|
|
|
8,893
|
|
|
|
(24,642
|
)
|
|
|
(277
|
)%
|
38
Revenue.
The Company did not generate any revenue in the nine months ended September 30, 2010
and 2009, respectively, and does not expect to generate any revenue from licensing, achievement of
milestones or product sales until the Company is able to commercialize product candidates or
execute a collaboration arrangement.
Research and Development Expense.
Research and development expense decreased 63%, or
$3,130,000, from $4,949,000 in the nine months ended September 30, 2009 to $1,819,000 in the nine
months ended September 30, 2010. Clinical trial and preclinical related CRO and investigator
clinical trial related expenses decreased $889,000 from $909,000 in the nine months ended September
30, 2009 to $20,000 in the nine months ended September 30, 2010 primarily due to the completion of
the ACS and CEA Phase 2 clinical trials in 2008, and the completion of the FDG-PET Phase 2 clinical
trial in 2009. The $889,000 decrease consisted of a $833,000 decrease in the ACS, CEA and FDG-PET
Phase II clinical trial expenses; a decrease of $46,000 in VIA-2291 general development expenses;
and a decrease of $10,000 in PDE4 expenses. Lab data analysis and other R&D expenses decreased
$472,000 from $760,000 in the nine months ended September 30, 2009 to $288,000 in the nine months
ended September 30, 2010. The $472,000 decrease consisted of a decrease of $157,000 in the ACS,
CEA and FDG-PET Phase II clinical trial expenses, a decrease of $229,000 in VIA-2291 general
development expenses, a decrease of $132,000 in expenses associated with the DNA isolation and
genotyping study associated with the development of VIA-2291, net of an increase of $46,000 in drug
development expenses for one of the Roche compounds. In-licensing expenses decreased $400,000 from
$400,000 in the nine months ended September 30, 2009 to $0 in the nine months ended September 30,
2010 due to the in-licensing of two Roche compounds in the nine months ended September 30, 2009.
Employee related expenses including salary, benefits, stock-based compensation, travel and
entertainment expense, information technology and facilities expenses, decreased $785,000 from
$1,964,000 in the nine months ended September 30, 2009 to $1,179,000 in the nine months ended
September 30, 2010 primarily due to a reduction in the number of employees that resulted from the
restructuring in March 2010. Consulting expenses decreased $750,000 from $916,000 in the nine
months ended September 30, 2009 to $166,000 in the nine months ended September 30, 2010 primarily
due to the completion of the Phase 2 clinical trials. Lease abandonment costs increased $166,000
from $0 in the three months ended September 30, 2009 to $166,000 in the three months ended
September 30, 2010 due to the early termination of the leased office space in Princeton, New Jersey
in September of 2010.
General and Administrative Expense.
General and administrative expense decreased 42%, or
$2,281,000, from $5,491,000 in the nine months ended September 30, 2009 to $3,210,000 in the nine
months ended September 30, 2010. Employee related expenses, including salary and benefits,
stock-based compensation and travel and entertainment expenses decreased $1,571,000 from $3,051,000
in the nine months ended September 30, 2009 to $1,481,000 in the nine months ended September 30,
2010, primarily due to a reduction in the number of employees that resulted from the March 2010
restructuring. Corporate and facilities general and administrative expenses decreased $714,000
from $2,075,000 in the nine months ended September 30, 2009 to $1,361,000 in the nine months ended
September 30, 2010 primarily due to the March 2010 restructuring. The $714,000 decrease consisted
of a $133,000 increase in audit expense, net of a $483,000 decrease in legal expense, a $223,000
decrease in board fees, investor relations expenses, SEC printing expenses and other public company
expenses, and a $141,000 decrease in facilities, IT and depreciation expenses. Consulting expenses
increased $3,000 from $365,000 in the nine months ended September 30, 2009 to $368,000 in the nine
months ended September 30, 2010 due primarily to the use of strategic consulting services necessary
as a result of the March 2010 restructuring.
Restructuring Costs.
On March 26, 2010 the Companys Board of Directors approved a
restructuring of the Company to reduce its workforce and operating costs effective March 31, 2010.
The reduction in workforce decreased total employees by approximately 63% to a total of six
employees and increased the focus of future operating expense on research and development
activities. This decision resulted in recording a charge to operating expenses of approximately $0
and $106,959 in the three and nine months ended September 30, 2010. This charge includes cash
costs of restructuring, principally related to severance and related medical costs for terminated
employees, of approximately $411,000, and non-cash charges of $227,000 primarily related to costs
associated with excess facilities at the Companys corporate headquarters, offset by approximately
$531,000 related to the reversal of previously recorded incentive award accruals recorded as of
December 31, 2009. In addition to this restructuring charge, the Company paid terminated employees
$178,000 for amounts accrued for unused vacation and sick pay. The total cash cost of the
restructuring costs, and amounts for accrued COBRA, vacation and sick pay, was $589,000, of which
$635 has not been paid and is included in accrued restructuring costs on the unaudited condensed
balance sheet as of September 30, 2010. As of September 30, 2010, the Company had accrued non-cash
restructuring costs of $133,222 which consisted of excess facility lease costs, of which $122,650
is a current obligation and $11,207 is a long-term obligation on the unaudited condensed balance
sheet.
Interest Expense.
Interest expense decreased $4,321,000 from $6,300,000 in the nine months
ended September 30, 2009 to $1,979,000 in the nine months ended September 30, 2010. Interest on
the notes payable increased $1,007,000 from $411,000 in the nine months ended September 30, 2009 to
$1,418,000 in the nine months ended September 30, 2010. Interest from the amortization of
notes payable discounts decreased $5,328,000 from $5,889,000 in the nine months ended
September 30, 2009 to $561,000 in the nine months ended September 30, 2010 due primarily to a
decrease in the amount of amortizable discount on notes payable.
39
Other Income/(Expense).
Other expense increased $25,000 from other income of $9,000 in the
nine months ended September 30, 2009 to other expense of $16,000 in the nine months ended September
30, 2010. Unrealized losses on foreign exchange transactions increased $3,000 from $4,000 in the
nine months ended September 30, 2009 to $7,000 in the nine months ended September 30, 2010.
Realized losses on foreign exchange transactions increased $16,000 from gains of $14,000 in the
nine months ended September 30, 2009 to losses of $2,000 in the nine months ended September 30,
2010. Losses on the disposal of fixed assets increased $6,000 from $1,000 in the nine months ended
September 30, 2009 to $7,000 in the nine months ended September 30, 2010.
Income Tax Expense.
There is no income tax provision (benefit) for federal or state income
taxes as the Company has incurred operating losses since inception and a full valuation allowance
has also been in place since inception.
Liquidity and Capital Resources
The Company does not have commercial products from which to generate cash resources. As a
result, from June 14, 2004 (date of inception) to September 30, 2010, the Company has financed its
operations primarily through a series of issuances of secured convertible notes, the generation of
interest income on the borrowed funds, the Merger with Corautus, a private placement through a
public equities transaction, and debt. The Company expects to incur substantial and increasing
losses for the next several years as it continues to expend substantial resources seeking to
successfully research, develop, manufacture, obtain regulatory approval for, and commercialize its
product candidates.
The Companys ability to meet its obligations in the ordinary course of business is dependent
upon its ability to raise substantial additional financing through public or private equity or debt
financings, collaborative or other strategic arrangements with corporate sources or other sources
of financing, until it is able to establish profitable operations. The Company received
approximately $11.1 million in cash through the Merger with Corautus that was consummated on June
5, 2007, and the Company issued 10,288,065 shares of common stock for $25.0 million in gross
proceeds in the private placement equity financing which closed in July and August of 2007.
In March 2009, the Company entered into the Loan Agreement with the Lenders whereby the
Lenders agreed to lend to the Company in the aggregate up to $10.0 million as more fully described
in Note 6 in the notes to the unaudited condensed financial statements. The Company secured the
loan with all of its assets, including the Companys intellectual property. On March 12, 2009, the
Company borrowed an initial amount of $2.0 million under the Loan Agreement. During the three
months ended June 30, 2009, the Company borrowed $2.0 million on May 19, 2009, and another $2.0
million on June 29, 2009. During the three months ended September 30, 2009, the Company borrowed
$2.0 million on August 14, 2009, and borrowed the final $2.0 million on September 11, 2009.
According to the terms of the original Loan Agreement, the debt and related interest was due to the
Lenders on September 14, 2009. The parties agreed to extend the repayments terms and, on February
26, 2010, the Lenders agreed to modify the Loan Agreement to further extend the repayment terms to
April 1, 2010. The Lenders did not modify the interest rate or offer any concessions in the amended
Loan Agreement. The Company failed to repay the debt and all related interest to the Lenders due on
April 1, 2010.
In March 2010, the Company entered into the 2010 Loan Agreement with the Lenders whereby the
Lenders agreed to lend to the Company in the aggregate up to $3.0 million as more fully described
in Note 6 in the notes to the unaudited condensed financial statements. On March 29, 2010, The
Company secured the loan with all of its assets, including the Companys intellectual property. On
March 29, 2010, the Company borrowed an initial amount of $1,250,000. During the three months
ended June 30, 2010, the Company borrowed $100,000 on May 26, 2010, $200,000 on June 4, 2010, and
another $300,000 on June 29, 2010. During the three months ended September 30, 2010, the Company
borrowed $100,000 on July 15, 2010, $750,000 on July 27, 2010 and a final $300,000 on September 28,
2010. As more fully described in Note 14 in the notes to the unaudited condensed financial
statements, on November 15, 2010, the Company entered into the 2010 Loan Amendment to enable the
Company to borrow up to an additional aggregate principal amount of $3,000,000, pursuant to the
terms of the 2010 Amended and Restated Notes delivered under the 2010 Loan Amendment. According to
the terms of the 2010 Loan Amendment, the debt is due to the Lenders on December 31, 2010.
The Company had $278,000 in cash at September 30, 2010. Management believes that, under normal
continuing operations, this amount of cash will enable the Company to meet only a portion of its
current obligations. Management does not believe that existing cash resources will be sufficient to
enable the Company to meet its ongoing working capital requirements for the next twelve months and
the Company will need to raise substantial additional funding in the near term to repay amounts
owed under the Loan Agreement and 2010 Loan Agreement, and to meet its ongoing working capital
requirements. As a result, there are substantial doubts that the Company will be able to continue
as a going concern and, therefore, may be unable to realize its assets and discharge its
liabilities in the normal course of business. The unaudited condensed financial statements do not
include any adjustments relating to the
recoverability and classification of recorded asset amounts or to amounts and classifications
of liabilities that may be necessary should the Company be unable to continue as a going concern.
40
Global market and economic conditions have been, and continue to be, disrupted and volatile.
The Company cannot provide assurance that additional financing will be available in the near term
when needed, particularly in light of the current economic environment and adverse conditions in
the financial markets, or that, if available, financing will be obtained on terms favorable to the
Company or to the Companys stockholders. Having insufficient funds may require the Company to
delay, scale back, or eliminate some or all research and development programs, including clinical
trial activities, or to relinquish greater or all rights to product candidates at an earlier stage
of development or on less favorable terms than the Company would otherwise choose. Failure to
obtain adequate financing in the near term will adversely affect the Companys ability to operate
as a going concern and may require the Company to cease operations. If the Company raises
additional capital by issuing equity securities, its existing stockholders ownership will be
diluted. In addition, to the extent the vested warrants granted to the Lenders to purchase an
aggregate of 83,333,333 shares of common stock at an exercise price of $0.12 per share are
exercised by the Lenders, and to the extent the vested warrants granted to the Lenders in the 2010
Loan Agreement to purchase an aggregate of 17,647,059 shares of common stock at an exercise price
of $0.17 per share are exercised by the Lenders existing stockholders ownership in the Company
will be significantly diluted. Any new debt financing the Company enters into may involve covenants
that restrict its operations. The Loan Agreement and 2010 Loan Agreement with the Lenders includes
restrictive covenants relating to the Companys ability to incur additional indebtedness, make
future acquisitions, consummate asset dispositions, grant liens and pledge assets, pay dividends or
make other distributions, incur capital expenditures and make restricted payments. The Company may
also be required to pledge all or substantially all of its assets, including intellectual property
rights, as collateral to secure any debt obligations. The Companys obligations under the Loan
Agreement and 2010 Loan Agreement are secured by all of the Companys assets, including its
intellectual property and any additional pledge of its assets would require the consent of the
lenders. In addition, if the Company raises additional funds through collaborative or other
strategic arrangements, the Company may be required to relinquish potentially valuable rights to
its product candidates or grant licenses on terms that are not favorable to the Company.
Prior to the Merger and the private placement, the Company issued secured convertible notes
for a total of $24.4 million from June 14, 2004 (date of inception) to September 30, 2010 to
finance its operations. All of the $24.4 million in secured convertible notes have been converted
to equity as of December 31, 2007. No convertible notes were issued in the three or nine months
ended September 30, 2010 nor in the years ended December 31, 2009 and 2008.
The Companys cash on hand decreased approximately $4.3 million from $4.6 million at September
30, 2009 to $278,000 at September 30, 2010. In the twelve months ended September 30, 2010, the
Company received $3.0 million in cash inflows and disbursed $7.3 million in cash outflows resulting
in the approximately $4.3 million decrease in cash. Cash inflows of $3.0 million consisted of $3.0
million in proceeds from borrowings on the affiliate loan arrangements. Cash outflows of $7.3
million consisted of $3.3 million in payments for payroll and related expenses, $1.2 million in
payments for research and development related expenses, $900,000 in payments to consultants for
consulting services, $500,000 in payments for legal services, $400,000 in payments for corporate
expenses, including audit fees, board fees, and public company expenses, and $1.0 million in
payments for travel reimbursement, facilities and other office related expenses.
The Company used $4.9 million and $9.5 million in net cash from operations in the nine months
ended September 30, 2010 and 2009, respectively, and $70.5 million for the period from September
14, 2004 (date of inception) to September 30, 2010. The $4.6 million decrease in the net cash used
in operations was comprised of a $9.6 million decrease in net loss from $16.7 million in the nine
months ended September 30, 2009 to $7.1 million in the nine months ended September 30, 2010, a
$300,000 decrease in the change in net assets, a $343,000 decrease in the change in net
liabilities, an $5.3 million decrease in amortization of the discount on notes payable, a $133,000
increase in excess facility lease costs resulting from the restructuring, a $174,000 increase in
lease abandonment costs, a $1,000 increase in the change in accrued restructuring costs, a $1.0
million increase in the change in interest payable to affiliate, a $33,000 decrease in deferred
rent, a $37,000 decrease in depreciation and amortization, a $72,000 increase in the disposal of
fixed assets, and a decrease of $388,000 in stock-based compensation expense. The $9.6 million
decrease in net loss was the result of a decrease of $3.1 million in research and development
expenses, a $2.3 million decrease in general and administrative expenses; net of a $107,000
increase in restructuring costs, a $4.3 million decrease in interest expense and a $25,000 increase
in other expense. For the period from June 14, 2004 (date of inception) to September 30, 2010, the
Company used $70.5 million of net cash in operating activities which was comprised of
inception-to-date net losses of $88.7 million, net of $13.0 million non-cash expenses, including
$4.5 million inception-to-date stock-based compensation expense, $600,000 in depreciation and
deferred rent expenses, $7.5 million in interest expense from the amortization of the discount on
notes payable, $173,000 in excess facility lease costs, $133,000 in lease abandonment costs, and
$77,000 in disposals of fixed assets; and net of $5.2 million net increase in the change in net
assets and liabilities. The Company cannot be certain if, when or to what extent it will receive
cash inflows from the commercialization of its product candidates. The Company expects its
clinical, research and development expenses to be substantial and to increase over the next few
years as it continues the advancement of its product development programs.
41
The Company used $0 and $16,000 in net cash from investing activities in the nine months ended
September 30, 2010 and 2009, respectively, and obtained $10.1 million cash from investing
activities for the period from June 14, 2004 (date of inception) to September 30, 2010. The Company
used $0 and $16,000 in cash for capital expenditures in the nine months ended September 30, 2010
and 2009, respectively. From June 14, 2004 (date of inception) to September 30, 2010, the Company
received $11.1 million in cash from the Merger with Corautus, net of an additional $350,000 in
capitalized Merger costs and $664,000 in capital expenditures.
The Company received $3.0 million and $10.0 million in net cash from financing activities in
the nine months ended September 30, 2010 and 2009, respectively, primarily through the issuance of
debt to the Companys principal investor in the amount of $3.0 million and $10.0 million in the
nine months ended September 30, 2010 and 2009, respectively. The Company also received $1,292 and
$1,933 in cash from employee exercises of stock options in the nine months ended September 30, 2010
and 2009, and used $763 and $0 to repurchase and retire common stock in the nine months ended
September 30, 2010 and 2009, respectively. From June 14, 2004 (date of inception) to September 30,
2010, the Company received $60.6 million in net cash provided by financing activities, $13.0
million in notes payable borrowings from the Companys principal stockholder, $24.4 million of cash
received through the issuance of secured convertible debt, $23.1 million of net cash received
through the equity financing completed in 2007, and $50,000 of cash received from employee and
consultant exercises of stock options.
In November 2010, the Company was notified by the Internal Revenue Service that it has been
awarded $244,479 in grants under the Qualifying Therapeutic Discovery Project (QTDP) program
established under Section 48D of the Internal Revenue Code as part of the Patient Protection and
Affordable Care Act of 2010. The Company submitted the grant application in July 2010 for qualified
2009 and 2010 investments in the VIA-2291 program. The grant is not taxable for federal income tax
purposes. The Company expects to receive the full amount of the grant
before the end of 2010.
Contractual Obligation and Commitments
The following table describes the Companys contractual obligations and commitments as of
September 30, 2010:
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Payments Due by Period
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Less Than
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After
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Total
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1 Year
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1-3 Years
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4-5 Years
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5 Years
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Operating lease obligations (1)
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$
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1,058,238
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$
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443,732
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$
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614,506
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$
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$
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Notes and related interest payable affiliate (2)
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15,207,466
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15,207,466
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Uncertain tax positions (3)
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Licensing agreements (4)
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$
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16,265,704
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$
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15,651,198
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$
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614,506
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$
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$
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(1)
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Operating lease obligations reflect contractual commitments for the
Companys office facilities for its headquarters in San Francisco,
California and its clinical operations location in Princeton, New
Jersey. The San Francisco headquarters lease has been extended through
May 31, 2013 and has been expanded to a total of 8,180 square feet.
The lease amendment resulted in an increase of approximately $1.5
million in future rent. The lease amendment to the Princeton, New
Jersey facility extends the lease through April 2, 2012 and has been
expanded to a total of 4,979 square feet. The lease amendment resulted
in an increase of approximately $330,000 in future rent. As more
fully described in Note 13 to the unaudited condensed financial
statements, on June 1, 2010, the Company abandoned its office space
leased in Princeton, New Jersey.
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(2)
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As more fully described in Note 6 in the notes to the unaudited
condensed financial statements, in March 2009, the Company entered
into the Loan Agreement with the Lenders whereby the Lenders agreed to
lend to the Company in the aggregate up to $10.0 million, pursuant to
the terms of the Notes delivered under the Loan Agreement. On March
12, 2009, the Company borrowed an initial amount of $2.0 million.
During the three months ended September 30, 2009, the Company borrowed
$2.0 million on May 19, 2009, and another $2.0 million on June 29,
2009. During the three months ended September 30, 2009, the Company
borrowed $2.0 million on August 14, 2009, and a final $2.0 million on
September 11, 2009. The Notes are secured by a first priority lien on
all of the assets of the Company, including the Companys intellectual
property. Amounts borrowed under the Notes accrue interest at the rate
of 15% per annum, which increases to 18% per annum following an event
of default. As of September 30, 2010, the Company accrued $1,607,671
in interest payable affiliate for unpaid interest expenses. Unless
earlier paid in accordance with the terms of the Notes, all unpaid
principal and accrued interest shall become fully due and payable on
the earlier to occur of (i) April 1, 2010, (ii) the closing of a debt,
equity or combined debt/equity financing resulting in gross proceeds
or available credit to the Company of not less than $20,000,000, and
(iii) the closing of a transaction in which the Company sells,
conveys, licenses or otherwise disposes of a majority of its assets or
is acquired by way of a merger, consolidation, reorganization or other
transaction or series of transactions pursuant to which stockholders
of the Company prior to such acquisition own less than 50% of the
voting interests in the surviving or resulting entity. While the
Lenders have not declared an event of default, the Company failed to
repay the debt and all related interest to the Lenders due on April 1,
2010. As a result, the Company is now accruing interest at the higher
18% per annum beginning April 1, 2010.
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42
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Also as more fully described in Note 6 in the notes to the unaudited
condensed financial statements, in March 2010, the Company entered
into an additional Note and Warrant Purchase Agreement (the 2010 Loan
Agreement) with the Lenders whereby the Lenders agreed to lend to the
Company in the aggregate up to $3,000,000, pursuant to the terms of
promissory notes (collectively, the 2010 Notes) delivered under the
2010 Loan Agreement. On March 29, 2010, the Company borrowed an
initial amount of $1,250,000. During the three months ended June 30,
2010, the Company borrowed $100,000 on May 26, 2010, $200,000 on June
4, 2010, and another $300,000 on June 29, 2010. During the three
months ended September 30, 2010, the Company borrowed $100,000 on July
15, 2010, $750,000 on July 27, 2010 and a final $300,000 on September
28, 2010. The 2010 Notes are secured by a lien on all of the assets
of the Company. Amounts borrowed under the 2010 Notes accrue interest
at the rate of 15% per annum, which increases to 18% per annum
following an event of default. As of September 30, 2010, the Company
accrued $52,233 in interest payable affiliate for unpaid interest
expenses. Unless earlier paid in accordance with the terms of the 2010
Notes, all unpaid principal and accrued interest shall become fully
due and payable on the earlier to occur of (i) December 31, 2010, (ii)
the closing of a debt, equity or combined debt/equity financing
resulting in gross proceeds or available credit to the Company of not
less than $20,000,000, and (iii) the closing of a transaction in which
the Company sells, conveys, licenses or otherwise disposes of a
majority of its assets or is acquired by way of a merger,
consolidation, reorganization or other transaction or series of
transactions pursuant to which stockholders of the Company prior to
such acquisition own less than 50% of the voting interests in the
surviving or resulting entity.
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(3)
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The Company adopted new accounting guidance for the accounting for
uncertainty in income tax positions on the first day of its 2007
fiscal year. The amount of unrecognized tax benefits at December 31,
2009 was $584,710. This amount has been excluded from the contractual
obligations table because a reasonably reliable estimate of the timing
of future tax settlements cannot be determined.
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(4)
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Under certain licensing agreements, Roche may receive up to $22.4
million in milestone payments, the majority of which would be tied to
the achievement of product development and regulatory milestones. In
addition, once products containing the compounds are approved for
marketing, Roche will receive single-digit royalties based on net
sales, subject to certain reductions.
|
Off-Balance Sheet Arrangements
The Company has not engaged in any off-balance sheet activities.
Critical Accounting Policies
The Companys discussion and analysis of its financial condition and results of operations are
based on its unaudited condensed financial statements, which have been prepared in accordance with
GAAP. The preparation of these unaudited condensed financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the unaudited condensed financial
statements and the reported amounts of revenue and expenses during the reporting periods. Note 2 in
the notes to the unaudited condensed financial statements includes a summary of the Companys
significant accounting policies and methods used in the preparation of the Companys unaudited
condensed financial statements. On an ongoing basis, the Companys management evaluates its
estimates and judgments, including those related to accrued expenses and the fair value of its
common stock. The Companys management bases its estimates on historical experience, known trends
and events, and various other factors that it believes to be reasonable under the circumstances,
which form its basis for managements judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
The Companys management believes the following accounting policies and estimates are most
critical to aid in understanding and evaluating the Companys reported financial results.
A critical accounting policy is defined as one that is both material to the presentation of
our unaudited condensed financial statements and requires management to make difficult, subjective
or complex judgments that could have a material effect on our financial condition and results of
operations. Specifically, critical accounting estimates have the following attributes: (i) we are
required to make assumptions about matters that are uncertain at the time of the estimate; and (ii)
different estimates we could reasonably have used, or changes in the estimate that are reasonably
likely to occur, would have a material effect on our financial condition or results of operations.
43
Estimates and assumptions about future events and their effects cannot be determined with
certainty. We base our estimates on historical experience, facts available to date, and on various
other assumptions believed to be applicable and reasonable under the circumstances. These estimates
may change as new events occur, as additional information is obtained and as our operating
environment changes. These changes have historically been minor and have been included in the
unaudited condensed financial statements as soon as they became known. The estimates are subject to
variability in the future due to external economic factors as well as the timing and cost of future
events. Based on a critical assessment of our accounting policies and the underlying judgments and
uncertainties affecting the application of those policies, management believes that our unaudited
condensed financial statements are fairly stated in accordance with GAAP, and present a meaningful
presentation of our financial condition and results of operations. We believe the following
critical accounting policies reflect our more significant estimates and assumptions used in the
preparation of our unaudited condensed financial statements.
Research and Development Accruals
As part of the process of preparing its unaudited condensed financial statements, the Company
is required to estimate expenses that the Company believes it has incurred, but has not yet been
billed for. This process involves identifying services and activities that have been performed by
third party vendors on the Companys behalf and estimating the level to which they have been
performed and the associated cost incurred for such service as of each balance sheet date in its
unaudited condensed financial statements. Examples of expenses for which the Company accrues
include professional services, such as those provided by certain CROs and investigators in
conjunction with clinical trials, and fees owed to contract manufacturers in conjunction with the
manufacture of clinical trial materials. The Company makes these estimates based upon progress of
activities related to contractual obligations and also information received from vendors.
A substantial portion of our preclinical studies and all of the Companys clinical trials have
been performed by third-party CROs and other vendors. For preclinical studies, the significant
factors used in estimating accruals include the percentage of work completed to date and contract
milestones achieved. For clinical trial expenses, the significant factors used in estimating
accruals include the number of patients enrolled, duration of enrollment and percentage of work
completed to date.
The Company monitors patient enrollment levels and related activities to the extent possible
through internal reviews, correspondence and status meetings with CROs, and review of contractual
terms. The Companys estimates are dependent on the timeliness and accuracy of data provided by our
CROs and other vendors. If we have incomplete or inaccurate data, we may either underestimate or
overestimate activity levels associated with various studies or trials at a given point in time. In
this event, we could record adjustments to research and development expenses in future periods when
the actual activity level become known. No material adjustments to preclinical study and clinical
trial expenses have been recognized to date.
Incentive Award Accruals
The Company accrues for liabilities under discretionary employee and executive incentive award
plans. These estimated liabilities are based upon progress against corporate objectives approved
by the Board of Directors, compensation levels of eligible individuals, and target bonus percentage
level of employees. The Board of Directors and the Compensation Committee of the Board of
Directors reviews and evaluates the performance against these objectives and ultimately determines
what discretionary payments are made. The Company has accrued incentive compensation expenses of
$767,185 and $1,308,043 at September 30, 2010 and December 31, 2009, respectively, for liabilities
associated with these employee and executive incentive award plans.
Stock-based Compensation
On January 1, 2006, the Company adopted new accounting guidance for accounting for stock-based
compensation. Under the fair value recognition provisions of this accounting guidance, stock-based
compensation cost is measured at the grant date based on the fair value of the award and is
recognized as expense on a straight-line basis over the requisite service period, which is the
vesting period. The Company elected the modified-prospective method, under which prior periods are
not revised for comparative purposes. The valuation provisions of the accounting guidance apply to
new grants and to grants that were outstanding as of the effective date and are subsequently
modified. Estimated compensation for grants that were outstanding as of the effective date of this
new guidance are now being recognized over the remaining service period using the compensation cost
estimated for the required pro forma disclosures.
44
The Company uses the Black-Scholes option pricing model to estimate the fair value of
stock-based awards. The determination of the fair value of stock-based awards on the date of grant
using an option-pricing model is affected by the value of the Companys
stock price as well as assumptions regarding a number of complex and subjective variables.
These variables include expected stock price volatility over the term of the awards, actual and
projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.
Prior to June 5, 2007, the Company was a privately-held company and its common stock was not
publicly traded. The fair value of stock options granted from January 2006 through June 5, 2007
(date of completion of the Merger with Corautus), and related stock-based compensation expense,
were determined based upon quoted stock prices of Corautus, the exchange ratio of shares in the
Merger, and a private company 10% discount for grants prior to March 31, 2007, as this represented
the best estimate of market value to use in measuring compensation. Subsequent to the Merger, the
Company, now publicly held, uses the closing stock price of the Companys common stock on the date
the options are granted to determine the fair market value of each option. The Company revalues
each non-employee option quarterly based on the closing stock price of the Companys common stock
on the last day of the quarter. The Company also revalues options when there is a change in
employment status.
The Company estimates the expected term of options granted by taking the average of the
vesting term and the contractual term of the option. As of September 30, 2010, the Company
estimates common stock price volatility using a hybrid approach consisting of the weighted-average
of actual historical volatility using a look back period of approximately three years, representing
the period of time the Companys stock has been publicly traded, blended with an average of
selected peer group volatility for approximately six years, consistent with the expected life from
grant date. The volatility for the Company and the selected peer group was approximately 128% and
105%, respectively, as of September 30, 2010, and 132% and 93%, respectively as of September 30,
2009. The blended volatility rate was approximately a range from 114% to 118% as of September 30,
2010 and 107% as of September 30, 2009. The Company will continue to incrementally increase the
look back period of the Companys common stock and percent of actual historical volatility until
historical data meets or exceeds the estimated term of the options. Prior to the year ended
December 31, 2009, the Company used peer group calculated volatility as the Company is a
development stage company with limited stock price history from which to forecast stock price
volatility. The risk-free interest rates used in the valuation model are based on U.S. Treasury
issues with remaining terms similar to the expected term on the options. The Company does not
anticipate paying any dividends in the foreseeable future and therefore used an expected dividend
yield of zero.
The Company calculated an annualized forfeiture rate of 4.77% and 2.98% as of September 30,
2010 and 2009, respectively, using the Companys historical data. These rates were used to exclude
future forfeitures in the calculation of stock-based compensation expense as of September 30, 2010
and 2009, respectively.
The assumptions used to value option and restricted stock award grants for the three and nine
months ended September 30, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
|
2010
|
|
2009
|
|
Expected life from grant date
|
|
6.16-7.21
|
|
|
|
|
|
6.16-7.21
|
|
|
6.08
|
|
Expected volatility
|
|
114%-118%
|
|
|
|
%
|
|
114%-118%
|
|
|
105
|
%
|
Risk free interest rate
|
|
1.64%-1.95%
|
|
|
|
%
|
|
1.64%-1.95%
|
|
|
2.89
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes stock-based compensation expenses related to stock options and
warrants for the three and nine months ended September 30, 2010 and 2009, and for the period from
June 14, 2004 (date of inception) to September 30, 2010, which were included in the statements of
operations in the following captions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Research and development expense
|
|
$
|
43,453
|
|
|
$
|
19,115
|
|
|
$
|
122,250
|
|
|
$
|
228,110
|
|
|
$
|
1,201,676
|
|
General and administrative expense
|
|
|
110,034
|
|
|
|
232,121
|
|
|
|
436,035
|
|
|
|
705,206
|
|
|
|
3,240,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
153,487
|
|
|
$
|
251,236
|
|
|
$
|
558,285
|
|
|
$
|
933,316
|
|
|
$
|
4,442,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If all of the remaining non-vested and outstanding stock option awards that have been granted
became vested, we would recognize approximately $616,000 in compensation expense over a weighted
average remaining period of 1.0 year. However, no compensation expense will be recognized for any
stock option awards that do not vest.
45
The following table summarizes stock-based compensation expenses related to employee
restricted stock awards for the three and nine months ended September 30, 2010 and 2009, and for
the period from June 14, 2004 (date of inception) to September 30, 2010, which were included in the
statements of operations in the following captions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 14, 2004
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(date of inception) to
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Research and development expense
|
|
$
|
3,588
|
|
|
$
|
3,934
|
|
|
$
|
10,695
|
|
|
$
|
11,754
|
|
|
$
|
27,063
|
|
General and administrative expense
|
|
|
6,314
|
|
|
|
12,024
|
|
|
|
23,651
|
|
|
|
35,490
|
|
|
|
73,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,902
|
|
|
$
|
15,958
|
|
|
$
|
34,346
|
|
|
$
|
47,244
|
|
|
$
|
100,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If all of the remaining non-vested restricted stock awards that have been granted became
vested, we would recognize approximately $8,000 in compensation expense over a weighted average
remaining period of 0.25 years. However, no compensation expense will be recognized for any stock
option awards that do not vest.
Forward-looking statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements relate to future events or
to the Companys future financial performance and involve known and unknown risks, uncertainties
and other factors that may cause the Companys actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. In some cases, you can
identify forward-looking statements by the use of words such as may, could, expect, intend,
plan, seek, anticipate, believe, estimate, predict, potential, continue or the
negative of these terms or other comparable terminology. You should not place undue reliance on
forward-looking statements because they involve known and unknown risks, uncertainties and other
factors that are, in some cases, beyond the Companys control and that could materially affect
actual results, levels of activity, performance or achievements. Factors that may cause actual
results to differ materially from current expectations include, but are not limited to:
|
|
|
the Companys ability to find a market maker to apply and be cleared by the Financial
Industry Regulatory Authority to quote the Companys common stock on the OTC Bulletin Board;
|
|
|
|
ability and willingness of active market makers in our Companys common stock to trade
the Companys common stock on the Pink Sheets under a piggyback qualification;
|
|
|
|
the Companys ability to obtain necessary financing in the near term, including amounts
necessary to repay the 2009 loan from Bay City Capital following the April 1, 2010 maturity
date and the 2010 loan, as amended, from Bay City Capital by the December 31, 2010 maturity date (or
earlier if certain repayment acceleration provisions are triggered);
|
|
|
|
the Companys ability to control its operating expenses;
|
|
|
|
the Companys ability to comply with covenants included in the loans with Bay City
Capital;
|
|
|
|
the Companys ability to operate its business following the restructuring, as described
in Note 12 in the notes to the unaudited condensed financial statements;
|
|
|
|
the Companys ability to comply with its reporting obligations under the rules and
regulations promulgated by the Securities and Exchange Commission following the
restructuring;
|
|
|
|
the Companys ability to timely recruit and enroll patients in any future clinical
trials;
|
|
|
|
the Companys failure to obtain sufficient data from enrolled patients that can be used
to evaluate VIA-2291, thereby impairing the validity or statistical significance of its
clinical trials;
|
46
|
|
|
the Companys ability to successfully complete its clinical trials of VIA-2291 on
expected timetables and the outcomes of such clinical trials;
|
|
|
|
complexities in designing and implementing cardiometabolic clinical trials using
surrogate endpoints in Phase 1 and Phase 2 clinical trials which may differ from the
ultimate endpoints required for registration of a candidate drug;
|
|
|
|
the results of any future clinical trials of the Company;
|
|
|
|
if the results of the ACS and CEA studies, upon further review and analysis, are revised,
interpreted differently by regulatory authorities or negated by later stage clinical trials;
|
|
|
|
the Companys ability to obtain necessary FDA approvals;
|
|
|
|
the Companys ability to successfully commercialize VIA-2291;
|
|
|
|
the Companys ability to identify potential clinical candidates from the family of DGAT1
compounds licensed and move them into preclinical development;
|
|
|
|
the Companys ability to obtain and protect its intellectual property related to its
product candidates;
|
|
|
|
the Companys potential for future growth and the development of its product pipeline,
including the THR beta agonist candidate and the other compounds licensed from Roche;
|
|
|
|
the Companys ability to obtain strategic opportunities to partner and collaborate with
large biotechnology or pharmaceutical companies to further develop VIA-2291;
|
|
|
|
the Companys ability to form and maintain collaborative relationships to develop and
commercialize our product candidates;
|
|
|
|
general economic and business conditions; and
|
|
|
|
the other risks described under the heading Risk Factors in the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2009, as supplemented by the risks
described under Risk Factors in Part II, Item 1A in the Companys Quarterly Reports on
Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010.
|
All forward-looking statements attributable to the Company or persons acting on the Companys
behalf are expressly qualified in their entirety by the cautionary statements set forth above.
Forward-looking statements speak only as of the date they are made, and the Company undertakes no
obligation to update publicly any of these statements in light of new information or future events.
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that
information required to be disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms and to ensure that
information required to be disclosed by the Company in the reports that it files or submits under
the Exchange Act is accumulated and communicated to management to allow timely decisions regarding
required disclosures. As of the end of the period covered by this quarterly report, an evaluation
was carried out under the supervision and with the participation of the Companys management,
including its Chief Executive Officer and Principal Financial and Accounting Officer, of the
effectiveness of its disclosure controls and procedures. Based on that evaluation, the Companys
Chief Executive Officer and Principal Financial and Accounting Officer concluded that the Companys
disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on
Form 10-Q, were effective at the reasonable assurance level to ensure that information required to
be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in United States Securities
and Exchange Commission rules and forms and to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the management, including CEO and PFO, as appropriate to allow timely decisions
regarding required disclosures.
47
Changes in Internal Control Over Financial Reporting
On March 26, 2010, the Companys Board of Directors approved a restructuring of the Company to
reduce its workforce and operating costs effective March 31, 2010. The reduction in workforce
decreased total employees by approximately 63% to a total of six employees and increased the focus
of future operating expense or research and development activities.
As a result of the restructuring, the Company made significant changes in internal control
over financial reporting to mitigate the risks associated with a lack of segregation of duties that
resulted from the reduction in force. Specifically, the Company increased the use of highly
qualified financial consultants to analyze all financial transactions for the three and nine months
ended September 30, 2010, prepare bank reconciliations for each month in the three months ended
September 30, 2010, and prepare and independently review financial statements for external
reporting purposes in accordance with GAAP for the review and approval of the Companys Chief
Executive Officer and Principal Financial and Accounting Officer.
The changes in internal control over financial reporting provides management with reasonable
assurance that (1) the maintenance of records is in reasonable detail and accurately and fairly
reflects the transactions and dispositions of the assets of the Company; (2) transactions are
recorded as necessary to permit preparation of financial statements in accordance with GAAP and
receipts and expenditures are being made only in accordance with authorizations of management and
directors of the Company; and (3) any unauthorized acquisition, use, or disposition of the
Companys assets that could have a material effect on the financial statements will be prevented or
timely detected.
PART II. OTHER INFORMATION
Item 1A. Risk Factors
The risk factors set forth in our Annual Report on Form 10-K for the year ended December 31,
2009 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010
have not materially changed.
Item 5. Other Information
2010 Loan Amendment
On November 15, 2010, the Company entered into an amendment to the 2010 Loan Agreement (2010
Loan Amendment) to enable the Company to borrow up to an additional aggregate principal amount of
$3,000,000, pursuant to the terms of amended and restated promissory notes (collectively, the 2010
Amended and Restated Notes) delivered under the 2010 Loan Amendment. Subject to the Lenders
approval, the Company may borrow in the aggregate up to an additional $2,800,000 at subsequent
closings pursuant to the terms of the 2010 Loan Amendment and 2010 Amended and Restated Notes.
The 2010 Amended and Restated Notes are secured by a lien on all of the assets of the Company.
Amounts borrowed under the 2010 Amended and Restated Notes accrue interest at the rate of fifteen
percent (15%) per annum, which increases to eighteen percent (18%) per annum following an event of
default. Unless earlier paid in accordance with the terms of the 2010 Amended and Restated Notes,
all unpaid principal and accrued interest shall become fully due and payable on the earlier to
occur of (i) December 31, 2010, (ii) the closing of a debt, equity or combined debt/equity
financing resulting in gross proceeds or available credit to the Company of not less than
$20,000,000, and (iii) the closing of a transaction in which the Company sells, conveys, licenses
or otherwise disposes of a majority of its assets or is acquired by way of a merger, consolidation,
reorganization or other transaction or series of transactions pursuant to which stockholders of the
Company prior to such acquisition own less than 50% of the voting interests in the surviving or
resulting entity.
Pursuant to the 2010 Loan Amendment, the Company issued to the Lenders additional warrants
(the 2010 Additional Warrants) to purchase an aggregate
of 42,253,521 shares (the 2010 Additional
Warrant Shares) of common stock at $0.071 per share. The number of 2010 Additional Warrant Shares
is equal to the $3,000,000 maximum aggregate principal amount that may be borrowed under the 2010
Loan Amendment, divided by the $0.071 per share exercise price of the 2010 Additional Warrants. The
2010 Additional Warrant Shares vest based on the amount of borrowings under the 2010 Amended and
Restated Notes. Based on the $201,397 initial borrowing, which amount
includes accrued and unpaid interest under the Bridge Note, 2,836,577 of the 2010 Warrant Shares vested
immediately on the date of grant. At each subsequent closing, the 2010 Additional Warrants will
vest with respect to the additional amount borrowed by the Company. The 2010 Additional Warrant
Shares, to the extent they are vested and exercisable, are
exercisable at any time until November 15,
2015.
In connection with the 2010 Loan Amendment and the 2010 Additional Warrants, on November 15,
2010, the Company also amended that certain Second Amended and Restated Registration Rights
Agreement, dated as of March 12, 2009, as amended by that certain First Amendment to the Second
Amended and Restated Registration Rights Agreement, dated as of March 26, 2010, (as so amended, the
Registration Rights Agreement) with the Lenders and certain stockholders of the Company (the
Lenders and certain stockholders collectively, the Stockholders), to include the 2010 Additional
Warrants Shares in the Registration Rights Agreement, pursuant to which the Company has granted
certain demand, shelf and piggyback registration rights to such Stockholders to register their
shares of common stock with the SEC so that such shares become freely tradeable without restriction
under the Securities Act.
48
The Lenders beneficially owned in the aggregate approximately 90% of the Companys common
stock immediately prior to the 2010 Loan Amendment. Fred B. Craves, Ph.D., a member of the
Companys Board of Directors, is the founder, chairman, and a manager of Bay City Capital LLC, the
beneficial owner of the shares held by the Lenders. Dr. Craves also owns 22.0588% of the membership
interests in Bay City Capital LLC. Douglass Given, the chairman of the Companys Board of Directors
is an investment partner of Bay City Capital LLC.
The 2010 Loan Amendment was approved by the Companys Board of Directors on November 12, 2010
following the recommendation of a special committee of the Companys Board of Directors.
The 2010 Loan Amendment, the 2010 Amended and Restated Notes, the 2010 Additional Warrants and
the second amendment to the Registration Rights Agreement (collectively, the Filed Agreements)
have been filed as exhibits to this Form 10-Q to provide investors and security holders with
information regarding their terms. They are not intended to provide any other factual information
about the Company. The representations, warranties, and covenants contained in the Filed Agreements
were made only for purpose of the Filed Agreements and as of specific dates, were solely for the
benefit of the parties to the Filed Agreements, and may be subject to limitations agreed upon by
the contracting parties, including being qualified by confidential disclosures exchanged between
the parties in connection with the execution of the Filed Agreements. The representations and
warranties may have been made for the purposes of allocating contractual risk between the parties
to the Filed Agreements instead of establishing
these matters as facts, and may be subject to standards of materiality applicable to the
contracting parties that differ from those applicable to investors. Investors and security holders
(other than the Lenders who are a party to the Filed Agreements) are not third-party beneficiaries
under the Filed Agreements and should not rely on the representations, warranties and covenants or
any descriptions thereof as characterizations of the actual state of facts or condition of the
Company. Moreover, information concerning the subject matter of the representations and warranties
may change after the date of the Filed Agreements, which subsequent information may or may not be
fully reflected in the Companys public disclosures.
The 2010 Additional Warrants issued to the Lenders were offered and issued pursuant to a
private placement in reliance upon the exemption from registration pursuant to Rule 506 under the
Securities Act. Each Lender represented to the Company that it is an accredited investor as
defined in Rule 501(a) of Regulation D and that such Lender is acquiring the securities for
investment purposes for such Lenders own account and not with a view toward distribution of the
securities. The Company advised the Lenders that the 2010 Additional Warrants and the securities
underlying the 2010 Additional Warrants have not been registered under the Securities Act and may
not be sold unless they are registered under the Securities Act or sold pursuant to a valid
exemption from registration under the Securities Act. The 2010 Additional Warrants issued to the
Lenders contain legends that the 2010 Additional Warrants have not been registered under the
Securities Act and states the restrictions on transfer and resale as described above. Additionally,
the Company did not engage in any general solicitation or advertisement in connection with the
issuance of the 2010 Additional Warrants.
Item 6. Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
3.1
|
|
|
Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Form 10-K filed on March 22, 2005
and incorporated herein by reference)
|
|
|
|
|
|
|
3.2
|
|
|
Certificate of Amendment to the Restated Certificate of Incorporation (filed as Exhibit 3.1 to the
Form 10-KSB filed on March 30, 2000 and incorporated herein by reference)
|
|
|
|
|
|
|
3.3
|
|
|
Certificate of Amendment to the Restated Certificate of Incorporation (filed as Exhibit 3.3 to the
Form 10-K filed on March 28, 2003 and incorporated herein by reference)
|
|
|
|
|
|
|
3.4
|
|
|
Certificate of Amendment to the Restated Certificate of Incorporation (filed as Exhibit 3.4 to the
Form 10-K filed on March 28, 2003 and incorporated herein by reference)
|
|
|
|
|
|
|
3.5
|
|
|
Certificate of Amendment to the Restated Certificate of Incorporation (filed as Exhibit 3.5 to the
Form 10-K filed on March 28, 2003 and incorporated herein by reference)
|
|
|
|
|
|
|
3.6
|
|
|
Amended and Restated Certificate of Designation of Preferences and Rights of Series C Preferred Stock
(filed as Annex H to the Form S-4/A filed on December 19, 2002 and incorporated herein by reference)
|
|
|
|
|
|
|
3.7
|
|
|
Certificate of Amendment to the Restated Certificate of Incorporation (Increase in Authorized Shares)
(filed as Exhibit 3.7 to the Form 10-Q filed on August 14, 2007 and incorporated herein by reference)
|
|
|
|
|
|
|
3.8
|
|
|
Certificate of Amendment to the Restated Certificate of Incorporation (Reverse Stock Split) (filed as
Exhibit 3.8 to the Form 10-Q filed on August 14, 2007 and incorporated herein by reference)
|
|
|
|
|
|
|
3.9
|
|
|
Certificate of Amendment to the Restated Certificate of Incorporation (Name Change) (filed as Exhibit
3.9 to the Form 10-Q filed on August 14, 2007 and incorporated herein by reference)
|
49
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
3.10
|
|
|
Fourth Amended and Restated Bylaws (filed as Exhibit 3.1 to the Form 8-K filed on April 17, 2008 and
incorporated herein by reference)
|
|
|
|
|
|
|
4.1
|
|
|
Warrant issued to Trout Partners LLC, dated July 31, 2007 (filed as Exhibit 99.1 to the Form 8-K filed
on August 6, 2007 and incorporated herein by reference)
|
|
|
|
|
|
|
4.2
|
|
|
Warrant issued to Redington, Inc., dated March 1, 2008 (filed as Exhibit 4.2 to the Form 10-K filed on
March 28, 2008 and incorporated herein by reference)
|
|
|
|
|
|
|
4.3
|
|
|
Warrant to Purchase Common Stock of VIA Pharmaceuticals, Inc. issued to Bay City Capital Fund IV Fund,
L.P., dated March 12, 2009 (filed as Exhibit 4.1 to the Form 8-K filed on March 12, 2009 and
incorporated herein by reference)
|
|
|
|
|
|
|
4.4
|
|
|
Warrant to Purchase Common Stock of VIA Pharmaceuticals, Inc. issued to Bay City Capital Fund IV
Co-Investment Fund, L.P., dated March 12, 2009 (filed as Exhibit 4.2 to the Form 8-K filed on March
12, 2009 and incorporated herein by reference)
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4.5
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Warrant to Purchase Common Stock of VIA Pharmaceuticals, Inc. issued to Bay City Capital Fund IV Fund,
L.P., dated March 26, 2010 (filed as Exhibit 4.5 to the Form 10-K filed on March 31, 2010 and
incorporated herein by reference)
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4.6
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Warrant to Purchase Common Stock of VIA Pharmaceuticals, Inc. issued to Bay City Capital Fund IV
Co-Investment Fund, L.P., dated March 26, 2010 (filed as Exhibit 4.6 to the Form 10-K filed on March
31, 2010 and incorporated herein by reference)
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4.7
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*
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Warrant to Purchase Common Stock of VIA Pharmaceuticals, Inc. issued to Bay City Capital Fund
IV Fund, L.P., dated November 15, 2010
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4.8
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*
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Warrant to Purchase Common Stock of VIA Pharmaceuticals, Inc. issued to Bay City Capital Fund
IV Co-Investment Fund, L.P., dated November 15, 2010
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4.9
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Second Amended and Restated Registration Rights Agreement, dated as of March 12, 2009, by and among
VIA Pharmaceuticals, Inc. and the parties named therein (filed as Exhibit 4.3 to the Form 8-K filed on
March 12, 2009 and incorporated herein by reference)
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4.10
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Amendment No. 1 to the Second Amended and Restated Registration Rights Agreement, dated as of March
26, 2010, by and among VIA Pharmaceuticals, Inc. and the parties named therein (filed as Exhibit 4.8
to the Form 10-K filed on March 31, 2010 and incorporated herein by reference)
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4.11
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*
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Amendment No. 2 to the Second Amended and Restated Registration Rights Agreement, dated as of
November 15, 2010, by and among VIA Pharmaceuticals, Inc. and the parties named therein
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10.1
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Promissory Note, dated as of October 29, 2010, by VIA Pharmaceuticals, Inc. and Bay City Capital Fund
IV, L.P. (filed as Exhibit 10.1 to the Form 8-K filed on November 4, 2010 and incorporated herein by
reference)
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10.2
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*
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Omnibus Amendment, dated as of November 15, 2010 by and among VIA Pharmaceuticals, Inc., Bay
City Capital Fund IV, L.P., Bay City Capital Fund IV Co-Investment Fund, L.P., and Bay City
Capital LLC
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10.3
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*
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Amended and Restated Promissory Note, dated as of November 15, 2010, by VIA Pharmaceuticals,
Inc. and payable to Bay City Capital Fund IV, L.P.
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10.4
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*
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Amended and Restated Promissory Note, dated as of November 15, 2010, by VIA Pharmaceuticals,
Inc. and payable to Bay City Capital Fund IV Co-Investment Fund, L.P.
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31.1
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*
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Principal Executive Officers Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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*
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Principal Financial Officers Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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*
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Certification Pursuant to 18 U.S.C. § 1350 (Section 906 of Sarbanes-Oxley Act of 2002).
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32.2
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*
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Certification Pursuant to 18 U.S.C. § 1350 (Section 906 of Sarbanes-Oxley Act of 2002).
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50
SIGNATURE
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 thereunto duly authorized.
Date: November 15, 2010
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VIA PHARMACEUTICALS, INC.
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By:
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/s/ Karen S. Wright
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Karen S. Wright
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Vice President, Controller
Duly Authorized Officer and
Principal Financial
Officer
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51
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