NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company, Basis of Presentation and Summary of Significant Accounting Policies
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 is developing 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 norepinephrine may play a role, 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 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.
We anticipate 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.
Basis of Presentation
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 United States Food and Drug Administration, or 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.
The Company remains focused on evaluating potential strategic opportunities that could include partnerships, out-licensing or the potential sale of the company.
If successful in completing such an arrangement, the Company would not anticipate that capital resources in excess of those available at December 31, 2013 would be needed during 2014, if ever, recognizing that, depending on the nature of the strategic arrangement, 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.
Regardless of the successful completion of a potential strategic arrangement, the approval of Northera requires significant incremental spending in 2014 including a milestone payment made upon approval to the Company’s partner DSP, commencement of the post-approval confirmatory study as required by the FDA and building adequate infrastructure to support regulatory compliance requirements. In addition, the Company plans to manufacture an adequate commercial supply of Northera.
Additional sources of capital might include equity issuances, debt arrangements, strategic alliances or other 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.
For presentation purposes, the Company has restated all information, where applicable, contained in this report related to shares authorized, issued and outstanding and related disclosures of weighted average shares and loss per share to reflect the results of the Delaware reincorporation in July 2005 as if the Delaware reincorporation had occurred at the beginning of each of the periods presented.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Consolidation
The accompanying financial statements present, on a 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 of America 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. The Company
considers an accounting estimate to be critical if the accounting estimate requires management to make assumptions about matters that were uncertain at the time the accounting estimate was made and where changes in the estimate that could occur from period to period, or use of different reasonable estimates in the current period, would have a material impact on our financial condition or results of operations.
Significant estimates and assumptions are required related to the estimated costs and estimated percentages of completion of research and development 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. Actual results may differ significantly from such estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and other highly-liquid investments with maturities of three months or less at the date of purchase.
Short-Term Investments
During early 2012, the Company held short-term investments consisting of investments in certificates of deposit, or CD’s, with maturities of 26-weeks as of the dates of purchase, that were purchased through the Certificate of Deposit Account Registry Service, or CDARS®, all of which were fully redeemed in early 2012.
Investments were made through a single CDARS Network member and when a large deposit was made, that institution used the CDARS service to place funds into CDs issued by other members of the CDARS Network. Investments occur in increments below the standard Federal Deposit Insurance Corporation, or FDIC, insurance maximum ($250,000) so that both principal and interest were eligible for FDIC insurance.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents.
A portion of the Company’s cash has been maintained in non-interest bearing accounts at federally insured financial institutions that, under the Transaction Account Guarantee Program, or TAGP, of the Federal Deposit Insurance Corporation, or FDIC, were fully insured.
This program expired on December 31, 2012.
The Company continues to maintain deposits in commercial accounts in excess of federally insured amounts ($250,000 for each account), primarily in fully liquid interest-bearing money market accounts, money market funds and Treasury funds.
However, while giving consideration to the expiration of the TAGP at December 31, 2012, management believes the Company is not exposed to significant credit risk for its cash and cash equivalents due to the financial position of the depository institutions in which those deposits are held and the nature of the investments.
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments, including cash and cash equivalents and accounts payable approximates fair value given their highly-liquid and short-term nature.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment, which consists of furniture and fixtures, software and equipment, is stated at cost and depreciated or amortized using the straight-line method over the estimated useful lives of the related assets. The useful life for all classes of assets other than leasehold improvements is three years.
The useful life for leasehold improvements is the shorter of the expected life of the leasehold improvement or the remaining term of the lease.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment loss, if recognized, would be based on the excess of the carrying value of the impaired asset over its respective fair value. Impairment, if any, is assessed using undiscounted cash flows. Through December 31, 2013, there has been no such impairment.
Research and Development
Research and development expenditures are expensed based upon the most recent estimate of costs needed to complete such activities. The Company often contracts with third-party contract research organizations, or 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
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 thee 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 (see Note 6).
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.
Loss per Share
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 as potentially dilutive securities from stock options and stock warrants would have an antidilutive effect since the Company incurred a net loss. The number of shares of common stock potentially issuable at December 31, 2013, 2012 and 2011 upon exercise or conversion that were not included in the computations of net loss per share were
7,156,709
,
9,099,600
and 8,687,452, respectively.
Income Taxes
The Company determines deferred tax assets or liabilities based on the difference between the financial statement and the tax bases of assets and liabilities as measured by the enacted tax rates, which will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.
The Company also recognizes, in its consolidated financial statements, the impact of a tax position if that position is more likely than not to be sustained upon examination, based on the technical merits of the position and provides explicit disclosure about the Company’s uncertainties related to the income tax position, including a detailed roll-forward of tax benefits taken that do qualify for financial statement recognition.
Stock-Based Compensation
The Company accounts for its stock options using a fair value based method of accounting for stock options or similar equity instruments and 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.
The fair value of each option award made to employees and directors during the years ended December 31, 2013, 2012 and 2011 was estimated on the date of grant using the Black-Scholes closed-form option valuation model utilizing the assumptions noted in the following table. 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 dividends on its common stock.
Effective January 1, 2011, the Company began relying exclusively on the trading and price history of the Company’s stock in order to determine the expected volatility given that, as of that date, there existed sufficient trading history to be able to determine historical volatility.
As of January 1, 2011, taking into consideration hiring completed and planned by the Company and the potential impact of forfeitures given the roles of these newly filled positions, the Company had estimated a forfeiture rate of
3
%.
Given the events of 2012 and the corporate restructuring announced in July 2012 that negatively impacted the Company’s staffing levels, the estimated forfeiture rate was changed to
24
% for the first six months of 2012 and the impact of this change in estimate was recognized as a cumulative catch-up and serves to reduce the stock-based compensation costs for the quarter ended June 30, 2012.
In July 2012 and in January 2013, the Company again reviewed its estimated forfeiture rate, based upon the adjusted staffing levels resulting from the corporate restructuring and, effective at those dates, modified the estimated forfeiture rate to
11.5
% and
10
%, respectively.
Prior to 2011, given the Company’s low historical rate of attrition and the senior nature of the roles for a significant portion of the Company’s
employees, the Company estimated 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 stock-price volatility, 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 years ended December 31, 2013, 2012 and 2011:
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
For the years ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Weighted-average risk-free interest rate
|
|
0.69
|
%
|
0.74
|
%
|
1.83
|
%
|
Weighted-average expected life of options
|
|
4.4 years
|
|
5 years
|
|
5 years
|
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
0
|
%
|
Weighted-average expected volatility
|
|
105.48
|
%
|
89.73
|
%
|
87.82
|
%
|
The table below summarizes the compensation expense recorded by the Company for the years ended December 31, 2013, 2012 and 2011 in conjunction with option grants made to employees and non-employee directors:
|
|
For the year ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Stock-based compensation expense recorded during period
|
|
$
|
1,847,076
|
|
$
|
1,828,203
|
|
$
|
2,648,741
|
|
Total unrecognized compensation expense remaining
|
|
$
|
2,952,464
|
|
$
|
4,173,830
|
|
$
|
5,724,738
|
|
Remaining average recognition period (in years)
|
|
|
1.88
|
|
|
2.81
|
|
|
1.95
|
|
As a result of the Company’s restructuring activities, stock-based compensation recorded for the year ended December 31, 2012 reflects the reversal of stock compensation expense for unvested options that were forfeited during the period and the impact of option modifications made for former executives and former Board members as a component of their resignations.
The expected future amortization expense for unrecognized compensation expense for stock option grants to employees and non-employee directors at December 31, 2013 is as follows:
Year ending December 31, 2014
|
|
$
|
1,731,814
|
|
Year ending December 31, 2015
|
|
|
876,035
|
|
Year ending December 31, 2016
|
|
|
290,407
|
|
Year ending December 31, 2017
|
|
|
54,208
|
|
|
|
$
|
2,952,464
|
|
Although no such grants have been made by the Company since 2005 (none of which remain outstanding as of December 31, 2013), option awards to consultants, advisors or other independent contractors are granted with an exercise price equal to the market price of the Company’s stock at the date of the grant, have
10
-year contractual terms and vest dependent upon the completion of performance commitments. As such, the value of stock options is measured at the then-current market value as of financial reporting dates and compensation cost is recognized for the net change in the fair value of the options for the reporting period, until such performance commitments are met.
Once each commitment is met, the options that vest in association with that commitment are adjusted, for the last time, to the then-current fair value and compensation cost is recognized accordingly.
No expense related to third-party grants were recognized during 2013, 2012 or 2011.
In determining the fair value of options granted to consultants, advisors and other independent contractors, the Company uses the Black-Scholes closed-form option valuation model in a manner consistent with its use in determining the fair value of options granted to employees and directors.
However, the expected life of the options is based on the contractual lives as defined in agreements with the third parties.
2. Short-term Investments
As of December 31, 2011, the Company held short-term investments of $
4.5
million consisting of investments in CD’s with maturities of 26-weeks as of the dates of purchase.
Such investments, made at various times during 2011, were purchased through CDARS and, at maturity, were fully redeemed in early 2012.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. 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 December 31, 2013 and 2012, assets measured at fair value on a recurring basis consisted of cash and cash equivalents of approximately $
45.3
million and $
28.4
million, respectively.
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.
4. Property and equipment:
Property and equipment consist of the following:
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Furniture and fixtures
|
|
$
|
285,987
|
|
$
|
285,987
|
|
Software
|
|
|
57,563
|
|
|
57,563
|
|
Leasehold improvements
|
|
|
39,909
|
|
|
39,909
|
|
Computer and office equipment
|
|
|
248,572
|
|
|
245,578
|
|
|
|
|
632,031
|
|
|
629,037
|
|
Less - accumulated depreciation and amortization
|
|
|
(587,453)
|
|
|
(477,493)
|
|
|
|
$
|
44,578
|
|
$
|
151,544
|
|
Depreciation and amortization expense was $
109,960
, $
127,350
and $
116,465
for the years ended December 31, 2013, 2012 and 2011, respectively.
5. Common Stock Offerings
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.
No sales were made under the program during the year ended December 31, 2012.
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.
On January 11, 2012, the Company raised gross proceeds of approximately $
23.7
million through the sale of
4,989,275
shares of its common stock in a publicly-marketed offering.
These shares were offered pursuant to the Company’s 2011 shelf registration statement, as amended effective January 5, 2012 pursuant to Rule 462(b) to increase the dollar amount of securities available for sale, filed with the SEC under which the Company could 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 $
63,950,000
.
Such registration statement became effective as of January 19, 2011.
In connection with this offering, the Company paid commissions and other offering-related costs of approximately $
1.6
million.
There are no more securities available under the Company’s 2011 shelf registration.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 24, 2011, the Company raised gross proceeds of approximately $
40.3
million through the sale of
10,062,500
shares of its common stock in a publicly-marketed offering.
These shares were offered pursuant to the Company’s 2011 shelf registration statement, amended pursuant to Rule 462(b), filed with the SEC under which the Company could 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 $
63,950,000
.
Such registration statement became effective as of January 19, 2011.
In connection with this offering, the Company paid commissions and other offering-related costs of approximately $
2.5
million.
On October 6, 2010, the Company raised gross proceeds of approximately $
40.3
million through the sale of
8,214,286
shares of its common stock in a publicly-marketed offering.
These shares were offered pursuant to the Company’s shelf registration statement, as amended effective October 1, 2010 pursuant to Rule 462(b) to increase the dollar amount of securities available for sale, as filed with the SEC under which it 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 $
61,566,686
.
Such registration statement became effective as of August 20, 2009.
In July 2010, the Company filed the required documents and became eligible to use an at-the-market common equity sales program for the sale of up to
3,000,000
shares of common stock.
In September 2010, the Company sold
634,500
shares of common stock under this program resulting in net proceeds, after expenses, of approximately $
2.9
million, or $
4.49
per share.
These shares were offered pursuant to the Company’s 2009 shelf registration statement.
On March 5, 2010, the Company raised gross proceeds of approximately $
18.2
million through the sale of
6,700,000
shares of its common stock plus warrants for the purchase of
2,345,000
shares of its common stock (the “2010 Offering”).
These warrants had an aggregate fair value of approximately $
3.9
million, 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.
These shares were offered pursuant to the Company’s 2009 shelf registration statement.
In connection with this offering, the Company paid commissions and other offering-related costs of approximately $
1.5
million.
There are no more securities available under the Company’s 2009 shelf registration.
On July 28, 2009, the Company raised gross proceeds of approximately $
13.3
million through the sale of
3,325,000
shares of its common stock.
These shares were offered pursuant to the Company’s prior shelf registration statement, as amended effective July 22, 2009 pursuant to Rule 462(b) to increase the dollar amount of securities available for sale, as filed with the SEC under which the Company could 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 $
62,218,060
.
Such registration statement became effective as of October 11, 2007.
In connection with this offering, the Company paid commissions and other offering-related costs of approximately $
0.9
million.
On November 8, 2007, the Company raised gross proceeds of approximately $
48.9
million through the sale of
7,388,172
shares of its common stock in a registered direct offering.
These shares were offered pursuant to the Company’s 2007 shelf registration statement.
In connection with this offering, the Company paid commissions and recorded or accrued other offering-related costs of approximately $
3.2
million.
There are no more securities available under the Company’s 2007 shelf registration.
On March 22, 2007, the Company raised gross proceeds of approximately $
12.5
million through the sale of
2,648,306
shares of its common stock plus warrants for the purchase of
794,492
shares of its common stock (the “2007 Placement”).
The aggregate fair value of these warrants was approximately $
1.3
million.
The warrants permitted the holders to purchase the underlying common shares at $
5.66
each and were exercisable in whole at any time, or in part from time to time, for cash, for five years from the date of issuance.
The warrants were redeemable at par value at the Company’s option in the event that the volume weighted-average closing price of the Company’s common stock is greater than $
12.00
per share for any 20 consecutive trading days provided the Company gives
60 business days’ written notice to the holders and simultaneously call all warrants on the same terms
.
Under the terms of the 2007 Placement, the Company agreed to and filed a registration statement with the SEC within 30 days of the closing for the shares of common stock sold and the shares of common stock underlying the warrants and such registration became effective on August 7, 2007.
In connection with this offering, the Company paid commissions and other offering-related costs of approximately $
1.0
million in cash.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 13, 2006, the Company raised gross proceeds of approximately $
21.5
million through the sale of
7,166,666
shares of its common stock plus warrants for the purchase of
2,149,999
shares of its common stock (the “2006 Placement”).
The allocated aggregate fair value of these warrants was approximately $
1.1
million.
The warrants permitted the holders to purchase the underlying common shares, for cash only, at $
4.20
each and were exercisable in whole at any time, or in part from time to time, for five years from the date of issuance.
The warrants were redeemable at par value at the Company’s option in the event that the Company’s volume weighted-average closing bid price of its common stock was greater than $
9.00
per share for any 20 consecutive trading days provided that the Company gave
30 business days’ written notice to the holders and simultaneously called all warrants on the same terms
.
In connection with the 2006 Placement, the Company paid commissions and other offering-related costs of approximately $
1.6
million in cash and issued warrants to the placement agent for the purchase of
716,666
shares of the Company’s common stock with an exercise price of $
3.30
per share, or
110
% of the price of the shares sold in the offering and an aggregate fair value of approximately $
0.7
million.
These warrants are exercisable in whole at any time, or in part from time to time, for cash or in a net share settlement, for seven years from the date of issuance.
Under the terms of the 2006 Placement, the Company agreed to and filed a registration statement with the SEC within 30 days of the closing for the shares of common stock sold and the shares of common stock underlying the warrants and such registration became effective on March 29, 2006.
In December 2004, Chelsea, Inc. raised gross proceeds of approximately $
14.5
million through the sale of
5,532,994
shares of its common stock (the “2004 Placement”). The amount raised includes the conversion of a $
1.7
million stockholder loan along with accrued interest, for which a total of
677,919
shares of common stock were issued.
In connection with this offering, Chelsea, Inc. paid commissions and other offering-related costs of approximately $
1.0
million in cash and issued warrants to the placement agent for the purchase of
483,701
shares of its common stock with an aggregate fair value of approximately $
14,000
. The warrants permitted the holders to purchase the underlying common shares at $
2.88
per share, and were exercisable in whole at any time, or in part from time to time, for cash or in a net share settlement, for seven years from the date of issuance.
6. Commitments
Facility Lease
On October 21, 2010, the Company entered into an amendment to its lease agreement, dated March 7, 2008, to increase the office space in Charlotte, North Carolina that serves as its corporate headquarters.
Occupancy of the additional space occurred in March 2011.
Occupancy for the originally leased space occurred in May 2008.
Upon taking delivery of the newly added space and upon expiration of a free rental period of six months from the date of delivery, the current
monthly
payments under the lease are approximately $
31,000
. The lease, as amended, expires on or about
March 11, 2016
and calls for annual rent increases of
3
%.
A security deposit of approximately $
38,000
was returned to the Company in 2012 per the terms of the lease.
The future aggregate minimum lease payments under non-cancellable operating leases are approximately $
0.9
million through the lease expiration date of March 2016.
Rent expense is normalized over the entire term of the lease such that expense is recognized on a straight-line basis. Rent expense for the years ended December 31, 2013, 2012 and 2011 was $
358,439
, $
358,439
and $
339,963
, respectively.
License Agreements
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,
sub-licensable
rights
, with certain geographic restrictions,
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.
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 immediate activities planned for the further development of this portfolio of compounds,
approximately $
1.5
million of payments may 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.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2006, the Company entered into an agreement with Dainippon Sumitomo Pharma Co., Ltd. (“DSP”) for an exclusive, sub-licensable license
, with certain geographic restrictions,
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.
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, paid upon achievement of milestones as defined in the DSP Agreement.
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 and has remaining potential future milestone payments, subject to the Company’s right to terminate the DSP Agreement, totaling $
2.5
million, including a milestone payment of $
1.5
million paid upon the approval of the Northera NDA.
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.
Such work has been completed and, based on work performed by DSP as of December 31, 2012, the Company had recorded 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 at the date the condition lapsed, 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.
In May 2013, all of these warrants expired unexercised.
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
.
The amount expended under these agreements and charged to research and development expense was $
750,000
during the year ended December 31, 2011. In February 2014, the Company made a payment of $
1.5
million to DSP in conjunction with and as a result of the approval of Northera.
Development and Commercialization Agreement
Effective May 2006, the Company entered into a development and commercialization agreement (the “Development Agreement”) with Active Biotech AB (“AB”) to co-develop and commercialize the I-3D portfolio of orally active, dihydroorotate dehydrogenase (“DHODH”) inhibiting compounds for the treatment of autoimmune diseases and transplant rejection. Under the terms of the Development Agreement, an initial payment of $
1.0
million was made to AB at the time of the Development Agreement with such funds utilized to cover the initial costs of research and development efforts jointly approved by both parties.
At December 31, 2006, the Company had expensed the entire $
1.0
million payment and expensed additional costs of $
0.3
million.
During 2007, the Company expensed costs of $
0.6
million under the program related to costs of research and development.
During 2008, the Company and AB ceased joint discovery efforts on this portfolio.
In April 2008, the Company and AB entered into a termination and assignment agreement (the “Termination Agreement”), whereby AB discontinued its participation in the I-3D co-development program and assigned its entire right, title and interest in the portfolio to the Company in exchange for royalties on future sales. The Termination Agreement also eliminated the Company’s obligation related to payment of potential future development milestones under the Development Agreement.
The Company has recorded no costs related to this program during 2013, 2012 or 2011.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 as contracted at December 31, 2013.
However, should a need arise to cancel activities under these contracts, there might be cancellation fees that could be punitive in nature.
In addition, the Company had contracted with a third party for the manufacture of commercial quantities of Northera prior to the date of final 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.
This risk notwithstanding, the Company initiated such activities with its primary supplier of active pharmaceutical ingredient of Northera in December 2010 and had incurred expenses of approximately $
1.2
million and $
3.8
million related to these activities during 2012 and 2011, respectively.
No such expenses were incurred during the year ended December 31, 2013.
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.
As such, the costs of material purchased prior to the approval of Northera is not recorded as a cost of inventory and, accordingly, will not result in charges to costs of goods sold once sales of Northera commence.
In addition, in October 2011, the Company committed to the purchase of active pharmaceutical ingredient from DSP to be used in the production of commercial inventory in preparation for the market launch of Northera in the United States with a value of approximately $
7.2
million, given exchange rates at that time.
A small initial shipment of this material was delivered in the first quarter of 2012.
In October 2012, the Company obtained a written waiver from the third-party manufacturer wherein the Company was released from its obligation to purchase the remaining material under this agreement. In February 2014, the Company agreed to purchase the remainder of this material for approximately $
4.6
million, given current exchange rates.
As more fully described in Significant Accounting Policies (see Note 1), material fluctuations in the estimated costs to complete contracted research and development activities of a material nature could occur during the normal course of business.
Although the Company has a rigorous process in place for the periodic review of the costs estimates utilized in accounting for expenses of contracted third-party research activities, during the fourth quarter of 2012 the Company’s analysis resulted in changes in the estimates to complete its Phase III clinical trial, Study 306B, and its estimate of final costs for its nearly completed Phase II clinical trial of CH-4051, Study 202.
At September 30, 2012, the Company had estimated the costs to complete Study 306B and its Northera extension studies would be approximately $
1.6
million from that date until the end of the first quarter of 2013.
However, based upon updated information obtained in the fourth quarter of 2012, the estimated costs to complete these programs were changed.
Expenses had been recorded in prior periods based upon previous estimates of these program costs and, as such, based on the changes in the estimates to complete, the Company recorded, in the fourth quarter of 2012, a reversal of $
0.9
million related to costs previously recorded. In addition, the Company modified the estimated costs needed to complete these programs in the first quarter of 2013 to $
0.5
million.
Similarly, the Company recorded a $
0.5
million reduction in research and development expenses during the fourth quarter of 2012 for its Phase II trial of the Company’s antifolates in rheumatoid arthritis.
Although all costs associated with this trial had been recognized in prior periods, the Company recorded the impact of this change in estimate in the fourth quarter of 2012.
Commitments under research and development programs represent contractual commitments entered into for materials and services in the normal course of business and totaled approximately $
23.6
million at December 31, 2013, primarily related to contracted research and development for our Study 401 trial for Northera in Neurogenic OH, subject to our right to terminate the study without a financial penalty.
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.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
On November 8, 2013, the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the Fourth Circuit.
Briefing of the appeal began in January 2014.
The Company and its officers intend to vigorously defend against the appeal but are unable to predict the outcome or reasonably estimate a range of possible loss at this time.
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. After the dismissal of the class action and the filing of the notice of appeal in that case, plaintiff in this action sought to proceed with the case and the parties entered into a scheduling stipulation in January 2014, subsequently approved by the Court of Chancery, for the briefing of defendants’ motions to stay the action and to dismiss the complaint.
Retention Bonus Plans
In 2013, 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, are eligible to receive a bonus payment when the Company obtains approval from the FDA to market Northera in the U.S.
if they remained employees as of the date of approval.
Further, board members are also eligible to receive a bonus payment, upon approval, based on total 2013 board compensation.
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 directors, executives and employees.
Such amount has been paid and recognized in the first quarter of 2014. (see Note 12).
In addition, directors, 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.
If such a transaction should occur, the Company would be obligated to make bonus payments of approximately $
1.3
million in the aggregate to qualifying directors, executives and employees for each event, calculated based on headcount as of December 31, 2013.
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 conditions for payment have been met.
Other Contractual Obligations
During 2011 and early 2012, the Company contracted with various third parties to facilitate, coordinate and perform agreed upon commercialization support activities in anticipation of approval to launch of Northera in the United States in 2012.
These contracts typically called 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 prepaid fees for future milestones, it would have recorded the prepayment as a prepaid asset and amortized the asset into sales and marketing expense over the period of time the contracted services were performed.
Most fees were incurred throughout the contract period and were expensed based on the percentage of completion at a particular date.
During the second quarter of 2012, the Company successfully curtailed these activities and cancelled the associated contracts given the receipt of the CRL from the FDA on March 28, 2012.
The Company did incur a cancellation penalty on one of these contracts and, during the second quarter of 2012, recorded $
100,000
of sales and marketing expense related to that penalty.
Business activities performed under these contracts included, but were not limited to, market research, marketing and advertising planning and development, contracted Medical Science Liaison professionals, sales territory mapping, publication planning, sales force recruiting, sales operations support and planning, messaging and website development, public relations and information technology support and planning.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Stockholders’ Equity
Preferred Stock
The Company’s Certificate of Incorporation provides that the Board of Directors of the Company has the authority to issue up to an aggregate of
5,000,000
shares of preferred stock in one or more classes or series and to determine, with respect to any such class or series, the designations, powers, preferences and rights of such class or series, and the qualifications, limitations and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption prices, liquidation preferences and the number of shares constituting any class or series or the designation of such class or series, without further vote or action by the stockholders.
As of December 31, 2013, no shares of preferred stock were issued and outstanding.
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 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, as consideration for the $
150,000
anniversary milestone payment due under its product license agreement with Dr. M. Gopal Nair (see Note 6).
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, as consideration for the $
150,000
anniversary milestone payment due under its product license agreement with Dr. M. Gopal Nair (see Note 6).
In May 2006, the Company issued
63,131
shares of its common stock as consideration for a product license agreement with DSP (see Note 6), with a value of approximately $
4.35
per share, or $
274,621
.
During April 2004, the Company issued
471,816
common shares as consideration in the product license agreement (see Note 6) and
478,330
shares were sold to Simon Pedder, the Company’s President and Chief Executive Officer under the terms of his employment agreement. These shares were valued at what was, at that time, Chelsea’s common stock’s estimated aggregate fair value of $
402
and $
408
, respectively, with such nominal values reflecting an asset-based valuation methodology.
During 2002, the Company issued
5,428,217
shares of its common stock for a subscription receivable of $
4,625
.
Warrants
At December 31, 2013, the Company had no outstanding warrants.
At December 31, 2012, the Company had outstanding warrants to purchase 2,023,530
shares of the Company's common stock.
Warrants outstanding as of December 31, 2012 were issued at prices ranging from $
2.79
to $
4.31
per share.
On March 5, 2010, in conjunction with the 2010 Offering, the Company issued warrants for the purchase of
2,345,000
shares of its common stock.
These warrants had an aggregate fair value of approximately $
3.9
million, permit the holders to purchase the underlying common shares at $
2.79
each or elect a net share settlement and are 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.
Warrants for the purchase of
1,286,764
shares of the Company’s stock remained unexercised and expired on March 5, 2013.
In March 2007, in conjunction with the 2007 Placement (see Note 5), the Company issued warrants for the purchase of
794,492
shares of its common stock.
The aggregate fair value of these warrants was approximately $
1.3
million.
The warrants permitted the holders to purchase the underlying common shares at $
5.66
each and are exercisable in whole at any time, or in part from time to time, for cash, for five years from the date of issuance.
The warrants were redeemable at par value at the Company’s option in the event that the volume weighted-average closing price of the Company’s common stock is greater than $12.00 per share for any 20 consecutive trading days provided the Company gives 60 business days
’ written notice to the holders and simultaneously call all warrants on the same terms.
Any remaining unexercised warrants expired in February 2012.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2006, in conjunction with and as compensation for activities related to the product license agreement with DSP (see Note 6) 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 did not occur until January 2007.
As such, in January 2007, the Company recorded a charge based on the warrants’ aggregate fair value at that date of $
433,750
.
The warrants permit the holders to purchase the underlying common shares at $4.31 per share, and are exercisable in whole at any time, or in part from time to time, for cash or in a net share settlement, for seven years from the date of issuance.
These warrants remained unexercised and expired in May 2013.
In February 2006, in conjunction with the 2006 Placement (see Note 5), the Company issued warrants for the purchase of
2,149,999
shares of its common stock.
The allocated aggregate fair value of these warrants was approximately $
1.1
million.
The warrants permitted the holders to purchase the underlying common shares at $4.20 each and were exercisable in whole at any time, or in part from time to time, for cash, for five years from the date of issuance. In addition, these warrants were redeemable at the Company’s option in the event that the volume weighted average closing bid price of its common stock for any 20 consecutive trading days was at least $9.00 per share.
These warrants were scheduled to expire in February 2011 and, prior to that date, warrants for the purchase of
2,131,399
shares of common stock had been exercised by the holders.
The remaining warrants for the purchase of
18,600
share of common stock remained unexercised and expired in February 2011.
The Company also issued warrants to its placement agent for the 2006 Placement to purchase
716,666
shares of its common stock with an exercise price of
110
% of the purchase price per share based on shares sold in the 2006 Placement, or $
3.30
per share and an aggregate fair value of approximately $
705,000
. These warrants are exercisable in whole at any time, or in part from time to time, for cash or in a net share settlement, for seven years from the date of issuance.
These warrants remained unexercised and expired in February 2013.
In February 2005, in conjunction with and as compensation for facilitating the Merger (see Note 1), the Company issued warrants for the purchase of
105,516
shares of its common stock at an exercise price of approximately $
2.62
per share.
The aggregate fair value of these warrants was approximately $
26,700
.
These warrants were exercisable in whole at any time, or in part from time to time, for cash or in a net share settlement, for seven years from the date of issuance.
As of December 31, 2013, all of these warrants had been exercised by the holders.
In December 2004, as compensation for fundraising efforts related to the 2004 Placement (see Note 5), the Company issued warrants to purchase
483,701
shares of its common stock, with a purchase price of
110
% of the purchase price per share based on shares sold in the 2004 Placement, or, as converted under terms of the Merger Agreement, approximately $
2.89
per share.
The aggregate fair value of these warrants was approximately $
14,000
.
The warrants permit the holders to purchase the underlying common shares at $
2.88
per share, and were exercisable in whole at any time, or in part from time to time, for cash or in a net share settlement, for seven years from the date of issuance.
These warrants
had all been exercised by the holders prior to December 2011.
Exercise of Common Stock Warrants
No warrants were exercised during the year ended December 31, 2013.
In February 2012, a warrant holder exercised the right to purchase
57,000
shares of the common stock of the Company, with an exercise price of $
3.30
per share, pursuant to a cashless exercise whereby the Company, in a net share settlement, issued
17,148
shares of its common stock to the warrant holder based on the excess of the market price over the exercise price on the date of exercise.
During January and February 2011, various warrant holders exercised their rights to purchase an aggregate of
1,993,444
shares of the common stock of the Company, with an exercise price of $
4.20
per share, pursuant to cash exercises whereby the Company received proceeds of approximately $
8.4
million.
In addition, in December 2011, a warrant holder exercised its right to purchase
37,277
shares of the common stock of the Company, with an exercise price of approximately $
2.89
per share, pursuant to a cash exercise whereby the Company received proceeds of approximately $
0.1
million.
During 2011, various warrant holders exercised the rights to purchase
331,245
shares of the common stock of the Company, with exercise prices of $
2.89
per share, pursuant to cashless exercises whereby the Company, in net share settlements, issued
149,950
shares of its common stock to the various warrant holders based on the excess of the market price over the exercise price on the dates of exercise.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2010, a warrant holder exercised the right to purchase
26,379
shares of the common stock of the Company, with an exercise price of $
2.62
per share, pursuant to a cashless exercise whereby the Company, in a net share settlement, issued
14,298
shares of its common stock to the warrant holder based on the excess of the market price over the exercise price on the date of exercise.
Also in 2010, a warrant holder exercised the right to purchase
1,058,236
shares of the common stock of the Company, with an exercise price of $
2.79
per share, pursuant to a cashless exercise whereby the Company, in a net share settlement, issued
661,930
shares of its common stock to the warrant holder based on the excess of the market price over the exercise price on the date of exercise.
During 2010, various warrant holders exercised their rights to purchase an aggregate of
65,555
shares of the common stock of the Company at an exercise price of $
4.20
per share pursuant to cash exercises whereby the Company recorded proceeds of approximately $
275,000
.
During 2009, various warrant holders exercised rights to purchase
119,691
shares of the common stock of the Company, with an average exercise price of approximately $
3.27
per share, pursuant to cashless exercises whereby the Company, in net share settlements, issued
63,927
shares of its common stock to the warrant holders based on the excess of the market price over the exercise price on the respective dates of exercise.
During 2008, various warrant holders, on various dates, exercised rights to purchase
100,487
shares of the common stock of the Company, with an average exercise price of approximately $
2.91
per share, pursuant to cashless exercises whereby the Company, in net share settlements, issued
57,983
shares of its common stock to the warrant holders based on the excess of the market price over the exercise price on the respective dates of exercise.
During 2008, various warrant holders, on various dates, exercised rights to purchase
11,200
shares of the common stock of the Company at an exercise price of $
4.20
per share pursuant to a cash exercise whereby the Company recorded proceeds of $
47,040
.
During 2007, various warrant holders, on various dates, exercised rights to purchase
116,596
shares of the common stock of the Company, with an average exercise price of approximately $
2.90
per share, pursuant to cashless exercises whereby the Company, in net share settlements, issued
68,136
shares of its common stock to the warrant holders based on the excess of the market prices over the exercise prices on the respective dates of exercise.
During 2007, various warrant holders, on various dates, exercised rights to purchase
61,200
shares of the common stock of the Company at an exercise price of $
4.20
per share pursuant to a cash exercise whereby the Company recorded cash proceeds, net of expenses, of $
252,040
.
During 2006, various warrant holders, on various dates, exercised rights to purchase
30,422
shares of the Company’s common stock, with an exercise price of approximately $
2.89
per share, pursuant to cashless exercises whereby the Company, in net share settlements, issued
15,461
shares of its common stock to the warrant holders based on the excess of the market prices over the exercise prices on the respective dates of exercise.
Stock Options
The Company has a stock incentive plan, as amended (the “Plan”) under which incentive 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.
Options awards to employees and directors are granted with an exercise price equal to or greater than the market price of the Company’s stock at the date of the grant and generally have 10-year contractual terms.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the years ended December 31, 2013, 2012 and 2011, the Company granted stock options to employees and non-employee directors as follows:
|
|
For the years ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Options granted during period
|
|
|
985,500
|
|
|
2,136,000
|
|
|
1,190,500
|
|
Weighted average exercise price
|
|
$
|
1.10
|
|
$
|
3.26
|
|
$
|
6.91
|
|
Weighted average grant date fair value
|
|
$
|
0.77
|
|
$
|
2.21
|
|
$
|
4.60
|
|
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.
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 December 31, 2013 of $4.43 per share for those awards that have an exercise price below the quoted closing price. The table below summarizes options outstanding, options vested and aggregate intrinsic value as of December 31, 2013:
Total options outstanding under the Plan
|
|
|
7,156,709
|
|
Weighted average remaining contractual life (in years)
|
|
|
5.76
|
|
Weighted average exercise price per share
|
|
$
|
3.52
|
|
Total options oustanding and vested
|
|
|
4,728,834
|
|
Total in-the-money options oustanding
|
|
|
4,452,709
|
|
Aggregate intrinsic value of in-the-money options outstanding
|
|
$
|
10,638,099
|
|
Total in-the-money options vested and outstanding
|
|
|
2,784,459
|
|
Aggregate intrinsic value of in-the-money options outstanding and vested
|
|
$
|
5,369,137
|
|
Each option granted to employees and non-employee directors during 2013, 2012 and 2011, other than those granted to non-employee directors on April 15, 2013 more fully described above, vests as to 25% of the shares on each of the first, second, third and fourth anniversary of the vesting commencement date.
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.
Effective June 5, 2012, the Plan was amended to modify Section 5.2, removing a sentence that could be interpreted as allowing repricing of options issued under the Plan.
During the years ended December 31, 2013, 2012 and 2011, options for
822,986
,
837,150
and
40,000
shares were forfeited by former employees and non-employee directors of the Company.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company’s stock option activity and related information since inception is as follows:
|
|
Available
|
|
Activity/
|
|
Wtd Avg
|
|
|
|
For Grant
|
|
Balance
|
|
Exercise Price
|
|
Establish 2002 Option Plan
|
|
1,085,648
|
|
-
|
|
$
|
0.00
|
|
Balance at December 31, 2002
|
|
1,085,648
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 Activity
|
|
-
|
|
-
|
|
$
|
0.00
|
|
Balance at December 31, 2003
|
|
1,085,648
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancel 2002 Stock Option Plan
|
|
(1,085,648)
|
|
-
|
|
$
|
0.00
|
|
Establish 2004 Stock Option Plan
|
|
1,085,648
|
|
-
|
|
$
|
0.00
|
|
2004 Option grants
|
|
(363,835)
|
|
363,835
|
|
$
|
0.56
|
|
Balance at December 31, 2004
|
|
721,813
|
|
363,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Plan Amendment
|
|
410,784
|
|
-
|
|
|
|
|
2005 Option grants
|
|
(761,451)
|
|
761,451
|
|
$
|
2.66
|
|
2005 Cancellations
|
|
58,683
|
|
(58,683)
|
|
$
|
2.62
|
|
2005 Exercises
|
|
-
|
|
(14,663)
|
|
$
|
0.07
|
|
Balance at December 31, 2005
|
|
429,829
|
|
1,051,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Plan Amendments
|
|
1,148,568
|
|
-
|
|
|
|
|
2006 Option grants
|
|
(668,085)
|
|
668,085
|
|
$
|
3.61
|
|
2006 Cancellations
|
|
8,802
|
|
(8,802)
|
|
$
|
2.62
|
|
2006 Exercises
|
|
-
|
|
(78,683)
|
|
$
|
0.06
|
|
Balance at December 31, 2006
|
|
919,114
|
|
1,632,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Plan Amendments
|
|
1,500,000
|
|
-
|
|
|
|
|
2007 Option grants
|
|
(665,500)
|
|
665,500
|
|
$
|
5.72
|
|
2007 Exercises
|
|
-
|
|
(17,868)
|
|
$
|
0.88
|
|
Balance at December 31, 2007
|
|
1,753,614
|
|
2,280,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Option grants
|
|
(837,500)
|
|
837,500
|
|
$
|
6.11
|
|
2008 Cancellations
|
|
148,802
|
|
(148,802)
|
|
$
|
4.95
|
|
2008 Exercises
|
|
-
|
|
(94,230)
|
|
$
|
0.63
|
|
Balance at December 31, 2008
|
|
1,064,916
|
|
2,874,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Plan Amendments
|
|
855,000
|
|
-
|
|
|
|
|
2009 Option grants
|
|
(938,290)
|
|
938,290
|
|
$
|
1.99
|
|
Balance at December 31, 2009
|
|
981,626
|
|
3,812,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Plan Amendments
|
|
1,200,000
|
|
-
|
|
|
|
|
2010 Option grants
|
|
(861,000)
|
|
861,000
|
|
$
|
3.10
|
|
2010 Cancellations
|
|
12,000
|
|
(12,000)
|
|
$
|
2.93
|
|
Balance at December 31, 2010
|
|
1,332,626
|
|
4,661,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 Plan Amendments
|
|
1,200,000
|
|
-
|
|
|
|
|
2011 Option grants
|
|
(1,190,500)
|
|
1,190,500
|
|
$
|
6.91
|
|
2011 Cancellations
|
|
40,000
|
|
(40,000)
|
|
$
|
5.07
|
|
Balance at December 31, 2011
|
|
1,382,126
|
|
5,812,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Plan Amendments
|
|
3,000,000
|
|
-
|
|
|
|
|
2012 Option grants
|
|
(2,136,000)
|
|
2,136,000
|
|
$
|
3.26
|
|
2012 Exercises
|
|
-
|
|
(35,210)
|
|
$
|
0.20
|
|
2012 Cancellations
|
|
-
|
|
(837,150)
|
|
$
|
4.74
|
|
Balance at December 31, 2012
|
|
2,246,126
|
|
7,076,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Option grants
|
|
(985,500)
|
|
985,500
|
|
$
|
1.10
|
|
2013 Exercises
|
|
-
|
|
(81,875)
|
|
$
|
1.72
|
|
2013 Cancellations
|
|
-
|
|
(822,986)
|
|
$
|
4.71
|
|
Balance at December 31, 2013
|
|
1,260,626
|
|
7,156,709
|
|
|
|
|
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2013, options for the purchase of 81,875 shares of the common stock of the Company were exercised at a weighted-average exercise price of approximately $1.72 per share and an aggregate intrinsic value at the dates of exercise of approximately $
49,900
.
During 2012, options for the purchase of 35,210 shares of the common stock of the Company were exercised at an exercise price of approximately $0.20 per share and an aggregate intrinsic value at the date of exercise of approximately $
44,900
.
During the year ended December 31, 2011, no options were exercised.
The weighted average exercise price for all vested and unvested options outstanding as of December 31, 2013, 2012 and 2011 is approximately $
3.52
, $
3.97
and $
4.32
per share, respectively.
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance consists of the following:
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Common stock warrants outstanding
|
|
-
|
|
2,023,530
|
|
Common stock options outstanding
|
|
7,156,709
|
|
7,076,070
|
|
Common stock options available for future grants
|
|
1,260,626
|
|
2,246,126
|
|
|
|
8,417,335
|
|
11,345,726
|
|
8. Income Taxes
The Company does not have any unrecognized tax benefits as it believes that all positions meet the more-likely-than-not recognition threshold, presuming that such tax position would be examined by a relevant taxing authority that has full knowledge of all relevant information.
As such, a tabular presentation of those tax benefits is not presented.
From time to time, the Company may be assessed interest or penalties by its tax jurisdictions, although, historically, there have been no such assessments and the Company believes that any potential future assessments would be minimal and immaterial to the Company’s results of operations and financial position. In the event the Company receives an assessment for interest and/or penalties, it would be classified in the consolidated financial statements as general and administrative expense.
The Company and its subsidiaries file tax returns in the United States and a small number of state jurisdictions.
The statute of limitations for examination of the Company’s returns has expired for years prior to 2010.
There are no income tax examinations currently in process nor has the Company been subject to examination since inception. The material jurisdictions subject to potential examination by taxing authorities for open tax years primarily include the United States and the State of North Carolina.
The components of the deferred tax assets and the valuation allowance are shown below.
The state carryforwards are shown net of federal tax.
|
|
December 31,
|
|
|
|
2013
|
|
2012(1)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss carryforward - Federal
|
|
$
|
71,092,552
|
|
$
|
65,943,411
|
|
Net operating loss carryforward - State
|
|
|
9,618,404
|
|
|
8,921,756
|
|
Licensing costs, net of amortization
|
|
|
797,329
|
|
|
878,519
|
|
Compensation costs and deferred stock compensation
|
|
|
1,633,267
|
|
|
1,683,583
|
|
Inventory purchases prior to commercialization
|
|
|
2,671,034
|
|
|
2,671,034
|
|
Other temporary differences
|
|
|
248,677
|
|
|
202,462
|
|
|
|
|
86,061,263
|
|
|
80,300,765
|
|
Less valuation allowance
|
|
|
(86,061,263)
|
|
|
(80,300,765)
|
|
|
|
$
|
-
|
|
$
|
-
|
|
(1)
Amounts have been revised to reflect certain deferred tax balances which were previously netted in order to conform to the 2013 presentation.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reasons for the difference between actual income tax benefit and the amount computed by applying the statutory federal income tax rate to the losses before income tax benefit are as follows:
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Rate reconciliation:
|
|
|
|
|
|
Statutory federal rate
|
|
-34.00
|
%
|
-34.00
|
%
|
State income tax rate (net of federal benefit)
|
|
-4.60
|
%
|
-4.60
|
%
|
Certain non-deductible expenses
|
|
3.51
|
%
|
1.61
|
%
|
Effect of increase in valuation allowance
|
|
35.09
|
%
|
36.99
|
%
|
Effective tax rate
|
|
0.00
|
%
|
0.00
|
%
|
Given the Company’s history of incurring operating losses, the Company’s ability to realize its deferred tax assets is not considered more likely than not.
As a result, a valuation allowance equal to the total deferred tax assets has been established.
The valuation allowance as of December 31, 2013 and 2012 was approximately $
86.1
million and $
80.3
million, respectively.
The increase in the valuation allowance during 2013 is primarily related to the increase in net operating losses.
At December 31, 2013, the Company had potentially utilizable federal and state net operating loss carryforwards of approximately $
209.1
million.
The net operating loss carryforwards expire in various amounts for federal and state tax purposes through 2033 and 2028, respectively.
Under limitations imposed by Internal Revenue Code Section 382, or IRC§382, certain potential changes in ownership of the Company, which may be outside the Company’s knowledge or control, may restrict future utilization of these NOL carryforwards.
During 2011, the Company undertook, with the assistance of its tax advisors, a detailed study in order to determine any potential IRC§382 limitations on its ability to utilize, in future periods, its federal NOL carryforwards.
This detailed study resulted in a determination that there had been two ownership changes previously, as defined by IRC§382, limiting the Company’s NOLs available for federal tax purposes to approximately $
165.6
million at December 31, 2013.
However, all NOLs would be available for use prior to their expiration, resulting in no adjustment to the tax provision and disclosure at December 31, 2013.
In future years, after utilizing the $165.6 million of NOLs currently available and any unrestricted future tax losses generated, the use of the remainder of the Company's NOLs at December 31, 2013 would be limited to approximately $
7.6
million for 2014, approximately $
4.1
million annually for the years from 2015 to 2022 and the remainder in 2023.
Any portion of an NOL limited by IRC§382 not used in a given year can be carried forward to subsequent years.
The Company has not performed an ownership change analysis since 2011. NOLs generated since the last study could be subject to limitation, which would have no financial statement impact due to the full valuation allowance. Management will perform a full analysis of ownership changes prior to utilizing any net operating losses
.
Although the Company believes that it is qualified for research and development tax credits, a detailed study has not been completed as utilization of such credits is not available until the Company exhausts its available NOL carryforwards.
However, similar limitations might be expected under Internal Revenue Code Section 383, or IRC§383, on the utilization of research and development tax credits that may be available to the Company.
The Company is currently unable to fully estimate the impact of any such available research and development tax credits and any related IRC§383 limitations nor has it undertaken the steps necessary to fully estimate the potential benefits that may be available to it from the utilization of research and development tax credits in future periods.
9. Savings and Retirement Plan
During 2005, the Company established a savings and retirement plan under Section 401(k) of the Internal Revenue Code that allows eligible employees to annually contribute a portion of their annual salary to the plan. The Company matches such contributions up to a maximum of
4
% of the employee's compensation, as defined and subject to applicable IRS limitations. For the years ended December 31, 2013, 2012 and 2011, the Company made contributions of approximately $
118,000
, $
196,000
and $
211,000
, respectively.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Restructuring
In July 2012, the Company, at the direction of its Board of Directors, initiated a corporate restructuring under which the number of employees were 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 and in January 2013 was named President and CEO and appointed to the Company’s Board of Directors.
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 result of the significant headcount reduction and given the increased workloads for those employees and directors that remain with the Company, the costs savings initiatives announced on June 7, 2012 involving a
25
% reduction in pay for all corporate executive officers and a similar reduction in directors’ fees were terminated.
Nearly all of the non-officers who were to have transitioned to part-time employment pursuant to that costs savings initiative have been terminated as part of the reduction in force.
Those non-officers remaining with the Company that were to have transitioned to reduced schedules have been reinstated as full-time employees.
The previously announced suspension of 2012 performance bonuses for all employees remains in effect.
A performance bonus program is expected to be reestablished for 2014.
Other than severance payments that continue to be made to its former CEO per the terms of his severance agreement, the Company completed all other severance payments related to the reduction in force in early 2013.
As a component of his 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 to two years from that date.
All options granted to the former CEO remain unexercised and outstanding at December 31, 2013.
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 could be exercised from 180 days from the date of separation to one year from that date.
Of those, options for the purchase of 100,210 shares were exercised in 2012 and 2013 while options for the purchase of 335,000 shares expired unexercised in July 2013.
For the former Vice President of Sales and Marketing, the Company agreed that options would continue to vest and could be exercised until the end of his severance period plus 90 days.
All such options expired unexercised in May 2013.
Given that all of these options were out of the money as of the dates of the modifications, the impact of these exercise and vesting period modifications did not generate any incremental stock-based compensation expense.
However, as such modifications are required to be treated as a cancellation of the original grants and the issuance of a new grant, adjustments were needed in order to true-up stock-based compensation expense recorded for those options in 2012 based upon their adjusted fair value.
To assist in retention, the Board granted the remaining executive officers options for the purchase of an aggregate of
350,000
shares of the common stock of the Company on July 9, 2012.
On July 23 and July 30, 2012, additional options were issued to the remaining members of the Board of Directors for the purchase of an aggregate of
157,500
shares of the common stock of the Company.
On August 15, 2012, options were granted to the remaining employees in the Company for the purchase of an aggregate of
319,500
shares of the common stock of the Company.
In the aggregate, the Company issued options for the purchase of
827,000
shares of the common stock of the Company.
During 2012, the Company established a reserve related to the costs of the restructuring totaling approximately $
2.5
million.
As of December 31, 2013, the Company had made cash payments of approximately $
2.1
million related to this reserve and had made other non-cash adjustments of approximately $
0.1
million.
The activity associated with the reserve established by the Company for restructuring charges associated with these actions for the year ended December 31, 2013 are as follows:
|
|
Restructuring
|
|
|
|
|
|
|
|
Adjustments,
|
|
Restructuring
|
|
|
|
Liabilities as of
|
|
|
|
|
|
|
|
Non-cash items
|
|
Liabilities as of
|
|
|
|
December 31,
|
|
Charges to the
|
|
Cash
|
|
and Changes
|
|
December 31,
|
|
|
|
2012
|
|
Reserve
|
|
Payments
|
|
to Estimates
|
|
2013
|
|
Employee related costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and salary continuation
|
|
$
|
814,028
|
|
$
|
-
|
|
$
|
(543,396)
|
|
$
|
(11,493)
|
|
$
|
259,139
|
|
Related payroll taxes
|
|
|
19,926
|
|
|
-
|
|
|
(18,876)
|
|
|
10,230
|
|
|
11,280
|
|
Benefits
|
|
|
7,230
|
|
|
-
|
|
|
(8,493)
|
|
|
1,263
|
|
|
-
|
|
Other costs
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Totals
|
|
$
|
841,184
|
|
$
|
-
|
|
$
|
(570,765)
|
|
$
|
-
|
|
$
|
270,419
|
|
CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Subsequent Events
Grant of Stock Options
In January 2014, the Company granted options for the purchase of
892,500
shares of its common stock to employees and non-employee directors. These grants had a weighted average exercise price of $
4.63
per share, a weighted average fair value of $
3.70
per share and were granted at an exercise price equal to or greater than the closing market value of the Company’s stock on the dates of grant.
Northera NDA Approval
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, are eligible to receive a bonus payment when the Company obtains approval from the FDA to market Northera in the U.S. (see Note 6).
In addition, members of the Company’s Board of Directors are 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.
Upon obtaining FDA approval of Northera, the Company was obligated and made a milestone payment under its DSP Agreement (see Note 6) of $
1.5
million.
Such payment was made in February 2014.