MYRX Myrexis Inc (CE)

Notes to Financial Statements (Unaudited)

Prior to February 2012, Myrexis, Inc. (“Myrexis” or the “Company”) was a biopharmaceutical company that generated a pipeline of differentiated drug candidates in oncology and autoimmune diseases. In February 2012, the Company announced that it had suspended development activity on all of its preclinical and clinical programs and retained Stifel Nicolaus Weisel, an investment banking firm, to assist in reviewing and evaluating a full range of strategic alternatives to enhance shareholder value. Thereafter, in March 2012, the Company initiated an alignment of its resources involving a phased reduction in its workforce from approximately 59 employees to 1 employee as of March 31, 2013.

Based on the Company’s evaluation of strategic alternatives, it determined to pursue the acquisition of one or more commercial-stage biopharmaceutical assets, with the goal of building a commercial-stage biopharmaceutical company by optimizing their performance and profitability. Integral to these efforts, on May 11, 2012, the Company announced a change in management, including the appointment of Richard B. Brewer as President and Chief Executive Officer and David W. Gryska as Chief Operating Officer. In addition, both Mr. Brewer and Mr. Gryska were appointed as members of the Board of Directors.

On August 15, 2012, the Company announced the death of Richard B. Brewer, its President and Chief Executive Officer. The Board of Directors appointed David W. Gryska as the Acting President and Chief Executive Officer while considering succession plans and proceeded to further evaluate the Company’s strategic direction in light of this development and the Company’s progress to date in identifying attractive biopharmaceutical assets.

On November 9, 2012, the Board of Directors concluded that it appeared unlikely that a strategic transaction at a valuation materially in excess of the Company’s estimated liquidation value would be achieved in the near term. Based on these and other factors, the Board of Directors concluded that a statutory dissolution and liquidation was in the best interests of the Company and its stockholders and therefore unanimously adopted a Plan of Complete Liquidation and Dissolution (the “Plan of Dissolution”), subject to stockholder approval.

On December 14, 2012, the Company filed proxy materials with the Securities and Exchange Commission (“SEC”) for a special meeting of stockholders on January 23, 2013, to consider and vote upon the Plan of Dissolution (the “Special Meeting”).

As previously disclosed, pursuant to the Company’s Separation and Distribution Agreement with Myriad Genetics, Inc. (“Myriad Genetics”), dated June 30, 2009, at the time of Myrexis’ separation from Myriad Genetics, Myrexis assumed liability for certain pending or threatened legal matters related to its business, and is obligated to indemnify Myriad Genetics for any liability arising out of such matters, including any costs and expenses of litigating such matters, including payment of attorneys’ fees incurred to defend against claims. One such matter, a lawsuit brought by the Alzheimer’s Institute of America, Inc. (“AIA”) against Myriad Genetics and its wholly owned subsidiary, Myriad Therapeutics, Inc. (formerly known as Myriad Pharmaceuticals, Inc.) (referred to hereinafter together with Myriad Genetics as “Myriad”), and the Mayo Clinic Jacksonville and Mayo Foundation for Medical Education and Research (referred to hereinafter together as “Mayo”), asserted that Myriad and Mayo infringed certain patents allegedly owned by AIA in connection with Myriad’s research and development of its failed Alzheimer’s drug candidate Flurizan (hereinafter referred to as the “Litigation”). Myrexis, Myriad, Mayo and AIA are hereinafter referred to collectively as the “Parties”.

On December 21, 2012, the Company announced that it entered into a settlement agreement that settled fully and finally the Litigation. Pursuant to the terms of the Settlement Agreement, in consideration of AIA’s release of claims against and covenant not to sue the other Parties for matters related to the Litigation, Myrexis agreed to (1) pay AIA approximately $1,525,000, and (2) transfer to AIA all program rights and assets associated with Myrexis’ Hsp90 inhibitor program, cancer metabolism inhibitor program, and small molecule anti-interferon (IKK€/TBK1) inhibitor program (the “Program Assets Transfer”). AIA assumed Myrexis’ liabilities under the program contracts being transferred to AIA and all liabilities for the further conduct of the programs, subject, in each case, to certain exclusions, including liabilities accruing or arising from events occurring prior to the Program Assets Transfer. The Settlement Agreement also includes a release of claims against AIA by each of Myrexis, Myriad and Mayo. Simultaneously with the delivery of the settlement payment to AIA by Myrexis on December 21, 2012, the Parties filed a stipulation of dismissal of the Litigation.

On December 21, 2012, David W. Gryska informed Myrexis of his resignation as Acting President and Chief Executive Officer, Chief Operating Officer and member of the Board of Directors, effective December 24, 2012.

On January 22, 2013, the Board of Directors of the Company unanimously determined to cancel the Special Meeting. The Board of Directors decided, after extensive and careful consideration of strategic alternatives, to abandon the proposed Plan of Dissolution and instead, the Board of Directors declared a special cash distribution to shareholders in the amount of $2.86 per share. The special cash distribution was paid to shareholders of record at the close of business on Monday, February 4, 2013. The dividend, totaling $78.6 million, was paid on February 15, 2013, and the Company’s Common Stock began trading ex-dividend on February 19, 2013. The Board of Directors also appointed Jonathan M. Couchman as a Class II director of the Company and as its President and Chief Executive Officer. Mr. Couchman is also the Chairman of the Board, President, CEO and CFO of Xstelos Holdings, Inc., a related party (see Note 8). Subsequent to Mr. Couchman’s appointment to the Board of Directors, the remaining members of the Board of Directors, Gerald P. Belle, Jason M. Aryeh, Robert Forrester, Timothy R. Franson, M.D., John T. Henderson, M.D., and Dennis H. Langer, M.D., J.D., resigned. On February 13, 2013, Steven Scheiwe and Michael Pearce were appointed to the Board. On February 28, 2013, Andrea Kendall’s employment as CFO was terminated voluntarily and on March 1, 2013, Mr. Couchman was appointed CFO of Myrexis. Myrexis, under the leadership of Mr. Couchman, will continue its evaluation of strategic alternatives.

The accompanying financial statements have been prepared by Myrexis in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the applicable rules and regulations of the SEC. In the opinion of management, the accompanying financial statements contain all adjustments necessary to present fairly all financial statements in accordance with GAAP, which consist of only normal recurring adjustments. The financial statements herein should be read in conjunction with the Company’s audited financial statements and notes thereto for the fiscal year ended June 30, 2012, included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2012. Operating results for the three and nine months ended March 31, 2013, may not necessarily be indicative of results to be expected for any other interim period or for the full year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The amortized cost, gross unrealized holding gains and losses, and fair value for available-for-sale securities by major security type and class of security at March 31, 2013 and June 30, 2012, were as follows:

In addition, at March 31, 2013 the Company holds $75,000 restricted cash in a 12-month certificate of deposit as collateral for a corporate purchasing card program, which matures in July 2013. On June 30, 2012, the Company held $200,000 restricted cash in an 18-month certificate of deposit as collateral for a corporate purchasing card program and $48,000 in a restricted cash account as collateral for office equipment. These amounts are included in long-term marketable securities on the balance sheet as of March 31, 2013 and June 30, 2012.

The fair value of the Company’s financial instruments reflects the amounts that the Company estimates to receive in connection with the sale of an asset or be paid in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy prioritizes the use of inputs used in valuation techniques into the following three levels:

Level 1—quoted prices in active markets for identical assets and liabilities.

Level 2—observable inputs other than quoted prices in active markets for identical assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Some of the Company’s marketable securities utilize a third-party pricing service which provides documentation on an ongoing basis that includes, among other things, pricing information with respect to reference data, methodology, inputs summarized by asset class, pricing application, corroborative information, etc. The documentation includes consensus price or weighted average based on reported trades, broker/dealer quotes, benchmark securities, bids, offers, and reference data including market research publications. Also included are data from the vendor trading platform. We review, test and validate this information as appropriate.

Level 3—unobservable inputs.

The substantial majority of the Company’s financial instruments are valued using quoted prices in active markets or based on other observable inputs. The following table sets forth the fair value of the Company’s financial assets that the Company re-measured at March 31, 2013, and June 30, 2012:

In conjunction with the suspension of all development activities, the Company evaluated its equipment and management committed to a plan to sell the Company’s laboratory equipment. Equipment categorized as equipment held for sale on the balance sheet at June 30, 2012 totaled $974,000. Equipment held for sale is no longer subject to depreciation, and is recorded at the lower of depreciated carrying value or fair market value less costs to sell. The fair value of the equipment was determined by using broker quotes for similar assets. The Company has classified the inputs used for determining the fair value of these assets as Level 2 in the fair value hierarchy. All such equipment had been sold as of March 31, 2013.

The loss per basic and diluted share is calculated by dividing net loss by the weighted-average number of shares outstanding during the reported period. For the three and nine months ended March 31, 2013, there were outstanding potential common equivalent shares of 1,311,369 and 1,759,388, respectively, compared to 3,020,086 and 2,716,187, respectively, in the same periods in 2012, which were excluded from the computation of diluted earnings per share because the effect would have been anti-dilutive. These potential dilutive common equivalent shares may be dilutive to basic earnings per share in future periods.

The calculation of diluted loss per share is the same as the basic loss per share since the inclusion of any potentially dilutive securities would be anti-dilutive.

The Company recognizes compensation expense using a fair-value based method for costs related to stock options and other equity-based compensation. The expense is measured based on the grant date fair value of the awards that are expected to vest, and the expense is recorded over the applicable requisite service period. In the absence of an observable market price for a share-based award, the fair value is based upon a valuation methodology that takes into consideration various factors, including the exercise price of the award, the expected term of the award, the current price of the underlying shares, the expected volatility of the underlying share price based on peer companies, the expected dividends on the underlying shares and the risk-free interest rate.

The Company has adopted two equity incentive plans, the Myrexis, Inc. 2009 Employee, Director and Consultant Equity Incentive Plan (the “Equity Incentive Plan”) and the Myrexis, Inc. 2009 Employee Stock Purchase Plan (the “ESPP”). The Company is authorized to issue a total of 10,063,259 shares under the plans. At March 31, 2013, there are 1,181,354 shares outstanding under the Plans, with a weighted average exercise price of $3.79. Total shares exercisable at March 31, 2013 is 1,179,881, with a weighted average exercise price of $3.79.

The Company’s Equity Incentive Plan provides for the issuance of Common Stock based awards, including restricted stock, restricted stock units, stock options, stock appreciation rights and other equity based awards to its directors, officers, employees and consultants.

The Company’s ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended. Full-time employees of Myrexis who will own less than five percent of Myrexis’s outstanding shares of Common Stock are eligible to contribute a percentage of their base salary, subject to certain limitations, over the course of six-month offering periods for the purchase of shares of Common Stock. The purchase price for shares of Common Stock purchased under the ESPP will equal 85 percent of the fair market value of a share of Common Stock at the beginning or end of the relevant six-month offering period, whichever is lower.

Share-based compensation expense recognized for Myrexis employees included in the statements of operations for the three and nine months ended March 31, 2013 and 2012 was as follows:

During the three months ended March 31, 2013, the Company did not grant options or restricted stock units under the Equity Incentive Plan. During the nine months ended March 31, 2013, the Company granted 60,000 options and 56,800 restricted stock units under the Equity Incentive Plan. The weighted-average option exercise price was $2.65 per share for options and the weighted-average grant price was $2.65 per share for restricted stock units.

During the three months ended March 31, 2013, 265,041 stock options were exercised at a weighted average price of $2.50 per share. During the nine months ended March 31, 2013, 598,755 stock options were exercised at a weighted average price of $2.33 per share. As of March 31, 2013, unrecognized compensation expense related to the unvested portion of stock options granted to Myrexis employees was $0.

The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model. Expected option lives were based on historical option lives under the Myrexis equity compensation plan and volatilities used in fair value calculations are based on a benchmark of peer companies with similar expected option lives. The related expense is recognized on a straight-line basis over the vesting period.

Eligible Myrexis employees participated in the ESPP offering period that began June 1, 2012 and closed November 30, 2012. Expense associated with Myrexis employees participating in the ESPP was approximately $0 and $9,000, respectively, for the three and nine months ended March 31, 2013. During the three and nine months ended March 31, 2013, there were 0 and 13,085 shares issued for total proceeds of approximately $26,600.

In accordance with the interim reporting requirements, the Company uses an estimated annual effective rate for computing its provision for income taxes. The effective rate was zero for each of the three and nine month periods ended March 31, 2013 and 2012.

The Company reduces deferred tax assets by a valuation allowance if, based on the weight of evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At March 31, 2013 the Company has certain deferred tax assets, primarily from NOLs and research and development tax credits generated since June 30, 2009, which have been offset in total by a valuation allowance.

The Company has adopted Accounting for Uncertainty in Income Taxes. For the three months ended March 31, 2013 and 2012, the Company recorded approximately $51,000 and $13,000, respectively, of additional liability for unrecognized tax benefits related to research tax credits. On January 2, 2013 the American Taxpayer Relief Act (”ATRA”) was enacted which reinstated the credit for increasing research activities. This credit had previously expired for qualified research expenses incurred after December 31, 2011. As a result of the reinstatement of the research credit, the Company qualified for estimated additional research credit of $328,000 for expenses incurred subsequent to December 31, 2011. The additional estimated credit is recorded in the quarter ended March 31, 2013 to coincide with the enactment of the ATRA during the quarter. The $51,000 additional liability for unrecognized tax benefits recorded during the three months ended March 31, 2013 is wholly due to the increase in the estimated research credit. The Company includes any interest and penalties associated with any unrecognized tax benefits within the provision for income taxes on the statement of operations. At March 31, 2013, the uncertain tax liability is approximately $717,000. The Company does not anticipate any material changes in the liability for unrecognized benefits in the next 12 months.

At March 31, 2013, the Company had Federal and State net operating loss carryforwards of approximately $142,512,000, of which $14,370,000 is attributable to excess tax benefits for which no deferred tax asset has been established. In addition, the Company had Federal research credit carryforwards of $2,996,000 and Utah research credit carryforwards of $1,063,000. These carryforward tax benefits can be used in certain circumstances to offset future tax liabilities. Pursuant to Sections 382 and 383 of the Internal Revenue Code, with which Utah complies, the Company’s use of the carryforward tax benefits may be limited in any given year as a result of certain changes in the Company’s ownership, including significant increases in ownership by the Company’s 5-percent shareholders. While the Company believes that its carryforward tax benefits as of March 31, 2013 are not limited under Sections 382 and 383, significant changes in ownership in the future may limit such usage. In March 2012, in an effort to protect the use of its carryforward tax benefits, the Company adopted a Tax Benefits Preservation Rights Plan that discourages significant changes in ownership of the Company’s stock that might limit the use of the Company’s carryforward tax benefits.

On April 26, 2013, at the Company’s 2012 Annual Meeting of shareholders (the “2012 Annual Meeting), shareholders approved an amendment to the Company’s Certificate of Incorporation (the “Protective Amendment”) designed to prevent certain transfers of the Company’s Common Stock that could result in an ownership change under Section 382 and, therefore, materially inhibit the Company’s ability to use its NOLs and Tax Attributes to reduce its future income tax liability, in order to preserve the tax treatment of the Company’s net operating losses and other tax benefits. The Protective Amendment’s transfer restrictions generally restrict any direct or indirect transfer of the Company’s Common Stock if the effect would be to increase the direct or indirect ownership of any Person (as defined in the Protective Amendment) from less than 4.75% to 4.75% or more of the Company’s Common Stock, or increase the ownership percentage of a Person owning or deemed to own 4.75% or more of the Company’s Common Stock. Any direct or indirect transfer attempted in violation of this restriction would be void as of the date of the prohibited transfer as to the purported transferee. The Protective Amendment permits the Board to approve transfers of the Company’s Common Stock that would otherwise violate the transfer restrictions in the Protective Amendment if it determines that the approval is in the best interests of the Company. The Protective Amendment was filed with the Secretary of State of Delaware on April 29, 2013.

Our former parent Myriad Genetics, Inc. (“MGI”) had entered into a license agreement (the “License Agreement”) for exclusive rights to utilize certain intellectual property rights related to the drug candidate Azixa with Maxim Pharmaceuticals, Inc. and Cytovia, Inc. All licensed rights of Maxim and Cytovia were subsequently acquired by EpiCept Corporation, and Maxim, Cytovia and EpiCept are collectively referred to herein as EpiCept. Pursuant to the separation agreement with MGI, Myrexis assumed all rights and obligations under the License Agreement.

In September 2011, Myrexis announced that it had suspended any further development of Azixa. On August 28, 2012, Myrexis provided EpiCept notice of termination of the License Agreement following its election to terminate all of its efforts to develop and commercialize Azixa in any major market as such products and markets are defined in the agreement. On January 4, 2013, Myrexis and EpiCept entered into an Asset Purchase Agreement (the “APA”) which expressly terminated the License Agreement and assigned to EpiCept rights in intellectual property, regulatory filings and certain other assets of Myrexis related to its Azixa development program for $1.00. The APA expressly terminates the License Agreement without further liability of either Myrexis or EpiCept. Myrexis has no further obligation for royalty or milestone payments to EpiCept. The APA provides for certain royalty and milestone payments to be made to Myrexis should EpiCept or its licensee develop and commercialize a product using intellectual property rights transferred to EpiCept under the APA.

In conjunction with the March 2012 reorganization, the Company determined that there were indicators of impairment of certain fixed assets, based on quoted market prices, and evaluated whether the carrying value of assets with impairment indicators is recoverable. Impairment charges of $282,000 were recorded in the year ended June 30, 2012, in conjunction with the March 2012 reorganization. During the nine months ended March 31, 2013, management reviewed the carrying value of certain fixed assets and recorded an additional $20,000 of impairment loss which is reflected in the statement of operations and comprehensive loss in general and administrative.

As of June 30, 2012, the Company evaluated its equipment and management has committed to a plan to sell the Company’s laboratory equipment. Equipment categorized as equipment held for sale on the balance sheet at June 30, 2012 totaled $974,000. Equipment held for sale is no longer subject to depreciation, and is recorded at the lower of depreciated carrying value or fair market value less costs to sell. For the three and nine months ended March 31, 2013, the Company sold assets with a net book value of $80,000 and $1.2 million, respectively, recognizing a net loss of $34,000 and gain of $271,000, respectively. These results are reflected in other income in the statement of operations and comprehensive loss.

In connection with the wind down of the Company’s operations, and the pursuit of other strategic alternatives, the Company recorded $0.8 million in one-time severance costs in the three months ended March 31, 2013. Of this amount, $0.6 million was paid during the three months ended March 31, 2013, and $0.2 million was accrued and is expected to be paid during the fourth fiscal quarter. These one-time expenses, which are reflected in the statement of operations and comprehensive loss, include $763,000 in general and administrative and $16,000 in research and development for the three and nine months ended March 31, 2013.

On February 27, 2013, Xstelos Corp. (“Xstelos”) and Myrexis entered into a stock purchase agreement (the “Stock Purchase Agreement”). Pursuant to terms of such stock purchase agreement, Myrexis agreed to issue and sell to Xstelos 7,000,000 shares of Myrexis’s Common Stock, representing approximately 20% of all outstanding Myrexis Common Stock after giving effect to such sale (the “Sale”). The shares were sold for an aggregate purchase price of approximately $250,000. Xstelos also agreed to provide to Myrexis services pursuant to the terms of an Intercompany Services Agreement (described below) as well as consent to Mr. Couchman serving as Myrexis’s Chief Financial Officer. Steven D. Scheiwe, a member of the Xstelos Holdings, Inc. Board of Directors, serves on the Board of Directors of Myrexis.

In connection with the Sale, Myrexis entered into a letter agreement (the “Letter Agreement”) dated February 27, 2013 with Xstelos pursuant to which Myrexis granted to Xstelos an exemption under Section 29 of Myrexis’s Tax Benefits Shareholder Rights Agreement, embodying a shareholder rights plan adopted on March 29, 2012 to protect the use of Myrexis’s net operating losses and certain other tax attributes. Under the exemption, Xstelos must not at any time represent more than the lesser of (i) 30% of Myrexis‘s outstanding Common Stock and (ii) the maximum percentage ownership of Myrexis’s outstanding Common Stock from time to time such that an ownership change would not have occurred for purposes of Section 382 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations thereunder.

On February 27, 2013, Xstelos and Myrexis entered into an Intercompany Services Agreement. Pursuant to the Intercompany Services Agreement, Xstelos agreed to provide Myrexis with certain administrative, management, accounting and information services for one year in exchange for a fee of $25,000. The Intercompany Services Agreement will terminate upon 30 days upon written notice given to the other party. No fees were accrued for the period ended March 31, 2013.