Document/ExhibitDescriptionPagesSize 1: 8-K Exegenics, Inc. HTML 721K
2: EX-2.1 EX-2.1 Merger Agreement & Plan of Reorganization HTML 263K
3: EX-4.1 EX-4.1 Form of Common Stock Warrant HTML 35K
4: EX-4.2 EX-4.2 Form of Series C Preferred Stock Warrant HTML 36K
5: EX-10.1 EX-10.1 Form of Lock-Up Agreement HTML 15K
10: EX-10.10 EX-10.10 Amendment No. 1 to License Agreement HTML 14K
11: EX-10.11 EX-10.11 Amendment No. 2 to License Agreement HTML 14K
12: EX-10.12 EX-10.12 License and Collaboration Agreement HTML 110K
13: EX-10.13 EX-10.13 Univ. of Penn. License Agreement HTML 67K
14: EX-10.14 EX-10.14 Univ. of Penn License Agreement HTML 66K
15: EX-10.15 EX-10.15 1st Amendment to Upenn License Agreement HTML 19K
16: EX-10.16 EX-10.16 1st Amendment to Upenn License Agreement HTML 18K
17: EX-10.17 EX-10.17 Amended Restated Subordination Agreement HTML 31K
18: EX-10.18 EX-10.18 Reich Employment Letter HTML 37K
19: EX-10.19 EX-10.19 Pfost Employment Agreement HTML 61K
6: EX-10.2 EX-10.2 Credit Agreement HTML 82K
7: EX-10.3 EX-10.3 Amended & Restated Venture Loan Agreement HTML 174K
8: EX-10.8 EX-10.8 Technology License Agreement HTML 86K
9: EX-10.9 EX-10.9 License Agreement HTML 82K
20: EX-99.1 EX-99.1 Press Release HTML 16K
4400 Biscayne Blvd
Suite 900
Miami, Florida
(Address of Principal Executive Offices)
33137
(Zip Code)
Registrant’s telephone number, including area code: (305) 575-6015
1250 Pittsford-Victor Road
Building 200, Suite 280
Pittsford, New York, 14534
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy
the filing obligation of the registrant under any of the following provisions (see General
Instruction A.2. below):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 1.01. Entry into a Material Definitive Agreement
The disclosures set forth in Item 2.01 to this Current Report are incorporated into this item
by reference.
Item 2.01. Completion of Acquisition or Disposition of Assets.
On March 27, 2007, we completed an acquisition of (a) Froptix Corporation, a privately held
Florida corporation (“Froptix”), and (b) Acuity Pharmaceuticals, Inc., a privately held Delaware
corporation (“Acuity”), pursuant to a merger agreement and plan of reorganization, dated as of
March 27, 2007 (referred to as the “Merger Agreement”), by and among eXegenics, Froptix, Acuity,
e-Acquisition Company I-A, LLC, a Delaware limited liability company wholly owned by us, and
e-Acquisition Company II-B, LLC, a Delaware limited liability company wholly owned by us.
The
Merger Agreement provided for the merger of Froptix with and into
e-Acquisition Company I-A, LLC, with e-Acquisition Company I-A, LLC surviving as our wholly-owned subsidiary (referred to
as the “Froptix Merger”) and the merger of Acuity with and into e-Acquisition Company II-B, LLC,
with e-Acquisition Company II-B, LLC surviving as our wholly-owned subsidiary (referred to as the
“Acuity Merger” and, with the Froptix Merger, the “Mergers”). In connection with the consummation
of the Mergers (1) e-Acquisition Company I-A, LLC changed its name to Froptix, LLC, (2)
e-Acquisition Company II-B, LLC changed its name to Acuity Pharmaceuticals, LLC and (3) we became
the parent company of these two wholly-owned operating subsidiaries. We incurred normal
acquisition related costs in connection with these transactions. Our trading symbol is “EXEG.OB.”
We intend to change our name to Opko Corporation in connection with our plan to apply for listing
on the American Stock Exchange.
At the closing of the Mergers, the former stockholders of Froptix and Acuity received shares
of our common stock and preferred stock as well as warrants to purchase our common stock in
exchange for all of their shares of Froptix and Acuity.
As
a result, at the closing of the Mergers, we issued (a) an aggregate of 61,775,002 shares of
our common stock to the former holders of Froptix common stock,
(b) an aggregate of 14,835,979
shares of our common stock to the former holders of Acuity common stock and Acuity Series A
preferred stock, and (c) an aggregate of 457,584 shares of our Series C preferred stock,
convertible into 45,758,400 shares of our common stock, to the former holders of Acuity Series B
preferred stock. We also granted 21,144,114 warrants to purchase shares of our common stock to
former stockholders of Froptix and Acuity.
Accounting Treatment
The accounting treatment of the acquisition of Froptix and Acuity by eXegenics was viewed to
be a two-step process. In step one Froptix was deemed to be the accounting acquirer of eXegenics
in what was accounted for as a reverse acquisition. In step two eXegenics acquired Acuity in a normal business
combination.
Treatment of Warrants and Options
In connection with the Mergers, we assumed the obligations under outstanding warrants
previously granted by Acuity to purchase 1,247,271 shares of Acuity common stock and 325,000 shares
of Acuity Series B preferred stock and, in connection therewith, we issued warrants to purchase
7,214,730 shares of our common stock and 16,866 shares of Series C preferred stock to such Acuity
warrant holders, convertible into 1,686,600 shares of our common stock.
Immediately before the closing of the Mergers, Froptix had outstanding options to purchase 65
shares of Froptix common stock and Acuity had outstanding options to purchase 2,191,619 shares of
Acuity common stock and options to purchase 141,000 shares of Acuity Series B preferred stock.
Pursuant to the terms of the Merger Agreement, the Company assumed all of the outstanding
obligations under such options and, accordingly, the Company
anticipates issuing 11,373,186 shares
of its common stock and 7,317 shares of its Series C preferred
stock, convertible into 731,700
shares of our common stock, upon the exercise of such options in lieu of shares of common stock of
Froptix or common stock and/or preferred shares of Acuity.
Our board of directors plans to adopt and implement a new stock incentive plan within the
coming months.
Escrow Agreement
As security for the respective customary indemnification obligations of Froptix and Acuity to
the Company, 11.5% of the Company shares and warrants issued in connection with the Mergers will be
held in escrow by us until March 25, 2008 such shares shall
thereafter be released to the extent no claims for indemnification
against such shares have been made.
Lock-Up Agreements
In connection with the Mergers, all of the former stockholders of Froptix and certain
significant former stockholders of Acuity entered into “lock-up” agreements. Each lock-up agreement
provides that the shares of the Company issued in the Mergers may not be, directly or indirectly,
sold for a period of two years following completion of the Mergers. Restrictions under the lock-up
agreements lapse with respect to one-third of the shares subject to the lock-up agreement on the
first anniversary of the lock-up agreement and with respect to an additional one-third six months
thereafter.
Registration Rights
Some of the former stockholders of Froptix and Acuity were granted certain rights with respect
to the registration under the Securities Act of the sale of their shares issued in the Mergers.
These rights may be triggered beginning on the first anniversary of the date of the Merger
Agreement if we propose to register any of our securities under the Securities Act, either for our
own account or for the account of other security holders exercising registration rights. Upon such
registration, such holders will be entitled to notice of such registration and to include shares in
the registration. These rights are subject to customary restrictions and exclusions as described
in the Registration Rights Agreement.
Entry
into Credit Agreement.
In connection with the consummation of the Mergers, we assumed the rights and obligations of
Acuity under a line of credit that Acuity had with The Frost Group, LLC, a Florida limited
liability company whose members include a trust controlled by Dr. Phillip Frost, who is the
Company’s Chief Executive Officer and Chairman of the board of directors, Dr. Jane H. Hsiao and
Steven D. Rubin, directors of the Company. We also amended and restated this line of credit to provide
additional available borrowing capacity. Under this amended and restated line of credit, we gained
access to $8,000,000 in available borrowings and we assumed Acuity’s existing obligation to repay
$4,000,000 previously drawn down under the line of credit. The Company is obligated to pay
interest on outstanding borrowings under the line of credit at a 10% annual rate. In connection
with the assumption and amendment of the line of credit, the Company
granted warrants to purchase 4,000,000 shares of eXegenics’
common stock to
The Frost Group, LLC.
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FORM 10 DISCLOSURES
As disclosed elsewhere in this report, on March 27, 2007, we acquired Froptix and Acuity in the Mergers. Item 2.01(f) of Form 8-K states that if the registrant was a shell
company, as we were immediately before the Mergers disclosed under Item 2.01, then the registrant
must disclose the information that would be required if the registrant were filing a general form
for registration of securities on Form 10 under the Securities Exchange Act of 1934, as amended.
Accordingly, we provide below the information that would be included in Form 10. Please note
that the information provided below relates to the combined company after the acquisition of the
Mergers, except that information relating to periods before the date
of the Mergers only relates to
eXegenics, unless otherwise specifically indicated.
This Current Report on Form 8-K , including the disclosures in accordance with Form 10,
contain “forward-looking statements,” as that term is defined under Private Securities Reform Act
of 1995 (the “PSLRA”). Forward-looking statements include statements about our expectations, beliefs or
intentions regarding our product development efforts, business, financial condition, results of
operations, strategies or prospects. You can identify forward-looking statements by the fact that
these statements do not relate strictly to historical or current matters. Rather, forward-looking
statements relate to anticipated or expected events, activities, trends or results as of the date
they are made. Because forward-looking statements relate to matters that have not yet occurred,
these statements are inherently subject to risks and uncertainties that could cause our actual
results to differ materially from any future results expressed or implied by the forward-looking
statements. Many factors could cause our actual activities or results to differ materially from
the activities and results anticipated in forward-looking statements. These factors include those
described under the caption “Risk Factors” in Item 1A of these Form 10 disclosures, which are
briefly listed below. We do not undertake any obligation to update forward-looking statements. We
intend that all forward-looking statements be subject to the
safe-harbor provisions of PSLRA. These forward-looking statements are only predictions
and reflect our views as of the date they are made with respect to future events and financial
performance.
Risks and uncertainties, the occurrence of which could adversely affect our business, include
the following:
•
We have a history of operating losses and we do not expect to become profitable in
the near future.
•
Our technologies are in an early stage of development and is unproven.
•
Our drug research and development activities may not result in commercially viable
products.
•
We are highly dependent on the success of our lead product candidate, bevasiranib,
and we cannot give any assurance that it will receive regulatory approval or be
successfully commercialized.
-4-
•
The results of previous clinical trials may not be predictive of future results, and
our current and planned clinical trials may not satisfy the
requirements of the U.S. Food and Drug Administration (the
“FDA”) or
other non-U.S. regulatory authorities.
•
We will require substantial additional funding, which may not be available to us on
acceptable terms, or at all.
•
If our competitors develop and market products that are more effective, safer or
less expensive than our future product candidates, our commercial opportunities will be
negatively impacted.
•
Our drug development activities could be delayed or stopped.
•
The regulatory approval process is expensive, time consuming and uncertain and may
prevent us or our collaboration partners from obtaining approvals for the
commercialization of some or all of our product candidates.
•
Failure to recruit and enroll patients for clinical trials may cause the development
of our product candidates to be delayed.
•
Even if we obtain regulatory approvals for our product candidates, the terms of
approvals and ongoing regulation of our products may limit how we manufacture and
market our product candidates, which could materially impair our ability to generate
anticipated revenues.
•
Even if we receive regulatory approval to market our product candidates, the market
may not be receptive to our products.
•
If we fail to attract and retain key management and scientific personnel, we may be
unable to successfully develop or commercialize our product candidates.
•
As we evolve from a company primarily involved in development to a company also
involved in commercialization, we may encounter difficulties in managing our growth and
expanding our operations successfully.
•
If we fail to acquire and develop other products or product candidates at all or on
commercially reasonable terms, we may be unable to diversify or grow our business.
•
We rely on third parties to manufacture and supply our product candidates.
•
We currently have limited marketing staff and no sales or distribution organization.
If we are unable to develop our sales and marketing and distribution capability on our
own or through collaborations with marketing partners, we will not be successful in
commercializing our product candidates.
•
Independent clinical investigators and contract research organizations that we
engage to conduct our clinical trials may not be diligent, careful or timely.
•
The success of our business may be dependent on the actions of our collaborative
partners.
-5-
•
If we are unable to obtain and enforce patent protection for our products, our
business could be materially harmed.
•
If we are unable to protect the confidentiality of our proprietary information and
know-how, the value of our technology and products could be adversely affected.
•
We will rely heavily on licenses from third parties.
•
We license patent rights to certain of our technology from third party owners. If
such owners do not properly maintain or enforce the patents underlying such licenses,
our competitive position and business prospects will be harmed.
•
Our commercial success depends significantly on our ability to operate without
infringing the patents and other proprietary rights of third parties.
•
The Medicare prescription drug coverage legislation and future legislative or
regulatory reform of the health care system may affect our ability to sell our products
profitably.
•
Failure to obtain regulatory approval outside the United States will prevent us from
marketing our product candidates abroad.
•
Non-U.S. governments often impose strict price controls, which may adversely affect
our future profitability.
•
Our business may become subject to economic, political, regulatory and other risks
associated with international operations.
•
The market price of our common stock may fluctuate significantly.
•
Trading of our common stock is limited and trading restrictions imposed on us by
applicable regulations and by lockup agreements we have entered unto with our principal
stockholders may further reduce our trading, making it difficult for our stockholders
to sell their shares.
•
Because our common stock may be a “penny stock,” it may be more difficult for
investors to sell shares of our common stock, and the market price of our common stock
may be adversely affected.
•
Directors, executive officers, principal stockholders and affiliated entities own a
significant percentage of our capital stock, and they may make decisions that you do
not consider to be in your best interests or in the best interests of our stockholders.
•
Compliance with changing regulations concerning corporate governance and public
disclosure may result in additional expenses.
* * * * *
Except where the context otherwise requires, the terms, “we,”“us,”“our,”“the Company,” or
“eXegenics” refer to the business of eXegenics Inc. and its consolidated subsidiaries: “Froptix” or
“Froptix, LLC” refers to the business of Froptix, LLC, our wholly-owned subsidiary and, “Acuity” or
“Acuity Pharmaceuticals” refers to the business of Acuity Pharmaceuticals, LLC, our wholly-owned
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subsidiary. Froptix and Acuity are the Company’s two operating subsidiaries and comprise all
of the operations of the Company as of the date of this Current Report.
Item 1. Business.
eXegenics was incorporated in the State of Delaware in November 1991. eXegenics was
previously involved in the research, creation, and development of drugs for the treatment and/or
prevention of cancer and infectious diseases. Before the consummation of the Mergers, we ceased
all operations relating to our historical business and adopted, upon consummation of the Mergers,
the business plan of Froptix and Acuity, each of which is now a wholly-owned subsidiary of ours.
Set forth below in this section entitled “Business” is a description of our new businesses. You
should read the following discussion in conjunction with our Consolidated Financial Statements and
the related Notes, the Financial Statements of Froptix, the Financial Statements of Acuity and the pro
forma financial statements contained in this Current Report on Form 8-K.
Company Overview
We are a clinical-stage biopharmaceutical company focused on the development of innovative
therapies for the treatment and prevention of ophthalmic disease. To date, we have concentrated
our resources to address ophthalmic disease in large and growing markets by employing a powerful
and rapidly progressing technology, known as RNA Interference (RNAi), to develop our lead product
candidate, bevasiranib sodium (referred to herein as bevasiranib and formerly known as Cand5).
Bevasiranib is a small interfering RNA (siRNA) therapeutic targeting vascular endothelial growth
factor (VEGF), which we are developing as an intravitreal injection for the treatment of wet
age-related macular degeneration (Wet AMD) and other related ocular conditions.
We have utilized our expertise in ophthalmology and RNAi to take bevasiranib from the
laboratory through animal models and rapidly, efficiently and safely move it into clinical trials.
We have completed a Phase II clinical trial studying the use of bevasiranib as a treatment for Wet
AMD. Bevasiranib demonstrated safety and an efficacy profile in our Phase II clinical trial for
Wet AMD in 129 patients. Top-line results showed bevasiranib to be safe and well tolerated, with a
dose-related effect evident across multiple endpoints including near vision, lesion size (CNV) and
time to rescue. Based on the results of this trial, we expect to begin the next stage of clinical
trials in 2007.
Significant scientific evidence suggests that the presence in the eye of elevated levels of
VEGF plays an important role in causing abnormal blood vessel growth and blood vessel leakage. We
believe that bevasiranib will be competitive with existing and anticipated therapies for Wet AMD as
it addresses the underlying source of VEGF production, rather than neutralizing existing VEGF that
has already been active in the disease pathogenesis. We are also developing product candidates for
the treatment of Wet AMD, which target other pathways involved in the pathogenesis of Wet AMD,
including HIF-1α.
We have licensed a novel formulation of an antimicrobial compound which has been tested in
early stage clinical trials. We plan to pursue additional clinical trials in patients with viral
conjunctivitis this year.
We are also in the early stages of developing treatments for two other retinal degenerative
diseases: dry age-related macular degeneration (“Dry AMD”) and retinitis pigmentosa (“RP”). We
plan to develop therapeutic products to arrest and potentially reverse vision loss resulting from
Dry AMD and RP.
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We plan to leverage our strengths to further develop a pipeline of product candidates for
ophthalmic indications that will employ RNAi and other novel technologies. Among the indications
that we may pursue are ocular inflammatory disorders, including uveitis, glaucoma, and cataracts.
We also plan on using our expertise and resources to expand our business to include other
types of ophthalmic products beyond therapeutics. These efforts may lead to our acquiring or
developing products which aid in the treatment and diagnosis of diseases of the eye to improve
vision health of patients. The product types may include diagnostic retina imaging instruments and
other ophthalmic devices.
Market Opportunity
Ophthalmic diseases can be caused by many factors and can affect both the front and back of
the eye. In the developed world, the major ophthalmic diseases that result in loss of vision
include cataracts, glaucoma, Age Related Macular Degeneration (AMD), and Diabetic Retinopathy.
There are two forms of AMD, termed wet and dry. Dry AMD affects over 35 million patients in
developed countries and many of these patients risk vision loss directly or may progress to Wet AMD
with resulting risk of loss of vision. Additionally, RP, fortunately a rarer disease, frequently
afflicts patients in their youth and causes progressive total loss of vision. Loss of vision has a
major impact on the quality of life and independence for those afflicted, causing both economic and
personal hardship on those afflicted and their families. Many significant ophthalmic disorders are
age dependent.
The ophthalmic therapeutic market is driven by:
•
An aging population with vision destroying disorders;
•
Diabetes (Type I and II) growing at epidemic proportions;
•
An active and increased life expectancy among the aging baby-boomer generation;
•
Sub-optimal and ineffective therapies;
•
Emerging technologies to treat ophthalmic diseases; and
•
Activist patients and physicians seeking alternatives to currently available treatments.
We have prioritized the opportunities within ophthalmology that we believe combine attractive
markets with an emerging understanding of disease pathways. We have found that five of these
pathways cross many of the largest and fastest growing ophthalmic indications. These pathways
include angiogenesis, infection, fibrosis, inflammation and drusen. Within these pathways, we have
identified molecular targets which we believe are susceptible to therapeutic intervention.
Dry AMD is much more common than Wet AMD and is characterized by the presence of drusen and
loss of retinal pigment epithelial (RPE) cells in the retina. Drusen are small, yellowish deposits
that form within the layers of the retina. It is estimated that 10% of the patients with Dry AMD
develop into the wet form. Both forms of AMD can eventually lead to blindness. Currently there is
no known proven pharmaceutical therapy for Dry AMD.
There are an estimated 12 to 15 million patients in the United States, and over 35 million
patients in developed countries, with Dry AMD with no treatment options. Age is the main risk
factor for AMD, and the number of cases of AMD is expected to increase significantly as the
population ages. It is estimated that more than 2.8 million Americans will suffer from visual
impairment as a result of AMD by
-8-
the year 2030, approximately double the number today. Untreated AMD can significantly decrease
the affected individual’s quality of life.
RP is a group of inherited eye diseases that cause the degeneration of cells in the retina. As
these cells degenerate and die, patients experience progressive vision loss. RP is relatively rare.
It affects 50,000 to 100,000 people in the United States. Worldwide, approximately 1.5 million
people are afflicted.
Bevasiranib for Wet AMD
We have an exclusive license to commercialize bevasiranib, which is an siRNA that works to
silence the gene that promotes the overgrowth of blood vessels that leads to vision loss in Wet
AMD, a leading cause of adult blindness in the developed world. Bevasiranib is a synthetic double
stranded RNA (dsRNA) oligonucleotide. We believe that bevasiranib selectively inhibits the
production of all isoforms of VEGF by efficiently and effectively halting the production of the
protein on the mRNA level. VEGF has been shown to be the central stimulus in the development of
ocular neovascularization. Bevasiranib is administered locally to the eye via an intravitreal
injection, a common office procedure performed by retinal specialists.
We believe that bevasiranib may contribute to better patient outcomes and compliance than
would be achieved with the current antagonist-based standard of care alone. Bevasiranib has been
shown to proactively shut down the production of VEGF and we believe that it will have safety and
efficacy advantages over other therapies, which inhibit VEGF only after it has already been
produced in the eye. Based on our bevasiranib Phase II clinical trial results, we envision three
potential therapeutic profiles for bevasiranib in the marketplace, including maintenance and
combination therapy, monotherapy and prophylactic treatment. We are currently planning the Phase
III clinical trials for bevasiranib, designed to target an initial label for maintenance therapy.
Clinical Results and Program Status of Bevasiranib
We completed a Phase II clinical trial for the use of bevasiranib in the treatment of Wet AMD.
The following table summarizes the status of our material clinical trials of bevasiranib to date:
Number of
Enrollment
Indication
Trial Name
Phase
Objectives
Patients
Status
Wet AMD
CARE Trial
Phase II
Safety
Dosage
Efficacy
129
Complete
Wet AMD
NA
Phase I
Safety
15
Complete
DME
RACE Trial
Phase II
Safety
Dosage
Efficacy
48
Complete
Total
research and development expenses were $8,534,000, $8,482,000, and
$3,604,000 during 2006, 2005 and 2004 respectively, and primarily
related to the development of bevasiranib.
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Clinical Trials for the Treatment of Wet AMD
C.A.R.E.™ Trial — Phase II Clinical Trial for Wet AMD. The “Cand5 Anti-VEGF RNAi Evaluation
(CARE study),” our 129 patient Phase II clinical study in patients with predominantly and minimally
classic Wet AMD was completed successfully. The outcome of this Phase II was positive and
represents what we believe to be the first clinical proof of concept of an siRNA based therapy.
The results of the CARE study demonstrated that bevasiranib is safe and well tolerated for
doses up to 3.0 mg/eye. Visual acuity outcomes taken both at distance and near, as well the
inhibition of the growth of CNV (choroidal neovascularization), demonstrated the biological effects
of RNA interference based VEGF suppression. All three dose levels of bevasiranib demonstrated
efficacy as determined by comparisons to the expected natural history of disease progression as
found in untreated patients in previous clinical trials with a similar patient population, however
no statistical significance for dose response was observed for changes in distance visual acuity
from baseline in this trial. There were trends across multiple endpoints that showed a dose
dependent effect. While these initial findings remain to be expanded and confirmed in Phase III
clinical trials, we found that bevasiranib was safe at doses up to 3.0 mg per eye.
Phase I Clinical Trial for Wet AMD. Our Phase I trial was an open label, dose escalation
study that included 15 patients and tested five dose levels administered by intravitreal injection
at six-week intervals. Bevasiranib was shown to be safe and well tolerated following repeat
administration of the escalating dose levels, up to 3.0 mg per eye.
This study was also the first for an ocular anti-VEGF agent to include a pharmacokinetic
analysis indicating that the study drug was not present in the plasma of any of the patients at any
of the doses tested. This absence of systemic exposure to bevasiranib is significant because VEGF
antagonists have been shown to have the potential for systemic side effects.
Clinical Trials for the Treatment of DME
R.A.C.E.™ Trial — Phase II Clinical Trial for DME. The RNAi Assessment of bevasiranib in
Diabetic Macular Edema, or R.A.C.E.™ trial, was a pilot phase II investigation of the safety and
preliminary efficacy of bevasiranib in patients with DME. This 48 patient multi-center,
double-masked and randomized trial studied three dose levels of bevasiranib.
Commercial Potential
Based on our bevasiranib Phase II clinical trial results, we believe there are three potential
therapeutic profiles for bevasiranib in the marketplace, including (1) maintenance and combination
therapy, (2) monotherapy treatment and (3) prophylactic treatment.
Maintenance and Combination Therapy. We anticipate bevasiranib being used by itself or in
combination with other therapies sequentially following an initiation therapy with an approved VEGF
antagonist drug. After the antagonist has absorbed extracellular VEGF, bevasiranib could be used in
order to suppress the formation of new VEGF and maintain a patient’s vision. When used in
combination with other therapies, bevasiranib’s sustained VEGF suppression may add to antagonist’s
activity, and provide a better outcome than that on VEGF antagonist alone.
Monotherapy. It is possible that not all patients will require the VEGF antagonist initiation
regimen due to low VEGF load at time of diagnosis. These patients may get the full benefit from
bevasiranib alone.
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Prophylactic Therapy. Certain patients who do not yet have the wet form of AMD may be
determined by their physician as being at high risk for progressing to the wet form. Future studies
may show that bevasiranib could prevent these high risk patients from progressing to the wet form
of AMD.
ACU-NCT-001 for Viral Conjunctivitis
We have a worldwide exclusive license to commercialize ophthalmic indications using
ACU-NCT-001. This is a proprietary formulation of the N-chloro derivative of the amino acid
taurine (referred to herein as NCT). NCT is a naturally occurring microbicidal oxidant that is
produced by stimulated granulocytes and monocytes via the enzyme myeloperoxidase. Researchers in
Austria have completed pilot clinical trials using NCT where it has been shown to have promising
antiseptic activity for viral conjunctivitis and to be safe and well-tolerated. Pre-clinical
studies have shown that ACU-NCT-001 will enhance NCT’s activity against bacteria, virus and fungi
and its penetration of activity through the cornea. ACU-NCT-001 is designed to combine
broad-spectrum anti-infective activity with very good tolerability, and its natural sterility and
absence of preservatives make it a good candidate for ocular applications. The first indication we
plan to pursue for ACU-NCT-001 is viral conjunctivitis.
ACU-HHY-011 for Wet AMD
We have a worldwide exclusive license to commercialize ACU-HHY-011, which is an siRNA
targeting HIF-1α, believed to be the most important transcription factor involved in the cellular
response to hypoxia, a key step in the neovascularization process which occurs in Wet AMD. HIF-1α
is upstream of the target for bevasiranib and preclinical data suggests that targeting HIF-1α may
have advantages over other approaches to treating Wet AMD. HIF-1α modulates the expression of more
than 60 genes, including multiple angiogenic factors under hypoxic conditions, such as VEGF,
angiopoietin-1, angiopoietin-2, placental growth factor and platelet-derived growth factor-B.
ACU-XSP-001 for Uveitis
We have entered into an option agreement to acquire an exclusive license in the field of
ophthalmology to commercialize ACU-XSP-001. ACU-XSP-001 is an siRNA that silences the syk-kinase
gene, a key cell-signaling molecule that has been shown to be central in initiating critical
elements of the inflammatory response in a number of disease models. Syk-kinase is essential for
the activation of signaling pathways that lead to the release of allergic mediators such as
cytokines and histamine that cause an inflammatory response. We believe that ACU-XSP-001 will have
utility in the treatment of inflammatory conditions of the eye, including uveitis and allergic
conjunctivitis, and that it also may have the potential to prevent the inflammation that
contributes to vision loss in conditions such as Wet AMD. The siRNA has been tested extensively by
its inventors in animal models of asthma and pulmonary inflammation via intranasal delivery where
it inhibited inflammation and bronchoconstriction.
ACU-HTR-00X for Anti-Fibrosis
We have a worldwide exclusive license in the field of ophthalmology to commercialize siRNAs
targeting transforming growth factor-b receptor Type II (TbRII), which is an important mediator of
wound healing and has been shown to play a significant causative role in ocular inflammation and
scarring.
Compounds for Dry AMD and RP
We have a worldwide exclusive license to commercialize compounds from the University of
Florida Research Foundation which have potential to treat Dry AMD by eliminating disease-causing
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accumulations of protein molecules at the back of the eye. Proteins must fold into their
correct three-dimensional conformation to achieve their biological function. Protein aggregation
and misfolding are contributors to many human diseases, such as autosomal dominant retinitis
pigmentosa, Alzheimer’s disease, and cystic fibrosis. The loss of vision associated with Dry AMD
is thought to be caused by the destructive effects of the misfolded protein and debris aggregates
likes lipofuscin. Autophagy is a cellular process by which cellular protein aggregates and
dysfunctional organelles like mitochondria are degraded. If methods for increasing autophagy were
available, they might enhance the elimination of misfolded proteins, and eliminate the destructive
effects associated with their accumulation. These compounds may mitigate retinal degeneration,
particularly retinal and macular degeneration as demonstrated in experiments demonstrating their
ability of preserving healthy cells at the back of the eye.
Our licensed technology from the University of Florida Research Foundation also includes small
molecules that can recruit bone marrow-derived stem cells to the eye. These drug candidates may be
administered intraocularly or systemically. Our lead compound induces the expression of a potent
cytokine that causes the recruitment of stem cells to various organs including the eye. Clinical
studies have shown that elderly patients have reduced levels of bone marrow-derived stem cells in
their circulation. These cells may be mobilized from the bone marrow to enter the systemic
circulation for recruitment to the retina. Using our compounds, it might be possible to initiate
cellular repair of the cell layers at the back of the eye. This type of cellular therapy may
represent a practical treatment for Dry AMD and RP.
Intellectual Property
We believe that technology innovation is driving breakthroughs in vision healthcare. We have
adopted a comprehensive intellectual property strategy which blends the efforts to innovate in a
focused manner with the efforts of our business development activities to strategically in-source
intellectual property rights.
We develop, protect and defend our own intellectual property rights as dictated by the
developing competitive environment. We value our intellectual property assets and believe we have
benefited from early and insightful efforts at understanding the interface between the ophthalmic
pathophysiology and the molecular basis of potential pharmaceutical intervention.
In total, we own or have exclusively licensed more than six issued patents in the United
States and three foreign patents, as well as more than 100 U.S.,
foreign patent
applications.
We have exclusively licensed technology, patents and patent applications from the University
of Pennsylvania related to siRNA directed to specific mRNA targets for therapeutic use. These
applications include targeting vascular endothelial growth factor (VEGF), hypoxia-inducible factor
1 alpha (HIF-1α), and intracellular adhesion molecules (ICAM), among other therapeutic targets.
We have exclusively licensed technology, patents and patent applications from Intradigm
Corporation related to the treatment of ophthalmic diseases characterized by excessive
neovascularization, angiogenesis or leakage and drug delivery technology.
We have exclusively licensed patent applications from Pathogenics, Inc. related to
N-chlorotaurine.
We have also exclusively licensed U.S. and foreign patent applications from the University of
Illinois related to siRNA targeting TGF-bRII for the treatment of ophthalmic diseases.
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We have exclusively licensed technology and patent applications from the University of Florida
Research Foundation related to the use of compounds to treat certain ophthalmic disorders including
Dry AMD and RP.
We also have an option to acquire an exclusive license in the field of ophthalmic diseases in
humans to an additional five U.S. patents, one U.S. patent application, as well as five foreign
patents and ten foreign patent applications related to syk-kinase.
Licenses and Collaborative Relationships
Our strategy is to develop a portfolio of product candidates through a combination of internal
development and external partnerships. Collaborations are key to our strategy and we continue to
build relationships and forge partnerships with companies both inside and outside of ophthalmology.
Over the past 36 months, we have completed strategic deals with the Trustees of the University of
Pennsylvania, the University of Illinois, the University of Florida Research Foundation, Intradigm
Corporation, and Pathogenics, Inc. We have also entered into an option agreement to acquire
exclusive licenses in the field of ophthalmology from ZaBeCor Pharmaceutical Company.
The Trustees of the University of Pennsylvania: In March 2003, we entered into two world-wide
exclusive license agreements with The Trustees of the University of Pennsylvania (the “University
of Pennsylvania”) to commercialize siRNA targeting VEGF,
HIF-1α, ICAM and other therapeutic
targets. In consideration for the licenses, we are obligated to make certain milestone payments to
the University of Pennsylvania. We also agreed to pay the University of Pennsylvania earned
royalties based on the number of products we sell that use the inventions claimed in the licensed
patents. We agreed to use commercially reasonable efforts to develop, commercialize, market and
sell such products covered by the license agreements.
The term of the agreements is for the later of the expiration or abandonment of the last
patent or ten years after the first commercial sale of the first licensed product. We may
terminate either of the agreements upon sixty days’ prior written notice. The University of
Pennsylvania may terminate either of the agreements if we are more than ninety days late in a
payment owed to the University of Pennsylvania, we breach the agreements and do not cure within
ninety days after receiving written notice from the University of Pennsylvania, if we become
insolvent or we are involved in bankruptcy proceedings.
Intradigm Corporation: In June 2005, we entered into a license and collaboration agreement
with Intradigm Corporation (“Intradigm”) for intellectual property covering the treatment of
ophthalmic diseases characterized by excessive neovascularization, angiogenesis or leakage. Under
the terms of the agreement, we have agreed to develop a topical siRNA pursuant to a mutually
agreeable research and development plan under the direction of a joint development committee (JDC).
Each party agreed to commit personnel, equipment, and resources to perform its obligations under
the research and development plan.
After the topical siRNA compound is selected by the JDC, we are obligated to use commercially
reasonable efforts to obtain regulatory approval for the topical siRNA in the United States and any
foreign country we choose, at our sole discretion and sole expense. We are also obligated to
use commercially reasonable efforts to market, distribute and sell the topical siRNA in the United
States and any selected foreign country. We have agreed to pay to Intradigm certain milestone
payments upon the achievement of specified milestones and royalty payments on all net sales of the
topical siRNA and other licensed products.
The term of the agreement is twenty years, unless earlier terminated in accordance with the
agreement. Either party may terminate upon mutual written consent, upon written notice by a party
if the
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other party dissolves or enters into bankruptcy or insolvency proceedings, or upon ninety days
prior written notice of a material breach of the agreement without cure.
Pathogenics, Inc.: In April 2006, we entered into a world wide license agreement with
Pathogenics, Inc. (“Pathogenics”) to commercialize N-chlorotaurine for the treatment of ophthalmic
disease or infection. We were also granted non-exclusive rights to all data resulting from a Phase
I clinical trial with N-chlorotaurine in Austria. We agreed to use commercially reasonable efforts
to develop and commercialize the licensed product, including commercially reasonable efforts to
initiate pre-clinical activities necessary to file an IND with the U.S. Food and Drug
Administration, or FDA, to initiate a Phase I clinical trial for N-chlorotaurine for an ophthalmic
indication. Pathogenics will have a non-exclusive right to such information for the treatment of
non-ophthalmic diseases or infections.
We are obligated to pay to Pathogenics certain milestone payments and royalty payments on net
sales of licensed products. We are also obligated to pay Pathogenics an annual minimum payment if
the total payments made for such year are less than a specified minimum amount. The term of the
agreement is for the shorter of twenty years or the last to expire of the Pathogenics intellectual
property. We may terminate the agreement for any reason upon written notice. The agreement may be
terminated upon mutual written consent of the parties, by either party upon written notice if
either party dissolves or is involved in a bankruptcy or insolvency proceeding or upon ninety days
prior written notice if the other party is in material breach and fails to cure.
The Board of Trustees of the University of Illinois: In August 2006, we entered into an
exclusive world wide license agreement with The Board of Trustees of the University of Illinois
(the “University of Illinois”) to commercialize intellectual property related to ophthalmic siRNA
targeting TGF-bRII for the treatment of ophthalmic disease. The license agreement obligates
us to pay to the University of Illinois certain milestone payments and royalty payments on all net
sales of licensed products and an annual license fee payment.
ZaBeCor Pharmaceutical Company: In June 2006, we entered into a material transfer agreement
with ZaBeCor Pharmaceutical Company, LLC (“ZaBeCor”) under which ZaBeCor provided us with
instructions to make a certain siRNA therapeutic directed to syk-kinase and granted us the right to
evaluate the potential use of the siRNA derived therapeutic for the treatment of ophthalmic
diseases in humans for the period of one year. We were also granted a one-year option to acquire
an exclusive license to certain of ZaBeCor’s patents related to the siRNA therapeutic for the
therapy of ophthalmic diseases in humans. If we enter into the license agreement, we will be
obligated to pay to ZaBeCor certain milestone payments in cash and common stock and royalty
payments on all net sales of licensed products.
University of Florida Research Foundation. In April 2006, we entered into three world-wide
exclusive license agreements with the University of Florida Research Foundation. The license
agreements obligate us to pay to University of Florida Research Foundation royalty payments on all
net sales of licensed products. We agreed to use our commercially reasonable activities to
commercialize products. The technology licensed from the University of Florida Research Foundation
includes autophagy inducing compounds which are designed to enhance the elimination of misfolded
proteins, and eliminate the destructive effects associated with their accumulation, compounds that
affect important intracellular pathways which lead to the accumulation of properly folded mutant
proteins and potential drug candidates that are designed to recruit stem cells which may aid in
delaying or reversing the damage at the back of the eye associated with several retinal diseases
including Dry AMD and RP. The term of each of the agreements is for the earlier of the date that
no licensed patent remains an enforceable patent or the payment of earned royalties under the
agreement once begun, ceases for more than two calendar quarters. We may terminate any of the
agreements upon sixty days’ prior written notice. The University
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of Florida Research Foundation may terminate any of the agreements if we are more than sixty
days late, after written demand for a payment owed to the University of Florida Research
Foundation, if we breach the agreements and do not cure within sixty days after receiving written
notice from the University of Florida Research Foundation or if we become involved in bankruptcy
proceedings.
Concurrent with the license agreement, we entered into a sponsored research agreement with the
University of Florida pursuant to which the University of Florida, under the supervision of Dr.
Shalesh Kaushal, our Chief Scientific Officer, conducts research on our behalf, under the
technologies licensed to us from the University of Florida Research Foundation. The research
agreement obligates us to pay to the University of Florida a total of $1,500,000, payable in
bi-annual payments of $250,000. Pursuant to this research agreement, we were granted the first
option to obtain a royalty-bearing license to any intellectual property developed by the University
of Florida pursuant to this research agreement, on the same terms and conditions as the licenses
outlined above. The term of the agreement is for three years expiring on April 7, 2009 and may be
extended upon mutual agreement of the parties. Either party may terminate this agreement upon
ninety days prior written notice to the other or immediately if the other party breaches the
agreement and does not cure such breach within ninety days after receiving notice of the breach.
Competition
The Wet AMD market is highly competitive within the pharmaceutical industry due to the large
number of products competing for market share and significant levels of commercial resources being
utilized to promote those products. In addition, our ability to compete may be affected because in
some cases insurers and other third-parties may seek to encourage the use of less expensive
products. This may have the effect of making our products less attractive, from a cost perspective,
to buyers. Among the products with which we will directly compete, we expect to differentiate on
the basis of enhanced safety and tolerability. Several pharmaceutical and biotechnology companies
are actively engaged in research and development related to new treatments for Wet AMD. We cannot
predict the basis upon which we will compete with new products marketed by others. Many of our
competitors have substantially greater financial, operational, sales and marketing and research and
development resources than we have.
Government Regulation of our Drug Development Activities
The United States federal government regulates healthcare through various agencies, including
but not limited to the following: (i) the FDA, which administers the Federal Food, Drug, and
Cosmetic Act (FDCA), as well as other relevant laws; (ii) the Center for Medicare & Medicaid
Services (CMS), which administers the Medicare and Medicaid programs; (iii) the Office of Inspector
General (OIG) which enforces various laws aimed at curtailing fraudulent or abusive practices,
including by way of example, the Anti-Kickback Law, the Anti-Physician Referral Law, commonly
referred to as Stark, the Anti-Inducement Law, the Civil Money Penalty Law, and the laws that
authorize the OIG to exclude healthcare providers and others from participating in federal
healthcare programs; and (iv) the Office of Civil Rights, which administers the privacy aspects of
the Health Insurance Portability and Accountability Act of 1996 (HIPAA). All of the aforementioned
are agencies within the Department of Health and Human Services (HHS). Healthcare is also provided
or regulated, as the case may be, by the Department of Defense through its TriCare program, the
Department of Veterans Affairs, especially through the Veterans Health Care Act of 1992, the Public
Health Service within HHS under Public Health Service Act § 340B (42 U.S.C. § 256b), the Department
of Justice through the Federal False Claims Act and various criminal statutes, and state
governments under the Medicaid and other state sponsored or funded programs and their internal laws
regulating all healthcare activities.
The testing, manufacture, distribution, advertising and marketing of drug products are subject
to extensive regulation by federal, state and local governmental authorities in the United States,
including the FDA, and by similar agencies in other countries. Any product that we develop must
receive all
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relevant regulatory approvals or clearances, as the case may be, before it may be marketed in
a particular country.
The regulatory process, which includes overseeing preclinical studies and clinical trials of
each pharmaceutical compound to establish its safety and efficacy and confirmation by the FDA that
good laboratory, clinical and manufacturing practices were maintained during testing and
manufacturing, can take many years, requires the expenditure of substantial resources, and gives
larger companies with greater financial resources a competitive advantage over us. Delays or
terminations of clinical trials that we undertake would likely impair our development of product
candidates. Delays or terminations could result from a number of factors, including stringent
enrollment criteria, slow rate of enrollment, size of patient population, having to compete with
other clinical trials for eligible patients, geographical considerations and others.
The FDA review process can be lengthy and unpredictable, and we may encounter delays or
rejections of our applications when submitted. Generally, in order to gain FDA approval, we must
first conduct preclinical studies in a laboratory and in animal models to obtain preliminary
information on a compound and to identify any safety problems. The results of these studies are
submitted as part of an IND application that the FDA must review before human clinical trials of an
investigational drug can commence.
Clinical trials are normally done in three sequential phases and generally take two to five
years or longer to complete. Phase I consists of testing the drug product in a small number of
humans, normally healthy volunteers, to determine preliminary safety and tolerable dose range.
Phase II usually involves studies in a limited patient population to evaluate the effectiveness of
the drug product in humans having the disease or medical condition for which the product is
indicated, determine dosage tolerance and optimal dosage and identify possible common adverse
effects and safety risks. Phase III consists of additional controlled testing at multiple clinical
sites to establish clinical safety and effectiveness in an expanded patient population of
geographically dispersed test sites to evaluate the overall benefit-risk relationship for
administering the product and to provide an adequate basis for product labeling. Phase IV clinical
trials may be conducted after approval to gain additional experience from the treatment of patients
in the intended therapeutic indication.
After completion of clinical trials of a new drug product, FDA and foreign regulatory
authority marketing approval must be obtained. Assuming that the clinical data support the
product’s safety and effectiveness for its intended use, a New Drug Application (NDA) is submitted
to the FDA for its review. Generally, it takes one to three years to obtain approval. If
questions arise during the FDA review process, approval may take a significantly longer period of
time. The testing and approval processes require substantial time and effort and we may not
receive approval on a timely basis, if at all, or the approval that we receive may be for a
narrower indication than we had originally sought, potentially undermining the commercial viability
of the product. Even if regulatory approvals are obtained, a marketed product is subject to
continual review, and later discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing of a product or
withdrawal of the product from the market as well as possible civil or criminal sanctions. For
marketing outside the United States, we also will be subject to foreign regulatory requirements
governing human clinical trials and marketing approval for pharmaceutical products. The
requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement
vary widely from country to country.
None of our products under development has been approved for marketing in the United States or
elsewhere. We may not be able to obtain regulatory approval for any such products under
development in a timely manner, if at all. Failure to obtain requisite governmental approvals or
failure to obtain
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approvals of the scope requested will delay or preclude us, or our licensees or marketing
partners, from marketing our products, or limit the commercial use of our products, and thereby
would have a material adverse effect on our business, financial condition and results of
operations. See “Risk Factors—The results of previous clinical trials may not be predictive of
future results, and our current and planned clinical trials may not satisfy the requirements of the
FDA or other non-U.S. regulatory authorities.”
Manufacturing
We have no manufacturing facilities and we currently do not intend to build manufacturing
facilities of our own in the foreseeable future. We have entered into agreements with various third
parties for the formulation and manufacture of our clinical supplies. These suppliers and their
manufacturing facilities must comply with FDA regulations, current good laboratory practices, or
cGLPs, and current good manufacturing practices, or cGMPs. We plan to outsource the manufacturing
and formulation of our clinical supplies.
Sales & Marketing
We currently do not have sales or marketing personnel. In order to commercialize any products
that are approved for commercial sale, we must either build a sales and marketing infrastructure or
collaborate with third parties with sales and marketing experience. We may build our own sales and
marketing infrastructure to market some of our product candidates targeting retinal specialists
either in certain regions or collaborate with a company established in this industry to market and
sell our products, if approved.
Employees
As of March 31, 2007, we have 17 full-time employees, 7 of who hold advanced degrees. We plan
to add to our headcount in key functional areas that will allow us to further the development of
our product candidates. None of our employees are represented by a collective bargaining
agreement.
Glossary of Terms
“ACU-HHY-011” is an siRNA targeting HIF-1α, believed to be the most important transcription factor
involved in the cellular response to hypoxia, a key step in the neovascularization process which
occurs in Wet AMD.
“ACU-NCT-001” is a proprietary formulation of the N-chloro derivative of the amino acid taurine
(referred to herein as NCT).
“ACU-XSP-001” is an siRNA that silences the syk-kinase gene, a key cell-signaling molecule that has
been shown to be central in initiating critical elements of the inflammatory response in a number
of disease models.
“AMD” is Age Related Macular Degeneration.
“Bevasiranib” is a small interfering RNA (siRNA) therapeutic targeting vascular endothelial growth
factor.
“Cand5 Anti-VEGF RNAi Evaluation (CARE study)” is our 129 patient Phase II clinical study in
patients with predominantly and minimally classic Wet AMD.
“CNV” is choroidal neovascularization.
“Dry AMD” is dry age-related macular degeneration.
“dsRNA” is synthetic double stranded RNA.
“HIF-1α” is hypoxia-inducible factor 1 alpha.
“ICAM” is intracellular adhesion molecules.
“R.A.C.E.™ Trial — Phase II Clinical Trial for DME” is the RNAi Assessment of bevasiranib in
Diabetic Macular Edema, or R.A.C.E.™.
“RP” is retinitis pigmentosa.
“RPE” is retinal pigment epithelial.
“VEGF” is a vascular endothelial growth factor which we are developing as an intravitreal injection
for the treatment of Wet AMD.
“Wet AMD” is wet age-related macular degeneration.
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Item 1A. Risk Factors.
An investment in our company involves a significant level of risk. Investors should carefully
consider the risk factors described below together with the other information included in this
Current Report on Form 8-K. If any of the risks described below occurs, or if other risks not
identified below occur, our business, financial condition, and results of operations could be
materially adversely affected.
We have a history of operating losses and we do not expect to become profitable in the near
future.
We are a clinical-stage biopharmaceutical company with a limited operating history. Our
Froptix and Acuity subsidiaries are not profitable and have incurred losses in each year since
their inception. We do not anticipate that we will generate revenue from the sale of products for
the foreseeable future. We have not yet submitted any products for approval by regulatory
authorities and we do not currently have rights to any product candidates that have been approved
for marketing in our territory. We continue to incur research and development and general and
administrative expenses related to our operations. Our net loss for our Acuity subsidiary for the
years ended December 31, 2006, 2005 and 2004 was $11,092,000, $10,100,000, and $5,382,000,
respectively. Our net loss for our Froptix subsidiary for the period ended December 31, 2006 was
$877,000. As of December 31, 2006, we had an accumulated deficit
of $57,050,000. We expect to
continue to incur losses for the foreseeable future, and we expect these losses to increase as we
continue our research activities and conduct development of, and seek regulatory approvals for, our
product candidates, and prepare for and begin to commercialize any approved products. If our
product candidates fail in clinical trials or do not gain regulatory approval, or if our product
candidates do not achieve market acceptance, we may never become profitable. Even if we achieve
profitability in the future, we may not be able to sustain profitability in subsequent periods.
Our technologies are in an early stage of development and are unproven.
We are engaged in the research and development of pharmaceutical products to employ various
technologies as therapies for ophthalmic diseases. The effectiveness of our technologies are not
well-known in, or accepted generally by, the clinical medical community. There can be no assurance
that we will be able to successfully employ our technologies as therapeutic solutions for any
ophthalmic disease. Our failure to establish the efficacy of our technologies would have a material
adverse effect on our business.
Our drug research and development activities may not result in commercially viable products.
Our product candidates are in various stages of development and are prone to the risks of
failure inherent in drug development. We will need to complete significant additional clinical
trials before we can demonstrate that our product candidates are safe and effective to the
satisfaction of the FDA and other non-U.S. regulatory authorities. Clinical trials are expensive
and uncertain processes that take years to complete. Failure can occur at any stage of the process,
and successful early clinical trials do not ensure that later clinical trials will be successful.
Product candidates in later-stage trials may fail to show desired efficacy and safety traits
despite having progressed through initial clinical trials. A number of companies in the
pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after
obtaining promising results in earlier trials.
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We
are highly dependent on the success of our lead product candidate, bevasiranib, and we
cannot give any assurance that it will receive regulatory approval or be successfully
commercialized.
Bevasiranib has been studied in a Phase II clinical trial for the treatment of Wet AMD, and we
plan to study bevasiranib in Phase III clinical trials. Our Phase III clinical trials may not be
successful, and bevasiranib may never receive regulatory approval or be successfully
commercialized. Our clinical development program for bevasiranib may not receive regulatory
approval if we fail to demonstrate that it is safe and effective in clinical trials and
consequently fail to obtain necessary approvals from the FDA,
or similar non-U.S. regulatory agencies, or if we have inadequate financial or other resources to
advance bevasiranib through the clinical trial process. Even if bevasiranib receives regulatory
approval, we may not be successful in marketing it for a number of reasons, including the
introduction by our competitors of more clinically-effective or cost-effective alternatives or
failure in our sales and marketing efforts. Any failure to obtain approval of bevasiranib and
successfully commercialize it would have a material and adverse impact on our business.
The results of previous clinical trials may not be predictive of future results, and our
current and planned clinical trials may not satisfy the requirements of the FDA or other non-U.S.
regulatory authorities.
Positive results from pre-clinical studies and early clinical trials should not be relied upon
as evidence that later-stage or large-scale clinical trials will succeed. We will be required to
demonstrate with substantial evidence through well-controlled clinical trials that our product
candidates are safe and effective for use in a diverse population before we can seek regulatory
approvals for their commercial sale. Success in early clinical trials does not mean that future
clinical trials will be successful because product candidates in later-stage clinical trials may
fail to demonstrate sufficient safety and efficacy to the satisfaction of the FDA and other
non-U.S. regulatory authorities despite having progressed through initial clinical trials.
Further, our product candidates may not be approved even if they achieve their primary
endpoints in Phase III clinical trials or registration trials. The FDA or other non-U.S. regulatory
authorities may disagree with our trial design and our interpretation of data from pre-clinical
studies and clinical trials. In addition, any of these regulatory authorities may change
requirements for the approval of a product candidate even after reviewing and providing comment on
a protocol for a pivotal Phase III clinical trial that has the potential to result in FDA approval.
In addition, any of these regulatory authorities may also approve a product candidate for fewer or
more limited indications than we request or may grant approval contingent on the performance of
costly post-marketing clinical trials. In addition, the FDA or other non-U.S. regulatory
authorities may not approve the labeling claims necessary or desirable for the successful
commercialization of our product candidates.
We will require substantial additional funding, which may not be available to us on acceptable
terms, or at all.
We are advancing multiple product candidates through clinical development. We will need to
raise substantial additional capital to continue our clinical development and commercialization
activities.
Our future funding requirements will depend on many factors, including but not limited to:
•
our need to expand our research and development activities;
•
the rate of progress and cost of our clinical trials;
•
the costs associated with establishing a sales force and commercialization capabilities;
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•
the costs of acquiring, licensing or investing in businesses, products, product
candidates and technologies;
•
the costs and timing of seeking and obtaining FDA and other non-U.S. regulatory
approvals;
•
our ability to maintain, expand and defend the scope of our intellectual property
portfolio;
•
our need and ability to hire additional management and scientific and medical
personnel;
•
the effect of competing technological and market developments;
•
our need to implement additional internal systems and infrastructure, including
financial and reporting systems; and
•
the economic and other terms and timing of our existing licensing arrangements and
any collaboration, licensing or other arrangements into which we may enter in the
future.
Until we can generate a sufficient amount of product revenue to finance our cash requirements,
which we may never do, we expect to finance future cash needs primarily through public or private
equity offerings, debt financings or strategic collaborations. We do not know whether additional
funding will be available on acceptable terms, or at all. If we are not able to secure additional
funding when needed, we may have to delay, reduce the scope of or eliminate one or more of our
clinical trials or research and development programs.
If our competitors develop and market products that are more effective, safer or less
expensive than our future product candidates, our commercial opportunities will be negatively
impacted.
The life sciences industry is highly competitive, and we face significant competition from
many pharmaceutical, biopharmaceutical and biotechnology companies that are researching and
marketing products designed to address Wet AMD and other ophthalmic diseases. We are currently
developing therapeutics that will compete with other drugs and therapies that currently exist or
are being developed. Products we may develop in the future are also likely to face competition from
other drugs and therapies. Many of our competitors have significantly greater financial,
manufacturing, marketing and drug development resources than we do. Large pharmaceutical companies,
in particular, have extensive experience in clinical testing and in obtaining regulatory approvals
for drugs. These companies also have significantly greater research and marketing capabilities than
we do. Some of the pharmaceutical companies we expect to compete with include Genentech, OSI
Pharmaceuticals, Pfizer, Novartis, Alcon, Allergan and B&L. In addition, many universities and
private and public research institutions may become active in ophthalmic disease research.
We believe that our ability to successfully compete will depend on, among other things:
•
the results of our clinical trials;
•
our ability to recruit and enroll patients for our clinical trials;
•
the efficacy, safety and reliability of our product candidates;
•
the speed at which we develop our product candidates;
•
our ability to commercialize and market any of our product candidates that may
receive regulatory approval;
•
our ability to design and successfully execute appropriate clinical trials;
•
the timing and scope of regulatory approvals;
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•
adequate levels of reimbursement under private and governmental health insurance
plans, including Medicare;
•
our ability to protect intellectual property rights related to our products;
•
our ability to have our partners manufacture and sell commercial quantities of any
approved products to the market; and
•
acceptance of future product candidates by physicians and other health care
providers.
If our competitors market products that are more effective, safer or less expensive than our
future product candidates, if any, or that reach the market sooner than our future product
candidates, if any, we may not achieve commercial success. In addition, the biopharmaceutical
industry is characterized by rapid technological change. Because our research approach integrates
many technologies, it may be difficult for us to stay abreast of the rapid changes in each
technology. If we fail to stay at the forefront of technological change, we may be unable to
compete effectively. Technological advances or products developed by our competitors may render our
technologies or product candidates obsolete or less competitive.
Our drug development activities could be delayed or stopped.
We do not know whether our other planned clinical trials will be completed on schedule, or at
all, and we cannot guarantee that our planned clinical trials will begin on time or at all. The
commencement of our planned clinical trials could be substantially delayed or prevented by several
factors, including:
•
limited number of, and competition for, suitable patients with the particular types
of ophthalmic disease required for enrollment in our clinical trials;
•
limited number of, and competition for, suitable sites to conduct our clinical trials;
•
delay or failure to obtain FDA approval or agreement to commence a clinical trial;
•
delay or failure to obtain sufficient supplies of the product candidate for our
clinical trials;
•
requirements to provide the drugs required in our clinical trial protocols at no
cost, which may require significant expenditures that we are unable or unwilling to
make;
•
delay or failure to reach agreement on acceptable clinical trial agreement terms or
clinical trial protocols with prospective sites or investigators; and
•
delay or failure to obtain institutional review board, or IRB, approval to conduct a
clinical trial at a prospective site.
The completion of our clinical trials could also be substantially delayed or prevented by
several factors, including:
•
slower than expected rates of patient recruitment and enrollment;
•
failure of patients to complete the clinical trial;
•
unforeseen safety issues;
•
lack of efficacy evidenced during clinical trials;
•
termination of our clinical trials by one or more clinical trial sites;
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•
inability or unwillingness of patients or medical investigators to follow our
clinical trial protocols; and
•
inability to monitor patients adequately during or after treatment.
Our clinical trials may be suspended or terminated at any time by the FDA, other regulatory
authorities, the IRB overseeing the clinical trial at issue, any of our clinical trial sites with
respect to that site, or us. Any failure or significant delay in completing clinical trials for our
product candidates could materially harm our financial results and the commercial prospects for our
product candidates.
The regulatory approval process is expensive, time consuming and uncertain and may prevent us
or our collaboration partners from obtaining approvals for the commercialization of some or all of
our product candidates.
The research, testing, manufacturing, labeling, approval, selling, marketing and distribution
of drug products are subject to extensive regulation by the FDA and other non-U.S. regulatory
authorities, which regulations differ from country to country. We are not permitted to market our
product candidates in the United States until we receive approval of an NDA from the FDA. We have
not submitted an application for or received marketing approval for any of our product candidates.
Obtaining approval of an NDA can be a lengthy, expensive and uncertain process. In addition,
failure to comply with FDA, non-U.S. regulatory authorities or other applicable U.S. and non-U.S.
regulatory requirements may, either before or after product approval, if any, subject our company
to administrative or judicially imposed sanctions, including:
•
restrictions on the products, manufacturers or manufacturing process;
•
warning letters;
•
civil and criminal penalties;
•
injunctions;
•
suspension or withdrawal of regulatory approvals;
•
product seizures, detentions or import bans;
•
voluntary or mandatory product recalls and publicity requirements;
•
total or partial suspension of production;
•
imposition of restrictions on operations, including costly new manufacturing
requirements; and
•
refusal to approve pending NDAs or supplements to approved NDAs.
Regulatory approval of an NDA or NDA supplement is not guaranteed, and the approval process is
expensive and may take several years. The FDA also has substantial discretion in the drug approval
process. Despite the time and expense exerted, failure can occur at any stage, and we could
encounter problems that cause us to abandon clinical trials or to repeat or perform additional
pre-clinical studies and clinical trials. The number of pre-clinical studies and clinical trials
that will be required for FDA approval varies depending on the drug candidate, the disease or
condition that the drug candidate is designed to address, and the regulations applicable to any
particular drug candidate. The FDA can delay, limit or deny approval of a drug candidate for many
reasons, including:
•
a drug candidate may not be deemed safe or effective;
•
FDA officials may not find the data from pre-clinical studies and clinical trials
sufficient;
-22-
•
the FDA might not approve our third-party manufacturer’s processes or facilities; or
•
the FDA may change its approval policies or adopt new regulations.
Failure to recruit and enroll patients for clinical trials may cause the development of our
product candidates to be delayed.
We may encounter delays or rejections if we are unable to recruit and enroll enough patients
to complete clinical trials. Patient enrollment depends on many factors, including the size of the
patient population, the nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the trial. We have experienced, and expect to experience in the future,
delays in patient enrollment in our clinical trials. Any such delays in planned patient enrollment
in the future may result in increased costs, which could harm our ability to develop products.
Even if we obtain regulatory approvals for our product candidates, the terms of approvals and
ongoing regulation of our products may limit how we manufacture and market our product candidates,
which could materially impair our ability to generate anticipated revenues.
Once regulatory approval has been granted, the approved product and its manufacturer are
subject to continual review. Any approved product may only be promoted for its indicated uses. In
addition, if the FDA and/or other non-U.S. regulatory authorities approve any of our product
candidates, the labeling, packaging, adverse event reporting, storage, advertising and promotion
for the product will be subject to extensive regulatory requirements. We and the manufacturers of
our products are also required to comply with cGMP regulations, which include requirements relating
to quality control and quality assurance as well as the corresponding maintenance of records and
documentation. Further, regulatory agencies must approve these manufacturing facilities before they
can be used to manufacture our products, and these facilities are subject to ongoing regulatory
inspection. If we fail to comply with the regulatory requirements of the FDA and other non-U.S.
regulatory authorities, or if previously unknown problems with our products, manufacturers or
manufacturing processes are discovered, we could be subject to administrative or judicially imposed
sanctions, including:
•
restrictions on the products, manufacturers or manufacturing process;
•
warning letters;
•
civil or criminal penalties or fines;
•
injunctions;
•
product seizures, detentions or import bans;
•
voluntary or mandatory product recalls and publicity requirements;
•
suspension or withdrawal of regulatory approvals;
•
total or partial suspension of production;
•
imposition of restrictions on operations, including costly new manufacturing
requirements; and
•
refusal to approve pending NDAs or supplements to approved NDAs.
In addition, the FDA and other non-U.S. regulatory authorities may change their policies and
additional regulations may be enacted that could prevent or delay regulatory approval of our
product candidates. We cannot predict the likelihood, nature or extent of government regulation
that may arise from future legislation or administrative action, either in the United States or
abroad. If we are not able to
-23-
maintain regulatory compliance, we would likely not be permitted to market our future product
candidates and we may not achieve or sustain profitability.
Even if we receive regulatory approval to market our product candidates, the market may not be
receptive to our products.
Even if our product candidates obtain regulatory approval, resulting products may not gain
market acceptance among physicians, patients, health care payors and/or the medical community. We
believe that the degree of market acceptance will depend on a number of factors, including:
•
timing of market introduction of competitive products;
•
safety and efficacy of our product;
•
prevalence and severity of any side effects;
•
potential advantages or disadvantages over alternative treatments;
•
strength of marketing and distribution support;
•
price of our future product candidates, both in absolute terms and relative to
alternative treatments; and
•
availability of coverage and reimbursement from government and other third-party
payors.
If our future product candidates fail to achieve market acceptance, we may not be able to
generate significant revenue or achieve or sustain profitability.
The coverage and reimbursement status of newly approved drugs is uncertain, and failure to
obtain adequate coverage and adequate reimbursement could limit our ability to market any future
product candidates we may develop and decrease our ability to generate revenue from any of our
existing and future product candidates that may be approved.
There is significant uncertainty related to the third-party coverage and reimbursement of
newly approved drugs. The commercial success of our existing and future product candidates in both
domestic and international markets will depend in part on the availability of coverage and adequate
reimbursement from third-party payors, including government payors, such as the Medicare and
Medicaid programs, managed care organizations, and other third-party payors. Government and other
third-party payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new drugs and, as a result, they may not cover or
provide adequate payment for our existing and future product candidates. These payors may conclude
that our future product candidates are less safe, less effective or less cost-effective than
existing or later introduced products, and third-party payors may not approve our future product
candidates for coverage and reimbursement. The failure to obtain coverage and adequate
reimbursement for our existing and future product candidates or health care cost containment
initiatives that limit or restrict reimbursement for our existing and future product candidates may
reduce any future product revenue.
If we fail to attract and retain key management and scientific personnel, we may be unable to
successfully develop or commercialize our product candidates.
We will need to expand and effectively manage our managerial, operational, financial,
development and other resources in order to successfully pursue our research, development and
commercialization efforts for our existing and future product candidates. Our success depends on
our
-24-
continued ability to attract, retain and motivate highly qualified management and pre-clinical
and clinical personnel. The loss of the services of any of our senior management could delay or
prevent the commercialization of our product candidates. We do not maintain “key man” insurance
policies on the lives of these individuals or the lives of any of our other employees. We employ
these individuals on an at-will basis and their employment can be terminated by us or them at any
time, for any reason and with or without notice. We will need to hire additional personnel as we
continue to expand our research and development activities and build a sales and marketing
function.
We have scientific and clinical advisors who assist us in formulating our research,
development and clinical strategies. These advisors are not our employees and may have commitments
to, or consulting or advisory contracts with, other entities that may limit their availability to
us. In addition, our advisors may have arrangements with other companies to assist those companies
in developing products or technologies that may compete with ours.
We may not be able to attract or retain qualified management and scientific personnel in the
future due to the intense competition for qualified personnel among biotechnology, pharmaceutical
and other businesses. If we are not able to attract and retain the necessary personnel to
accomplish our business objectives, we may experience constraints that will impede significantly
the achievement of our research and development objectives, our ability to raise additional capital
and our ability to implement our business strategy. In particular, if we lose any members of our
senior management team, we may not be able to find suitable replacements in a timely fashion or at
all and our business may be harmed as a result.
As we evolve from a company primarily involved in development to a company also involved in
commercialization, we may encounter difficulties in managing our growth and expanding our
operations successfully.
As we advance our product candidates through clinical trials, we will need to expand our
development, regulatory, manufacturing, marketing and sales capabilities or contract with third
parties to provide these capabilities for us. As our operations expand, we expect that we will need
to manage additional relationships with such third parties, as well as additional collaborators and
suppliers. Maintaining these relationships and managing our future growth will impose significant
added responsibilities on members of our management. We must be able to: manage our development
efforts effectively; manage our clinical trials effectively; hire, train and integrate additional
management, development, administrative and sales and marketing personnel; improve our managerial,
development, operational and finance systems; and expand our facilities, all of which may impose a
strain on our administrative and operational infrastructure.
Furthermore, we may acquire additional businesses, products or product candidates that
complement or augment our existing business. Integrating any newly acquired business or product
could be expensive and time-consuming. We may not be able to integrate any acquired business or
product successfully or operate any acquired business profitably. Our future financial performance
will depend, in part, on our ability to manage any future growth effectively and our ability to
integrate any acquired businesses. We may not be able to accomplish these tasks, and our failure to
accomplish any of them could prevent us from successfully growing our company.
If we fail to acquire and develop other products or product candidates at all or on
commercially reasonable terms, we may be unable to diversify or grow our business.
We intend to continue to rely on in-licensing as the source of our products and product
candidates for development and commercialization. The success of this strategy depends upon our
ability to identify,
-25-
select and acquire pharmaceutical product candidates. Proposing, negotiating and implementing
an economically viable product acquisition or license is a lengthy and complex process. We compete
for partnering arrangements and license agreements with pharmaceutical and biotechnology companies
and academic research institutions. Our competitors may have stronger relationships with third
parties with whom we are interested in collaborating and/or may have more established histories of
developing and commercializing products. As a result, our competitors may have a competitive
advantage in entering into partnering arrangements with such third parties. In addition, even if we
find promising product candidates, and generate interest in a partnering or strategic arrangement
to acquire such product candidates, we may not be able to acquire rights to additional product
candidates or approved products on commercially reasonable terms that we find acceptable, or at
all.
We expect that any product candidate to which we acquire rights will require additional
development efforts prior to commercial sale, including extensive clinical testing and approval by
the FDA and other non-U.S. regulatory authorities. All product candidates are subject to the risks
of failure inherent in pharmaceutical product development, including the possibility that the
product candidate will not be shown to be sufficiently safe and effective for approval by
regulatory authorities. Even if the product candidates are approved, we cannot be sure that they
would be capable of economically feasible production or commercial success.
We rely on third parties to manufacture and supply our product candidates.
We do not own or operate manufacturing facilities for clinical or commercial production of our
product candidates. We have no experience in drug formulation or manufacturing, and we lack the
resources and the capability to manufacture any of our product candidates on a clinical or
commercial scale. We believe we currently have, or can access, sufficient supplies of bevasiranib
to conduct and complete our planned Phase III clinical trials. If our manufacturing partners are
unable to produce bevasiranib in the amounts that we require, we may not be able to establish a
contract and obtain a sufficient alternative supply from another supplier on a timely basis and in
the quantities we require. We expect to continue to depend on third-party contract manufacturers
for the foreseeable future.
Our product candidates require precise, high quality manufacturing. Any of our contract
manufacturers will be subject to ongoing periodic unannounced inspection by the FDA and other
non-U.S. regulatory authorities to ensure strict compliance with current Good Manufacturing
Practice, or cGMP, and other applicable government regulations and corresponding standards. If our
contract manufacturers fail to achieve and maintain high manufacturing standards in compliance with
cGMP regulations, we may experience manufacturing errors resulting in patient injury or death,
product recalls or withdrawals, delays or interruptions of production or failures in product
testing or delivery, delay or prevention of filing or approval of marketing applications for our
products, cost overruns or other problems that could seriously harm our business.
Any performance failure on the part of our contract manufacturers could delay clinical
development or regulatory approval of our product candidates or commercialization of our future
product candidates, depriving us of potential product revenue and resulting in additional losses.
In addition, our dependence on a third party for manufacturing may adversely affect our future
profit margins. Our ability to replace an existing manufacturer may be difficult because the number
of potential manufacturers is limited and the FDA must approve any replacement manufacturer before
it can begin manufacturing our product candidates. Such approval would require new testing and
compliance inspections. It may be difficult or impossible for us to identify and engage a
replacement manufacturer on acceptable terms in a timely manner, or at all.
-26-
We currently have limited marketing staff and no sales or distribution organization. If we are
unable to develop our sales and marketing and distribution capability on our own or through
collaborations with marketing partners, we will not be successful in commercializing our product
candidates.
We currently have limited marketing and no sales or distribution capabilities. If our product
candidates are approved, we intend to establish our sales and marketing organization with technical
expertise and supporting distribution capabilities to commercialize our product candidates, which
will be expensive and time consuming. Any failure or delay in the development of our internal
sales, marketing and distribution capabilities would adversely impact the commercialization of
these products. With respect to our existing and future product candidates, we may choose to
collaborate with third parties that have direct sales forces and established distribution systems,
either to augment our own sales force and distribution systems or in lieu of our own sales force
and distribution systems. To the extent that we enter into co-promotion or other licensing
arrangements, our product revenue is likely to be lower than if we directly marketed or sold our
products. In addition, any revenue we receive will depend in whole or in part upon the efforts of
such third parties, which may not be successful and are generally not within our control. If we are
unable to enter into such arrangements on acceptable terms or at all, we may not be able to
successfully commercialize our existing and future product candidates. If we are not successful in
commercializing our existing and future product candidates, either on our own or through
collaborations with one or more third parties, our future product revenue will suffer and we may
incur significant additional losses.
Independent clinical investigators and contract research organizations that we engage to
conduct our clinical trials may not be diligent, careful or timely.
We will depend on independent clinical investigators to conduct our clinical trials. Contract
research organizations may also assist us in the collection and analysis of data. These
investigators and contract research organizations will not be our employees and we will not be able
to control, other than by contract, the amount of resources, including time that they devote to
products that we develop. If independent investigators fail to devote sufficient resources to the
development of product candidates, or if their performance is substandard, it will delay the
approval and commercialization of any products that we develop. Further, the FDA requires that we
comply with standards, commonly referred to as good clinical practice, for conducting, recording
and reporting clinical trials to assure that data and reported results are credible and accurate
and that the rights, integrity and confidentiality of trial subjects are protected. If our
independent clinical investigators and contract research organizations fail to comply with good
clinical practice, the results of our clinical trials could be called into question and the
clinical development of our product candidates could be delayed. Failure of clinical investigators
or contract research organizations to meet their obligations to us or comply with good clinical
practice procedures could adversely affect the clinical development of our product candidates and
harm our business.
The success of our business may be dependent on the actions of our collaborative partners.
An element of our strategy may be to enter into collaborative arrangements with established
multinational pharmaceutical companies which will finance or otherwise assist in the development,
manufacture and marketing of products incorporating our technology. We anticipate deriving some
revenues from research and development fees, license fees, milestone payments and royalties from
collaborative partners. Our prospects, therefore, may depend to some extent upon our ability to
attract and retain collaborative partners and to develop technologies and products that meet the
requirements of prospective collaborative partners. In addition, our collaborative partners may
have the right to abandon research projects and terminate applicable agreements, including funding
obligations, prior to or upon the expiration of the agreed-upon research terms. There can be no
assurance that we will be successful in
-27-
establishing collaborative arrangements on acceptable terms or at all, that collaborative
partners will not terminate funding before completion of projects, that our collaborative
arrangements will result in successful product commercialization or that we will derive any
revenues from such arrangements. To the extent that we are not able to develop and maintain
collaborative arrangements, we would need substantial additional capital to undertake research,
development and commercialization activities on our own.
If we are unable to obtain and enforce patent protection for our products, our business could
be materially harmed.
Our success depends, in part, on our ability to protect proprietary methods and technologies
that we develop under the patent and other intellectual property laws of the United States and
other countries, so that we can prevent others from unlawfully using our inventions and proprietary
information. However, we may not hold proprietary rights to some patents required for us to
commercialize our proposed products. Because certain U.S. patent applications are confidential
until patents issue, such as applications filed prior to November 29, 2000, or applications filed
after such date which will not be filed in foreign countries, third parties may have filed patent
applications for technology covered by our pending patent applications without our being aware of
those applications, and our patent applications may not have priority over those applications. For
this and other reasons, we may be unable to secure desired patent rights, thereby losing desired
exclusivity. If licenses are not available to us on acceptable terms, we will not be able to
market the affected products or conduct the desired activities, unless we challenge the validity,
enforceability or infringement of the third party patent or otherwise circumvent the third party
patent.
Our strategy depends on our ability to rapidly identify and seek patent protection for our
discoveries. In addition, we will rely on third-party collaborators to file patent applications
relating to proprietary technology that we develop jointly during certain collaborations. The
process of obtaining patent protection is expensive and time-consuming. If our present or future
collaborators fail to file and prosecute all necessary and desirable patent applications at a
reasonable cost and in a timely manner, our business will be adversely affected. Despite our
efforts and the efforts of our collaborators to protect our proprietary rights, unauthorized
parties may be able to obtain and use information that we regard as proprietary.
The issuance of a patent does not guarantee that it is valid or enforceable. Any patents we
have obtained, or obtain in the future, may be challenged, invalidated, unenforceable or
circumvented. Moreover, the United States Patent and Trademark Office ( the
“USPTO”) may commence interference proceedings involving our patents or
patent applications. Any challenge to, finding of unenforceability or invalidation or circumvention
of, our patents or patent applications would be costly, would require significant time and
attention of our management and could have a material adverse effect on our business. In
addition, court decisions may introduce uncertainty in the enforceability or scope of patents owned
by biotechnology and pharmaceutical companies.
Our pending patent applications may not result in issued patents. The patent position of
pharmaceutical or biotechnology companies, including ours, is generally uncertain and involves
complex legal and factual considerations. The standards that the USPTO and its foreign
counterparts use to grant patents are not always applied predictably or uniformly and can change.
There is also no uniform, worldwide policy regarding the subject matter and scope of claims granted
or allowable in pharmaceutical or biotechnology patents. Accordingly, we do not know the degree of
future protection for our proprietary rights or the breadth of claims that will be allowed in any
patents issued to us or to others. The legal systems of certain countries do not favor the
aggressive enforcement of patents, and the laws of foreign countries may not protect our rights to
the same extent as the laws of the United States. Therefore,
-28-
the enforceability or scope of our owned or licensed patents in the United States or in
foreign countries cannot be predicted with certainty, and, as a result, any patents that we own or
license may not provide sufficient protection against competitors. We may not be able to obtain or
maintain patent protection for our pending patent applications, those we may file in the future, or
those we may license from third parties, including the University of Pennsylvania, the University
of Illinois, the University of Florida Research Foundation, Intradigm, and Pathogenics.
While we believe that our patent rights are enforceable, we cannot assure you that any patents
that have issued, that may issue or that may be licensed to us will be enforceable or valid or will
not expire prior to the commercialization of our product candidates, thus allowing others to more
effectively compete with us. Therefore, any patents that we own or license may not adequately
protect our product candidates or our future products.
If we are unable to protect the confidentiality of our proprietary information and know-how,
the value of our technology and products could be adversely affected.
In addition to patent protection, we also rely on other proprietary rights, including
protection of trade secrets, know-how and confidential and proprietary information. To maintain the
confidentiality of trade secrets and proprietary information, we will seek to enter into
confidentiality agreements with our employees, consultants and collaborators upon the commencement
of their relationships with us. These agreements generally require that all confidential
information developed by the individual or made known to the individual by us during the course of
the individual’s relationship with us be kept confidential and not disclosed to third parties. Our
agreements with employees also generally provide that any inventions conceived by the individual in
the course of rendering services to us shall be our exclusive property. However, we may not obtain
these agreements in all circumstances, and individuals with whom we have these agreements may not
comply with their terms. In the event of unauthorized use or disclosure of our trade secrets or
proprietary information, these agreements, even if obtained, may not provide meaningful protection,
particularly for our trade secrets or other confidential information. To the extent that our
employees, consultants or contractors use technology or know-how owned by third parties in their
work for us, disputes may arise between us and those third parties as to the rights in related
inventions.
Adequate remedies may not exist in the event of unauthorized use or disclosure of our
confidential information. The disclosure of our trade secrets would impair our competitive position
and may materially harm our business, financial condition and results of operations.
We will rely heavily on licenses from third parties.
Many of the patents and patent applications in our patent portfolio are not owned by us, but
are licensed from third parties. For example, we rely on technology licensed from the University
of Pennsylvania, the University of Illinois, the University of Florida Research Foundation,
Intradigm and Pathogenics. Such license agreements give us rights for the
commercial exploitation of the patents resulting from the patent applications, subject to certain
provisions of the license agreements. Failure to comply with these provisions could result in the
loss of our rights under these license agreements. Our inability to rely on these patents and
patent applications which are the basis of our technology would have a material adverse effect on
our business.
-29-
We license patent rights to certain of our technology from third party owners. If such owners
do not properly maintain or enforce the patents underlying such licenses, our competitive position
and business prospects will be harmed.
We have obtained licenses from the University of Pennsylvania, the University of Illinois, the
University of Florida Research Foundation, Intradigm and Pathogenics. that are
necessary or useful for our business. In addition, we intend to enter into additional licenses of
third party intellectual property in the future.
Our success will depend in part on the ability of our licensors to obtain, maintain and
enforce patent protection for our licensed intellectual property and, in particular, those patents
to which we have secured exclusive rights in our field. Our licensors may not successfully
prosecute the patent applications which are licensed to us. Even if patents issue in respect of
these patent applications, our licensors may fail to maintain these patents, may determine not to
pursue litigation against other companies that are infringing these patents, or may pursue such
litigation less aggressively than we would. Without protection for the intellectual property we
have licensed, other companies might be able to offer substantially identical products for sale,
which could adversely affect our competitive business position and harm our business prospects.
Some jurisdictions may require us to grant licenses to third parties. Such compulsory licenses
could be extended to include some of our product candidates, which may limit our potential revenue
opportunities.
Many countries, including certain countries in Europe, have compulsory licensing laws under
which a patent owner may be compelled to grant licenses to third parties. In addition, most
countries limit the enforceability of patents against government agencies or government
contractors. In these countries, the patent owner may be limited to monetary relief and may be
unable to enjoin infringement, which could materially diminish the value of the patent. Compulsory
licensing of life-saving products is also becoming increasingly popular in developing countries,
either through direct legislation or international initiatives. Such compulsory licenses could be
extended to include some of our product candidates, which may limit our potential revenue
opportunities.
Our commercial success depends significantly on our ability to operate without infringing the
patents and other proprietary rights of third parties.
Other entities may have or obtain patents or proprietary rights that could limit our ability
to manufacture, use, sell, offer for sale or import products or impair our competitive position. In
addition, to the extent that a third party develops new technology that covers our products, we may
be required to obtain licenses to that technology, which licenses may not be available or may not
be available on commercially reasonable terms, if at all. If licenses are not available to us on
acceptable terms, we will not be able to market the affected products or conduct the desired
activities, unless we challenge the validity, enforceability or infringement of the third party
patent or circumvent the third party patent, which would be costly and would require significant
time and attention of our management. Third parties may have or obtain valid and enforceable
patents or proprietary rights that could block us from developing products using our technology.
Our failure to obtain a license to any technology that we require may materially harm our business,
financial condition and results of operations.
Additionally, RNA interference is a relatively new scientific field that has generated many
different patent applications from organizations and individuals seeking to obtain important
patents in the field. These applications claim many different methods, compositions and processes
relating to the discovery, development and commercialization of RNAi therapeutics. Because the
field is so new, very
-30-
few of these patent applications have been fully processed by government patent offices around
the world, and there is a great deal of uncertainty about which patents will issue, when, to whom,
and with what claims. It is likely that there will be significant litigation and other
proceedings, such as interference and opposition proceedings in various patent offices, relating to
patent rights in the RNAi field. Others may attempt to invalidate our intellectual property rights.
Even if our rights are not directly challenged, disputes among third parties could impact our
intellectual property rights.
If we become involved in patent litigation or other proceedings related to a determination of
rights, we could incur substantial costs and expenses, substantial liability for damages or be
required to stop our product development and commercialization efforts.
Third parties may sue us for infringing their patent rights. Likewise, we may need to
resort to litigation to enforce a patent issued or licensed to us or to determine the scope and
validity of proprietary rights of others. In addition, a third party may claim that we have
improperly obtained or used its confidential or proprietary information. Furthermore, in
connection with our third-party license agreements, we generally have agreed to indemnify the
licensor for costs incurred in connection with litigation relating to intellectual property rights.
The cost to us of any litigation or other proceeding relating to intellectual property rights,
even if resolved in our favor, could be substantial, and the litigation would divert our
management’s efforts. Some of our competitors may be able to sustain the costs of complex patent
litigation more effectively than we can because they have substantially greater resources.
Uncertainties resulting from the initiation and continuation of any litigation could limit our
ability to continue our operations.
If any parties successfully claim that our creation or use of proprietary technologies
infringes upon their intellectual property rights, we might be forced to pay damages, potentially
including treble damages, if we are found to have willfully infringed on such parties’ patent
rights. In addition to any damages we might have to pay, a court could require us to stop the
infringing activity or obtain a license. Any license required under any patent may not be made
available on commercially acceptable terms, if at all. In addition, such licenses are likely to be
non-exclusive and, therefore, our competitors may have access to the same technology licensed to
us. If we fail to obtain a required license and are unable to design around a patent, we may be
unable to effectively market some of our technology and products, which could limit our ability to
generate revenues or achieve profitability and possibly prevent us from generating revenue
sufficient to sustain our operations.
The Medicare prescription drug coverage legislation and future legislative or regulatory
reform of the health care system may affect our ability to sell our products profitably.
In the United States, there have been a number of legislative and regulatory proposals, at
both the federal and state government levels, to change the healthcare system in ways that could
affect our ability to sell our products profitably, if approved. For example, the Medicare
Prescription Drug and Modernization Act of 2003 (referred to as the “MMA”), went into effect on
January 1, 2006 and has changed the types of drugs covered by Medicare, and the methodology used to
determine the price for such drugs. Our business could be harmed by the MMA, by the possible
effect of this legislation on amounts that private payors will pay and by other healthcare reforms
that may be enacted or adopted in the future.
We are unable to predict what additional legislation or regulation, if any, relating to the
health care industry or third-party coverage and reimbursement may be enacted in the future or what
effect such legislation or regulation would have on our business. Any cost containment measures or
other health care system reforms that are adopted could have a material adverse effect on our
ability to commercialize our existing and future product candidates successfully.
-31-
Failure to obtain regulatory approval outside the United States will prevent us from marketing
our product candidates abroad.
We intend to market certain of our existing and future product candidates in non-U.S. markets.
In order to market our existing and future product candidates in the European Union and many other
non-U.S. jurisdictions, we must obtain separate regulatory approvals. We have had limited
interactions with non-U.S. regulatory authorities, and the approval procedures vary among countries
and can involve additional testing, and the time required to obtain approval may differ from that
required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory
authorities in other countries, and approval by one or more non-U.S. regulatory authorities does
not ensure approval by regulatory authorities in other countries or by the FDA. The non-U.S.
regulatory approval process may include all of the risks associated with obtaining FDA approval. We
may not obtain non-U.S. regulatory approvals on a timely basis, if at all. We may not be able to
file for non-U.S. regulatory approvals and may not receive necessary approvals to commercialize our
existing and future product candidates in any market.
Non-U.S. governments often impose strict price controls, which may adversely affect our future
profitability.
We intend to seek approval to market certain of our existing and future product candidates in
both the United States and in non-U.S. jurisdictions. If we obtain approval in one or more non-U.S.
jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our
product. In some countries, particularly in the European Union, prescription drug pricing is
subject to governmental control. In these countries, pricing negotiations with governmental
authorities can take considerable time after the receipt of marketing approval for a drug
candidate. To obtain reimbursement or pricing approval in some countries, we may be required to
conduct a clinical trial that compares the cost-effectiveness of our existing and future product
candidates to other available therapies. If reimbursement of our future product candidates is
unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be
unable to achieve or sustain profitability.
Our business may become subject to economic, political, regulatory and other risks associated
with international operations.
Our business is subject to risks associated with conducting business internationally, in part
due to a number of our suppliers being located outside the United States. Accordingly, our future
results could be harmed by a variety of factors, including:
•
difficulties in compliance with non-U.S. laws and regulations;
•
changes in non-U.S. regulations and customs;
•
changes in non-U.S. currency exchange rates and currency controls;
•
changes in a specific country’s or region’s political or economic environment;
•
trade protection measures, import or export licensing requirements or other
restrictive actions by U.S. or non-U.S. governments;
•
negative consequences from changes in tax laws; and
•
difficulties associated with staffing and managing foreign operations, including
differing labor relations.
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The market price of our common stock may fluctuate significantly.
The market price of our common stock may fluctuate significantly in response to numerous
factors, some of which are beyond our control, such as:
•
the announcement of new products or product enhancements by us or our competitors;
•
developments concerning intellectual property rights and regulatory approvals;
•
variations in our and our competitors’ results of operations;
•
changes in earnings estimates or recommendations by securities analysts, if our
common stock is covered by analysts;
•
developments in the biotechnology industry;
•
the results of product liability or intellectual property lawsuits;
•
future issuances of common stock or other securities;
•
the addition or departure of key personnel;
•
announcements by us or our competitors of acquisitions, investments or strategic
alliances; and
•
general market conditions and other factors, including factors unrelated to our
operating performance.
Further, the stock market in general, and the market for biotechnology companies in
particular, has recently experienced extreme price and volume fluctuations. Continued market
fluctuations could result in extreme volatility in the price of our common stock, which could cause
a decline in the value of our common stock. Price volatility of our common stock might be worse if
the trading volume of our common stock is low.
Some or all of the “restricted” shares of our common stock issued to former stockholders of
Froptix and Acuity in connection with the Mergers or held by other of our stockholders may be
offered from time to time in the open market pursuant to an effective registration statement or
Rule 144, and these sales may have a depressive effect on the market for our common stock.
Trading of our common stock is limited and trading restrictions imposed on us by applicable
regulations and by lockup agreements we have entered into with our principal shareholders may
further reduce our trading, making it difficult for our stockholders to sell their shares.
Trading of our common stock is currently conducted on the National Association of Securities
Dealers, Inc.’s, OTC Bulletin Board, or “OTC BB.” The liquidity of our common stock is limited,
not only in terms of the number of shares that can be bought and sold at a given price, but also as
it may be adversely affected by delays in the timing of transactions and reduction in security
analysts’ and the media’s coverage of us, if at all.
Approximately 68% of the outstanding shares of our common stock (including outstanding shares
of our preferred stock on an as converted basis) are subject to lockup agreements which limit sales
for a two-year period. These factors may result in lower prices for our common stock than might
otherwise be obtained and could also result in a larger spread between the bid and ask prices for
our common stock. In addition, without a large float, our common stock is less liquid than the
stock of companies with broader public ownership and, as a result, the trading prices of our common
stock may be more volatile. In the absence of an active public trading market, an investor may be
unable to liquidate his investment in our
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common stock. Trading of a relatively small volume of our common stock may have a greater
impact on the trading price of our stock than would be the case if our public float were larger.
We cannot predict the prices at which our common stock will trade in the future.
Because our common stock may be a “penny stock,” it may be more difficult for investors to
sell shares of our common stock, and the market price of our common stock may be adversely
affected.
Our common stock may be a “penny stock” if, among other things, the stock price is below $5.00
per share, it is not listed on a national securities exchange or approved for quotation on the
Nasdaq Stock Market or any other national stock exchange or it has not met certain net tangible
asset or average revenue requirements. Broker-dealers who sell penny stocks must provide
purchasers of these stocks with a standardized risk-disclosure document prepared by the Securities
and Exchange Commission. This document provides information about penny stocks and the nature and
level of risks involved in investing in the penny-stock market. A broker must also give a
purchaser, orally or in writing, bid and offer quotations and information regarding broker and
salesperson compensation, make a written determination that the penny stock is a suitable
investment for the purchaser, and obtain the purchaser’s written agreement to the purchase.
Broker-dealers must also provide customers that hold penny stock in their accounts with such
broker-dealer a monthly statement containing price and market information relating to the penny
stock. If a penny stock is sold to an investor in violation of the penny stock rules, the investor
may be able to cancel its purchase and get its money back.
If applicable, the penny stock rules may make it difficult for investors to sell their shares
of our common stock. Because of the rules and restrictions applicable to a penny stock, there is
less trading in penny stocks and the market price of our common stock may be adversely affected.
Also, many brokers choose not to participate in penny stock transactions. Accordingly, investors
may not always be able to resell their shares of our common stock publicly at times and prices that
they feel are appropriate.
Directors, executive officers, principal stockholders and affiliated entities own a
significant percentage of our capital stock, and they may make decisions that you do not consider
to be in the best interests of our stockholders.
As of the closing of the Mergers, our directors, executive officers, principal stockholders
and affiliated entities beneficially owned, in the aggregate, approximately 65% of our outstanding
voting securities. As a result, if some or all of them acted together, they would have the ability
to exert substantial influence over the election of our board of directors and the outcome of
issues requiring approval by our stockholders. This concentration of ownership may also have the
effect of delaying or preventing a change in control of our company that may be favored by other
stockholders. This could prevent transactions in which stockholders might otherwise recover a
premium for their shares over current market prices.
Compliance with changing regulations concerning corporate governance and public disclosure may
result in additional expenses.
There have been changing laws, regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act, new regulations promulgated by the Securities
and Exchange Commission and rules promulgated by the American Stock Exchange, the other national
securities exchanges and the NASDAQ. These new or changed laws, regulations and standards are
subject to varying interpretations in many cases due to their lack of specificity, and, as a
result, their application in practice may evolve over time as new guidance is provided by
regulatory and governing bodies, which could result in continuing uncertainty regarding compliance
matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
As a result, our efforts to
comply with evolving laws, regulations and standards are likely to continue to result in
increased general and administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities. Our board members, Chief Executive Officer
and Chief Accounting Officer could face an increased risk of personal liability in connection with
the performance of their duties. As a result, we may have difficulty attracting and retaining
qualified board members and executive officers, which could harm our business. If our efforts to
comply with new or changed laws, regulations and standards differ from the activities intended by
regulatory or governing bodies, we could be subject to liability under applicable laws or our
reputation may be harmed.
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Item 2. Financial Information.
The following selected financial data of eXegenics should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations for
eXegenics” and the Company’s financial statements and the notes to those statements and other
financial information appearing elsewhere in this Report and in the
Company's Form 10-K for the year ending December 31, 2006.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF EXEGENICS
The following discussion should be read in conjunction with, and is qualified in its entirety
by, the financial statements and the notes thereto included with this Current report and in the Company’s Report on Form 10-K for the
year ended December 31, 2006. This “Management’s
Discussion and Analysis of Financial Condition and Results of Operations of eXegenics” section of
this Current Report contains certain forward-looking statements as that term is defined in the Private
Securities Litigation Reform of 1995. Such statements are based on management’s current
expectations and are subject to a number of factors and uncertainties that could cause actual
results to differ materially from those described in the forward-looking statements. When used
herein, the words “anticipate,”“believe,”“estimate,”“expect” and similar expressions as they
relate to our management or us are intended to identify such forward-looking statements. Our actual
results, performance or achievements could differ materially from those expressed in, or implied
by, these forward-looking statements. Historical operating results are not necessarily indicative
of the trends in operating results for any future period.
The discussion and analysis of our financial condition and results of operations are based
upon our financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to investments, intangible assets, income taxes,
contingencies and litigation. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Overview
Immediately prior to the consummation of the Mergers, eXegenics had no business operations.
eXegenics was formerly known as Cytoclonal Pharmaceutics, Inc. and was involved in the research,
creation and development of drugs for the treatment and prevention of cancer and infectious
diseases. Historically, eXegenics operated as a drug discovery company, exploiting new enabling
technologies to advance and shorten the new drug development cycle. Commencing in 2003, eXegenics
began terminating its research and related activities. Since then, all of our scientific staff and
administrative positions have been eliminated and all of our research and development activities
have been terminated. As such, eXegenics was a holding company with a portfolio of marketable
securities and no operations.
Since the termination of operations, the board of directors of eXegenics and management have
been focused on redeploying the remaining residual assets of eXegenics. The board established a
committee — the Business Opportunities Search Committee — to study strategic direction and identify
potential business opportunities. The objective of eXegenics was to redeploy its assets and
actively pursue new business opportunities.
On February 9, 2007, eXegenics completed its sale of 19,440,491 shares of eXegenics common
stock, constituting approximately 51% of the issued and outstanding shares of eXegenics capital
stock, on a fully diluted basis, to a small group of investors led by The Frost Group, LLC, a
private equity firm controlled by Dr. Phillip Frost, our chief executive officer and chairman, and
Dr. Jane Hsiao and Steve Rubin, two of our directors. The stock sale was made pursuant to the
terms of a previously announced stock purchase agreement dated August 14, 2006, as amended as of
November 30, 2006. The investors
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paid eXegenics an aggregate purchase price of $8,613,000 at the closing, which is subject to
adjustment based on eXegenics stockholders’ equity at the closing.
Critical Accounting Policies
We believe the following critical accounting policies affect management’s more significant
judgments and estimates used in the preparation of our financial statements.
We consider all non-restrictive, highly liquid short-term investments purchased with an
original maturity of three months or less to be cash equivalents. Investments consist of equity
securities and are classified as available for sale and reported at their fair values. The realized
gains and losses from these investments are reported in current earnings. Unrealized gains and
losses from these securities are reported as a separate component of stockholders’ equity and
excluded from current earnings.
In
May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Statement Accounting Standards No. 154,
“Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement
No. 3” (“SFAS 154”). This Statement replaces APB Opinion No. 20, “Accounting Changes,” and FASB
Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 requires
retrospective application to prior periods’ financial statements for changes in accounting
principle, unless it is impractical to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that a change in depreciation,
amortization, or depletion method for long, non-financial assets be accounted for as a change in
accounting estimate effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning after December 15,2005. Adoption of the provisions of SFAS 154 did not have a material effect on
our financial condition.
In
July 2006, the FASB issued FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN
48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined.
FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition
and measurement related to accounting for income taxes. We do not expect the interpretation will
have a material impact on our financial condition.
In September 2006, the FASB issued statement No. 157, “Fair Value Measurements”, (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States, and expands disclosures about fair
value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, with
earlier application encouraged. Any amounts recognized upon adoption as a cumulative effect
adjustment will be recorded to the opening balance of retained earnings in the year of adoption. We
have not yet determined the impact of this Statement on its financial condition.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more
likely than not to be realized. While we have considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation allowance, in the
event we were to determine that we would be able to realize deferred tax assets in the future in
excess of its net recorded amount, an adjustment to the net deferred tax asset would increase
income in the period such determination was made. Likewise, should we determine that we would not
be able to realize all or part of our net deferred tax asset in the future, an adjustment to the
net deferred tax asset would be charged to income in the period such determination was made.
eXegenics recognized $0 from license, research and development revenues during fiscal 2006 and
2005. There was no license, research and development revenue as a result of eXegenics’ exit from
the drug discovery business and termination of related research and development activities.
eXegenics had no operations in 2006.
Research and Development Expenses
eXegenics incurred research and development expenses of $0 during fiscal 2006 and fiscal 2005.
This was a result of eXegenics’ exit from the drug discovery business and termination of related
research and development activities.
General and Administrative Expenses
General and administrative expenses for fiscal 2006 were $1,117,000 compared to $1,438,000 for
fiscal 2005, a decrease of $321,000 or 22%. General and administrative expenses decreased primarily
as a result of the reduction in payroll and related expenses. Significant variances in fiscal 2006,
compared to fiscal 2005, were as follows: headcount related expenses, primarily salaries, travel
and entertainment, health insurance, employee relations and office expenses declined by $288,000;
investor and public relations expense declined by $5,000; insurance, primarily directors and
officers liability insurance expense declined by $78,000; audit fees declined by $49,000; leased
equipment expenses declined by $46,000; board of director travel expenses declined by $4,000 and
miscellaneous expenses declined $86,000. The decrease in general and administrative expenses was
partially offset by the following: a $180,000 increase in legal expenses (primarily attributable to
the increase in the reserve for on ongoing litigation with Dr. Labidi), an increase in professional
consulting fees of $25,000 and a $30,000 increase in board of director compensation.
Merger, Tender Offers and Consent Solicitation Expenses
In 2006 and 2005, eXegenics incurred no expenses related to failed merger, tender offers and
consent solicitation activities. In 2006, in anticipation of the transactions completed by the
Stock Purchase Agreement previously discussed, eXegenics incurred approximately $56,000 in legal,
accounting and other related costs.
Expenses Related to Terminating the Drug Discovery Operations
As a result of eXegenics’ decision to terminate its drug discovery operations, in fiscal 2006
and 2005 we incurred no costs associated with expenses from terminated operations. No expenses were
recognized in 2006 or 2005 for eXegenics’ strategic redirection.
Interest Income
Interest income for fiscal 2006 was $469,000 as compared to $190,000 for fiscal 2005, an
increase of $279,000 or 68%. The increase in interest income was due to higher interest rates.
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Other Income and Expenses
Other income and expenses was $0 during fiscal 2006 and a profit of $1,062,000 during fiscal
2005. The decrease was due to the appreciation and sale, by eXegenics of Javelin Pharmaceuticals,
Inc. common stock in 2005.
Net Loss
eXegenics incurred net losses of $648,000 during fiscal 2006 and $186,000 during fiscal 2005.
The increase in net loss of $462,000 or 60% is a result of the aforementioned sale of investments
in 2005. Net loss per common share for fiscal 2006 was $0.04 and for fiscal 2005 was $0.03.
eXegenics recognized $0 from license, research and development revenues during fiscal 2005 and
2004. There was no license, research and development revenue as a result of eXegenics’ exit from
the drug discovery business and termination of related research and development activities. There
were no operations in 2005.
Research and Development Expenses
eXegenics incurred research and development expenses of $0 during fiscal 2005 and fiscal 2004.
This was a result of eXegenics exit from the drug discovery business and termination of related
research and development activities.
General and Administrative Expenses
General and administrative expenses for fiscal 2005 were $1,438,000 compared to $2,051,000 for
fiscal 2004, a decrease of $613,000 or 42%. General and administrative expenses decreased primarily
as a result of the termination of drug discovery operations. Significant variances in fiscal 2005,
compared to fiscal 2004, were as follows: professional consulting fees declined by $60,000;
headcount related expenses, primarily salaries, travel and entertainment, health insurance,
employee relations and office expenses declined by $210,000; investor and public relations expense
declined by $44,000; insurance, primarily directors and officers liability insurance expense
declined by $435,000, primarily as a result of a change in insurance carriers; tax expense, mainly
franchise tax, declined by $49,000; legal fees declined by $61,000; leased equipment declined by
$60,000; board of directors fees and travel expenses declined by $110,000; and audit fees declined
by $35,000. The increase of $250,000 is for the reserve established in connection with the lawsuit
with Dr. Labidi, which reserve reflects a reasonable estimate of eXegenics’ obligations to pay
under the judgment; and an increase of $201,000 for the allowance recorded against the
subscriptions receivable reflects eXegenics’ uncertainty as to its collectability.
Merger, Tender Offers and Consent Solicitation Expenses
In 2005 and 2004, eXegenics recognized an aggregate of $0 in expenses related to merger,
tender offers and consent solicitation activities.
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Expenses Related to Terminating the Drug Discovery Operations
As a result of eXegenics’ decision to terminate its drug discovery operations, in fiscal 2005
and 2004 eXegenics incurred $0 and $5,000, respectively, in costs associated with expenses from
terminated operations. Cash disbursements made during fiscal 2004 against a previously established
restructuring reserve included $90,000 for severance payments, $87,000 for terminated operating
lease obligations, and $16,000 for equipment and facilities relocation. No expenses were recognized
in 2005 and 2004 for eXegenics’ strategic redirection.
Interest Income
Interest income for fiscal 2005 was $190,000 as compared to $127,000 for fiscal 2004, an
increase of $63,000 or 50%. The increase in interest income was due to higher interest rates and
increased investable balances resulting from the appreciation in value and ultimate sale of Javelin
Pharmaceuticals, Inc. common stock.
Other Income and Expenses
Other income and expenses was a profit of $1,062,000 during fiscal year 2005 and $2,000 during
fiscal year 2004. The increase was due to the appreciation and sale by eXegenics of Javelin
Pharmaceuticals, Inc. common stock.
Net Loss
eXegenics incurred net losses of $186,000 during fiscal 2005 and $1,926,000 during fiscal
2004. The decrease in net loss of $1,740,000 or 90% is a result of the aforementioned sale of
investments. Net loss per common share for fiscal 2005 was $0.03 and for fiscal 2004 was $0.13.
Liquidity and Capital Resources
At December 31, 2006 eXegenics had cash, cash equivalents and investments of approximately
$8,596,000. During 2006, eXegenics used approximately $305,000 to fund its operating activities.
Restricted cash was pledged as collateral in support of leases of laboratory equipment. In
connection with the termination of eXegenics drug discovery research programs, eXegenics
repurchased equipment subject to a capital lease agreement. However, in 2003, when eXegenics was in
the process of exiting from the drug discovery business, it was not able to terminate its
contractual obligations; it was not able to terminate its lease obligations until August 2005. In
August 2005, in conjunction with the return of remaining lease obligations, the lessor of this
equipment released $175,000 of restricted cash that was pledged as collateral. In addition, in 2005
eXegenics received proceeds of approximately $1,064,000 from the sale of shares of Javelin
Pharmaceuticals, Inc common stock. The impact of maintaining its lease obligations through August
2005, was $46,000 in 2005 and $106,000 in 2004.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FROPTIX AND ACUITY
You should read the following discussion and analysis of the financial condition and results
of operations of the Froptix and Acuity subsidiaries of the Company, which now represent our
ongoing business operations, together with the financial statements and the related notes appearing
at the end of this report. Some of the information contained in this
discussion and analysis or set forth elsewhere in this report, including information with respect
to our plans and related financing, includes forward-looking statements that involve risks and
uncertainties. You should read the “Risk Factors” section of this report for a discussion of
important factors that could cause actual results to differ materially from the results described
in or implied by the forward-looking statements contained in the following discussion and analysis.
The discussion and analysis of our financial condition and results of operations are based on
our financial statements, which we have prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these financial statements requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, as well as the reported
revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such
estimates and judgments, including those described in greater detail below. We base our estimates
on historical experience and on various other factors that we believe 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 may differ
from these estimates under different assumptions or conditions.
The following discussion and analysis excludes the impact of eXegenics’ financial condition
and results of operations prior to the Mergers because they were not material for any of the
periods presented. Specifically, for the years ended December 31, 2006, 2005 and 2004, eXegenics
had no revenue, expenses consisting solely of general and administrative expenses (i.e., legal,
accounting and other professional fees) in the amount of $1,117,000, $1,438,000 and $2,051,000,
respectively, and other income (i.e., amounts earned from investing available cash in a money
market account) in the amount of $469,000, $1,252,000 and $125,000, respectively.
eXegenics’ balance sheet as of December 31, 2006 consisted solely of total current assets
equal to $8,752,000 (which consisted of cash and cash equivalents, prepaid expenses and other
current assets) and total liabilities equal to $674,000. During these periods, eXegenics had no
sources of cash and its sole use of cash was payment of the aforementioned professional fees and
other costs associated with complying with eXegenics’ reporting obligations under the rules and
regulations promulgated by the SEC and consummating the Mergers with Froptix and Acuity. A
discussion of eXegenics financial condition prior to the Mergers is included above in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations of eXegenics.”
Overview
We are a clinical-stage biopharmaceutical company focused on the development of innovative
therapies for the treatment and prevention of ophthalmic disease. We have concentrated our
resources to address ophthalmic disease in large and growing markets by employing a powerful and
rapidly progressing technology, known as RNA Interference (RNAi), to develop its lead product
candidate, bevasiranib sodium (referred to herein as bevasiranib and formerly known as Cand5).
Bevasiranib is a small interfering RNA (siRNA) therapeutic targeting vascular endothelial growth
factor (VEGF), which
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we are developing as an intravitreal injection for the treatment of wet age-related macular
degeneration (Wet AMD) and diabetic macular edema (DME).
Our Froptix and Acuity operating subsidiaries have not generated any revenues from operations,
except for interest income. Since its inception in March 2003, Acuity has generated significant
losses in connection with the research and development of its technology, including the clinical
development of bevasiranib, and has accumulated a deficit equal to $32.7 million. Since its
inception on June 23, 2006, Froptix has generated losses in connection with the research and
development of its technology and has accumulated a deficit equal to $877,000. Since we do not
generate revenue from any of our product candidates, we expect to continue to generate losses in
connection with the clinical development of bevasiranib and the research and development activities
relating to its technology and other drug candidates. As a result, we believe that our operating
losses are likely to be substantial over the next several years. Such losses may fluctuate
significantly from quarter to quarter and are expected to increase as we expand our research and
development programs, including preclinical studies and clinical trials for our pharmaceutical
product candidates under development. We will need to obtain additional funds to finish clinical
testing of bevasiranib and to further develop our research and development programs.
Critical Accounting Estimates and Policies
While our significant accounting policies are more fully described in Note 3 to our financial
statements appearing at the end of this Current Report on Form 8-K, we believe that the following
accounting policies are the most critical for one to fully understand and evaluate our financial
condition and results of operations.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property and equipment, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, then an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. As of December 31, 2006, management
believes that no revision of the remaining useful lives or write-down of long-lived assets is
required.
Stock-Based Compensation
Before January 1, 2006, Acuity applied the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(APB No. 25), and related interpretations including FASB Interpretation No. 44, (FIN 44),
Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion
No. 25, to account for its fixed-plan stock options. Under the intrinsic-value-based method,
compensation expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price.
Effective January 1, 2006, Acuity, and, effective as of June 23, 2006 (the date of inception)
Froptix, adopted SFAS No. 123(R), Share-Based Payments SFAS No. 123(R) replaces SFAS No. 123,
Accounting for Stock-Based Compensation, and supersedes APB No. 25. SFAS No. 123(R) requires that
all stock-based compensation be recognized as an expense in the financial statements and that such
cost be measured at the fair value of the award. Acuity had adopted the prospective transition
method provided for under SFAS No. 123(R) for private companies and, consequently, did not restate
its results
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from prior periods. Under this transition method, compensation cost recognized in 2006
associated with stock options includes (i) amortization related to all stock option awards
granted/modified on or subsequent to January 1, 2006, based on the estimated grant date fair value
using the Black-Scholes option-pricing model, and (ii) amortization of the intrinsic value recorded
as deferred compensation for options granted prior to January 1, 2006 being accounted for under APB
Opinion No. 25. Option awards granted prior to adoption of SFAS No. 123(R) continue to follow the
provisions of APB Opinion No. 25 and FIN 44 until modified and or settled.
Prior to the adoption of SFAS No. 123(R), Acuity presented all tax benefits resulting from the
exercise of stock options as operating cash flows in the statements of cash flows. SFAS No. 123(R)
requires that cash flows resulting from tax deductions in excess of the cumulative compensation
cost recognized for options exercised (excess tax benefits) be classified as financing cash flows.
We have sufficient net operating loss carryforwards to generally eliminate cash payments for
income taxes. Therefore, no cash has been retained as a result of excess tax benefits relating to
share based payments made to directors and employees.
Neither Acuity nor Froptix had any revenues for the year ended December 31, 2006 or since
inception.
Research and Development Expenses
Research
and development expenses were $8,534,000 for the years ended
December 31, 2006, an increase of $52,000, or 1% from $8,482,000
for the year ended December 31, 2005.
General and Administrative Expenses
General
and administrative expenses were $3,073,000 for the year ended December 31, 2006, an
increase of $1,384,000, or 82%, from $1,689,000 for the year ended
December 31, 2005. The increase was principally due to
stock-based compensation.
Financial Expenses and Income
Total net interest expense was $361,000 for the year ended December 31, 2006, compared to net
interest income of $71,000 for the year ended December 31, 2005. The decrease resulted primarily
from the lower balance of cash and cash equivalents held by Acuity during such periods and the
incurrence by Acuity of interest expense in connection with the amortization of the warrant costs associated with the Acuity convertible notes.
Research
and development expenses were $8,482,000 for the year ended December 31, 2005, an
increase of $4,879,000, or 135%, from $3,603,000 for the year ended December 31, 2004. The
increase related to an increase in costs associated with the clinical trial expenses of Acuity
during 2005.
General and Administrative Expenses
General
and Administrative expenses were $1,689,000 for the year ended December 31, 2005, an
increase of $349,000, or 26%, from $1,340,000 for the year ended December 31, 2004.
Financial Expenses and Income
Total net interest income was $71,000 for the year ended December 31, 2005, compared to net
interest expense of $439,000 for the year ended December 31, 2004. The decrease resulted primarily
from the higher balance of cash and cash equivalents held by Acuity during 2005.
Liquidity and Capital Resources
As a result of its significant research and development expenditures and the lack of any
approved products to generate product sales revenue, Acuity has not been profitable and has
generated operating losses since its inception. From inception through December 31, 2006, Acuity
has funded its operations primarily with proceeds equal to $1.3 million from the sale of common
stock, $1.5 million from the sale of Series A preferred stock, $16.4 million from the same of
Series B preferred stock, $1,000,000 from the sale of convertible notes and $4,000,000 from the
issuance of a term note. Froptix has also not been profitable and has generated operating losses
since its inception. From inception through December 31, 2006, Froptix has funded its operations
primarily with proceeds equal to $639,000 from the sale of common stock.
On March 27, 2007, in connection with the Mergers, the Company entered into a line of credit
agreement with The Frost Group, LLC, a Florida limited liability company controlled by certain of
our directors. The line of credit provides the Company with the right to draw up to $12,000,000 in
available funds for working capital and to fund operations. The Company assumed the $4,000,000
previously drawn on the line of credit by Acuity and has an additional $8,000,000 available for
borrowing. The Company pays interest of 10% on borrowing made under the line of credit.
Immediately
following consummation of the Mergers, the Company has $16,250,000 in
cash and cash equivalents and access to an additional $8,000,000 under the assumed line of credit.
Funding Requirements
We expect to incur losses from operations for the foreseeable future. We expect to incur
increasing research and development expenses, including expenses related to the hiring of personnel
and additional clinical trials. We expect that general and administrative expenses will also
increase as we expand our finance and administrative staff, add infrastructure, and incur
additional costs related to being an operating public company in the United States, including the
costs of directors’ and officers’ insurance, investor relations programs, and increased
professional fees. Our future capital requirements will depend on a number of factors, including
the continued progress of its research and development of
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product candidates, the timing and outcome of clinical trials and regulatory approvals, the
costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent
claims and other intellectual property rights, the acquisition of licenses to new products or
compounds, the status of competitive products, the availability of financing, and our success in
developing markets for our product candidates.
We do not anticipate that we will generate product revenues for at least the next several
years. In the absence of additional funding, we expect continuing operating losses to result in
increases in our cash used in operations over the next several years. To the extent that our
capital resources are insufficient to meet our future capital requirements, we will need to finance
our future cash needs through public or private equity offerings, debt financings, or corporate
collaboration and licensing arrangements. We currently have no commitments for future external
funding other than as described above. We may need to raise additional funds more quickly if one
or more of our assumptions prove to be incorrect or if we choose to expand our product development
efforts more rapidly than we presently anticipate, and we may decide to raise additional funds even
before we need them if the conditions for raising capital are favorable.
We may seek to sell additional equity or debt securities or obtain a bank credit facility.
The sale of additional equity or debt securities may result in dilution to our stockholders. The
incurrence of indebtedness would result in increased fixed obligations and could also result in
covenants that would restrict our operations. Additional equity or debt financing, grants, or
corporate collaboration and licensing arrangements may not be available on acceptable terms, if at
all. If adequate funds are not available, we may be required to delay, reduce the scope of or
eliminate our research and development programs, reduce our planned commercialization efforts or
obtain funds through arrangements with collaborators or others that may require us to relinquish
rights to certain product candidates that we might otherwise seek to develop or commercialize
independently.
Contractual Obligations
The following table summarizes our principal contractual obligations immediately upon
consummation of the Mergers.
Payments Due By Period
Contractual Obligations
Total
Less than 1 year
1-3 years
3-5 years
More than 5 years
Long-term Debt Obligations (1)
$
8,000,000
$
1,667,000
$
6,333,000
—
—
Capital Lease Obligations
—
—
—
—
—
Operating Lease Obligations (2)
356,000
59,000
210,000
87,000
—
Research License Agreement
Obligations (3)
5,125,000
575,000
1,050,000
2,100,000
1,400,000
Purchase
Obligations (4)
144,000
144,000
—
—
—
Total
$
13,625,000
$
2,445,000
$
7,593,000
$
2,187,000
$
1,400,000
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(1)
Our long-term debt obligations referred to in the table above are amounts that are
required to be paid under our term loan with Horizon Technology Funding Company LLC and our
line of credit with The Frost Group, LLC.
(2)
Includes remaining lease payments for lab equipment and Morristown, New Jersey office
space.
(3)
Includes minimum annual payments under Pathogenics and the
University of Illinois licensing agreements and the
University of Florida research agreement.
(4)
Includes open purchase orders.
The preceding table does not include information with respect to the following contractual
obligations because the amounts of the obligations are currently not determinable: contractual
obligations in connection with clinical trials, which are payable on a per-patient basis, royalty
obligations, which are payable based on the sales levels of some of our biopharmaceutical products
and milestone payments which are payable upon the achievement of certain conditions.
Off-Balance Sheet Arrangements
We
have no off-balance sheet arrangements as of December 31, 2006
and 2005 and as of the
consummation of the Mergers.
Quantitative and Qualitative Disclosures About Market Risk
In the normal course of doing business we are exposed to the risks associated with foreign
currency exchange rates and changes in interest rates. We do not engage in trading market risk
sensitive instruments or purchasing hedging instruments or “other than trading” instruments that
are likely to expose us to significant market risk, whether interest rate, foreign currency
exchange, commodity price or equity price risk.
Our exposure to market risk relates to our cash and investments and to our borrowings. We
maintain an investment portfolio of money market funds and qualified purchaser funds. The
securities in our investment portfolio are not leveraged, and are, due to their very short-term
nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure.
Because of the short-term maturities of our investments, we do not believe that a change in market
rates would have a significant negative impact on the value of our investment portfolio.
The primary objective of our investment activities is to preserve principal while at the same
time maximizing yields without significantly increasing risk. To achieve this objective, we invest
our excess cash in debt instruments of the U.S. Government and its agencies, bank obligations,
repurchase agreements and high-quality corporate issuers, and, by policy, restrict our exposure to
any single corporate issuer by imposing concentration limits. To minimize the exposure due to
adverse shifts in interest rates, we maintain investments at an average maturity of generally less
than one month.
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Item 3. Properties.
Our principal corporate office is now located at 4400 Biscayne Blvd, Suite 900, Miami,
Florida. We rent this space from Frost Real Estate Holdings, LLC which is a company controlled by
Dr. Phillip Frost, our chief executive officer and chairman.
We currently lease approximately 4,000 square feet of lab and office space in Philadelphia,
Pennsylvania. This facility includes corporate offices and laboratory space and is rented on a
month-to-month basis. Administrative services, preclinical research and development, project
management, and pharmacology are all based at the Philadelphia, PA location. We also currently
lease approximately 2,000 square feet of office space in Morristown, New Jersey. Clinical Research
and Development are based at the Morristown, New Jersey location.
We have an office located at 1250 Pittsford-Victor Road, Building 200, Suite 280, Pittsford,
New York14534 that consists of approximately 500 square feet of office space. The Company sublets
this office space from RFG Associates, a general partnership in which John A. Paganelli, our
interim chief executive officer and secretary of the Company, is a partner. Monthly rent is $625 and
the sublease may be terminated by either party upon thirty (30) days notice. We have provided
notice of our intention to terminate this lease. eXegenics paid an aggregate of $10,000 in rent
expenses in fiscal 2006.
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Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following tables set forth information, as of the closing date of the Mergers, regarding
beneficial ownership of our common stock to the extent known to us by:
•
Each person who is known by us to own beneficially more than 5% of our common stock;
•
Each director;
•
Our Chief Executive Officer and our three most highly compensated officers other
than our Chief Executive Officer who served in such capacities in 2006 (collectively,
the “Named Executive Officers”); and
•
All of our directors and Named Executive Officers collectively.
Unless otherwise noted, we believe that all persons named in the table have sole voting and
investment power with respect to all shares of our common stock beneficially owned by them.
For purposes of these tables, a person is deemed to be the beneficial owner of securities that
can be acquired by such person within 60 days from the date hereof upon exercise of options,
warrants and convertible securities. Each beneficial owner’s percentage ownership is determined by
assuming that options, warrants and convertible securities that are held by such person (but not
those held by any other person) and that are exercisable within 60 days from March 30, 2007 have
been exercised. The percentage of outstanding common shares have been calculated based upon
113,116,350 shares of common stock outstanding on March 30, 2007.
The Frost Group, LLC holds 15,490,546 shares of the Company’s common stock, warrants to
purchase 6,487 shares of the Company’s Series C Preferred Stock, convertible into 648,700
-48-
shares of the Company’s common stock. The Frost Group, LLC also holds 4,147,458 warrants to
purchase common stock.
(2)
The Frost Gamma Investments Trust holds 36,518,923 shares of the Company’s common stock and
warrants to purchase 9,241,589 shares of common stock. The number of shares included above
also includes 12,697,601 shares of Common Stock, warrants to purchase 3,399,671 shares of
common stock and warrants to purchase 5,317 shares of the Company’s Series C preferred stock,
convertible into 531,700 shares of the Company’s common stock, owned directly by The Frost
Group, LLC. Frost Gamma Investments Trust is a principal member of The Frost Group, LLC.
Frost Gamma Investments Trust disclaims beneficial ownership of these shares of common stock,
except to the extent of any pecuniary interest therein.
(3)
Johnson and Johnson Development Corporation holds 129,736 shares of the Company’s Series C
preferred stock, convertible into 12,973,600 shares of the Company’s common stock. Johnson
and Johnson Development Corporation also holds 2,949,141 warrants to purchase common stock and
203,034 options to purchase shares of common stock.
(4)
Psilos Group Partners II-S holds 90,815 shares of the Company’s Series C preferred stock,
convertible into 9,081,500 shares of the Company’s common stock. Psilos Group Partners II
SBIC also holds 2,064,399 warrants to purchase common stock and 138,384 options to purchase
shares of common stock.
Security Ownership of Directors and Named Executive Officers
Percentage of
Common
Shares
Assuming
Conversion of
all Outstanding
Series C
Number of
Percentage of
Preferred Stock
Title of
Name of
Outstanding Shares
Outstanding
into Common
Class
Beneficial Owner
Beneficially Owned
Common Shares
Stock
Common Stock
Phillip Frost, M.D.
66,047,216
(1)
58.39
%
41.57
%
Common Stock
Jane H. Hsiao, Ph.D., MBA
14,540,724
(2)
12.85
%
9.15
%
Common Stock
David Eichler
11,284,283
(3)
9.98
%
7.10
%
Common Stock
Steven D. Rubin
5,132,021
(4)
4.54
%
3.23
%
Common Stock
Dale Pfost, Ph.D.
4,753,246
(5)
4.20
%
2.99
%
Common Stock
Samuel Reich
1,373,539
(6)
1.21
%
0.86
%
Common Stock
Michael Reich
649,145
(7)
*
*
Common Stock
Denis O’Shaughnessy, Ph.D.,
194,066
(8)
*
*
Common Stock
Robert Baron
186,339
(9)
*
*
Common Stock
John A. Paganelli
155,000
(10)
*
*
Common Stock
Adam Logal
16,216
(11)
*
*
Common Stock
Richard A. Lerner, M.D.
—
—
—
Common Stock
Melvin L. Rubin, M.D.
—
—
—
Common Stock
All Executive Officers and
Directors as a group (12
persons)
104,267,256
92.18
%
65.63
%
*
less than 1%.
(1)
The number of shares beneficially owned by Dr. Frost includes shares of common stock and
warrants to purchase shares of common stock held by or beneficially owned by Frost Gamma
Investments Trust, of which Frost Gamma Limited Partnership is the sole and exclusive
beneficiary. Dr. Frost is one of two limited partners of Frost Gamma, L.P. The general partner of
Frost Gamma, L.P. is Frost Gamma, Inc. and the sole shareholder of Frost Gamma, Inc. is
Frost-Nevada Corporation. Dr. Frost is also the sole shareholder of Frost-Nevada Corporation.
The Frost Gamma Investments Trust holds 36,518,923 shares of the Company’s common stock and
warrants to purchase 9,241,589 shares of common stock. The number of shares included above
also includes 15,490,546 shares of common stock, warrants to purchase 4,147,458 shares of
common stock and warrants to purchase 6,487 shares of the Company’s Series C preferred stock,
convertible into 648,700 shares of the Company’s common stock, owned directly by The Frost
Group, LLC. Frost
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(2)
Dr. Hsiao is a member of The Frost Group, LLC. Dr. Hsiao disclaims beneficial ownership of the
securities held by The Frost Group, except to the extent of her pecuniary interest therein.
(3)
Includes 11,145,899 shares and warrants and 138,384 options that are exercisable as of March30, 2007 or will become exercisable on or before May 30, 2007 and which are held by Psilos
Group Partners II-S, LP, an entity with which Mr. Eichler is affiliated. Mr. Eichler
disclaims beneficial ownership of all such shares, warrants and options.
(4)
Mr. Rubin is a member of The Frost Group, LLC. Mr. Rubin disclaims beneficial ownership of
the securities held by The Frost Group, except to the extent of his pecuniary interest
therein.
(5)
Includes 1,543,961 shares which are the subject of stock options that are exercisable as of
March 30, 2007 or will become exercisable on or before May 30, 2007.
(6)
Includes 837,968 shares which are the subject of stock options that are exercisable as of
March 30, 2007 or will become exercisable on or before May 30, 2007. Excludes 330,254 shares
beneficially owned by Ilana K. Reich, of which Mr. Samuel J. Reich disclaims beneficial
ownership.
(7)
Includes 256,875 shares which are the subject of stock options that are exercisable as of
March 30, 2007 or will become exercisable on or before May 30, 2007.
(8)
Includes 194,066 shares which are the subject of stock options that are exercisable as of
March 30, 2007 or will become exercisable on or before May 30, 2007.
(9)
Includes
55,000 shares which are the subject of stock options that are exercisable as of
March 30, 2007 or will become exercisable on or before May 30, 2007.
(10)
Includes
55,000 shares which are the subject of stock options that are exercisable as of
March 30, 2007 or will become exercisable on or before May 30, 2007.
(11)
Includes 16,216 shares which are the subject of stock options that are exercisable as of
March 30, 2007 or will become exercisable on or before May 30, 2007.
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Item 5. Directors and Executive Officers.
The following table sets forth information concerning our executive officers and directors,
including their ages, as of March 31, 2007:
Name
Age
Title
Phillip Frost, M.D.
70
Chief Executive Officer and Chairman of the Board
Dale Pfost, Ph.D.
49
President
Samuel J. Reich
32
Executive Vice President and Secretary
Denis O’Shaughnessy, Ph.D.
56
Senior Vice President of Clinical Development
Adam Logal
29
Executive Director of Finance,
Chief Accounting Officer and Treasurer
John A. Paganelli
72
Director
David A. Eichler
36
Director
Michael Reich
63
Director
Jane H. Hsiao, Ph.D., MBA
59
Director
Steven D. Rubin
46
Director
Robert Baron
66
Director
Richard A. Lerner, M.D.
68
Director
Melvin L. Rubin, M.D.
75
Director
Phillip Frost, M.D. Dr. Frost became the CEO and Chairman of our board of directors
after consummation of the Mergers on March 27, 2007. Dr. Phillip Frost was named the Vice Chairman
of the Board of Teva Pharmaceutical Industries, Limited (“Teva”) in January 2006 when Teva acquired
IVAX Corporation (“IVAX”). Dr. Frost had served as Chairman of the board of directors and Chief
Executive Officer of IVAX Corporation since 1987. Dr. Frost was named Chairman of the Board of
Ladenburg Thalmann & Co., Inc., an American Stock Exchange-listed investment banking and securities
brokerage firm, in July 2006 and has been a director of Ladenburg Thalmann since March 2005. He
serves on the Board of Regents of the Smithsonian Institution, a member of the Board of Trustees of
the University of Miami, a Trustee of each of the Scripps Research Institutes, the Miami Jewish
Home for the Aged, and the Mount Sinai Medical Center and is Vice Chairman of the Board of
Governors of the American Stock Exchange. Dr. Frost is also a director of Protalix
BioTherapeutics, Inc., an American Stock Exchange-listed biotech pharmaceutical company,
Continucare Corporation, an American Stock Exchange-listed provider of outpatient healthcare and
home healthcare services, Northrop Grumman Corp., a New York Stock Exchange-listed global defense
and aerospace company, Castle Brands, Inc., an American Stock Exchange-listed developer and
marketer of alcoholic beverages, and Cellular Technical Services, Inc., a provider of products and
services for the telecommunications industry.
Dale Pfost, Ph.D. Dr. Dale Pfost became our President after consummation of the Mergers on
March 27, 2007. Previously, Dr. Pfost served as the President, CEO and Chairman of Acuity
Pharmaceuticals and was one of the members of the founding management team from 2003 through March
2007. Dr. Pfost served as President, CEO and Chairman of Orchid BioSciences from 1996 through 2002
and was the founding CEO. From 1988 until 1996 Dr. Pfost served as President, CEO and Managing
Director of Oxford GlycoSciences, where he was the founding CEO. Dr. Pfost was the founder and
President of Infitek, Inc. from 1982 through 1984 until it was acquired by SmithKline Beckman where
Dr. Pfost served in varying levels of increasing responsibilities through 1988.
Samuel J. Reich. Mr. Samuel Reich became our Executive Vice President after consummation of
the Mergers on March 27, 2007. Prior to joining us, Mr. Reich served as Executive Vice President,
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Research and Development and was a co-founder of Acuity. Mr. Reich co-founded Acuity in 2002
where he served in capacities of increasing responsibility from 2002 to March 2007. Prior to
founding Acuity, Mr. Reich was a doctoral candidate at the University of Pennsylvania Medical
School, where his doctoral research involved recognizing and pioneering the opportunity in RNAi
therapeutics for treating ophthalmic diseases from 2001 until 2002.
John A. Paganelli. Mr. Paganelli served as our Interim Chief Executive Officer and Secretary
from June 29, 2005 through the consummation of the Mergers, and Chairman of the eXegenics Board of
Directors from December 2003 through the consummation of the Mergers. Mr. Paganelli served as
President and Chief Executive Officer of Transamerica Life Insurance Company of New York from 1992
to 1997. Since 1987, Mr. Paganelli has been a partner in RFG Associates, a financial planning
organization. Mr. Paganelli is the Managing Partner of Pharos Systems Partners, LLC, a company
formed to raise capital to purchase the controlling interest in Pharos Systems International, a
software development company. Mr. Paganelli is Chairman of the Board of Pharos Systems
International. He was Vice President and Executive Vice President of PEG Capital Management, an
investment advisory organization, from 1987 until 2000. From 1980 to January 2003, Mr. Paganelli
was an officer and director-shareholder of Mike Barnard Chevrolet, Inc., an automobile dealership.
Mr. Paganelli was on the Board of Directors of Mid Atlantic Medical Services, Inc. from 1999 until
2005. Mid Atlantic was listed on the New York Stock Exchange and through its wholly owned
subsidiaries is in the business of selling various forms of health insurance. Mr. Paganelli was
also on the Board of Directors of Mid Atlantic’s subsidiary, MAMSI Life and Healthy Insurance
Company. Mr. Paganelli holds an A.B. from Virginia Military Institute. In 2005 Mid Atlantic Medical
Services, Inc. was acquired by UnitedHealth Group, Inc.
Denis O’Shaughnessy, Ph.D., Dr. Denis O’Shaughnessy became out Senior Vice President of
Clinical Development upon consummation of the Mergers on March 27, 2007. Prior to joining us, Dr.
O’Shaughnessy served as Senior Vice President of Clinical Development for Acuity from October 2006
to March 2007. From 2005 to October 2006, Dr. O’Shaughnessy was an independent clinical research
consultant. From 2000 to 2005, Dr. O’Shaughnessy was a founding member of Eyetech Pharmaceuticals
and served as Senior Vice President of Clinical Development. From 1990 to 2000 Dr. O’Shaughnessy
was employed by Hoffmann-La Roche with increasing levels of responsibility, most recently as
Director of Clinical Operations. From 1980 through 1990, Dr. O’Shaughnessy served at several
pharmaceutical companies in various roles of increasing responsibility most recently as Head of
Clinical Research for Celltech Ltd.
Adam Logal . Mr. Logal became out Director of Finance and Chief Accounting Officer after
consummation of the Mergers on March 27, 2007. Prior to joining the Company, Mr. Logal served in
various finance capacities at Nabi Biopharmaceuticals, most recently as Sr. Director, Accounting
and Reporting. From March 2006 to June 2006, Mr. Logal served as Chief Financial Officer, Chief
Accounting Officer and Treasurer and from November 2002 to June 2006 Mr. Logal served in various
roles of increasing responsibility within the Finance Department. Prior to Nabi
Biopharmaceuticals, Mr. Logal served from May 2001 to November 2002 as a tax accountant at Spherion
Corporation, a recruiting and staffing company. From November 2000 to May 2001, Mr. Logal served as
a staff accountant for Dunn & Co., CPAs PA, a public accounting firm.
Board of Directors
Jane H. Hsiao, Ph.D., MBA. Dr. Hsiao has served as a director of the Company since February
2007. Dr. Hsiao served as the Vice Chairman-Technical Affairs of IVAX from 1995 to January 2006,
when Teva acquired IVAX. Dr. Hsiao served as IVAX’s Chief Technical Officer since 1996, and as
Chairman, Chief Executive Officer and President of IVAX Animal Health, IVAX’s veterinary products
subsidiary, since 1998. From 1992 until 1995, Dr. Hsiao served as IVAX’s Chief Regulatory Officer
and
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Assistant to the Chairman. Dr. Hsiao served as Chairman and President of DVM Pharmaceuticals
from 1998 through 2006 and is also a director of Protalix BioTherapeutics, Inc., an American Stock
Exchange-listed biotech pharmaceutical company, and Cellular Technical Services Company, Inc., a
provider of products and services for the telecommunications industry.
Steven D. Rubin. Mr. Rubin has served as a director of the Company since February 2007. Mr.
Rubin served as the Senior Vice President, General Counsel and Secretary of IVAX from August 2001
until September 2006. Prior to joining IVAX, Mr. Rubin was Senior Vice President, General Counsel
and Secretary with privately held Telergy, Inc., a provider of business telecommunications and
diverse optical network solutions, from early 2000 to August 2001. In addition, he was with the
Miami law firm of Stearns Weaver Miller Weissler Alhadeff & Sitterson from 1986 to 2000, in the
Corporate and Securities Department. Mr. Rubin had been a shareholder of that firm since 1991 and a
director since 1998. Mr. Rubin currently serves on the board of directors of Dreams, Inc., a
vertically integrated licenses sports products company.
David A. Eichler. Mr. Eichler is a Managing Director of Psilos Group, a New York-based
venture capital firm specializing in healthcare investments. Mr. Eichler joined Psilos in 1999 and
focuses on investments in the specialty pharmaceutical, medical technology, healthcare services and
healthcare IT sectors. Mr. Eichler has served on the board of directors of several Psilos
portfolio companies, and has extensive experience as an advisor to senior management on M&A,
financial restructuring and capital raising transactions. Mr. Eichler has been a director of
Acuity since 2004 and also currently serves as Chairman of Caregiver Services, Inc., a leading
provider of in-home care services. Prior to joining Psilos, Mr. Eichler was an investment banker
at Wasserstein Perella & Co. where he was a member of the firm’s Healthcare Group.
Michael Reich. Mr. Michael Reich is a proprietor of a commercial property development
company. Previously, Mr. Reich was chief executive officer of Cosrich, Inc., a manufacturer of
popularly priced cosmetics and toiletries, including numerous well known brands. Mr. Reich’s area
of expertise is in operations, finance and marketing. Prior to the Mergers, Mr. Reich had been a
board member of Acuity since 2003.
Robert A. Baron. Mr. Baron has served on the board of directors of the company since
2003. Previously, Mr. Baron served as the President of Cash City, Inc. from 1999 to 2003. Cash
City is a payday advance and check cashing business. From 1997 to 1999 Mr. Baron was the President
of East Coast Operations for CSS/TSC, Inc., a distributor of blank t-shirts and fleece and
accessories and a subsidiary of Tultex, Inc., a publicly held company. From 1986 to 1997, Mr. Baron
was the chairman of T shirt City, Inc., a privately held company. From 1993 to 1997, Mr. Baron was
a member of the board of directors of Suburban Bank Corp. When Mr. Baron was on Suburban’s board,
its common stock was traded on NASDAQ. Mr. Baron is also a director of Hemobiotech, Inc., a
development stage biopharmaceutical company, and Andover Medical, Inc., a medical equipment
distributor.
Richard A. Lerner, M.D. Dr. Lerner has been President of The Scripps Research Institute, a
private, non-profit biomedical research organization, since 1986. Dr. Lerner is a member of
numerous scientific associations, including the National Academy of Science and the Royal Swedish
Academy of Sciences. Dr. Lerner serves as director of Kraft Foods, Inc. He is also on the board of
directors for Xencor and Intra-Collular Therapies, two privately held biotechnology companies, and
serves on the scientific advisory boards of Dyadic, a biotechnology company.
Melvin L. Rubin, M.D. Dr. Rubin is member of the faculty at the University of Florida
Department of Ophthalmology where he holds the titles of Professor and Chairman Emeritus of
Ophthalmology and Shaler Richardson Eminent Scholar Emeritus. He has been a member of the
University of Florida Department of Ophthalmology faculty since 1963. He has served national
ophthalmology on the board of directors and as president of the
American Academy of Ophthalmology (the “AAO”)
-53-
and later, president of the Foundation of the AAO. He has also been trustee and president of
the Association for Research in Vision and Ophthalmology, and on the board of directors and
chairman of the American Board of Ophthalmology.
Item 6. Executive Compensation.
Compensation Discussion and Analysis
The primary goals of our board of directors with respect to executive compensation will be to
attract and retain talented and dedicated executives, to tie annual and long-term cash and stock
incentives to achievement of specified performance objectives, and to create incentives which will
result in stockholder value creation. To achieve these goals, we plan to form a compensation
committee to recommend executive compensation packages to our board of directors that are generally
based on a mix of salary, discretionary bonus and equity awards. Although we have not adopted any
formal guidelines for allocating total compensation between equity compensation and cash
compensation, we intend to implement and maintain compensation plans that tie a substantial portion
of our executives’ overall compensation to achievement of corporate goals.
Benchmarking of Cash and Equity Compensation
We have not retained a compensation consultant to review our policies and procedures with
respect to executive compensation. We have, in the past, conducted an annual benchmark review of
the aggregate level of our executive compensation, as well as the mix of elements used to
compensate our executive officers. This review is based on a survey of executive compensation paid
by peer companies in the pharmaceutical industry of similar size and stage of development. In
addition, we have historically taken into account input from other independent members of our board
of directors and publicly available data relating to the compensation practices and policies of
other companies within and outside our industry.
We may retain the services of third-party executive compensation specialists from time to time
in connection with the establishment of cash and equity compensation and related policies.
Elements of Compensation
We will evaluate individual executive performance with a goal of setting compensation at
levels the board or any applicable committee thereof believes are comparable with executives in
other companies of similar size and stage of development while taking into account our relative
performance and our own strategic goals. The compensation received by our executive officers
consists of the following elements:
Base Salary. Base salaries for our executives are established based on the scope of their
responsibilities and individual experience, taking into account competitive market compensation
paid by other companies for similar positions within the pharmaceutical industry. Our current
senior vice president of clinical development was hired in November 2006 at an annual base salary
of $265,000. Our current executive director of finance and chief accounting officer was hired in
March 2007 at an annual base salary of $140,000. In connection with the consummation of the
Mergers, we increased the base salary of our executive vice president to $210,000.
Discretionary Annual Bonus. In addition to base salaries, our compensation committee has the
authority to award discretionary annual bonuses to our executive officers. The annual incentive
bonuses
-54-
are intended to compensate officers for achieving corporate goals and value-creating
milestones. Each executive officer is eligible for a discretionary annual bonus up to an amount
equal to a specified percentage of such executive officer’s salary.
Long-Term Incentive Program. We believe that long-term performance is achieved through an
ownership culture that encourages such performance by our executive officers through the use of
stock and stock-based awards. We believe that the use of equity and equity-based awards offers the
best approach to achieving our compensation goals. We have not adopted formal stock ownership
guidelines.
Our board of directors plans to adopt and implement a new stock incentive plan within the
coming months.
Severance and Change-in-Control Benefits. Certain of our named executive officers are entitled
to certain severance and change of control benefits, the terms of which are described below under
“—Employment Agreements and Change in Control Arrangements.” We believe these severance and
change-in-control benefits are an essential element of our executive compensation package and
assist us in recruiting and retaining talented individuals.
Restricted Stock Grants or Awards. We did not grant any restricted stock or restricted stock
awards pursuant to our equity benefit plans to any of our executive officers in the year ended
December 31, 2006. However, our compensation committee, in its discretion, may in the future elect
to make such grants to our executive officers if it deems it advisable.
Other Compensation. We intend to continue to maintain the current benefits and perquisites for
our executive officers; however, our compensation committee, in its discretion, may in the future
revise, amend or add to the benefits and perquisites of any executive officer if it deems it
advisable. The material terms of our employment agreements with our named executive officers are
described below under “—Employment Agreements and Change in Control Arrangements.”
Summary Compensation Table
The following table sets forth a summary for the fiscal year ended December 31, 2006 of the
cash and non-cash compensation awarded, paid or accrued by the Company to our Named Executive
Officers.
Stock
Option
All Other
Name and Principal Position
Year
Salary($)
Bonus($)
Award(s)($)
Award(s) ($)
Compensation($)
Total($)
John A. Paganelli (1)
Interim Chief Executive Officer
2006
25,000
—
—
810
75,000
(2)
100,810
Phillip Frost, M.D. (3)
Chief Executive Officer
2006
—
—
—
—
—
—
Dale Pfost, Ph.D.
President (4)
2006
280,000
84,000
—
359,982
—
723,982
Adam Logal
Executive
Director of Finance and Chief Accounting
Officer (5)
2006
—
—
—
—
—
—
Samuel J. Reich
Executive Vice President (6)
2006
172,000
51,600
—
193,470
—
417,070
Denis O’Shaughnessy (7) (8)
Senior Vice President of Clinical Development
2006
47,702
45,520
—
21,564
—
114,786
(1)
Mr. Paganelli served as the Company’s interim Chief Executive Officer from June 29, 2005
and he resigned from this position upon the consummation of the Mergers.
-55-
(2)
Includes $75,000 of director fees for Mr. Paganelli.
(3)
Dr. Frost became the Company’s Chief Executive Officer upon consummation of the Mergers.
(4)
Dr. Pfost served as the President and Chief Executive Officer of Acuity prior to the Mergers
and was appointed to be the Company’s President on March 29, 2007.
(5)
Mr. Logal served as the Executive Director of Finance and Chief Accounting Officer of Acuity
prior to the Mergers and was appointed to be the Company’s Executive Director of Finance,
Chief Accounting Officer and Treasurer on March 29, 2007.
(6)
Samuel Reich served as the Executive Vice President of Acuity prior to the Mergers and was
appointed to be the Company’s Executive Vice President and Secretary on March 29, 2007.
(7)
Dr. O’Shaughnessy served as the Senior Vice President of Clinical Development of Acuity prior
to the Mergers and was appointed to be the Company’s Senior Vice President of Clinical
Development on March 29, 2007.
(8)
Dr. O’Shaughnessy commenced employment with Acuity on November 13, 2006.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information with respect to the Named Executive Officers
concerning equity awards granted by the Company as of December 31, 2006.
Option Awards
Stock Awards
Number of
Number of
Securities
Securities
Number of Shares or
Market Value of
Underlying
Underlying
Units of Stock That
Shares or Units of
Unexercised Options (#)
Unexercised Options (#)
Option Exercise
Option Expiration
Have Not
Stock That Have Not
Name
Exercisable (1)
Unexercisable
Price ($)
Date
Vested (#)
Vested ($)
Phillip Frost, M.D.
—
—
—
—
—
—
Dale Pfost, Ph.D.
77,841
233,524
0.05
01/01/2016
—
—
90,815
220,550
0.05
11/01/2015
—
—
608,138
689,223
0.04
02/15/2015
—
—
225,740
(2)
—
0.04
09/24/2014
—
—
323,042
107,680
0.04
12/11/2013
—
—
John A. Paganelli
25,947
0.08
07/01/2016
25,947
0.08
04/01/2016
25,947
0.08
01/01/2016
Adam Logal
—
—
—
—
—
—
Samuel J. Reich
71,920
215,766
0.05
01/01/2016
—
—
83,907
203,778
0.05
11/01/2015
—
—
214,063
242,605
0.04
02/15/2015
—
—
131,360
102,169
0.04
09/21/2014
—
—
194,603
64,867
0.04
12/11/2013
—
—
Denis O’Shaughnessy
32,433
745,980
0.06
10/23/2016
259,471
(3)
—
0.06
10/23/2016
(1)
Except as noted below, all options vest in 48 equal monthly installments beginning on the
date of grant.
(2)
This option was fully vested on the grant date.
(3)
This option was fully vested on the grant date.
Director Compensation
The following table sets forth information with respect to compensation of directors of the
Company during fiscal year 2006.
-56-
Nonqualified
Non-Equity
Deferred
Fees Earned or Paid
Option
Incentive Plan
Compensation
All Other
in Cash
Stock Award
Awards
Compensation
Earnings
Compensation
Total
Name
($)
($)
($)
($)
($)
($)
($)
Robert Baron
50,000
—
810
—
—
—
50,810
David A, Eichler
—
—
13,815
—
—
—
13,815
Michael Reich (1)
—
—
46,960
—
—
—
46,960
Steven D. Rubin
—
—
—
—
—
—
—
Jane H. Hsiao, Ph.D.
—
—
—
—
—
—
—
(1)
At December 31, 1006, Michael Reich had outstanding options to purchase 291,644 shares of
our Common Stock.
We are currently considering compensation policies for directors of the Company. In the
future, we may adopt a policy of paying independent directors an annual retainer and a fee for
attendance at board and committee meetings. We anticipate reimbursing each director for reasonable
travel expenses related to such director’s attendance at board of directors and committee meetings.
Employment Agreements and Change in Control Arrangements
Dale R. Pfost, Ph.D. We are employing Dale R. Pfost as our President. Under his employment
agreement, Dr. Pfost receives an annual base salary, subject to increases upon an annual review by
our board of directors. Dr. Pfost’s current salary is $280,000. The agreement provides for a
discretionary annual bonus based on Dr. Pfost’s performance and our business results as determined
by our board of directors. Under the agreement, either we or Dr. Pfost may terminate his
employment at any time, subject to continuation of salary payment and benefits for 12 months if we
terminate Dr. Pfost’s employment without cause, if Dr. Pfost terminates his employment for good
reason or we give Dr. Pfost notice of our intention not to renew the term of the agreement prior to
its expiration. The employment period will automatically be extended for one additional year
unless either the Company or Dr. Pfost shall have given to the other party written notice of
non-extension at least thirty (30) days prior to such anniversary. In addition, all unvested
options to acquire shares of the Company’s capital stock will vest immediately upon a change in
control.
Samuel J. Reich. We are employing Samuel J. Reich as our Executive Vice President and
Secretary. Under his employment agreement, Mr. Reich receives an annual base salary, subject to
increases upon an annual review by our board of directors. Mr. Reich’s current salary is $210,000.
The agreement provides for a discretionary annual bonus based on Mr. Reich’s performance and our
business results as determined by our board of directors. Under the agreement, either we or Mr.
Reich may terminate his employment at any time, subject to continuation of salary payment and
benefits for 12 months if we terminate Mr. Reich’s employment without cause, if Mr. Reich
terminates his employment for good reason or if we give Mr. Reich notice of our intent not to renew
the agreement after the initial year of his employment with the Company. The employment period
will automatically be extended for one additional year unless either the Company or Mr. Reich shall
have given to the other party written notice of non-extension at least thirty (30) days prior to
such anniversary. We have agreed to grant Mr. Reich an option to purchase 500,000 shares of our
common stock upon subject to the adoption of and approval by our stockholders of a new equity
incentive plan.
-57-
Denis O’Shaughnessy, Ph.D. We are employing Dr. O’Shaughnessy as our Senior Vice President of
Clinical Development. We have entered into a severance agreement with Dr. O’Shaughnessy which
provides that if terminate his employment without cause during his first year of employment, we are
obligated to pay him severance equal to three months salary following termination. The severance
period increases by three months after each year of employment up to twelve months. We have also
agreed to continue vesting of his options during the applicable severance period.
Adam Logal. We are employing Adam Logal as our Executive Director of Finance, Chief
Accounting Officer and Treasurer. We have agreed to enter into a severance agreement with Mr.
Logal to provide that: Mr. Logal will receive four months of paid salary and continued benefits if
he is terminated without cause or he reasons for “good reason.” Upon such termination, we have
agreed to accelerate the vesting of all unvested stock options granted to Mr. Logal in connection
with the commencement of his employment.
If we terminated our named executive officers without cause or they resigned for good reason
on December 31, 2006, we would have to make the payments set forth in the following chart:
Cash Payments upon
Termination without
Cause or
Resignation for
Name and Principal Position
Good Reason
Vesting of Stock Options
John A. Paganelli (1) Interim Chief Executive Officer
None
None
Phillip Frost, M.D. Chief Executive Officer
None
None
Adam
Logal Executive Director of Finance, Chief Accounting Officer and Treasurer
$
46,667
389,207
Dale Pfost, Ph.D. President
$
280,000
587,702
Samuel J. Reich Executive Vice President and Secretary
$
210,000
376,394
Denis O’Shaughnessy Senior Vice President of
Clinical Development
$
88,333
48,650
Stock Option Plans
Immediately prior to the closing of the Mergers, Acuity had options to purchase 2,191,619
shares of common stock and options to purchase 141,000 shares of its Series B preferred stock.
Immediately prior to the closing of the Mergers, Froptix had options to purchase 65 shares of
common stock. Pursuant to the terms of Merger Agreement, we assumed all of the outstanding Froptix
and Acuity options and, accordingly, we anticipate issuing 15,810,064 shares of our common stock
and 7,317 shares of our Series C preferred stock, which will be convertible into 731,700 shares of
our common stock, upon the exercise of such options.
Immediately prior to the closing of the Mergers, we had outstanding options to purchase
240,000 shares of common stock under our Amended and Restated 2000 Stock Option Plan.
-58-
New Incentive Plan to be Adopted
Our board of directors plans to adopt and implement a new stock incentive plan within the
coming months.
Corporate Governance
The Company currently trades its shares on the National Association of Securities Dealers,
Inc.’s, OTC Bulletin Board, or “OTCBB.” Accordingly, we are not required to have an audit,
compensation or nominating committee. However, we plan to submit a listing application to list our
shares on the American Stock Exchange. We cannot assure you that we will be successful in listing
our shares with the American Stock Exchange. We currently monitor developments in the area of
corporate governance to ensure we will be in compliance with the standards and regulations required
by the American Stock Exchange. A summary of our corporate governance measures follows:
Independent Directors
We believe a majority of the members of our board of directors are independent from
management. When making determinations from time to time regarding independence, the board of
directors will reference the listing standards adopted by the American Stock Exchange as well as
the independence standards set forth in the Sarbanes-Oxley Act of 2002 and the rules and
regulations promulgated by the SEC under that Act. In particular, our audit committee will
periodically evaluate and report to the board of directors on the independence of each member of
the Board. Our audit committee will analyze whether a director is independent by evaluating, among
other factors, the following:
1.
Whether the member of the board of directors has any material relationship with
us, either directly, or as a partner, stockholder or officer of an organization that
has a relationship with us;
2.
Whether the member of the board of directors is a current employee of our
company or our subsidiaries or was an employee of our company or our subsidiaries
within three years preceding the date of determination;
3.
Whether the member of the board of directors is, or in the three years
preceding the date of determination has been, affiliated with or employed by (i) any of
our present internal or external auditors or any affiliate of such auditor, or (ii) any
of our former internal or external auditors or any affiliate of such auditor, which
performed services for us within three years preceding the date of determination;
4.
Whether the member of the board of directors is, or in the three years
preceding the date of determination has been, part of an interlocking directorate, in
which any of our executive officers serve on the compensation committee of another
company that concurrently employs the member as an executive officer;
5.
Whether the member of the board of directors receives any compensation from us,
other than fees or compensation for service as a member of the board of directors and
any committee of the board of directors and reimbursement for reasonable expenses
incurred in connection with such service and for reasonable educational expenses
associated with board of directors or committee membership matters;
6.
Whether an immediate family member of the member of the board of directors is
-59-
currently or was an executive officer of ours within three years preceding the date
of determination;
7.
Whether an immediate family member of the member of the board of directors is,
or in the three years preceding the date of determination has been, affiliated with or
employed in a professional capacity by (i) any of our present internal or external
auditors, or (ii) any of our former internal or external auditors which performed
services for us within three years preceding the date of determination; and
8.
Whether an immediate family member of the member of the board of directors is,
or in the three years preceding the date of determination has been, part of an
interlocking directorate, in which any of our executive officers serve on the
compensation committee of another company that concurrently employs the immediate
family member of the member of the board of directors as an executive officer.
The above list is not exhaustive and we anticipate that the audit committee will consider all
other factors which could assist it in its determination that a director will have no material
relationship with us that could compromise that director’s independence.
Our non-management directors will hold formal meetings, separate from management, at least two
times per year.
We have no formal policy regarding attendance by our directors at annual stockholders
meetings, although we encourage such attendance and anticipate most of our directors will attend
these meetings.
Steven D. Rubin has participated in discussions with our named executive officers regarding
their employment agreements and the terms of their employment.
Personal Loans to Executive Officers and Directors
We currently prohibit extensions of credit in the form of a personal loan from us to our
directors and executive officers.
Communications with the Board of Directors
Anyone who has a concern about our conduct, including accounting, internal accounting controls
or audit matters, may communicate directly with the audit committee. These communications may be
confidential or anonymous, and may be mailed, e-mailed, submitted in writing or reported by phone.
All of these concerns will be forwarded to the appropriate directors for their review.
Item 7. Certain Relationships and Related Transactions, and Director Independence.
Jane H. Hsiao and Steven D. Rubin, two of our directors, and a trust controlled by Dr. Phillip
Frost, our Chief Executive Officer and Chairman of the board of directors are members of The Frost
Group, LLC, an entity which controls approximately 13.3% of our outstanding voting securities.
Furthermore, the trust that is a member of the Frost Group owns 39% of our outstanding voting
securities and 55.16% of our outstanding common stock. We are parties to a credit agreement with
the Frost Group under which we have access to a line of credit with available borrowings of $12.0
million. To date, $4.0 million has been drawn under the line of credit by Acuity prior to the
Mergers and the obligation to repay this amount was assumed by us as a result of the Mergers. We
are obligated to pay interest at a 10%
-60-
annual rate on the borrowings on the line of credit. In connection with the entering into the
line of credit, we have granted 4,000,000 warrants to purchase shares of common stock to The Frost
Group, LLC.
Our principal corporate office is now located at 4400 Biscayne Blvd, Suite 900, Miami,
Florida. We rent this space from Frost Real Estate Holdings, LLC, which is a company controlled by
Dr. Phillip Frost, our chief executive officer and chairman.
Until a formal policy is established, the independent members of the our board of directors
will review and approve all future transactions that would be required to be reported under Item
404(a) of Regulation S-K.
Pursuant to the Merger Agreement, certain of our stockholders are entitled to certain rights
with respect to the registration of the shares of our capital stock. Under the terms of these
registration rights, if we propose to register any of our securities under the Securities Act,
either for our own account or for the account of other security holders, such holders are entitled
to notice of such registration and are entitled to include up to fifty percent (50%) of the shares
of our common stock held by such stockholders in the registration.
Item 8. Legal Proceedings.
None.
Item 9. Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters.
The Registrant’s common stock is traded on the OTCBB under the symbol “EXEG.OB.” We issued
76,610,981 shares of our common stock pursuant to the Mergers and, accordingly, there are currently
113,116,350 shares of common stock outstanding. As of March 29, 2007, the closing price for our
common stock was $3.57 per share. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
As of the close of business on March 29, 2007, there were approximately 210 holders of record
of our common stock.
We have no plans to declare cash dividends on our common stock in the future and have not
declared any thus far during fiscal year 2006 or during the last two completed fiscal years. There
are restrictions that limit our ability to declare cash dividends on our common stock. We have
agreed not to pay any cash dividends on our common stock pursuant to our loan agreement with
Horizon Technology Funding Company LLC. We have also agreed not to declare any dividends on our
common stock until we have paid the 2% cumulative dividend on our Series C preferred stock.
Item 10. Recent Sales of Unregistered Securities
On March 27, 2007, in connection with the Mergers, the Company entered into a $12,000,000 line
of credit with The Frost Group, LLC, a Florida limited liability company controlled by certain of
our directors. In partial consideration for the line of credit, the Company granted The Frost
Group warrants to purchase 4,000,000 shares of our common stock.
-61-
In January 2007, Acuity issued warrants to purchase up to 125,000 shares of Series B preferred
stock and warrants to purchase 15,625 shares of its common stock to The First Group in connection
with the entry into a $7,000,000 line of credit. The warrants were assumed by us as a result of
the Mergers and now represent warrants to purchase 6,487 shares of our Series C preferred stock and
147,458 shares of our common stock.
During the second quarter of fiscal year 2006, Froptix Corporation issued 905 shares of common
stock to a group of private investors in exchange for $639,000 in the aggregate. These shares were
converted into 61,775,002 shares of our common stock and warrants to purchase 15,632,969 shares of
our common stock in the Mergers.
In September 2005, Acuity issued warrants to purchase up to 200,000 shares of Series B
preferred stock and warrants to purchase 25,000 shares of its common stock to Horizon Technology
Funding Company LLC in connection with a loan from Horizon Technology Funding Company LLC to Acuity
of $4,000,000. The warrants were assumed by us as a result of the Mergers and now represent
warrants to purchase 10,379 shares of our Series C preferred stock and 235,932 shares of our common
stock.
Between September and December 2004, Acuity issued 4,408,839 shares of its Series B preferred
stock and warrants to purchase 585,823 shares of common stock in a private placement to a group of
investors for $8,203,500. These shares of Acuity Series B preferred stock were converted into
228,792 shares of our Series C preferred stock and warrants to purchase 2,057,288 shares of our
Common stock in the Mergers. Furthermore, we assumed the Acuity warrants to purchase shares of
Acuity common stock as a result of the Mergers and these warrants now represent warrants to
purchase 3,242,788 shares of our common stock.
Between May and July 2005, Acuity issued 4,408,839 shares of its Series B preferred stock and
warrants to purchase 585,823 shares of common stock in a private placement to a group of investors
for $8,203,500. These shares of Acuity Series B preferred stock were converted into 228,792
shares of our Series C preferred stock and warrants to purchase 2,057,288 shares of our common
stock in the Mergers. Furthermore, we assumed the Acuity warrants to purchase shares of Acuity
common stock as a result of the Mergers and these warrants now represent warrants to purchase
3,242,788 shares of our common stock.
Between December 2003 and January 2004, Acuity issued 742,000 shares of its Series A preferred
stock in a private placement to a group of investors for $1,484,000. These shares were converted
into 1,925,284 shares of our common stock and warrants to purchase 350 222 shares of our common
stock in the Mergers.
Between March and July 2003, Acuity issued 1,141,015 shares of its common stock in private
placements to group of investors for $1,313,189. These shares were converted into 5,921,217 shares
of our common stock and warrants to purchase 538,537 shares of our common stock in the Mergers.
In March 2003, Acuity issued 408,334 shares of common stock to the University of Pennsylvania
in a private placement in connection with the entry into two license agreements with Acuity. These
shares were converted into 2,119,021 shares of our common stock and warrants to purchase 192,726
shares of our common stock in the Mergers.
In March 2005, Acuity issued 250,000 shares of common stock to the Intradigm Corporation in a
private placement in connection with the entry into a license and collaboration agreement with
Acuity. These shares were converted into 1,297,358 shares of our common stock and warrants to
purchase 117,995 shares of our common stock in the Mergers.
-62-
We believe that the securities sold in the foregoing transactions were exempt from
registration under the Securities Act in reliance upon Section 4(2) or Regulation D of the
Securities Act.
From March 2003 through December 2006, Acuity granted 317,528 shares of stock to its
employees, consultants and directors. These shares were converted into 1,647,789 shares of our
common stock and warrants to purchase 149,867 shares of our common stock in the Mergers.
From March 2003 through January 11, 2007, Acuity issued options to approximately 50 employees,
consultants, and directors to purchase up to an aggregate total of 2,191,619 of its common shares,
which we have assumed in connection with the Mergers and which now represent options to purchase
11,373,186 shares of our common stock. The exercise prices per share ranged from $0.20 to $2.87
prior to the Mergers and have been proportionately adjusted based on the adjustment to the number
of shares issuable upon exercise of such options. In September 2004 Acuity issued an option to its
president to purchase 141,000 shares of its Series B preferred stock which we have assumed in
connection with the Mergers and which now represent options to purchase 7,317 shares of our Series
C preferred stock which are convertible into 731,700 shares of our common stock. The exercise
price per share was $1.65 prior to the Mergers and has been proportionately adjusted based on the
adjustment to the number of shares issuable upon exercise of such options. As of January 11, 2007,
options to purchase 29,250 shares of Acuity’s common stock have been exercised by a consultant of
Acuity.
In July 2006, Froptix issued options to one of its founders to purchase up to an aggregate
total of 65 of its common shares which we have assumed in connection with the Mergers and which now
represent options to purchase 4,436,878 shares of our common stock. The exercise price per share
was $706 prior to the Mergers and has been proportionately adjusted based on the adjustment to the
number of shares issuable upon exercise of such options.
No consideration was paid to Acuity or Froptix by any recipient of any of the foregoing
options for the grant of such options. We believe that the securities sold in these transactions
were exempt from registration under the Securities Act in reliance upon Rule 701 or Regulation D of
the Securities Act.
-63-
ITEM 11. Description of Registrant’s Securities.
Our authorized capital stock consists of 225,000,000 shares of common stock, par value $.01
per share, and 10,000,000 shares of preferred stock, par value $.01 per share.
Common Stock
Of the authorized common stock, 113,116,350 shares are currently outstanding and are held by
approximately 210 record holders. Subject to the prior rights of the holders of any shares of
preferred stock currently outstanding or which may be issued in the future, the holders of the
common stock are entitled to receive dividends from our funds legally available therefor when, as
and if declared by our board of directors, and are entitled to share ratably in all of our assets
available for distribution to holders of common stock upon the liquidation, dissolution or
winding-up of our affairs subject to the liquidation preference, if any, of any then outstanding
shares of preferred stock. Holders of our common stock do not have any preemptive, subscription,
redemption or conversion rights. Holders of our common stock are entitled to one vote per share on
all matters which they are entitled to vote upon at meetings of stockholders or upon actions taken
by written consent pursuant to Delaware corporate law. The holders of our common stock do not have
cumulative voting rights, which means that the holders of a plurality of the outstanding shares can
elect all of our directors. All of the shares of our common stock currently issued and outstanding
are fully-paid and nonassessable. No dividends have been paid to holders of our common stock since
our incorporation, and no cash dividends are anticipated to be declared or paid in the reasonably
foreseeable future.
Preferred Stock
Our board of directors has the authority, without further action by the holders of the
outstanding common stock, to issue preferred stock from time to time in one or more classes or
series, to fix the number of shares constituting any class or series and the stated value thereof,
if different from the par value, as to fix the terms of any such series or class, including
dividend rights, dividend rates, conversion or exchange rights, voting rights, rights and terms of
redemption (including sinking fund provisions), the redemption price and the liquidation preference
of such class or series. We presently have two series of preferred stock outstanding, designated as
Series A convertible preferred stock (the “Series A preferred stock”) and Series C convertible
preferred stock (the “Series C preferred stock”). We have no present plans to issue any other
series or class of preferred stock. The designations, rights and preferences of the Series A
preferred stock and the Series C Preferred Stock are set forth in the certificate of designations
of Series A convertible preferred stock and the certificate of designations of Series C convertible
preferred stock, each of which has been filed with the Secretary of State of the State of Delaware.
Series A Preferred Stock
Of the authorized preferred stock, 4,000,000 shares have been designated Series A preferred
stock, 1,083,404 of which are currently issued and outstanding and held by 71 stockholders.
Dividends are payable on the Series A preferred stock in the amount of $.25 per share, payable
annually in arrears. At the option of our board of directors, dividends will be paid either (i)
wholly or partially in cash or (ii) in newly issued shares of Series A preferred stock valued at
$2.50 per share to the extent cash dividend is not paid.
Holders of Series A preferred stock have the right to convert their shares, at their option
exercisable at any time, into shares of our common stock on a one-for-one basis subject to
anti-dilution
-64-
adjustments. These anti-dilution adjustments are triggered in the event of any subdivision or
combination of our outstanding common stock, any payment by us of a stock dividend to holders of
our common stock or other occurrences specified in the certificate of designations relating to the
Series A preferred stock. We may elect to convert the Series A preferred stock into common stock or
a substantially equivalent preferred stock in the case of a merger or consolidation in which we do
not survive, a sale of all or substantially all of our assets or a substantial reorganization of
us.
Each share of Series A preferred stock is entitled to one vote on all matters on which the
common stock has the right to vote. Holders of Series A preferred stock are also entitled to vote
as a separate class on any proposed adverse change in the rights, preferences or privileges of the
Series A preferred stock and any increase in the number of authorized shares of Series A preferred
stock. In the event of any liquidation or winding up of the Company, the holders of the Series A
preferred stock will be entitled to receive $2.50 per share plus any accrued and unpaid dividends
before any distribution to the holders of the common stock and any other class of series of
preferred stock ranking junior to it.
We may redeem the outstanding shares of Series A preferred stock for $2.50 per share (plus
accrued and unpaid dividends), at any time.
Series B Junior Participating Preferred Stock
Of the authorized preferred stock, 30,000 shares have been designated Series B Junior
Participating preferred stock, none of which are currently issued and outstanding.
Series C Preferred Stock
Of the authorized preferred stock, 500,000 shares have been designated Series C preferred
stock, of which 457,589 are currently issued and outstanding and held by 30 stockholders.
Cumulative dividends are payable on the Series C preferred stock in the amount of $1.54 per share
when declared by the board of directors.
Holders of our Series C preferred stock have the right to convert their shares, at their
option exercisable at any time, into shares of our common stock on a one hundred-for-one basis
subject to anti-dilution adjustments. These anti-dilution adjustments are triggered in the event of
any subdivision or combination of our outstanding common stock, any payment by us of a stock
dividend to holders of our common stock or other occurrences specified in the certificate of
designations relating to the Series C preferred stock.
The shares of Series C preferred stock will automatically convert into shares of common stock,
on a one-hundred-for-one basis (subject to adjustment as noted above), if (a) our common stock
trades above $3.83 per share on any of the specified exchanges for ten consecutive days, (b) we
raise at least $30,000,000 in proceeds at a per share valuation of at least $1.92, or (c) at least
60% of the holders of the Series C preferred stock so elect.
Each share of Series C preferred stock is entitled to 100 votes on all matters on which the
common stock has the right to vote. Holders of Series C preferred stock are also entitled to vote
as a separate class on any proposed adverse change in the rights, preferences or privileges of the
Series C preferred stock and any increase in the number of authorized shares of Series C preferred
stock. In the event of any liquidation or winding up of the Company or any change of control
transaction (including certain mergers and sales of stock or assets), the holders of our Series C
preferred stock will be entitled to receive $77.00 per share plus any accrued and unpaid dividends
before any distribution to the holders of the other classes of preferred stock or common stock.
The Series C preferred stock will be entitled
-65-
hereafter (and after the payment of any other liquidation preference on any other class or
series of preferred stock) to share in our remaining assets on a pro-rata basis with the holders of
common stock and any other series or class of participating preferred stock.
Each holder of Series C preferred stock has a pre-emptive right to purchase a pro rata share
of any equity securities offered for sale by us in a private placement transaction for a period of
18 months following the Mergers subject to customary exceptions set forth in the certificate of
designations relating to the Series C preferred stock.
We are subject to Section 203 of the Delaware General Corporation law, which prohibits a
publicly held Delaware corporation from engaging in a “business combination” with an “interested
stockholder” for a period of three years after the date of the transaction in which the person
became an interested stockholder, unless:
•
prior to such date, our board of directors approves either the business combination
or the transaction that resulted in the stockholder’s becoming an interested
stockholder;
•
upon consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of our outstanding
voting stock, excluding shares held by directors, officers and certain employee stock
plans; or
•
on or after the consummation date, the business combination is approved by our
board of directors and by the affirmative vote at an annual or special meeting of
stockholders holding of at least two-thirds of our outstanding voting stock that is not
owned by the interested stockholder.
For purposes of Section 203, a “business combination” includes, among other things, a
merger, asset sale or other transaction resulting in a financial benefit to the interested
stockholder, and an “interested stockholder” is generally a person who, together with affiliates
and associates of such person:
•
owns 15% or more of outstanding voting stock; or
•
is an affiliate or associate of ours and was the owner of 15% or more of our
outstanding voting stock at any time within the prior three years.
Our amended and restated certificate of incorporation and amended and restated bylaws include
provisions that, among others, could have the effect of delaying, deferring, or discouraging
potential acquisition proposals and could delay or prevent a change of control of us. The
provisions in our certificate of incorporation and bylaws that may have such effect include:
•
Preferred Stock. As noted above, our board of directors, without stockholder
approval, has the authority under our certificate of incorporation to issue preferred
stock with rights superior to the rights of the holders of common stock. As a result,
we could issue preferred stock quickly and easily, which could adversely affect the
rights of holders of
-66-
our common stock and could be issued with terms calculated to delay or prevent a
change of control or make removal of management more difficult.
•
Election and Removal of Directors. Directors may be removed by the affirmative vote
of the holders of at least a majority of the voting power of all of
the outstanding shares of capital stock of the corporation entitled to vote thereon, voting together as
a single class.
•
Stockholder Meetings. Under our certificate of incorporation and bylaws, special
meetings of our stockholders may be called only by the vote of a majority of the entire
board. Our stockholders may not call a special meeting of the stockholders.
•
Requirements for Advance Notification of Stockholder Nominations and Proposals. Our
bylaws establish advance notice procedures with respect to stockholder proposals and
the nomination of candidates for election as directors, other than nominations made by
or at the direction of our board of directors or a committee thereof.
-67-
ITEM 12. Indemnification of Directors and Officers.
The Delaware General Corporation Law and certain provisions of our bylaws under certain
circumstances provide for indemnification of our officers, directors and controlling persons
against liabilities which they may incur in such capacities. A summary of the circumstances in
which such indemnification is provided for is contained herein, but this description is qualified
in its entirety by reference to our bylaws and to the statutory provisions.
In general, any officer, director, employee or agent may be indemnified against expenses,
fines, settlements or judgments arising in connection with a legal proceeding to which such person
is a party, if that person’s actions were in good faith, were believed to be in our best interest,
and were not unlawful. Unless such person is successful upon the merits in such an action,
indemnification may be awarded only after a determination by independent decision of the board of
directors, by legal counsel, or by a vote of the stockholders, that the applicable standard of
conduct was met by the person to be indemnified.
The circumstances under which indemnification is granted in connection with an action brought
on our behalf is generally the same as those set forth above; however, with respect to such
actions, indemnification is granted only with respect to expenses actually incurred in connection
with the defense or settlement of the action. In such actions, the person to be indemnified must
have acted in good faith and in a manner believed to have been in our best interest, and have not
been adjudged liable for negligence or misconduct.
Indemnification may also be granted pursuant to the terms of agreements which may be entered
into in the future or pursuant to a vote of stockholders or directors. The statutory provision
cited above also grants the power to us to purchase and maintain insurance which protects our
officers and directors against any liabilities incurred in connection with their service in such a
position, and such a policy may be obtained by us.
A stockholder’s investment may be adversely affected to the extent we pay the costs of
settlement and damage awards against directors and officers as required by these indemnification
provisions. At present, there is no pending litigation or proceeding involving any of our
directors, officers or employees regarding which indemnification by us is sought, nor are we aware
of any threatened litigation that may result in claims for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted
to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been
informed that, in the opinion of the SEC, this indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Items 3.02. Unregistered Sales of Equity Securities.
The disclosure set forth in Item 2.01 to this Current Report is incorporated into this item by
reference.
Item. 5.01. Changes in Control of Registrant.
As a result of the Mergers described in Item 2.01 to this Current Report on Form 8-K,
including the Form 10 disclosures, The Frost Group, LLC which beneficially owned (as such term is
defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended) 15,490,546 shares of
common stock of
-68-
the Company, representing 41.27% of the then outstanding voting securities of the Company
prior to the Mergers, together with its members, now beneficially own 77,265,548 shares of common
stock, representing 48% of now outstanding voting securities of the Company.
The disclosure set forth in Item 2.01 of this Current Report on Form 8-K, including the Form
10 disclosures, is incorporated into this item by reference.
Item 5.02.
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
The disclosure set forth in Item 2.01 of this Current Report on Form 8-K, including the Form
10 disclosures, is incorporated into this item by reference.
Effective as at the closing of the Mergers, Subbarao Uppaluri resigned from the board of
directors of eXegenics.
At the closing of the Mergers, in accordance with our bylaws for filling newly-created board
vacancies, our directors appointed David Eichler and Michael Reich to our board of directors. On
March 29, 2007, Richard A, Lerner, M.D. and Melvin L. Rubin, M.D. were added to our board of
directors. All directors hold office until the next annual meeting of stockholders and the
election and qualification of their successors.
After the closing of the Mergers, our board of directors appointed the following persons to
serve in the offices set forth immediately after their names:
Name
Title
Phillip Frost, M.D.
Chief Executive Officer and Chairman of the Board
Dale R. Pfost, Ph.D.
President
Samuel J. Reich
Executive Vice President
Adam Logal
Executive Director of Finance,
Chief Accounting Officer, Treasurer and Secretary
Shalesh Kaushal, M.D., Ph.D.
Chief Scientific Officer
Denis O’Shaughnessy, Ph.D.
Senior Vice President of Clinical Development
Officers serve at the discretion of our board of directors.
Item 5.06. Change in Shell Company Status.
The disclosure set forth in Item 2.01 to this Current Report is incorporated into this item by
reference. As a result of the completion of the Mergers, we believe we are no longer a Shell
Company as that term is defined in Rule 12(b)-2 of the Exchange Act.
Item 9.01. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
(b) Pro forma financial information.
-69-
INDEX TO FINANCIAL STATEMENTS
Froptix Corporation
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Froptix Corporation
We have audited the accompanying balance sheet of Froptix Corporation (a Florida corporation in the
development stage) as of December 31, 2006, and the related statements of operations, changes in
stockholders’ equity and cash flows for the period from June 23, 2006 (inception) to December 31,2006. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Company’s internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Froptix Corporation as of December 31, 2006, and the results of
its operations and its cash flows for the period from June 23, 2006 (inception) to December 31,2006, in conformity with U.S. generally accepted accounting principles.
Froptix Corporation (the Company) was incorporated in Florida on June 23, 2006 (inception). An
affiliate of the Company assigned license and research agreements with the University of Florida to
the Company on June 23, 2006 (see Note 6). The Company is a development stage ophthalmic
pharmaceutical company engaged in the development of therapeutics to treat and prevent ophthalmic
disorders and diseases. The Company is currently devoting substantially all of its efforts toward
conducting pharmaceutical discovery and development, and negotiating strategic corporate
relationships.
2. Development Stage Risks and Liquidity
The Company has not generated any revenues and has incurred losses since its inception. There is no
assurance that profitable operations can be achieved, and, if ever achieved, can be sustained on a
continuing basis. In addition, development activities and clinical and preclinical testing and
commercialization of the Company’s proprietary technology will require significant additional
financing. The Company’s deficit accumulated during the development stage through December 31, 2006
is $876,779, and the Company’s management expects to incur substantial and increasing losses in
future periods.
Further, the Company’s future operations are dependent on, among other factors, the services of its
future employees and consultants, the success of the Company’s research, development, manufacture,
and marketing activities, and, ultimately, regulatory and market acceptance of the Company’s
proposed future products.
The financial statements do not include any adjustments that might result from the outcome of
above-mentioned uncertainties.
The Company’s founders have committed to finance future operations with additional capital
contributions of up to $1 million. However, if additional funds are raised through a combination of
private placements of equity and/or debt, the founders may reduce their capital contribution
commitment to the extent of funds raised, dollar for dollar, up to $1 million. See Note 8.
F-8
Froptix Corporation
(A Development Stage Company)
Notes to Financial Statements (continued)
3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date
of the financial statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less when
purchased to be cash equivalents. As of December 31, 2006, cash and cash equivalents consists of
bank deposit accounts and money market funds.
Research and Development
Research and product development costs are charged to expense as incurred.
Income Taxes
Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and the respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in operations in the period that includes
the enactment date.
Deferred income taxes are recorded for the tax effects of temporary differences between the basis
of assets and liabilities recognized for financial reporting purposes and the tax basis, and net
operating losses and credits. The most significant component of the Company’s net deferred tax
assets as of December 31, 2006 is its net operating loss carryforward. A full valuation allowance
was established for the deferred tax assets, as management of the Company does not believe
realization of the tax benefits is more likely than not.
F-9
Froptix Corporation
(A Development Stage Company)
Notes to Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Comprehensive Loss
The Company’s comprehensive loss has no components other than its net loss.
Loss
Per Share
(Loss) per
share is computed by dividing net loss by the weighted average number
of shares of common stock outstanding during the year. All
outstanding stock options and warrants are considered potential
common stock. The dilutive effect, if any, of stock options and
warrants is calculated using the treasury stock method. The
Company’s stock options (discussed in Note 4) were not
included in the calculation of diluted loss per share because their
impact is antidilutive.
Stock-Based Compensation
We account for non-employee stock-based compensation in accordance with Statement of Financial
Accounting Standards No. 123R, Accounting for Stock Based Compensation (SFAS 123R) and Emerging
Issues Task Force No. 96-18 Accounting for Equity Instruments That are Issued to Other Employees
for Acquiring or in Conjunction with Selling Goods and Services (EITF 96-18). SFAS 123R and EITF
96-18 require that we initially account for our stock-based compensation grants to non-employees
based on the fair value of the stock-based compensation on the date of grant with subsequent
adjustments to compensation expense as the fair value of the equity instrument changes over its
vesting period.
4. Stock-Based Compensation
SFAS 123R requires that cash flows resulting from tax deductions in excess of the cumulative
compensation cost recognized for options exercised (excess tax benefits) be classified as financing
cash flows. The Company has sufficient net operating losses to generally eliminate cash payments
for income taxes to date. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model, with the following weighted average assumptions:
expected life of ten years, expected dividend yield of zero, volatility of 35%, and risk-free
interest rate of approximately 4.5%.
During 2006, the Company entered into a stock option agreement with a consultant by granting
nonqualified stock options to purchase an aggregate of 65 shares of the Company’s common stock. The
options are exercisable for a period of ten years from the date of grant and vest over four years,
and were accounted for in accordance with EITF 96-18. As of December 31, 2006, none of these
options to purchase shares of common stock were exercisable. The weighted average remaining
contractual life of these options outstanding at December 31, 2006 is 9.5 years. The fair value of
the options was determined using the Black-Scholes options pricing model. The exercise price is
$705.89. The estimated fair value of the non-employee options as of December 31, 2006 was
$2,181,000, of which $258,000 was recognized as compensation expense in the statement of operations
from inception to December 31, 2006 and the remaining
F-10
Froptix Corporation
(A Development Stage Company)
Notes to Financial Statements (continued)
4. Stock-Based Compensation (continued)
amount will be charged to expense on pro rata basis over the remaining three and one half year
vesting period. The total compensation expense will also continue to be remeasured for changes in
the fair value of the equity instrument over the vesting period of the option, which may result in
future compensation expense being significantly different than the amount estimated as of December31, 2006.
5. Income Tax
There is no provision for or benefit from income taxes for the period from June 23, 2006
(inception) to December 31, 2006. As of December 31, 2006, the Company has federal and state net
operating loss carryforwards of approximately $0.9 million that begin to expire in 20 years.
Pursuant to the Internal Revenue Code, the annual utilization of the federal and certain state
carryforwards may be limited in terms of utilization in certain circumstances, including a change
in ownership of the Company, as defined. The Company will not recognize a tax benefit for financial
reporting purposes for net operating losses or credit carryforwards, until such time as management
believes it is more likely than not that the Company’s future operations will generate sufficient
taxable income to be able to realize such benefits.
6. License and Research Agreements
In April 2006, an affiliate of the Company and the University of Florida entered into an exclusive
worldwide license agreement for certain patents and technology rights. The agreement provides for
royalty payments equal to various percentages of future commercial sales of products manufactured
using the licensed technology, as defined, if any, through the expiration of the licensed patent.
In April 2006, an affiliate of the Company entered into a research agreement with the University of
Florida to conduct research on behalf of the affiliate of the Company. Both the license agreement
and the research agreement were assigned to the Company on June 23, 2006.
As part of the research agreement, the Company has agreed to make bi-annual payments during each
budget year as follows:
Year 1: $250,000, upon full execution of the agreement and $250,000 at the six month
anniversary of the effective date of the agreement.
F-11
Froptix Corporation
(A Development Stage Company)
Notes to Financial Statements (continued)
6. License and Research Agreements (continued)
Year 2: $250,000 at the beginning of the budget year and $250,000 at the end of the sixth month
of the budget year.
Year 3: $250,000 at the beginning of the budget year and $250,000 at the end of the sixth month
of the budget year.
The agreement is a fixed price agreement and either party may terminate the agreement upon ninety
(90) days prior written notice to the other. The Company has made the first year payments totaling
$500,000 to the University of Florida in 2006.
7. Related Party Transactions
Included in the statement of operations are General and Administrative expenses of $63,000 for
consulting services provided by officers of the Company.
8. Subsequent Event
On January 11, 2007, the Company entered into an agreement with Acuity Pharmaceuticals, Inc.
(Acuity) and The Frost Group, LLC (Frost Group), whose principal shareholders are also the majority
shareholders of the Company, whereby the Frost Group will provide a subordinated secured line of
credit, up to $7,000,000 to Acuity; the Company will merge with and into a wholly-owned subsidiary
of a publicly traded “shell” company (Public Shell) controlled by the Frost Group and certain
affiliates and associates of the Frost Group; and Acuity will also merge with and into a
wholly-owned subsidiary of the Public Shell. The merger is expected to occur by April 30, 2007.
However, there are no assurances the merger will be achieved by April 30, 2007.
F-12
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
The Board
of Directors
Acuity Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Acuity Pharmaceuticals, Inc. (a
development-stage company) as of December 31, 2006 and 2005, and the related statements of
operations, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash
flows for each of the years in the three year period ended December 31, 2006 and period from March27, 2003 (inception) to December 31, 2006. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Acuity Pharmaceuticals, Inc. as of December 31, 2006 and 2005,
and the results of its operations and its cash flows for each of the years in the three year period
ended December 31, 2006 and period from March 27, 2003 (inception) to December 31, 2006, in
conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. As discussed in note 2 to the financial statements, the Company has suffered
recurring losses from operations and has a total stockholders’ deficit that raises substantial
doubt about its ability to continue as a going concern. Management’s plans in regard to these
matters are described in note 2. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
As discussed in notes 3 and 7 to the financial statements, effective January 1, 2006, the Company
adopted the fair value method of accounting for stock-based compensation as required by Statement
of Financial Accounting Standards No. 123(R), Share-Based Payment.
Liabilities, Redeemable Convertible Preferred Stock, and
Stockholders’ Equity (Deficit)
Current liabilities:
Current portion of long-term notes payable
$
1,666,667
—
Accounts payable
3,136,255
1,631,358
Accrued compensation
298,584
186,734
Accrued expenses
406,692
1,090,608
Total current liabilities
5,508,198
2,908,700
Long-term notes payable, net of unamortized warrant discount of
$167,919 and $279,863 at December 31, 2006 and 2005, respectively
2,165,414
3,720,137
Total liabilities
7,673,612
6,628,837
Commitments and contingencies (note 9)
Series B Redeemable Convertible Preferred Stock, $0.01 par value;
authorized 13,255,179 shares; issued and outstanding 8,817,679
shares at December 31, 2006 and 2005 (liquidation value of
$38,148,330 at December 31, 2006)
25,987,978
21,081,644
Stockholders’ equity (deficit):
Series A Convertible Preferred Stock, $0.01 par value; authorized,
issued, and outstanding 742,000 shares at December 31, 2006
and 2005 (liquidation value of $1,484,000 at December 31, 2006)
7,420
7,420
Common stock, $0.01 par value; authorized 19,584,956 shares;
issued and outstanding 2,116,877 and 2,017,532 shares at
December 31, 2006 and 2005, respectively
21,169
20,175
Additional paid-in capital
—
942,639
Deferred compensation
—
(21,770
)
Deficit accumulated during development stage
(32,708,748
)
(18,558,590
)
Total stockholders’ equity (deficit)
(32,680,159
)
(17,610,126
)
Total liabilities, redeemable convertible preferred stock
and stockholders’ equity (deficit)
$
981,431
10,100,355
See accompanying notes to financial statements.
F-16
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
Interest expense, including amortization of
beneficial conversion and warrant costs of
$111,944, $32,651, $406,516, and $551,111 in
2006, 2005 and 2004 and from March 27, 2003
(inception) to December 31, 2006, respectively
(618,983
)
(182,753
)
(453,524
)
(1,255,260
)
Total interest income (expense)
(366,848
)
71,163
(438,580
)
(732,919
)
Net loss
$
(11,092,209
)
(10,099,711
)
(5,382,382
)
(29,650,799
)
See accompanying notes to financial statements.
F-17
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Issuance of Series A preferred stock at $2 per share
—
—
129,166
1,292
—
—
257,040
—
—
—
258,332
Issuance of warrants to purchase 155,300 shares of common
stock at $0.01 per share in connection with issuance of
convertible notes payable
—
—
—
—
—
—
203,258
—
—
—
203,258
Beneficial conversion feature on convertible notes
—
—
—
—
—
—
203,258
—
—
—
203,258
Issuance of 100,000 shares of Series B preferred stock, warrants
and options to purchase 141,000 shares of Series B preferred
stock at $1.65, and 43,500 and 12,500 shares of common stock
at $1.65 and $0.20, respectively, in connection with the
settlement of employment liabilities
100,000
200,000
—
—
—
—
137,600
—
—
—
137,600
Issuance of Series B preferred stock at $2 per share, net of
$219,072 in offering costs and a $15,000 subscription
receivable
4,101,750
7,969,428
—
—
—
—
—
—
—
—
—
Issuance of Series B preferred stock in connection with the
conversion of notes payable
514,179
1,028,357
—
—
—
—
—
—
—
—
—
Issuance of warrants to purchase 512,719 shares of common
stock at $0.01 in connection with the sale of Series B
preferred stock
—
(97,417
)
—
—
—
—
97,417
—
—
—
97,417
Issuance of warrants to purchase 15,000 shares of common stock
at $2 in connection with the sale of Series B preferred stock
—
(1,650
)
—
—
—
—
1,650
—
—
—
1,650
Issuance of common stock in connection with employment or
service agreements
—
—
—
—
83,434
835
75,923
—
—
—
76,758
Receipt of subscriptions receivable
—
—
—
—
—
—
—
—
521,924
—
521,924
Compensation resulting from grant of options to employees at
below fair market value
—
—
—
—
—
—
5,225
(5,225
)
—
—
—
Issuance of options to vendors for services
—
—
—
—
—
—
140,800
—
—
—
140,800
Amortization of deferred compensation
—
—
—
—
—
—
—
12,589
—
—
12,589
Preferred stock dividend
—
192,040
—
—
—
—
(192,040
)
—
—
—
(192,040
)
Accretion of redemption premium on Series B preferred stock
—
355,066
—
—
—
—
(355,066
)
—
—
—
(355,066
)
Accretion of cost incurred and warrants in connection with sale
of Series B preferred stock
—
16,054
—
—
—
—
(16,054
)
—
—
—
(16,054
)
Charge related to repricing of outstanding options
Acuity Pharmaceuticals, Inc. (the Company) was incorporated in Delaware on March 27, 2003
(inception). On March 31, 2003, the Company merged with Ocugen, LLC and became the surviving
company. All 133,333 common shares of Ocugen, LLC were converted to 133,333 common shares of
the Company. The Company is a development-stage ophthalmic pharmaceutical company engaged in
the development of therapeutics to treat and prevent ophthalmic disorders and diseases. The
Company is currently devoting substantially all of its efforts toward conducting
pharmaceutical discovery and development, licensing technology, planning for regulatory
approval for products under development, negotiating strategic corporate relationships,
recruiting personnel, and raising capital.
(2)
Development-Stage Risks and Liquidity
The Company has not generated any revenues and has not yet achieved profitable operations.
There is no assurance that profitable operations, if ever achieved, could be sustained on a
continuing basis. In addition, development activities and clinical and preclinical testing and
commercialization of the Company’s proprietary technology will require significant additional
financing. The Company’s deficit accumulated during the development stage through December 31,2006 aggregated $32,708,748, including $3,057,949 of Series B Redeemable Convertible Preferred
Stock (Series B) accretion of the redemption premium and amortization of costs incurred, and
the Company’s management expects to incur substantial and increasing losses in future periods.
Further, the Company’s future operations are dependent on, among other factors, the services
of its employees and consultants, the success of the Company’s research, development,
manufacture, and, ultimately, upon regulatory approval and market acceptance of the Company’s
proposed future products.
The Company’s future operations are dependent on the timely and successful completion of its
ongoing research and development, the development of competitive therapies by other
biotechnology and pharmaceutical companies, other treatment modalities for the Company’s
targeted diseases, and ultimately, regulatory approval and market acceptance of the Company’s
proposed future products.
The Company has not generated any revenues from product sales and expects to incur substantial
losses in future periods. There is no assurance that profitable operations, if ever achieved,
could be sustained on a continuing basis. In addition, development activities and clinical and
preclinical testing and commercialization of the Company’s proprietary technology will require
significant additional financing. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
In order to continue as a going concern, additional funding will be required before mid-2007.
The Company plans to finance future operations with a combination of private placements;
payments from potential strategic research and development, licensing, and/or marketing
arrangements; public offerings; debt; revenues from future product sales, if any; and
potential sale of the Company. The Company has not generated positive cash flows from
operations, and there are no assurances that the Company will be successful in obtaining an
adequate level of financing for the development and commercialization of its planned products.
The ability of the Company to continue as a going concern is dependent upon the infusion of
capital. See note 12 for a discussion of subsequent events.
(Continued)
F-21
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates
and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
(b)
Cash, Cash Equivalents and Investments
For the purpose of the statements of cash flows, the Company considers all highly liquid
investment instruments with an original maturity of three months or less when purchased
to be cash equivalents. As of December 31, 2006 and 2005, cash and cash equivalents
consist of bank deposit accounts and money market funds. Highly liquid investment
instruments with an original maturity of greater than three months are classified as
investments. Investments are considered available-for-sale and are carried at fair value
which approximates amortized cost as of December 31, 2006 and 2005.
(c)
Property and Equipment, net
Property and equipment are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, generally five to ten
years. Expenditures for repairs and maintenance are charged to expense as incurred, while
betterments are capitalized.
(d)
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property and
equipment, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, then an impairment
charge is recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. As of December 31, 2006, management believes that no revision of
the remaining useful lives or write-down of long-lived assets is required.
(e)
Research and Development
Research and product development costs are charged to expense as incurred.
(f)
Income Taxes
Income taxes are accounted for under the asset-and-liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and the respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
(Continued)
F-22
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in operations in the period that includes the enactment date.
(g)
Stock-Based Compensation
Prior to January 1, 2006, the Company applied the intrinsic-value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to
Employees (APB No. 25), and related interpretations including FASB Interpretation No. 44
(FIN 44), Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under
the intrinsic-value-based method, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise price.
Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment. SFAS
No. 123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation, and Supersedes
APB No. 25. SFAS No. 123(R) requires that all stock-based compensation be recognized as
an expense in the financial statements and that such cost be measured at the fair value
of the award. The Company has adopted the prospective transition method provided for
under SFAS No. 123(R) for private companies and, consequently, has not restated results
from prior periods. Under this transition method, compensation cost recognized in 2006
associated with stock options includes (i) amortization related to all stock option
awards granted/modified on or subsequent to January 1, 2006, based on the estimated grant
date fair value using the Black-Scholes option-pricing model, and (ii) amortization of
the intrinsic value recorded as deferred compensation for options granted prior to
January 1, 2006 being accounted for under APB Opinion No. 25. Option awards granted prior
to adoption of SFAS No. 123(R) continue to follow the provisions of APB Opinion No. 25
and FIN 44 until modified and or settled.
Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits
resulting from the exercise of stock options as operating cash flows in the statements of
cash flows, if any. SFAS No. 123(R) requires that cash flows resulting from tax
deductions in excess of the cumulative compensation cost recognized for options exercised
(excess tax benefits) be classified as financing cash flows. The Company has sufficient
net operating loss carryforwards to generally eliminate cash payments for income taxes.
In September 2005, the Company entered into a $4,000,000 term loan. The term loan bears
interest at 12.23%, which is payable monthly commencing September 15, 2005. Interest
expense for the year ended December 31, 2006 and 2005 was $489,200 and $145,401,
respectively, and $634,601 for the
period from March 27, 2003 (inception) to December 31, 2006. The principal is payable in
12 equal monthly installments commencing August 2007. Principal on the term loan matures
as follows: 2007 — $1,666,667 and 2008 — $2,333,333. The term loan is collateralized by
all personal property of the Company, except intellectual property, and contains certain
negative covenants that limit the payment of cash dividends, redemption of equity
securities, change in ownership, and the creation or extinguishment of debt. In
connection with the issuance of the term note, the Company issued warrants to purchase
200,000 shares of Series B at $2.00 per share and warrants to purchase 25,000 shares of
common stock at $0.01 per share.
The fair value of the warrants was estimated on the date of grant using the Black-Scholes
option pricing model. The Company allocated $312,514 of the proceeds from the term loan
to the warrants, based on the relative fair values of the loan and warrants. The warrants
were accounted for as a discount to the term loan and are being charged to expense as
interest over the term of the loan. Amortization of the debt discount associated with the
value of the warrants was $111,944 and $32,651 for the years ended December 31, 2006 and
2005, respectively, and $144,595 for the period from March 27, 2003 (inception) to
December 31, 2006.
The Company incurred $45,000 of debt issuance cost, which has been deferred and will be
amortized over the life of the debt. Amortization was $16,119 and $4,701 for the years
ended December 31, 2006 and 2005, respectively, and $20,820 for the period from March 27,2003 (inception) to December 31, 2006.
(b)
Convertible Notes Payable
From March to June 2004, the Company issued 8% Convertible Notes (the Notes), resulting
in aggregate cash proceeds of $1,000,000. Interest expense related to the Notes was
$28,357 for the year ended December 31, 2004. The Notes were convertible into Series B
and provided for the issuance of warrants to purchase 155,300 shares, as amended, of
common stock at $0.01 per share (note 7). In connection with the issuance of the Notes,
the Company incurred aggregate financing costs of $18,651, which were being amortized to
interest expense over the term of the Notes. In September 2004, $1,028,357, which
represented the total principal of the Notes and the interest accrued thereon, was
converted into 514,179 shares of Series B. Unamortized deferred financing costs were
charged to interest expense at the time of the conversion. Amortization of the deferred
financing costs was $18,651 for the year ended December 31, 2004.
(Continued)
F-24
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
The fair value of the warrants was estimated on the date of grant using the Black-Scholes
option pricing model. The Company allocated $203,258 of the proceeds from the Notes to
the warrants, based on the relative fair values of the Notes and warrants. The warrants
were accounted for as a discount to the Notes and were charged to expense as interest
over the term of the Notes. Unamortized discount was charged to interest expense at the
time of the conversion. Amortization of the debt discount associated with the value of
the warrants was $203,258 for the year ended December 31, 2004.
Additionally, in accordance with Emerging Issues Task Force (EITF) Issue No. 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features of Contingently
Adjustable Conversion Ratios, and EITF Issue No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments, the Company recorded an additional debt discount of
$203,258, which represents the value of the beneficial conversion feature (BCF) of the
Notes. The value allocated to the BCF represents the excess of the fair market value of
the underlying preferred stock issued to the holders of the Notes over the adjusted value
of the Notes, after deducting the fair value ascribed to the warrants issued in
connection with the Notes. This additional debt discount was being amortized to interest
expense over the term of the Notes. Unamortized discount was charged to interest expense
at the time of the conversion. Amortization of the BCF was $203,258 for the year ended
December 31, 2004.
(6)
Redeemable Convertible Preferred Stock
(a)
Series A Convertible Preferred Stock
The Company issued an aggregate of 742,000 shares of Series A Convertible Preferred Stock
(Series A) in December 2003 and January 2004 at $2.00 per share. Gross proceeds to the
Company were $1,484,000.
Series A is convertible at any time at the option of the
holder, into the number of shares of common stock obtained by dividing the original purchase price by the conversion
price, as defined, subject to adjustment pursuant to the terms of Series A. The Series A
is to be automatically converted into common stock at the applicable conversion rate at
any time upon the earlier of (i) the election of the holders of at least 60% of the
outstanding shares of Series B or (ii) the closing of a firmly underwritten public
offering in which the price per share is at least five times the Series B purchase price
of $2.00 per share, as adjusted for stock dividends, combinations, splits, and
recapitalizations; the aggregate net cash proceeds to the Company from the offering are
at least $40,000,000; and the common stock is listed on the New York Stock or NASDAQ
Exchanges.
The holders of Series A have voting rights equal to the number of shares of common stock
into which the holders’ shares could be converted, and vote together with all other
classes of stock as a single class. The holders of Series A are entitled to receive
dividends at an annual rate of 8%, when and if declared by the Company’s board of
directors. No dividends have been declared through December 31, 2006.
In the event of liquidation, dissolution, or winding up of the Company, each holder of
Series A would be entitled to receive $2.00 per share, as adjusted pursuant to the terms
of the Series A, plus
(Continued)
F-25
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
any declared but unpaid dividends on the Series A after payment of
the Series B liquidation preference. As of December 31, 2006, the liquidation value of
the Series A was $1,484,000.
(b)
Series B Redeemable Convertible Preferred Stock
Between September and December 2004, the Company sold 4,101,750 shares of Series B at
$2.00 per share, and warrants to purchase 512,719 shares of common stock at $0.01 per
share, for an aggregate purchase price of $8,203,500. The fair value of the warrants was
estimated on the date of grant using the Black-Scholes option pricing model. The Company
allocated $97,417 of the proceeds to the warrants, based on the relative fair values of
the Series B shares and warrants.
In 2004, the Company issued 100,000 shares of Series B, warrants to purchase 12,500
shares of common stock at $0.20 per share (note 7), options to purchase 43,500 shares of
common stock at $0.20 per share, and options to purchase 141,000 shares of Series B at
$1.65 per share to its president and CEO to satisfy outstanding obligations of the
Company related to services provided under the president’s employment agreement. The
Company recorded the 100,000 shares of Series B at an aggregate $200,000 and valued the
warrants and options at an aggregate $137,600.
Between May and July 2005, the Company sold 4,101,750 shares of Series B at $2.00 per
share, and warrants to purchase 512,719 shares of common stock at $0.01 per share, for an
aggregate purchase price of $8,203,500. The fair value of the warrants was estimated on
the date of grant using the
Black-Scholes option pricing model. The Company allocated $97,417 of the proceeds to the
warrants, based on the relative fair values of the Series B shares and warrants.
Series B is convertible at any time at the option of the holder into the number of shares
of common stock obtained by dividing the original purchase price plus all accrued and
unpaid dividends by the conversion price, as defined, subject to adjustment pursuant to
the terms of the Series B. The Series B is to be automatically converted into common
stock at any time upon the earlier of (i) the election of the holders of at least 60% of
the outstanding shares of Series B or (ii) the closing of a firmly underwritten public
offering in which the price per share is at least five times the Series B purchase price
of $2.00 per share, as adjusted for stock dividends, combinations, splits, and
recapitalizations; the aggregate net cash proceeds to the Company from the offering are
at least $40,000,000; and the common stock is listed on the New York Stock or NASDAQ
Exchanges.
The holders of Series B have voting rights equal to the number of shares of common stock
into which the holders’ shares could be converted and vote together with all other
classes of stock as a single class. In addition to general matters requiring stockholder
vote, a vote of at least 60% of the outstanding shares of Series B is required for
certain events, as defined, including, but not limited to, changes to the rights,
preferences, and privileges of the Series B stockholders; payment of dividends;
incurrence of any liability other than ordinary course trade payables in excess of
$50,000; and capital purchases in excess of $50,000. The holders of Series B are entitled
to receive cumulative dividends at an annual rate of 8%, compounded each calendar
quarter. Such dividends accrue from the date of issuance, whether or not earned or
declared. If not declared and paid, then accrued dividends are to be paid upon the
earlier of a liquidation event, as defined, or upon redemption of the Series B. As of
December 31, 2006 and 2005, cumulative but undeclared dividends payable upon redemption
were $2,877,614 and $1,319,531, respectively.
(Continued)
F-26
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
In the event of liquidation, dissolution, or winding up of the Company, each holder of
Series B would be entitled to receive $4.00 per share (two times the original purchase
price), as adjusted pursuant to the terms of Series B, plus all accrued and unpaid
dividends and all declared but unpaid dividends on the Series B. As of December 31, 2006,
the liquidation value of the Series B was $38,148,330.
At the earlier of September 24, 2009 or ten days after the occurrence of any uncured
breach, the Company shall redeem the Series B by paying in cash an amount per share of
Series B equal to the redemption price. The redemption price is, for each share of Series
B, the sum of (i) $4.00, as adjusted for any stock dividends, combinations, splits, and
recapitalizations, plus (ii) all accrued and unpaid dividends. During the years ended
December 31, 2005 and 2004, the Company incurred third-party costs of $60,342 and
$219,072, respectively, in connection with the sale of Series B. These third-party costs
reduced the carrying value of Series B. As a result of the Series B redemption feature,
the carrying value of Series B will be accreted to its redemption value through September24, 2009. The accretion of the redemption premium above the original issue price during
the years ended December 31, 2006, 2005 and 2004 was $3,256,389, $2,155,606 and $355,066
respectively, and $5,767,061 for the period from March 27, 2003 (inception) to December31, 2006. The accretion of third-party costs and warrants issued in connection with the
Series B during the years ended December 31, 2006, 2005 and 2004 was $91,862, $75,928 and
$16,054, respectively, and $183,844 for the period from March 27, 2003 (inception) to
December 31, 2006.
(7)
Stock Options and Warrants
(a)
Common Stock Options
The Company’s 2003 Equity Incentive Plan, as amended (the 2003 Plan), allows the granting
of incentive and nonqualified stock options and issuance of common stock to employees,
directors, consultants, and contractors to purchase an aggregate of 2,050,000 shares of
the Company’s common stock. The options are exercisable generally for a period of ten
years from the date of grant and vest over terms ranging from immediately to four years.
As of December 31, 2006, 288,211 shares remained reserved for grants under the 2003 Plan.
In addition to options granted under the 2003 Plan, the Company has 181,600 outstanding
nonqualified stock options to individuals for consulting and board services as of
December 31, 2006. The exercise rights and vesting terms of these options are similar to
those options granted under the 2003 Plan.
(Continued)
F-27
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
In addition to options granted under the 2003 Plan, the Company issued 33,770 shares
of common stock under the 2003 Plan at $1.50 to $1.65 per share for services.
(Continued)
F-28
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
The following table details additional information with regard to employee and
nonemployee options as of December 31, 2006 and for the year then ended:
Weighted average grant date
fair value of options granted
$
0.62
0.58
0.62
SFAS No. 123(R) expense
$
52,036
75,726
127,762
APB No. 25 option expense
$
790,069
—
790,069
At December 31, 2006, there was $305,033 of total unrecognized compensation expense,
net of expected forfeitures, related to nonvested share-based compensation arrangements
granted and accounted for under the provisions of SFAS No. 123(R). The expense is
expected to be recognized over a weighted average period of 3.05 years. At December 31,2006, there was $386,716 of unrecognized compensation expense related to unamortized
intrinsic value for share-based compensation awards accounted for under the provisions of
APB No. 25, which will be recognized over a weighted average period of 1.83 years.
(Continued)
F-29
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
The fair value of each employee option award granted after the adoption of SFAS No.
123(R) and each nonemployee award granted is estimated on the date of grant using the
Black-Scholes option pricing model and assumptions noted in the following table:
The expected life of the employee options was calculated using the shortcut method
allowed by the provisions of SFAS No. 123(R). The expected volatility is estimated by the
Company utilizing volatility statistics from peer groups. The risk-free interest rate is
based on the continuous rates provided by the U.S. Treasury, with a term approximating
the expected life of the option. The dividend yield is based on the projected annual
dividend payment per share. The Company has not paid any dividends nor does it expect to
in the future.
In 2006, the Company extended the contractual life of 73,373 employee option awards
granted prior to January 1, 2006. As a result of that modification, the Company recorded
expense of $10,379 based on the fair value of the award on the date of modification
calculated using the Black-Scholes option pricing model.
During 2006, 2005 and 2004, the Company issued 101,300, 115,172 and 131,750 options,
respectively, to nonemployee consultants to purchase common stock, which includes the
options granted outside of the 2003 Plan. The fair value of the options was determined
using the Black-Scholes option pricing model. The fair value of the nonemployee options
issued during 2006, 2005 and 2004 was $69,197, $19,700 and $140,800, respectively, which
was charged to expense upon grant as the options were 100% vested.
The Company repriced 139,900 nonemployee consultant options in November 2004 at $0.20 per
share and recorded a compensation charge of $7,417 for the year ended December 31, 2004.
The Company repriced 364,333 employee options in November 2004 at $0.20 per share. The
amount of compensation expense for the repriced employee option grants is subject to
change each reporting period, based upon the difference between the exercise price and
the fair value of the Company’s common stock on each reporting period, until the
settlement of the option.
In connection with the grant and repricing of options to employees, the Company recorded
deferred stock compensation of $17,592 and $5,225 for 2005 and 2004, respectively, and
$54,767 from March 27, 2003 (inception) to December 31, 2005, representing the difference
between the exercise price and the fair value of the Company’s common stock on the date
such options were granted or
(Continued)
F-30
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
each balance sheet date for the repriced options. Through
December 31, 2005, deferred compensation was included as a component of stockholders’
equity (deficit) and was amortized to expense ratably over the vesting period of each
option grant. Amortization expense for the years ended December 31, 2005 and 2004 was
$19,580 and $12,589, respectively, and $32,997 from March 27, 2003 (inception) to
December 31, 2005. Upon adoption of SFAS No. 123(R), on January 1, 2006, deferred
compensation was eliminated against additional paid-in capital and option expense related
to unamortized intrinsic value of APB Opinion No. 25 options and related compensation
expense for the remeasurement of repriced options is charged to expense and additional
paid-in capital as amortized. Compensation expense for the year ended December 31, 2006
was $223,595 for amortization of APB Opinion No. 25 intrinsic value and $604,460 for
amortization of compensation related to repriced options subject to APB Opinion No. 25.
(b)
Series B Preferred Stock Options
In September 2004, the Company issued options to purchase 141,000 shares of Series B at
$1.65 per share to its president and CEO (note 6). The options are nonqualified options
and were fully vested as of December 31, 2005.
(c)
Warrants
The Company issued warrants in 2006 to a consultant to purchase 30,000 shares of common
stock at $0.01 per share. The warrants were valued at $10,200 and were expensed as they
were immediately vested.
In 2005, in connection with the issuance of the term loan, the Company issued warrants to
purchase 25,000 shares at common stock at an exercise price of $0.01 per share,
exercisable through September 2015 (note 5).
In 2005, in connection with the Series B financing, the Company issued warrants to
purchase 512,719 shares of common stock at an exercise price of $0.01 per share,
exercisable through July 1, 2015 (note 6).
In 2004, in connection with the Series B financing, the Company issued warrants to
purchase 512,719 shares of common stock at an exercise price of $0.01 per share,
exercisable through September 24, 2014 (note 6).
In connection with the Series B financing, the Company issued warrants in 2005 and 2004
to purchase a total of 30,000 shares of common stock at an exercise price of $2.00 per
share, exercisable for 10 years, in consideration for consulting services relating to the
sale of the Company’s Series B (note 6). The value of the warrants granted was $1,650
using the Black-Scholes options pricing model, with the following assumptions: volatility
of 80%, risk-free interest rate of 4%, dividend yield of 0%, and an expected life of 10
years.
(Continued)
F-31
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
In connection with the issuance of the Notes from March to June 2004, the Company issued
warrants to purchase 155,300 shares of common stock at an exercise price of $0.01 per
share, exercisable through September 24, 2014 (note 5). During 2006, 77,650 warrants were
exercised for proceeds of $777.
In connection with the satisfaction of outstanding obligations to the Company’s president
and CEO under an employment agreement, the Company issued warrants to purchase 12,500
shares of common stock at an exercise price of $0.20 per share in 2004, exercisable
through September 24, 2014 (note 6).
All 1,200,588 warrants outstanding as of December 31, 2006 are exercisable.
(8)
Income Taxes
There is no provision for or benefit from income taxes for the period from March 27, 2003
(inception) to December 31, 2006, as the Company incurred losses for the period for income tax
purposes. As of December 31, 2006, the Company has federal net operating loss carryforwards of
approximately $11,300,000 that begin to expire in 2023 and state net operating loss
carryforwards of approximately $11,300,000 that begin to expire in 2023. Pursuant to the
Internal Revenue Code, the annual utilization of the federal carryforwards may be limited in
terms of utilization in certain circumstances, including a change in ownership of the Company,
as defined. In the case of Pennsylvania state loss carryforwards, there is a $3,000,000 limit
on utilization per year. The Company also has research and development credit carryforwards of
$473,000 that begin to expire in 2023. The Company will not recognize a tax benefit for
financial reporting purposes for any previously incurred or future operating losses or credit
carryforwards, until such time as management believes it is more likely than not that the
Company’s future operations will generate sufficient taxable income to be able to realize such
benefits.
Deferred income taxes are recorded for the tax effects of temporary differences between the
basis of assets and liabilities recognized for financial reporting purposes and the tax basis,
and net operating losses and credits. The most significant component of the Company’s net
deferred tax assets as of December 31, 2006 are net operating loss carryforwards and
capitalized research and development costs. A full valuation allowance was established for the
deferred tax assets, as realization of the tax benefits is not assured.
(9)
Commitments and Contingencies
(a)
Leases
The Company leases laboratory equipment under an operating lease that commenced in June
2004 and expires in May 2007. Rent expense under this operating lease was $14,222,
$14,222 and $8,269 for the years ended December 31, 2006, 2005 and 2004, respectively.
Future minimum lease payments as of December 31, 2006 are $5,953 for the year ending
December 31, 2007.
(b)
License and Research Agreements
In March 2003, the Company and the University of Pennsylvania entered into two exclusive
worldwide licenses for certain technology rights. The Company issued 408,334 shares of
common stock valued at $612,501 in exchange for licenses of certain patent rights. The
Company recorded the
(Continued)
F-32
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
license fee as research and development expense, as the licensed
technology had not reached technological feasibility and had no alternative future uses.
Additional license fees of up to $950,000 are required upon the completion of three
separate milestones, as defined. The agreement also provides for royalty payments equal
to various percentages of future commercial sales of products manufactured using the
licensed technology, as defined, if any, through the later of the expiration of the
licensed patent or ten years after the first commercial sale of the licensed product. As
of December 31, 2006, no milestones were achieved and no royalties have been paid to the
University of Pennsylvania.
In February 2005, the Company and Intradigm Corporation (Intradigm), a RNAi delivery
technology company, entered into a license and collaboration agreement for the license of
certain patents and the development of a siRNA delivery system for the posterior pole of
the eye. The Company issued 250,000 shares of common stock at $0.20 per share to
Intradigm at execution of the agreement. The shares were valued at $50,000 at date of
grant and expensed in 2005. The shares are restricted and vest as specific milestones, as
defined, are achieved. As of December 31, 2006, Intradigm has vested in 25,000 shares.
The Company expensed and paid $500,000 in 2005 related to the license agreement, and is
required to pay royalties, equal to various percentages, on future sales, if any, of
products manufactured using the licensed technology. The collaboration agreement calls
for payments upon the achievement of certain milestones, if any, up to $5,100,000 for the
development and commercialization of a siRNA therapeutic. In addition to the milestone
payments, the Company is required to pay Intradigm $15,000 per month for each full-time
equivalent employee that Intradigm has provided related to the work being performed under
the collaboration agreement. The Company expensed $89,169 and $134,500 in 2006 and 2005,
respectively, related to these services. As of December 31, 2006, no milestones were
achieved and no royalties have been paid to Intradigm.
In April 2006, the Company entered into a license agreement with Pathogenics, Inc.
(Pathogenics) for N-Chlorotaurine (NCT) and licensed products, as defined, for the
treatment of ophthalmic disease or infection in any territory. The Company was also
granted non-exclusive rights to all data resulting from a phase I clinical trial with NCT
in Austria. The Company is obligated to pay to Pathogenics certain milestone payments
totaling up to $6,325,000 upon the achievement of specified milestones
and royalty payments of 6% on all net sales, if any, of licensed products. The Company is
also obligated to pay Pathogenics an annual minimum payment if the total payments made
for such year are less than a specified minimum amount. The minimum payments due are
$50,000 for 2007; $100,000 for 2008, 2009, and 2010; $200,000 for 2011 and 2012; and
$1,500,000 for 2013. Additionally, the Company must have funds of up to $75,000 available
to accelerate a certain milestone, as defined. The term of the agreement is for the
shorter of twenty years or the last to expire of the Pathogenics patent rights. The
Company expensed and paid $153,830 in 2006 related to this license agreement. As of
December 31, 2006, no milestones were achieved and no royalties have been paid to
Pathogenics.
In June 2006, the Company entered into a material transfer agreement with ZaBeCor
Pharmaceutical Company, LLC (ZaBeCor) under which ZaBeCor provided the Company with
instructions to make a certain siRNA-derived therapeutic with the right to evaluate the
potential use of the siRNA-derived therapeutic for the treatment of ophthalmic diseases
in humans for the period of one year. The
(Continued)
F-33
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
Company was granted an option to acquire an
exclusive license to certain of ZaBeCor’s patents related to the siRNA-derived
therapeutic for the therapy of ophthalmic diseases in humans. The term of the option to
license is for one year from the date of the material transfer agreement. The license
agreement, if opted, provides for royalty payments equal to various percentages of future
net sales, as defined, if any. The license agreement also provides for payments in cash
and common stock of the Company upon the achievement of specified milestones, if any, up
to $10,950,000 and 400,000 in cash and common stock, respectively. The Company expensed
and paid $50,000 in 2006 related to this material transfer agreement. As of December 31,2006, the Company has not exercised the option to license, and as such, no milestones
were achieved and no royalties have been paid to ZaBeCor.
In August 2006, the Company entered into a license agreement with the Board of Trustees
of the University of Illinois (UIC) for the license of certain inventions, patents, and
technological information related to Ophthalmic siRNA targeting TGF-â for the inhibition
and treatment of ophthalmic disease. The agreement provides for payments upon the
achievement of specified milestones, if any, up to $2,450,000 and royalty payments of
either 1.5% or 3.0%, as defined, on all net sales, as defined, of licensed products.
Additional license fees of $25,000, $50,000, and $100,000 are due in connection with the
first and second, third and fourth, and fifth and subsequent anniversaries of the license
agreement, respectively, with an annual minimum royalty of $400,000 on net sales, if any.
The Company expensed and paid $50,947 in 2006 related to this license agreement. As of
December 31, 2006, no milestones were achieved and no royalties have been paid to UIC.
(c)
Manufacturing Supply Agreement
The Company and Avecia BioTechnology, Inc. (Avecia) had entered into a long-term supply
agreement in September 2004. Avecia has been unable to produce product for the Company
pursuant to this agreement. During 2006, the Company notified Avecia that the agreement
is terminated as a result of this failure to produce product. The Company and Avecia are
currently in negotiations with regard to the legal termination of the agreement. The
Company does not believe that there are any future commitments under this agreement and
will recognize return of payments made under the agreement, if any, when settlement is
reached.
(d)
Employment Agreements
The Company has employment agreements with certain officers and key employees that
provide for, among other things, salary, performance incentive bonuses, severance, and
change in control provisions.
(e)
Contingencies
The Company may be involved from time to time in certain legal actions arising in the
ordinary course of business. Management believes, based on the advice of outside legal
counsel, that the outcome of such actions will not have a material adverse effect on the
Company’s financial position or results of operations.
(Continued)
F-34
ACUITY PHARMACEUTICALS, INC.
(A Development-Stage Company)
During the year ended December 31, 2005, the Company adopted a 401(k) retirement plan (the
401(k) plan). The 401(k) plan allows eligible employees to contribute a portion of their
salary on a pretax basis, subject to annual limits. The Company may make discretionary
matching contributions to the plan as determined by the board of directors. For the years
ended December 31, 2006 and 2005, there were no discretionary matching contributions approved
by the board of directors.
(11)
Supplemental Cash Flow Information
Supplemental cash flow information is summarized as follows:
Beneficial conversion
feature on convertible
notes payable
—
—
203,258
203,258
Conversion of notes
payable to equity
—
—
1,025,357
1,028,357
(12)
Subsequent Event
On January 11, 2007, the Company entered into an agreement with the Froptix Corporation
(Froptix) and The Frost Group, LLC (Frost Group) whereby the Frost Group provided a
subordinated secured line of credit, up to $8,000,000 to the Company; the Company will merge
with and into a wholly-owned subsidiary of a publicly traded “shell” company (Public Shell)
controlled by the Frost Group and certain affiliates and associates of the Frost Group; and
Froptix will also merge with and into a wholly-owned subsidiary of the Public Shell.
In exchange for entering into this agreement, the Company agreed to grant to the Frost Group a
warrant to purchase up to 125,000 shares of Acuity Series B Preferred Stock, par value $0.01
per share, for an exercise price of $2.00 per share and a warrant to purchase up to 15,625
shares of Acuity Common Stock, par value $0.01 per share for an exercise price of $0.01 per
share. The holders of the Series A and Series B Preferred Stock agreed to waive all redemption
and liquidation rights as of December 14, 2006.
On March 27, 2007, the Company, Froptix, and eXegenics, Inc., the Public Shell, executed a
merger agreement that brought the three companies under one corporate umbrella. The combined
company was re-named Opko Corporation. As part of the transaction, the Frost Group agreed to increase the line of credit to
$12,000,000.
F-35
eXegenics,
Inc.
A DEVELOPMENT STAGE COMPANY
UNAUDITED
PRO FORMA
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet combines the historical condensed consolidated balance sheets of eXegenics, Froptix and Acuity as of December 31, 2006 giving effect to the
merger as if it had occurred on December 31, 2006. The Unaudited Pro Forma Condensed Consolidated Statement of Operations combines the historical condensed consolidated statements of operations of eXegenics,
Froptix and Acuity giving effect to the merger as if it had occurred on January 1, 2006. These Pro Forma statements are presented for illustrative purposes only. The Pro Forma adjustments are based upon
available information and assumptions that management believes are reasonable. The Unaudited Pro Forma Condensed Consolidated Financial Statements do not purport to project the future financial position or
operating results of the merged company. The acquisition of Froptix and Acuity is viewed to have taken place in a three step transaction.
The first
step is the purchase of 19.4 million shares for a 51% interest
in eXegenics in February 2007 by a group of investors led by
Dr. Phillip Frost. This purchase created common control between eXegenics and
Froptix as investors included in the group led by Dr. Phillip
Frost own 91% of Froptix. The second step is Froptix acquiring eXegenics. This step has been accounted for as a reverse acquisition under the
purchase method of accounting. The combination of these two companies is recorded as a recapitalization of eXegenics. The third step is eXegenics and Froptix, being under common control, acquiring Acuity in a
purchase business combination. The first column of pro forma adjustments reflects the acquisition of shares in February 2007 by the group of investors. The second column of pro forma adjustments reflects the
second step, the recapitalization. The third column of pro forma adjustments reflects the third step, purchase price allocation of Acuity.
These Unaudited Pro Forma Condensed Consolidated Financial Statements do not give effect to any restructuring costs or to any potential cost savings or other operating efficiencies that could result from the
merger between eXegenics, Froptix and Acuity.
You should read this information in conjunction with the accompanying notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements; the separate historical consolidated financial statements of
eXegenics contained in this Current Report on Form 8-K previously filed with the Securities and Exchange Commission.
F-36
eXegenics,
Inc.
A DEVELOPMENT STAGE COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share information)
Long-term notes payable, net of unamortized warrant discount of
$168 at December 31, 2006
0
0
0
0
0
2,165
0
2,165
Total Liabilities
674
0
95
0
769
7,674
16,673
25,116
Commitments and contingencies
Series B Redeemable Convertible Preferred Stock, $0.01 par value;
authorized 13,255,179 shares; issued and outstanding 8,817,679
shares at December 31, 2006. (Liquidation value of $38,148,330
at December 31, 2006); none on a pro forma basis
0
0
0
0
0
25,988
(25,988)
e
0
Total Series B Redeemable Convertible Preferred Stock
0
0
0
0
0
25,988
(25,988
)
0
Stockholders’ equity (deficit):
Series A Convertible Preferred Stock, $0.01 par value; authorized
issued and outstanding 742,000 shares at December 31, 2006
(Liquidation value of $1,484,000 at December 31, 2006); none on a pro forma basis
0
0
0
0
0
7
(7)
e
0
Series A Preferred Stock, $0.01 par value, authorized 10,000,000 shares; issued and outstanding 1,002,017 at December 31, 2006;
and on a pro forma basis
10
0
0
0
10
0
0
10
Series B Junior Participating Preferred Stock, $0.01 par value;
30,000 designated ; none outstanding at December 31, 2006 or on a pro forma basis
0
0
0
0
0
0
0
0
Series C Preferred Stock, $0.01 par value, authorized 500,000 shares; issued and outstanding 952,839 at December 31, 2006;
457,589 on a pro forma basis
0
0
0
0
0
0
5
d
5
Common stock, $0.01 par value; authorized 19,584,956 shares;
issued and outstanding 2,116,877 shares at December 31, 2006 none on a pro forma basis
0
0
0
0
0
21
(21)
e
0
Common stock, $0.01 par value; authorized 225,000,000; issued and outstanding
16,990,991 shares issued and outstanding at December 31, 2006
113,116,299 on a pro forma basis
170
194
a
0
618
b
982
0
148
d
1,130
Additional paid-in capital
68,285
7,830
a
898
(61,005)
b
16,008
0
189,481
dei
205,489
Deficit accumulated during development stage
(57,050
)
0
(877
)
57,050
c
(877
)
(32,709
)
32,709
f
(213,877
)
(213,000)
g
Less: Treasury Stock of 611,200, at cost
(3,337
)
0
0
3,337
c
0
0
0
0
Total Stockholders’ equity (deficit)
8,078
8,024
21
0
16,123
(32,681
)
9,315
(7,243
)
Total Liabilities and Stockholders’ equity (deficit)
$
8,752
$
8,024
$
116
$
0
$
16,892
$
981
$
0
$
17,873
See accompanying notes to unaudited Pro Forma Condensed Consolidated Financial Statements.
F-37
eXegenics,
Inc.
A DEVELOPMENT STAGE COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2006
(in thousands, except per share information)
Pro Forma
Pro Forma
eXegenics
Froptix
Acuity
Adjustments
Consolidated
Revenues
Operating expenses:
Research and development
$
0
$
508
$
8,027
$
0
$
8,535
General and administrative
1,117
375
2,698
0
4,190
Write off of in process research and development
0
0
0
0
g
0
Operating loss
(1,117
)
(883
)
(10,725
)
0
(12,725
)
Interest income
469
6
252
0
727
Interest expense
0
0
(619
)
0
(619
)
Total interest income (expense)
469
6
(367
)
0
108
Income taxes
0
0
0
0
0
Net loss
(648
)
(877
)
(11,092
)
—
(12,617
)
Preferred stock dividend
(238
)
0
0
(705)
h
(943
)
Net loss attributable to common
shareholders
$
(886
)
$
(877
)
$
(11,092
)
$
(705
)
$
(13,560
)
Weighted average number of shares
16,369
113,042
j
Diluted loss per share
$
(0.05
)
$
(0.12
)
See accompanying notes to unaudited Pro Forma Condensed Consolidated Financial Statements.
F-38
eXegenics,
Inc.
A DEVELOPMENT STAGE COMPANY
Notes
to Unaudited Pro Forma Condensed Consolidated Financial Statements
a
Cash raised through the sale of additional shares of
eXegenics largely to a group of investors lead by Dr. Phillip Frost in February, 2007 for approximately $0.44 per share reduced by a subsequent
purchase price adjustment of $588,947.
b
The issuance of 61,775,000 shares of common stock for 100% of the outstanding shares of Froptix.
c
Eliminate eXegenics retained deficit and treasury stock.
d
Represents eXegenics shares issued and options/warrants granted (including their corresponding fair values) in exchange for 100% ownership in Acuity as follows:
Shares
Issued/Grants
Fair Value
Received
Received
Common Stock
14,835,930
$
39,315,215
Series C Preferred
Stock, if converted
45,758,686
$
121,260,518
Series C Preferred
Stock Options, if
converted
731,700
$
1,763,397
Series C Preferred
Stock Warrants, if
converted
1,686,600
$
4,047,840
Replacement warrants
for Acuity warrants
6,472,636
$
16,311,048
New warrants issued
6,253,239
$
14,444,983
Vested common stock
options
6,428,266
$
15,739,231
Total
$
212,882,232
e
Eliminate Froptix common stock and Acuity common and preferred stock.
f
Eliminate Acuity retained deficit.
g
Represents write off of in process research and development
of Acuity (approximately $213,000,000 — see note d). Amount was valued at consummation of the
acquisition but then subsequently written off in accordance with FASB Interpretation No. 4, Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by the Purchase Method. Note this amount is not included in the
accompanying pro forma condensed consolidated statement of operations.
h
Represents dividends which would have been paid to Acuity preferred stock holders had the merger occurred January 1, 2006. Amount calculated as 457,589 Series C
Preferred Stock shares multiplied by a fair value of $77/share multiplied by 2% dividend rate (457,589*$77*2%=$704,687).
i
Represents liability ($16,673,275) associated with equity
instruments (options and warrants) issued to individuals other than
employees. In accordance with EITF 00-19 the fair value
of these instruments has been recorded as a liability with a corresponding offset to additional paid in capital.
j
Represents weighted average number of shares as follows:
Issuance of
shares on February 8, 2007 to a group of investors led by Dr. Phillip
Frost
19,440,491
Issuance of
shares on March 27, 2007 to Froptix shareholders upon converting
Froptix shares to eXegenics shares
61,775,000
Issuance of
shares on March 27, 2007 to Acuity shareholders upon converting
Acuity shares to eXegenics shares
14,835,930
Total
113,042,412
Note:
The allocation of purchase price
is preliminary and may change significantly. The stock price of
eXegenics leading up to the closing of the merger increased
significantly, resulting in a much higher valuation of Acuity in
purchase accounting than was contemplated in the negotiations between the parties to the merger.
F-39
(d) Exhibits
Exhibit Number
Description
2.1
Merger Agreement and Plan of
Reorganization
3.2*
Series C Certificate of Designation
4.1
Form of Common Stock Warrant
4.2
Form of Preferred Stock Warrant
10.1
Form of Lockup Agreement
10.2
Credit Agreement, dated as of March 27, 2007, by and
among eXegenics Inc., The Frost Group, LLC, and Acuity
Pharmaceuticals, LLC
10.3
Amended and Restated Venture Loan and Security
Agreement, dated as March 27, 2007, by and among
Horizon Technology Funding Company LLC, Acuity
Pharmaceuticals, LLC and eXegenics, Inc.
10.4*
Research Agreement, dated April 7, 2006, between
Froptix Corporation and the University of Florida
Board of Trustees
10.5*
Standard Exclusive License Agreement, dated as April18, 2006, by and between University of Florida
Research Foundation, Inc. and Froptix Corporation
10.6*
Standard Exclusive License Agreement, dated as April18, 2006, by and between University of Florida
Research Foundation, Inc. and Froptix Corporation
10.7*
Standard Exclusive License Agreement, dated as April18, 2006, by and between University of Florida
Research Foundation, Inc. and Froptix Corporation
10.8
Technology License Agreement, dated August 3, 2006,
between the Board of Trustees of the University of
Illinois and Acuity Pharmaceuticals, Inc.
10.9
License Agreement, dated April 13, 2006, by and
between Acuity Pharmaceuticals, Inc. and Pathogenics,
Inc.
10.10
Amendment No. 1 to Agreement, dated August 2, 2006, by
and between Acuity Pharmaceuticals, Inc. and
Pathogenics, Inc.
10.11
Amendment No. 2 to Agreement, dated March 8, 2007, by
and between Acuity Pharmaceuticals, Inc. and
Pathogenics, Inc.
10.12
License and Collaboration Agreement, dated as of June2, 2005, by and between Acuity Pharmaceuticals, Inc.
and Intradigm Corporation
10.13
License Agreement, dated as March 31, 2003, by and
between the Trustees of the University of Pennsylvania
and Acuity Pharmaceuticals, Inc. (Reich/Tolentinio)
10.14
License Agreement, dated as March 31, 2003, by and
between the Trustees of the University of Pennsylvania
and Acuity Pharmaceuticals, Inc. (Reich/Gewirtz)
10.15
First Amendment to License Agreement, dated as August1, 2003, by and between the Trustees of the University
of Pennsylvania and Acuity Pharmaceuticals, Inc.
(Reich/Tolentinio)
10.16
First Amendment to License Agreement, dated as August1, 2003, by and between the Trustees of the University
of Pennsylvania and Acuity Pharmaceuticals, Inc.
(Gewirtz)
10.17
Amended and Restated Subordination Agreement, dated as
of March 27, 2007, by and among The Frost Group, LLC,
Horizon Technology Funding Company LLC, Acuity
Pharmaceuticals, LLC, and eXegenics Inc.
Exhibit Number
Description
10.18
Employment letter dated March 29, 2007, between Samuel
J. Reich and eXegenics Inc.
10.19
Employment Agreement, dated as of September 25, 2004,
by and between Dale R. Pfost and Acuity
Pharmaceuticals, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
