Entelos Inc.
Entelos Inc.
("Entelos" or "the Company")
Preliminary Results for the year ended 31 December 2007
There will be an analyst meeting at 10:00 am in the offices of Buchanan
Communications, 45 Moorfields, London, EC2Y 9AE. A conference call will be
running simultaneously with the analyst meeting. Please ensure that if you wish
to join the conference call you do so 5 minutes before (09:55am) the start of
the briefing.
Dial In Number: + 44 (0) 20 8609 1435
Pin Code: 162873#
Financial Highlights
-- Recognized revenue of $21.8 million for the full year 2007 (2006: $21.6
million)
-- Net loss of $132,000 for the full year 2007 (2006: loss of $754,000)
-- Completed $3.5 million follow-on placement with Pfizer Ireland
Pharmaceuticals and Abingworth Management, Ltd.
-- Entered into a $6.5 million debt financing agreement with Imperium
Master Fund, Ltd
-- Cash, investments and accounts receivable as at 31 December 2007
totalled $10.0 million (2006: $9.9 million)
Operating Highlights
-- Completed the Cardiovascular PhysioLab(R) platform
-- Extended contracts with Pfizer, Organon, and Johnson & Johnson
Pharmaceutical Research and Development ("J&JPRD"), and made significant
progress with other customers across multiple disease areas
-- Signed a two-year agreement with the US Food and Drug Administration
("FDA") to build a model of human liver physiology to better predict
drug-induced liver injury ("DILI")
-- Acquired a series of late stage compounds
-- Created a cost-effective drug discovery and development capability
through a strategic alliance with Jubilant Biosys, a premier services
company based in India
-- Acquired Iconix Biosciences ("Iconix"), a privately held company in an
all-share transaction on 31 August 2007. Iconix's predictive toxicology
capability combined with Entelos' predictive in silico disease models
will address the pharmaceutical industry's two biggest issues around
failures: safety and efficacy
-- Appointed two new, independent non-executive directors to the Board
Post-Period announcements
-- Entered into an agreement with UCB Pharma S.A. ("UCB Pharma") in
rheumatoid arthritis
-- Signed an agreement with PDL Biopharma ("PDL") to conduct in silico
research and "virtual clinical trials" to support PDL's antibody
development programs
-- Appointed KBC Peel Hunt, Ltd as Nominated Advisor ("NOMAD") and broker
to the Company in March 2008
-- Obtained a U.S. patent that expires in 2024 for the diabetes model
-- Entered into an agreement to collaborate with Conopco, Inc., d/b/a as
Unilever ("Unilever") to develop a new PhysioLab platform to accelerate
Unilever's product development
-- The American Diabetes Association ("ADA") broadened in silico testing of
"virtual mice" by providing its members Entelos' Type 1 Diabetes Realab
platform online
Chairman and Chief Executive's Review
We are pleased to present our financial and operating results for the full year
ended 31 December 2007.
The net loss for the year ended 31 December 2007 was $132,000 (2006: net loss of
$754,000) on revenue of $21.8 million (2006: $21.6 million). This resulted in
net loss per share (basic) of $0.00 (2006: $0.02). Net loss is after investment
in research and development (R&D), including new applications and therapeutic
development. Investment in R&D for the full year 2007 was $6.1 million (2006:
$6.7 million).
At year end 2007 the Company had cash, investments and accounts receivable of
$10.0 million (2006: $9.9 million). Management believes the Company will achieve
its 2008 plans and stay in compliance with all of its debt covenants.
Collaborative Partners and PhysioLab(R) Models
Entelos partners with global pharmaceutical and biotechnology companies and
provides scientific expertise and disease models to validate novel drug targets,
select and develop compounds, conduct "virtual clinical trials", reprofile
drugs, evaluate in-licensing candidates, and better position existing products
in competitive markets. During 2007, the Company announced the following:
-- Completed the Cardiovascular PhysioLab(R) platform, a comprehensive
large-scale model designed to predict a drug's long-term clinical
efficacy in managing cholesterol, atherosclerosis, and heart disease,
and announced conducting cardiovascular research projects with three
pharmaceutical companies.
-- Extended its research agreement for two years with Organon to pursue
candidate targets and biomarkers in its ongoing collaboration in
rheumatoid arthritis.
-- Continued its research contract with Pfizer in cardiovascular disease,
Entelos' original collaborator in building the Cardiovascular PhysioLab
platform.
-- Entered into a Cooperative Research and Development Agreement (CRADA)
with the U.S. Food and Drug Administration's Center for Drug Evaluation
and Research (CDER) to develop a computer model of drug-induced liver
injury (DILI). The goal is to use this platform to guide the development
of clinical biomarkers and preclinical assays to identify patient types
and drug combinations with an increased risk of developing liver injury.
Acquisitions, Alliances and Therapeutic Programs
Entelos can also leverage its predictive disease models to develop a portfolio
of therapeutic products in areas of high unmet medical needs. The Company
expanded its partnering capabilities through the following:
-- Acquired a series of selective progesterone-receptor modulators from
Ortho-McNeil, an affiliate of J&JPRD. The lead compound has been tested
in humans, and Entelos intends to use its technology to identify optimal
patient types that could benefit from treatment. Potential indications
include a variety of women's health-related diseases such as
endometriosis, uterine fibroids, and breast, uterine, or ovarian
cancers, and Entelos will seek to partner out select programs.
-- Created a broad strategic alliance with Jubilant Biosys, a premier drug
discovery and development services company based in India to jointly
develop and offer an integrated spectrum of services to expand each
company's respective businesses with existing and future pharmaceutical
and biotechnology partners. Together, Entelos and Jubilant intend to
provide a spectrum of complementary and non-overlapping capabilities,
ranging from predictive biosimulation, modeling, chemistry, biology, and
preclinical and clinical testing to drug formulation, synthesis,
manufacturing and supply to the global pharmaceutical and biotechnology
industry.
-- Acquired Iconix Biosciences, Inc., a privately held predictive
toxicology company located in Mountain View, California, in an all-share
transaction. Iconix's predictive toxicology capability, which is
currently used by the FDA, combined with Entelos' predictive in silico
disease models help to address the pharmaceutical industry's two biggest
issues around drug failures: safety and efficacy. With this acquisition,
and Entelos' collaboration with the FDA, the Company has expanded its
reach into safety assessment.
Board of Director Changes and Appointments
-- Dr. Jonathan MacQuitty, a director of the company since March 2000 and
President and Director of Abingworth's US subsidiary, Abingworth
Management Inc., did not stand for re-election to the Board at the
Annual General Meeting held on 23 May 2007.
-- Entelos appointed two new, independent non-executive directors in
February and April 2007, respectively:
- Greg Schiffman, currently Chief Financial Officer of
Seattle-based Dendreon Corporation (Nasdaq:DNDN). Mr.
Schiffman brings a strong financial background from the life
sciences industry and he is the chair of our Audit
Committee.
- Per Peterson, M.D., Ph.D., retired Chair of Research and
Development and a former member of the Executive Committee
of Johnson & Johnson (NYSE:JNJ). Dr. Peterson brings a
wealth of senior executive level experience from the
pharmaceutical industry.
Post-Period announcements
-- Entelos announced an agreement with UCB Pharma to conduct in silico
research in the field of rheumatoid arthritis using the Entelos(R)
Rheumatoid Arthritis PhysioLab(R) platform. This platform is an
innovative and predictive computer model that simulates arthritic
patients and drug effects and it has already been used successfully with
other pharmaceutical partners to select targets and compounds, find the
best doses for patients, and support clinical trial design.
-- Entelos announced an agreement with PDL Biopharma to conduct in silico
research and "virtual clinical trials" focused on identifying primary
endpoints, patient types, and optimal doses to support PDL's antibody
development programs.
-- Entelos appointed KBC Peel Hunt, Ltd as NOMAD and broker to the Company
in March 2008.
-- Entelos obtained U.S. patent #7,353,152 that expires in 2024 for the
diabetes model. This patent relates to the mathematical and computer
modeling of multiple biological processes underlying the Entelos(R)
Metabolism PhysioLab(R) platform, which can be applied to obesity as
well as diabetes research.
-- Entered into an agreement to collaborate with Unilever to develop a new
PhysioLab platform that will complement Unilever's internal capabilities
and create a powerful integrated discovery platform to accelerate
Unilever's product development.
-- The American Diabetes Association broadens in silico testing of "virtual
mice" by providing its members Entelos' Type 1 Diabetes Realab platform
online.
Strategy & Outlook
Entelos has grown to become the leader in providing modeling, simulation, and
disease expertise to the pharmaceutical and biotechnology industry. We intend to
expand our capabilities and increase adoption within our customer base by:
-- Continuing to demonstrate its impact and value for lowering the risk,
time, and cost of drug discovery and development
-- Assessing safety at an earlier stage of the R&D process
-- Using our predictive technologies, alliances, and partnerships to
discover and develop new therapeutics in a more cost-effective manner
-- Salvaging therapeutic programs and initiatives through reprofiling and
repositioning; that is, finding new uses and indications for existing
drug programs
Our strategy thus focuses on the following key points:
-- Continue to build more models and acquire complementary predictive
technologies for efficacy and safety testing to generate revenue from
services and technology licensing
-- Create new products and offerings that allow greater customer access to
our suite of predictive technologies for efficacy and safety
-- Expand our offerings in safety assessment, both through our recent
acquisition of Iconix Bioscience's predictive toxicology capabilities
and through our efforts with the FDA
-- Partner out later-stage compound assets
-- Begin to grow our customer base from markets outside of pharmaceutical
R&D, particularly in the health care arena where an increasingly amount
of new genetic, diagnostic, and imaging data need to be combined with
medical histories and other critical tests to help provide an
integrative, holistic view of individual patients to dramatically
improve patient choice, care, and outcomes.
We are excited about Entelos' anticipated corporate growth and look forward to
continued success in the future.
Jon Saxe James Karis
Chairman of the Board President and Chief Executive Officer
16 April 2008
Enquiries:
Entelos, Inc.
Alan Blazei, CFO Today on Tel +44 (0) 20 7466 5000
Jill Fujisaki, VP Investor Relations Thereafter on Tel +1 650 572 5400
KBC Peel Hunt, Ltd (Nominated Advisor and
Broker)
Capel Irwin/David Anderson Tel +44 (0) 20 4718 8900
Buchanan Communications
Lisa Baderoon/Mary-Jane Johnson Tel +44 (0) 20 7466 5000
Entelos, Inc.
Unaudited Balance Sheets
31 December
---------------------------
2007 2006
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,260,079 $ 4,702,426
Short-term investments - 3,267,351
Accounts receivable, net of allowance of
$100,000 and $0 at 31 December 2007 and
2006, respectively 4,693,409 1,969,539
Prepaid expenses and other current assets 464,867 238,425
------------- -------------
Total current assets 10,418,355 10,177,741
Property and equipment, net 1,826,668 2,159,102
Intangible assets, net 9,295,131 -
Notes receivable from related parties 723,795 694,443
Other assets 375,000 375,000
------------- -------------
Total assets $ 22,638,949 $ 13,406,286
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable $ 900,911 $ 379,159
Accrued liabilities 1,806,289 527,303
Accrued compensation 2,680,665 2,133,794
Deferred revenue 5,706,813 13,770,388
Notes payable, current - 112,446
------------- -------------
Total current liabilities 11,094,678 16,923,090
Long-term debt 4,249,369 -
Other 37,200 -
------------- -------------
Total liabilities 15,381,247 16,923,090
------------- -------------
Stockholders' equity (deficit)
Common stock, par value $0.001,
authorized 150,000,000 shares, issued
and outstanding 69,109,361 and
53,265,434 shares at 31 December 2007
and 2006, respectively 69,093 53,226
Additional paid-in capital 81,354,047 70,625,226
Deferred stock-based compensation (148,864) (310,717)
Accumulated deficit (74,016,574) (73,884,579)
------------- -------------
Total stockholders' equity (deficit) 7,257,702 (3,516,844)
------------- -------------
Total liabilities and stockholders'
equity (deficit) $ 22,638,949 $ 13,406,246
============= =============
Entelos, Inc.
Unaudited
Statement of Operations
Years Ended 31 December
---------------------------------------
2007 2006 2005
------------ ------------ -------------
Revenues $21,816,830 $21,564,488 $ 2,766,999
------------ ------------ -------------
Operating costs and expenses:
Cost of revenue 9,213,411 7,861,754 6,891,302
General and administrative 4,483,774 4,265,901 1,965,404
Research and development 6,065,278 6,673,558 5,269,771
Sales and marketing 1,777,527 2,260,110 1,964,501
Asset impairment - 1,370,570 -
Restructuring charge 601,239 - -
------------ ------------ -------------
Total operating costs and
expenses 22,141,229 22,431,893 16,090,978
------------ ------------ -------------
Loss from operations (324,399) (867,405) (13,323,979)
Interest income 225,778 555,772 268,726
Interest expense (59,705) (681,926) (755,886)
Other income (expense), net 26,331 (154,854) 10,745
------------ ------------ -------------
Loss before cumulative effect
of change in accounting
principle (Note 5) (131,995) (1,148,413) (13,800,394)
Cumulative effect of change in
accounting principle - 394,549 -
------------ ------------ -------------
Net loss (131,995) (753,864) (13,800,394)
Net loss allocable to
preferred stockholders - (34,604) (138,888)
------------ ------------ -------------
Net loss allocable to common
stockholders $ (131,995) $ (788,468) $(13,939,282)
============ ============ =============
Net loss per share - basic and
diluted
Before cumulative effect of
change in accounting
principle $ - $ (0.03) $ (1.56)
Cumulative effect of change
in accounting principle - 0.01 -
------------ ------------ -------------
Net loss per share - basic
and diluted $ - $ (0.02) $ (1.56)
============ ============ =============
Weighted average common shares
outstanding used in
calculating net loss per
common share:
Basic and diluted 58,071,254 41,427,310 8,914,997
============ ============ =============
Entelos, Inc.
Unaudited Statements of Stockholders' Equity (Deficit)
Common Shares Additional Deferred
Paid-In Stock-Based
Capital Compensation
------------------
Shares Amount
---------- ------- ------------ -------------
Balances, 31 December
2004 8,765,044 $ 8,765 $ 573,358 $ (79,020)
Net loss
Issuance of common stock
on exercise of options 459,554 460 105,445 -
Deferred stock-based
compensation - - 585,158 (585,158)
Amortization of deferred
stock-based
compensation - - - 101,581
Accretion on redeemable
convertible preferred
stock - - - -
---------- ------- ------------ -------------
Balances, 31 December
2005 9,224,598 9,225 1,263,961 (562,597)
Net loss - - - -
Conversion of redeemable
convertible preferred
stock to common stock 28,921,934 28,922 50,911,799 -
Conversion warrants for
preferred stock to
warrants for common
stock - - 287,597 -
Issuance of common stock
on exercise of options 652,964 653 149,473 -
Issuance of common stock
upon initial public
offering, net of
issuance costs 13,810,173 13,810 16,622,981 -
Issuance of common stock
for acquisition 655,765 656 956,761 -
Amortization of deferred
stock-based
compensation - - - 146,406
Reversal of deferred
compensation due to
cancellations - - (105,474) 105,474
Stock-based compensation - - 538,128 -
Accretion on redeembable
convertible preferred
stock - - - -
---------- ------- ------------ -------------
Balances, 31 December
2006 53,265,434 53,266 70,625,226 (310,717)
Accumulated Total
Deficit Stockholders'
Equity
(Deficit)
------------- --------------
Balances, 31 December 2004 $(59,156,829) $(58,653,726)
Net loss (13,800,394) (13,800,394)
Issuance of common stock on exercise of
options - 105,905
Deferred stock-based compensation - -
Amortization of deferred stock-based
compensation - 101,581
Accretion on redeemable convertible
preferred stock (138,888) (138,888)
------------- --------------
Balances, 31 December 2005 (73,096,111) (72,385,522)
Net loss (753,864) (753,864)
Conversion of redeemable convertible
preferred stock to common stock - 50,940,721
Conversion warrants for preferred stock
to warrants for common stock - 287,597
Issuance of common stock on exercise of
options - 150,126
Issuance of common stock upon initial
public offering, net of issuance costs - 16,636,791
Issuance of common stock for acquisition - 957,417
Amortization of deferred stock-based
compensation - 146,406
Reversal of deferred compensation due to
cancellations - -
Stock-based compensation - 538,128
Accretion on redeembable convertible
preferred stock (34,604) (34,604)
------------- --------------
Balances, 31 December 2006 (73,884,579) (3,516,804)
Entelos, Inc.
Unaudited Statements of Stockholders' Equity (Deficit)
(Continued)
Common Shares
------------------
Additional
Shares Amount Paid-In
Capital
---------- ------- ------------
Balances, 31 December 2006 53,265,434 53,266 70,625,226
Net loss - - -
Issuance of common stock on exercise
of options 265,543 248 99,538
Issuance of common stock for
acquisition 9,278,771 9,279 6,065,986
Issuance of common stock for cash 6,299,613 6,300 3,493,700
Amortization of deferred based
compensation - - -
Reversal of deferred compensation due
to cancellations - - (31,670)
Stock-based compensation - - 909,718
Issuance of warrants in connection
with long-term debt - - 191,549
-------------------------------
Balances, 31 December 2007 69,109,361 $69,093 $81,354,047
===============================
Deferred Total
Stock-Based Accumulated Stockholders'
Compensation Deficit Equity
(Deficit)
------------- ------------- --------------
Balances, 31 December 2006 (310,717) (73,884,579) (3,516,804)
Net loss - (131,995) (131,995)
Issuance of common stock on
exercise of options - - 99,786
Issuance of common stock
for acquisition - - 6,075,265
Issuance of common stock
for cash - - 3,500,000
Amortization of deferred
based compensation 130,183 - 130,183
Reversal of deferred
compensation due to
cancellations 31,670 - -
Stock-based compensation - - 909,718
Issuance of warrants in
connection with long-term
debt - - 191,549
-------------------------------------------
Balances, 31 December 2007 $(148,864) $(74,016,574) $ 7,257,702
===========================================
Entelos, Inc.
Unaudited Statements of Cash Flow
Years ended 31 December
----------------------------------------
2007 2006 2005
------------ ------------- -------------
Cash flows from operating
activities:
Net loss $ (131,995) $ (753,864) $(13,800,394)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization 1,278,374 826,779 708,308
Change in fair value of * *
warrants (238,796)
Stock-based compensation 1,039,901 684,534 101,581
Amortization of discount
on notes payable 4,938 162,850 136,196
Loss on disposal of assets 23,199 * *
Loss due to asset * *
impairment 1,370,570
Restructuring charge 601,239 * *
Changes in assets and
liabilities:
Accounts receivable (2,501,670) 532,164 3,497,583
Prepaid expenses, notes
receivable and other
current assets (336,318) 464,950 (797,606)
Other assets - 102,263 (324,754)
Accounts payable (321,780) (220,826) (548,865)
Accrued liabilities (571,601) 49,676 123,611
Accrued compensation 376,922 484,644 118,938
Deferred revenue (8,369,046) (11,588,987) 6,567,167
------------ ------------- -------------
Net cash used in
operating activities (8,907,837) (8,124,043) (4,218,235)
------------ ------------- -------------
Cash flows from investing
activities:
Purchase of short-term
investments (1,489,026) (22,272,700) (6,718,758)
Sales of short-term
investments 4,756,377 24,109,200 3,666,341
Purchases of property and
equipment (286,760) (1,742,182) (833,286)
Proceeds from business
acquisition 73,671 -- --
------------ ------------- -------------
Net cash provided by
(used in) investing
activities 3,054,262 94,318 (3,885,703)
------------ ------------- -------------
Entelos, Inc.
Unaudited Statements of Cash Flow
(Continued)
Years ended 31 December
--------------------------------------
2007 2006 2005
------------ ------------ ------------
Cash flows from financing
activities:
Proceeds from issuance of
Series D redeemable *
convertible preferred stock,
net of issuance costs -- 4,962,901
Proceeds from issuance of
common stock 3,599,786 150,126 105,905
Proceeds from initial public * *
offering of common stock, net 16,636,791
Change in book overdraft * (237,314) 237,314
Proceeds from issuance of notes
payable 4,423,888 -- 3,000,000
Repayment of notes payable (1,612,446) (4,100,457) (1,820,562)
------------ ------------ ------------
Net cash provided by
financing activities 6,411,228 12,449,146 6,485,558
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents 557,653 4,419,421 (1,618,380)
Cash and cash equivalents at
beginning of year 4,702,426 283,005 1,901,385
------------ ------------ ------------
Cash and cash equivalents at end
of year $ 5,260,079 $ 4,702,426 $ 283,005
============ ============ ============
Supplemental disclosures of cash
flow information:
Interest paid $ 42,675 $ 519,135 $ 439,836
------------ ------------ ------------
Supplemental disclosure of
noncash investing and financing
activities:
Issuance of warrants in * *
connection with notes payable $ 191,549
------------ ------------ ------------
Issuance of common stock upon *
an acquisition $ 6,075,265 $ 957,417
------------ ------------ ------------
Issuance of redeemable
preferred stock upon an * *
acquisition $ 500,000
------------ ------------ ------------
Deferred stock-based * *
compensation $ 585,158
------------ ------------ ------------
Accretion on redeemable *
convertible preferred stock $ 34,604 $ 138,888
------------ ------------ ------------
Reclassification of preferred
stock warrant upon adoption of * *
FSP 150-5 $ 526,392
------------ ------------ ------------
Entelos, Inc.
Notes to Financial Statements (Unaudited)
NOTE 1 - The Company and Summary of Significant Accounting Policies
The Company
Entelos, Inc (the "Company") was incorporated in the state of California on 31
July 1996. On 4 April 2006, the Company reincorporated from the State of
California into the State of Delaware. On 12 April 2006, the Company completed
an initial public offering on the Alternative Investment Market of the London
Stock Exchange ("AIM") for the sale of 13,810,173 common shares which raised
$16.6 million of net proceeds.
Entelos is a US-based life sciences company that develops and applies next
generation predictive technologies to reduce the risk, time, and cost of drug
discovery and development. The Company's portfolio of proprietary computer
models and toxicology reference systems--known as PhysioLab(R) and DrugMatrix(R)
systems, respectively--have helped its pharmaceutical customers select novel
compounds, assess drug safety, simulate clinical trials and patient populations,
evaluate in-licensing candidates, and better position existing products in
competitive markets. Entelos currently provides research services,
technology, and scientific expertise in toxicology screening, asthma, obesity,
diabetes, cardiovascular disease, rheumatoid arthritis, hematopoeisis (anemia),
cholesterol metabolism, and skin sensitization. The Company's PhysioLab(R)
systems provide a platform for creating "virtual patients" and virtual
populations that can also be extended to other applications in medical
education, patient support, healthcare delivery, nutritionals, and consumer
products.
Going concern uncertainty
The Company has incurred significant operating losses and negative cash flows
from operations since inception and will continue to be in a net loss position
until sufficient revenues can be generated to offset expenses. In 2007, the
Company obtained $6.5 million in available debt financing that contains
covenants pertaining to liquid assets, net working capital and quarterly
operating income. If the Company does not meet the covenants it could result in
the debt holder calling a portion or all of the debt. Management intends to
continue to finance operations of the Company through a combination of future
cash flows from operations, cost reduction measures, licensing of rights to
existing compounds and if necessary, future debt/equity financings. There can be
no assurance that the Company will be successful in obtaining additional
financing on favorable terms, or at all. If additional funds are raised by
issuing equity securities, substantial dilution to existing shareholders may
result. These matters raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Risks and uncertainties
The Company is subject to all of the risks inherent in a company which operates
in the intensely competitive service industry, providing a service which is
relatively new and constantly evolving. These risks include, but are not limited
to: the Company's ability to convince prospective strategic partners and
customers that its technology is an attractive component of pharmaceutical
research and development; the willingness and ability of customers to adopt new
technologies; its customers' perception that the Company's technologies can help
accelerate efforts and reduce costs in drug development; and the Company's
ability to sell and support sufficient numbers of customer projects.
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates and such
differences could affect the results of operations reported in future periods.
Revenue Recognition
The Company is using its patented PhysioLab(R) technology to derive revenue from
research and development collaboration contracts. Collaboration agreements
involve development of and research using dynamic computer models of human
diseases, and typically require payments from customers for technology access
fees, research and development funding, milestone payments (which can be either
success-based or delivery-based), or a combination of these elements.
When software is not incidental to the arrangement and the services in the
arrangement do not involve significant production, modification, or
customization of the software, the Company recognizes revenue in accordance with
Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), as
amended. Revenue from multiple-element arrangements is allocated to each
individual element based on vendor specific objective evidence. Amounts billed
but not yet recognized as revenue, and other payments received prior to
recognition of revenue, are recorded as deferred revenue.
When the arrangement requires significant production, modification or
customization of software, the entire arrangement is accounted in accordance
with SOP 81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts", as required by SOP 97-2. For arrangements for which
the costs to complete a project can not be reasonably and reliably estimated,
the completed contract method of accounting is used. Under the completed
contract method, revenue is recognized only when a contract is completed or
substantially complete.
For arrangements consisting solely of services, we recognize revenue in
accordance with Securities and Exchange Commission Staff Accounting Bulletin
No. 104 ("SAB 104"). Arrangements with multiple elements are accounted for in
accordance with EITF 00-21, "Revenue Arrangements with Multiple Deliverables."
Revenues are recognized when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed and
determinable and collectibility is reasonably assured.
Certain agreements may define specific milestones and the payments associated
with each milestone. Such payments are recognized as revenue upon achievement of
the milestone events, after which there are no future performance obligations to
this payment. Any payments received in advance of the completion of the
milestone are recorded as deferred revenue.
Reimbursements received from customers for out-of-pocket expenses are classified
as revenue, with the associated costs included in cost of revenue.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an original
maturity or remaining maturities of three months or less on the date of purchase
to be cash equivalents. At 31 December 2007 and 2006, the Company held its cash
and cash equivalents in a checking account, a money market account and
investment accounts with high credit quality financial institutions.
Short-term investments
The Company classifies all short-term investments as available-for-sale in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." The Company places its
short-term investments primarily in U.S. government bonds, money market and
corporate bonds. The Company held $3,267,351 available-for-sale investments in
corporate bonds at 31 December 2006. At the above date, the estimated fair value
of the investments approximated their cost and the amount of gross unrealized
gains and losses were not significant. There were no investments at 31 December
2007.
Realized gains and losses from the sales of short-term investments were not
material for the periods presented.
Fair value of financial instruments
The carrying amounts of certain of the Company's financial instruments,
including cash, cash equivalents, accounts receivable and accounts payable
approximate fair value due to the relatively short maturity periods. Based on
the interest rates available to the Company for debt with comparable maturities,
the carrying values of the Company's notes payable and long-term debt
approximate fair values.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentration of
credit risk consist of cash, cash equivalents, short-term investments and
accounts receivable. Cash and cash equivalents are held with a limited number of
financial institutions. Deposits held with these financial institutions may
exceed the amount of insurance provided on such deposits. Management believes
that the financial institutions that hold the Company's investments are
financially credit-worthy and, accordingly, minimal credit risk exists with
respect to those investments.
Credit risk with respect to accounts receivable is concentrated due to a limited
number of customers having historically accounted for a substantial portion of
the Company's revenues. The Company's customers are pharmaceutical companies
that are located in the United States and Europe. The Company performs ongoing
credit evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. The Company maintains an allowance
for doubtful accounts receivable based upon the expected collectibility of
accounts receivable when necessary.
Concentration of credit risk with respect to net accounts receivable consists of
$1,302,768, $1,257,500, and $950,000 with three customers as of 31 December 2007
and $250,000, $200,000, $522,039, and $787,500 with four customers at 31
December 2006.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is generally calculated using the
straight-line method over the estimated useful lives of the related assets
ranging from 1 to 5 years. Leasehold improvements and assets acquired under
capital leases are amortized on a straight-line basis over the term of the
lease, or the useful life of the assets, whichever is shorter. Maintenance and
repairs are charged to expense as incurred and improvements and betterments are
capitalized. When assets are retired or otherwise disposed of, the cost and
accumulated depreciation and amortization are removed from the accounts and any
resulting gain or loss is reflected in operations in the period realized.
Impairment of long-lived assets
The Company evaluates the carrying amount of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company assesses
recoverability using undiscounted cash flow attributed to that asset. If an
asset is impaired, it is written down to its estimated fair market value.
Goodwill and purchased intangible assets
Identifiable finite lived intangible assets are generally comprised of service
agreements and related relationships and technology and are amortized on a
straight line basis over the estimated useful lives of the assets. Such lives
range from 15 months to 60 months. The Company evaluates the recovery of finite
lived intangible assets whenever events or changes in circumstances indicate
that their current value may not be recoverable through the estimated and
undiscounted future cash flows resulting from the use of the assets. If
determined that the carrying value is not recoverable, impairment is measured by
using the projected discounted cash flow method.
The excess of the cost of acquisition over the net amount assigned to the assets
acquired and liabilities assumed is recorded as goodwill. Goodwill is not
amortized but instead tested for impairment annually and whenever events or
circumstances may occur that might require the need for more frequent tests.
For goodwill and intangible assets, the impairment test consists of a comparison
of the fair value of the asset to its carrying amount. If the carrying amount of
the asset exceeds its fair value, an impairment loss is recognized in an amount
equal to that excess. In valuing its goodwill and intangible assets, the Company
uses the income method. Under the income approach, the fair value of a reporting
unit is calculated based on the present value of estimated discounted future
cash flows. The present value of estimated discounted future cash flows uses the
Company's estimates of revenues driven by assumed market growth rates and
estimated costs as well as appropriate discount rates.
Goodwill impairment is determined using a two-step process. The first step of
the goodwill impairment test is used to identify potential impairment by
comparing the fair value of the Company's reporting unit with the net book value
(or carrying amount), including goodwill. If the fair value of the reporting
unit exceeds the carrying amount, goodwill of the reporting unit is considered
not impaired and the second step of the impairment test is unnecessary. If the
carrying amount of the reporting unit exceeds the fair value, the second step of
the goodwill impairment test is performed to measure the amount of impairment
loss, if any.
The second step of the goodwill impairment test compares the implied fair value
of the reporting unit's goodwill with the carrying value of that goodwill. If
the carrying amount of the reporting unit's goodwill exceeds the implied fair
value of the reporting unit goodwill, an impairment loss is recognized in an
amount equal to that excess. The implied fair value of goodwill is determined in
the same manner as the amount of goodwill recognized in a business combination,
accordingly the fair value of the reporting unit is allocated to all of the
assets and liabilities of that unit as if the reporting unit had been acquired
in a business combination and the fair value of the reporting unit was the
purchase price paid to acquire the reporting unit.
The Company performs it's annual impairment test of goodwill during the month of
December based on conditions as of the end of November, in accordance with
Statement of Financial Account Standards No. 142 "Goodwill and Other Intangible
Assets" ("SFAS No. 142). Impairment tests performed as of November 2007
indicated that no impairment was necessary based on the conditions at that time.
During fiscal 2006, we determined that the carrying value of goodwill and net
intangible assets associated with our acquisition of Discovery Innovations, Inc.
exceeded their estimated fair values. The revenues as projected for the first
year of operations were lower than expected. Consequently, we recorded non-cash
intangible impairment charges of $1,370,570 (see Note 6).
Software development costs
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be, Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon the
completion of a working model. To date, costs incurred by the Company between
the completion of the working model and the point at which the product is ready
for general release have been insignificant. Accordingly, the Company has
charged all such costs to research and development expense in the period
incurred.
Research and development
Research and development costs consist primarily of compensation and related
costs for personnel and consultants as well as costs related to materials,
supplies, equipment depreciation and facilities allocations for scientific
research and product development. All research and development costs are
expensed as incurred.
Segment reporting
We organize ourselves as one segment reporting to the chief operating
decision-maker. We have sales outside of the United States, which are described
in Note 15. All long-lived assets are maintained in the United States.
Income Taxes
Income taxes are accounted for using an assets and liability approach, which
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
the provisions of enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts expected to be realized.
In July 2006, the Financial Accounting Standards Board, or FASB, issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," or FIN 48.
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with Statement of Financial
Accounting Standards, or SFAS, No. 109, "Accounting for Income Taxes." FIN 48
prescribes a recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The Company adopted the provisions of FIN 48
effective January 1, 2007. Refer to Note 10 for further details of the impact of
adoption.
Recent pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("SFAS 157") which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value measurements but rather
eliminates inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 is effective for fiscal years beginning after 15
November 2007. However, on 6 February 2008, the FASB issued FSP SFAS 157-b which
defers the effective date of SFAS 157 for one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a recurring basis. We will adopt SFAS 157 in fiscal year
2008 except as it applies to those nonfinancial assets and nonfinancial
liabilities as noted in FSP SFAS 157-b. The partial adoption of SFAS 157 will
not have a material effect on our results of operations, cash flows or financial
position.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities,
including an amendment of FASB Statements No. 115" ("SFAS 159"). SFAS 159
permits entities to choose, at specified election dates, to measure eligible
items at fair value (the "fair value option"). A business entity shall report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting period. This accounting
standard is effective as of the beginning of an entity's first fiscal year that
begins after 15 November 2007. The effect, if any, of adopting SFAS 159 on our
financial position and results of operations has not been finalized.
NOTE 2 - INITIAL PUBLIC OFFERING
On 12 April 2006, the Company completed its initial public offering of
13,810,173 shares of its common stock, at $1.44 per share. Net cash proceeds of
the initial public offering were approximately $16.6 million, after deducting
underwriter discounts, commissions and other offering expenses. In conjunction
with the closing of the initial public offering, all of the Company's
outstanding shares of Series A, Series B, Series C, and Series D convertible
preferred stock outstanding at the time of the offering were automatically
converted into 28,921,934 shares of common stock.
NOTE 3 - NET LOSS PER SHARE
Basic net loss per share attributed to common shares is computed by dividing the
net loss attributable to common shares for the year by the weighted average
number of common shares outstanding during the year as reduced by the weighted
average unvested common shares subject to repurchase by the Company. Net loss
available to common stockholders is calculated using the two class method as the
net loss less preferred stock dividends for the period and amounts allocated to
preferred stock to reflect the rights of the preferred stock to receive
dividends in preference to common stock. Diluted net loss per share is computed
using the weighted average number of common and potential common shares
outstanding. Potential common shares include long-term incentive awards, common
stock subject to repurchase rights, and an incremental number of shares of
common stock issuable upon the exercise of stock options and warrants. Potential
common shares are excluded from the computation if their effect is
anti-dilutive.
Years Ended 31 December
----------------------------------
2007 2006 2005
----------- ----------- ----------
Weighted average common shares
outstanding 58,106,014 41,464,695 8,919,465
Weighted average unvested common
shares subject to repurchase (34,760) (37,385) (4,468)
----------- ----------- ----------
Denominator for diluted net loss
per share 58,071,254 41,427,310 8,914,997
=========== =========== ==========
The potential shares, which are excluded from the determination of diluted net
loss per share as their effect is anti-dilutive, are as follows:
31 December
-------------------------------
2007 2006 2005
---------- --------- ----------
Redeemable convertible preferred stock -- -- 28,380,019
Warrants to purchase common stock 1,213,379 443,332 --
Warrants to purchase redeemable
convertible preferred stock -- -- 373,529
Options to purchase common stock 3,216,432 3,064,861 3,314,355
Long-term incentive plan award 7,101,313 1,987,502 --
Convertible debentures 6,382,979 -- --
Shares subject to repurchase 15,840 92,461 60,832
---------- --------- ----------
17,929,943 5,588,156 32,128,735
========== ========= ==========
NOTE 4 - RELATED PARTY TRANSACTIONS
At 31 December 2007, the Company held full recourse notes receivable from three
employees with total balances of $723,795. The interest rates on these notes
range from 2.78 per cent to 5.26 per cent per annum. The notes mature in 2009
and 2011.
The Company has entered into various collaboration agreements with Pfizer, Inc.
(whose subsidiary, Pfizer Overseas Pharmaceuticals is a shareholder of the
Company) to provide consulting and research related services on drug
development. Under the collaboration agreements, the Company has recognized
revenues amounting to $1,896,648, $1,078,125 and $937,500 for the years ended 31
December 2007, 2006 and 2005, respectively. At 31 December 2007 and 2006, the
deferred revenue balance with Pfizer, Inc. was $649,570 and $787,500,
respectively.
Mr. Saxe, a director of the Company, and Abingworth Management, a shareholder of
the Company, were also a director and shareholder of Iconix BioSciences, Inc.
(See Note 6 Acquisitions), respectively.
NOTE 5 - CHANGE IN ACCOUNTING POLICY
On 29 June 2005, the FASB issued Staff Position 150-5, "Issuer's Accounting
under FASB Statement No. 150 ("SFAS 150") for Freestanding Warrants and Other
Similar Instruments on Shares That Are Redeemable" ("FSP 150-5"). FSP 150-5
affirms that such warrants are subject to the requirements in SFAS 150,
regardless of the timing of the redemption feature or the redemption price.
Therefore, under SFAS 150, the freestanding warrants that are related to the
purchase of the Company's convertible preferred stock are liabilities that
should be recorded at fair value.
The Company adopted FSP 150-5 and accounted for the cumulative effect of the
change in accounting principle as of 1 January 2006. In the year ended 31
December 2006, the Company recorded $394,549 of additional income related to
cumulative change in accounting principle to reflect the warrants remeasured on
1 January 2006. The Company recorded an expense of $155,753 that is recorded in
other income (expense), net to reflect the change in fair value between 1
January 2006 and 6 April 2006, the date the preferred warrants were converted to
common stock warrants.
Effective 1 January 2006, the Company adopted FAS 123R using the
prospective-transition method. See Note 10 for further discussion.
NOTE 6 - ACQUISITION
Iconix BioSciences, Inc.
In August 2007 the Company acquired the outstanding stock of Iconix BioSciences,
Inc., a privately held predictive toxicology company located in Mountain View,
CA. The initial consideration of $6,459,702 was satisfied by the issuance of
9,278,771 shares of the Company's common stock valued at $6,075,265 plus
acquisition related cost of $384,437. The acquisition was accounted for using
the purchase method and, accordingly, the purchase price has been allocated to
the assets acquired and liabilities assumed based on estimated fair values at
the date of acquisition.
The following tables summarizes, on a preliminary basis, the allocation of the
purchase price of Iconix BioSciences, Inc. to the assets acquired and
liabilities assumed in the acquisition and remains subject to finalization:
Current assets $ 586,450
Fixed assets 446,668
Other assets 13,333
Existing technology 223,000
Customer relationships 939,000
Goodwill 8,368,847
------------
Total assets acquired 10,577,298
------------
Current liabilities (2,274,925)
Deferred revenue (305,471)
Notes payable (1,500,000)
Other liabilities (37,200)
------------
Total liabilities assumed (4,117,596)
------------
Net assets acquired $ 6,459,702
============
Valuing certain components of the acquisition, including certain assets and
accrued expenses required the Company to make estimates that may be adjusted in
the future; consequently the purchase price allocation is considered
preliminary. Final determination of these estimates could result in an
adjustment to the preliminary purchase price allocation, with an offsetting
adjustment to goodwill.
Upon the closing of the above transaction, the Company also became contingently
liable for up to an additional $25 million worth of shares of common stock in
the event that certain revenue goals are met through 31 August 2008. The
contingent consideration is based on the designated stock price, as defined in
the purchase agreement, and will be recorded as purchase price and allocated to
goodwill. In accordance with the purchase agreement 7,935,328 shares of common
stock are held in escrow related to the contingent consideration.
The goodwill, existing technology, and customer relationships are recorded on
the balance sheet as intangibles. None of the goodwill is deductible for tax
purposes. The goodwill represents benefits of the acquisition that are
additional to the fair value of the other net assets acquired. The primary
reasons for the acquisition and the principal factors that contributed to the
purchase price that resulted in the recognition of goodwill were as follows:
-- Iconix's predictive toxicology capability combined with Entelos'
predictive in silico disease models will address the pharmaceutical
industry's two biggest issues around failures: safety and efficacy.
-- Iconix's DrugMatrix system has been installed at the U.S. Food and Drug
Administrative (FDA) for use by the Center for Drug Evaluation and
Research (CDER) to evaluate voluntarily genomic data submissions. In
addition, Iconix is a member of the Predictive Safety Testing
Consortium, which is developing data and processes to support the
regulatory use of new safety biomarkers.
-- This acquisition of Iconix, as well as the Company's collaboration with
the FDA to develop a predictive model of drug-induced human liver
injury, expands the combined companies' reach into safety assessment.
-- Iconix's technology will also add significant new capabilities for
translational medicine and for finding new uses for existing drugs and
drug combinations.
Discovery Innovations, Inc.
In May 2005 the Company acquired certain assets, intellectual property and
technical designs related to the software services of Discovery Innovations,
Inc. The initial purchase price of $570,440 consisted of $500,000 of Series C
convertible preferred stock and $70,440 of acquisition related costs. The
acquisition was accounted for using the purchase method. Upon closing of the
transaction, the Company also became contingently liable for up to an additional
1,000,000 shares of Series C reedemable convertible preferred stock (1,349,000
common shares upon conversion) in the event certain revenue goals were met as
stated in the purchase agreement. In October 2006 the Company issued an
additional 655,765 shares of common stock as revenue was less than expected
during the first year of operations. The consideration of $957,417 was recorded
as purchase price and allocated to goodwill. The allocation of the purchase
price and additional issuance of shares was a follows:
Fixed assets $ 101,662
Service agreements and related relationships 90,000
Trademarks 20,000
Goodwill 1,316,195
------------
$ 1,527,857
============
The acquired goodwill and intangibles from both acquisitions are recorded on the
balance sheet as intangibles and other assets. The intangible assets are being
amortized over their useful lives:
Trademarks and service agreements 4 years
Technology 5 years
Customer Relationships (Platform Alliance Customers) 1.4 years
Customer Relationships (Service Customers) 3 years
Goodwill was not subject to amortization. Amortization expense relating to the
intangibles totaled $235,712, $33,958 and $21,667, for the years ended 31
December 2007, 2006 and 2005, respectively.
As a result of our annual impairment analysis, the intangible asset related to
the trademarks and service agreements and goodwill related to the acquisition of
Discovery Innovation, Inc were determined to be impaired. The Company reduced
the carrying value to zero and recorded a loss of $1,370,570 due to the
impairment on the Statement of Operations.
NOTE 7 - REDEEMABLE CONVERTIBLE PREFERRED STOCK
In conjunction with the closing of the initial public offering on 12 April 2006,
all the Company's outstanding shares of Series A, Series B, Series C and Series
D convertible preferred stock outstanding at the time of the offering were
converted into 28,921,934 shares of common stock. There was no convertible
preferred stock outstanding as of 31 December 2007 and 2006.
NOTE 8 - COMMON SHARES
The Company's Articles of Incorporation, as amended, authorize the Company to
issue 150,000,000 shares of common stock. As of 31 December 2007, the Company
has reserved the following shares of common stock for future issuance:
Stock options outstanding 3,216,432
Stock options available for future grant 1,014,876
Stock warrants 1,213,379
Stock held in escrow in connection with acquisition 7,935,328
NOTE 9 - STOCK OPTION PLANS
1997 Stock Option Plan
On 12 June 1997, the Company adopted the 1997 Stock Plan (the "1997 Plan") under
which 7,153,552 shares of the Company's common stock were reserved for issuance
to employees, directors and consultants. Options granted under the 1997 Plan may
be incentive stock options or nonqualified stock options. Incentive stock
options ("ISO") may only be granted to employees of the Company. The
nonqualified stock options ("NSO") may be granted to Company employees,
directors and consultants. Options to purchase shares of the Company's common
stock are granted at a price equal to the fair value of the stock at the date of
grant, as determined by the Board of Directors. The exercise price of an ISO
granted to an employee who owns stock more than 10 per cent of the voting power
of all classes of stock of the Company shall not be less than 110 per cent of
the fair value per share on the date of grant. Generally options terminate ten
years after the date of the grant. ISO's granted to employees who own more than
ten per cent of the total stock of the Company terminate five years from the
date of the grant. The options generally vest over a four year period, 25 per
cent after one year and the balance ratably thereafter. The 1997 Plan has been
replaced with the 2006 Equity Plan (the "2006 Plan"), cancellations of non
vested options from this plan are not added back for future grants.
The 2006 Plan
On 28 March 2006, the Company adopted the 2006 Plan under which 2,000,000 shares
of the Company's common stock have been reserved for issuance to employees,
directors and consultants. Options granted under the 2006 Plan may be ISO's,
restricted stock awards, and NSO's to employees, directors and consultants.
ISO's may be granted to current employees only. NSO's and restricted stock
awards may be granted to employees, directors and consultants. ISO's my be
granted with an exercise price of no less than 100% of the market value of the
underlying common shares on the date of grant. NSO's and restricted stock awards
may be granted with an exercise price or purchase price of no less than 85 per
cent of the market value of the underlying common shares on the date of grant.
No option shall be exercisable after its expiration date or have an expiration
date that is more than ten years (five years in the case of a 10 per cent
shareholder) after the date of grant.
The following table summarizes option activity under both stock option plans:
Shares Available Options Weighted Average
For Future Grant Outstanding Exercise Price
-------------------------------------------------
Balances at 31 December 2004 164,349 2,996,896 $ 0.24
Additional shares reserved 1,000,000 -
Options granted (986,750) 986,750 0.25
Options exercised - (459,554) 0.23
Options canceled 209,737 (209,737) 0.25
---------------- ------------ ----------------
Balances at 31 December 2005 387,336 3,314,355 0.25
Additional shares reserved 2,000,000 -
Options granted (630,917) 630,917 1.25
Options exercised - (652,964) 0.27
Options canceled 227,447 (227,447) 0.38
---------------- ------------ ----------------
Balances at 31 December 2006 1,983,866 3,064,861 0.44
Options granted (814,250) 814,250 0.79
Options exercised - (265,543) 0.26
Options canceled 261,995 (261,995) 0.94
Options canceled not available for future grant (416,735) (135,141) -
---------------- ------------ ----------------
Balances at 31 December 2007 1,014,876 3,216,432 $ 0.50
================ ============ ================
The weighted average per share grant date fair value of stock options granted
during 2007 and 2006 was $0.38 and $0.74, respectively, the intrinsic value of
options exercised during 2007 and 2006 was $277,930 and $489,295, respectively
and the total fair value of shares granted and vested during 2007 and 2006 was
$19,250 and $34,407.
Option grants outstanding as of 31 December 2007 and related weighted average
price and contractual life information are as follows:
Options Outstanding Options Vested
----------------------------- --------------------------------------------------
Weighted average
remaining
Number contractual life Weighted average Weighted average
Exercise price in US$ Outstanding (in years) exercise price Number vested exercise price
------------------------- -------------------------------------------------------------- -----------------
$0.16 - $0.20 67,000 1.03 $ 0.17 67,000 $ 0.17
$0.25 - $0.30 1,954,100 5.98 0.25 1,745,945 0.25
$0.51 - $0.56 509,000 9.80 0.54 12,873 0.56
$1.06 - $1.10 413,332 8.72 1.08 139,627 1.09
$1.32 - $1.61 273,000 8.90 1.46 47,707 1.58
----------- ---------------- ---------------- ------------- -----------------
3,216,432 7.08 $ 0.50 2,013,152 $ 0.34
=========== ================ ================ ============= =================
Early Exercise of Employee Options
The Company issued common stock to employees pursuant to the early exercises of
their stock options in exchange for cash. Unvested shares, comprising of 15,840
and 92,461 shares at 31 December 2007 and 2006, respectively, were subject to a
repurchase right held by the Company at the original issuance price in the event
the option holders' employment is terminated either voluntarily or
involuntarily. For exercises of employee options, this right lapses 25 per cent
on the first anniversary of the agreement and in 36 equal monthly amounts
thereafter. These repurchase terms are considered to be a forfeiture provision
and do not result in variable accounting. In accordance with EITF No. 00-23,
"Issues related to the Accounting for Stock Compensation under APB 25", cash
received from employees for exercise of unvested options are treated as a
refundable deposit shown as a liability in the Company's financial statements.
The amount of the liability recorded for refundable deposits at 31 December 2007
and 2006 is $6,384 and $26,604, respectively.
Long-Term Incentive Stock Plan
On 25 September 2007 and 5 April 2006, the Remuneration Committee of the Board
of Directors granted performance stock awards pursuant to the Long Term
Incentive Plan (the "LTIP"). Under the LTIP common stock will be awarded to
Executive Directors and senior managers conditional upon the achievement of
specific measurable performance criteria determined by the Remuneration
Committee. In particular, the Company's total shareholder return ("TSR") will be
measured against the TSR of companies comprised in an appropriate comparator
group set by the Remuneration Committee.
The number of shares granted under the LTIP is 7,101,313 (1,987,502 in 2006 and
5,113,811 in 2007). During the year ended 31 December 2007 and 2006,
compensation expense and additional paid-in capital of approximately $813,472
and $467,505 was recorded in relation to the LTIP. Compensation expense during
the year ended 31 December 2007 was based on the fair value of the awards at
date of grant. As of 31 December 2007 there was approximately $2,483,092 of
total unrecognized compensation expense related to the LTIP. Shares awarded
under the LTIP vest at the end of the three year period subject to the Company
achieving specified TSR targets measured as of the end of the three year period.
Stock Based Compensation
Through 31 December 2005, the Company accounted for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
("APB No. 25") and complied with the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Under APB No. 25, compensation cost is
recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the exercise price. SFAS No. 123 defines a
"fair value" based method of accounting for an employee stock option or similar
equity investment.
Effective 1 January 2006, the Company adopted FAS 123R using the
prospective-transition method. Under this transition method, stock compensation
cost recognized beginning 1 January 2006 includes compensation cost for all
share-based payments granted on or subsequent to 1 January 2006 based on the
grant-date fair value estimated in accordance with the provisions of FAS 123R
and compensation expense on the remaining unvested awards under the
intrinsic-value method of APB No. 25 for options granted prior to the SFAS 123R
effective date.
The Company uses the Black-Scholes-Merton option-pricing model with the
following assumptions to estimate the share-based compensation expense for the
years ended 31 December 2007 and 2006, respectively: weighted-average risk-free
interest rate of 4.34 and 4.81 per cent based on the U.S. Treasury yield for a
period consistent with the expected term of the option in effect at the time of
grant; no expected dividend payments; expected life of 4.60 and 4.47 years;
weighted-average volatility factor of 55 and 57 per cent based on peer group
analysis. Total compensation expense under SFAS 123R for the years ended 31
December 2007 and 2006 was $909,718 and $538,128, respectively; $96,246 and
$70,623 was related to the 1997 and 2006 stock option plans and $813,472 and
$467,505 was recorded in relation to the LTIP.
The Company has not been public for a significant period of time to use its own
volatility. Therefore, the Company used the average volatility of similar
entities. Four out of the five companies used as guideline companies are U.S.
publicly traded companies that have disclosed their volatility assumptions for
the year ending 31 December 2007. The Company used historical exercise data from
the Company's inception for the basis of estimating the expected term.
During 2005 and 2004 options were granted to employees at exercise prices that
were less than the fair market value of the common shares on the date of grant
which resulted in deferred compensation of $586,000. Amortization of deferred
stock compensation is recognized on a straight-line basis over the vesting
period, reduced by cancellations of unvested options. Amortization of deferred
stock compensation for 2007, 2006 and 2005 was $130,183, $146,406 and $101,581,
respectively.
Stock based compensation expense was recorded in the Statement of Operations as
follows:
Years Ended 31 December
----------------------------------------
2007 2006 2005
------------ -------------- ------------
Cost of revenue $ 267,105 $ 204,421 $ -
General and administrative 483,780 133,671 18,059
Research and development 214,588 261,413 76,750
Sales and marketing 74,428 85,029 6,772
------------ -------------- ------------
$ 1,039,901 $ 684,534 $ 101,581
============ ============== ============
As of 31 December 2007 there was $630,676 of total unrecognized compensation
expense related to non-vested stock options under APB No. 25 and SFAS No. 123R.
The weighted average period over which compensation expense is expected to be
recognized is 2.83 years.
NOTE 10 - INCOME TAXES
The components of deferred income tax assets and liabilities are as follows:
Years Ended 31 December
-------------------------------
2007 2006
-------------- ----------------
Current deferred tax assets (liabilities):
Accrued compensation and accrued expenses $ 1,919,821 $ 1,115,067
Deferred revenue 56,288 3,101,567
-------------- ----------------
Net current deferred tax assets 1,976,109 4,216,634
-------------- ----------------
Noncurrent deferred tax assets:
Federal NOL carryover 24,965,297 20,067,496
Federal research and development credit 1,650,724 2,407,588
Federal AMT credit 39,223 -
State NOL carryovers 2,603,488 2,214,642
State credit carryovers 1,106,986 1,644,298
Costs capitalized 1,600,193 814,300
-------------- ----------------
Net noncurrent deferred tax assets (liabilities) 31,965,911 27,148,324
-------------- ----------------
Total net deferred tax assets 33,942,020 31,364,958
Less: valuation reserve (33,942,020) (31,364,958)
-------------- ----------------
Net deferred tax assets $ - $ -
============== ================
The difference between the tax expense (benefit) derived by applying the Federal
statutory income tax rate to the net income (loss) and the expense (benefit)
recognized in the consolidated financial statements is as follows:
Years Ended 31 December
--------------------------------------------
2007 2006 2005
------------- -------------- --------------
Rate Reconciliation:
Pre-tax loss $ (131,995) $ (753,864) $ (13,800,394)
------------- -------------- --------------
Federal statutory income tax rate--34% (44,878) (256,314) (4,692,134)
Add (deduct) the effect of:
State tax provision (benefit) (7,920) (45,232) (604,325)
Goodwill and intangible impairment charges - 570,478 -
Permanent differences and other, net 122,985 118,020 24,246
Federal and state tax credits (349,298) (544,354) (628,209)
Change in valuation reserve 279,111 157,402 5,900,422
------------- -------------- --------------
Total tax provision (benefit) $ - $ - $ -
============= ============== ==============
The Company makes certain estimates and judgments in determining income tax
expense for financial statement purposes. These estimates and judgments occur in
the calculation of certain tax assets and liabilities, which arise from
differences in the timing of recognition of revenue and expense for tax and
financial statement purposes.
As part of the process of preparing its financial statements, the Company is
required to estimate its income taxes in each of the jurisdictions in which it
operates. This process involves the Company estimating its current tax exposure
under the most recent tax laws and assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included in
the Company's balance sheets.
The Company assesses the likelihood that it will be able to recover its deferred
tax assets. The Company considers all available evidence, both positive and
negative, including historical levels of income and loss, expectations and risks
associated with estimates of future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a valuation
allowance. If the Company does not consider it more likely than not that it will
recover its deferred tax assets, the Company will record a valuation allowance
against the deferred tax assets that it estimates will not ultimately be
recoverable. As a result of the Company's analysis of all available evidence,
both positive and negative, as of 31 December 2007 and 2006, the Company did not
consider it was more likely than not that the Company would recover its deferred
tax assets. Accordingly, a full valuation allowance was recorded for deferred
tax assets. The valuation allowance increased by $2.6 million, $.2 million, and
$5.9 million during the years ended December 31, 2007, 2006 and 2005,
respectively. In accordance with SFAS 123(R), the Company has excluded from
deferred tax assets tax benefits attributable to employee stock option
exercises.
As of 31 December 2007, the Company had federal net operating loss carryforwards
of approximately $73.4 million and federal research and development tax credit
carryforwards of approximately $1.6 million, which expire in the years 2011
through 2027. The Company also had California net operating loss carryforwards
of approximately $40.6 million, which expire in the years 2010 through 2017, and
California research and development tax credit carryforwards of approximately
$1.7 million, which do not expire. In addition, The Company also had net
operating loss carryforwards from various other states of approximately
$4 million, which expire in the years 2008 through 2027.
The Internal Revenue Code of 1986, as amended and corresponding state statutes,
contains provision that may limit the net operating loss and tax credit carry
forwards available for use in any given period upon the occurrence of certain
events, including a significant change in ownership interests. The Company
recently conducted an analysis of our stock ownership to determine whether IRC
Section 382 would limit the use of these tax attributes. Based on that analysis,
we believe, that approximately $53 million of NOL associated with our
acquisition of IconixBioSciences, Inc. will expire unutilized. In addition,
approximately $3.9 million of Iconix federal R&D credit will expire unutilized.
We believe that the balance of Iconix federal NOL ($14.8) million and California
NOL ($2.7) million will be available to offset our combined taxable income in
the future. Our analysis indicates that the balance of other tax attributes will
be available, to offset our future taxable income. However, utilization of our
net operating loss and research and development credit carryforwards may still
be subject to substantial annual limitations due to ownership change limitations
provided by the Internal Revenue Code and similar state provisions for ownership
changes after 31 December 2007. Such an annual limitation could result in the
expiration of the net operating loss and research and development credit
carryforwards available as of 31 December 2007 before utilization.
The Company files income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. The Company is subject to U.S. federal and state
income tax examinations by tax authorities for tax years 1997 through 2007 due
to net operating losses that are being carried forward for tax purposes.
We adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes,
or FIN 48, on 1 January 2007. As a result of the implementation of FIN 48, we
did not recognize any adjustment to the liability for uncertain tax positions.
As of the date of adoption, we recorded a $1.6 million reduction to deferred tax
assets, all of which was offset by a full valuation allowance and therefore did
not record any adjustment to the beginning balance of retained earnings.
However, the Company has unrecognized tax benefits in connection with its
acquisition of Iconix. The following is a tabular reconciliation of the total
amount of unrecognized tax benefits for the year ended 31 December 2007:
Unrecognized tax benefit at 1 January 2007 $ -
Gross increases - tax position in current period 4,247,678
Gross decreases - tax positions in current period
Unrecognized tax benefit at 31 December 2007 -
---------------
$ 4,247,678
===============
FIN 48 is not expected to have a material impact on the Company's effective tax
rate in the next twelve months. Additionally, the Company does not expect any
material changes in unrecognized tax benefits in the next twelve months.
The Company's policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. As of the date
of adoption of FIN 48, the Company did not have any accrued interest or
penalties associated with any unrecognized tax benefits, nor was any interest
expense recognized for the year ended December 31, 2007.
NOTE 11 - NOTES PAYABLE
On 21 December 2007, the Company entered into a debt financing agreement with
Imperium Master Fund, LTD ("Imperium") in which Imperium will provide $6,500,000
in total cash loan proceeds. The Company used $1,500,000 of the proceeds to
repay certain debt of Iconix Biosciences, Inc. assumed in the acquisition (See
Note 6) and $5,000,000 as long-term working capital.
The financing provides the Company with $1,500,000 under a secured bridge note
and $5,000,000 under secured convertible debentures. At the closing of the
financing on 21 December 2007, the Company received a total of $4,423,888,
representing the $4,500,000 total proceeds from the bridge note and initial
debenture less certain expenses of Imperium agreed to be paid by Entelos in
connection with the transaction. The expenses were recorded as a discount on the
bridge note and initial debentures and will be amortized as interest expense
using the effective interest method over the life of the bridge note and initial
debentures.
The bridge note will mature 15 months from issuance. The principal amount of the
bridge note will accrete and compound each month at the rate of 0.833 per cent
per month, such that the principal amount at maturity will be $1,698,843. The
bridge note may be repaid by the Company at any time at 101 per cent of the
outstanding principal amount, including accreted principal, upon 30 days notice.
In connection with the bridge note, the Company issued to Imperium a five
year-term warrant to purchase up to 943,576 share of the Company's common stock
at an exercise price of $0.45 per share (Note 12).
The convertible debenture totaling $5,000,000 is available in two separate
tranches. At the closing, Imperium purchased the initial convertible debenture
from the Company for an issuance purchase price of $3,000,000 in principal
amount, which debenture will have a repayment amount of $3,314,139. On or about
9 October 2008, Imperium will purchase a $2,000,000 principal amount convertible
debenture from the Company, which will have a repayment amount of $2,209,426.
The initial principal amounts of the debentures will accrete and compound each
month at the rate of 0.833 per cent per month for 12 months from their
respective dates of issuance. After one year, the outstanding principal amounts
will accrue interest at 8per cent per annum.
The two tranches of the convertible debenture will be identical in all respects
other than the issue and amortization dates. They will amortize in 24 equal
monthly payments beginning 3 years from the date of their respective issuance.
If the debentures are partially converted, the monthly amortization payments
will be reduced proportionately. The Company does not have the ability to call
the debenture prior to its maturity.
Imperium may call the debentures upon a change in control of the Company,
including a sale of 50 per cent or more of its assets or a merger in which the
pre-merger Company stockholders do not hold at least 75 percent of the surviving
entity, and certain other mergers of the Company, or an event of default by the
Company under the debentures. In the event of such a call, the Company would be
required to repay Imperium the greater of (a) 120 per cent of the unpaid
principal amount of the debentures being redeemed plus all accrued and unpaid
interest thereon, or (b) an amount calculated pursurant a formula based upon the
Company's stock price at the time of such call. Imperium also may call the
bridge note upon a change of control of the Company or an event of default; in
such case the Company would be required to repay 101 per cent of the
then-outstanding principal plus accrued interest and default interest, under the
bridge note.
Payment of the note and debentures is collateralized by a security interest in
the assets of the Company, except certain excluded intellectual property assets.
The principal of the two tranches of the debentures will be convertible at any
time at the option of Imperium into common stock of the Company at a price per
share of $0.47 per share. The conversion price was based upon 125 per cent of
the average of the 20 daily volume weighted average price per share of the
Company's common stock for each of the 20 business days prior to the closing of
the initial debenture. The Company will not have the ability to require or force
Imperium to convert the debentures. Imperium may not convert if such conversion
would result in Imperium holding more than 9.9 per cent of the Company's
then-outstanding share of common stock.
The debt financing agreement contains certain covenants pertaining to liquid
assets, net working capital and quarterly operating income, as defined in the
debt financing agreement. If the Company does not meet the liquid asset or net
working capital covenants, Imperium shall have the option to notify the Company
in writing demanding the Company prepay the bridge note and/or the convertible
debenture then-outstanding by an aggregate amount equal to such shortfall. If
the Company does not meet the quarterly operating income covenant, Imperium may
call the debentures, as noted above, due to an event of default. The Company is
in compliance with all covenants as of 31 December 2007.
On 29 March 2004, the Company entered into a Loan and Security Agreement (the
"Agreement") with Lighthouse Capital Partners IV. The Agreement allowed for
borrowings up to $5,000,000 of working capital requirements and expires on 28
February 2008. As of 31 December 2006, the Company repaid the borrowings in full
and terminated the Agreement.
In connection with this borrowing, the Company has issued warrants to purchase
200,000 shares of Series C preferred stock at $2.50 per share (Note 14). The
warrants were converted to common stock warrants upon the Company's initial
public offering.
Annual maturities of long-term debt at 31 December 2007 consist of the
following:
2009 $ 1,698,758
2010 530,262
2011 1,846,712
2012 1,728,876
--------------
5,804,608
Less amounts representing interest (1,292,385)
Less discounts on Notes payable (262,854)
--------------
$ 4,249,369
==============
NOTE 12 - WARRANTS
In May 1999, the Company granted a warrant to purchase 173,529 shares of Series
A redeemable convertible preferred stock at $1.70 per share. The warrants are
exercisable until the earlier of 17 May 2007, or one year from the effective
date of the Company's initial public offering of its common shares. As of 6
April 2006, the warrants were converted from preferred warrants to warrants for
173,529 common shares. The warrants expired and were not exercised.
In conjunction with a Loan and Security Agreement entered into in March 2004,
the Company issued warrants to purchase 200,000 shares of Series C redeemable
convertible preferred stock at $2.50 per share. The warrants expire in 29 March
2011. Using the Black-Scholes option pricing model with a term of seven years,
volatility of 70 per cent, no dividend yield and risk-free interest rate of 3.55
per cent., the Company determined that the fair value of the warrant was
$322,000 at the date of issuance, which was recorded as a discount to the notes
payable and amortized to interest expense over the loan term. The loan was
repaid in full and the discount was taken into interest expense during 2006.
As of 6 April 2006 the warrants were converted from preferred warrants to common
warrants. After conversion the warrants are exercisable for an aggregate of
269,803 common shares, at an exercise price of $1.85 per common share. As of 31
December 2007, all the warrants were outstanding.
In conjunction with the debt financing agreement dated 21 December 2007, the
Company issued warrants to purchase 943,576 share of the Company's common stock
at exercise price of $0.45 per share. The warrants expire 21 December 2012.
Using the Black-Scholes option pricing model with a term of five years,
volatility of 55 per cent, no dividend yield and risk-free interest rate of 3.58
per cent., the Company determined that the fair value of the warrant was
$191,549 at the date of issuance, which was recorded as a discount to the notes
payable and is amortized to interest expense over the loan term. As of 31
December 2007, all the warrants were outstanding.
NOTE 13 - BUSINESS SEGMENTS AND MAJOR CUSTOMERS
The Company operates in one segment, comprising of pharmaceutical R&D consulting
activities to accelerate drug discovery, development and commercialization.
The Company provides services to domestic and international customers. The
customer location is not always indicative of where the project is performed.
Long-lived assets outside of the United States are insignificant. The following
table summarizes net revenue on a percentage basis by geographic region, based
on the country in which the customer is located:
Years Ended 31 December
------------------------------------
Geographic Region 2007 2006 2005
--------------------------------------------------------------- ------------ -----------
United States of America 78% 96% 94%
Europe 22% 4% 6%
----------- ------------ -----------
Total Revenue 100% 100% 100%
=========== ============ ===========
NOTE 14 - RESTRUCTURING CHARGE
In the fourth quarter of 2007, the Company recorded $601,239 of restructuring
charges, of which $240,505 was related to a buy-out of a purchase commitment
entered into by Iconix BioSciences, Inc., and closure of the Mountain View, CA
facility due to our outsourcing of the array functions to a lower cost provider.
As a result, we terminated 4 employees. Substantially all of the remaining
restructuring reserve balance was paid by the end of the first quarter 2008.
NOTE 15 - SUBSEQUENT EVENTS
In January 2008, the Company entered into an equipment lease line to borrow up
to $1,000,000 for equipment purchases for the period 9 January 2008 to 31
December 2008. The company has utilized $31,815 of the line in the first quarter
of 2008.
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