During 2002, the Company issued 5,428,217
shares of its common stock for a subscription receivable of $4,625.
During 2004, the Company converted a loan
with an affiliate for aggregate principal of $1,745,000 and accrued interest of $34,020 into shares of its common stock, issuing
677,919 shares, at approximately $2.62 per share in lieu of repayment of this obligation.
In December 2004, in conjunction with and
as compensation for activities related to the December 2004 sale of equity securities, the Company issued warrants to purchase
483,701 shares of its common stock, with a purchase price of approximately $2.88 per share and an aggregate fair value of $14,400.
All of these warrants were exercised by the holders prior to their expiration in December 2011.
In conjunction with the merger and recapitalization
of the Company effective February 11, 2005, the Company issued 11,911,357 shares of its common stock in exchange for all of the
issued and outstanding shares of Chelsea Therapeutics, Inc. In addition, in conjunction with and as compensation for facilitating
the merger, the Company issued warrants for the purchase of 105,516 shares of its common stock at an exercise price of $2.62 per
share and an aggregate fair value of $26,700. All of these warrants were exercised by the holder prior to expiration.
In February 2006, in conjunction with and
as compensation for activities related to the February 2006 sale of equity securities, the Company issued warrants to purchase
716,666 shares of its common stock, with a purchase price of $3.30 per share and an aggregate fair value of approximately $705,000.
Of these, warrants for the purchase of 229,900 shares were exercised and 486,766 shares remained unexercised and expired in February
2013.
In May 2006, in conjunction with and as
compensation for activities related to a licensing agreement and under a Finder’s Agreement, the Company issued warrants
to purchase 250,000 shares of its common stock, with an exercise price of $4.31 per share. The exercise of these warrants was conditioned
on an event that occurred in January 2007 and, accordingly, the Company recorded a charge based on the warrants’ fair value
determined at January 2007 of $433,750. All of these warrants remained unexercised and expired in May 2013.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
AS OF MARCH 31, 2014
(U
naudited)
|
NOTE 1
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE
OF OPERATIONS
|
The Company
Chelsea Therapeutics
International, Ltd. (“Chelsea Ltd.” or the “Company”) is a development stage pharmaceutical company
focused on the acquisition, development and commercialization of innovative pharmaceutical products. Specifically, the
Company has been preparing for the commercial launch, in the United States, of Northera™ (droxidopa), a novel
therapeutic agent for the treatment of symptomatic neurogenic orthostatic hypotension, or Neurogenic OH, in patients with
primary autonomic failure, dopamine β-hydroxylase, or DBH, deficiency and non-diabetic autonomic neuropathy. The Company
also has an interest in evaluating other conditions and diseases in which it is hypothesized that norepinephrine may play a
role and droxidopa could provide symptomatic benefit, including intradialytic hypotension, fibromyalgia and adult attention
deficit hyperactivity disorder. The Company has also devoted resources to the development of pharmaceuticals for multiple
autoimmune disorders, including rheumatoid arthritis, psoriasis, inflammatory bowel disease and cancer.
On February 18, 2014, the
United States Food and Drug Administration, or FDA, granted accelerated approval of Northera for the treatment of symptomatic
Neurogenic OH. Northera is the first and only therapy approved by the FDA which demonstrates symptomatic benefit in patients
with Neurogenic OH. The Company anticipates that Northera sales will begin in the second half of 2014, at the earliest,
and that it will be made available in 100 mg, 200 mg and 300 mg doses. The Northera approval was granted under
the FDA’s accelerated approval program, which allows for conditional approval of a medicine that fills a serious
unmet medical need, provided additional confirmatory studies are conducted. To this end, a large,
multi-center, placebo-controlled, randomized withdrawal study, which includes a 4-week randomized withdrawal phase preceded
by a three month open label run-in phase, designed with the goal of definitively establishing the durability of the clinical
benefits of Northera, has been preliminarily agreed to with the FDA. The FDA has also agreed that a period of seven years to
complete the study is acceptable, given the size of the study and orphan treatment population.
The Company’s operating subsidiary,
Chelsea Therapeutics, Inc. (“Chelsea Inc.”), was incorporated in the State of Delaware on April 3, 2002 as Aspen Therapeutics,
Inc., with the name changed in July 2004. In February 2005, Chelsea Inc. merged with a wholly-owned subsidiary of Chelsea Ltd.’s
predecessor company, Ivory Capital Corporation (“Ivory”), a Colorado public company with no operations (the “Merger”).
The Company reincorporated into the State of Delaware in July 2005, changing its name to Chelsea Therapeutics International, Ltd.
As a result of the Merger of Ivory and Chelsea Inc. in February 2005, and the reincorporation in Delaware in July 2005, Chelsea
Ltd. is the reporting company and is the 100% owner of Chelsea Inc. The separate existence of Ivory ceased in connection with the
Delaware reincorporation in July 2005. Except where the context provides otherwise, references to the “Company” and
similar terms mean Ivory, Chelsea Ltd. and Chelsea Inc.
Since inception, the Company has focused
primarily on organizing and staffing, negotiating in-licensing agreements with partners, acquiring, developing and securing its
proprietary technology, participating in regulatory discussions with the FDA, the
European Medicines Agency, or EMA, and other regulatory agencies, undertaking preclinical trials and clinical trials of product
candidates and raising capital. In addition, during late 2011 and early 2012, the Company conducted activities in preparation for
the planned commercial launch of Northera but, upon receipt of the complete response letter, or CRL, from the FDA in March 2012,
brought such activities to a close. In February 2014, upon the approval of Northera in the United States, the Company re-initiated
such activities to support the commercial launch of Northera that is currently estimated to occur, at the earliest, in the second
half of 2014. The Company is a development stage company and has generated no revenue since inception.
The Company has sustained operating losses
since its inception and expects that such losses could continue for the foreseeable future. On May 7, 2014, the Company entered
into an Agreement and Plan of Merger with H. Lundbeck A/S, a Danish corporation and Charlie Acquisition Corp., a Delaware corporation
and an indirect wholly owned subsidiary of Lundbeck (see Note 9) and, if this transaction, or any alternate strategic transaction,
is completed successfully, the Company would not anticipate that capital resources in excess of those available at March 31, 2014
would be needed during 2014, if ever, recognizing that, depending on the success of any potential transaction, its operations
as an independent entity might cease. If the Company is unable to successfully complete a strategic transaction, additional sources
of capital would need to be evaluated to pursue an independent launch of Northera. If the Company is unable to obtain additional
sources of capital, the launch of Northera would need to be delayed or reduced in scope in order to extend its capital resources
into early 2015.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD.
AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
AS OF MARCH 31, 2014
(
U
naudited)
Regardless of the successful
completion of a potential strategic arrangement, the approval of Northera requires significant incremental spending in 2014
including a milestone payment that was made upon approval to the Company’s partner Dainippon Sumitomo Pharma Co., Ltd.,
or DSP, commencement of the post-approval confirmatory study as required by the FDA and, potentially, building
adequate infrastructure to support regulatory compliance requirements. In addition, the Company purchased additional
active pharmaceutical ingredient in April 2014 and, subsequently, has begun the manufacture of an initial commercial supply
of Northera.
Additional sources of capital might include
equity issuances, debt arrangements or strategic arrangements of a collaborative nature. If adequate funds are
not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development
programs, delay or scale back certain activities including its commercialization program, or limit or cease operations in which
event its business, financial condition and results of operations would be materially harmed.
Basis of Presentation
The accompanying condensed
consolidated financial statements include the accounts of the Company and its operating subsidiary, which are collectively
referred to as the “Company”. These statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and do
not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation of the results for the interim periods have been
included. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results for the
year ending December 31, 2014 or future periods. The accompanying condensed consolidated financial statements should be read
in conjunction with the Company’s audited consolidated financial statements and related notes included in the
Company’s Annual Report on Form 10-K filed on March 11, 2014 and available on the website (
www.sec.gov
) of the
United States Securities and Exchange Commission, or the SEC. The accompanying condensed consolidated balance sheet as of
December 31, 2013 has been derived from the audited balance sheet as of that date included in the Form 10-K.
Basis of Consolidation
The accompanying financial statements present,
on a condensed consolidated basis, the financial position and results of operations of Chelsea Ltd. and its subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation
of financial statements in conformity with accounting principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities
at the date of the financial statements as well as the reported expenses during the reporting periods. On an ongoing basis, management
evaluates its estimates and judgments. Management bases estimates on its historical experience and on various other factors that
it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other sources. Actual results might differ from these estimates
under different assumptions or conditions.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD.
AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
AS OF MARCH 31, 2014
(U
naudited)
Significant estimates
and assumptions are required related to the estimated costs and estimated percentages of completion of research and development
activities and commercialization activities that are outsourced to third-party contractors, the valuation of assets and stock-based
compensation. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates.
For any given individual estimate or assumption made by the Company, there may also be other estimates or assumptions that are
reasonable. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available
at the time the estimates and assumptions were made and actual results may differ significantly from such estimates.
Research and Development
Research and development activities have primarily focused on the clinical development of the Company's drug candidates and
regulatory activities directed at obtaining approval of Northera in Neurogenic OH. Research and development expenses are
recognized as they are incurred and consist primarily of:
|
·
|
salaries and related expenses for personnel, including
stock-based compensation;
|
|
·
|
fees paid to third party contract research organizations,
or CROs, in conjunction with conduct and independent monitoring of preclinical activities and clinical trials, including pass-through
fees;
|
|
·
|
costs related to the purchase of drug substance, formulation
activities, the production and distribution of clinical trial materials and process validation activities;
|
|
·
|
costs related to medical affairs activities;
|
|
·
|
costs
related to upfront and milestone payments under in-licensing agreements prior to obtaining approval;
|
|
·
|
costs related to clinical and other non-commercial
compliance with regulatory requirements in the U.S., EU and other foreign jurisdictions, and;
|
|
·
|
consulting fees paid to third parties.
|
Those research and
development expenditures incurred under contracts with CRO’s are expensed based upon the most recent estimate of costs
needed to complete such activities. The Company often contracts with CROs to
facilitate, coordinate and perform agreed upon research and development activities. Expense recognition is based upon
estimated percentage of completion at the financial statement date applied against estimated amounts to complete the project.
Estimates are calculated, maintained and presented to the Company by CROs and are then subjected to rigorous periodic
internal review and analysis to ensure reasonableness of the estimates. Such review includes difficult, subjective and
complex judgments, particularly in instances of studying orphan drug candidates where prior clinical activity is limited,
providing little or no historical cost information. Given the highly variable nature of the costs involved in the completion
of a clinical or pre-clinical trial, fluctuations in costs estimates can occur at any time during the trial or at its
conclusion based on a number of factors including, but not limited to, the rate at which investigator sites are identified,
site locations (US versus International), the timing of site activations, the rate at which patients are enrolled into a
trial, changes to the number of sites and/or patients that are targeted for the trial, the timelines for trial completion
and changes in scope of the actions to be taken by the contractor.
Given that the recognition of expense related
to the Company’s contracted research and development activities comprise a significant component of reported expenses during
any given period, such fluctuations can be material to the results of operations and/or the carrying value of assets and liabilities.
The estimates to complete each contracted project are also used in the determination and disclosure of contractual obligations
of the Company providing a snapshot of estimated cash requirements arising from future contractual payment obligations based upon
the best information available at the time the financial statements are published.
To ensure that research and development
costs are expensed as incurred, the Company measures expense based on estimated work performed for the underlying contract, typically
utilizing a percentage-of-completion approach, and records prepaid assets or accrues expenses on a monthly basis for such activities
based on the measurement of liability from expense recognition and the receipt of invoices. Contracts for research and development
programs typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain
milestones. In the event that the Company prepays fees for future milestones, the Company records the prepayment as a prepaid
asset and amortizes the asset into research and development expense over the period of time the contracted research and development
services are performed. Most fees are incurred throughout the contract period and are expensed based on their estimated percentage
of completion at a particular date. Although such fees may fluctuate during the life of a research and development program, such
fluctuations are generally based on changes in or delays in the timelines for study completion.
These contracts generally include pass
through fees. Pass through fees include, but are not limited to, regulatory expenses, investigator fees, travel costs, and
other miscellaneous costs including shipping and printing fees. Because these fees are incurred at various times during the
contract term and they are used throughout the contract term, the Company records a monthly expense allocation to recognize the
fees during the contract period. Fees incurred to set up the clinical trial are expensed during the setup period. Estimating
the costs of pass-through expenses for a contracted research and development program can be difficult and complex. Judgments used
in the development of these estimates include the input of the CRO, the costs of previous clinical trials, estimates of patient
recruitment rates, estimates of drop-out rates and estimates of site identification and activation rates. Estimates of investigator
payments, lab costs, database development and management and adverse event reporting are based on parameters such as number of
office visits, laboratory requirements, screening failure rates, location of the investigator site and the patient related factors
discussed above. Historically, the Company has experienced fluctuations in the estimates of these costs and has implemented rigorous
review processes to ensure reliability of estimates. Fluctuations that have occurred previously have been in the range of +/- 5%
of total program costs and the Company would anticipate that similar fluctuations could occur in the future. Depending on the size
of the trial, the estimated costs to complete and the volume of overall research and development activities during any given period,
such fluctuations could be material to the results of operations and financial position.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD.
AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
AS OF MARCH 31, 2014
(U
naudited)
Costs related to the acquisition of technology
rights and patents for which development work is still in process are expensed as incurred and considered a component of research
and development costs. Costs related to the acquisition of such technology rights that are incurred upon or after approval will
be capitalized as contractual intangible assets and amortized over the period during which the asset is expected to contribute
directly or indirectly to future cash flows.
|
NOTE 2
|
FAIR VALUE MEASUREMENTS
|
In determining fair value, the Company
utilizes techniques that optimize the use of observable inputs, when available, and minimize the use of unobservable inputs to
the extent possible. At March 31, 2014, assets measured at fair value on a recurring basis consisted of cash and cash equivalents
of approximately $37.1 million. Based on the short-term liquid nature of these assets, the fair value, determined using level 1
inputs, is equivalent to the recorded book value.
|
Note 3
|
Stock-Based
Compensation
|
The Company has a stock incentive plan,
as amended (the “Plan”), under which stock options for 10,400,000 shares of the Company’s common stock may be
granted. Grants under the Plan may be made to employees (including officers), directors, consultants, advisors or other independent
contractors who provide services to the Company or its subsidiary.
The Company’s accounting for stock
options or similar equity instruments requires the measurement and recognition of compensation expense for all share-based payment
awards made to employees and non-employee directors based on estimated fair values determined using an option-pricing model. The
value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods
in the Company’s statements of operations.
During the three months ended March 31,
2014 and 2013, the Company granted stock options to employees and non-employee directors as follows:
|
|
For the three months ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Options granted during period
|
|
|
952,500
|
|
|
|
785,500
|
|
Weighted average exercise price
|
|
$
|
4.71
|
|
|
$
|
0.93
|
|
Weighted average grant date fair value
|
|
$
|
3.76
|
|
|
$
|
0.71
|
|
On April 15, 2013, the Company granted
options for the purchase of an aggregate of 200,000 shares of its common stock to non-employee directors that vest only upon a
change of control of the Company. Per the Notice of Grant, a change of control is defined as the sale, lease, exchange or other
transfer of substantially all of the assets of the Company; or if any person not a shareholder on the date of grant becomes the
beneficial owner, directly or indirectly, of 50% or more of the combined voting power of the Company’s outstanding securities
other than through a traditional financing transaction; or a merger or consolidation to which the Company is a party should occur
resulting in the shareholders of the Company having beneficial ownership of less than 50% of the combined voting power of the surviving
company’s outstanding securities immediately following such a transaction. These grants expire on December 31, 2014. The
vesting of these options is conditioned upon an event that has not yet occurred. As such, compensation expense for these options
will not be recorded unless and until that event occurs and the vesting condition is met.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD.
AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
AS OF MARCH 31, 2014
(U
naudited)
The fair value of each option award made
to employees and directors during the three months ended March 31, 2014 and 2013 was estimated on the date of grant using the Black-Scholes
closed-form option valuation model utilizing the following assumptions. To determine the risk-free interest rate, the Company utilized
the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected term of the Company’s
awards. The Company estimated the expected life of the options granted based on anticipated exercises in future periods. The expected
dividends reflect the Company’s current and expected future policy for no payment of dividends on its common stock. The Company
relies exclusively on the trading and price history of the Company’s stock in order to determine the expected volatility.
The Company plans to continue to analyze the expected stock price volatility and expected term assumption at each grant date as
more historical data for its common stock becomes available. In January 2013, the Company reviewed its estimated forfeiture rate,
based upon the adjusted staffing levels resulting from attrition in late 2012 and early 2013 and, effective at that date, modified
its estimated forfeiture rate to 10%. In the first quarter of 2014, the Company again reviewed its estimated forfeiture rate based
upon the approval of Northera by the FDA, and effective for the quarter ended March 31, 2014, assumed that it would experience
no forfeitures or that the rate of forfeiture would be immaterial to the recognition of compensation expense for those options
outstanding. Due to the limited amount of historical data available to the Company, particularly with respect to employee exercise
patterns and forfeitures, actual results could differ from the Company’s assumptions. The table below summarizes the assumptions
utilized in estimating the fair value of the stock options granted during the three months ended March 31, 2014 and 2013:
|
|
For the three months ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Weighted average risk-free interest rate
|
|
|
1.70
|
%
|
|
|
0.81
|
%
|
Expected life of options
|
|
|
5 years
|
|
|
|
5 years
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted average expected volatility
|
|
|
112.18
|
%
|
|
|
103.78
|
%
|
Options granted to employees and non-employee
directors during the three months ended March 31, 2014 and 2013 vest as to 25% of the shares on each of the first, second, third and fourth anniversary
of the vesting commencement date. Options granted to non-employee directors on April 15, 2013 are exercisable and vest only upon
a change in control of the Company, as described above. Following the vesting periods, options are exercisable by employees until
the earlier of 90 days after the employee’s termination with the Company or the ten-year anniversary of the initial grant,
subject to adjustment under certain conditions and at the discretion of the Board of Directors. Following the vesting periods,
options are exercisable by non-employee directors until the earlier of 180 days after they cease to be a member of the Board of
Directors or the ten-year anniversary of the initial grant, subject to adjustment under certain conditions and at the discretion
of the Board of Directors. As of January 2012, options that are forfeited or cancelled are not returned to the option pool and
are, accordingly, no longer eligible for grant under the Plan.
The table below summarizes the compensation
expense recorded by the Company for the three months ended March 31, 2014 and 2013 in conjunction with option grants made to employees
and non-employee directors:
|
|
For the three months ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Stock-based compensation expense recorded during period
|
|
$
|
706,060
|
|
|
$
|
625,874
|
|
Total unrecognized compensation expense remaining
|
|
$
|
5,829,320
|
|
|
$
|
4,038,554
|
|
Remaining average recognition period (in years)
|
|
|
2.4
|
|
|
|
2.4
|
|
CHELSEA THERAPEUTICS INTERNATIONAL, LTD.
AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
AS OF MARCH 31, 2014
(U
naudited)
The table below summarizes options outstanding,
options vested and aggregate intrinsic value as of March 31, 2014:
|
|
As of
|
|
|
|
March 31, 2014
|
|
Options outstanding under the plan:
|
|
|
|
|
Total options outstanding
|
|
|
8,085,999
|
|
Weighted average remaining contractual life (in years)
|
|
|
6.03
|
|
Weighted average exercise price per share
|
|
$
|
3.67
|
|
Total options outstanding and vested
|
|
|
5,179,999
|
|
Total in-the-money options outstanding
|
|
|
6,231,499
|
|
Aggregate intrinsic value of in-the-money options outstanding
|
|
$
|
16,988,783
|
|
Total in-the-money options outstanding and vested
|
|
|
3,574,249
|
|
Aggregate intrinsic value of in-the-money options outstanding and vested
|
|
$
|
9,889,650
|
|
The aggregate intrinsic value is calculated
as the difference between the exercise prices of the underlying awards and the quoted closing price of the common stock of the
Company as of March 31, 2014 and only include those awards that have an exercise price below the quoted closing price, or in-the-money
options.
During the three months ended March
31, 2014, options for the purchase of 23,210 shares were exercised at an exercise price of approximately $0.03 per share and
had an aggregate intrinsic value at the date of exercise of $120,562. During the three months ended March 31, 2013, no options
were exercised. During the three months ended March 31, 2014, no vested or unvested options were forfeited by former
employees. During the three months ended March 31, 2013, unvested options for 30,000 shares were forfeited by an employee
that resigned during the period and vested options of former employees for 10,000 shares expired unexercised.
Basic net loss per common share is calculated
by dividing net loss by the weighted-average number of common shares outstanding for the period, without consideration for potentially
dilutive securities. For the periods presented, basic and diluted net loss per common share are identical. Potentially dilutive
securities from stock options would be antidilutive as the Company incurred a net loss. The number of shares of common stock potentially
issuable at March 31, 2014 and 2013 upon exercise or conversion that were not included in the computation of net loss per share
totaled 8,085,999 and 8,071,570 shares, respectively.
|
Note 5
|
COMMON STOCK
WARRANTS
|
No warrants were exercised during the three
months ended March 31, 2014 and 2013 nor did any warrants remain outstanding as of March 31, 2014.
In May 2013, unexercised warrants for the
purchase of 250,000 shares of the Company’s stock expired. These warrants had been issued in 2006 in conjunction with and
as compensation for activities related to a licensing agreement and under a Finder’s Agreement and permitted the holder to
purchase the underlying common shares at $4.31 per share. The exercise of these warrants was conditioned on an event that occurred
in January 2007 and, accordingly, the Company recorded a charge based on the warrants’ fair value determined at January 2007.
In March 2013, unexercised warrants for
the purchase of 1,286,764 shares of the Company’s stock expired. These warrants had been issued in March 2010 in conjunction
with a 2010 sale of equities and permitted the holders to purchase the underlying common shares at $2.79 each or elect a net share
settlement and were exercisable in whole at any time, or in part from time to time, during the period commencing six months after
the date of issuance and ending three years from the date of issuance. Of the 2,345,000 warrants issued in 2010, warrants for the
purchase of 1,058,236 shares had been exercised in previous periods.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD.
AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
AS OF MARCH 31, 2014
(U
naudited)
In February 2013, unexercised warrants
for the purchase of 486,766 shares of the Company’s stock expired. These warrants had been issued in February 2006 in conjunction
with a 2006 sale of equities and were exercisable in whole at any time, or in part from time to time, for cash or in a net share
settlement, at an exercise price of $3.30 per share, for seven years from the date of issuance. Of the 716,666 warrants issued
in 2006, warrants for the purchase of 229,900 shares had been exercised in previous periods.
|
Note 6
|
SALES OF COMMON
STOCK
|
In June 2013, at the Company’s annual
meeting of shareholders, an amendment to the Company’s Certificate of Incorporation was approved to increase the number of
authorized shares of the Company’s capital stock from 105,000,000 shares to 205,000,000 shares and to increase the number
of authorized shares of Common Stock from 100,000,000 shares to 200,000,000 shares.
In November 2013, the Company raised gross
proceeds of approximately $23.0 million through the sale of 7,666,667 shares of its common stock in a publicly-marketed offering.
These shares were offered pursuant to the Company’s 2012 shelf registration statement. In connection with this offering,
the Company paid commissions and other offering-related costs of approximately $1.6 million, resulting in net proceeds of approximately
$21.4 million.
In November 2012, the Company filed the
required documents and became eligible to use an at-the-market common equity sales program for the sale of shares of its common
stock up to a value of $20,000,000. These shares were offered pursuant to the Company’s 2012 shelf registration statement.
During the year ended December 31, 2013, 3,609,595 shares of common stock were sold under this program at an average sales price
of approximately $3.02 per share, generating gross proceeds of approximately $10.9 million. In conjunction with this program, the
Company paid commissions and other offering-related expenses of approximately $0.5 million, resulting in net proceeds of approximately
$10.4 million. In November 2013, the Company elected to terminate this program.
On February 8, 2012, the Company amended
its shelf registration statement, originally filed on January 26, 2012, with the SEC, under which the Company may offer shares
of its common stock and preferred stock, various series of debt securities and/or warrants to purchase any of such securities,
either individually or in units, in one or more offerings, up to a total dollar amount of $100,000,000. Such registration statement,
as amended, became effective as of February 9, 2012.
|
Note 7
|
commitments
and contingencies
|
License Agreements
Commercial Products
In May 2006, the Company entered into
an agreement with DSP for an exclusive, sub-licensable license and rights to certain intellectual property and proprietary
information (the “DSP Agreement”) relating to L-threo-3,4-dihydroxyphenylserine (“L-DOPS” or
“droxidopa”) including, but not limited to all information, formulations, materials, data, drawings, sketches,
designs, testing and test results, records and regulatory documentation. Pursuant to the DSP Agreement, DSP reserved rights
to market droxidopa in Japan, Korea, China and Taiwan that precludes the Company’s commercialization of droxidopa in
those markets. As consideration for these rights, the Company paid DSP $100,000 and issued 63,131 shares of its common stock,
with a value of approximately $4.35 per share, or $274,621. As additional consideration, the Company agreed to pay DSP and/or
its designees (1) royalties on the sales should any compound be approved for commercial sale, and (2) milestone payments,
payable upon achievement of milestones as defined in the DSP Agreement. The potential royalty payment under the license
agreement is a mid-single-digit percentage of net sales of the commercialized products licensed under the DSP Agreement. All
obligations of the Company to pay royalties under the DSP Agreement expire (i) with respect to North America, which is
defined to include the United States, Canada and Mexico, eight years after the First Commercial Sale, as defined in the DSP
Agreement, in the United States, and (ii) with respect to the remainder of the territory, eleven years after the First
Commercial Sale in either the United Kingdom, France, Italy, Germany or Spain. Based on the terms of the DSP agreement, the
granting of orphan drug designation for droxidopa triggered a milestone payment in February 2007 to DSP of $250,000.
In February 2008, the Company made a milestone payment under the DSP Agreement of $500,000 related to patient dosing in a
Phase III study. In December 2011, the Company made a milestone payment under the DSP Agreement of $750,000 related to
submission of an NDA to the FDA. In February 2014, the Company made a milestone payment under the DSP agreement of $1.5
million upon approval of Northera by the FDA and capitalized that amount as an intangible asset. The Company plans to
amortize this intangible asset, on a straight-line basis, into the cost of revenues during the period from market launch of
Northera in the United States until the expiration of orphan drug market exclusivity, or February 2021, as this is as the
period over which the asset is expected to contribute directly or indirectly to future cash flows.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD.
AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
AS OF MARCH 31, 2014
(U
naudited)
There is a remaining potential
future milestone payment as of March 31, 2014, subject to the Company’s right to terminate the DSP Agreement, totaling
$1.0 million related to the achievement of a certain sales volume. The DSP Agreement has no fixed term and upon expiration of the
relevant royalty term, all of the licenses and rights granted to the Company in the applicable territory under the DSP
Agreement shall become irrevocable, perpetual, fully-paid, and royalty-free. Prior to that, the DSP Agreement provides for
termination (i) upon material breach by either party if such breach remains uncured for a period of sixty days from the date
the breaching party was notified of such breach, (ii) for bankruptcy by either party upon thirty days written notice and
(iii) for convenience by the Company upon sixty days written notice. The Company and DSP also initiated, and the Company
agreed to fund, activities focused on modifying the manufacturing capabilities of DSP in order to expand capacity and comply
with regulations and requirements of the FDA. Final expenses for this work were recognized in the second quarter of 2012
resulting in the Company recording cumulative expense of approximately $3.1 million.
In conjunction with and as consideration
for activities related to the execution of the DSP Agreement, the Company entered into a Finder’s Agreement with Paramount
BioCapital, Inc. (“Paramount”). In May 2006, pursuant to the Finder’s Agreement, the Company issued warrants
for the purchase of 250,000 shares of its common stock at an exercise price of $4.31 per share. The exercise of these warrants
was conditioned on an event that occurred in January 2007 and, accordingly, the Company recorded a charge for the fair value of
the warrants at January 2007 of $433,750. The Company utilized the Black-Scholes-Merton valuation model for estimating the fair
value of the warrants as of the date the condition for exercise occurred, based on a risk-free interest rate of 4.79%, an expected
life of three years, an expected dividend yield of 0%, an expected volatility of 66.01% and no estimated forfeitures. Such warrants
remained unexercised and expired in May 2013. As additional consideration, the Company agreed to (1) make future milestone payments
to Paramount, upon achievement of milestones as defined in the Finder’s Agreement, (2) pay royalties on sales should any
licensed compound become available for commercial sale, and (3) compensate a stated third-party consultant for services rendered
in the evaluation of the transaction with DSP. The Company has remaining potential future milestone payments under the Finder’s
Agreement of $150,000.
Products in Development
In March 2004, the Company entered into a license agreement
with Dr. M. Gopal Nair, Ph.D., of the University of South Alabama College of Medicine, for the rights to use, produce, distribute
and market products derived from an invention by Dr. Nair, claimed in US Patent # 5,912,251, entitled “metabolically inert
anti-inflammatory and antitumor antifolates”, designated by the Company as CH-1504 and related compounds. The license provides
the Company exclusive rights, excluding India, for CH-1504 and related compounds. The Company made an upfront payment in May 2004
of $150,000 and milestone payments as required by the agreement of $100,000 each in March 2006 and 2005. In April 2007, the Company
issued 26,643 shares of its common stock, subject to trading restrictions, at a value of approximately $5.63 per share, in settlement
of the $150,000 annual milestone payment liability. In March 2008, the Company made a milestone payment of $100,000 related to
patient dosing in a Phase II study as required by the agreement. In April 2008, the Company issued 30,612 shares of its common
stock, subject to trading restrictions, at a value of approximately $4.90 per share, in settlement of the 2008 anniversary milestone
payment. In April 2009, the Company made the 2009 anniversary milestone payment of $150,000. In September 2010, the Company made
a milestone payment of $100,000 related to patient dosing in a Phase II study as required by the agreement. The Company is obligated
to pay royalties under the agreement until the later of the expiration of the applicable patent or the applicable last date of
market exclusivity after the first commercial sale, on a country-by-country basis. The potential royalty payment under the license
agreement is a mid-single-digit percentage of net sales of the commercialized products licensed under the agreement and there are
no minimum royalties required under the agreement. The Company is also obligated to make future potential milestone payments based
on the achievement of specific development and regulatory approval milestones. Although the Company has no current development
activity ongoing for this portfolio of compounds, approximately $1.5 million of payments might become due if specific clinical
or regulatory milestones are achieved at a future date, subject to the Company’s right to terminate the license agreement.
In addition, should the Company enter into an out-licensing agreement, such payments could be offset by revenue received from the
sub-licensee. The agreement remains in effect until the date of the last to expire claim in the patent rights, if not terminated
earlier. Currently, the date of the last to expire claim in the patent rights under this agreement is January 17, 2018, without
consideration of the potential for patent term extension or the granting of additional patents. The agreement also provides for
termination (i) upon material breach, including nonpayment by the Company of any monies due, if such breach remains uncured for
a period of sixty days, (ii) for bankruptcy of the Company and (iii) for convenience by the Company upon thirty days’ written
notice.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD.
AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
AS OF MARCH 31, 2014
(U
naudited)
Contract Research and Manufacturing Purchase Obligations
The Company often
contracts with third parties to facilitate, coordinate and perform agreed upon research and development and manufacturing activities.
These contracts typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement
of certain milestones. The Company currently intends to continue its research and manufacturing activities for contracts existing
as of March 31, 2014.
In November 2011, the Company contracted
with a third party for the manufacture of commercial quantities of Northera, prior to the date of marketing approval and might
perform similar activities for other of its product candidates in the future. The scale-up and commercial production of pre-launch
inventories involves the risk that such products may not be approved for marketing by the appropriate regulatory agencies on a
timely basis, or ever. Until final approval to market any of the Company’s product candidates is received from the appropriate
regulatory agencies, such costs are expensed to research and development.
In
addition, in October 2011, the Company committed to the purchase of active pharmaceutical ingredient from the
manufacturer, to be used in the production of commercial inventory of Northera. A small initial shipment of this material was
delivered in the first quarter of 2012. In April 2014, the Company completed the purchase of the remaining material under
this agreement, despite having received a written waiver releasing the Company from that purchase obligation in October 2012.
(See Note 9).
No such costs were incurred in 2013.
Legal Proceedings
Following the receipt of the CRL from
the FDA regarding the NDA for Northera™ (droxidopa) in March 2012 and the subsequent decline of the price of the
Company’s common stock, two purported class action lawsuits were filed on April 4, 2012 and another purported class
action lawsuit was filed on May 1, 2012 in the U.S. District Court for the Western District of North Carolina against the
Company and certain of its executive officers.
The complaints generally allege that, during
differing class periods, all of the defendants violated Sections 10(b) of the Exchange Act and Rule 10b-5 and the individual defendants
violated Section 20(a) of the Exchange Act in making various statements related to the Company’s development of Northera
for the treatment of symptomatic neurogenic OH and the likelihood of FDA approval. The complaints seek unspecified damages, interest,
attorneys’ fees, and other costs. Following consolidation of the three lawsuits and the appointment of a lead plaintiff,
a consolidated complaint was filed on October 5, 2012, on behalf of purchasers of the Company’s common stock from November
3, 2008 through March 28, 2012. On November 16, 2012, the Company and the other defendants moved to dismiss the complaint. On October
10, 2013, the court granted the motion to dismiss with prejudice and entered judgment in favor of the defendants. Plaintiff filed
a notice of appeal and briefing on the appeal has been completed. The Company and its officers intend to vigorously defend against
any appeal but are unable to predict the outcome or reasonably estimate a range of possible loss at this time.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD.
AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
AS OF MARCH 31, 2014
(U
naudited)
On May 2, 2012, a purported shareholder
derivative lawsuit was filed in the Delaware Court of Chancery against the members of the Company’s board of directors as
of the date of the lawsuit. The complaint generally alleges that, from at least June 2011 through February 2012, the defendants
breached their fiduciary duties and otherwise caused harm to the Company in connection with various statements related to the development
of Northera for the treatment of Neurogenic OH and the likelihood of FDA approval. The complaint seeks unspecified damages,
attorneys’ fees and other costs. On June 25, 2012, the Court of Chancery entered an Order staying the action until
the U.S. District Court for the Western District of North Carolina ruled upon the motion to dismiss that the Company and its officers
filed in November 2012 in response to the consolidated complaint in the class action. Following the dismissal of the class action
and the filing of the notice of appeal, plaintiff sought to proceed with the case and the parties entered into a scheduling stipulation,
subsequently approved by the Court, for the briefing of defendants’ motions to stay the action or dismiss the complaint.
The motion to stay was filed on February 14, 2014 and the motion to dismiss was filed February 28, 2014.
Retention Bonus Plans
In April 2013, at the direction of its
Board of Directors, the Company implemented an Executive Retention Bonus Plan and an Employee Retention Bonus Plan. Under their
respective plans, executives and employees employed by the Company as of April 23, 2013, were eligible to receive a bonus payment
should the Company obtain approval from the FDA to market Northera in the U.S. In addition, members of the Company’s Board
of Directors were also eligible to receive a bonus payment upon FDA approval of Northera. As the approval was obtained in February
2014, the Company became obligated to make bonus payments of approximately $1.3 million in the aggregate to qualifying board members,
executives and employees. Such amount was paid and recorded in the first quarter of 2014.
In addition, board
members, executives and employees are eligible to receive a bonus payment should the Company enter into a transaction that
results in (i) the sale, lease, exchange or other transfer of substantially all of the assets of the Company; (ii) any person
not a shareholder on the date of grant becoming the beneficial owner, directly or indirectly, of 50% or more of the combined
voting power of the Company’s outstanding securities other than through a traditional financing transaction; or, (iii)
a merger or consolidation to which the Company is a party occurring that results in the shareholders of the Company
having beneficial ownership of less than 50% of the combined voting power of the surviving company’s outstanding
securities immediately following such a transaction, collectively, a “sale event”. Should such a transaction
occur, the Company would be obligated to make bonus payments of approximately $1.3 million in the aggregate to qualifying
directors, executives and employees calculated based on headcount as of March 31, 2014. As these bonus payments are
conditioned on an event that has yet to occur, no expense will be recorded by the Company unless and until the condition for
payment has been met. In order to be qualify for payment of the bonus, the eligible directors, executives and employees must
be engaged or employed by the Company on the date such condition for payment is met.
Incentive Bonus Plan
As a component of the cost savings initiative announced in June 2012 and further confirmed during
the restructuring announced in July 2012, the Company had suspended its incentive bonus programs for 2012 and 2013. At January
1, 2014, this program has been reestablished and the Company has begun to accrue the targeted amounts for the year ended
December 31, 2014. During the quarter ended March 31, 2014, the Company had accrued approximately $0.2 million under the
program. If a sale event should occur, as defined above, no payments would be made under the 2014 Incentive Bonus Plan.
Other Contractual Obligations
As it had done during 2011 and early
2012, the Company plans to contract with various third parties to facilitate, coordinate and perform agreed upon
commercialization support activities in anticipation of the commercial launch of Northera in the second half of 2014, at the
earliest. Typically, these contracts will require the payment of fees for services at the initiation of the contract and/or
upon the achievement of certain milestones. In the event that the Company prepays fees for future milestones, it would
record the prepayment as a prepaid asset and amortize the asset into sales and marketing or medical affairs expense over the
period of time the contracted services were to be performed. Most fees would be incurred throughout the contract period and
would be expensed based on the percentage of completion at a particular report date.
Business activities
to be performed under these contracts include, but are not limited to, contract sales staffing, sales force recruiting, sales operations
support and planning, market research, marketing and advertising planning and development, medical information, employee training,
regulatory compliance, safety, sales territory mapping, publication planning, messaging and website development, public relations
and information technology support and planning. As of March 31, 2014, the Company had begun to work with selected vendors on scope
and gap analyses to support the development of contractual agreements and had only executed a few contracts, primarily
for consulting services related to commercialization planning and support.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD.
AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
AS OF MARCH 31, 2014
(U
naudited)
NOTE 8 RESTRUCTURING
In July 2012, the Company, at the
direction of its Board of Directors, conducted a corporate restructuring under which the number of employees was
significantly reduced, retaining only those employees necessary to continue the Company’s efforts to obtain marketing
approval for Northera in the United States. This reduction in force primarily, but not exclusively, impacted those positions
that had been filled in 2011 and 2012 to support the planned commercialization of Northera in the United States. In addition,
the Company’s Chief Executive Officer, or CEO, and its Vice President of Sales and Marketing left the Company. The
Company’s Vice President of Operations was appointed Interim President and CEO as the Board evaluated candidates for
that position. At the Board level, the Chairman of the Board stepped down, but remains a director, while another existing
director assumed the role of Chairman. The former CEO and two other directors also resigned from the Board.
As a component of the former
CEO’s departure, the Company accelerated the vesting of all unvested options that had been previously granted to its
former CEO and extended the period in which those options could be exercised from 90 days from the date of termination of
July 10, 2012, to two years from that date. For the directors that resigned from the Board, the Company accelerated the
vesting of all unvested options that had been previously granted and extended the period in which those options can be
exercised from 180 days from the date of separation of July 9, 2012, to one year from that date. During that period, those
former directors exercised options for the purchase of 100,210 shares while options for the purchase of 335,000 shares
remained unexercised and expired.
In March 2014, the Company was notified
by the former CEO that he had been offered and had accepted another full-time position and that such employment would begin on
April 1, 2014. Per the terms of his severance agreement, the Company is entitled to a dollar for dollar offset from the severance
pay of any amounts earned by the former CEO in his new employment. The
Company adjusted the remaining restructuring reserve related to the former CEO’s severance accordingly.
During 2012, the Company established a
reserve related to the costs of the restructuring totaling approximately $2.5 million. As of March 31, 2014, the Company had made
cash payments of approximately $2.2 million related to this reserve and had made other non-cash adjustments of approximately $0.2
million. The activity associated with the reserve established by the Company for restructuring charges associated with these actions
as of March 31, 2014 was as follows:
|
|
Restructuring
|
|
|
|
|
|
|
|
|
Adjustments,
|
|
|
Restructuring
|
|
|
|
Liabilities as of
|
|
|
|
|
|
|
|
|
Non-cash items
|
|
|
Liabilities as of
|
|
|
|
December 31,
|
|
|
Charges to the
|
|
|
Cash
|
|
|
and Changes
|
|
|
March 31,
|
|
|
|
2013
|
|
|
Reserve
|
|
|
Payments
|
|
|
to Estimates
|
|
|
2014
|
|
Employee related costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance, salary continuation and related costs
|
|
$
|
270,419
|
|
|
$
|
-
|
|
|
$
|
(132,208
|
)
|
|
$
|
(98,049
|
)
|
|
$
|
40,162
|
|
Other costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Totals
|
|
$
|
270,419
|
|
|
$
|
-
|
|
|
$
|
(132,208
|
)
|
|
$
|
(98,049
|
)
|
|
$
|
40,162
|
|
NOTE 9 SUBSEQUENT EVENTS
Agreement and Plan of Merger
On May 7, 2014, the
Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with H. Lundbeck A/S, a Danish corporation
(“Parent”) and Charlie Acquisition Corp., a Delaware corporation and an indirect wholly owned subsidiary of Parent
(“Acquisition Sub”).
Pursuant to the Merger
Agreement, and upon the terms and subject to the conditions thereof, Parent will cause Acquisition Sub to commence a tender offer
(as it may be amended from time to time, the “Offer”) to purchase any and all of the outstanding shares of the Company’s
common stock, $0.0001 par value per share (the “Shares”), for a purchase price consisting of (i) $6.44 per Share in
cash, without interest (the “Cash Consideration”), and (ii) one contingent value right of Parent per Share (a “CVR”
and, together with the Cash Consideration, the “Merger Consideration”), which represents a contractual right to receive
up to $1.50 per CVR upon the achievement of certain sales milestones, in each case subject to any required withholding of taxes.
The obligation of
Acquisition Sub to purchase Shares tendered in the Offer is subject to the satisfaction or waiver of a number of conditions set
forth in the Merger Agreement, including (i) Shares have been validly tendered and not validly withdrawn that represent a majority
of the Fully Diluted Shares (as defined in the Merger Agreement) as of the expiration of the Offer, (ii) the expiration or termination
of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) the absence of
governmental orders and litigation (A) challenging or seeking to prohibit the Offer or the Merger (as defined below) or (B) that,
if successful, would reasonably be expected to result in a prohibition or limitation on Parent’s ownership and use of Northera,
(iv) there not having occurred any change, circumstance, event or occurrence that has had or would reasonably be expected to have
a Company Material Adverse Effect (as defined in the Merger Agreement), and (v) other customary conditions. The consummation of
the Offer is not subject to any financing condition.
Following the successful
completion of the Offer and subject to the satisfaction or waiver of certain customary conditions set forth in the Merger Agreement,
Acquisition Sub will merge with and into the Company, with the Company surviving as an indirectly wholly owned subsidiary of Parent
(the “Merger”), pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law
(the “DGCL”) without any additional stockholder approvals. At the effective time of the Merger (the “Effective
Time”), each issued and outstanding Share (other than Shares owned by the Company, Parent, Acquisition Sub, any direct or
indirect subsidiary of the Company, Parent or Acquisition Sub or by stockholders of the Company who have validly exercised their
statutory rights of appraisal under the DGCL) will be converted into the right to receive the Merger Consideration.
To the extent not
exercised prior to the Effective Time, then at the Effective Time, each Company stock option (“Company Option”) shall
be deemed to be cancelled, with each former holder of any such cancelled Company Option with an exercise price less than the Cash
Consideration becoming entitled to receive, at the Effective Time or as soon as practicable thereafter (i) an amount in cash,
without interest, equal to (a) the excess of the Cash Consideration over the exercise price per Share subject to such Company
Option multiplied by (b) the total number of Shares subject to such Company Option and (ii) one CVR for each Share subject to
such Company Option. The amount payable shall be zero with respect to a Company Option that has an exercise price that is equal
to or exceeds the Cash Consideration and such Company Option shall be cancelled and terminated without any payment being made
in respect thereof (whether in the form of cash or a CVR).
The Merger Agreement
includes representations and warranties and covenants of the parties customary for a transaction of this nature. Until the earlier
of the termination of the Merger Agreement and the Effective Time, the Company has agreed to operate its business and the business
of its subsidiaries in the ordinary course and has agreed to certain other operating covenants, as set forth more fully in the
Merger Agreement. The Company has also agreed (i) not to solicit or initiate discussions with any third party regarding acquisition
proposals and (ii) to certain restrictions on its ability to respond to such proposals, subject to fulfillment of certain fiduciary
requirements of the board of directors of the Company.
The Merger Agreement
also includes customary termination provisions for both the Company and Parent and provides that, in connection with the termination
of the Merger Agreement under specified circumstances, including termination by the Company to accept and enter into a definitive
agreement with respect to an unsolicited superior proposal, the Company will be required to pay an $18,550,000 fee (the “Termination
Fee”), less the amount of Parent expenses previously reimbursed by the Company pursuant to the Merger Agreement. A superior
proposal is a bona fide written inquiry, offer or proposal pursuant to which a third party would acquire more than 50% of the
voting power of the Company on terms that the Board of Directors of the Company determines in its good faith judgment (after consultation
with its outside financial advisors and outside legal counsel) to be more favorable to the Company’s stockholders from a
financial point of view than the terms of the Offer and the Merger and is reasonably capable of being completed on the terms proposed
taking into account all terms and conditions of the proposal and all relevant circumstances. Any such termination of the Merger
Agreement by the Company is subject to certain conditions, including the Company’s compliance with certain procedures set
forth in the Merger Agreement and a determination by the board of directors of the Company that the failure to terminate the Merger
Agreement would reasonably be expected to be inconsistent with its fiduciary duties to stockholders under applicable law, payment
of the Termination Fee by the Company and the substantially concurrent execution of a definitive agreement by the Company with
such third party. Additionally, upon a termination of the Merger Agreement under certain circumstances, the Company will be required
to reimburse Parent for reasonably documented expenses incurred in connection with the transaction in amount up to $2,650,000.
Contingent Value Rights Agreement
Prior to the closing
of the Offer, Parent and a rights agent to be selected by Parent and reasonably acceptable to the Company will enter into a Contingent
Value Rights Agreement (“CVR Agreement”) governing the terms of the CVRs. Each holder shall be entitled to one CVR
for (i) each Share outstanding that Acquisition Sub accepts for payment from such holder pursuant to the Offer, (ii) each outstanding
Share owned by or issued to such holder as of immediately prior to the Effective Time and converted into the right to receive
the Merger Consideration pursuant to the Merger Agreement, and (iii) each Share underlying a Company Option with an exercise price
less than the Cash Consideration that is then outstanding and unexercised, immediately prior to the Effective Time. The CVRs will
not be transferable, will not be certificated or evidenced by any instrument and will not be registered or listed for trading.
Pursuant to the terms
and subject to the conditions of the CVR Agreement, the holder of a CVR will have a right to receive contingent cash payments
from Parent based upon net sales of Northera during the period commencing on January 1, 2015 through December 31, 2017 (each of
the below, a “Milestone Payment”), as follows:
|
·
|
Holders of CVRs will be entitled to receive
a payment of up to $0.50 per CVR based on the amount, if any, by which worldwide net sales of Northera (excluding Japan, Korea,
China and Taiwan) exceed $100,000,000 during the period commencing January 1, 2015 to and including December 31, 2015.
|
|
·
|
Holders of the CVRs will be entitled to
receive a payment of up to $0.50 per CVR based on the amount, if any, by which worldwide net sales of Northera (excluding Japan,
Korea, China and Taiwan) exceed $200,000,000 during the period commencing January 1, 2016 to and including December 31, 2016.
|
|
·
|
Holders
of the CVRs will be entitled to receive a payment for each CVR of up to $0.50 based on the amount, if any, by which worldwide
net sales of Northera (excluding Japan, Korea, China and Taiwan) exceed $300,000,000 during the period commencing January 1, 2017
to and including December 31, 2017.
|
Exercise of Stock Options
Subsequent to March 31, 2014, the
former CEO of the Company exercised options for the purchase of 478,726 shares of the common stock of the Company at an
exercise price of approximately $2.62 per share and an aggregate intrinsic value as of the dates of exercise of
approximately $1.3 million.
Purchase of Commercial Inventory
The
Company had previously been released from its obligation to purchase active pharmaceutical ingredient under an October 2011
purchase commitment. In April 2014, given that the material remained available for purchase, the Company completed
the purchase of 2.4 metric tons of active pharmaceutical ingredient from the manufacturer to be used in the production
of commercial inventory in preparation for the market launch of Northera in the United States. Given exchange rates at the
date of purchase, the value of this raw material was approximately $4.6 million and such costs have been recorded as
inventory.