ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is currently traded on the Pink Sheets, a real-time inter-dealer electronic quotation and trading system in the over-the-counter securities market, under the symbol “VIAP”. Prior to January 4, 2010, our common stock was traded on The NASDAQ Capital Market under the same ticker symbol. Effective January 4, 2010, trading in our common stock on The NASDAQ Capital Market was suspended and NASDAQ initiated procedures to delist our common stock. As of March 1, 2011, there were approximately 122 registered holders of record of common stock.
The following table shows the high and low sales prices for our common stock on The NASDAQ Capital Market or Pink Sheets, as applicable, during the fiscal year ended 2009 and 2010, respectively:
Shortly following the filing of this Annual Report on Form 10-K, the Company plans to file a Form 15, Notice of Termination of Registration and Suspension of Duty to File, with the SEC to voluntarily terminate its registration under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company has determined that deregistering under the Exchange Act would result in significant time and cost savings to the Company. This will result in less information about the Company being available to shareholders and investors immediately following the filing of the Form 15. It is expected that the deregistration of our common stock under the Exchange Act will become effective ninety (90) days after the date on which the Form 15 is filed. The Company is eligible to deregister under the Exchange Act because its common stock is held of record by fewer than 500 persons and its assets have not exceeded $10 million on the last day of each of its three most recent fiscal years.
The Pink Sheets does not require Exchange Act registration or that the Company meet the reporting requirements of the Exchange Act. The Company expects its common stock will continue to trade in the Pink Sheets, so long as market makers demonstrate an interest in trading in the Company’s common stock. The Company can give no assurance that its common stock will continue to be actively traded on the Pink Sheets or on any other quotation medium.
Dividend Policy
We have never paid any cash dividends on our common stock to date. We currently anticipate that we will retain all future earnings, if any, to fund the development and growth of our business and do not anticipate paying any cash dividends for at least the next five years, if ever.
The information set forth below should be read in conjunction with “Item 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition contains certain statements that are not strictly historical and are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a high degree of risk and uncertainty. Our actual results may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in our operations, development efforts and business environment, including those set forth under the Section entitled “Risk Factors” in Item 1A, and 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.
Corporate History and Description of Merger
On June 5, 2007, privately-held VIA Pharmaceuticals, Inc. completed a reverse merger transaction (the “Merger”) with Corautus Genetics Inc. Until shortly before the Merger, Corautus Genetics Inc. (“Corautus”) was primarily focused on the clinical development of gene therapy products using a vascular growth factor gene. These activities were discontinued in November 2006. Privately-held VIA Pharmaceuticals, Inc. was formed in Delaware and began operations in June 2004. Unless otherwise specified, the “Company,” “VIA,” “we,” “us,” and “our” refers to the business of the combined company after the Merger and the business of privately-held VIA Pharmaceuticals, Inc. prior to the Merger. Unless specifically noted otherwise, “Corautus Genetics Inc.” or “Corautus” refers to the business of Corautus Genetics Inc. prior to the Merger.
Business Overview
VIA Pharmaceuticals, Inc. is a biotechnology company focused on the treatment of cardiovascular and metabolic diseases. VIA is building a pipeline of small-molecule drugs that target cardiovascular and metabolic diseases. Metabolic diseases such as diabetes, obesity and dyslipidemia are highly prevalent world-wide and have both genetic and environmental etiologies. Ultimately, these metabolic diseases progress into more severe forms of diabetes and cardiovascular disease leading to diabetic complications such as blindness, heart attacks and strokes.
VIA’s current drug development pipeline includes (i) VIA-3196, a Phase-1 ready liver-directed thyroid hormone receptor (“THR”) beta agonist that targets dyslipidemia, including high LDL cholesterol, high triglycerides and elevated Lp(a), (ii) a Diacylglycerol Acyl Transferase 1 (“DGAT1”) inhibitor for diabetes, with upside potential in weight control and dyslipidemia, and (iii) VIA’s 5-LO inhibitor, VIA-2291, which targets the treatment of atherosclerotic plaque, an underlying cause of heart attack, stroke and other vascular diseases.
In December 2008, the Company entered into two research, development and commercialization agreements with Hoffman-LaRoche Inc. and Hoffman-LaRoche Ltd. (collectively, “Roche”) to license, on an exclusive, worldwide basis, two sets of compounds (the “Roche Licenses”). The first license is for Roche’s 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 Roche’s preclinical DGAT1 metabolic disorders program.
Liver-directed THR Beta Agonist (VIA-3196)
The liver-directed THR beta agonist, VIA-3196, is a clinically ready candidate for dyslipidemia to lower LDL cholesterol, triglyceride levels and Lp(a). 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. The mechanism by which THR beta lowers cholesterol is distinct from statins and is believed to primarily be mediated by increased cholesterol excretion out of the body through the bile. The compound also reduces triglycerides in the liver by increasing fat metabolism. Preclinical studies demonstrated a rapid reduction of non-HDL cholesterol and the drug was shown to be synergistic with statins in animal studies. VIA will investigate the possibility of using the THR beta agonist alone or in combination with statins for the treatment of hypercholesterolemia in high risk patients whose LDL cholesterol is not controlled by statins alone. 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. The Phase 1 clinical trials planned for VIA-3196 anticipated in 2011 will provide safety information and demonstrate proof of concept for LDL cholesterol lowering. The Company filed an Investigational New Drug (“IND”) application with the FDA on September 3, 2010 (IND #109408). The IND is required before the Company can proceed with human clinical trials. The IND contains the plans for the clinical studies and gives a complete picture of the drug, including its structural formula, animal test results, and manufacturing information. The IND is currently open to conduct the initial Phase1 clinical study.
DGAT1
The preclinical DGAT1 metabolic disorders program targets the treatment of type 2 diabetes and has potential benefit in dyslipidemia and body weight loss. 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 an innovative class of compounds that may modify the way that lipids are absorbed in the intestine leading to elevation of peptides. 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. VIA intends to identify potential clinical candidates from the compounds in this program and begin IND-enabling studies.
VIA-2291
In 2005, the Company identified 5-Lipoxygenase (“5LO”) as a key target of interest for treating atherosclerosis. 5LO 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 5LO 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 5LO 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 selective and reversible inhibitor of 5-LO, which is a key enzyme in the biosynthesis of leukotrienes (important mediators of inflammation involved in the development and progression of atherosclerosis). Potentially a complement to current standard of care therapies that treat risk factors, such as statins, antiplatelet and blood pressure medications, VIA-2291 could be beneficial to more than 15 million patients who suffer from atherosclerosis and cardiovascular disease.
VIA-2291 was studied in three Phase 2 clinical trials with novel study designs aimed at providing evidence of plaque modification and systemic anti-inflammatory effects as early as possible in the clinical development process.
VIA completed the Phase 2 ACS Trial in 191 patients at 15 clinical sites in the United States and Canada for patients with Acute Coronary Syndrome (ACS) who experienced a recent heart attack. In addition, the Company has completed the Phase 2 CEA Trial of VIA-2291 at clinical sites in Italy for patients who underwent a carotid endarterectomy (“CEA”).
Results from the CEA and ACS Phase 2 trials were presented at the American Heart Association (AHA) 2008 Scientific Sessions on November 9, 2008. A sub-study of over 85 patients in the ACS Phase 2 trial elected to continue in the study for an additional 12 weeks, receiving either placebo of VIA-2291 on top of standard medical care. Following treatment these patients received a 64 slice multi-detector computed tomography (“MDCT”) scan which was compared to a baseline scan. Results of this sub-study were presented May 2009 at the AHA Arteriosclerosis, Thrombosis and Vascular Biology Annual Conference 2009. The results of the ACS study are published in Circulation Cardiovascular Imaging by lead author and principal investigator Jean-Claude Tardif (2010;3:298-307).
VIA completed its third Phase 2 clinical trial of VIA-2291, the FDG-PET Trial - an experimental non-invasive imaging technique that utilizes Positron Emission Tomography with fluorodeoxyglucose tracer (“FDG-PET”) to measure the impact of VIA-2291 on reducing FDG uptake into vascular beds. The Company enrolled 52 patients following an Acute Coronary Syndrome event, such as heart attack or unstable angina, into the 24 week, randomized, double blind, placebo-controlled study, which was run at clinical sites in the United States and Canada.
Overall, the studies demonstrated potent dose-dependent inhibition of Leukotrienes B4 and E4 by VIA-2291. Systemic and plaque anti-inflammatory effects were observed, including statistically significant inhibition of hsCRP with the 100 mg dose. Inflammatory genes in unstable plaques were down-regulated with VIA-2291 treatment. Serial multi-detector Computed Tomography (“MDCT”) indicated a statistically significant reduction in non-calcified plaque volume and the number of patients developing new coronary lesions with VIA-2291 treatment.
The Phase 3 trial for VIA -2291 will test the ability of the drug to reduce heart attacks and strokes in a high risk cardiovascular patient population. Due to the size and cost of such a trial the company believes it is best undertaken with a pharmaceutical company partner. To date VIA has been unable to establish such a collaboration. The company continues to evaluate strategies for partnering the program but currently intends to conduct no further internally funded activities.
Going Concern Uncertainty
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 December 31, 2010, the Company’s accumulated deficit was approximately $91.2 million. The Company had $84,001 in cash at December 31, 2010. In connection with the loan amendments discussed below, the Company borrowed an additional $500,000 on January 14, 2011 and $1,498,603 on March 24, 2011. 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 2009 Loan Agreement, the 2010 Loan Agreement, and the 2010 Loan Amendment (which loan agreements and amendments are described below), and to meet its ongoing working capital requirements. Moreover, in connection with these loans, the Company must also satisfy certain conditions and comply with covenants, including covenants relating to the Company’s 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. These restrictions may limit the Company’s ability to pursue its business strategies and obtain additional funds. 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 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 Company’s 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 the preclinical development of one or more of its other preclinical candidates;
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curtail its licensing activities that are designed to identify molecular targets and small molecules for treating cardiovascular disease;
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relinquish rights to product candidates, development programs, or discovery development programs that it may otherwise seek to develop or commercialize on its own; and
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delay, reduce the scope of, or eliminate one or more of its research and development programs, or ultimately cease operations.
On March 26, 2010, the Company’s 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 revenue since June 14, 2004, the inception of the Company. The Company 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 arrangement. 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. The Company expects to incur substantial and increasing losses as it continues to expend substantial resources seeking to successfully research, develop, manufacture, obtain regulatory approval for, and commercialize its product candidates.
Until the Company can establish profitable operations to finance its cash requirements, the Company’s 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.
As more fully described in Note 6 in the notes to the financial statements, in March 2009, the Company entered into a Note and Warrant Purchase Agreement (the “2009 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 Company’s intellectual property. On March 12, 2009, the Company borrowed the initial $2.0 million available under the 2009 Loan Agreement. Subsequently, the Company made $2.0 million borrowings under the 2009 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 2009 Loan Agreement on September 11, 2009. According to the terms of the original 2009 Loan Agreement, the aggregate loan amount 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 2009 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 2009 Loan Agreement. 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 rate of 18% per annum beginning April 1, 2010.
As more fully described in Note 6 in the notes to the financial statements, in March 2010, the Company entered into a second 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 $3.0 million, pursuant to the terms of promissory notes issued under the 2010 Loan Agreement. The Company secured the loan with all of its assets, including the Company’s 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. The original 2010 Loan Agreement notes are secured by a lien on all of the assets of the Company. Amounts borrowed under the original 2010 Loan Agreement 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 original 2010 Loan Agreement 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 failed to repay the debt and all related interest to the Lenders due on December 31, 2010. On January 14, 2011, the Company entered into an amendment to the 2010 Loan Agreement and 2010 Loan Amendment to extend the maturity date under the 2010 Loan Agreement and 2010 Loan Amendment from December 31, 2010 to June 30, 2011 and on March 24, 2011, the Company entered into a second amendment to further extend the maturity date to September 30, 2011.
As more fully described in Note 6 in the notes to the financial statements, 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 amended and restated promissory notes issued under the 2010 Loan Amendment. The Company accrued $1,397 in unpaid interest for the period October 29, 2010 to November 15, 2010, which is included in the Company’s statement of operations.
As more fully described in Note 6 in the notes to the 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 issued under the 2010 Loan Amendment. Subject to the Lenders’ approval, as of December 31, 2010, the Company may borrow in the aggregate up to an additional $1,998,603 at subsequent closings pursuant to the terms of the 2010 Loan Amendment and the amended and restated promissory notes issued under the 2010 Loan Amendment. On November 15, 2010, the $201,397 outstanding principal and unpaid interest on the Bridge Note were automatically converted into obligations of the Company under the 2010 Loan Amendment as advances. During the three months ended December 31, 2010, the Company borrowed an additional $800,000 on November 22, 2010. The original 2010 Loan Amendment notes are secured by a lien on all of the assets of the Company. Amounts borrowed under the 2010 Loan Amendment 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 original 2010 Loan Amendment 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. On January 14, 2011, the Company entered into an amendment to the 2010 Loan Agreement and 2010 Loan Amendment to extend the maturity date under the 2010 Loan Agreement and 2010 Loan Amendment from December 31, 2010 to June 30, 2011 and on March 24, 2011, the Company entered into a second amendment to further extend the maturity date to September 30, 2011.
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 Company received the full amount of the grant on January 19, 2011.
All outstanding principal and accrued interest under the 2009 Loan Agreement was due on April 1, 2010. All outstanding principal and accrued interest under the 2010 Loan Agreement and 2010 Loan Amendment was originally due on December 31, 2010. The Company was not able to repay the loans on the respective due dates. On January 14, 2011, the Company entered into an amendment to the 2010 Loan Agreement and 2010 Loan Amendment to extend the maturity date under the 2010 Loan Agreement and 2010 Loan Amendment from December 31, 2010 to June 30, 2011 and on March 24, 2011, the Company entered into a second amendment to further extend the maturity date to September 30, 2011. The Lenders may terminate the 2009 Loan Agreement, 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.
Revenue
The Company has not generated revenue since June 14, 2004, the inception of the Company. The Company 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 arrangement.
Research and Development Expenses
The Company is focused on the development of compounds for the treatment of cardiovascular and metabolic disease. The Company’s VIA-2291 compound is a selective and reversible inhibitor of 5-LO, which is a key enzyme in the biosynthesis of leukotrienes (important mediators of inflammation involved in the development and progression of atherosclerosis). Potentially a complement to current standard of care therapies that treat risk factors, such as statins, antiplatelet and blood pressure medications, VIA-2291 could be beneficial to more than 15 million patients who suffer from atherosclerosis and cardiovascular disease. The Company has completed the ACS, CEA and FDG-PET Phase 2 clinical trials 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 Company’s 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 Company’s intention to use the imaging results of the FDG-PET study in determining the future clinical plans for VIA-2291.
The Company’s THR (VIA-3196) compound is a clinically ready candidate for the control of cholesterol, triglyceride levels and potential in insulin sensitization/diabetes The Company anticipates beginning Phase 1 clinical trials for VIA-3196 in 2011 to provide safety information and demonstrate proof of concept for LDL cholesterol lowering. The Company filed an Investigational New Drug (“IND”) application with the FDA on September 3, 2010 (IND #109408). The IND is required before the Company can proceed with human clinical trials. The IND contains the plans for the clinical studies and gives a complete picture of the drug, including its structural formula, animal test results, and manufacturing information. The IND is currently open to conduct the initial Phase1 clinical study. In preparation for the Phase 1 clinical trials, the Company has made significant progress in drug development and stability testing in 2009 and 2010.
The preclinical DGAT1 metabolic disorders program targets the treatment of type 2 diabetes and has potential benefit in dyslipidemia and body weight loss. VIA intends to identify potential clinical candidates from the compounds in this program and begin IND-enabling studies.
Research and development (“R&D”) expense represented 30% and 46% of total operating expense for the year ended December 31, 2010 and 2009, respectively, and 54% for the period from June 14, 2004 (date of inception) to December 31, 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:
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compensation of personnel associated with research and development activities, including consultants, investigators, and contract research organizations (“CROs”);
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laboratory supplies and materials;
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costs associated with the manufacture of product candidates for preclinical testing and clinical studies;
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preclinical costs, including toxicology and carcinogenicity studies;
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fees paid to professional service providers for independent monitoring and analysis of the Company’s clinical trials;
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depreciation and equipment; and
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allocated costs of facilities and infrastructure.
The following reflects the breakdown of the Company’s research and development expenses generated internally versus externally for the years ended December 31, 2010 and 2009, and for the period from June 14, 2004 (date of inception) to December 31, 2010:
Externally generated research and development expenses consist primarily of the following:
Internally generated research and development expenses consist primarily of the following:
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, ACS, and FDG-PET Phase 2 clinical trials and related expenses have decreased as a result of completing the studies. 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 Company’s 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 Company’s 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.
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 years ended December 31, 2010 and 2009
The following table summarizes the Company’s results of operations with respect to the items set forth in such table for the years ended December 31, 2010 and 2009 together with the change in such items in dollars and as a percentage:
Revenue. The Company did not generate any revenue in the years ended December 31, 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 70%, or approximately $4.3 million, from $6.1 million in the year ended December 31, 2009 to $1.8 million in the year ended December 31, 2010. Clinical trial and preclinical related CRO and investigator clinical trial related expenses decreased by approximately $1.0 million from $1.0 million in the year ended December 31, 2009 to approximately $0 in the year ended December 31, 2010. The ACS and CEA Phase 2 clinical trials were completed in 2008. As a result, related CRO and investigator expenses were approximately $0 for each trial in the years ended December 31, 2010 and 2009. FDG-PET CRO and investigator expenses decreased approximately $1.0 million from $1.0 million in the year ended December 31, 2009 to approximately $0 in the year ended December 31, 2010 as last patient visit occurred in 2009. Lab data analysis and other R&D expenses decreased $1.0 million from $1.1 million in the year ended December 31, 2009 to approximately $100,000 in the year ended December 31, 2010 primarily due to an $200,000 decrease in ACS, CEA and FDG-PET Phase 2 clinical trial expenses from $200,000 in the year ended December 31, 2009 to approximately $0 in the year ended December 31, 2010 due to the completion of the studies in 2009, a $200,000 decrease in THR drug development expenses from $400,000 in the year ended December 31, 2009 to $200,000 in the year ended December 31, 2010 due to the timing of work associated with THR drug development, a $500,000 decrease in VIA-2291 general development from $300,000 in the year ended December 31, 2009 to ($200,000) in the year ended December 31, 2010 due to the receipt of a $200,000 QTDP grant from the Internal Revenue Service in November of 2010 and due to the substantial completion of clinical work in the development of VIA-2291 in 2009, and a $100,000 decrease in expenses associated with the DNA isolation and genotyping study that is associated with the development of VIA-2291 from $100,000 in the year ended December 31 2009 to $0 in the year ended December 31, 2010. Employee related expenses including salary, benefits, stock-based compensation, travel and entertainment expense, information technology and facilities expenses, decreased $900,000 from $2.4 million in the year ended December 31, 2009 to $1.5 million in the year ended December 31, 2010 primarily due to the restructuring in March 2010 whereby headcount was reduced to six employees. In-licensing expenses decreased $400,000 from $400,000 in the year ended December 31, 2009 to $0 in the year ended December 31, 2010 due to the in-licensing of THR and DGAT1 in the year ended December 31, 2009 and no in-licensing activities in the year ended December 31, 2010. Consulting expenses decreased $900,000 from $1.1 million in the year ended December 31, 2009 to $200,000 in the year ended December 31, 2010. The Company also incurred $65,000 in expenses associated with the termination of the lease of research and development office space in Princeton, New Jersey in the year ended December 31, 2010.
General and Administrative Expense. General and administrative expense decreased 43%, or approximately $3.1 million, from $7.2 million in the year ended December 31, 2009 to $4.1 million in the year ended December 31, 2010 due primarily to the restructuring in March 2010 whereby headcount was reduced to six employees. Employee related expenses, including salary and benefits, stock-based compensation and travel and entertainment expenses decreased $2.2 million from $4.0 million in the year ended December 31, 2009 to $1.8 million in the year ended December 31, 2010, primarily to the decrease in headcount that resulted from the March 2010 restructuring of the Company. Corporate and facilities general and administrative expenses decreased $900,000 from $2.7 million in the year ended December 31, 2009 to $1.8 million in the year ended December 31, 2010 primarily due to a $500,000 decrease in audit and legal expenses from $1.5 million the year ended December 31, 2009 to $1.0 million in the year ended December 31, 2010, a $200,000 decrease in investor relations and other public company expenses from $400,000 in the year ended December 31, 2009 to $200,000 in the year ended December 31, 2010, and a $200,000 decrease in facilities and IT related expenses from $800,000 in the year ended December 31, 2009 to $600,000 in the year ended December 31, 2010. The Company was able to hold consulting expenses at approximately $500,000 in the years ended December 31, 2010 and 2009.
Interest Expense. Interest expense decreased $4,171,000 from $7,733,000 in the year ended December 31, 2009 to $3,562,000 in the year ended December 31, 2010. Interest on the note payable - affiliate increased $1,215,000 from $789,000 in the year ended December 31, 2009 to $2,004,000 in the year ended December 31, 2010 due to the accumulation of increasing levels of debt over time. Interest expense incurred in the amortization of the discount of the notes payable - affiliate decreased $5,386,000 from $6,944,000 in the year ended December 31, 2009 to $1,558,000 in the year ended December 31, 2010 due to all of the discount associated with the $10.0 million 2009 Loan Agreement being fully amortized in 2009 and due to the reduction in the amount of borrowing year over year.
Other Expense/Income. Other expense increased $27,000 from other income of $9,000 in the year ended December 31, 2009 to other expense of $18,000 in the year ended December 31, 2010. Unrealized losses on foreign exchange transactions decreased $4,000 from $4,000 in the year ended December 31, 2009 to $0 in the year ended December 31, 2010; realized losses on foreign exchange transactions increased $24,000 from realized gains $13,000 in the year ended December 31, 2009 to realized losses of $11,000 in the year ended December 31, 2010. The foreign exchange transactions were incurred primarily in connection with the CEA Phase 2 clinical trial and in patent legal expenses incurred with vendors who invoiced in foreign currency. Losses on the disposal of fixed assets increased $7,000 from approximately $0 in the year ended December 31, 2009 to $7,000 in the year ended December 31, 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 December 31, 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 Company’s 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 2009 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 financial statements. The Company secured the loan with all of its assets, including the Company’s 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 2009 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 2009 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 financial statements. On March 29, 2010, the Company secured the loan with all of its assets, including the Company’s 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. According to the terms of the original 2010 Loan Agreement, the debt and related interest was due to the Lenders on December 31, 2010. The Company failed to repay the debt and all related interest be such date. As more fully described in Note 6 in the notes to the 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 $3.0 million, pursuant to the terms of the amended and restated promissory notes issued under the 2010 Loan Amendment. According to the original terms of the 2010 Loan Amendment, the debt was due to the Lenders on December 31, 2010. As more fully described in Note 14 in the notes to the financial statements, on January 14, 2011, the Lenders agreed to amend the 2010 Loan Agreement and 2010 Loan Amendment to extend the repayment terms of the aggregate $6.0 million borrowings from December 31, 2010 to June 30, 2011 and on March 24, 2011, the Company entered into a second amendment to further extend the maturity date to September 30, 2011. The Lenders did not modify the interest rate or offer any concessions in the January 14, 2011 or March 24, 2011 amendments.
The Company had $84,001 in cash at December 31, 2010. Management believes that, under normal continuing operations, this amount of cash will enable the Company to meet only a small 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 2009 Loan Agreement, the 2010 Loan Agreement, and the 2010 Loan Amendment, and to meet its ongoing working capital requirements. Moreover, in connection with these loans, the Company must also satisfy certain conditions and comply with covenants, including covenants relating to the Company’s 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. These restrictions may limit the Company’s ability to pursue its business strategies and obtain additional funds. 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 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.
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 Company’s 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 Company’s 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, and to the extent the vested warrants granted to the Lenders to purchase an aggregate of 42,253,521 shares of common stock at an exercise price of $0.071 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 2009 Loan Agreement, the 2010 Loan Agreement and the 2010 Loan Amendment with the Lenders includes restrictive covenants relating to the Company’s 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 Company’s obligations under the 2009 Loan Agreement, the 2010 Loan Agreement, and the 2010 Loan Amendment are secured by all of the Company’s 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 December 31, 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 years ended December 31, 2010, 2009 or 2008.
The Company’s cash on hand decreased approximately $2.1 million from $2.2 million at December 31, 2009 to approximately $84,000 at December 31, 2010. In the fiscal year ended December 31, 2010, the Company received $4.0 million in cash inflows and disbursed $6.1 million in cash outflows resulting in the $2.1 million decrease in cash. Cash inflows of $4.0 million consisted of $4.0 million in proceeds from borrowings on the affiliate loan arrangements. Cash outflows of $6.1 million consisted of $2.8 million in payments for payroll and related expenses, $900,000 in payments for research and development related expenses, $800,000 in payments to consultants for consulting services, $400,000 in payments for legal services, $300,000 in payments for corporate expenses, including audit fees, board fees, and public company expenses, and $900,000 in payments for travel reimbursement, facilities and other office related expenses.
The Company used $6.1 million and $11.9 million in net cash from operations in the years ended December 31, 2010 and 2009, respectively, and $71.6 million for the period from June 14, 2004 (date of inception) to December 31, 2010. The $5.8 million decrease in the net cash used in operations was comprised of an $11.4 million decrease in net loss from $21.0 million in the year ended December 31, 2009 to $9.6 million in the year ended December 31, 2010, a $600,000 decrease in the change in net assets, a $400,000 decrease in the change in net liabilities, a $5.4 million decrease in the amortization of the discount on notes payable, a $1.2 million increase in the change in interest payable to affiliate, a decrease of $500,000 in stock-based compensation expense, and a net increase of $100,000 in excess facility lease cost, depreciation expense and net losses on disposals of fixed assets. The $11.4 million decrease in net losses was the result of a decrease of $4.2 million in research and development expenses and a $3.1 million decrease in general and administrative expenses, a $100,000 increase in restructuring expenses, and a $4.2 million decrease in interest expense. For the period from June 14, 2004 (date of inception) to December 31, 2010, the Company used $71.6 million of net cash in operating activities which was comprised of inception-to-date net losses of $91.2 million, net of $14.0 million non-cash expenses, including $4.7 million inception-to-date stock-based compensation expense, $800,000 in excess facility lease cost, depreciation expense and net losses on disposals of fixed assets, $8.5 million in interest expense from the amortization of the discount on notes payable, and net of $1.8 million net increase in the change in net assets and liabilities, and a $3.8 million increase in the change in interest payable to affiliate. 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.
The Company used $0 and $16,000 in net cash from investing activities in the years ended December 31, 2010 and 2009, respectively, and obtained $10.1 million cash from investing activities for the period from June 14, 2004 (date of inception) to December 31, 2010. The Company used $0 and $16,000 in cash for capital expenditures in the years ended December 31, 2010 and 2009, respectively. From June 14, 2004 (date of inception) to December 31, 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 $4.0 million and $10.0 million in cash from financing activities through loan arrangements with its principal stockholder in the years ended December 31, 2010 and 2009, respectively. There were no equity financings in the years ending December 31, 2010 and 2009. The Company received approximately $1,000 and $2,000 in cash from employee exercises of stock options in the years ended December 31, 2010 and 2009, and repurchased and retired approximately $1,000 and $0 of common stock in the years ended December 31, 2010 and 2009, respectively. From June 14, 2004 (date of inception) to December 31, 2010, the Company received $61.6 million in net cash provided by financing activities, including $14.0 million in notes payable borrowings from the Company’s principal stockholder, $24.4 million of cash received through the issuance of secured convertible debt from the Company’s principal stockholder, $23.1 million of net cash received through the equity financing completed in 2007, and $100,000 of cash received from employee and from 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 received the full amount of the grant in January 2011.
Contractual Obligation and Commitments
The following table describes the Company’s contractual obligations and commitments as of December 31, 2010:
Off-Balance Sheet Arrangements
The Company has not engaged in any off-balance sheet activities.
Critical Accounting Policies
The Company’s discussion and analysis of its financial condition and results of operations are based on its financial statements, which have been prepared in accordance with GAAP. The preparation of these 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 financial statements and the reported amounts of revenue and expenses during the reporting periods. Note 2 in the notes to the financial statements includes a summary of the Company’s significant accounting policies and methods used in the preparation of the Company’s financial statements. On an ongoing basis, the Company’s management evaluates its estimates and judgments, including those related to accrued expenses and the fair value of its common stock. The Company’s 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 management’s 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 Company’s management believes the following accounting policies and estimates are most critical to aid in understanding and evaluating the Company’s reported financial results.
A critical accounting policy is defined as one that is both material to the presentation of our 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.
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 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 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 financial statements.
Research and Development Accruals
As part of the process of preparing its 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 Company’s 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 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 Company’s 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 Company’s 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 December 31, 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.
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 Company’s 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 Company’s 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 Company’s 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 December 31, 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 Company’s 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 127% and 105%, respectively, as of December 31, 2010, and 130% and 104%, respectively as of December 31, 2009. The blended volatility rate was approximately a range from 115% to 116% as of December 31, 2010 and 114% as of December 31, 2009. The Company will continue to incrementally increase the look back period of the Company’s 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 2.82% as of December 31, 2010 and 2009, respectively, using the Company’s historical data. These rates were used to exclude future forfeitures in the calculation of stock-based compensation expense as of December 31, 2010 and 2009, respectively.
The assumptions used to value option and restricted stock award grants for the years ended December 31, 2010 and 2009 are as follows:
The following table summarizes stock-based compensation expenses related to stock options and warrants for the years ended December 31, 2010 and 2009, and for the period from June 14, 2004 (date of inception) to December 31, 2010, which were included in the statements of operations in the following captions:
If all of the remaining non-vested and outstanding stock option awards that have been granted became vested, we would recognize approximately $473,000 in compensation expense over a weighted average remaining period of 0.84 years. However, no compensation expense will be recognized for any stock option awards that do not vest.
The following table summarizes stock-based compensation expense related to employee restricted stock awards for the years ended December 31, 2010 and 2009 and for the period from June 14, 2004 (date of inception) to December 31, 2010, which was included in the statements of operations in the following captions:
All of the restricted stock awards that have been granted became fully vested in 2010.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15. “Exhibits and Financial Statement Schedules.”
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
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, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. As of the end of the period covered by this Annual Report on Form 10-K, an evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Principal Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this Annual Report on Form 10-K, 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 Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in United States Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, the Company’s Chief Executive Officer and Principal Financial Officer, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
1.
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
2.
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
3.
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework set forth in the report entitled “Internal Control-Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
On March 26, 2010, the Company’s 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 fiscal year ended December 31, 2010, prepare bank reconciliations for each month in fiscal year ended December 31, 2010, and prepare and independently review financial statements for external reporting purposes in accordance with GAAP for the review and approval of the Company’s 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 Company’s assets that could have a material effect on the financial statements will be prevented or timely detected.
On January 14, 2011, the Lenders agreed to amend the 2010 Loan Agreement and the 2010 Loan Amendment, as more fully described in Note 6 in the notes to the financial statements, to extend the repayment terms of the aggregate $6.0 million borrowings under both the 2010 Loan Agreement and the 2010 Loan Amendment from December 31, 2010 to June 30, 2011 and on March 24, 2011, the Company entered into a second amendment to further extend the maturity date to September 30, 2011. The Lenders did not modify the interest rate or offer any concessions in the amendments to the 2010 Loan Agreement and the 2010 Loan Amendment.
On January 14, 2011 and March 24, 2011, the Company borrowed an additional $500,000 and $1,498,603, respectively, in principal amounts for general corporate purposes under the 2010 Loan Amendment more fully discussed in Note 6 in the notes to the financial statements. The Company has previously borrowed $1,501,397 in principal amounts and the drawdown on March 24, 2011 was the final drawdown under the terms of the 2010 Loan Amendment. A total of 7,042,254 of the 42,253,521 2010 Additional Warrant Shares vested immediately on January 14, 2011 and a total of 21,107,084 of the 42,253,521 2010 Additional Warrant Shares vested immediately on March 24, 2011, bringing the aggregate vested and exercisable 2010 Additional Warrant Shares held by the Lenders to 42,253,521 shares. The 2010 Additional Warrant Shares, to the extent they are vested and exercisable, are exercisable at any time until November 15, 2015.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Board Leadership Structure
The Company separates the roles of Chief Executive Officer, or CEO, and Chairman of the Board in recognition of the differences between the two roles. The CEO is responsible for setting the strategic direction for the Company and the day to day leadership and performance of the Company, while the Chairman of the Board provides guidance to the CEO and sets the agenda for Board meetings and presides over meetings of the full Board. The Board believes separating the roles of Chief Executive Officer and Chairman of the Board is in the best interests of the stockholders and the Company because it provides the appropriate balance between strategy development and oversight and accountability of management. However, no single leadership model is right for all companies and at all times. The Board recognizes that depending on the circumstances, other leadership models might be appropriate. The Company’s Bylaws allow for the Chief Executive Officer and Chairman of the Board positions to be held by the same individual. Accordingly, the Board periodically reviews its leadership structure.
Directors
Set forth below is certain biographical information as of March 1, 2011 regarding our current directors.
1.
Member of the Audit Committee.
2.
Member of the Compensation Committee.
3.
Member of the Nominating and Governance Committee.
Lawrence K. Cohen, Ph.D. Lawrence K. Cohen has served as President, Chief Executive Officer and a director of the Company since the consummation of the Merger on June 5, 2007, and prior to that time served as President, Chief Executive Officer and a director of privately-held VIA Pharmaceuticals, Inc. since its formation in 2004. Previously, he was the Chief Executive Officer of Zyomyx, Inc., a privately-held biotechnology company focused on protein chip technologies. Dr. Cohen joined Zyomyx in 1999 as Chief Operating Officer, where he was responsible for all internal activities, including research and development, business development, financing and operations. Dr. Cohen received a Ph.D. in Microbiology from the University of Illinois and completed his postdoctoral work in Molecular Biology at the Dana-Farber Cancer Institute and the Department of Biological Chemistry at Harvard Medical School. The Board selected Dr. Cohen to serve as a director because he is the Company’s Chief Executive Officer, and has served in such capacity since privately-held VIA Pharmaceuticals, Inc. was formed in 2004. He has an expansive knowledge of the biotechnology industry having served in various leadership roles with pharmaceutical companies for more than two decades and he brings a unique and valuable perspective to the Board.
Douglass B. Given, M.D., Ph.D., M.B.A. Douglass B. Given has served as Chairman of the Company’s Board of Directors since the consummation of the Merger on June 5, 2007, and prior to that time served as Chairman of privately-held VIA Pharmaceuticals, Inc.’s Board of Directors since its formation in 2004. Dr. Given is a partner at Bay City Capital LLC, which manages investment funds in the life sciences industry, and was founded in June 1997. From July 2001 to June 2003, Dr. Given served as the Chief Executive Officer and Director of NeoRx Corporation, a cancer therapeutics company. Since 2006, Dr. Given has served as President, Chief Executive Officer and Chairman of Vivaldi Biosciences, an anti-viral and vaccine development company. Dr. Given was Corporate Senior Vice President and Chief Technology Officer of Mallinckrodt, Inc. from August 1999 to October 2000. From 2006 to 2007, Dr. Given served as a member of the board of directors of Aksys, Ltd., a company focused on hemodialysis products and services. From 2001 to 2008, Dr. Given served as a member of the board of directors of SemBioSys Genetics Inc., a Canadian biotechnology company. Dr. Given chairs the advisory board to the University of Chicago Medical Center, serves on the Health Advisory Board of Johns Hopkins Bloomberg School of Public Health, serves on the International Advisory Council of the Harvard School of Public Health, AIDS/HIV Initiative and is a director of Arrowhead Research Corporation. Dr. Given earned his M.D. and Ph.D. from the University of Chicago and his M.B.A. from the Wharton School, University of Pennsylvania. He was a fellow in Internal Medicine and Infectious Diseases at Harvard Medical School and Massachusetts General Hospital. The Board selected Dr. Given to serve as a director because of his extensive executive experience in the biotechnology industry and his many years of experience in the venture capital and private equity field, which is very valuable to the Company in its evaluation of various financing and partnering alternatives presented to the Company.
Mark N.K. Bagnall. Mark N.K. Bagnall has served as a director of the Company since June 5, 2007. Since July 2009, Mr. Bagnall has served as President and a member of the board of directors of GenturaDx, Inc., a privately-held life science and molecular diagnostic company. Mr. Bagnall joined GenturaDx, Inc. in March 2009 as Chief Financial Officer. From April to December 2008, Mr. Bagnall served as Executive Vice President, Chief Financial Officer and a member of the board of directors of ADVENTRX Pharmaceuticals, Inc., a biopharmaceutical research and development company focused on commercializing proprietary product candidates for the treatment of cancer. He continued to serve as a member of the board of ADVENTRX until August 24, 2009. From May 2000 to June 2007, Mr. Bagnall was Senior Vice President and Chief Finance and Operations Officer of Metabolex, Inc., a privately-held pharmaceutical company focused on the development of drugs to treat diabetes and related metabolic disorders. Mr. Bagnall has been in the biotechnology industry for over 20 years. In the 12 years prior to joining Metabolex, Mr. Bagnall held the top financial position at four life science companies: Metrika, Inc., a privately-held diagnostics company, and three public biotechnology companies: Progenitor, Inc., Somatix Therapy Corporation, and Hana Biologics, Inc. During his career in biotechnology, he has managed several private and public financings, merger and acquisition transactions and corporate licensing agreements. Mr. Bagnall received his B.S. in Business Administration from the U.C. Berkeley Business School and is a Certified Public Accountant. The Board selected Mr. Bagnall to serve as a director because it believes he brings valuable management and finance expertise to the Board, as well as biotechnology expertise. He has been in the biotechnology industry for over 20 years. In the 12 years prior to joining Metabolex, Mr. Bagnall held the top financial position at four life science companies: Metrika, Inc., a privately-held diagnostics company, and three public biotechnology companies: Progenitor, Inc., Somatix Therapy Corporation, and Hana Biologics, Inc. During his career in biotechnology, he has managed several private and public financings, merger and acquisition transactions and corporate licensing agreements. Mr. Bagnall provides the Board with a distinguished financial expert for the Audit Committee (of which he serves as Chairman).
Fred B. Craves, Ph.D. Fred B. Craves has served as a director of the Company since the consummation of the Merger on June 5, 2007, and prior to that time served as a director of privately-held VIA Pharmaceuticals, Inc. since January 2005. Dr. Craves is an Investment Partner, Managing Director and founder of Bay City Capital, a manager of investment funds in the life sciences industry, and serves as a member of the board of directors and Chairman of the executive committee. Before founding Bay City Capital, he spent over 25 years leading and managing biotechnology and pharmaceutical companies. Previously, he was Executive Vice President of Schering Berlin, a pharmaceutical company, and Chief Executive Officer and President of Berlex Biosciences, a research, development and manufacturing organization. He founded Burrill & Craves, a merchant bank focused on biotechnology and emerging pharmaceutical companies. He was also the founding Chairman of the Board and Chief Executive Officer of Codon and co-founder of Creative Biomolecules, both biotechnology companies. From 1999 to 2007, Dr. Craves served as a member of the board of directors of Reliant Pharmaceuticals, Inc., a privately-held pharmaceuticals company. From 2002 to 2007, Dr. Craves served as a member of the board of directors of BioSeek Inc., a privately-held drug discovery services company. Dr. Craves is a member of the board of directors of Poniard Pharmaceuticals, a biopharmaceutical company focused on oncology; ProGenTech, a privately-held life science and molecular diagnostic company; and ReSet Therapeutics, Inc., a privately-held biotechnology company. He also serves as a member of The J. David Gladstone Institutes’ Advisory Council and is a member of the Board of Trustees of Loyola Marymount University in Los Angeles. Dr. Craves earned a B.S. in Biology from Georgetown University and a Ph.D. in Pharmacology and Toxicology from the University of California, San Francisco. The Board selected Dr. Craves to serve as a director because of his extensive executive experience in the biotechnology industry and his many years of experience in the venture capital and private equity field, which is very valuable to the Company in its evaluation of various financing and partnering alternatives presented to the Company. His experiences as a co-founder of a number of biotechnology companies and life science merchant banks is valuable to the Company, as a development stage company.
David T. Howard. David T. Howard has served as a director of the Company since the consummation of the Merger on June 5, 2007. Mr. Howard joined the Board of Directors of Angiotech Pharmaceuticals, Inc., a pharmaceutical and medical device company, in March 2000 and became Chairman of the Board of Directors in September 2002. Mr. Howard is a director of MSI Methylation Sciences Inc., a privately-owned biotechnology company located in Vancouver, British Columbia. From May 2000 to July 2003, he was Chair of the Board and Chief Executive Officer of SCOLR, Inc., a biopharmaceutical company located in Redmond, Washington. He continued to serve on the board of directors of SCOLR until 2005. From 2005 to 2009, Mr. Howard served as a member of the board of directors of SemBioSys Genetics, Inc., a Canadian biotechnology company. From 2006 to 2008, Mr. Howard served as a member of the board of directors of JRI International Ltd., a privately-owned agriculture company. Prior to this, Mr. Howard served as President and Chief Operating Officer of two pharmaceutical companies: Novopharm International of Toronto, Ontario and President of Novopharm USA, Inc. Mr. Howard’s industry experience includes operational and strategic positions with Boehringer Mannheim Canada, where he was Vice President Pharmaceuticals Division, and Rhône-Poulenc Pharma in Montreal and Paris, where he was Vice-President Sales and Marketing and International Product Manager, respectively. Mr. Howard is the Chief Executive Officer and President of 159230 Canada Inc., a consulting company for the pharmaceutical, biotechnology and medical devices industries, which he founded in 1986. The Board selected Mr. Howard to serve as a director because he has extensive Board and committee experience at both public and private companies. Through his service on the boards of Angiotech, SCOLR and SemBioSys, among others, he has valuable experience in governance, compensation and audit issues.
John R. Larson. John R. Larson has served as a director of the Company since the consummation of the February 2003 merger between Genstar Therapeutics Corporation and Vascular Genetics Inc. Prior to such merger, he served as a director of Vascular Genetics since 1999. Mr. Larson is a founder of Prolifaron, Inc., an early-stage biotechnology company started in 1997 and sold to Alexion Pharmaceuticals, Inc. in 2000, and a founder of Materia, Inc., a research and development company specializing in new applications of patented polymer products. Mr. Larson served as a director for Prolifaron, Inc. from April 1997 to September 2000, a director of Materia, Inc. from 1997 to 1999, and a director of Northland Securities, Inc. from October 2002 to September 2004. He continues to serves as Senior Vice President and Secretary of Northland Securities, Inc., a position he has held since 2002. Since December 1999, he has served as the Managing Director of Clique Capital, LLC, a venture capital group focused in the healthcare and technology area. Since 2006, Mr. Larson has also served as an officer and director of Armada Media Corporation, a privately held company that owns and operates radio stations in small and mid-sized markets. Mr. Larson holds a B.A. degree from Minnesota State University and a J.D. from William Mitchell College of Law. The Board selected Mr. Howard to serve as a director because he has extensive Board and committee experience at both public and private companies. Additionally, Mr. Larson practiced law for over 30 years concentrating in the areas of securities and finance and since August 2000 has been an “Of Counsel” with the law firm of Messerli & Kramer. Mr. Larson has been a frequent speaker on securities matters, having served as Commissioner of Securities and Chairman of the Commerce Commission for the State of Minnesota. In such capacity, Mr. Larson served on a number of committees for the North American Securities Administrators Association, Inc. and the National Association of Securities Dealers, Inc. With Mr. Larson’s extensive experience, he brings strong securities law and biotechnology expertise to the Board.
There are no family relationships among any of our directors and executive officers.
Executive Officers
The information with respect to our executive officers is set forth in Part I, Item 1 of the 10-K under the caption “Executive Officers of the Registrant.”
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act, and regulations of the SEC thereunder require our directors, officers and persons who own more than 10% of our Common Stock, as well as certain affiliates of such persons, to file initial reports of their ownership of our Common Stock and subsequent reports of changes in such ownership with the SEC. Directors, officers and persons owning more than 10% of our Common Stock are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. Based solely on our review of the copies of such reports and amendments thereto received by us and written representations from these persons that no other reports were required, we believe that during the fiscal year ended December 31, 2010, all of our directors, officers and owners of more than 10% of our Common Stock complied with all applicable filing requirements.
Code of Conduct
On June 5, 2007, we adopted a Code of Business Conduct and Ethics, which applies to all of our officers, directors and employees, and we amended the Code of Business Conduct and Ethics on April 16, 2008. Our Code of Business Conduct and Ethics, as amended, is posted on our website at www.viapharmaceuticals.com under the headings “Investor Relations - Corporate Governance - Other Governance Documents - Code of Business Conduct and Ethics.” We will also provide a copy of the Code of Business Conduct and Ethics to stockholders upon request. Any amendments to our Code of Business Conduct and Ethics will be posted on our website. In addition, any waivers from any provision of our Code of Business Conduct and Ethics for directors or executive officers will be promptly disclosed to our stockholders by filing a report on Form 8-K.
Meetings and Committees of the Board of Directors
The Board of Directors conducts its business through meetings of the full Board and through committees of the Board, consisting of an Audit Committee, a Compensation Committee and a Nominating and Governance Committee. In addition to the standing committees, the Board from time to time establishes special purpose committees.
During the fiscal year ended December 31, 2010, the Company’s Board of Directors held nine meetings, the Audit Committee held five meetings, and there were three Special Committee meetings. The Compensation Committee and the Nominating and Governance Committee did not meet during the fiscal year ended December 31, 2010. The Company’s Corporate Governance Principles provide that Board members are expected to regularly prepare for and attend all meetings of the Board and of each committee that the director is a member, with the understanding that, on occasion, a director may be unable to attend a meeting. The Corporate Governance Principles are posted on our website at www.viapharmaceuticals.com under the headings “Investor Relations - Corporate Governance - Committee Charters - Corporate Governance Principles.”
The Board’s Role in Risk Oversight
The role the Company’s Board of Directors fulfills in risk oversight is set out in the Company’s Corporate Governance Principles. The Board is actively involved in the oversight of risks that could affect the Company. This oversight is conducted primarily through committees of the Board but the full Board has retained responsibility for general oversight of risks. The Board satisfies this responsibility through full reports by each committee chair regarding the committee’s considerations and actions, as well as through regular reports directly from management on areas of material risks to the Company, including operational, financial, liquidity, legal and regulatory, strategic and reputational risks. A fundamental part of risk management is not only understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the Company. Management is responsible for establishing the Company’s business strategy, identifying and assessing the related risks and establishing appropriate risk management practices. The Board oversees the Company’s business strategy and management’s assessment of the related risk, and discusses with management the appropriate level of risk for the Company.
The Audit Committee
On June 5, 2007 following the completion of the Merger, our Board adopted a charter that sets forth the responsibilities of the Audit Committee, and we amended the Audit Committee charter on March 25, 2009. The Audit Committee’s charter, as amended, is posted on our website at www.viapharmaceuticals.com under the headings “Investor Relations - Corporate Governance - Committee Charters - Audit Committee Charter.” The purpose of the Audit Committee is to assist the Board with its oversight responsibilities regarding: (1) the integrity of the Company’s financial statements and its financial reporting and disclosure practices; (2) the soundness of the Company’s system of internal controls regarding finance, accounting and disclosure compliance; (3) the independent auditor’s qualifications, engagement, compensation and independence; (4) the performance of the Company’s internal audit function and independent auditor; (5) the Company’s compliance with legal and regulatory requirements in connection with the foregoing; (6) compliance with the Company’s Code of Business Conduct and Ethics to the extent such Code of Ethics addresses financial and accounting related matters; and (7) addressing certain concerns related to accounting, internal accounting controls and auditing matters as provided in the Company’s Complaint and Investigation Procedures for Accounting, Internal Accounting Controls, Fraud or Other Matters.
The Audit Committee charter provides that such Committee shall consist of two or more members of the Board. The members of the Audit Committee are Mark N.K. Bagnall (chair) and David T. Howard, each of whom has been determined by the Board of Directors to be independent as defined by the rules of the SEC and the applicable NASDAQ Stock Market listing standards. The Board of Directors has also determined that Mr. Bagnall is an “audit committee financial expert,” as defined under Item 407(d) of Regulation S-K.
The Compensation Committee
On June 5, 2007 following the completion of the Merger, our Board adopted a charter that sets forth the responsibilities of the Compensation Committee, and we amended the Compensation Committee charter on April 15, 2009. The Compensation Committee’s charter, as amended, is posted on our website at www.viapharmaceuticals.com under the headings “Investor Relations - Corporate Governance - Committee Charters - Compensation Committee Charter.” The purposes of the Compensation Committee are to discharge the Board’s responsibilities relating to: (1) the establishment and maintenance of compensation and benefit policies designed to attract, motivate and retain personnel with the requisite skills and abilities to enable the Company to achieve superior operating results; (2) the compensation of the Company’s executives and non-management directors; and (3) the issuance of an annual report on executive and chief executive officer compensation for inclusion in the Company’s annual proxy statement or Form 10-K, as applicable.
The Compensation Committee recommends to the Board a compensation structure to compensate all levels of management employees of the Company as well as the Company’s non-management directors. The Compensation Committee reviews and approves the compensation of all executive officers, all merit increases and bonuses, including the establishment of goals and objectives. The Compensation Committee also makes recommendations to the Board as to compensation of non-management directors. The Compensation Committee has the authority to hire compensation consultants, to request management to perform studies and to furnish other information, to obtain advice from external legal, accounting or other advisors, and to make such decisions or recommendations to the Board based thereon as the Compensation Committee deems appropriate. However, since the consummation of the Merger, the Company has not engaged any compensation consultants to assist in determining or recommending the amount or form of executive and director compensation.
The Compensation Committee charter provides that such Committee shall consist of two or more members of the Board. The members of the Compensation Committee are David T. Howard (co-chair) and Mark N.K. Bagnall (co-chair). Each member of the Compensation Committee is an “outside” director as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), and a “non-employee” director within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Board or Directors has determined that each of the members of the Compensation Committee is independent, as defined by the applicable NASDAQ Stock Market listing standards.
The Nominating and Governance Committee
On June 5, 2007 following the completion of the Merger, our Board adopted a charter that sets forth the responsibilities of the Nominating and Governance Committee, and we amended the Nominating and Governance Committee charter on April 15, 2009. The Nominating and Governance Committee’s charter, as amended, is posted on our website at www.viapharmaceuticals.com under the headings “Investor Relations - Corporate Governance - Committee Charters - Nominating and Governance Committee Charter.” The purposes of the Nominating and Governance Committee are to: (1) assist the Board in identifying individuals qualified to become Board members; (2) assist the Board in the selection of nominees for election as directors at the Company’s annual meeting of the stockholders; (3) develop and recommend to the Board a set of corporate governance guidelines applicable to the Company; (4) establish policies and procedures regarding the consideration of director nominations from stockholders; (5) recommend to the Board director nominees for each Board committee; (6) review and make recommendations to the Board concerning Board committee structure, operations and Board reporting; (7) evaluate Board and management performance; and (8) oversee compliance with the Company’s Code of Business Conduct and Ethics other than with respect to financial and accounting related matters.
The Nominating and Governance Committee charter provides that such Committee shall consist of two or more members of the Board. The members of the Nominating and Governance Committee are David T. Howard (chair) and Mark N.K. Bagnall. The Board of Directors has determined that all of the members of the Nominating and Governance Committee are independent, as defined by the applicable NASDAQ Stock Market listing standards.
At an appropriate time prior to each annual meeting of the Company’s stockholders at which directors are to be elected or reelected, and whenever there is otherwise a vacancy on the Board of Directors, the members of the Nominating and Governance Committee will assess the qualifications and effectiveness of the current Board members and, to the extent there is a need, shall actively seek individuals well qualified and available to serve to become Board members. Once a Committee member has identified a potential candidate, the Committee member will recommend the potential candidate to the full Nominating and Governance Committee. Candidates recommended by a stockholder will be evaluated in the same manner as any candidate identified by a Committee member.
The full Nominating and Governance Committee will review each potential candidate’s qualifications and may request such candidate to complete and return a directors and officers questionnaire. If the Committee determines that the potential candidate may be qualified after a preliminary inquiry, the Committee will make an investigation and interview the potential candidate, as necessary, to make an informed final determination.
The Nominating and Governance Committee will select, by majority vote, the most qualified candidate or candidates, as the case may be, to recommend to the Board for selection as a director nominee. Upon selection of one or more director nominees, the Chairman of the Board will extend an invitation to the individual to become a director nominee to be included on the proxy card for election at the next annual meeting.
Nomination of Directors
Recommendations to the Board of Directors for election as directors of VIA at an annual meeting may be made only by the Nominating and Governance Committee or by the Company’s stockholders (through the Nominating and Governance Committee) who comply with the timing, informational, and other requirements of our Bylaws. Stockholders have the right to recommend persons for nomination by submitting such recommendation, in written form, to the Nominating and Governance Committee, and such recommendation will be evaluated pursuant to the policies and procedures adopted by the Board. Such recommendation must be delivered to or mailed to and received by the Secretary of the Company at the principal executive offices not later than 120 calendar days prior to the anniversary of the date the Company’s prior year proxy statement was first made available to stockholders, except that if no annual meeting of stockholders was held in the preceding year or if the date of the annual meeting of stockholders has been changed by more than 30 calendar days from the date contemplated at the time of the preceding year’s proxy statement, the notice shall be received by the Secretary at the Company’s principal executive offices not less than 150 calendar days prior to the date of the contemplated annual meeting or the date that is 10 calendar days after the date of the first public announcement or other notification to stockholders of the date of the contemplated annual meeting, whichever first occurs.
Director Criteria and Diversity
The Nominating and Governance Committee, in accordance with the board’s governance principles, seeks to create a board that has the ability to contribute to the effective oversight and management of the Company, that is as a whole strong in its collective knowledge of and diversity of skills and experience with respect to accounting and finance, management and leadership, vision and strategy, business judgment, biotechnology industry knowledge, corporate governance and global markets. The Nominating and Governance Committee does not have a formal policy with respect to diversity; however, the Board and the Nominating and Governance Committee believe it is essential that the Board members represent diverse viewpoints, professional experience, education, skill and other individual qualities and attributes that contribute to board heterogeneity. When the Committee reviews a potential new candidate, the Committee looks specifically at the candidate’s qualifications in light of the needs of the Board and the Company at that time given the then current mix of director attributes.
General criteria for the nomination and evaluation of director candidates include:
•
loyalty and commitment to promoting the long term interests of the Company’s stockholders;
•
the highest personal and professional ethical standards and integrity;
•
an ability to provide wise, informed and thoughtful counsel to top management on a range of issues;
•
a history of achievement that reflects superior standards for themselves and others;
•
an ability to take tough positions in constructively-challenging the Company’s management while at the same time working as a team player; and
•
individual backgrounds that provide a diverse portfolio of personal and professional experience and knowledge commensurate with the needs of the Company.
The Committee must also ensure that the members of the board as a group maintain the requisite qualifications under the applicable SEC rules and the Company’s Committee Charter requirements for populating the Audit, Compensation and Nominating and Governance Committees.
Written recommendations from a stockholder for a director candidate must include the following information:
•
the stockholder’s name and address, as they appear on our corporate books;
•
the class and number of shares that are beneficially owned by such stockholder;
•
the dates upon which the stockholder acquired such shares; and
•
documentary support for any claim of beneficial ownership.
Additionally, the recommendation needs to include, as to each person whom the stockholder proposes to recommend to the Nominating and Governance Committee for nomination to election or reelection as a director, all information relating to the person that is required pursuant to Regulation 14A under the Exchange Act, as amended, and evidence satisfactory to us that the nominee has no interests that would limit their ability to fulfill their duties of office.
Once the Nominating and Governance Committee receives a recommendation, it will deliver a questionnaire to the director candidate that requests additional information about his or her independence, qualifications and other information that would assist the Nominating and Governance Committee in evaluating the individual, as well as certain information that must be disclosed about the individual in the Company’s proxy statement, if nominated. Individuals must complete and return the questionnaire within the time frame provided to be considered for nomination by the Nominating and Governance Committee.
The Nominating and Governance Committee will review the stockholder recommendations and make recommendations to the Board of Directors that the Committee feels are in the best interests of the Company and its stockholders.
Communications with the Board of Directors
Stockholders may contact an individual director or the Board as a group, or a specified Board committee or group, including the non-employee directors as a group, by the following means:
Mail:
Attn: Board of Directors
VIA Pharmaceuticals, Inc.
750 Battery Street, Suite 330
San Francisco, CA 94111
Email:
AskBoard@viapharmaceuticals.com
Each communication should specify the applicable addressee or addressees to be contacted as well as the general topic of the communication. We will initially receive and process communications before forwarding them to the addressee. We also may refer communications to other departments within the Company. We generally will not forward to the directors a communication that is primarily commercial in nature, relates to an improper or irrelevant topic, or requests the Company’s general information.
Complaint and Investigation Procedures for Accounting, Internal Accounting Controls, Fraud or Auditing Matters
We have created procedures for confidential submission of complaints or concerns relating to accounting or auditing matters and contracted with Shareholder.com to facilitate the gathering, monitoring and delivering reports on any submissions. As of the date of this report, there have been no submissions of complaints or concerns to Shareholder.com. Complaints or concerns about our accounting, internal accounting controls or auditing matters may be submitted to the Audit Committee and our executive officers by contacting Shareholder.com. Shareholder.com provides phone, internet and e-mail access and is available 24 hours per day, seven days per week, 365 days per year. The hotline number is 1-866-713-4532 and the website is www.openboard.info/via/. Any person may submit a written Accounting Complaint to via@openboard.com.
Our Audit Committee under the direction and oversight of the Audit Committee Chair will promptly review all submissions and determine the appropriate course of action. The Audit Committee Chair has the authority, in his discretion, to bring any submission immediately to the attention of other parties or persons, including the full Board, accountants and attorneys. The Audit Committee Chair shall determine the appropriate means of addressing the concerns or complaints and delegate that task to the appropriate member of senior management, or take such other action as it deems necessary or appropriate to address the complaint or concern, including obtaining outside counsel or other advisors to assist the Audit Committee.
Summary Compensation Table
The total compensation paid to the Company’s Principal Executive Officer and its highest compensated executive officers other than the Principal Executive Officer, respectively, for services rendered in 2010 and 2009, as applicable, is summarized as follows:
Footnotes to Summary Compensation Table
Narrative to Summary Compensation Table
Understanding our history is key to the understanding of our compensation structure for 2010 and 2009. After the Merger on June 5, 2007, the executive officers of privately-held VIA Pharmaceuticals, Inc. became our executive officers. On January 14, 2008, the Company hired Dr. Rebecca A. Taub as Senior Vice President, Research & Development. Effective March 31, 2010, the employment of Mr. James G. Stewart was terminated in connection with the restructuring of the Company. On April 30 2010, the Company appointed Karen S. Wright as an executive officer to serve as the principal financial officer of the Company following the restructuring of the Company. Accordingly, the following applies only to our Chief Executive Officer, Dr. Lawrence K. Cohen, our Vice President, Controller (Principal Financial Officer) beginning in 2010, Ms. Karen S. Wright, and our Senior Vice President, Research & Development, Dr. Rebecca A. Taub (collectively, our “NEOs”).
Base Salary
Upon consummation of the Merger, the Compensation Committee increased Dr. Cohen’s annual base salary to $385,000 from $325,000. Ms. Wright’s annual salary is $244,400 and was pro-rated based on her start date as an executive officer of April 30, 2010. Dr. Taub’s annual base salary is $300,000 and was pro-rated based on her start date of January 14, 2008.
Bonuses
For 2009 and 2010, we have not yet paid our NEOs any bonuses. The Compensation Committee elected to defer any decision on bonuses based on our 2009 and 2010 performance until the Company is able to secure additional financing.
Equity Compensation
The NEOs (other than Dr. Taub) received stock option grants at the time they were hired by privately-held VIA Pharmaceuticals, Inc. Such options generally vest over time, with 25% of the options vesting after one year of employment and monthly vesting thereafter with full vesting after four years. Dr. Taub received stock option grants with a similar vesting schedule at the time she was hired by VIA Pharmaceuticals, Inc.
In December 2008, the Compensation Committee granted our NEOs restricted stock awards in the amount set forth on the table below entitled “Outstanding Equity Awards at 2010 Fiscal Year End”. The restricted stock vests equally each month over a two year schedule, subject to earlier vesting in full if in the discretion of the Compensation Committee the Company has entered into a partnering transaction with a pharmaceutical or biotechnology company with respect to conducting follow-on clinical trials which are reasonably expected to result in further progress of VIA-2291 toward ultimate registration with the FDA. The Company also agreed to provide the recipients of the restricted stock awards a tax “gross-up” payment with respect to their applicable income tax expenses incurred upon making an election under Section 83(b) of the Internal Revenue Code in connection with the grant of restricted stock.
All stock options and restricted stock issued to Dr. Cohen and Dr. Taub, respectively, vest and become exercisable upon a change in control.
Severance
Pursuant to the terms of their employment agreements, our NEOs may be entitled to severance in the event that their employment is terminated without cause (or in the case of Dr. Cohen constructively). Such severance is subject to execution of a general release of claims and compliance with a non-compete. The amount of severance is 12 months base salary for Dr. Cohen, three months base salary for Ms. Wright, and six months base salary for Dr. Taub. In addition, we will pay the premiums for them and their dependents for COBRA continuation coverage under our group health plan for the period of severance or, if sooner, the date they are eligible for coverage under another employer’s group health plan.
Change in Control Agreements
On December 21, 2007, the Company entered into a Change in Control Agreement with Dr. Cohen as a means of providing him certain protections in the event his employment were to be terminated following a change in control. On January 14, 2008, the Company entered into a Change in Control Agreement with Dr. Taub. The Compensation Committee considers the Change in Control Agreements to be a retention device, as it removes any uncertainty regarding the executive’s position in the event we were to explore further strategic transactions.
Under the terms of the agreements, if the executive is terminated without cause or constructively within 12 months following a change in control, he or she would be eligible for the following benefits:
•
continued health benefits for the severance period;
•
pro rata bonus for the year of termination; and
•
full vesting in all equity compensation.
In addition, if the executive is subject to the excise tax applicable under Section 4999 of the Internal Revenue Code regarding excess parachute payments then:
•
if the change in control is a result of a hostile transaction or a change in directors in contested election, the executive will be entitled to a tax-gross up to cover such excise tax, as well as any additional income taxes on the tax-gross up; or
•
if the change in control is not hostile or due to a contested election, then the executive will either be subject to the excise tax, or will forfeit payments in an amount that would not subject him to the tax, whichever provides him the greater payment.
Outstanding Equity Awards at 2010 Fiscal Year End
Footnotes to Outstanding Equity Awards at 2010 Fiscal Year End Table
Compensation of Directors
The following table summarizes the total compensation earned in 2010 for the Company’s non-management directors. Dr. Cohen receives no additional compensation for his service as a director.
Footnote to Compensation of Directors Table
Narrative to Director Compensation Table
Each independent director is entitled to receive the following annual compensation:
•
an initial equity grant of 5,575 options to purchase shares of Common Stock, which options are fully vested on the date of grant and exercisable for ten years from the date of grant;
•
$500 for each committee meeting attended, whether in person or telephonically.
Non-independent directors, Drs. Cohen, Craves and Given do not receive any compensation in connection with their director service.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding the beneficial ownership of shares of our Common stock as of March 1, 2011 for:
•
each person known to us to be the beneficial owner of more than 5% of our outstanding shares of Common Stock;
•
each of our named executive officers;
•
all directors and named executive officers as a group.
Information with respect to beneficial ownership has been furnished by each director, executive officer or beneficial owner of more than 5% of our Common Stock. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting and investment power with respect to the securities. Except as otherwise provided by footnote, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. The number of shares of Common Stock used to calculate the percentage ownership of each listed person includes the shares of Common Stock underlying options or warrants held by such persons that are currently exercisable or exercisable within 60 days of March 1, 2011, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
Percentage of beneficial ownership is based on 20,558,446 shares of Common Stock outstanding as of March 1, 2011.
Unless otherwise indicated, the address of each individual listed below is c/o VIA Pharmaceuticals, Inc., 750 Battery Street, Suite 330, San Francisco, California 94111.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Review and Approval of Related Party Transactions
Pursuant to a written policy adopted on June 5, 2007 following the completion of the Merger, the Company reviews all transactions, arrangements or relationships (or any series of similar transactions, arrangements or relationships) in excess of $50,000 in which the Company (including any of its subsidiaries) was, is or will be a participant and the amount involved exceeds $50,000, and in which any Related Party had, has or will have a direct or indirect interest (each, a “Related Party Transaction”). For purposes of the policy, a “Related Party” means:
1.
any person who is, or at any time since the beginning of the Company’s last fiscal year was, a director or executive officer of the Company or a nominee to become a director of the Company;
2.
any person who is known to be the beneficial owner of more than 5% of any class of the Company’s voting securities;
3.
any immediate family member of any of the foregoing persons; and
4.
any firm, corporation or other entity in which any of the foregoing persons is employed or is a general partner or principal or in a similar position or in which such person has a 5% or greater beneficial ownership interest.
The Audit Committee reviews the relevant facts and circumstances of each Related Party Transaction, including if the transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third party and the extent of the Related Party’s interest in the transaction, takes into account the conflicts of interest and corporate opportunity provisions of the Company’s Code of Business Conduct and Ethics, and either approves or disapproves the Related Party Transaction.
Management presents to the Audit Committee each proposed Related Party Transaction, including all relevant facts and circumstances relating thereto and updates the Audit Committee as to any material changes to any approved or ratified Related Party Transaction and provides a status report at least annually at a regularly scheduled meeting of the Audit Committee of all then current Related Party Transactions. No director may participate in approval of a Related Party Transaction for which he or she is a Related Party.
Related Party Transactions
Baxter Healthcare Relationship
Baxter Healthcare owns all 2,000 shares of our outstanding 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 Company’s common stock multiplied by (b) the number of shares of converted Series C Preferred Stock. As of December 31, 2010, the Series C Preferred Stock is convertible into 13,986,013 shares of the Company’s Common Stock. As of December 31, 2010, Baxter Healthcare has not initiated the conversion of the Series C Preferred Stock into the Company’s common stock.
Bay City Capital Relationship
From the date of the founding of privately-held VIA Pharmaceuticals, Inc. in June 2004 through February 7, 2007, privately-held VIA Pharmaceuticals, Inc. entered into a number of financing transactions with its principal stockholder, Bay City Capital. On February 7, 2007, privately-held VIA Pharmaceuticals, Inc. received $5,000,000 in additional borrowings pursuant to the terms of a promissory note with Bay City Capital. Immediately following the receipt of such borrowings, privately-held VIA Pharmaceuticals, Inc. fully extinguished all of its outstanding debt obligations to Bay City Capital after converting the previously issued notes and $334,222 of unpaid accrued interest to $13,334,222 of Series A Preferred Stock of privately-held VIA Pharmaceuticals, Inc. All of the Series A Preferred Stock of privately-held VIA Pharmaceuticals, Inc. owned by Bay City Capital was converted into common stock of the Company in connection with the consummation of the Merger on June 5, 2007.
On March 12, 2009, the Company entered into a note and warrant purchase agreement (the “2009 Loan Agreement”) with Bay City Capital (through its Bay City Capital Fund IV, L.P. and affiliate Bay City Capital Fund IV Co-Investment Fund, L.P.) pursuant to which Bay City Capital agreed to lend to the Company in the aggregate up $10,000,000, pursuant to the terms of promissory notes (collectively, the “2009 Notes”) issued under the 2009 Loan Agreement (the “2009 Loan Transaction”). On March 12, 2009, the Company borrowed an initial amount of $2,000,000 and as of September 11, 2009, the Company had drawn down the remaining $8,000,000 from the debt facility. The 2009 Notes are secured by a first priority lien on all of the assets of the Company. 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 2009 Notes, all unpaid principal and accrued interest shall become fully due and payable on the earliest 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 fifty percent of the voting interests in the surviving or resulting entity. The Company was not able to repay the loan on April 1, 2010 and is currently in default under the 2009 Loan Agreement. Pursuant to the 2009 Loan Agreement, the Company issued to Bay City Capital warrants (the “2009 Warrants”) to purchase up to an aggregate of 83,333,333 shares (the “2009 Warrant Shares”) of Common Stock of the Company, at $0.12 per share. The number of 2009 Warrant Shares is equal to the $10,000,000 aggregate principal amount borrowed under the 2009 Loan Agreement, divided by the $0.12 per share exercise price of the Warrants. As set forth in the 2009 Warrants, the 2009 Warrant Shares vest based on the amount of borrowings under the Notes and the passage of time. Based on the aggregate $10,000,000 of borrowings, 83,333,333 2009 Warrant Shares are vested and are exercisable at any time until 5:00 p.m. (Pacific Time) on March 12, 2014. In connection with the 2009 Loan Transaction and 2009 Warrants, the Company also entered into a Second Amended and Restated Registration Rights Agreement (the “2009 Registration Rights Agreement”) with Bay City Capital and certain stockholders of the Company, pursuant to which the Company has granted certain demand, shelf and “piggyback” registration rights to Bay City Capital and the certain stockholders of the Company to register their shares of Common Stock (including the 2009 Warrant Shares) with the SEC so that such shares become freely tradeable without restriction under the Securities Act of 1933, as amended.
On March 26, 2010, the Company entered into a note and warrant purchase agreement (the “2010 Loan Agreement”) with Bay City Capital (through its Bay City Capital Fund IV, L.P. and affiliate Bay City Capital Fund IV Co-Investment Fund, L.P.) pursuant to which Bay City Capital agreed to lend to the Company in the aggregate up to $3,000,000, pursuant to the terms of promissory notes issued under the 2010 Loan Agreement (the “2010 Loan Transaction”). On March 29, 2010, the Company borrowed an initial amount of $1,250,000 and as of September 28, 2010, the Company had drawn down the remaining $1,750,000 from the debt facility. The 2010 Loan Agreement notes are secured by a lien on all of the assets of the Company. Amounts borrowed under the 2010 Loan Agreement 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 original 2010 Loan Agreement, 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 Loan Agreement notes. Based on the aggregate $3,000,000 of borrowings, 17,647,059 2010 Warrant Shares are vested and are exercisable at any time until 5:00 p.m. (Pacific Time) on March 26, 2015. In connection with the 2010 Loan Transaction and 2010 Warrants, the Company also amended the Registration Rights Agreement, pursuant to which the Company has granted certain demand, shelf and “piggyback” registration rights to Bay City Capital and the certain stockholders of the Company to register their shares of Common Stock (including the 2010 Warrant Shares) with the SEC so that such shares become freely tradeable without restriction under the Securities Act of 1933, as amended. On January 14, 2011, the Company entered into an amendment to the 2010 Loan Agreement and 2010 Loan Amendment to extend the maturity date under the 2010 Loan Agreement and 2010 Loan Amendment from December 31, 2010 to June 30, 2011 and on March 24, 2011, the Company entered into a second amendment to further extend the maturity date to September 30, 2011.
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 amended and restated promissory notes issued under the 2010 Loan Amendment The Company accrued $1,397 in unpaid interest for the period October 29, 2010 to November 15, 2010, which is included in the Company’s statement of operations.
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 issued under the 2010 Loan Amendment. Subject to the Lenders’ approval, as of December 31, 2010, the Company may borrow in the aggregate up to an additional $1,998,603 at subsequent closings pursuant to the terms of the 2010 Loan Amendment. On November 15, 2010, the $201,397 outstanding principal and unpaid interest on the Bridge Note were automatically converted into obligations of the Company under the 2010 Loan Amendment as advances. During the three months ended December 31, 2010, the Company borrowed an additional $800,000 on November 22, 2010. The 2010 Loan Amendment notes are secured by a lien on all of the assets of the Company. Amounts borrowed under the original 2010 Loan Amendment 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 original 2010 Loan Amendment, 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 Loan Amendment notes. Based on the $1,001,397 of borrowings, 14,104,183 2010 Additional Warrant Shares are vested and are exercisable as of December 31, 2010. 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 2010 Additional Warrants, the Company also amended the Registration Rights Agreement, pursuant to which the Company has granted certain demand, shelf and “piggyback” registration rights to Bay City Capital and certain stockholders of the Company to register their shares of Common Stock (including the 2010 Additional Warrant Shares) with the SEC so that such shares become freely tradeable without restriction under the Securities Act of 1933, as amended. On January 14, 2011, the Company entered into an amendment to the 2010 Loan Agreement and 2010 Loan Amendment to extend the maturity date under the 2010 Loan Agreement and 2010 Loan Amendment from December 31, 2010 to June 30, 2011 and on March 24, 2011, the Company entered into a second amendment to further extend the maturity date to September 30, 2011.
Fred B. Craves, a member of the Company’s Board of Directors, is the founder, chairman, and a manager of Bay City Capital. Douglass B. Given, the chairman of the Company’s Board of Directors is an investment partner of Bay City Capital.
Director Independence
Although the Company’s common stock is no longer listed on NASDAQ, our Corporate Governance Principles require that at least fifty percent (50%) of the Board of Directors be comprised of directors who qualify as independent directors under the listing standards of The NASDAQ Stock Market. The NASDAQ independence criteria include various objective standards and a subjective test. A member of the Board is not considered independent under the objective standards if, for example, he or she is employed by the Company or if the Company paid his or her family member more than $120,000 during any period of twelve consecutive months within the past three years. For example, Dr. Cohen is not independent because he is employed by the Company. The subjective test requires that each independent director not have a relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director, and the subjective test is made in the context of the objective standards. In making its independence determinations, the Board generally considers commercial, financial services, charitable, and other transactions and other relationships between the Company and each director and his or her family members and affiliated entities. For example, with regard to the independence determination for Mr. Bagnall, the Board considered his position with a portfolio company of Bay City Capital, a significant stockholder of the Company, and concluded he is not an affiliated person under applicable SEC and NASDAQ rules. Based on its review, the Board has determined that each of the Company’s directors, except for Drs. Cohen, Craves and Given, are independent as defined by the applicable NASDAQ Stock Market listing standards and under applicable law. As of January 4, 2010, the Company’s common stock is no longer listed on The NASDAQ Stock Market and the Company is no longer subject to the NASDAQ listing standards, including NASDAQ listing rule 5605 which requires, among other things, that the Company’s board of directors be comprised of at least a majority of independent directors and that the Company’s audit committee be comprised of at least three independent directors.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Deloitte & Touche LLP (“Deloitte”) has been the Company’s independent registered public accounting firm since the completion of the Merger in June 2007 and had previously served as privately-held VIA Pharmaceuticals, Inc.’s independent registered public accounting firm since the date of privately-held VIA Pharmaceuticals, Inc.’s formation in 2004. The appointment of Deloitte as the Company’s independent registered public accounting firm was approved by the Audit Committee on June 5, 2007. Deloitte completed its client approval procedures and accepted the appointment as the Company’s independent registered public accounting firm as of June 19, 2007.
The accountant’s report issued by Deloitte on the financial statements of the Company for the fiscal year ended December 31, 2009 expressed an unqualified opinion and included an explanatory paragraph describing conditions that raise substantial doubt about the Company’s ability to continue as a going concern. The accountant’s report issued by Deloitte on the financial statements of the Company for the fiscal year ended December 31, 2010 expressed an unqualified opinion and included an explanatory paragraph describing conditions that raise substantial doubt about the Company’s ability to continue as a going concern. From January 1, 2009 through December 31, 2010, there were no disagreements with Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. There were no reportable events, as described in Item 304(a)(1)(v) of Regulation S-K, during the Company’s two most recent fiscal years (ended December 31, 2010 and 2009).
Audit and Non Audit Fees
Aggregate fees for professional services rendered by Deloitte for the fiscal years ended December 31, 2010 and 2009 are set forth below. The aggregate fees included in the Audit Fee category are fees billed for each of these fiscal years for the audit of our annual financial statements and review of financial statements included in the Company’s Quarterly Reports on Form 10-Q and for services provided in connection with statutory and regulatory filings or engagements. The aggregate fees included in each of the other categories are fees billed in the fiscal years.
Aggregate fees incurred by Deloitte for professional services rendered to the Company from January 1, 2009 through December 31, 2010:
Audit Fees for the fiscal years ended December 31, 2010 and 2009 were for professional services rendered for the audits of the annual financial statements of the Company included in the Company’s Form 10-K and quarterly review of the financial statements included in the Company’s Quarterly Reports on Form 10-Q. Audit Fees for the fiscal year ended December 31, 2009 also included services provided by Deloitte related to the filing of a Form S-8 in March 2009.
Tax Fees for the fiscal year ended December 31, 2010 consisted of professional services provided by Deloitte related to the Company’s “Qualifying Therapeutic Discovery Project” tax credit application. There were no fees for services rendered by Deloitte that fall into the classification of Tax Fees for the fiscal year ended December 31, 2009.
There were no fees for services rendered by Deloitte that fall into the classification of Audit-Related Fees for the fiscal years ended December 31, 2010 or 2009.
There were no fees for services rendered by Deloitte that fall into the classification of All Other Fees for the fiscal years ended December 31, 2010 or 2009.
Policy on Audit Committee Preapproval of Audit and Permissible Nonaudit Services of the Independent Registered Public Accounting Firm
As specified in the Audit Committee charter, the Audit Committee pre-approves all audit and nonaudit services provided by the independent registered public accounting firm prior to the receipt of such services. Thus, the Audit Committee approved 100% of the services set forth in the above table prior to the receipt of such services and no services were provided under the permitted de minimus threshold provisions.
The Audit Committee of the Board of Directors determined that the provision of such services was compatible with the maintenance of the independence of Deloitte.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements and Financial Statement Schedules
The Company’s Financial Statements included in Item 8 include:
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2010 and 2009
Statements of Operations for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010
Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2010, 2009, 2008, 2007 and for the period from inception (June 14, 2004) to December 31, 2010
Statements of Cash Flow for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010
Notes to the Financial Statements
2. Financial Statement Schedules
All other schedules not listed above have been omitted, because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto.
3. Exhibits required to be filed by Item 601 of Regulation S-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 24, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the registrant in the capacities indicated.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
VIA Pharmaceuticals, Inc.
San Francisco, CA
We have audited the accompanying balance sheets of VIA Pharmaceuticals, Inc. (a development stage company) (the “Company”), as of December 31, 2010 and 2009, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2010, and for the period from June 14, 2004 (date of inception) to December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2010, and for the period from June 14, 2004 (date of inception) to December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company is a development stage enterprise engaged in the research and development of cardiovascular disease. As discussed in Note 1 to the financial statements, the deficiency in working capital at December 31, 2010 and Company’s operating losses since inception raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
San Francisco, California
March 24, 2011
VIA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
See accompanying notes
VIA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
See accompanying notes
VIA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
For the Period June 14, 2004 (Date of Inception) To December 31, 2010
See accompanying notes
VIA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
See accompanying notes
VIA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE 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 Roche’s 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 Roche’s preclinical diacylglycerol acyl transferase 1 metabolic disorders program.
Through December 31, 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.
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 December 31, 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.
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 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 financial statements, “Corautus Genetics Inc.” or “Corautus” refers to the business of Corautus prior to the Merger.
Going Concern Uncertainty - 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 December 31, 2010, the Company’s accumulated deficit was approximately $91.2 million. The Company had $84,001 in cash at December 31, 2010. In connection with the loan amendments discussed below, the Company borrowed an additional $500,000 on January 14, 2011 and $1,498,603 on March 24, 2011. 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 2009 Loan Agreement, the 2010 Loan Agreement, and the 2010 Loan Amendment (which loan agreements and amendments are described below), and to meet its ongoing working capital requirements. Moreover, in connection with these loans, the Company must also satisfy certain conditions and comply with covenants, including covenants relating to the Company’s 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. These restrictions may limit the Company’s ability to pursue its business strategies and obtain additional funds. 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 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 Company’s 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 the preclinical development of one or more of its other preclinical candidates;
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curtail its licensing activities that are designed to identify molecular targets and small molecules for treating cardiovascular disease;
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relinquish rights to product candidates, development programs, or discovery development programs that it may otherwise seek to develop or commercialize on its own; and
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delay, reduce the scope of, or eliminate one or more of its research and development programs, or ultimately cease operations.
On March 26, 2010, the Company’s 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 revenue since June 14, 2004, the inception of the Company. The Company 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 arrangement. 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. The Company expects to incur substantial and increasing losses as it continues to expend substantial resources seeking to successfully research, develop, manufacture, obtain regulatory approval for, and commercialize its product candidates.
Until the Company can establish profitable operations to finance its cash requirements, the Company’s 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.
As more fully described in Note 6 in the notes to the financial statements, in March 2009, the Company entered into a Note and Warrant Purchase Agreement (the “2009 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 2009 Loan Agreement with all of its assets, including the Company’s intellectual property. On March 12, 2009, the Company borrowed the initial $2.0 million available under the 2009 Loan Agreement. Subsequently, the Company made $2.0 million borrowings under the 2009 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 2009 Loan Agreement on September 11, 2009. According to the terms of the original Loan 2009 Agreement, the aggregate loan amount 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 2009 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 2009 Loan Agreement. 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 rate of 18% per annum beginning April 1, 2010.
As more fully described in Note 6 in the notes to the financial statements, in March 2010, the Company entered into a second 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 $3.0 million, pursuant to the terms of promissory notes (collectively, the “2010 Loan Agreement notes”) issued under the 2010 Loan Agreement. The Company secured the original 2010 Loan Agreement with all of its assets, including the Company’s 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. The original 2010 Loan Agreement notes are secured by a lien on all of the assets of the Company. Amounts borrowed under the original 2010 Loan Agreement 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 original 2010 Loan Agreement 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 failed to repay the debt and all related interest to the Lenders due on December 31, 2010. On January 14, 2011, the Company entered into an amendment to the 2010 Loan Agreement and 2010 Loan Amendment to extend the maturity date under the 2010 Loan Agreement and 2010 Loan Amendment from December 31, 2010 to June 30, 2011 and on March 24, 2011, the Company entered into a second amendment to further extend the maturity date to September 30, 2011.
As more fully described in Note 6 in the notes to the financial statements, 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 Loan Amendment. The Company accrued $1,397 in unpaid interest for the period October 29, 2010 to November 15, 2010, which is included in the Company’s statement of operations.
As more fully described in Note 6 in the notes to the 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 issued under the 2010 Loan Amendment. Subject to the Lenders’ approval, as of December 31, 2010, the Company may borrow in the aggregate up to an additional $1,998,603 at subsequent closings pursuant to the terms of the 2010 Loan Amendment notes. On November 15, 2010, the $201,397 outstanding principal and unpaid interest on the Bridge Note were automatically converted into obligations of the Company under the 2010 Loan Amendment as advances. During the three months ended December 31, 2010, the Company borrowed an additional $800,000 on November 22, 2010. The original 2010 Loan Amendment notes are secured by a lien on all of the assets of the Company. Amounts borrowed under the 2010 Loan Amendment 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 original 2010 Loan Amendment 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 failed to repay the debt and all related interest to the Lenders due on December 31, 2010. On January 14, 2011, the Company entered into an amendment to the 2010 Loan Agreement and 2010 Loan Amendment to extend the maturity date under the 2010 Loan Agreement and 2010 Loan Amendment from December 31, 2010 to June 30, 2011 and on March 24, 2011, the Company entered into a second amendment to further extend the maturity date to September 30, 2011.
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 Company received the full amount of the grant on January 19, 2011.
All outstanding principal and accrued interest under the 2009 Loan Agreement was due on April 1, 2010. All outstanding principal and accrued interest under the 2010 Loan Agreement and 2010 Loan Amendment was originally due on December 31, 2010. The Company was not able to repay the loans on the respective due dates. On January 14, 2011, the Company entered into an amendment to the 2010 Loan Agreement and 2010 Loan Amendment to extend the maturity date under the 2010 Loan Agreement and 2010 Loan Amendment from December 31, 2010 to June 30, 2011 and on March 24, 2011, the Company entered into a second amendment to further extend the maturity date to September 30, 2011. The Lenders may terminate the 2009 Loan Agreement, 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of the financial statements in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our 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 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 Statement of Operations. Through December 31, 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 December 31, 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 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 Company’s 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.
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:
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Level 1 - Quoted prices in active markets for identical assets or liabilities.
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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.
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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 the 2009 Loan Agreement with the Lenders, as more fully described in Note 6 in the notes to the financial statements. At the date of each borrowing under the 2009 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 Company’s balance sheets in accordance with the following accounting guidance:
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Derivative financial instruments indexed to and potentially settled in a company’s own stock;
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Accounting for derivative instruments and hedging activities; and
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Accounting for convertible debt and debt issued with stock purchase warrants.
The Company made separate $2.0 million borrowings under the $10.0 million 2009 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 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 Company’s 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 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 Company’s balance sheets in accordance with the following accounting guidance:
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Derivative financial instruments indexed to and potentially settled in a company’s own stock;
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Accounting for derivative instruments and hedging activities; and
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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 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 Company’s 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.
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 $3.0 million, pursuant to the terms of the amended and restated promissory notes issued under the 2010 Loan Amendment. At the date of each borrowing under the 2010 Loan Amendment, 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 Company’s balance sheets in accordance with the following accounting guidance:
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Derivative financial instruments indexed to and potentially settled in a company’s own stock;
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Accounting for derivative instruments and hedging activities; and
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Accounting for convertible debt and debt issued with stock purchase warrants.
The Company made separate borrowings of $201,397 on November 15, 2010 and $800,000 on November 22, 2010, under the 2010 Loan Amendment, with warrants vesting at the time of the draw as described more fully in Note 6 in the notes to the 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 Company’s 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.
Changes in Level 3 Recurring Fair Value Measurements - The following is a rollforward of balance sheet amounts as of December 31, 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 December 31, 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.
(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 Company’s 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 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 years ended December 31, 2010 and 2009:
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 years ended December 31, 2010 and 2009 because their inclusion would be anti-dilutive:
As described in Note 7 in the notes to the 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 Company’s common stock on June 13, 2010. Accordingly, we have not included any Series C Preferred Stock in the table above for the years ended December 31, 2009. As of December 31, 2010, the Series C Preferred Stock is convertible into 13,986,013 shares of the Company’s Common Stock. As of December 31, 2010, the Series C Preferred Stock stockholder has not initiated the conversion of the Series C Preferred Stock into the Company’s Common Stock.
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 years ended December 31, 2010 and 2009:
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 Company’s 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 Company’s statement of operations during the period of change. The Company does not use derivative instruments for speculative purposes.
As of December 31, 2010 and 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 Company’s December 31, 2010 and 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 financial statements.
On April 29, 2010, the FASB issued ASU 2010-17, which establishes a revenue recognition model for contingent consideration that is payable upon the achievement of an uncertain future event, referred to as a milestone. The scope of the ASU is limited to research or development arrangements and requires an entity to record the milestone payment in its entirety in the period received if the milestone meets all the necessary criteria to be considered substantive. However, entities would not be precluded from making an accounting policy election to apply another appropriate accounting policy that results in the deferral of some portion of the arrangement consideration. The ASU is effective for fiscal years (and interim periods within those fiscal years) beginning on or after June 15, 2010. Early application is permitted. Entities can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted. The Company does not believe this standard will have in immediate impact on our financial statements.
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 Company’s 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 Company’s 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 Company’s 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 December 31, 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 Company’s 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 127% and 105%, respectively, as of December 31, 2010, and 130% and 104%, respectively as of December 31, 2009. The blended volatility rate was approximately a range from 115% to 116% as of December 31, 2010 and 114% as of December 31, 2009. The Company will continue to incrementally increase the look back period of the Company’s 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 2.82% as of December 31, 2010 and 2009, respectively, using the Company’s historical data. These rates were used to exclude future forfeitures in the calculation of stock-based compensation expense as of December 31, 2010 and 2009, respectively.
The assumptions used to value option and restricted stock award grants for the years ended December 31, 2010 and 2009 are as follows:
The following table summarizes stock-based compensation expenses related to stock options and warrants for the years ended December 31, 2010 and 2009, and for the period from June 14, 2004 (date of inception) to December 31, 2010, which were included in the statements of operations in the following captions:
If all of the remaining non-vested and outstanding stock option awards that have been granted became vested, we would recognize approximately $473,000 in compensation expense over a weighted average remaining period of 0.84 years. However, no compensation expense will be recognized for any stock option awards that do not vest.
The following table summarizes stock-based compensation expense related to employee restricted stock awards for the years ended December 31, 2010 and 2009, and for the period from June 14, 2004 (date of inception) to December 31, 2010, which was included in the statements of operations in the following captions:
All of the restricted stock awards that have been granted became fully vested in 2010.
4. RESEARCH AND DEVELOPMENT
The Company’s research and development expenses include expenses related to Phase 2 clinical development of the Company’s lead compound VIA-2291, regulatory activities, and preclinical development costs for additional assets in the Company’s 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 Company’s 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.
The following reflects the breakdown of the Company’s research and development expenses generated internally versus externally for the years ended December 31, 2010 and 2009, and for the period from June 14, 2004 (date of inception) to December 31, 2010:
Externally generated research and development expenses consist primarily of the following:
Internally generated research and development expenses consist primarily of the following:
5. PROPERTY AND EQUIPMENT
Property and equipment - net, at December 31, 2010 and 2009 consisted of the following:
Depreciation expense on property and equipment was $74,882 and $136,360 in the years ended December 31, 2010 and 2009, respectively, and $578,755 for the period from June 14, 2004 (date of inception) to December 31, 2010, and was included in the statements of operations as follows:
6. NOTES PAYABLE - AFFILIATES
Notes Payable - Affiliates consisted of the following:
Notes Payable Issued March 12, 2009 - due April 1, 2010 (2009 Loan Agreement)
In March 2009, the Company entered into the 2009 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 “2009 Notes”) issued under the Loan Agreement.
On March 12, 2009, the Company borrowed an initial amount of $2.0 million under the 2009 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 2009 Notes are secured by a first priority lien on all of the assets of the Company, including the Company’s intellectual property. Amounts borrowed under the 2009 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 2009 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 aggregate loan amount 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 2009 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 $2,135,343 from anticipated interest expense based on the original due date of the 2009 Notes of $7,328,449 to actual interest after the loan amendments of $9,463,792 from the inception of the 2009 Notes to December 31, 2010.
Pursuant to the terms of the Loan Agreement, the Company issued to the Lenders warrants (the “2009 Warrants”) to purchase an aggregate of up to 83,333,333 shares (the “2009 Warrant Shares”) of common stock at $0.12 per share as more fully described below. The number of 2009 Warrant Shares is equal to the $10.0 million maximum aggregate principal amount that may be borrowed under the 2009 Loan Agreement, divided by the $0.12 per share exercise price of the 2009 Warrants. The 2009 Warrant Shares vest based on the amount of borrowings under the 2009 Notes and based on the passage of time. For each $2.0 million borrowing, 8,333,333 2009 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 2009 Warrants, including that the Company did not complete a $20.0 million financing, as defined in the 2009 Loan Agreement, within 45 days of the borrowing. Based on the aggregate $10.0 million of borrowings at December 31, 2010, all 83,333,333 2009 Warrant Shares are vested and are exercisable at December 31, 2010. The 2009 Warrant Shares are exercisable at any time until March 12, 2014.
On March 12, 2009, the fair value of the note and of the 16,666,666 2009 Warrant Shares related to the $2.0 million borrowed under the 2009 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 2009 Warrants. The Company has recorded the $900,000 freestanding 2009 Warrants as permanent equity under accounting guidance for accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s 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 December 31, 2010, the balance of notes payable - affiliate net of discount was $2,000,000 and the unamortized discount was $0. At December 31, 2009, the balance of notes payable - affiliate net of discount was $1,999,964 and the unamortized discount was $36.
Interest expenses on the $2.0 million March 12, 2009 borrowing for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
The Company estimated the fair value of the 2009 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 2009 Warrants at March 12, 2009 (date of inception) are:
On May 19, 2009, the Company borrowed an additional $2.0 million under the 2009 Loan Agreement and the fair value of the note and of the 16,666,666 2009 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 2009 Warrants. The Company has recorded the $1.5 million freestanding 2009 Warrants as permanent equity under accounting guidance for accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s 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 December 31, 2010, the balance of notes payable - affiliate net of discount was $2,000,000 and the unamortized discount was $0. At December 31, 2009, the balance of notes payable - affiliate net of discount was $1,999,904 and the unamortized discount was $96.
Interest expenses on the $2.0 million May 19, 2009 borrowing for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
The Company estimated the fair value of the 2009 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 2009 Warrants at May 19, 2009 (date of inception) are:
On June 29, 2009, the Company borrowed an additional $2.0 million under the 2009 Loan Agreement and the fair value of the note and of the 16,666,666 2009 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 2009 Warrants. The Company has recorded the $1.6 million freestanding 2009 Warrants as permanent equity under accounting guidance for accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s 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 December 31, 2010, the balance of notes payable - affiliate net of discount was $2,000,000 and the unamortized discount was $0. At December 31, 2009, the balance of notes payable - affiliate net of discount was $1,999,843 and the unamortized discount was $157.
Interest expenses on the $2.0 million June 29, 2009 borrowing for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
The Company estimated the fair value of the 2009 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 2009 Warrants at June 29, 2009 (date of inception) are:
On August 14, 2009, the Company borrowed an additional $2.0 million under the 2009 Loan Agreement and the fair value of the note and of the 16,666,666 2009 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 2009 Warrants. The Company has recorded the $1.4 million freestanding 2009 Warrants as permanent equity under accounting guidance for accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s 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 December 31, 2010 and 2009, the balance of notes payable - affiliate net of discount was $2,000,000 and the unamortized discount was $0. At December 31, 2009, the balance of notes payable - affiliate net of discount was $1,999,671 and the unamortized discount was $329.
Interest expenses on the $2.0 million August 14, 2009 borrowing for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
The Company estimated the fair value of the 2009 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 2009 Warrants at August 14, 2009 (date of inception) are:
On September 11, 2009, the Company borrowed the final $2.0 million under the 2009 Loan Agreement and the fair value of the note and of the 16,666,666 2009 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 2009 Warrants. The Company has recorded the $1.5 million freestanding 2009 Warrants as permanent equity under accounting guidance for accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s 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 December 31, 2010, the balance of notes payable - affiliate net of discount was $2,000,000 and the unamortized discount was $0. At December 31, 2009, the balance of notes payable - affiliate net of discount was $1,996,244 and the unamortized discount was $3,756.
Interest expenses on the $2.0 million September 11, 2009 borrowing for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
The Company estimated the fair value of the 2009 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 2009 Warrants at September 11, 2009 (date of inception) are:
Interest expenses on the aggregate $10.0 million 2009 Loan Agreement for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
At December 31, 2010 the aggregate balance of the notes payable - affiliate net of discount was $10,000,000 and the aggregate unamortized discount was $0. At December 31, 2009 the aggregate balance of the notes payable - affiliate net of discount was $9,995,626 and the aggregate unamortized discount was $4,374. The Company had accrued interest of $2,515,068 and $789,041 as of December 31, 2010 and December 31, 2009, respectively, which is included in the Balance Sheet.
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 Loan Agreement 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 original 2010 Loan Agreement notes are secured by a lien on all of the assets of the Company. Amounts borrowed under the 2010 Loan Agreement 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 Loan Agreement 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. On January 14, 2011, as more fully described in Note 14 in the notes to the financial statements, the Company entered into amendments to the 2010 Loan Agreement and the 2010 Loan Amendment to extend the maturity date under the 2010 Loan Agreement and 2010 Loan Amendment from December 31, 2010 to June 30, 2011 and on March 24, 2011, the Company entered into a second amendment to further extend the maturity date to September 30, 2011.
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 Loan Agreement notes. Based on the $3,000,000 borrowings as of December 31, 2010, all 17,647,059 of the 2010 Warrant Shares are vested and are exercisable at December 31, 2010. The Warrant Shares are exercisable at any time until March 26, 2015.
On March 29, 2010, the fair value of the 2010 Loan Agreement 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 Loan Agreement 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 company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. The $524,000 discount on the note payable - affiliate is netted against the $1.25 million 2010 Loan Agreement 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 December 31, 2010, the balance of notes payable - affiliate net of discount was $1,250,000 and the unamortized discount was $0.
Interest expenses on the $1.25 million March 29, 2010 borrowing for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
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:
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 2010 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 Loan Agreement 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 company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s 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 December 31, 2010, the balance of notes payable - affiliate net of discount was $100,000 and the unamortized discount was $0.
Interest expenses on the $100,000 May 26, 2010 borrowing for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
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:
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 2010 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 Loan Agreement 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 company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. The $67,000 discount on the note payable - affiliate is netted against the $200,000 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 December 31, 2010, the balance of notes payable - affiliate net of discount was $200,000 and the unamortized discount was $0.
Interest expenses on the $200,000 June 4, 2010 borrowing for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
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:
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 2010 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 Loan Agreement 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 company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s 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 December 31, 2010, the balance of notes payable - affiliate net of discount was $300,000 and the unamortized discount was $0.
Interest expenses on the $300,000 June 29, 2010 borrowing for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
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:
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 2010 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 Loan Agreement 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 company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s 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 December 31, 2010, the balance of notes payable - affiliate net of discount was $100,000 and the unamortized discount was $0.
Interest expenses on the $100,000 July 15, 2010 borrowing for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
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:
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 2010 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 Loan Agreement 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 company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s 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 December 31, 2010, the balance of notes payable - affiliate net of discount was $750,000 and the unamortized discount was $0.
Interest expenses on the $750,000 July 27, 2010 borrowing for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
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:
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 2010 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 Loan Agreement 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 company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s 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 $300,000 and the unamortized discount was $0.
Interest expenses on the $300,000 September 28, 2010 borrowing for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
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:
Aggregate interest expenses on the $3,000,000 2010 Loan Agreement debt for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
At December 31, 2010 the aggregate balance of the 2010 Loan Agreement notes payable - affiliate net of discount was $3,000,000 and the aggregate unamortized discount was $0. The Company has accrued interest of $259,521 as of December 31, 2010, which is included in the Balance Sheet.
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 amended and restated promissory notes issued under the 2010 Loan Amendment. The Company accrued $1,397 in unpaid interest for the period October 29, 2010 to November 15, 2010, which is included in the Company’s statement of operations.
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 issued under the 2010 Loan Amendment. On November 15, 2010, the $201,397 outstanding principal and unpaid interest on the Bridge Note were automatically converted into obligations of the Company under the 2010 Loan Amendment as advances. During the three months ended December 31, 2010, the Company borrowed an additional $800,000 on November 22, 2010. The original 2010 Loan Amendment notes are secured by a lien on all of the assets of the Company. Amounts borrowed under the 2010 Loan Amendment 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 original 2010 Loan Amendment 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. On January 14, 2011, as more fully described in Note 14 in the notes to the financial statements, the Company entered into amendments to the 2010 Loan Agreement and 2010 Loan Amendment to extend the maturity date under the 2010 Loan Agreement and 2010 Loan Amendment from December 31, 2010 to June 30, 2011 and on March 24, 2011, the Company entered into a second amendment to further extend the maturity date to September 30, 2011.
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 Loan Amendment notes. Based on the $1,001,397 of borrowings, 14,104,183 2010 Additional Warrant Shares are vested and are exercisable as of December 31, 2010. 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.
On November 15, 2010, the fair value of the $201,397 of bridge loans converted under the terms of the 2010 Loan Amendment and of the 2,836,577 2010 Additional Warrant Shares related to the $201,397 borrowed under the 2010 Loan Amendment was $201,397 and approximately $165,000, respectively. This resulted in the Company allocating the relative fair value of approximately $110,000 of the $201,397 in proceeds to the 2010 Loan Amendment notes and approximately $91,000 to the 2010 Additional Warrants. The Company has recorded the $91,000 freestanding 2010 Additional Warrants as permanent equity under accounting guidance for accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. The $91,000 discount on the note payable - affiliate is netted against the $201,397 2010 Loan Amendment notes and is being amortized to interest expense using the interest method from November 15, 2010 through December 31, 2010, the maturity date of the note payable. At December 31, 2010, the balance of notes payable - affiliate net of discount was $201,397 and the unamortized discount was $0.
Interest expenses on the $201,397 November 15, 2010 borrowing for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
The Company estimated the fair value of the 2010 Additional Warrants of approximately $91,000 at November 15, 2010 using the Black-Scholes pricing model methodology with assumptions outlined below. The assumptions used to value the 2010 Additional Warrants at November 15, 2010 (date of inception) are:
On November 22, 2010, the Company borrowed an additional $800,000 under the 2010 Loan Amendment and the fair value of the note and of the 11,267,606 2010 Additional Warrant Shares related was $800,000 and approximately $863,000, respectively. This resulted in the Company allocating the relative fair value of approximately $385,000 of the $800,000 in proceeds to the 2010 Loan Amendment notes and approximately $415,000 to the 2010 Additional Warrants. The Company has recorded the $415,000 freestanding 2010 Additional Warrants as permanent equity under accounting guidance for accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. The $415,000 discount on the note payable - affiliate is netted against the $800,000 note and is being amortized to interest expense using the interest method from November 22, 2010 through December 31, 2010, the maturity date of the note payable. At December 31, 2010, the balance of notes payable - affiliate net of discount was $800,000 and the unamortized discount was $0.
Interest expenses on the $800,000 November 22, 2010 borrowing for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
The Company estimated the fair value of the 2010 Additional Warrants of approximately $415,000 at November 22, 2010 using the Black-Scholes pricing model methodology with assumptions outlined below. The assumptions used to value the 2010 Additional Warrants at November 22, 2010 (date of inception) are:
Aggregate interest expenses on the $1,001,397 2010 Loan Amendment debt for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
At December 31, 2010 the aggregate balance of the 2010 amended notes payable - affiliate net of discount was $1,001,397 and the aggregate unamortized discount was $0. The Company has accrued interest of $17,040 as of December 31, 2010, which is included in the Balance Sheet.
Interest expenses in aggregate on the outstanding $14,001,397 debt, including interest on the Bridge Note, for the years ended December 31, 2010 and 2009, and for the period from inception (June 14, 2004) to December 31, 2010 were included in the statement of operations as follows:
At December 31, 2010 the aggregate balance of the notes payable - affiliate net of discount was $14,001,397 and the aggregate unamortized discount was $0. The Company has accrued interest payable of $2,791,629 and $789,041 at December 31, 2010 and 2009, respectively, 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 Company’s stock are as follows:
Common Stock - The Company’s authorized common stock was 200,000,000 shares at December 31, 2010 and 2009. Common stockholders are entitled to dividends if and when declared by the Board of Directors, subject to preferred stockholder dividend rights.
At December 31, 2010 and 2009, the Company had reserved the following shares of common stock for issuance:
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 Company’s 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 Company’s authorized Series A Preferred Stock was 5,000,000 shares at December 31, 2010 and 2009. There were no issued and outstanding shares of Series A Preferred Stock at December 31, 2010 and 2009.
The Company’s authorized Series C Preferred Stock was 17,000 shares at December 31, 2010 and 2009. There were 2,000 shares of Series C Preferred Stock issued and outstanding at December 31, 2010 and 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 Company’s common stock multiplied by (b) the number of shares of converted Series C Preferred Stock. As of December 31, 2010, the Series C Preferred Stock is convertible into 13,986,013 shares of the Company’s Common Stock. As of December 31, 2010, the Series C Preferred Stock stockholder has not initiated the conversion of the Series C Preferred Stock into the Company’s Common Stock
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 Company’s Board of Directors adopted the 2004 Stock Plan. Under the 2004 Stock Plan, up to 427,479 shares of the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 2,068,738 and 587,712 shares available for future grant at December 31, 2010 and 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 Company’s 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, 2007 to December 31, 2010 follows:
As of December 31, 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 5,793 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 December 31, 2010:
The weighted-average fair value of options granted was $0.15 in the year ended December 31, 2009. No options were granted in the year ended December 31, 2010. The total intrinsic value of stock options exercised was $897 and $11,865 for the years ended December 31, 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 Company’s 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 $42,572 and $63,389 in stock-based compensation expense in the years ended December 31, 2010 and 2009, respectively, and $108,488 in stock-based compensation expense in the period from June 14, 2004 (date of inception) to December 31, 2010. As the restricted stock awards vested through 2010, the Company recognized the related stock-based compensation expense over the vesting period. 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, 2007 to December 31, 2010 follows:
Warrants - Affiliates - Pursuant to the terms of the 2009 Loan Agreement as more fully discussed in Note 6 in the notes to the financial statements, the Company issued to the Lenders the 2009 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 2009 Warrant Shares is equal to the $10.0 million maximum aggregate principal amount that may be borrowed under the 2009 Loan Agreement, divided by the $0.12 per share exercise price of the 2009 Warrants, which is fixed on the date of the 2009 Loan Agreement. The 2009 Warrant Shares vest based on the amount of borrowings under the 2009 Notes and based on the passage of time. For each $2.0 million borrowing, 8,333,333 2009 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 2009 Warrant, including that the Company did not complete a $20.0 million financing, as defined in the 2009 Loan Agreement, within 45 days of the borrowing. At each subsequent closing, the 2009 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 2009 Warrants. The 2009 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 2009 Warrant Shares are vested and are exercisable on December 31, 2010.
As described more fully in Note 6 in the notes to the financial statements, at December 31, 2009, the Company computed the fair value of the 83,333,333 2009 Warrant Shares related to the aggregate $10.0 million of borrowings under the 2009 Loan Agreement utilizing the Black-Scholes pricing model. In accordance with the provisions of derivative financial instruments indexed to and potentially settled in a Company’s 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 2009 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 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 Loan Agreement 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 December 31, 2010.
As described more fully in Note 6 in the notes to the financial statements, at December 31, 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 Company’s 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.
Pursuant to the terms of the 2010 Loan Amendment as more fully discussed in Note 6 in the notes to the financial statements, the Company issued to the Lenders the 2010 Additional Warrants to purchase an aggregate of up to 42,253,521 shares of common stock at $0.071 per share, which will become fully exercisable to the extent that the entire additional $3.0 million is drawn. The number of 2010 Additional Warrant Shares is equal to the additional $3.0 million 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, which is fixed on the date of the 2010 Loan Amendment. The 2010 Additional Warrant Shares vest based on the amount of borrowings under the 2010 Loan Agreement notes. The 2010 Additional Warrant Shares, to the extent they are vested and exercisable, are exercisable at any time until November 15, 2015. Based on the $1,001,397 of borrowings, 14,104,183 2010 Additional Warrant Shares are vested and are exercisable on December 31, 2010.
As described more fully in Note 6 in the notes to the financial statements, at December 31, 2010, the Company computed the fair value of the 14,104,183 2010 Additional Warrant Shares related to the additional $1,001,397 of borrowings under the 2010 Loan Amendment utilizing the Black-Scholes pricing model. In accordance with the provisions of derivative financial instruments indexed to and potentially settled in a Company’s 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 Additional Warrants of approximately $505,898 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 December 31, 2010, outstanding warrants to purchase approximately 9,762 shares of common stock at exercise prices of $10.05-$19.50 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 Company’s 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 are expensed as stock-based compensation expense over the vesting period in the statements of operations. 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 Company’s 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 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 Company’s 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 are expensed as stock-based compensation expense over the service vesting period in the statements of operations. The warrants were fully expensed in 2008.
8. RELATED PARTIES
As more fully described in Note 6 in the notes to the financial statements, in March 2009, the Company entered into the 2009 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. In November 2010, the Company entered into the 2010 Loan Amendment to enable the Company to borrow up to an additional aggregate principal amount of $3.0 million.
The Company terminated its licensing agreement with Leland Stanford Junior University (“Stanford”) effective February 2009. The Company’s 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 $7,500 in the years ended December 31, 2010 and 2009, respectively. While the Company did not issue any stock options in years ended December 31, 2010 and 2009, 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. Using the Black-Scholes pricing model, the Company valued the 42,300 option shares granted in 2007 as of December 31, 2010 at fair values ranging from $0.159 per share to $0.188 per share or an aggregate of $731 using an expected life ranging from 6.59 to 6.96 years, a risk free interest rate ranging from 2.56% to 2.70%, a volatility rate ranging from 115% to 116%, and the fair market value stock price at December 31, 2010 of $0.04 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 ($2,622) and $2,706 in the years ended December 31, 2010 and 2009, respectively. The Company revalues non-employee options quarterly based on the closing stock price of the Company’s 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 Company’s common stock on the last vesting date.
During 2006, the Company used the services of an employee of the Company’s 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 Company expensed the option as stock-based compensation expense over the vesting period in the statements of operations.
From the Company’s inception through February 4, 2010, the Company’s Chief Development Officer (“Officer”) was also an employee of the Company’s primary investor. The Company paid the Officer compensation of $44,384 and $60,000 in the years ended December 31, 2010 and 2009, respectively. The Company did not grant any options to the Officer in fiscal years ended December 31, 2010 and 2009. However, the Company granted 26,921, 35,685, and 15,611 shares of stock options to the CDO 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. 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. 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 Company’s 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 $1,135 and $11,195 in the years ended December 31, 2010 and 2009, respectively.
Effective July 1, 2009, the Company sub-leased property in the Company’s office facilities in its headquarters in San Francisco, California on a month-to-month basis to an affiliate of the Company’s 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 $8,186 and $1,674 in the years ended December 31, 2010 and 2009, respectively, which were included as a reduction to rent expenses in the statement of operations for the year ended December 31, 2010.
Effective September 15, 2010, the Company sub-leased property in the Company’s office facilities in its headquarters in San Francisco, California for one year to an additional affiliate of the Company’s primary investor for $5,241 per month. The Company received rent from the tenant in the amount of $18,517 in the year ended December 31, 2010, which was included as a reduction to rent expenses in the statement of operations for the year ended December 31, 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 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 $65,000, which reflects the cost incurred by the Company, in settlement with the landlord, to vacate the lease for which the Company will no longer receive any economic benefit.
Rent expense, including lease settlement costs, for the years ended December 31, 2010 and 2009, respectively, and for the period from June 14, 2004 (date of inception) to December 31, 2010, was included in the statements of operations as follows:
Future minimum lease payments under non-cancelable operating leases, including lease commitments entered into subsequent to December 31, 2010 are as follows:
Operating lease obligations reflect contractual commitments for the Company’s office facilities for its headquarters in San Francisco, California.
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.
The following table reconciles the amount of income taxes computed at the federal statutory rate of 34% for all periods presented, to the amount reflected in the Company’s statement of operations for the years ended December 31, 2010 and 2009:
The tax effect of temporary differences related to various assets, liabilities and carryforwards that give rise to deferred tax assets and liabilities at December 31, 2010 and 2009 are comprised of the following:
The net valuation allowance increased by $3,281,243 and $8,271,398 during the periods ended December 31, 2010 and 2009, respectively, principally related to increased net operating loss carryforwards.
The Company has federal net operating loss carryforwards of approximately $22,070,552 as of December 31, 2010 that expire beginning in 2026. The Company has California state net operating loss carryforwards of approximately $15,693,647 as of December 31, 2010 that expire beginning 2016. The Company has New Jersey state net operating loss carryforwards of approximately $19,992,088 as of December 31, 2010 that expire beginning 2013. The Company has Pennsylvania state net operating loss carryforwards of approximately $1,086,788 that expire beginning 2030. The Company also has federal, California state, and New Jersey state research and development tax credits of approximately $327,953, $290,757, and $206,282, respectively. Federal research credits will expire beginning 2026, California state credits can be carried forward indefinitely, and New Jersey state credits will expire beginning in the year 2022.
Utilization of the net operating loss and tax credit carryforwards were 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 experienced a change of control which resulted in a substantial reduction to the previously reported net operating losses at December 31, 2008. As of December 31, 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.
At December 31, 2010, the Company had unrecognized tax benefits of $659,992, all of which would not currently affect the Company’s effective tax rate if recognized due to the Company’s deferred tax assets being fully offset by a valuation allowance.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
The Company would classify interest and penalties related to uncertain tax positions in income tax expense, if applicable. There was no interest expense or penalties related to unrecognized tax benefits recorded through December 31, 2010. The tax years 2006 through 2010 remain open to examination by one or more major taxing jurisdictions to which the Company is subject.
The Company does not anticipate that total unrecognized net tax benefits will significantly change prior to the end of 2011.
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 Company’s 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 $94,529 in the years ended December 31, 2010 and 2009, respectively, and $208,523 for the period from June 14, 2004 (date of inception) to December 31, 2010.
12. RESTRUCTURING COSTS
On March 26, 2010 the Company’s 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 $106,959 and $0 in the years ended December 31, 2010 and 2009, respectively. 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 Company’s 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, all of which was paid as of December 31, 2010. As of December 31, 2010, the Company had a balance of $104,675 in accrued non-cash restructuring costs, all of which consisted of excess facility lease costs, which is included as a current obligation on the 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. The sublease was to have expired on January 15, 2012. In November 2010, the Company and the landlord agreed to a settlement whereby the Company paid $65,000 to the landlord in exchange for vacating the lease. The Company has no other obligations under the settlement agreement. The Company recorded the $65,000 in research and development operating expense in the statement of operations in the year ended December 31, 2010.
14. SUBSEQUENT EVENTS
On January 14, 2011, the Lenders agreed to modify the 2010 Loan Agreement and the 2010 Loan Amendment to extend the repayment terms of the aggregate $6.0 million borrowings under the 2010 Loan Agreement and the 2010 Loan Amendment from December 31, 2010 to June 30, 2011. On this date the Company borrowed an additional $500,000 in principal amounts under the 2010 Loan Amendment. Refer to Note 6.
On March 24, 2011, the Company entered into a second amendment to further extend the maturity date to September 30, 2011. On this date the Company borrowed an additional $1,498,603 which is the final drawdown on the 2010 Loan Amendment. Refer to Note 6.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)