| |
Item 9B. | Other Information |
None.
PART IIIItem 15.
| |
Item 10. | Directors and Executive Officers |
The information relating to our directors that are required by this item is incorporated by reference from the information under the caption “Election of Directors” contained in our definitive proxy statement (the “Proxy Statement”), which will be filed with the SecuritiesExhibits and Exchange Commission in connection with our 2007 Annual Meeting of Shareholders.
Executive Officers of the RegistrantFinancial Statement Schedules
The following documents are filed as exhibits to this Form 10-K/A:
The names of our executive officers and their ages as of December 5, 2006 are set forth below. The officers are elected annually by the Board of Directors and hold office until their respective successors are qualified and appointed or until their resignation, removal or disqualification.
| | | | | | |
Name Exhibit No. | | Age Description |
31.1 | | PositionCertification of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
|
Eric K. Brandt | | |
4431.2 | | Certification of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
| | |
President and Chief32.1 | | Certification of Principal Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
Keith A. Katkin | | |
3532.2 | | | Senior Vice President, Sales and Marketing |
Michael J. Puntoriero | | | 53 | | | Senior Vice PresidentCertification of Finance and ChiefPrincipal Financial Officer |
Gregory P. Hanson, CMA | | | 60 | | | Vice President, Chief Accounting Officer and Secretary |
Theresa Hope-Reese | | | 49 | | | Vice President, Human Resources |
Randall E. Kaye, M.D. | | | 44 | | | Vice President, Clinical and Medical Affairs |
Jagadish C. Sircar, Ph.D. | | | 71 | | | Vice President, Drug Discovery pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
Eric K. Brandt. Mr. Brandt joined AVANIR in September 2005 as President and Chief Executive Officer and as a director. Previously, Mr. Brandt was Executive Vice President, Finance and Technical Operations, Chief Financial Officer of Allergan, Inc. He had increasing influence at Allergan, having previously served in the various roles of Executive Vice President, Finance, Strategy and Corporate Development; Chief Financial Officer; President of the Global Consumer Eye Care Business; and Corporate Vice President and Chief Financial Officer. Prior to joining Allergan in 1999, Mr. Brandt spent ten years with the Boston Consulting Group, Boston, Massachusetts, serving as Vice President/Partner. Mr. Brandt has a Bachelor of Science degree in Chemical Engineering from MIT and an M.B.A. degree from the Harvard Business School. Mr. Brandt serves on the Board of Vertex Pharmaceuticals, Inc., where he is Chair of the Audit Committee and on the Board of Dentsply International Inc.
Keith Katkin. Mr. Katkin joined AVANIR in July of 2005 as Senior Vice President of Sales and Marketing. Mr. Katkin previously served as Vice President, Commercial Development for Peninsula Pharmaceuticals from May 2004 to July 2005, playing a key role in the sale of Peninsula to Johnson & Johnson. Prior to his tenure at Peninsula, Mr. Katkin was Vice President of Pulmonary and Infectious Disease Marketing at InterMune, Inc., a biopharmaceutical company, from May 2002 to April 2004. From 1996 to April 2002, Mr. Katkin held Sales and Marketing positions with Amgen Inc., a global biotechnology company. Earlier in his career, Mr. Katkin spent several years at Abbott Laboratories where he gained product launch and brand management experience on products such as Neupogen, Neulasta, and Biaxin. Mr. Katkin received a Bachelor of Science degree in Business and Accounting from Indiana University and an M.B.A. degree in Finance from the Anderson School of Management at UCLA, graduating with honors. Mr. Katkin is also a Certified Public Accountant.
Michael J. Puntoriero. Mr. Puntoriero joined AVANIR in May 2006 as Senior Vice President of Finance and Chief Financial Officer. His responsibilities include the areas of finance, treasury, business planning, investor relations and information technology. Prior to joining AVANIR, Mr. Puntoriero spent over 20 years with Arthur
45
Andersen LLP, including positions as audit partner, head of the Orange County, California audit practice and ultimately as Managing Partner of the Orange County, California office. Most recently, Mr. Puntoriero held senior executive positions from July 2004 to March 2006 with Fleetwood Enterprise, Inc., and as Executive Vice President and Chief Financial Officer of First Consulting Group, Inc. from January 2003 to September 2003. In addition, Mr. Puntoriero serves as a director of Oakley, Inc., chair of the audit committee and member of the nominating and corporate governance committee. Mr. Puntoriero earned a Bachelor of Science degree in Accounting from California State University, Northridge and an M.B.A degree from the University of Southern California. Mr. Puntoriero is a licensed Certified Public Accountant.Gregory P. Hanson, CMA. Mr. Hanson has served as the Vice President and Chief Accounting Officer since May 2006, Corporate Compliance Officer since 2002, and Corporate Secretary since July 1998. He also has served as Vice President, Finance and Chief Financial Officer (CFO) from July 1998 to May 2006. From September 1995 to July 1998, he was the Chief Financial Officer of XXsys Technologies Inc., a composite materials technology company; and from May 1993 to September 1995, he held a number of financial positions within The Titan Corporation, a diversified telecommunications and information technology company, including acting CFO and acting Controller for its subsidiary, Titan Information Systems. Earlier in his career, Mr. Hanson held various management positions at Ford Motor Company over a14-year span and at Solar Turbines Incorporated, a subsidiary of Caterpillar Inc., over a three-year span. Mr. Hanson has a B.S. degree in Mechanical Engineering from Kansas State University and an M.B.A. degree with honors from the University of Michigan. He is a Certified Management Accountant and has passed the examination for Certified Public Accountants. Mr. Hanson has been a member of the Financial Accounting Standards Board’s Small Business Advisory Committee (“SBAC”) since April 2004 and serves on the SBAC’s Agenda Committee.
Theresa Hope-Reese. Ms. Hope-Reese joined AVANIR in August 2006 as Vice President of Human Resources. Ms. Hope-Reese is responsible for overseeing all human resource practices and policies for AVANIR. Prior to joining AVANIR, Ms. Hope-Reese spent over six years with Water Pik Technologies, Inc. as Corporate Vice President of Human Resources where she was responsible for all global human resource functions for over 1,200 employees. Prior to joining Water Pik, she worked for Varco International, Inc., where she was Vice President of Human Resources. Ms. Hope-Reese earned her Bachelor of Science degree in Management from California State University, San Diego and her M.B.A. degree from the University of North Texas. Additionally, she has earned an Executive Certificate in Management after completing a post graduate program at the Peter F. Drucker and Masatoshi Ito Graduate School of Management in Claremont, California.
Randall E. Kaye, M.D. Dr. Kaye joined AVANIR in January 2006 in the newly created role of Vice President of Medical Affairs and assumed the role of Vice President Clinical and Medical Affairs starting in November 2006. Immediately prior to joining AVANIR, Dr. Kaye was the Vice President of Medical Affairs for Scios Inc., a division of Johnson & Johnson from 2004 to 2006. From 2002 to 2004, Dr. Kaye recruited and managed the Medical Affairs department for InterMune Inc. Previously, Dr. Kaye served for nearly a decade in a variety of Medical Affairs and Marketing positions for Pfizer Inc. Dr. Kaye earned his Doctor of Medicine, Masters in Public Health and Bachelor of Science degrees at George Washington University in Washington, D.C. and was a Research Fellow in Allergy and Immunology at Harvard Medical School.
Jagadish Sircar, Ph.D. Dr. Sircar joined AVANIR in November 1995 as Director of Chemistry, and was responsible for creating AVANIR’s medicinal chemistry drug discovery program. From April 2000 to November 2002, he held the position of Executive Director, Drug Discovery at AVANIR and has served as our Vice President of Drug Discovery since November 2002. Before joining AVANIR, Dr. Sircar held the position of Senior Vice President, Research and Discovery for Biofor, Inc. from January 1992 to November 1995. Previously, from 1969 to 1991, Dr. Sircar worked with Warner-Lambert/Parke-Davis in its Research Division (currently Pfizer), where he attained the position of Associate Research Fellow and Chairman of the Immunoinflammatory Project Team. During his tenure at Warner-Lambert/Parke-Davis, he was responsible for the discovery and pre-clinical development of six compounds. Dr. Sircar holds a Ph.D. degree in Organic Chemistry, an M.S. degree in Pure Chemistry and a B.S. degree (Honors) in Chemistry, all from the University of Calcutta, Calcutta, India. Dr. Sircar is the author of 170 patents and scientific publications.
46
Code of EthicsSIGNATURES
We have adopted a code of ethics for directors, officers (including our principal executive officer, principal financial officer and principal accounting officer or controller), and employees. This code of ethics is available on our website atwww.avanir.com. Any waivers from or amendments to the code of ethics will be filed with the SEC onForm 8-K.
| |
Item 11. | Executive Compensation |
The information required by this item is incorporated by reference to the information under the caption “Executive Compensation” contained in the Proxy Statement.
| |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
The information required by this item is incorporated by reference to the information under the caption “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” contained in the Proxy Statement.
| |
Item 13. | Certain Relationships and Related Transactions |
The information required by this item is incorporated by reference to the information under the caption “Certain Relationships and Related Transactions” contained in the Proxy Statement.
| |
Item 14. | Principal Accountant Fees and Services |
The information required by this item is incorporated by reference to the information under the caption “Fees for Independent Registered Public Accounting Firm” contained in the Proxy Statement.
PART IV
| |
Item 15. | Exhibits, Financial Statements and Schedules |
(a) Financial Statements and Schedules
(1) Index to consolidated financial statements appears onpage F-1.
(b) Exhibits
| | | | |
| 3 | .1 | | Restated Articles of Incorporation of the Registrant, dated April 1, 2004(13) |
| | | | |
| | | | |
| 3 | .2 | | Amended and Restated Bylaws of the Registrant, dated September 25, 2005(14) |
| | | | |
| | | | |
| 4 | .1 | | Form of Class A Common Stock Certificate(1) |
| | | | |
| | | | |
| 4 | .2 | | Certificate of Determination with respect to Series C Junior Participating Preferred Stock of the Registrant(2) |
| | | | |
| | | | |
| 4 | .3 | | Rights Agreement, dated as of March 5, 1999, with American Stock Transfer & Trust Company(2) |
| | | | |
| | | | |
| 4 | .4 | | Form of Rights Certificate with respect to the Rights Agreement, dated as of March 5, 1999(2) |
| | | | |
| | | | |
| 4 | .5 | | Amendment No. 1 to Rights Agreement, dated November 30, 1999, with American Stock Transfer & Trust Company(4) |
| | | | |
| | | | |
| 4 | .6 | | Form of Class A Stock Purchase Warrant, issued in connection with the Securities Purchase Agreement dated July 21, 2003(10) |
| | | | |
| | | | |
| 4 | .7 | | Form of Class A Stock Purchase Warrant, issued in connection with the Securities Purchase Agreement dated November 25, 2003(11) |
| | | | |
| | | | |
| 10 | .1 | | License Agreement, dated March 31, 2000, by and betweenAvanir Pharmaceuticals and SB Pharmco Puerto Rico, a Puerto Rico Corporation(5) |
| | | | |
47
| | | | |
| 10 | .2 | | License Agreement, dated November 22, 2002, by and betweenAvanir Pharmaceuticals and Drug Royalty USA, Inc.(17) |
| | | | |
| | | | |
| 10 | .3 | | Research, Development and Commercialization Agreement, dated April 27, 2005, by and betweenAvanir Pharmaceuticals and Novartis International Pharmaceutical Ltd.*(18) |
| | | | |
| | | | |
| 10 | .4 | | Research Collaboration and License Agreement, dated July 8, 2005, by and between Avanir Pharmaceuticals and AstraZeneca UK Limited* (23) |
| | | | |
| | | | |
| 10 | .5 | | Standard Industrial Net Lease by and betweenAvanir Pharmaceuticals and BC Sorrento, LLC, effective September 1, 2000(6) |
| | | | |
| | | | |
| 10 | .6 | | Standard Industrial Net Lease by and betweenAvanir Pharmaceuticals (‘‘Tenant”) and Sorrento Plaza, a California limited partnership (‘‘Landlord”), effective May 20, 2002(8) |
| | | | |
| | | | |
| 10 | .7 | | Office lease agreement by and between RREEF AMERICA REIT II CORP. FFF andAvanir Pharmaceuticals, dated April 28, 2006 |
| | | | |
| | | | |
| 10 | .8 | | License Agreement, dated August 1, 2000, by and betweenAvanir Pharmaceuticals (‘‘Licensee”) and Irisys Research and Development, LLC, a California limited liability company(6) |
| | | | |
| | | | |
| 10 | .9 | | Sublease agreement betweenAvanir Pharmaceuticals and Sirion Therapeutics, Inc., dated September 5, 2006 |
| | | | |
| | | | |
| 10 | .10 | | License Agreement, dated April 2, 1997, by and between Irisys Research & Development, LLC and the Center for Neurologic Study(16) |
| | | | |
| | | | |
| 10 | .11 | | Amendment to License Agreement, dated April 11, 2000, by and between IriSys Research & Development, LLC and the Center for Neurologic Study(16) |
| | | | |
| | | | |
| 10 | .12 | | Clinical Development Agreement, dated March 22, 2005, by and betweenAvanir Pharmaceuticals and SCIREX Corporation(16) |
| | | | |
| | | | |
| 10 | .13 | | Unit Purchase Agreement by and among AVANIR Pharmaceuticals, the Sellers and Alamo Pharmaceuticals, LLC, dated May 22, 2006 *(24) |
| | | | |
| | | | |
| 10 | .14 | | Senior Note for $14.4 million payable to Neal R. Cutler, dated May 24, 2006 (24) |
| | | | |
| | | | |
| 10 | .15 | | Senior Note for $6,675,000 payable to Neal R. Cutler, dated May 24, 2006 (24) |
| | | | |
| | | | |
| 10 | .16 | | Senior Note for $4.0 million payable to Neal R. Cutler, dated May 24. 2006 (24) |
| | | | |
| | | | |
| 10 | .17 | | Registration Rights Agreement between Avanir Pharmaceuticals and Neil Cutler, dated May 24, 2006 (24) |
| | | | |
| | | | |
| 10 | .18 | | Amended and Restated Development, License and Supply Agreement by and between CIMA Labs Inc. and Alamo Pharmaceuticals, LLC, dated August 22, 2005* (24) |
| | | | |
| | | | |
| 10 | .19 | | Amendment #1 to Amended and Restated Development, License and Supply Agreement by and between CIMA Labs Inc. and Alamo Pharmaceuticals, LLC, dated October 19, 2005* (24) |
| | | | |
| | | | |
| 10 | .20 | | Docosanol License Agreement between Kobayashi Pharmaceutical Co., Ltd. and AVANIR Pharmaceuticals, dated January 5, 2006* (28) |
| | | | |
| | | | |
| 10 | .21 | | Docosanol Data Transfer and Patent License Agreement between AVANIR Pharmaceuticals and Healthcare Brands International Limited, dated July 6, 2006* |
| | | | |
| | | | |
| 10 | .22 | | Development and License Agreement between Eurand, Inc. and AVANIR Pharmaceuticals, dated August 7, 2006* |
| | | | |
| | | | |
| 10 | .23 | | Amended and Restated 1998 Stock Option Plan(7) |
| | | | |
| | | | |
| 10 | .24 | | Amended and Restated 1994 Stock Option Plan(7) |
| | | | |
| | | | |
| 10 | .25 | | Amended and Restated 2000 Stock Option Plan(9) |
| | | | |
| | | | |
| 10 | .26 | | Form of Restricted Stock Grant Notice for use with Amended and Restated 2000 Stock Option Plan(9) |
| | | | |
| | | | |
| 10 | .27 | | 2003 Equity Incentive Plan(9) |
| | | | |
| | | | |
| 10 | .28 | | Form of Non-qualified Stock Option Award Notice for use with 2003 Equity Incentive Plan(9) |
| | | | |
| | | | |
| 10 | .29 | | Form of Restricted Stock Grant for use with 2003 Equity Incentive Plan(9) |
| | | | |
| | | | |
| 10 | .30 | | Form of Restricted Stock Grant Notice (cash consideration) for use with 2003 Equity Incentive Plan(9) |
| | | | |
48
| | | | |
| 10 | .31 | | Form of Indemnification Agreement with certain Directors and Executive Officers of the Registrant(12) |
| | | | |
| | | | |
| 10 | .32 | | 2005 Equity Incentive Plan (23) |
| | | | |
| | | | |
| 10 | .33 | | Form of Stock Option Agreement for use with 2005 Equity Incentive Plan (20) |
| | | | |
| | | | |
| 10 | .34 | | Form of Restricted Stock Unit Agreement for use with 2005 Equity Incentive Plan and 2003 Equity Incentive Plan |
| | | | |
| | | | |
| 10 | .35 | | Form of Restricted Stock Agreement for use with 2005 Equity Incentive Plan |
| | | | |
| | | | |
| 10 | .36 | | Form of Change of Control Agreement (26) |
| | | | |
| | | | |
| 10 | .37 | | Employment Agreement with Eric Brandt, dated August 15, 2005* (23) |
| | | | |
| | | | |
| 10 | .38 | | Employment Agreement with Keith Katkin, dated June 13, 2005 (23) |
| | | | |
| | | | |
| 10 | .39 | | Employment Agreement with Michael J. Puntoriero, dated May 4, 2006 |
| | | | |
| | | | |
| 10 | .40 | | Employment Agreement with Randall Kaye, dated December 23, 2005 (25) |
| | | | |
| | | | |
| 10 | .41 | | Employment Agreement with Theresa Hope-Reese, dated August 7, 2006 (27) |
| | | | |
| | | | |
| 18 | .1 | | Letter regarding change in accounting principle |
| | | | |
| | | | |
| 21 | .1 | | List of Subsidiaries |
| | | | |
| | | | |
| 23 | .1 | | Consent of Independent Registered Public Accounting Firm |
| | | | |
| | | | |
| 31 | .1 | | Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
| | | | |
| | | | |
| 31 | .2 | | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
| | | | |
| | | | |
| 31 | .3 | | Certification of Chief Accounting Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
| | | | |
| | | | |
| 32 | .1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | | |
| | | | |
| 32 | .2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32 | .3 | | Certification of Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
* | | Certain confidential portions of this exhibit have been retracted. A complete copy of this exhibit has been filed with the Secretary of the Securities and Exchange Commission pursuant to an application requesting confidential treatment underRule 246-2 of the Securities Exchange Act of 1934. |
|
(1) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Registration Statement onForm S-1, File No.33-32742, declared effective by the Commission on May 8, 1990. |
|
(2) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed March 11, 1999. |
|
(3) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed April 1, 1999. |
|
(4) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed December 3, 1999. |
|
(5) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed May 4, 2000. |
|
(6) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report onForm 10-Q, filed August 14, 2000. |
|
(7) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Annual Report onForm 10-K, filed December 21, 2001. |
|
(8) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report onForm 10-Q, filed August 13, 2002. |
|
(9) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report onForm 10-Q, filed May 13, 2003. |
49
| | |
(10) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Registration on FromS-3, FileNo. 333-107820, declared effective by the Commission on August 19, 2003. |
|
(11) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed December 11, 2003. |
|
(12) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Annual Report onForm 10-K, filed December 23, 2003. |
|
(13) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed on April 6, 2004. |
|
(14) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed September 28, 2005. |
|
(15) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed September 21, 2004. |
|
(16) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 10-Q, filed May 13, 2005. |
|
(17) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed January 7, 2003. |
|
(18) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 10-Q, filed August 12, 2005. |
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(19) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed March 23, 2005. |
|
(20) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed October 24, 2005. |
|
(21) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Annual Report onForm 10-K, filed December 14, 2005. |
|
(22) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 10-Q, filed August 9, 2006. |
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(23) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 10-Q, filed February 9, 2006. |
|
(24) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed June 26, 2006. |
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(25) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed August 10, 2006. |
|
(26) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 10-Q, filed May 10, 2006. |
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Avanir Pharmaceuticals
| | | | |
| Avanir Pharmaceuticals
| |
| By: | /s/ Eric K. Brandt Keith A. Katkin | |
| | Keith A. Katkin | |
| | President and Chief Executive Officer | |
|
Eric K. Brandt
President and Chief Executive Officer
Date: December 15, 200624, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
| | | | | | |
Signature | | Title | | Date |
|
/s/ Eric K. Brandt
Eric K. Brandt | | President and Chief Executive Officer (Principal Executive Officer) | | December 15, 2006 |
| | | | |
/s/ Michael J. Puntoriero, CPA
Michael J. Puntoriero, CPAKeith A. Katkin | | Senior Vice President of Finance and Chief FinancialExecutive Officer (Principal Financial Officer) | | December 15, 200624, 2008 |
| | | | |
/s/ Gregory P. Hanson, CMA
Gregory P. Hanson, CMAKeith A. Katkin | | Vice President and Chief Accounting Officer (Principal Accounting(Principal Executive Officer) | | December 15, 2006 |
| | | | |
/s/ Charles A. Mathews
Charles A. MathewsChristine G. Ocampo | | DirectorVice President, Finance | | December 15, 200624, 2008 |
| | | | |
/s/ StephenChristine G. Austin, CPA
Stephen G. Austin, CPAOcampo | | Director(Principal Financial Officer) | | December 15, 2006 |
| | | | |
/s/ David J. Mazzo, Ph.D.
David J. Mazzo, Ph.D. | | Director | | December 15, 2006 |
| | | | |
/s/ Dennis G. Podlesak
Dennis G. Podlesak | | Director | | December 15, 2006 |
| | | | |
/s/ Jonathan T. Silverstein, J.D.
Jonathan T. Silverstein, J.D. | | Director | | December 15, 2006 |
| | | | |
/s/ Paul G. Thomas
Paul G. Thomas | | Director | | December 15, 2006 |
| | | | |
/s/ Craig A. Wheeler
Craig A. Wheeler | | Director | | December 15, 2006 |
| | | | |
/s/ Scott M. Whitcup, M.D.
Scott M. Whitcup, M.D. | | Director | | December 15, 2006 |
51
AvanirPharmaceuticals
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | |
| | Page |
| |
Craig A. Wheeler | | | F-2 | |
Financial Statements:Director, Chairman of the Board | | | | |
| | | F-3 | |
| | | F-4 | |
| | | F-5 | |
| | | F-6 | |
| | | F-7 | |
Financial Statement Schedules: | | | | |
Financial statement schedules have been omitted for the reason that the required information is presented in financial statements or notes thereto, the amounts involved are not significant or the schedules are not applicable. | | | | |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Avanir Pharmaceuticals
We have audited the accompanying consolidated balance sheets ofAvanir Pharmaceuticals and subsidiaries (the “Company”) as of September 30, 2006 and 2005, and the related consolidated statements of operations, shareholders’ (deficit) equity and comprehensive loss, and cash flows for each of the three years in the period ended September 30, 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 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, such consolidated financial statements present fairly, in all material respects, the financial position ofAvanirPharmaceuticals and subsidiaries as of September 30, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2006, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of September 30, 2006, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 15, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
As discussed in Note 3 to the financial statements, the Company (1) adopted Statement of Financial Accounting Standards No. 123(R),Share-based Payment, and (2) changed its method of accounting for certain patent related costs, effective October 1, 2005.
/s/ Deloitte & Touche LLP
San Diego, California
December 15, 2006
F-2
| | | | | | | | |
| | September 30, | |
| | 2006 | | | 2005 | |
|
ASSETS |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 4,898,214 | | | $ | 8,620,143 | |
Short-term investments in securities | | | 16,778,267 | | | | 14,215,005 | |
Receivables, net | | | 3,042,468 | | | | 1,169,654 | |
Inventories | | | 2,835,203 | | | | 27,115 | |
Prepaid expenses | | | 1,778,918 | | | | 2,370,801 | |
| | | | | | | | |
Total current assets | | | 29,333,070 | | | | 26,402,718 | |
Investments in securities | | | 2,216,995 | | | | 3,845,566 | |
Restricted investments in securities | | | 856,597 | | | | 856,872 | |
Property and equipment, net | | | 6,047,729 | | | | 6,004,527 | |
Intangible assets, net | | | 10,113,329 | | | | 3,665,086 | |
Goodwill | | | 22,110,328 | | | | — | |
Long-term inventories | | | 347,424 | | | | 347,424 | |
Other assets | | | 436,865 | | | | 279,797 | |
| | | | | | | | |
TOTAL ASSETS | | $ | 71,462,337 | | | $ | 41,401,990 | |
| | | | | | | | |
|
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 10,845,057 | | | $ | 6,751,781 | |
Accrued expenses and other liabilities | | | 9,857,639 | | | | 4,094,295 | |
Assumed liabilities for returns and other discounts | | | 3,980,229 | | | | — | |
Accrued compensation and payroll taxes | | | 3,125,862 | | | | 1,272,231 | |
Deferred revenues, net | | | 7,592,563 | | | | 1,970,989 | |
Notes payable | | | 670,737 | | | | 317,667 | |
Capital lease obligations | | | 230,760 | | | | 26,305 | |
| | | | | | | | |
Total current liabilities | | | 36,302,847 | | | | 14,433,268 | |
Other liabilities | | | 230,450 | | | | — | |
Deferred revenues, net of current portion | | | 15,716,762 | | | | 17,187,221 | |
Notes payable, net of current portion | | | 24,715,905 | | | | 637,285 | |
Capital lease obligations, net of current portion | | | 170,908 | | | | 9,337 | |
| | | | | | | | |
Total liabilities | | | 77,136,872 | | | | 32,267,111 | |
| | | | | | | | |
Commitments and contingencies (Notes 4, 14, 17 and 19) | | | | | | | | |
Shareholders’ (deficit) equity: | | | | | | | | |
Preferred stock — no par value, 10,000,000 shares authorized, no shares issued or outstanding as of September 30, 2006 and 2005, respectively: | | | — | | | | — | |
Common stock — no par value, 200,000,000 shares authorized; 31,708,461 and 27,341,732 shares issued and outstanding as of September 30, 2006 and 2005, respectively | | | 211,993,249 | | | | 167,738,303 | |
Unearned compensation | | | — | | | | (3,477,144 | ) |
Accumulated deficit | | | (217,565,280 | ) | | | (155,012,466 | ) |
Accumulated other comprehensive loss | | | (102,504 | ) | | | (113,814 | ) |
| | | | | | | | |
Total shareholders’ (deficit) equity | | | (5,674,535 | ) | | | 9,134,879 | |
| | | | | | | | |
TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY | | $ | 71,462,337 | | | $ | 41,401,990 | |
| | | | | | | | |
See notes to consolidated financial statements.
F-3
AvanirPharmaceuticals
CONSOLIDATED STATEMENTS OF OPERATIONS | | | | | | | | | | | | |
| | Years Ended September 30, | |
| | 2006 | | | 2005 | | | 2004 | |
|
REVENUES: | | | | | | | | | | | | |
Research and development services | | $ | 7,837,788 | | | $ | 1,617,525 | | | $ | — | |
Licenses | | | 5,154,709 | | | | 12,800,000 | | | | 328,000 | |
Royalties and sale of royalty rights | | | 1,938,203 | | | | 1,752,321 | | | | 1,715,152 | |
Government research grants | | | 236,882 | | | | 503,328 | | | | 758,827 | |
Product sales | | | 18,270 | | | | 17,400 | | | | 787,338 | |
| | | | | | | | | | | | |
Total revenues | | | 15,185,852 | | | | 16,690,574 | | | | 3,589,317 | |
| | | | | | | | | | | | |
OPERATING EXPENSES: | | | | | | | | | | | | |
Cost of research and development services | | | 7,198,397 | | | | 2,346,044 | | | | 979,182 | |
Cost of government research grant services | | | 292,111 | | | | 497,210 | | | | — | |
Research and development | | | 29,222,089 | | | | 26,140,504 | | | | 21,502,499 | |
Selling, general and administrative | | | 38,054,219 | | | | 18,796,188 | | | | 9,340,260 | |
Cost of product sales | | | 415,045 | | | | 3,102 | | | | 213,192 | |
| | | | | | | | | | | | |
Total operating expenses | | | 75,181,861 | | | | 47,783,048 | | | | 32,035,133 | |
| | | | | | | | | | | | |
Loss from operations | | | (59,996,009 | ) | | | (31,092,474 | ) | | | (28,445,816 | ) |
Interest income | | | 1,794,049 | | | | 619,857 | | | | 290,067 | |
Interest expense | | | (765,871 | ) | | | (92,533 | ) | | | (34,508 | ) |
Other income (expense) | | | 33,505 | | | | (39,601 | ) | | | 38,068 | |
| | | | | | | | | | | | |
Loss before income taxes | | | (58,934,326 | ) | | | (30,604,751 | ) | | | (28,152,189 | ) |
Provision for income taxes | | | (2,430 | ) | | | (1,813 | ) | | | (2,664 | ) |
| | | | | | | | | | | | |
Loss before cumulative effect of change in accounting principle | | | (58,936,756 | ) | | | (30,606,564 | ) | | | (28,154,853 | ) |
Cumulative effect of change in accounting principle (Note 3) | | | (3,616,058 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net loss | | $ | (62,552,814 | ) | | $ | (30,606,564 | ) | | $ | (28,154,853 | ) |
| | | | | | | | | | | | |
Basic and diluted net loss per share (Note 2): | | | | | | | | | | | | |
Loss before cumulative effect of change in accounting principle | | $ | (1.92 | ) | | $ | (1.19 | ) | | $ | (1.44 | ) |
Cumulative effect of change in accounting principle | | | (0.12 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net loss | | $ | (2.04 | ) | | $ | (1.19 | ) | | $ | (1.44 | ) |
| | | | | | | | | | | | |
Basic and diluted weighted average number of common shares outstanding (Note 2) | | | 30,634,872 | | | | 25,617,432 | | | | 19,486,603 | |
| | | | | | | | | | | | |
See notes to consolidated financial statements.
F-4
AvanirPharmaceuticals
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Accumulated
| | | | | | | |
| | Common Stock | | | | | | | | | Other
| | | Total
| | | | |
| | Class A | | | Class B | | | Accumulated
| | | Unearned
| | | Comprehensive
| | | Shareholders’
| | | Comprehensive
| |
| | Shares (Note 2) | | | Amount | | | Shares | | | Amount | | | Deficit | | | Compensation | | | Income (Loss) | | | (Deficit) Equity | | | Loss | |
|
BALANCE, OCTOBER 1, 2003 | | | 16,454,109 | | | $ | 97,286,433 | | | | 3,375 | | | $ | 8,395 | | | $ | (96,251,049 | ) | | $ | — | | | $ | (6,548 | ) | | $ | 1,037,231 | | | | | |
Net loss | | | | | | | | | | | | | | | | | | | (28,154,853 | ) | | | | | | | | | | | (28,154,853 | ) | | $ | (28,154,853 | ) |
Issuance of Class A common stock in connection with: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exercise of warrants | | | 73,724 | | | | 448,671 | | | | | | | | | | | | | | | | | | | | | | | | 448,671 | | | | | |
Exercise of stock options | | | 31,002 | | | | 160,823 | | | | | | | | | | | | | | | | | | | | | | | | 160,823 | | | | | |
Sale of stock and warrants | | | 7,005,027 | | | | 34,015,320 | | | | | | | | | | | | | | | | | | | | | | | | 34,015,320 | | | | | |
Research milestone obligation of MIF technology | | | 259,202 | | | | 2,733,023 | | | | | | | | | | | | | | | | | | | | | | | | 2,733,023 | | | | | |
Conversion of Class B common stock | | | 3,375 | | | | 8,395 | | | | (3,375 | ) | | | (8,395 | ) | | | | | | | | | | | | | | | — | | | | | |
Compensation expense related to valuation of stock options granted to employees and non-employees for services rendered | | | | | | | 34,870 | | | | | | | | | | | | | | | | | | | | | | | | 34,870 | | | | | |
Unrealized losses on investments in securities | | | | | | | | | | | | | | | | | | | | | | | | | | | (77,826 | ) | | | (77,826 | ) | | | (77,826 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, SEPTEMBER 30, 2004 | | | 23,826,439 | | | | 134,687,535 | | | | — | | | | — | | | | (124,405,902 | ) | | | — | | | | (84,374 | ) | | | 10,197,259 | | | $ | (28,232,679 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | | | | | (30,606,564 | ) | | | | | | | | | | | (30,606,564 | ) | | $ | (30,606,564 | ) |
Issuance of Class A common stock in connection with: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exercise of warrants | | | 211,486 | | | | 1,293,339 | | | | | | | | | | | | | | | | | | | | | | | | 1,293,339 | | | | | |
Exercise of stock options | | | 27,974 | | | | 125,491 | | | | | | | | | | | | | | | | | | | | | | | | 125,491 | | | | | |
Sale of stock and warrants | | | 2,525,833 | | | | 22,765,135 | | | | | | | | | | | | | | | | | | | | | | | | 22,765,135 | | | | | |
Acquisition of certain contractual rights to Zenvia | | | 500,000 | | | | 5,300,000 | | | | | | | | | | | | | | | | | | | | | | | | 5,300,000 | | | | | |
Issuance of restricted awards | | | 250,000 | | | | 3,556,000 | | | | | | | | | | | | | | | | (3,555,000 | ) | | | | | | | 1,000 | | | | | |
Amortization of unearned compensation | | | | | | | | | | | | | | | | | | | | | | | 77,856 | | | | | | | | 77,856 | | | | | |
Compensation expense related to valuation of stock options granted to employees and non-employees for services rendered | | | | | | | 10,803 | | | | | | | | | | | | | | | | | | | | | | | | 10,803 | | | | | |
Unrealized losses on investments in securities | | | | | | | | | | | | | | | | | | | | | | | | | | | (29,440 | ) | | | (29,440 | ) | | | (29,440 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, SEPTEMBER 30, 2005 | | | 27,341,732 | | | | 167,738,303 | | | | — | | | | — | | | | (155,012,466 | ) | | | (3,477,144 | ) | | | (113,814 | ) | | | 9,134,879 | | | $ | (30,636,004 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | | | | | (62,552,814 | ) | | | | | | | | | | | (62,552,814 | ) | | $ | (62,552,814 | ) |
Issuance of Class A common stock in connection with: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exercise of warrants | | | 827,575 | | | | 5,908,997 | | | | | | | | | | | | | | | | | | | | | | | | 5,908,997 | | | | | |
Exercise of stock options | | | 524,807 | | | | 3,264,953 | | | | | | | | | | | | | | | | | | | | | | | | 3,264,953 | | | | | |
Sale of stock and warrants | | | 3,016,122 | | | | 35,637,905 | | | | | | | | | | | | | | | | | | | | | | | | 35,637,905 | | | | | |
Issuance of restricted awards | | | 28,000 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | — | | | | | |
Common stock surrendered | | | (29,775 | ) | | | (200,386 | ) | | | | | | | | | | | | | | | | | | | | | | | (200,386 | ) | | | | |
Elimination of unearned compensation | | | | | | | (3,477,144 | ) | | | | | | | | | | | | | | | 3,477,144 | | | | | | | | — | | | | | |
Share-based compensation expense | | | | | | | 3,120,621 | | | | | | | | | | | | | | | | | | | | | | | | 3,120,621 | | | | | |
Unrealized gain on investments in securities | | | | | | | | | | | | | | | | | | | | | | | | | | | 11,310 | | | | 11,310 | | | | 11,310 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, SEPTEMBER 30, 2006 | | | 31,708,461 | | | $ | 211,993,249 | | | | — | | | $ | — | | | $ | (217,565,280 | ) | | $ | — | | | $ | (102,504 | ) | | $ | (5,674,535 | ) | | $ | (62,541,504 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements.
F-5
AvanirPharmaceuticals
| | | | | | | | | | | | |
| | Years Ended September 30, | |
| | 2006 | | | 2005 | | | 2004 | |
|
OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net loss | | $ | (62,552,814 | ) | | $ | (30,606,564 | ) | | $ | (28,154,853 | ) |
Adjustments to reconcile net loss to net cash provided by (used for) operating activities: | | | | | | | | | | | | |
Cumulative effect of change in accounting principle | | | 3,616,058 | | | | — | | | | — | |
Depreciation and amortization | | | 3,871,278 | | | | 1,852,427 | | | | 1,826,372 | |
Share-based compensation expense | | | 2,920,234 | | | | 88,659 | | | | 34,870 | |
Amortization of debt discount | | | 85,400 | | | | — | | | | — | |
Purchased in-process research and development | | | 1,300,000 | | | | — | | | | — | |
Expense for issuance of common stock in connection with the acquisition of additional contractual rights to Zenvia | | | — | | | | 5,300,000 | | | | — | |
Research milestone obligation paid with common stock | | | — | | | | — | | | | 2,733,023 | |
Loss on sale and impairment of investment | | | — | | | | 84,252 | | | | — | |
Loss on disposal of assets | | | 36,985 | | | | 16,400 | | | | 162 | |
Intangible assets impaired and abandoned | | | 8,222 | | | | 423,123 | | | | — | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Receivables | | | (846,075 | ) | | | (929,775 | ) | | | 31,802 | |
Inventory | | | (510,971 | ) | | | (365,237 | ) | | | 201,552 | |
Prepaid expenses and other assets | | | 835,112 | | | | (848,219 | ) | | | (9,912 | ) |
Accounts payable | | | 3,188,980 | | | | 4,615,629 | | | | (300,210 | ) |
Accrued expenses and other liabilities | | | 3,973,998 | | | | 1,604,136 | | | | 612,151 | |
Assumed liabilities for returns and other discounts | | | (2,421,092 | ) | | | — | | | | — | |
Accrued compensation and payroll taxes | | | 1,333,667 | | | | 561,863 | | | | 84,214 | |
Deferred revenue | | | 4,151,115 | | | | (1,850,905 | ) | | | (1,733,526 | ) |
| | | | | | | | | | | | |
Net cash used for operating activities | | | (41,009,903 | ) | | | (20,054,211 | ) | | | (24,674,355 | ) |
| | | | | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | | | | |
Investments in securities | | | (65,823,381 | ) | | | (23,448,802 | ) | | | (9,381,391 | ) |
Proceeds from sales and maturities of investments in securities | | | 64,900,275 | | | | 16,830,113 | | | | 2,150,000 | |
Acquisition of businesses, net of cash acquired | | | (4,794,029 | ) | | | | | | | | |
Patent costs | | | — | | | | (1,278,935 | ) | | | (1,156,975 | ) |
Purchases of property and equipment | | | (1,663,347 | ) | | | (990,601 | ) | | | (793,913 | ) |
| | | | | | | | | | | | |
Net cash used for investing activities | | | (7,380,482 | ) | | | (8,888,225 | ) | | | (9,182,279 | ) |
| | | | | | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | | | | | |
Proceeds from issuances of common stock and warrants, net of commissions and offering costs | | | 44,811,855 | | | | 24,184,966 | | | | 34,624,814 | |
Proceeds from issuances of notes payable | | | 359,875 | | | | 395,244 | | | | 1,074,570 | |
Payments on notes and capital lease obligations | | | (503,274 | ) | | | (511,714 | ) | | | (547,075 | ) |
| | | | | | | | | | | | |
Net cash provided by financing activities | | | 44,668,456 | | | | 24,068,496 | | | | 35,152,309 | |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (3,721,929 | ) | | | (4,873,940 | ) | | | 1,295,675 | |
Cash and cash equivalents at beginning of year | | | 8,620,143 | | | | 13,494,083 | | | | 12,198,408 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 4,898,214 | | | $ | 8,620,143 | | | $ | 13,494,083 | |
| | | | | | | | | | | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | | | | | | | | | |
Interest paid | | $ | 681,122 | | | $ | 92,533 | | | $ | 34,508 | |
Income taxes paid | | $ | 2,430 | | | $ | 1,912 | | | $ | 2,664 | |
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | | | | | |
Issuance of promissory notes to sellers as consideration for the Alamo acquisition, net of discount (See Note 4 for other liabilities assumed and assets acquired in the acquisition) | | $ | 24,343,000 | | | $ | — | | | $ | — | |
Elimination of unearned compensation | | $ | 3,477,144 | | | $ | — | | | $ | — | |
Issuance of 250,000 shares of restricted Class A common stock for unearned compensation cost | | $ | — | | | $ | 3,555,000 | | | $ | — | |
Accounts payable and accrued expenses for purchases of property and equipment | | $ | 74,617 | | | $ | 242,213 | | | $ | 3,951 | |
See notes to consolidated financial statements.
F-6
AvanirPharmaceuticals
| |
1. | Description of Business |
Avanir Pharmaceuticals (“Avanir,” “we,” or the “Company”) is a pharmaceutical company focused on developing, acquiring and commercializing novel therapeutic products for the treatment for chronic human diseases. Our product candidates address therapeutic markets that include the central nervous system, cardiovascular disorders, inflammatory diseases and infectious diseases.
We currently market FazaClo, (clozapine, USP), the only orally-disintegrating formulation of clozapine for the management of treatment resistant schizophrenia and reduction in the risk of recurrent suicidal behavior in schizophrenia or schizoaffective disorders. We acquired FazaClo in the acquisition of Alamo Pharmaceuticals, LLC (“Alamo”) in May 2006. Alamo was a privately owned specialty pharmaceutical company that developed and marketed pharmaceutical products with a sales force of approximately 41 representatives currently marketing FazaClo. In addition to the sales force, Alamo employs a FazaClo Patient Registry team that is composed of dedicated healthcare, registry, call center, administrative support, data management and professional management. See Note 4, “Alamo Acquisition” for further discussion.
Our operations are subject to certain risks and uncertainties frequently encountered by companies in the early stages of operations, particularly in the evolving market for small biotech and specialty pharmaceuticals companies. Such risks and uncertainties include, but are not limited to, timing and uncertainty of achieving milestones in clinical trials and in obtaining approvals by the FDA and regulatory agencies in other countries.Our ability to generate revenues in the future will depend substantially on sales of our marketed product, FazaClo®, license arrangements, the timing and success of reaching development milestones, in obtaining regulatory approvals and ultimately market acceptance of Zenviatm (formerly referred to as Neurodextm) for the treatment of IEED/PBA, assuming the FDA approves our new drug application. Our operating expenses depend substantially on the level of expenditures for marketing and sales of FazaClo, clinical development activities for Zenvia for the treatment of IEED/PBA and diabetic neuropathic pain, and program funding authorized by our research partners and the rate of progress being made on such programs.
Since our inception through September 30, 2006, the Company has reported accumulated net losses of approximately $218 million, and recurring negative cash flows from operations. In order to maintain sufficient cash and investments to fund future operations we will seek to raise additional capital in fiscal year 2007 through various financing alternatives. The balance of securities available for sale under our existing shelf registration was approximately $48.8 million as of December 5, 2006. We believe that these anticipated offering proceeds plus our cash, cash equivalents and unrestricted investments in securities of approximately $23.9 million at September 30, 2006 as well as anticipated future cash flows generated from licensed technologies and sales from the shipments of FazaClo, will be sufficient to sustain our planned level of operations for at least the next 12 months. However, the Company cannot provide assurances that our plans will not change, or that changed circumstances will not result in the depletion of capital resources more rapidly than anticipated. If we are unable to generate sufficient cash flows from licensed technologies or sales from the shipments of FazaClo and unable to raise sufficient capital management believes that planned expenditures could be curtailed in order to continue operations for the next 12 months.
On January 17, 2006, we implemented aone-for-four reverse stock split of our common stock. All share and per share information herein (including shares outstanding, earnings per share and warrant and stock option exercise prices) reflect the retrospective adjustment for this reverse stock split.
F-7
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
3. | Summary of Significant Accounting Policies |
Basis of presentation
The consolidated financial statements include the accounts ofAvanir Pharmaceuticals and its wholly-owned subsidiaries, Alamo Pharmaceuticals LLP (“Alamo”) from the date of acquisition, Xenerex Biosciences, Avanir Holding Company and Avanir Acquisition Corp. All intercompany accounts and transactions have been eliminated. Certain amounts from prior years have been reclassified to conform to the current year presentation. Our fiscal year ends on September 30 of each year. The years ended September 30, 2006, 2005, and 2004 may be referred to as fiscal 2006, fiscal 2005 and fiscal 2004, respectively.
Management 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Purchase Price Allocation
The allocation of purchase price for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired, including in-process research and development, and liabilities assumed based on their respective fair values. In fiscal 2006, we completed the acquisition of Alamo Pharmaceuticals LLC. See Note 4, “Alamo Acquisition,” for detailed discussion.
Cash and cash equivalents
Cash and cash equivalents consist of cash and highly liquid investments with maturities of three months or less at the date of acquisition.
Restricted investments in securities
We have restricted investments in two securities totaling $856,597 and $856,872 as of September 30, 2006 and 2005, respectively. These restricted investments represent amounts pledged to our bank as collateral for letters of credit issued in connection with our real estate lease agreements, and are classified asheld-to-maturity and are stated at lower of cost or market. The restricted amounts that apply to the terms of the leases are as follows:
| | | | | | | | |
| | Restricted Amount as of
| | | | |
| | September 30,
| | | Lease Term
| |
Property Location | | 2006 | | | Expires on | |
|
11388 Sorrento Valley Road, San Diego | | $ | 388,122 | | | | 08/31/08 | |
11404 and 11408 Sorrento Valley Road, San Diego | | | 468,475 | | | | 08/31/12 | |
| | | | | | | | |
Total | | $ | 856,597 | | | | | |
| | | | | | | | |
Investments
We account for and report our investments in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Investments are comprised of marketable securities consisting primarily of certificates of deposit, federal, state and municipal government obligations and corporate bonds. All marketable securities are held in our name and primarily under the custodianship of two major financial institutions. Our policy is to protect the principal value of our investment portfolio and minimize principal risk. Except for restricted investments, our marketable securities are classified as“available-for-sale” and stated at fair value, with net unrealized gains or losses recorded as a component of
F-8
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accumulated other comprehensive loss. Short-term investments are marketable securities with maturities of less than one year from the balance sheet date. Marketable security investments are evaluated periodically for impairment. If it is determined that a decline of any investment is other than temporary, then the investment basis would be written down to fair value and the write-down would be included in earnings as a loss.
Concentrations
Substantially all of our cash and cash equivalents are maintained with three major financial institutions in the United States. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk.
Financial instruments that potentially subject us to concentrations of credit risk consist principally of marketable securities, interest rate instruments and accounts receivable. The counterparties to our investment securities and interest rate instruments are various major corporations and financial institutions of high credit standing.
We perform ongoing credit evaluations of our customers’ financial conditions and would limit the amount of credit extended if deemed necessary but usually we have required no collateral.
Allowance for doubtful accounts
We evaluate the collectibility of accounts receivable on a regular basis. The allowance is based upon various factors including the financial condition and payment history of major customers, an overall review of collections experience on other accounts and economic factors or events expected to affect our future collections experience.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on afirst-in, first-out (“FIFO”) basis. We evaluate the carrying value of inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared to quantities on hand, the price we expect to obtain for products in their respective markets compared with historical cost and the remaining shelf life of goods on hand.
Property and Equipment
Property and equipment, net, is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful life of the asset. Estimated useful lives of three to five years are used on computer equipment and related software. Office equipment, furniture and fixtures are depreciated over five years. Amortization of leasehold improvements is computed using the shorter of the remaining lease term or eight years. Leased assets meeting certain capital lease criteria are capitalized and the present value of the related lease payments is recorded as a liability. Assets under capital lease arrangements are depreciated using straight-line method over their estimated useful lives or their related lease term, whichever is shorter.
Capitalization and Valuation of Long-Lived and Intangible Assets
In accordance with Statement of Financial Accounting Standards No. 141,“Business Combinations”(“FAS 141”) and Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets” (“FAS 142”), goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment on an annual basis or more frequently if certain indicators arise. Goodwill represents the excess of purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. The Company operates in one segment and goodwill is evaluated at the company level as there is only one reporting unit. Goodwill is evaluated in the fourth
F-9
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
quarter of each fiscal year. There was no impairment of goodwill for the fiscal year ended September 30, 2006. The Company had no goodwill as of September 30, 2005.
Intangible assets with finite useful lives are amortized over their respective useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”.) The method of amortization shall reflect the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, a straight-line amortization method will be used. Intangible assets with finite useful lives include product rights, customer relationships, trade name, non-compete agreement and license agreement, which are being amortized over their estimated useful lives ranging from one to 15.5 years.
In accordance with FAS 144, intangible assets and other long-lived assets, except for goodwill, are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the review indicates that intangible assets or long-lived assets are not recoverable (i.e. the carrying amount is less than the future projected undiscounted cash flows), their carrying amount would be reduced to fair value. Factors we consider important that could trigger an impairment review include the following:
| | December 24, 2008 |
| • | A significant underperformance relative to expected historical or projected future operating results; | | |
/s/ Stephen G. Austin, CPA | | | | |
| • | A significant change in the manner of our use of the acquired asset or the strategy for our overall business; and/or | | |
Stephen G. Austin, CPA | | Director | | December 24, 2008 |
| | | | |
/s/ Charles A. Mathews | | | | |
| • | A significant negative industry or economic trend. | | |
Prior to October 1, 2005, intangible assets with finite useful lives also include capitalized legal costs incurred in connection with approved patents and patent applications pending. We amortized costs of patents and patent applications pending over their estimated useful lives. For patents pending, we amortized the costs over the shorter of a period of twenty years from the date of filing the application or, if licensed, the term of the license agreement. For patent and patent applications pending and trademarks that we abandon, we charge the remaining unamortized accumulated costs to expense.
Change in Accounting for Patent-Related Costs
In the fourth quarter of fiscal 2006, we changed our method of accounting, effective October 1, 2005 for legal costs, all of which were external, associated with the application for patents. Prior to the change, we expensed as incurred all internal costs associated with the application for patents and capitalized external legal costs associated with the application for patents. Costs of approved patents were amortized over their estimated useful lives or if licensed, the terms of the license agreement, whichever was shorter, while costs for patents pending were amortized over the shorter period of twenty years from the date of the filing application or if licensed, the term of the license agreement. Amortization expense for these capitalized costs was classified as research and development expenses in our consolidated statements of operations. Under the new method, external legal costs are expensed as incurred and classified as research and development expenses in our consolidated statements of operations. We believe that this change is preferable because it will result in a consistent treatment for all costs, that is, under our new method both internal and external costs associated with the application for patents are expensed as incurred. In addition, the change will provide a better comparison with our industry peers. The $3.6 million cumulative effect of the change on prior years as of October 1, 2005 is included as a charge to net loss in fiscal 2006, retrospectively applied to the first quarter. The effect of the change for fiscal 2006 was to increase the net loss by $3.7 million, $3.6 million of which represents the cumulative effect of the change on prior years, or $0.12 per basic and diluted share.
Pro forma amounts assuming the new method for patent-related costs was applied retroactively are as follows:
| | | | | | | | | | | | |
| | Fiscal 2006 | | Fiscal 2005 | | Fiscal 2004 |
|
Net loss | | $ | (58,936,756 | ) | | $ | (31,255,373 | ) | | $ | (29,056,101 | ) |
Basic and diluted loss per share | | $ | (1.92 | ) | | $ | (1.22 | ) | | $ | (1.49 | ) |
F-10
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred rent
We account for rent expense by accumulating total minimum rent payments over the lives of the lease agreements and recognize the rent as expense on a straight-line basis. The difference between the actual amount paid and the amount recorded as rent expense in each fiscal year has been recorded as an adjustment to deferred rent. The amount classified as deferred rent as of September 30, 2006 and 2005 was $681,000 and $598,000, respectively.
Fair value of financial instruments
At September 30, 2006 and 2005, our financial instruments included cash and cash equivalents, receivables, investments in securities, accounts payable, accrued expenses, accrued compensation and payroll taxes and long-term borrowings. The carrying amount of cash and cash equivalents, receivables, accounts payable, accrued expenses and accrued compensation and payroll taxes approximates fair value due to the short-term maturities of these instruments. Our short- and long-term investments in securities are carried at fair value based on quoted market prices. The fair value of our notes payable and capital lease obligations were estimated based on quoted market prices or pricing models using current market rates. At September 30, 2006 and 2005, the fair value of our notes payable were approximately $25.3 million and $825,000, respectively.
Revenue recognition
General. We recognize revenue in accordance with the SEC’s Staff Accounting Bulletin Topic 13 (“Topic 13”),“Revenue Recognition.” Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured.
Certain product sales are subject to rights of return. For these products, our revenue recognition policy is consistent with the requirements of Statement of Financial Accounting Standards No. 48,“Revenue Recognition When Right of Return Exists” (“FAS 48”). FAS 48 states that revenue from sales transactions where the buyer has the right to return the product shall be recognized at the time of sale only if several criteria are met, including that the seller be able to reasonably estimate future returns.
Certain revenue transactions include multiple deliverables. We allocate revenue to separate elements in multiple element arrangements based on the guidance in Emerging Issues Task ForceNo. 00-21 (“EITF00-21”),“Accounting for Revenue Arrangements with Multiple Deliverables.” Revenue is allocated to a delivered product or service when all of the following criteria are met: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item; and (3) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. We use the relative fair values of the separate deliverables to allocate revenue.
Revenue Arrangements with Multiple Deliverables. We have revenue arrangements whereby we deliver to the customer multiple productsand/or services. Such arrangements have generally included some combination of the following: antibody generation services; licensed rights to technology, patented products, compounds, data and other intellectual property; and research and development services. In accordance with EITF00-21, we analyze our multiple element arrangements to determine whether the elements can be separated. We perform our analysis at the inception of the arrangement and as each product or service is delivered. If a product or service is not separable, the combined deliverables will be accounted for as a single unit of accounting.
When a delivered product or service (or group of delivered products or services) meets the criteria for separation in EITF00-21, we allocate revenue based upon the relative fair values of each element. We determine the fair value of a separate deliverable using the price we charge other customers when we sell that product or service separately; however if we do not sell the product or service separately, we use third-party evidence of fair value. We
F-11
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
consider licensed rights or technology to have standalone value to our customers if we or others have sold such rights or technology separately or our customers can sell such rights or technology separately without the need for our continuing involvement.
License Arrangements. License arrangements may consist of non-refundable upfront license fees, data transfer fees, research reimbursement payments, exclusive licensed rights to patented or patent pending compounds, technology access fees, various performance or sales milestones and future product royalty payments. Some of these arrangements are multiple element arrangements.
Non-refundable, up-front fees that are not contingent on any future performance by us, and require no consequential continuing involvement on our part, are recognized as revenue when the license term commences and the licensed data, technologyand/or compound is delivered. Such deliverables may include physical quantities of compounds, design of the compounds and structure-activity relationships, the conceptual framework and mechanism of action, and rights to the patents or patents pending for such compounds. We defer recognition of non-refundable upfront fees if we have continuing performance obligations without which the technology, right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee that is separate and independent of our performance under the other elements of the arrangement. In addition, if we have continuing involvement through research and development services that are required because our know-how and expertise related to the technology is proprietary to us, or can only be performed by us, then such up-front fees are deferred and recognized over the period of continuing involvement.
Payments related to substantive, performance-based milestones in a research and development arrangement are recognized as revenue upon the achievement of the milestones as specified in the underlying agreements when they represent the culmination of the earnings process.
Research and Development Services. Revenue from research and development services is recognized during the period in which the services are performed and is based upon the number of full-time-equivalent personnel working on the specific project at theagreed-upon rate. Reimbursements from collaborative partners for agreed upon direct costs including direct materials and outsourced, or subcontracted, pre-clinical studies are classified as revenue in accordance with EITF IssueNo. 99-19,“Reporting Revenue Gross as a Principal versus Net as an Agent,” and recognized in the period the reimbursable expenses are incurred. Payments received in advance are recorded as deferred revenue until the research and development services are performed or costs are incurred.
Royalty Revenues. We recognize royalty revenues from licensed products when earned in accordance with the terms of the license agreements. Net sales figures used for calculating royalties include deductions for costs of unsaleable returns, managed care chargebacks, cash discounts, freight and warehousing, and miscellaneous write-offs.
Revenues from Sale of Royalty Rights. When we sell our rights to future royalties under license agreements and also maintain continuing involvement in earning such royalties, we defer recognition of any upfront payments and recognize them as revenue over the life of the license agreement. We recognize revenue for the sale of an undivided interest of our abreva license agreement to Drug Royalty USA under the“units-of-revenue method.” Under this method, the amount of deferred revenue to be recognized as revenue in each period is calculated by multiplying the following: (1) the ratio of the royalty payments due to Drug Royalty USA for the period to the total remaining royalties that we expect GlaxoSmithKline will pay Drug Royalty USA over the term of the agreement by (2) the unamortized deferred revenue amount.
Government Research Grant Revenue. We recognize revenues from federal research grants during the period in which the related expenditures are incurred.
Product Sales — Active Pharmaceutical Ingredient Docosanol (“API Docosanol”). Revenue from sales of our API Docosanol is recorded when title and risk of loss have passed to the buyer and provided the criteria in SAB Topic 13 are met. We sell the API Docosanol to various licensees upon receipt of a written order for the
F-12
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
materials. Shipments generally occur fewer than five times a year. Our contracts for sales of the API Docosanol include buyer acceptance provisions that give our buyers the right of replacement if the delivered product does not meet specified criteria. That right requires that they give us notice within 30 days after receipt of the product. We have the option to refund or replace any such defective materials; however, we have historically demonstrated that the materials shipped from the same pre-inspected lot have consistently met the specified criteria and no buyer has rejected any of our shipments from the same pre-inspected lot to date. Therefore, we recognize revenue at the time of delivery without providing any returns reserve.
Product Sales — FazaClo. As discussed in Note 4, “Alamo Acquisition,” in the Notes to Consolidated Financial Statements, we acquired Alamo Pharmaceuticals LLC (“Alamo”) on May 24, 2006. Alamo has one product, FazaClo (clozapine, USP), that Alamo began shipping in July 2004 in 48-pill units. At that time, FazaClo had a two-year shelf life. In June 2005, Alamo received FDA approval to extend the product expiration date to three years. In October 2005, Alamo began to ship 96-pill units and accepted returns of unsold or undispensed 48-pill units.
FazaClo is sold primarily to third-party wholesalers that in turn sell this product to retail pharmacies, hospitals, and other dispensing organizations. Alamo has entered into agreements with its wholesale customers, various states, hospitals, certain other medical institutions and third-party payers throughout the United States. These agreements frequently contain commercial incentives, which may include favorable product pricing and discounts and rebates payable upon dispensing the product to patients. Additionally, these agreements customarily provide the customer with rights to return the product, subject to the terms of each contract. Consistent with pharmaceutical industry practice, wholesale customers can return purchased product during an18-month period that begins six months prior to the product’s expiration date and ends 12 months after the expiration date. Additionally, some dispensing organizations, such as pharmacies and hospitals, have the right to return expired product at any time.
At the present time, we are unable to reasonably estimate future returns due to the lack of sufficient historical returns data for FazaClo. Accordingly, we currently defer recognition of revenue on shipments of FazaClo until the right of return no longer exists, i.e. when we receive evidence that the products have been dispensed to patients. We determine when products are dispensed to patients from rebate requests that have been submitted to us by various state agencies and others. We are not able to estimate how much has been dispensed until we receive the rebate requests. Rebate requests are generally received in 30 to 90 days from the last day of the quarter in which the product was dispensed to patients. Since the date of the Alamo acquisition (May 24, 2006), we have recorded all rebate requests as a reduction of the assumed liabilities for returns and discounts which was recorded as part of the acquisition, because we believe this method reasonably estimates the matching of the initial shipments to the related rebate. Accordingly, no FazaClo revenue was recognized in fiscal 2006.
For our FazaClo shipments, we invoice the wholesaler, record deferred revenue at gross invoice sales price less estimated cash discounts and classify the inventory shipped as inventories subject to return. We estimate rebates and other discounts based on our historical experience. Net deferred revenues represent the sum of all FazaClo shipments subsequent to the acquisition, net of estimated rebates, sales returns and chargebacks, for which revenue recognition criteria have not been met. Deferred rebates, sales returns and chargebacks are included in accrued expenses. Sales incentives are also deferred until the related product shipments are recognized as revenue. Sales incentives are classified as deductions from revenue in accordance with EITF IssueNo. 01-09,“Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).”The cost of product relative to deferred revenue has also been deferred and is included in inventories, categorized as inventories subject to return.
Cost of Revenues
Cost of revenues includes direct and indirect costs to manufacture product sold, including the write-off of obsolete inventory, and to provide research and development services. Also, classified within cost of product sales is the amortization of the acquired FazaClo product rights.
F-13
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Shipping and Handling Costs
We do not charge customers for shipping and handling. We expense shipping and handling costs as incurred. Shipping and handling costs charged to selling, general and administration expense amounted to $29,000, $0 and $0 for fiscal 2006, 2005 and 2004, respectively.
Recognition of Expenses in Outsourced Contracts
Pursuant to management’s assessment of the services that have been performed on clinical trials and other contracts, we recognize expenses as the services are provided. Such management assessments include, but are not limited to: (1) an evaluation by the project manager of the work that has been completed during the period, (2) measurement of progress prepared internallyand/or provided by the third-party service provider, (3) analyses of data that justify the progress, and (4) management’s judgment. Several of our contracts extend across multiple reporting periods, including our largest contract, representing a $10.7 million Phase III clinical trial contract as of September 30, 2006. A 3% variance in our estimate of the work completed in our largest contract could increase or decrease our quarterly operating expenses by approximately $320,000.
Research and Development Expenses
Research and development expenses consist of expenses incurred in performing research and development activities including salaries and benefits, facilities and other overhead expenses, clinical trials, contract services and other outside expenses. Research and development expenses are charged to operations as they are incurred. Up-front payments to collaborators made in exchange for the avoidance of potential future milestone and royalty payments on licensed technology are also charged to research and development expense when the drug is still in the development stage, has not been approved by the FDA for commercialization and concurrently has no alternative uses.
We assess our obligations to make milestone payments that may become due under licensed or acquired technology to determine whether the payments should be expensed or capitalized. We charge milestone payments to research and development expense when:
Charles A. Mathews | | Director | | December 24, 2008 |
| • | The technology is in the early stage of development and has no alternative uses; | | |
/s/ David J. Mazzo, Ph.D. | | | | |
| • | There is substantial uncertainty regarding the future success of the technology or product; | | |
David J. Mazzo, Ph.D. | | Director | | December 24, 2008 |
| | | | |
| | | | |
| • | There will be difficulty in completing the remaining development; and | | |
Dennis G. Podlesak | | Director | | December 24, 2008 |
| | | | |
/s/ Nicholas J. Simon | | | | |
| • | There is substantial cost to complete the work. |
Acquired in-process research and development. In accordance with FAS 141, we immediately charge the costs associated with acquired in-process research and development (“IPR&D”) to research and development expense upon acquisition. These amounts represent an estimate of the fair value of purchased IPR&D for projects that, as of the acquisition date, had not yet reached technological feasibility, had no alternative future use, and had uncertainty in receiving future economic benefits from the acquired IPR&D. We determine the future economic benefits from the acquired IPR&D to be uncertain until such technology is approved by the FDA or when other significant risk factors are abated. We incurred significant IPR&D expense related to the Alamo acquisition. See also Note 4, “Alamo Acquisition — In-Process Research and Development.”
Acquired contractual rights. Payments to acquire contractual rights to a licensed technology or drug candidate are expensed as incurred when there is uncertainty in receiving future economic benefits from the acquired contractual rights. We consider the future economic benefits from the acquired contractual rights to a drug candidate to be uncertain until such drug candidate is approved by the FDA or when other significant risk factors are abated.
F-14
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Change in Accounting Method for Share-Based Compensation
We adopted the provisions of revised Statement of Financial Accounting Standards No. 123 (“FAS 123R”),“Share-Based Payment,” including the provisions of Staff Accounting Bulletin No. 107 (“SAB 107”) on October 1, 2005, the first day of our fiscal 2006, using the modified prospective transition method to account for our employee share-based awards. The valuation provisions of FAS 123R apply to new awards and to awards that are outstanding at the effective date and subsequently modified or cancelled. Estimated compensation expense for awards outstanding at the effective date are being recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation” (“FAS 123”). Our consolidated financial statements as of September 30, 2006 and for the fiscal year ended September 30, 2006 reflect the impact of FAS 123R. In accordance with the modified prospective transition method, our consolidated financial statements for prior periods were not restated to reflect, and do not include, the impact of FAS 123R.
On November 10, 2005, the FASB issued FASB Staff PositionNo. FAS 123R-3,“Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards”(“FAS 123R-3”). We have elected to adopt the alternative transition method provided inFAS 123R-3. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123R.
Share-based compensation expense recognized during a period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Share-based compensation expense recognized in our consolidated statement of operations for fiscal 2006 includes compensation expense for share-based payment awards granted prior to, but not yet vested as of, September 30, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of FAS 123, adjusted for estimated forfeitures, and share-based payment awards granted subsequent to September 30, 2005 based on the grant date fair value estimated in accordance with FAS 123R. For share awards granted in fiscal 2006, expenses are amortized under the straight-line attribution method. For share awards granted prior to fiscal 2006, expenses are amortized under the straight-line single option method prescribed by FAS 123. As share-based compensation expense recognized in the consolidated statement of operations for fiscal 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be approximately 8% for both officers and directors and 13% for other employees in fiscal 2006 based on our historical experience. In our pro forma information required under FAS 123 for the periods prior to fiscal 2006, we accounted for forfeitures as they occurred.
The adoption of FAS 123R resulted in incremental share-based compensation expense of 1.5 million in fiscal year ended September 30, 2006. The incremental share-based compensation caused our loss from continuing operations before income taxes, loss from operations and net loss to increase by the same amount and the basic and diluted loss per share to increase by $0.05 per share. Total compensation expense related to all of our share-based awards, recognized under FAS 123R, for fiscal 2006 was comprised of the following:
| | | | |
| | Fiscal 2006 | |
|
Selling, general and administrative expense | | $ | 2,514,427 | |
Research and development expense | | | 606,194 | |
| | | | |
Share-based compensation expense before taxes | | | 3,120,621 | |
Related income tax benefits | | | — | |
| | | | |
Share-based compensation expense | | $ | 3,120,621 | |
| | | | |
Net share-based compensation expense per common share — basic and diluted | | $ | (0.10 | ) |
| | | | |
F-15
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | |
| | Fiscal 2006 | |
|
Share-based compensation expense from: | | | | |
Stock options | | $ | 1,795,610 | |
Restricted stock awards | | | 1,179,621 | |
Restricted stock units | | | 145,390 | |
| | | | |
Total | | $ | 3,120,621 | |
| | | | |
Since we have a net operating loss carry-forward as of September 30, 2006, no excess tax benefits for the tax deductions related to share-based awards were recognized in the consolidated statement of operations. Additionally, no incremental tax benefits were recognized from stock options exercised in fiscal 2006 that would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities. Compensation expense relating to employee share-based awards was not recognized in fiscal year ended September 30, 2005.
Prior to fiscal year 2006, we accounted for share-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations and provided the required pro forma disclosures of FAS 123.
The following table summarizes the pro forma effect on our net loss and per share data if we had applied the fair value recognition provisions of FAS 123 to share-based employee compensation for fiscal 2005 and 2004.
| | | | | | | | |
| | Fiscal 2005 | | | Fiscal 2004 | |
|
Net loss, as reported | | $ | (30,606,564 | ) | | $ | (28,154,853 | ) |
Add: Share-based employee compensation expense | | | 77,856 | | | | 24,069 | |
Deduct: Total share-based employee compensation expense determined under fair value based method for all awards | | | (1,777,838 | ) | | | (1,026,844 | ) |
| | | | | | | | |
Pro forma net loss | | $ | (32,306,546 | ) | | $ | (29,157,628 | ) |
| | | | | | | | |
Net loss per share: | | | | | | | | |
Basic and diluted — as reported | | $ | (1.19 | ) | | $ | (1.44 | ) |
Basic and diluted — pro forma | | $ | (1.26 | ) | | $ | (1.50 | ) |
For employee stock options granted in fiscal 2005 and 2004, we determined pro forma compensation expense under the provisions of FAS 123 using the Black-Scholes model and the following assumptions: (1) an expected volatility of 95% and 133%, respectively, (2) an expected term of 3.4 years, (3) a risk-free interest rate of 3.8% and 2.4%, respectively, and (4) an expected dividend yield of 0%. The weighted average fair value of options granted in fiscal 2005 and 2004 was $11.36 and $7.24 per share, respectively.
We account for stock options granted to non-employees in accordance with Emerging Issues Task ForceNo. 96-18,“Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,”(“EITF 96-18”). UnderEITF 96-18, we determine the fair value of the stock options granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
Restructuring Expense
We record costs and liabilities associated with exit and disposal activities, as defined in Statements of Financial Accounting Standards No. 146,“Accounting for Costs Associated with Exit or Disposal Activities” (“FAS 146”), at fair value in the period the liability is incurred. In periods subsequent to initial measurement, changes to a liability are measured using the credit-adjusted risk-free rate applied in the initial period. In fiscal
F-16
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2006, we recorded costs and liabilities for exit and disposal activities related to a relocation plan, including a decision to discontinue occupying certain leased office and laboratory facilities, in accordance with FAS 146. The liability is evaluated and adjusted as appropriate on at least a quarterly basis for changes in circumstances. Please refer to Note 5, “Relocation of Commercial and General and Administrative Operations” for further information.
Advertising expenses
Advertising costs are expensed as incurred, and these costs are included in selling, general and administrative expenses. Advertising costs were $1.3 million, $61,000 and $0 for fiscal 2006, 2005 and 2004, respectively.
Income taxes
We account for income taxes and the related accounts under the liability method. Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the income tax bases of assets and liabilities. A valuation allowance is applied against any net deferred tax asset if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Comprehensive loss
Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including foreign currency translation adjustments and unrealized gains and losses on marketable securities. We present an accumulated other comprehensive loss in our consolidated statements of shareholders’ (deficit) equity and comprehensive loss.
Computation of net loss per common share
Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period (“Basic EPS Method”). Diluted net loss per common share is computed by dividing net loss by the weighted-average number of common and dilutive common equivalent shares outstanding during the period (“Diluted EPS Method”). In the loss periods, the shares of common stock issuable upon exercise of stock options and warrants are excluded from the computation of diluted net loss per share, as their effect is anti-dilutive. For fiscal 2006, 2005 and 2004, 194,665, 250,000 and 0 restricted shares, respectively, of Class A common stock with a right of repurchase have been excluded from the computation of basic net loss per share, because the right of repurchase for these restricted shares has not lapsed.
For fiscal 2006, 2005, and 2004, the following options and warrants to purchase shares of common stock, restricted stock awards and restricted stock units were excluded from the computation of diluted net loss per share, as the inclusion of such shares would be antidilutive:
| | | | | | | | | | | | |
| | Fiscal 2006 | | | Fiscal 2005 | | | Fiscal 2004 | |
|
Stock options | | | 1,587,070 | | | | 1,600,034 | | | | 1,313,398 | |
Stock warrants | | | 269,305 | | | | 1,122,047 | | | | 1,333,539 | |
Restricted stock awards | | | 29,250 | | | | — | | | | — | |
Restricted stock units | | | 51,480 | | | | — | | | | — | |
Recent accounting pronouncements
Financial Accounting Standards No. 154 (“FAS 154”). In May 2005, the FASB issued FAS 154,“Accounting Changes and Error Corrections.” FAS 154 establishes retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. FAS 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is
F-17
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
impracticable. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of FAS 154 to significantly affect our financial condition or results of operations.
Financial Accounting Standards No. 155 (“FAS 155”). In February 2006, the FASB issued FAS 155,“Accounting for Certain Hybrid Financial Instruments,” an amendment of Financial Accounting Standards No. 133,“Accounting for Derivative Instruments and Hedging Activities”(“FAS 133”) and Financial Accounting Standards No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FAS 140”). With respect to FAS 133, FAS 155 simplifies accounting for certain hybrid financial instruments by permitting fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation and eliminates the interim guidance in Statement 133 Implementation Issue No. D1,“Application of Statement 133 to Beneficial Interests in Securitized Financial Assets,” which provided that beneficial interests in securitized financial assets are not subject to the provision of FAS 133. With respect to FAS 140, FAS 155 eliminates a restriction on the passive derivative instruments that a qualifying special-purpose entity may hold. FAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We do not expect the adoption of FAS 155 to significantly affect our financial condition or results of operations.
FASB Interpretation No. 48 (“FIN 48”). In July 2006, the FASB issued FIN 48,“Accounting for Uncertainty in Income Taxes”which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 will be effective for us beginning October 1, 2007. We are in the process of determining the effect, if any, the adoption of FIN 48 will have on our financial statements.
Financial Accounting Standards No. 157 (“FAS 157”). In September 2006, the FASB issued FAS 157,“Fair Value Measurements.” FAS 157 defines fair value, established a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not expect the adoption of FAS 157 to significantly affect our financial condition or results of operations.
Financial Accounting Standards No. 158 (“FAS 158”). In September 2006, the FASB issued FAS 158,“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an Amendment of FASB Statements No. 87, 88, 106 and 132(R).” FAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize the changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of anot-for-profit organization. FAS 158 is effective for us as of the end of the fiscal year ending after December 15, 2006. We do not expect the adoption of FAS 158 to significantly affect our financial condition or results of operations.
Staff Accounting Bulleting No. 108 (“SAB 108”). In September 2006, the SEC released SAB 108 to address diversity in practice regarding consideration of the effects of prior year errors when quantifying misstatements in current year financial statements. The SEC staff concluded that registrants should quantify financial statement errors using both a balance sheet approach and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 states that if correcting an error in the current year materially affects the current year’s income statement, the prior period financial statements must be restated. SAB 108 is effective for fiscal years ending after November 15, 2006. We do not expect the adoption of SAB 108 to significantly affect our financial condition or results of operations.
FASB Staff PositionNo. FAS 123R-5(“FAS 123R-5”). In October 2006, the FASB issuedFAS 123R-5,“Amendment of FASB Staff PositionFAS 123R-1,” to address whether a modification of an instrument in connection
F-18
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
with an equity restructuring should be considered a modification for purposes of applyingFAS 123R-1,“Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. FAS 123(R).” The provisions inFAS 123R-5 are effective for us in the quarter beginning January 1, 2007. We do not expect the adoption ofFAS 123R-5 to significantly affect our financial condition or results of operations.
| | |
4. Nicholas J. Simon | Alamo Acquisition |
On May 24, 2006, pursuant to a Unit Purchase Agreement dated May 22, 2006 (the “Acquisition Agreement”), we acquired all of the outstanding equity interests in Alamo from the former members of Alamo (the “Selling Holders”) for approximately $30.0 million in consideration, consisting of approximately $4.0 million in cash, $25.1 million in promissory notes and $912,000 in acquisition related transaction costs. The purchase price exceeded the net assets acquired resulting in the recognition of $22.1 million goodwill. The results of operations of Alamo have been included in our consolidated financial statements since the date of acquisition.
We also agreed to pay up to an additional $39,450,000 in revenue-based earn-out payments, based on future sales of FazaClo (clozapine USP), Alamo’s orally disintegrating drug for the treatment of refractory schizophrenia. These earn-out payments are based on FazaClo sales in the United States from the closing date of the acquisition through December 31, 2018 (the “Contingent Payment Period”) and are payable to the Selling Holders as follows:
| Director | | December 24, 2008 |
| • | A promissory note that would have been issuable in the principal amount of $4,000,000 if FazaClo sales, as reported by IMS Health Incorporated, for each of the months of April and May 2006 exceeded $1,266,539. Since the closing of the acquisition, we have determined that FazaClo sales for the months April and May 2006 did not satisfy this condition and thus this promissory note will not be issued pursuant to this contingency. | | |
/s/ Scott M. Whitcup, M.D. | | | | |
| • | If the preceding condition is not satisfied, then (A) a promissory note, in the principal amount of $2,000,000, payable one time if monthly FazaClo net product sales, as reported by us, exceed $1,000,000 for each of the three months in a given fiscal quarter during the Contingent Payment Period, and (B) an additional promissory note in the principal amount of $2,000,000, payable one time if monthly FazaClo net product sales, as reported by us, exceed $1,500,000 for each of the three months in a given fiscal quarter during the Contingent Payment Period. As discussed in Note 3,“Summary of Significant Accounting Policies — Revenue Recognition — Product Sales — FazaClo,” all revenue from FazaClo shipments since acquisition date are deferred; therefore, monthly FazaClo net product sales in the quarter ended September 30, 2006 did not meet these conditions at September 30, 2006. |
| |
Scott M. Whitcup, M.D. | • | A one-time cash payment of $10,450,000 if FazaClo net product sales, as reported by us, exceed $40.0 million over four consecutive fiscal quarters during the Contingent Payment Period. |
|
| • Director | A one-time cash payment of $25,000,000 if FazaClo net product sales, as reported by us, exceed $50.0 million over four consecutive fiscal quarters during the Contingent Payment Period. |
Any of these additional revenue-based earn-out payments that are ultimately paid upon satisfying the contingent conditions above will be treated as additional consideration and recorded as goodwill.
We have also agreed to pay the Selling Holders one-half of all net licensing revenues that we received during the Contingent Payment Period from licenses of FazaClo outside of the United States (“Non-US Licensing Revenues”). Any amounts paid to the Selling Holders on Non-US Licensing Revenues will be recognized in the consolidated statement of operations in the period such amounts are paid.
F-19
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Purchase Price Allocation
In accordance with FAS 141, we allocated the total purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition, using the purchase method of accounting. The components of the purchase price allocation are as follows:
| | | | |
Purchase price: | | | | |
Cash paid at closing | | $ | 4,040,000 | |
Estimated fair value of notes payable issued | | | 24,343,000 | |
Transaction costs | | | 911,536 | |
| | | | |
| | $ | 29,294,536 | |
| | | | |
Allocation: | | | | |
Net tangible assets acquired: | | | | |
Cash | | $ | 157,507 | |
Accounts receivable | | | 1,026,740 | |
Inventories | | | 2,297,117 | |
Property and equipment | | | 1,845,077 | |
Other assets | | | 423,457 | |
Identifiable intangible assets acquired: | | | | |
Product rights | | | 7,200,000 | |
In-process research and development | | | 1,300,000 | |
Customer relationships | | | 2,900,000 | |
Trade name | | | 400,000 | |
Non-compete agreement | | | 160,000 | |
Goodwill | | | 22,110,328 | |
| | | | |
Total assets acquired | | | 39,820,226 | |
| | | | |
Liabilities assumed: | | | | |
Accounts payable and accrued expenses | | | (3,611,653 | ) |
Assumed liabilities for returns and other discounts | | | (6,401,321 | ) |
Capital lease obligations | | | (512,716 | ) |
| | | | |
Total liabilities assumed | | | (10,525,690 | ) |
| | | | |
| | $ | 29,294,536 | |
| | | | |
F-20
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following are the estimated amortization percentages by year for amortizable intangible assets:
| | | | | | | | | | | | | | | | |
| | | | | Customer
| | | | | | Non-Compete
| |
Year: | | Product Rights | | | Relationships | | | Trade Name | | | Agreements | |
|
1 | | | 14 | % | | | 15 | % | | | 8% | | | | 100 | % |
2 | | | 15 | % | | | 22 | % | | | 9% | | | | — | |
3 | | | 15 | % | | | 18 | % | | | 8% | | | | — | |
4 | | | 14 | % | | | 13 | % | | | 9% | | | | — | |
5 | | | 14 | % | | | 9 | % | | | 8% | | | | — | |
6 | | | 14 | % | | | 8 | % | | | 9% | | | | — | |
7 | | | 14 | % | | | 8 | % | | | 8% | | | | — | |
8 | | | — | | | | 7 | % | | | 9% | | | | — | |
9 | | | — | | | | — | | | | 8% | | | | — | |
10 | | | — | | | | — | | | | 9% | | | | — | |
11 | | | — | | | | — | | | | 8% | | | | — | |
12 | | | — | | | | — | | | | 8% | | | | — | |
None of the goodwill will be deductible for tax purposes.
Pursuant to EITF01-3,“Accounting in a Business Combination for Deferred Revenue of an Acquiree,” we did not assume Alamo’s deferred revenue balance as of the acquisition date, and accordingly will not record revenue associated with product that was shipped prior the acquisition date. However, in connection with the acquisition, we assumed an obligation for future product returns, chargebacks, rebates, discounts and royalties associated with pre-acquisition shipments of FazaClo. As such, we recorded preliminary estimated liabilities for such returns and other discounts based on our estimate of the fair values of the liabilities at the acquisition date, which is classified as Assumed Liabilities for Returns and Other Discounts in the accompanying consolidated balance sheets.
The purchase price allocation shown above differs from the initial preliminary purchase price recorded in the third quarter ended June 30, 2006 primarily due to an increase of goodwill of $22.1 million and a corresponding reduction in value of identifiable intangible assets acquired. We acquired Alamo for the purpose of acquiring the sales force and a product that showed potentially greater sales opportunity with enhanced marketing and promotion. The value of the sales force is encompassed in goodwill. The lower allocation to intangible assets reflects a higher risk-adjusted discount rate for the identifiable intangible assets than other assets purchased in the transaction, which lowered the fair values of the intangible assets acquired and increased the residual being applied to goodwill.
The fair values of the assets acquired and liabilities assumed were determined in accordance with FAS 141 and are substantially finalized. We may adjust certain elements of the purchase price which are still considered to be a preliminary allocation. This will be done after obtaining additional information about the amount and type of FazaClo product in the distribution channel as of the purchase date in order to appropriately determine the reserve for product returns and the resulting effect on goodwill. We are working with our key wholesalers to obtain this information. We expect this will occur by the second quarter of fiscal 2007, at which time we will finalize the purchase price allocation. Liabilities assumed in connection with the acquisition and subject to change and that could impact the purchase price allocation include product returns due to expired or changed product formulation, manufacturing technology and packaging, chargebacks from wholesalers, and rebates. These amounts comprise the balance of assumed liabilities for returns and other discounts in the accompanying consolidated balance sheet as of September 30, 2006.
Identifiable Intangible Assets
We determined fair values of identifiable intangible assets acquired based on estimates and assumptions by management on projected sales and product returns, rebates, chargebacks and discounts. Identifiable intangible
F-21
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assets acquired represent expected benefits of the FazaClo product rights (see Note 17, “Research and Licensing Agreements — CIMA Labs Inc. Royalty Agreement”), customer relationships, trade name and non-compete agreement. The fair values of the customer relationships, technology, trade name and covenants not to compete were determined using an income approach and discounted cash flow (“DCF”) techniques. The fair value of the software registry and assembled workforce were determined using a cost approach. The remaining goodwill value of the Company was determined using a residual approach, by comparing the total fair market value of the assumed liabilities and equity consideration paid less the fair value of the tangible and identified intangible assets.
The identifiable intangible assets are being amortized, with the annual amortization amount based on the rate of consumption of the expected benefits of the intangible, if identifiable, or the straight-line method over the remaining estimated economic life ranging from one to 12 years if the rate of consumption of the expected benefits cannot be reasonably determined otherwise.
In-Process Research and Development
We evaluated research and development projects including new manufacturing technology for FazaClo under development by CIMA Labs. As the basis for identifying whether or not the development projects represented in-process research and development (“IPR&D”), we conducted an evaluation in the context of FASB Interpretation 4 (“FIN 4: Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method”). In accordance with these provisions, we examined the research and development projects to determine whether any alternative future uses existed. Such evaluation consisted of a specific review of the efforts, including the overall objectives of the project, progress toward the objectives, and the uniqueness of the developments of these objectives as well as our intended use of the developments. Further, we reviewed each development project to determine whether technological feasibility had been achieved. Based on our analysis, we determined that the DuraSolv technology, a certain technology being developed in collaboration with CIMA Labs for manufacturing FazaClo, was IPR&D. We expect to begin generating material positive cash flows from the technology in the second half of 2007, assuming the FDA approves the use of the technology for manufacturing FazaClo.
In order to estimate the fair value of the DuraSolv technology, we used the relief from royalty valuation approach on incremental product revenues that could result from manufacturing with such technology. The fair value of the IPR&D is determined by measuring the present value of the after-tax cash flows from revenues from such technology based on an appropriate technology royalty rate applied over 12 years commencing after FDA approval (if approved), discounted of a risk-adjusted rate of 29%. DuraSolv technology allows for the product to be packaged in a bottle, which is more convenient to open than the current blister packaging for FazaClo. We expect to use the DuraSolv manufacturing technology to replace the current OraSolv technology for manufacturing FazaClo, assuming the manufacturing process is approved by the FDA. We determined the future economic benefits from the purchased IPR&D to be uncertain because such technology has not been approved by the FDA. No material change in pricing or manufacturing cost is anticipated. As DuraSolv was determined to be IPR&D, the estimated fair value of DuraSolv of $1.3 million was expensed in fiscal 2006, under guidelines in FAS 141.
F-22
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Pro Forma Results of Operations
The following unaudited financial information presents the pro forma results of operations and gives effect to the Alamo acquisition as if the acquisition was consummated at the beginning of fiscal 2005. This information is presented for informational purposes only, and is not intended to be indicative of any expected results of operations for future periods, or the results of operations that actually would have been realized if the acquisition had in fact occurred as of the beginning of fiscal 2005.
| | | | | | | | |
| | Fiscal 2006 | | | Fiscal 2005 | |
|
Pro forma net revenues(1) | | $ | 17,503,000 | | | $ | 18,522,000 | |
Pro forma loss before cumulative effect of change in accounting principle(2) | | $ | (62,963,000 | ) | | $ | (56,307,000 | ) |
Pro forma net loss(2) | | $ | (66,579,000 | ) | | $ | (56,307,000 | ) |
Pro forma loss per basic and diluted share: | | | | | | | | |
Loss before cumulative effect of change in accounting principle | | $ | (2.06 | ) | | $ | (2.20 | ) |
Net loss | | $ | (2.17 | ) | | $ | (2.20 | ) |
Shares used for basic and diluted computation | | | 30,634,872 | | | | 25,617,432 | |
| | |
(1) | | In accordance with the provisions of EITF01-3 we did not assume Alamo’s reported deferred revenue balance as of the acquisition date and accordingly will not record revenue associated with such deferred revenue, resulting in lower net revenues in the periods following the merger than Alamo would have achieved as a separate company. |
|
(2) | | Pro forma net loss for the periods presented included the following pro forma adjustments: |
| | |
| • | Amortization of identifiable intangible assets, |
|
| • | Interest expense associated with the notes payable issued as part of purchase price, |
|
| • | Elimination of interest expense associated with Alamo’s historical debt that was not assumed by us in the acquisition, |
|
| • | Reduction of interest income by an amount determined by applying the average rate of return for the respective periods to the decrease in our cash balance of $4.0 million used to fund the acquisition, |
|
| • | Amortization of discount associated with the notes payable, and |
|
| • | The charge of $1.3 million purchased IPR&D is not included in the pro forma results of operations. The purchase IPR&D is a one-time charge directly related to the acquisition and does not have a continuing impact on our future operations.December 24, 2008 |
| |
5. | Relocation of Commercial and General and Administrative Operations |
On May 4, 2006, our Board of Directors authorized the relocation of our commercial and general and administrative operations (the “Relocation Plan”). During fiscal 2006, we expanded our sales and marketing operations and began relocating all operations other than research and development from San Diego, California to Aliso Viejo, California. The Relocation Plan included decisions to enter into a lease for new office facilities in Aliso Viejo, to discontinue occupying approximately 30,000 square feet of office and laboratory buildings in San Diego under an operating lease to us (“BC Sorrento Lease”) and relocate certain commercial and general and administrative positions.
In May 2006, we entered into a lease for the Aliso Viejo facilities and are in possession of approximately 9,245 square feet under the lease agreement as of September 30, 2006. See Note 14, “Commitments and Contingencies — Operating Lease Commitments” for further discussion. In connection with the Relocation Plan, we anticipate that we will incur estimated total restructuring charges of $420,000 relating to one-time termination
F-23
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and relocation benefits and $984,000 relating to a lease restructuring liability. In fiscal 2006, we recorded restructuring and other related expenses of $515,000, consisting of $237,000 for employee severance and relocation benefits and $278,000 of the lease restructuring liability.
The following table presents the cumulative restructuring activities through September 30, 2006:
| | | | | | | | | | | | |
| | Charge for
| | | | | | | |
| | Twelve Months Ended
| | | Payments in Fiscal
| | | Accruals As of
| |
| | September 30, 2006 | | | 2006 | | | September 30, 2006 | |
|
Employee severance and relocation benefits | | $ | 237,050 | | | $ | — | | | $ | 237,050 | |
Lease restructuring liability | | | 277,627 | | | | (3,629 | ) | | | 273,998 | |
| | | | | | | | | | | | |
Balance, September 30, 2006 | | $ | 514,677 | | | $ | (3,629 | ) | | $ | 511,048 | |
| | | | | | | | | | | | |
| |
6. | Investments in Securities |
The following tables summarize our investments in securities, all of which are classified asavailable-for-sale except for restricted investments, which are classified asheld-to-maturity.
| | | | | | | | | | | | | | | | |
| | | | | Gross
| | | Gross
| | | | |
| | Amortized
| | | Unrealized
| | | Unrealized
| | | Fair
| |
| | Cost | | | Gains | | | Losses(1) | | | Value | |
|
As of September 30, 2006: | | | | | | | | | | | | | | | | |
Certificates of deposit | | $ | 856,597 | | | $ | — | | | $ | — | | | $ | 856,597 | |
Government debt securities | | | 19,097,766 | | | | — | | | | (102,504 | ) | | | 18,995,262 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 19,954,363 | | | $ | — | | | $ | (102,504 | ) | | $ | 19,851,859 | |
| | | | | | | | | | | | | | | | |
Reported as: | | | | | | | | | | | | | | | | |
Short-term investments: | | | | | | | | | | | | | | | | |
Classified asavailable-for-sale | | | | | | | | | | | | | | $ | 16,778,267 | |
| | | | | | | | | | | | | | | | |
Long-term investments: | | | | | | | | | | | | | | | | |
Classified asavailable-for-sale | | | | | | | | | | | | | | | 2,216,995 | |
Restricted investments(2) | | | | | | | | | | | | | | | 856,597 | |
| | | | | | | | | | | | | | | | |
Long-term investments | | | | | | | | | | | | | | | 3,073,592 | |
| | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | | $ | 19,851,859 | |
| | | | | | | | | | | | | | | | |
F-24
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | |
| | | | | Gross
| | | Gross
| | | | |
| | Amortized
| | | Unrealized
| | | Unrealized
| | | Fair
| |
| | Cost | | | Gains | | | Losses(1) | | | Value | |
|
As of September 30, 2005: | | | | | | | | | | | | | | | | |
Certificates of deposit | | $ | 956,872 | | | $ | 48 | | | $ | — | | | $ | 956,920 | |
Government debt securities | | | 18,074,385 | | | | — | | | | (113,862 | ) | | | 17,960,523 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 19,031,257 | | | $ | 48 | | | $ | (113,862 | ) | | $ | 18,917,443 | |
| | | | | | | | | | | | | | | | |
Reported as: | | | | | | | | | | | | | | | | |
Short-term investments: | | | | | | | | | | | | | | | | |
Classified asavailable-for-sale | | | | | | | | | | | | | | $ | 14,215,005 | |
| | | | | | | | | | | | | | | | |
Long-term investments: | | | | | | | | | | | | | | | | |
Classified asavailable-for-sale | | | | | | | | | | | | | | | 3,845,566 | |
Restricted investments(2) | | | | | | | | | | | | | | | 856,872 | |
| | | | | | | | | | | | | | | | |
Long-term investments | | | | | | | | | | | | | | | 4,702,438 | |
| | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | | $ | 18,917,443 | |
| | | | | | | | | | | | | | | | |
| | |
(1) | | Unrealized loss is reported as “accumulated other comprehensive loss” on the consolidated balance sheets. |
|
(2) | | Restricted investments represent amounts pledged to our bank as collateral for letters of credit issued in connection with our leases of office and laboratory space. |
Gross realized loss for fiscal 2005 was $6,240. There were no realized gains or losses for fiscal 2006 and 2004.
Receivables as of September 30, 2006 and 2005 consist of the following:
| | | | | | | | |
| | 2006 | | | 2005 | |
|
Accounts receivable | | $ | 1,966,164 | | | $ | 60,391 | |
Unbilled receivables | | | 908,284 | | | | 1,010,902 | |
Other receivables | | | 178,619 | | | | 126,460 | |
| | | | | | | | |
| | | 3,053,067 | | | | 1,197,753 | |
Allowance for doubtful accounts | | | (10,599 | ) | | | (28,099 | ) |
| | | | | | | | |
Receivables, net of allowances | | $ | 3,042,468 | | | $ | 1,169,654 | |
| | | | | | | | |
F-25
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventories include FazaClo product and active pharmaceutical ingredients docosanol as of September 30, 2006 and docosanol only as of September 30, 2005, with the following carrying amounts as of those dates:
| | | | | | | | |
| | 2006 | | | 2005 | |
|
Finished goods | | $ | 1,642,208 | | | $ | — | |
Raw materials | | | 923,822 | | | | 374,539 | |
Work in progress | | | 80,580 | | | | — | |
Inventories subject to return | | | 536,017 | | | | — | |
| | | | | | | | |
Total inventories | | | 3,182,627 | | | | 374,539 | |
Less: current portion | | | (2,835,203 | ) | | | (27,115 | ) |
| | | | | | | | |
Long-term portion | | $ | 347,424 | | | $ | 347,424 | |
| | | | | | | | |
Inventories subject to return represent the costs of FazaClo product shipped to customers that have not been recognized as cost of product sales based on our revenue recognition policies. See Note 3, “Significant Accounting Policies — Revenue Recognition — Product Sales, FazaClo,” for further discussion.
| |
9. | Property and Equipment |
Property and equipment as of September 30, 2006 and 2005 consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2006 | | | 2005 | |
| | Gross
| | | | | | | | | Gross
| | | | | | | |
| | Carrying
| | | Accumulated
| | | | | | Carrying
| | | Accumulated
| | | | |
| | Value | | | Depreciation | | | Net | | | Value | | | Depreciation | | | Net | |
|
Research and development equipment | | $ | 4,210,214 | | | $ | (3,134,970 | ) | | $ | 1,075,244 | | | $ | 3,903,735 | | | $ | (2,567,843 | ) | | $ | 1,335,892 | |
Computer equipment and related software | | | 2,207,370 | | | | (872,592 | ) | | | 1,334,778 | | | | 1,038,390 | | | | (565,137 | ) | | | 473,253 | |
Leasehold improvements | | | 5,826,441 | | | | (3,665,799 | ) | | | 2,160,642 | | | | 5,583,177 | | | | (1,641,485 | ) | | | 3,941,692 | |
Office equipment, furniture and fixtures | | | 1,293,775 | | | | (453,547 | ) | | | 840,228 | | | | 558,911 | | | | (305,221 | ) | | | 253,690 | |
Automobiles | | | 499,275 | | | | (124,157 | ) | | | 375,118 | | | | — | | | | — | | | | — | |
Manufacturing equipment | | | 261,719 | | | | — | | | | 261,719 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total property and equipment | | $ | 14,298,794 | | | $ | (8,251,065 | ) | | $ | 6,047,729 | | | $ | 11,084,213 | | | $ | (5,079,686 | ) | | $ | 6,004,527 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation expense associated with property and equipment was $3.3 million, $1.6 million and $1.6 million for fiscal 2006, 2005 and 2004, respectively. In connection with the Relocation Plan as discussed in Note 5, “Relocation of Commercial and General and Administrative Operations,” we revised the estimated remaining economic lives of the leasehold improvements in the buildings under the BC Sorrento Lease and recorded an additional depreciation expense of $1.3 million in fiscal 2006.
At September 30, 2006 and 2005, scientific equipment acquired under capital leases totaled $601,000 and $601,000, respectively, with accumulated depreciation of $529,000 and $427,000, respectively. Depreciation expense associated with scientific equipment acquired under capital leases was $102,000, $106,000 and $106,000
F-26
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
for fiscal 2006, 2005 and 2004, respectively. In connection with the Alamo acquisition in May 2006, we acquired automobiles under capital leases totaled $499,000 with accumulated depreciation of $124,000 at September 30, 2006. Depreciation expense associated with automobiles acquired under capital leases was $124,000.
| |
10. | Intangible Assets and Goodwill |
Intangible Assets. Intangible assets, consisting of both intangible assets with finite and indefinite useful lives as of September 30, 2006 and 2005, are as follows:
| | | | | | | | | | | | | | | | |
| | 2006 | |
| | Gross
| | | | | | | | | Weighted Average
| |
| | Carrying
| | | Accumulated
| | | | | | Amortization Period
| |
| | Value | | | Amortization | | | Net | | | (in Years) | |
|
Intangible assets with finite lives: | | | | | | | | | | | | | | | | |
FazaClo product rights | | $ | 7,200,000 | | | $ | (365,144 | ) | | $ | 6,834,856 | | | | 7 | |
Customer relationships | | | 2,900,000 | | | | (156,200 | ) | | | 2,743,800 | | | | 8 | |
Trade name | | | 400,000 | | | | (11,833 | ) | | | 388,167 | | | | 12 | |
Non-compete agreement | | | 160,000 | | | | (56,800 | ) | | | 103,200 | | | | 1 | |
Licenses | | | 42,461 | | | | (20,160 | ) | | | 22,301 | | | | 15.5 | |
| | | | | | | | | | | | | | | | |
Total intangible assets with finite lives | | | 10,702,461 | | | | (610,137 | ) | | | 10,092,324 | | | | 7.4 | |
Intangible assets with indefinite useful lives | | | 21,005 | | | | — | | | | 21,005 | | | | | |
| | | | | | | | | | | | | | | | |
Total intangible assets | | $ | 10,723,466 | | | $ | (610,137 | ) | | $ | 10,113,329 | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 2005 | |
| | Gross
| | | | | | | | | Weighted Average
| |
| | Carrying
| | | Accumulated
| | | | | | Amortization Period
| |
| | Value | | | Amortization | | | Net | | | (in Years) | |
|
Intangible assets with finite lives: | | | | | | | | | | | | | | | | |
Patent applications pending | | $ | 3,029,127 | | | $ | (336,457 | ) | | $ | 2,692,670 | | | | 20.0 | |
Patents | | | 1,429,532 | | | | (506,144 | ) | | | 923,388 | | | | 15.4 | |
Licenses | | | 42,461 | | | | (17,904 | ) | | | 24,557 | | | | 15.5 | |
| | | | | | | | | | | | | | | | |
Total intangible assets with finite lives | | | 4,501,120 | | | | (860,505 | ) | | | 3,640,615 | | | | 18.5 | |
Intangible assets with indefinite useful lives | | | 24,471 | | | | — | | | | 24,471 | | | | | |
| | | | | | | | | | | | | | | | |
Total intangible assets | | $ | 4,525,591 | | | $ | (860,505 | ) | | $ | 3,665,086 | | | | | |
| | | | | | | | | | | | | | | | |
In the fourth quarter of fiscal 2006, we changed our method of accounting, effective October 1, 2005 for legal costs, all of which were external, associated with the application for patents. Prior to the change, we expensed as incurred all internal costs associated with the application for patents and capitalized external legal costs associated with the application for patents. Costs of approved patents were amortized over their estimated useful lives or if licensed, the terms of the license agreement, whichever was shorter, while costs for patents pending were amortized over the shorter period of twenty years from the date of the filing application or if licensed, the term of the license agreement. Amortization expense for these capitalized costs was classified as research and development expenses in our consolidated statements of operations. Under the new method, external legal costs are expensed as incurred and classified as research and development expenses in our consolidated statements of operations. We believe that this change is preferable because it will result in a consistent treatment for all costs, that is, under our new method both internal and external costs associated with the application for patents are expensed as incurred. In addition, the change will provide a better comparison with our industry peers. The $3.6 million cumulative effect of the change
F-27
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
on prior years as of October 1, 2005 is included as a charge to net loss in fiscal 2006, retrospectively applied to the first quarter. The effect of the change for fiscal 2006 was to increase the net loss by $3.7 million, $3.6 million of which represents the cumulative effect of the change on prior years, or $0.12 per basic and diluted share. See Note 3, “Summary of Significant Accounting Policies — Change in Accounting for Patent-Related Costs” for detailed discussion.
During fiscal 2006, FazaClo product rights (see Note 17, “Research and Licensing Agreements — CIMA Labs Inc. Royalty Agreement”), customer relationships, a trade name and a non-compete agreement were acquired in connection with the Alamo Acquisition. During fiscal 2005, there were additions of $1.3 million in capitalized patent and patent pending costs.
Amortization expense related to amortizable intangible assets was $592,000, $226,000 and $253,000 for fiscal 2006, 2005, and 2004, respectively. Charges for intangible assets abandoned and impaired for fiscal 2006, 2005 and 2004 were $8,000, $423,000 and $0, respectively. Charges for patents and patent applications pending abandoned and impaired in fiscal 2005 and 2004 were included in research and development expense in our consolidated statements of operations. Charges for trademarks abandoned are included in selling, general and administrative expense in our consolidated statements of operations.
Estimated amortization expense of intangible assets for fiscal years ending September 30 are as follows:
| | | | |
Amortization Expense | | | |
|
Fiscal year ending September 30: | | | | |
2007 | | $ | 1,681,000 | |
2008 | | | 1,665,000 | |
2009 | | | 1,525,000 | |
2010 | | | 1,386,000 | |
2011 | | | 1,304,000 | |
Thereafter | | | 2,531,000 | |
| | | | |
Total | | $ | 10,092,000 | |
| | | | |
Goodwill. In connection with the Alamo acquisition, we recognized $22.1 million goodwill in fiscal 2006 (see Note 4, “Alamo Acquisition”).
| |
11. | Accrued Expenses and Other Liabilities |
Accrued expenses and other liabilities at September 30, 2006 and 2005 are as follows:
| | | | | | | | |
| | 2006 | | | 2005 | |
|
Accrued returns, rebates and other discounts | | $ | 2,371,703 | | | $ | — | |
Accrued research and development expenses | | | 3,947,191 | | | | 1,909,229 | |
Accrued sales and marketing expenses | | | 2,354,344 | | | | 1,065,229 | |
Deferred rent | | | 680,730 | | | | 597,551 | |
Other | | | 503,671 | | | | 522,286 | |
| | | | | | | | |
Total | | $ | 9,857,639 | | | $ | 4,094,295 | |
| | | | | | | | |
| |
12. | Assumed Liabilities for Returns and Other Discounts |
In connection with the Alamo Acquisition, we assumed outstanding obligations for future product returns, chargebacks, rebates, discounts and royalties associated with pre-acquisition shipments of FazaClo. As such, we recorded liabilities in the amount of $6.4 million for such returns and other discounts based on estimated fair value
F-28
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
at the acquisition date. The following table sets forth the assumed liabilities for returns and other discounts as of September 30, 2006:
| | | | |
Balance, at acquisition date | | $ | 6,401,321 | |
Payments for returns and other discounts | | | (2,421,092 | ) |
| | | | |
Balance, at September 30, 2006 | | $ | 3,980,229 | |
| | | | |
| |
13. | Net Deferred Revenues |
The following table sets forth as of September 30, 2006 the net deferred revenue balances for our sale of future abreva® royalty rights to Drug Royalty USA, FazaClo product shipments and other agreements.
| | | | | | | | | | | | | | | | |
| | | | | FazaClo
| | | | | | | |
| | Drug Royalty
| | | Product
| | | Other
| | | | |
| | USA Agreement | | | Shipments, Net | | | Agreements | | | Total | |
|
Net deferred revenues as of October 1, 2005 | | $ | 19,049,877 | | | $ | — | | | $ | 108,333 | | | $ | 19,158,210 | |
Changes during the period: | | | | | | | | | | | | | | | | |
Shipments, net | | | — | | | | 3,955,150 | | | | — | | | | 3,955,150 | |
License fees | | | — | | | | — | | | | 2,288,638 | | | | 2,288,638 | |
Recognized as revenues during period | | | (1,937,964 | ) | | | — | | | | (154,709 | ) | | | (2,092,673 | ) |
| | | | | | | | | | | | | | | | |
Net deferred revenues as of September 30, 2006 | | $ | 17,111,913 | | | $ | 3,955,150 | | | $ | 2,242,262 | | | $ | 23,309,325 | |
| | | | | | | | | | | | | | | | |
Classified and reported as: | | | | | | | | | | | | | | | | |
Current portion of deferred revenues, | | $ | 1,981,799 | | | $ | 3,955,150 | | | $ | 1,655,614 | | | $ | 7,592,563 | |
Deferred revenues, net of current portion | | | 15,130,114 | | | | — | | | | 586,648 | | | | 15,716,762 | |
| | | | | | | | | | | | | | | | |
Total deferred revenues | | $ | 17,111,913 | | | $ | 3,955,150 | | | $ | 2,242,262 | | | $ | 23,309,325 | |
| | | | | | | | | | | | | | | | |
FazaClo Product — The amount of deferred revenues from FazaClo product shipments is shown net of estimated rebates, returns and chargebacks. The amount that ultimately will be recognized as net revenues in our consolidated financial statements may be different. See Note 3, “Significant Accounting Policies — Revenue Recognition — Product Sales, FazaClo,” for further discussion.
Drug Royalty Agreement — In December 2002, we sold to Drug Royalty USA an undivided interest in our rights to receive future abreva royalties under the license agreement with GlaxoSmithKline for $24.1 million (the “Drug Royalty Agreement” and the “GlaxoSmithKline License Agreement,” respectively). Under the Drug Royalty Agreement, Drug Royalty USA has the right to receive royalties from GlaxoSmithKline on sales of abreva until December 2013.
In accordance with SAB Topic 13, revenues are recognized when earned, collection is reasonably assured and no additional performance of services is required. We classified the proceeds received from Drug Royalty USA as deferred revenue, to be recognized as revenue ratably over the life of the license agreement consistent with SAB Topic 13 because of our continuing involvement over the term of the Drug Royalty Agreement. Such continuing involvement includes overseeing the performance of GlaxoSmithKline and its compliance with the covenants in the GlaxoSmithKline License Agreement, monitoring patent infringement, adverse claims or litigation involving abreva, and undertaking to find a new license partner in the event that GlaxoSmithKline terminates the agreement. The Drug Royalty Agreement contains both covenants (Section 8) and events of default
F-29
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Section 10) that require such performance our part. Therefore, nonperformance on our part could result in default of the arrangement, and could give rise to additional rights in favor of Drug Royalty USA under a separate security agreement with Drug Royalty USA, which could result in loss of our rights to share in future abreva royalties if wholesale sales by GlaxoSmithKline exceed $62 million a year. Because of our continuing involvement, we recorded the net proceeds of the transaction as deferred revenue, to be recognized as revenue ratably over the life of the license agreement. Based on a review of our continuing involvement, we concluded that the sale proceeds did not meet any of the rebuttable presumptions in EITF88-18 that would require classification of the proceeds as debt.
Kobayashi Docosanol License Agreement — In January 2006, we signed an exclusive license agreement with Kobayashi Pharmaceutical Co., Ltd. (“Kobayashi”), a Japanese corporation, to allow Kobayashi to market in Japan medical products that are curative of episodic outbreaks of herpes simplex or herpes labialis and that contain a therapeutic concentration of our docosanol 10% cream either as the sole active ingredient or in combination with any other ingredient, substance or compound (the “Products”) (the “Kobayashi License Agreement”). Pursuant to the terms of the Kobayashi License Agreement, we received a non-refundable know-how and data transfer fee (“License Fee”) of $860,000 in March 2006. In addition, we will be eligible to receive milestone payments of up to 450 million Japanese Yen (or up to approximately U.S. $3.8 million based on the exchange rate as of September 30, 2006), subject to achievement of certain milestones relating to the regulatory approval and commercialization of docosanol in Japan and patent and know-how royalties for sales of Products in Japan, if commercial sales commence.
Under the terms of the Kobayashi License Agreement, Kobayashi will be responsible for obtaining all necessary approvals for marketing, all sales and marketing activities and the manufacturing and distribution of the Products. Because the know-how and expertise related to the docosanol 10% cream are proprietary to us, we will be providing assistance to Kobayashi, upon their request, in completing additional required clinical studies and in filing the new drug application (“NDA”) submission for the licensed product in Japan. As of September 30, 2006, we estimated the period of time of our continuing involvement in advising and assisting Kobayashi with additional clinical studies and obtaining regulatory approval in Japan to be approximately four years. Pursuant to SAB Topic 13, revenue from the License Fee of $860,000 is deferred and being recognized on a straight-line basis over four years. Accordingly, we recognized $121,000 of the License Fee in fiscal 2006.
HBI Docosanol License Agreement — In July 2006, we entered into an exclusive license agreement with Healthcare Brands International (“HBI”), pursuant to which we granted to HBI the exclusive rights to develop and commercialize docosanol 10% in the following countries: Austria, Belgium, Czech Republic, Estonia, France, Germany, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Russia, Slovakia, Slovenia, Spain, Ukraine and the United Kingdom (the “Licensed Territory”) (the “HBI License Agreement”).
Pursuant to the HBI License Agreement, we received an upfront data and know-how transfer fee of $1.4 million in July 2006 in exchange for providing certain data (“Data Transfer Requirements”). We will also be eligible to receive £750,000 (or approximately U.S. $1.4 million based on the exchange rate as of September 30, 2006) for each of the first two regulatory approvals for marketing in any countries in the Licensed Territory. If there is any subsequent divestiture or sublicense of docosanol by HBI (including through a sale of HBI), or any initial public offering of HBI’s securities, we will receive an additional payment related to the future value of docosanol under the Agreement.
HBI will bear all expenses related to the regulatory approval and commercialization of docosanol within the Licensed Territory. HBI also has certain financing obligations, pursuant to which it will be obligated to raise a minimum amount of working capital within certain time periods following execution of the HBI License Agreement. As of September 30, 2006, we have not completed the Data Transfer Requirements; therefore, the upfront transfer fee of $1.4 million is deferred and will be recognized as revenue upon completion of Data Transfer Requirements.
F-30
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
14. | Commitments and Contingencies |
Operating lease commitments. We lease laboratory and office space and certain equipment under non-cancelable operating leases. In May 2006, we entered into a five-year lease agreement for a total of approximately 17,000 square feet of office space, commencing on July 10, 2006 with 6,245 square feet and increasing to the full amount in the second quarter of 2007. As of September 30, 2006, we were in possession of 9,245 square feet of this office space. The lease has scheduled rent increases each year and expires on June 14, 2011. As of September 30, 2006, the financial commitment for the remainder of the term of the lease is $2.5 million.
In connection with the Alamo acquisition, we acquired a lease for 5,750 square feet of sales and marketing offices, located in New Jersey. The lease has scheduled rent increases every year and expires in September 2009. As of September 30, 2006 the financial commitment for the remainder of the term of this lease is $383,000.
In March 2000 (as amended in February 2001), we entered into an eight-year lease for 27,212 square feet of office and lab space in a building located at 11388 Sorrento Valley Road, Suite 200, San Diego, California, commencing on September 1, 2000. The lease has scheduled rent increases each year and expires on August 31, 2008. As of September 30, 2006, the financial commitment for the remainder of the term of the lease is $1.6 million. We delivered an irrevocable standby letter of credit to the lessor in the amount of $388,122, to secure our performance under the lease.
In May 2002, we signed a ten-year lease for approximately 26,770 square feet of office and lab space in buildings adjacent to our existing facilities, commencing on January 15, 2003. In April 2003, we signed an amendment to the lease for an additional 3,600 square feet of space in the building adjacent to our existing facilities. The lease has scheduled rent increases each year and expires on January 14, 2013. In September 2006, we subleased approximately 9,000 square feet of these buildings. The sublease has scheduled rent increases each year and a three-year term that expires in September 2009. As of September 30, 2006, the financial commitment for the remainder of the term of the lease is $7.0 million (excluding $766,000 rental income to be received from the sublease). We delivered an irrevocable standby letter of credit to the lessor in the amount of $468,475, to secure our performance under the lease.
Rental expenses, excluding common area charges and other executory costs, were $1.9 million in fiscal 2006, $1.8 million in fiscal 2005 and $1.8 million in fiscal 2004. Sublease rental income was $18,000 in fiscal 2006. Future minimum rental payments under non-cancelable operating lease commitments as of September 30, 2006 are as follows:
| | | | |
| | Minimum
| |
Year Ending September 30, | | Payments(1) | |
|
2007 | | $ | 2,380,000 | |
2008 | | | 2,537,000 | |
2009 | | | 1,782,000 | |
2010 | | | 1,721,000 | |
2011 | | | 1,603,000 | |
Thereafter | | | 1,574,000 | |
| | | | |
Total | | $ | 11,597,000 | |
| | | | |
| | |
(1) | | Minimum payments have not been reduced by minimum sublease rentals of $766,000. Due in the future under noncancelable subleases. |
Capital lease commitments. In September 2001, January 2002 and May 2002, we acquired several pieces of equipment under three-year, four-year and five-year capital lease obligations, respectively. Each of these capital leases provides us with the option at the expiration of the lease term to purchase all the equipment leased for a price
F-31
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of one dollar ($1.00). In connection with the Alamo acquisition in May 2006, we acquired certain automobiles under36-month capital lease obligations. Each of these capital leases provides us with the option at the expiration of the lease term to purchase the automobile leased for a price of $250 plus over mileage charge at 4 cents per mile.
Future minimum payments under the capital leases as of September 30, 2006 are as follows:
| | | | |
| | Minimum
| |
Year Ending September 30, | | Payments | |
|
2007 | | $ | 252,479 | |
2008 | | | 172,092 | |
| | | | |
Total | | | 424,571 | |
Less amount representing interest | | | (22,903 | ) |
| | | | |
Present value of net lease payments | | | 401,668 | |
Less current portion | | | (230,760 | ) |
| | | | |
Long-term portion of obligation | | $ | 170,908 | |
| | | | |
Legal contingencies. In the ordinary course of business, we may face various claims brought by third parties and we may, from time to time, make claims or take legal actions to assert our rights, including intellectual property rights as well as claims relating to employment and the safety or efficacy of our products. Any of these claims could subject us to costly litigation and, while we generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage or our policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on our operations, cash flows and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business. Management believes the outcome of currently pending claims and lawsuits will not likely have a material effect on our operations or financial position.
Employment and Severance Agreements. We have an employment agreement with our Chief Executive Officer, which provides for minimum salaries, as adjusted, incentive bonuses and share-based award and severance provisions in the event of termination under specified conditions, including change of control. We also have employment agreements and change of control severance agreements with our Chief Financial Officer and certain other executive officers (“Employees”). The employment agreements provide for severance payments in the event of termination without cause. The employment agreements provide for severance payments in the event of termination without “cause” or “resignation with good reason” (as such terms are defined). If these conditions are met for a particular Employee, that Employee will receive severance payments equal to certain number of months of base salary (ranges from six to twelve months), plus an amount equal to the greater of (a) certain percentage of the Employee’s base salary or (b) certain percentage of the last bonus payment received by such Employee in the Company’s preceding fiscal year. The change in control severance agreements provide for severance payments in the event that employment is involuntarily terminated in connection with a change in control of the Company. These severance benefits will be paid only if (i) the termination of employment occurs within 12 months following the change of control and (ii) the termination was without “cause” or was a “resignation for good reason” (as such terms are defined). If these conditions are met for a particular Employee, the Employee will receive severance payments equal to either 12 or 24 months of base salary, plus an amount equal to the greater of (A) the aggregate bonus payment(s) received by such Employee in the Company’s preceding fiscal year or (B) the Employee’s then-current target bonus amount. Additionally, the vesting of outstanding equity awards will accelerate and the Employee will be entitled to up to 12 months of post-termination Company-paid benefits continuation under COBRA.
F-32
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of September 30, 2006 and 2005, notes payable consist of the following:
| | | | | | | | |
| | September 30, | |
| | 2006 | | | 2005 | |
|
Senior notes with an interest rate of LIBOR + 1.33%; interest payable monthly; principal due May 2009, net of $646,600 unamortized discount | | $ | 24,428,400 | | | $ | — | |
9.5% equipment loan due April 2008 | | | 451,405 | | | | 703,560 | |
7.9% business insurance financing due June 2007 | | | 320,957 | | | | — | |
10.43% equipment loan due February 2009 | | | 106,170 | | | | 142,881 | |
10.17% equipment loan due January 2009 | | | 79,710 | | | | 108,511 | |
| | | | | | | | |
Total | | | 25,386,642 | | | | 954,952 | |
Less: current portion | | | (670,737 | ) | | | (317,667 | ) |
| | | | | | | | |
Total long-term notes payable | | $ | 24,715,905 | | | $ | 637,285 | |
| | | | | | | | |
Senior Notes. In connection with the Alamo Acquisition, we issued three promissory notes in the respective principal amounts of $14,400,000, $6,675,000 and $4,000,000 (the “First Note,” “Second Note” and “Third Note” respectively) (collectively, the “Notes”). The Notes bear interest at an average rate equal to the London Inter-Bank Offered Rate, or “LIBOR,” plus 1.33%. LIBOR rate at September 30, 2006 was 5.33%. Interest accruing on the Notes is payable monthly and the principal amount of the Notes matures on May 24, 2009, provided that (i) the Selling Holders may demand early repayment of the First Note if the closing price of our common stock, as reported on the Nasdaq Global Market, equals or exceeds $15.00 per share for a total of 20 trading days in any 30 consecutivetrading-day period (the “Stock Contingency”), and (ii) we must apply 20% of any future net offering proceeds from equity offerings to repay the Notes (starting with the First Note), and must repay the Notes in full if we have raised in an offering more than $100,000,000 in future aggregate net proceeds. Subsequent to September 30, 2006, we completed an equity offering and received net offering proceeds of approximately $14.4 million. See Note 23, “Subsequent Events,” for further discussion. As a result, we repaid $2.9 million against the First Note in November 2006. We classified the Notes as long term, because they are not reasonably expected to require the use of existing resources.
If the Selling Holders demand repayment of the First Note following satisfaction of the Stock Contingency, we must repay the First Note within 180 days from the demand in our choice of cash or shares of common stock. At our sole option, if we elect to repay the First Note in shares of common stock, the shares will be valued at 95% of the average closing price of the common stock, as reported on the NASDAQ Global Market, for the five trading days prior to repayment, subject to a price floor.
We have the right to prepay, in cash or in common stock, the amounts due under the Notes at any time, provided that we may only pay the Notes in common stock if the Stock Contingency has occurred prior to the maturity date and if we have registered the shares on an effective registration statement filed with the SEC. If we elect to prepay the Notes with common stock, the shares will be valued at 95% of the average closing price of the common stock, as reported on the NASDAQ Global Market, for the five trading days prior to repayment, subject to a price floor.
We have concluded that the First Note, Second Note and Third Note have fair values of $14.0 million, $6.4 million, and $3.9 million, respectively. These fair value amounts were determined by discounting the expected payments on the notes to present value based on a market rate of 10.75%. The timing and amount of expected payments were determined by 1) the note repayment terms, 2) mandatory prepayments as a result of future financings, and 3) lender prepayment rights in the event a trigger event occurs. Mandatory prepayments were developed based upon management’s expectations regarding future financing activities. Trigger event likelihoods
F-33
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
were determined based upon a Monte Carlo model using an expected annual volatility of 53%. The fair values are the amounts recognized for these notes as part of recording the business combination. We recorded the notes at their fair values at the acquisition date and are accreting the debt discount over the three-year periods of the notes as interest expense.
We also evaluated the three promissory notes for features that may be considered to be embedded derivatives under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”). We concluded that the embedded derivatives shall not be bifurcated from the host contracts and accounted for separately as derivative instruments because they fail the test of not being clearly and closely related. Our assessment is based on the fact that the notes were not issued at a substantial discount to the face value, which is the first test for bifurcation from the host debt instrument.
Equipment Loans. In September 2004, we entered into a finance agreement with GE Healthcare Financial Services (“GE Capital”) that provides for loans to purchase equipment, secured by the equipment purchased. The amount of capital equipment financed and subject to lien at September 30, 2006 and 2005 under the GE Capital finance agreement is approximately $637,000 and $955,000, respectively. The loans are for a term of 42 months at annual interest rates ranging from 9.5% to 10.4% per year with fixed monthly payments.
Insurance Financing. In fiscal 2006, we obtained $360,000 from a third party to facilitate annual payments on certain insurance premiums. The financing is for a term of nine months at an annual interest rate of 7.9% with a monthly payment of approximately $41,000. The balance of this note is $321,000 at September 30, 2006.
Aggregate annual maturities of notes payable as of September 30, 2006, are as follows:
| | | | |
| | Minimum
| |
Year Ending September 30, | | Payments | |
|
2007 | | $ | 2,394,674 | |
2008 | | | 1,935,682 | |
2009 | | | 26,359,243 | |
| | | | |
Total | | | 30,689,599 | |
Less amount representing interest | | | (5,302,957 | ) |
| | | | |
Present value of payments | | | 25,386,642 | |
Less current portion | | | (670,737 | ) |
| | | | |
Long-term portion of obligation | | $ | 24,715,905 | |
| | | | |
| |
16. | Shareholders’ (Deficit) Equity |
The share and per share amounts and share prices have been adjusted for aone-for-four reverse stock split. See Note 2, “Reverse Stock Split.”
On April 1, 2004, we amended and restated our Articles of Incorporation, pursuant to the authority granted us by our shareholders at our 2004 Annual Meeting of Shareholders. Upon the filing of our Amended and Restated Articles of Incorporation, we eliminated all classes and series of stock that were no longer outstanding and increased our authorized Class A common stock to 200 million shares. As of September 30, 2006 and 2005, we have authorized 200 million shares of Class A common stock and 10 million shares of preferred stock, of which 1 million shares have been designated Class C Junior Participating Preferred.
F-34
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Preferred Stock
In March 1999, our Board of Directors approved a shareholder rights plan (the “Plan”) that provides for the issuance of Series C junior participating preferred stock to each of our shareholders of record under certain circumstances. None of the Series C junior participating preferred stock was outstanding on September 30, 2006 and 2005. The Plan provided for a dividend distribution of one preferred share purchase right (the “Right”) on each outstanding share of our Class A common stock, payable on shares outstanding as of March 25, 1999 (the “Record Date”). All shares of Class A common stock issued by the Company after the Record Date have been issued with such Rights attached. Subject to limited exceptions, the Rights would become exercisable if a person or group acquires 15% or more of our common stock or announces a tender offer for 15% or more of our common stock (a “Trigger Event”).
If and when the Rights become exercisable, each Right will entitle shareholders, excluding the person or group causing the Trigger Event (an “Acquiring Person”), to buy a fraction of a share of our Series C junior participating preferred stock at a fixed price. In certain circumstances following a Trigger Event, each Right will entitle its owner, who is not an Acquiring Person, to purchase at the Right’s then current exercise price, a number of shares of Class A common stock having a market value equal to twice the Right’s exercise price. Rights held by any Acquiring Person would become void and not be exercisable to purchase shares at the discounted purchase price.
Our Board of Directors may redeem the Rights at $0.01 per Right at any time before a person has acquired 15% or more of the outstanding common stock. The Rights will expire on March 25, 2009.
Common stock
Class A common stock.
Fiscal 2006. In October 2005, we issued and sold to certain institutional investors 1,523,585 shares of our common stock at a price of $10.60 per share, for aggregate net offering proceeds of approximately $16.2 million. In December 2005, we issued and sold to certain institutional investors 1,492,538 shares of our common stock at $13.40 per share, for aggregate offering proceeds of approximately $20.0 million and net offering proceeds of approximately $19.4 million, after deducting commissions and offering fees and expenses. These offerings were made pursuant to our shelf registration statement onForm S-3, filed with the SEC in June 2005.
In September 2006, our CEO exercised his option to pay for minimum required withholding taxes associated with certain vested shares of his restricted stock award by surrendering 29,775 shares of Class A common stock at the market price of $6.73.
Also during fiscal 2006, we issued an aggregate of 1,352,382 shares of Class A common stock in connection with the exercises of stock purchase warrants (827,575 shares at a weighted average price of $7.14 per share), employee stock options (524,807 shares at a weighted average price of $6.22 per share) and restricted stock awards (28,000 shares at price of $0.00) for cash in the aggregate amount of approximately $9.2 million.
Fiscal 2005. In September 2005, we issued to our CEO a restricted stock award to purchase 250,000 shares of Class A common stock at an exercise price of $0.004 per share (“Restricted Stock”). The Restricted Stock is subject to a right of repurchase by us at the original issue price of $0.004 per share that lapsed as to one-third of the shares in September 2006 and lapses as to an additional one-twelfth of the shares quarterly thereafter. In September 2005, the award was exercised to purchase all of 250,000 shares of Restricted Stock for total cash of $1,000. The fair value of the award totaled $3.6 million based on the5-day average closing sales price beginning 2 days before, the day of, and 2 days after the date of the agreement. The value of the Restricted Stock was recorded as unearned compensation in a separate component of shareholders’ equity to be amortized as compensation expense ratably over the repurchase period of three years. Pursuant to FAS 123R, unamortized unearned compensation of $3.5 million at October 1, 2005 was eliminated against common stock upon the adoption of FAS 123R. See Note 3, “Significant Accounting Policies — Change in Accounting Method for Share-based Compensation.”
F-35
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During fiscal 2006 and 2005, $1.1 million and $78,000, respectively, was charged to compensation expense. As of September 30, 2006 and 2005, 83,335 and 0 shares, respectively, of the Restricted Stock was vested.
In April 2005, we issued and sold 1,942,500 shares of Class A common stock in a registered direct offering at a price of $8.80 per share, for aggregate offering proceeds of approximately $17.1 million and net offering proceeds of approximately $15.9 million, after deducting commissions and offering fees and expenses. The offering was made pursuant to our shelf registration statement onForm S-3, filed with the SEC on April 9, 2004.
In March 2005, we issued 500,000 shares of Class A common stock, with a fair value of $5.3 million, to IriSys, Inc. (“IriSys”) in connection with the acquisition of additional contractual rights to Zenvia, our late-stage drug candidate for the treatment of multiple central nervous system disorders. We valued these shares at $10.60 per share, based on the5-day average closing price of our common stock, beginning two days before and ending two days after the close and announcement of the agreement on March 9, 2005. See Note 19, “Related Party Transactions,” for further discussions.
In December 2004, we issued and sold to an institutional investor 583,333 shares of Class A common stock at a price of $12.00 per share, for aggregate net offering proceeds of approximately $7 million. The offering was made pursuant to our shelf registration statement onForm S-3, filed with the SEC on April 9, 2004.
Also during fiscal 2005, we issued an aggregate of 239,459 shares of Class A common stock in connection with the exercise of stock purchase warrants (211,486 shares at a weighted average price of $6.12 per share) and employee stock options (27,973 shares at a weighted average price of $4.48 per share) for cash in the aggregate amount of approximately $1.4 million.
Fiscal 2004. In August 2004, we issued to the Ciblex Corporation 259,202 shares of Class A common stock in connection with an amendment to that certain Technology Acquisition Agreement with Ciblex dated August 2001.
In June 2004, we completed an underwritten public offering of 4,921,260 shares of Class A common stock at $5.08 per share ($4.72 per share after underwriter’s discount). The financing transaction was made pursuant to the terms of an underwriting agreement. On June 10, 2004, the underwriter exercised its option to purchase from us an additional 738,189 shares of Class A common stock at the public offering price of $5.08 per share ($4.72 per share after underwriter’s discount) to cover over-allotments. This offering generated net proceeds of approximately $26.5 million after the underwriter’s discount of $2.0 million and issuance costs of approximately $267,000.
In December 2003, we sold and issued 1,345,579 shares of Class A common stock and warrants to purchase an additional 807,347 shares of Class A common stock to several accredited investors and received approximately $8.0 million in gross proceeds. The warrant exercise price is $7.00 per share. The financing transaction was made pursuant to the terms of a securities purchase agreement that provided each investor with a warrant to purchase six-tenths of a share of Class A common stock for every share of Class A common stock purchased under the agreement. The effect of the financing transaction was an increase in cash and shareholders’ equity in the amount of approximately $7.5 million after taking into effect the costs of the transaction. In connection with this transaction and its costs, the placement agent was paid $415,000 in fees and expenses, and issued a warrant to purchase 40,367 shares of our Class A common stock at $7.00 per share.
Also during fiscal 2004, we issued an aggregate of 104,726 shares of Class A common stock in connection with the exercise of stock purchase warrants (73,724 shares at a weighted average price of $6.36 per share) and employee stock options (31,002 shares at a weighted average price of $5.20 per share) for cash in the aggregate amount of approximately $609,000, representing a weighted average price per share of $5.80.
F-36
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of common stock transactions during fiscal 2006, 2005 and 2004 are shown below.
| | | | | | | | | | | | | | | | |
Common Stock Issued and Warrants
| | | | | Class A
| | | Gross Amount
| | | Average Price
| |
and Stock Options Exercised | | Date | | | Common Stock | | | Received(1) | | | Per Share(2) | |
|
Fiscal year ended September 30, 2006: | | | | | | | | | | | | | | | | |
Private placement of common stock | | | October 2005 | | | | 1,523,585 | | | $ | 16,150,001 | | | $ | 10.60 | |
Private placement of common stock | | | December 2005 | | | | 1,492,538 | | | | 19,400,002 | | | $ | 13.00 | |
Restricted stock award | | | Various | | | | 28,000 | | | | 112 | | | $ | 0.00 | |
Stock options | | | Various | | | | 524,807 | | | | 3,264,953 | | | $ | 6.22 | |
Warrants(4) | | | Various | | | | 827,575 | | | | 5,908,997 | | | $ | 7.14 | |
| | | | | | | | | | | | | | | | |
Total | | | | | | | 4,396,505 | | | $ | 44,724,065 | | | | | |
| | | | | | | | | | | | | | | | |
Fiscal year ended September 30, 2005: | | | | | | | | | | | | | | | | |
Private placement of common stock | | | December 2004 | | | | 583,333 | | | $ | 6,999,999 | | | $ | 12.00 | |
Private placement of common stock | | | April 2005 | | | | 1,942,500 | | | | 17,094,000 | | | $ | 8.80 | |
Acquisition of certain contractual rights to Zenvia | | | March 2005 | | | | 500,000 | | | | 5,300,000 | | | $ | 10.60 | |
Restricted stock award | | | September 2005 | | | | 250,000 | | | | 1,000 | | | $ | 0.00 | |
Stock options | | | Various | | | | 27,974 | | | | 125,491 | | | $ | 4.49 | |
Warrants(4) | | | Various | | | | 211,486 | | | | 1,293,339 | | | $ | 6.12 | |
| | | | | | | | | | | | | | | | |
Total | | | | | | | 3,515,293 | | | $ | 30,813,829 | | | | | |
| | | | | | | | | | | | | | | | |
Fiscal year ended September 30, 2004: | | | | | | | | | | | | | | | | |
Underwritten public offering(3) | | | June 2005 | | | | 5,659,449 | | | $ | 26,737,500 | | | $ | 4.72 | |
Private placement of common stock and warrants | | | December 2004 | | | | 1,345,579 | | | | 8,019,652 | | | $ | 5.96 | |
Issuance of common stock to Ciblex | | | August 2005 | | | | 259,202 | | | | 2,733,023 | | | $ | 10.54 | |
Conversions of Class B common stock | | | Various | | | | 3,375 | | | | 8,395 | | | $ | 2.49 | |
Stock options | | | Various | | | | 31,002 | | | | 160,823 | | | $ | 5.19 | |
Warrants(4) | | | Various | | | | 73,724 | | | | 448,671 | | | $ | 6.09 | |
| | | | | | | | | | | | | | | | |
Total | | | | | | | 7,372,331 | | | $ | 38,108,064 | | | | | |
| | | | | | | | | | | | | | | | |
| | |
(1) | | Amount received represents the amount before the cost of financing and after underwriter’s discount, if any. |
|
(2) | | Average price per share has been rounded to two decimal places. |
|
(3) | | Price per share of $4.72 in the underwritten public offering is after underwriter’s discount of $2.0 million, representing approximately $0.36 per share. |
|
(4) | | Includes 4,780 shares issued on a “cashless” exercise basis at an average exercise price of $4.20 per share. |
Class B common stock conversions. As of September 30, 2004, there were no shares of Class B common stock issued or outstanding. During fiscal 2004, 3,375 shares of Class B common stock were converted to 3,375 shares of Class A common stock. In March 2004, our shareholders voted on, and approved an amendment to our articles of incorporation that eliminated our Class B common stock.
Warrants
Between January 26, 2006 and February 7, 2006, we received proceeds of $4.7 million from the exercise of warrants to purchase 671,923 shares of Class A common stock in connection with our call for redemption of a group
F-37
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of outstanding warrants. The warrants had been issued in connection with a financing transaction in December 2003 involving the sale of Class A common stock and warrants (the “Warrants”). The exercise price of the Warrants was $7.00 per share. The Warrants had a five-year term, but included a provision that we could redeem the Warrants for $1.00 each if our stock price traded above twice the warrant exercise price for a certain period of time (the “Redemption Right”). On January 24, 2006, we sent the Warrant holders notice that the Redemption Right had been triggered and that the Warrants would expire, to the extent unexercised, on February 7, 2006. One of the warrants to purchase 25,167 shares of Class A common stock expired unexercised.
Also during fiscal 2006, Class A warrant holders exercised their rights to purchase an aggregate of 155,652 shares of Class A common stock for total cash of $1.2 million. As of September 30, 2006, Class A warrants to purchase 269,305 shares at $8.92 remained outstanding.
The following table summarizes all warrant activity for fiscal 2006, 2005 and 2004:
| | | | | | | | | | | | |
| | Shares of Class A
| | | Weighted
| | | | |
| | Common Stock
| | | Average
| | | | |
| | Purchasable Upon
| | | Exercise Price
| | | Range of
| |
| | Exercise of Warrants | | | per Share | | | Exercise Prices | |
|
Outstanding at October 1, 2003 | | | 572,475 | | | $ | 7.64 | | | $ | 3.64 - $10.88 | |
Issued | | | 850,727 | | | $ | 7.00 | | | $ | 7.00 | |
Tendered(1) | | | (7,720 | ) | | $ | 4.20 | | | $ | 4.20 | |
Exercised | | | (73,724 | ) | | $ | 6.36 | | | $ | 4.20 - $ 7.00 | |
Expired | | | (8,219 | ) | | $ | 9.76 | | | $ | 9.76 | |
| | | | | | | | | | | | |
Outstanding at September 30, 2004 | | | 1,333,539 | | | $ | 7.32 | | | $ | 5.52 - $10.88 | |
Exercised | | | (211,492 | ) | | $ | 6.12 | | | $ | 5.80 - $ 8.76 | |
| | | | | | | | | | | | |
Outstanding at September 30, 2005 | | | 1,122,047 | | | $ | 7.56 | | | $ | 7.00 - $ 8.92 | |
Exercised | | | (827,575 | ) | | $ | 7.14 | | | $ | 7.00 - $ 8.92 | |
Expired | | | (25,167 | ) | | $ | 7.00 | | | $ | 7.00 | |
| | | | | | | | | | | | |
Outstanding at September 30, 2006 | | | 269,305 | | | $ | 8.92 | | | $ | 8.92 | |
| | | | | | | | | | | | |
| | |
(1) | | Warrant shares tendered represent 7,720 in the amount of warrant shares given up, in lieu of cash, for warrants exercised (“cashless exercise”). |
Employee Equity Incentive Plans
We currently have five equity incentive plans (the “Plans”): the 2005 Equity Incentive Plan (the “2005 Plan”), the 2003 Equity Incentive Plan (the “2003 Plan”), the 2000 Stock Option Plan (the “2000 Plan”), the 1998 Stock Option Plan (the “1998 Plan”) and the 1994 Stock Option Plan (the “1994 Plan”), which are described below. All of the Plans were approved by the shareholders, except for the 2003 Equity Incentive Plan, which was approved solely by the Board of Directors. Stock-based awards are subject to terms and conditions established by the Compensation Committee of our Board of Directors. Our policy is to issue new common shares upon the exercise of stock options, conversion of share units or purchase of restricted stock.
During fiscal 2006, we granted share-based awards under both the 2003 Plan and the 2005 Plan. Under the 2003 Plan and 2005 Plan, options to purchase shares, restricted stock units, restricted stock and other share-based awards may be granted to our employees and consultants. Under the Plans, as of September 30, 2006, we had an aggregate of 2,207,305 shares of our common stock reserved for issuance. Of those shares, 1,527,800 were subject to outstanding options and other awards and 679,505 shares were available for future grants of share-based awards. We also issued share-based awards outside of the Plans. As of September 30, 2006, options to purchase
F-38
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
140,000 shares of our common stock that were issued outside of the Plans (inducement option grants) are outstanding. None of the share-based awards is classified as a liability as of September 30, 2006.
2005 Equity Incentive Plan. On March 17, 2005, our shareholders approved the adoption of the 2005 Plan that initially provided for the issuance of up to 500,000 shares of Class A common stock, plus an annual increase beginning in fiscal 2006 equal to the lesser of (a) 1% of the shares of Class A common stock outstanding on the last day of the immediately preceding fiscal year, (b) 325,000 shares of Class A common stock, or (c) such lesser number of shares of Class A common stock as the board of directors shall determine. Pursuant to the provisions of annual increases, the number of authorized shares of Class A common stock for issuance under the 2005 Plan increased by 273,417 shares to 773,417 shares effective November 16, 2005. In February 2006, our shareholders eliminated the limitation on number of shares of Class A common stock that may be issued under the 2005 Plan. The 2005 Plan allows us to grant options, restricted stock awards and stock appreciation rights to our directors, officers, employees and consultants. As of September 30, 2006 and 2005, 249,687 and 321,250 shares of Class A common stock, respectively, remained available for issuance under the 2005 Plan. On November 30, 2006, the number of shares of Class A common stock available for issuance under the 2005 Plan increased by 317,084 shares in accordance with the provisions for annual increases under the 2005 Plan.
2003 Equity Incentive Plan. On March 13, 2003, the board of directors approved the adoption of the 2003 Plan that provides for the issuance of up to 625,000 shares of Class A common stock, plus an annual increase beginning January 2004 equal to the lesser of (a) 5% of the number of shares of Class A common stock outstanding on the immediately preceding December 31, or (b) a number of shares of Class A common stock set by the board of directors. The 2003 Plan allows us to grant options, restricted stock awards and stock appreciation rights to our directors, officers, employees and consultants. As of September 30, 2006 and 2005, 343,813 and 582,500 shares of Class A common stock, respectively, remained available for issuance under the 2003 Plan. On November 30, 2006, the number of shares of Class A common stock available for issuance under the 2003 Plan increased by 1,528,474 shares in accordance with the provisions for annual increases under the 2003 Plan.
2000 Stock Option Plan. On March 23, 2000, our shareholders approved the adoption of the 2000 Plan, pursuant to which an aggregate of 575,000 shares of our Class A common stock have been reserved for issuance. On March 14, 2002, our shareholders approved an amendment to the 2000 Plan to increase the number of shares of Class A common stock issuable under the Plan by 250,000 shares, for an aggregate of 825,000 shares. On March 13, 2003, we amended the 2000 Plan to allow for the issuance of restricted stock awards. As of September 30, 2006 and 2005, 75,721 and 2,442 shares of Class A common stock, respectively, were available for grant under the 2000 Plan.
1998 Stock Option Plan. On February 19, 1999, our shareholders approved the 1998 Plan. The 1998 Plan as amended in 2002 provides for the issuance of up to an aggregate of 468,750 shares of Class A common stock. The 1998 Plan allows us to grant options to our directors, officers, employees and consultants. As of September 30, 2006 and 2005, options to purchase 10,284 and 1,826 shares of Class A common stock, respectively, were available for grant under the 1998 Plan.
Stock Options. Stock options are granted with an exercise price equal to the current market price of our common stock at the grant date and have10-year contractual terms. Options awards typically vest in accordance with one of the following schedules:
a. 25% of the option shares vest and become exercisable on the first anniversary of the grant date and the remaining 75% of the option shares vest and become exercisable quarterly in equal installments thereafter over three years;
b. One-third of the option shares vest and become exercisable on the first anniversary of the grant date and the remaining two-thirds of the option shares vest and become exercisable daily or quarterly in equal installments thereafter over two years; or
c. Options fully vest and become exercisable at the date of grant.
F-39
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans).
Summaries of stock options outstanding and changes during fiscal 2006 are presented below.
| | | | | | | | | | | | | | | | |
| | | | | | | | Weighted Average
| | | | |
| | | | | Weighted Average
| | | Remaining
| | | Aggregate
| |
| | | | | Exercise Price Per
| | | Contractual Term
| | | Intrinsic
| |
| | Number of Shares | | | Share | | | (in Years) | | | Value | |
|
Outstanding, October 1, 2003 | | | 1,327,151 | | | $ | 7.84 | | | | | | | | | |
Granted | | | 60,750 | | | $ | 7.24 | | | | | | | | | |
Exercised | | | (31,002 | ) | | $ | 5.20 | | | | | | | | | |
Forfeited | | | (18,616 | ) | | $ | 11.06 | | | | | | | | | |
Expired | | | (24,885 | ) | | $ | 10.16 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding, September 30, 2004 | | | 1,313,398 | | | $ | 7.80 | | | | | | | | | |
Granted | | | 379,875 | | | $ | 12.60 | | | | | | | | | |
Exercised | | | (27,974 | ) | | $ | 4.48 | | | | | | | | | |
Forfeited | | | (56,641 | ) | | $ | 14.18 | | | | | | | | | |
Expired | | | (8,624 | ) | | $ | 13.75 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding, September 30, 2005 | | | 1,600,034 | | | $ | 8.76 | | | | | | | | | |
Granted | | | 658,312 | | | $ | 10.83 | | | | | | | | | |
Exercised | | | (524,807 | ) | | $ | 6.22 | | | | | | | | | |
Forfeited | | | (146,094 | ) | | $ | 12.68 | | | | | | | | | |
Expired | | | (375 | ) | | $ | 10.00 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding, September 30, 2006 | | | 1,587,070 | | | $ | 10.07 | | | | 7.2 | | | $ | 817,000 | |
| | | | | | | | | | | | | | | | |
Vested and expected to vest in the future, September 30, 2006 | | | 1,472,726 | | | $ | 10.05 | | | | 7.2 | | | $ | 799,000 | |
| | | | | | | | | | | | | | | | |
Exercisable, September 30, 2006 | | | 765,411 | | | $ | 8.98 | | | | 5.0 | | | $ | 732,000 | |
| | | | | | | | | | | | | | | | |
Exercisable, September 30, 2005 | | | 1,257,896 | | | $ | 7.92 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Exercisable, September 30, 2004 | | | 1,164,103 | | | $ | 7.96 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
The weighted average grant-date fair values of options granted during fiscal 2006, 2005 and 2004 were $6.85, $11.36 and $7.24 per share, respectively. The total intrinsic value of options exercised during fiscal 2006, 2005 and 2004 was $4.6 million, $228,000 and $72,000, respectively, based on the differences in market prices on the dates of exercise and the option exercise prices.
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model (“Black-Scholes model”) that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of our common stock and other factors. The expected term of options granted is based on analyses of historical employee termination rates and option exercises. The risk-free interest rates are
F-40
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant.
Assumptions used in the Black-Scholes model for options granted during fiscal 2006, 2005 and 2004 were as follows:
| | | | | | |
| | 2006 | | 2005 | | 2004 |
|
Expected volatility | | 77.4% - 80.4% | | 76.6% - 130.2% | | 132.9 - 133.3% |
Weighted-average volatility | | 78.4% | | 95.5% | | 133.1% |
Average expected term in years | | 4.5 | | 3.4 | | 3.4 |
Risk-fee interest rate (zero coupon U.S. Treasury Note) | | 4.5% | | 3.8% | | 2.4% |
Expected dividend yield | | 0% | | 0% | | 0% |
The following table summarizes information concerning outstanding and exercisable Class A stock options as of September 30, 2006:
| | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | | | | | | |
| | | | | Weighted
| | | | | | Options Exercisable | |
| | | | | Average
| | | Weighted
| | | | | | Weighted
| |
| | | | | Remaining
| | | Average
| | | | | | Average
| |
| | Number
| | | Contractual
| | | Exercise
| | | Number
| | | Exercise
| |
Range of Exercise Prices | | Outstanding | | | Life in Years | | | Price | | | Exercisable | | | Price | |
|
$ 1.20 – $ 4.64 | | | 214,271 | | | | 4.2 | | | $ | 3.98 | | | | 214,271 | | | $ | 3.98 | |
$ 5.12 – $ 6.92 | | | 234,725 | | | | 6.3 | | | $ | 6.13 | | | | 124,225 | | | $ | 6.10 | |
$ 7.12 – $ 9.92 | | | 196,921 | | | | 6.6 | | | $ | 8.66 | | | | 132,128 | | | $ | 8.99 | |
$10.10 – $10.70 | | | 181,750 | | | | 9.6 | | | $ | 10.64 | | | | 3,126 | | | $ | 10.24 | |
$11.08 – $11.76 | | | 327,892 | | | | 8.7 | | | $ | 11.69 | | | | 45,914 | | | $ | 11.70 | |
$12.12 – $13.84 | | | 262,061 | | | | 7.2 | | | $ | 13.26 | | | | 183,797 | | | $ | 13.33 | |
$14.28 – $19.38 | | | 169,450 | | | | 7.6 | | | $ | 16.19 | | | | 61,950 | | | $ | 17.10 | |
| | | | | | | | | | | | | | | | | | | | |
| | | 1,587,070 | | | | 7.2 | | | $ | 10.07 | | | | 765,411 | | | $ | 8.98 | |
| | | | | | | | | | | | | | | | | | | | |
Restricted stock units. RSUs generally vest based on three years of continuous service and may not be sold or transferred until the awardee’s termination of service. The following table summarizes the RSU activities for fiscal 2006:
| | | | | | | | |
| | | | | Weighted Average
| |
| | | | | Grant Date
| |
| | Number of Shares | | | Fair Value | |
|
Unvested, October 1, 2005 | | | — | | | $ | — | |
Granted | | | 51,480 | | | $ | 15.54 | |
Vested | | | — | | | $ | — | |
Forfeited | | | — | | | $ | — | |
| | | | | | | | |
Unvested, September 30, 2006 | | | 51,480 | | | $ | 15.54 | |
| | | | | | | | |
The grant-date fair value of RSUs granted during fiscal 2006 was $800,000. No RSUs were granted during fiscal 2005 and 2004. As of September 30, 2006, the total unrecognized compensation cost related to unvested shares was $550,000, which is expected to be recognized over a weighted-average period of 2.4 years, based on the vesting schedules.
F-41
AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted stock awards. Restricted stock awards are grants that entitle the holder to acquire shares of restricted common stock at a fixed price, which is typically nominal. The shares of restricted stock cannot be sold, pledged, or otherwise disposed of until the award vests and any unvested shares may be reacquired by us for the original purchase price following the awardee’s termination of service. The restricted stock awards typically vest on the second or third anniversary of the grant date or on a graded vesting schedule over three years of employment. A summary of our unvested restricted stock awards as September 30, 2006 and changes during the fiscal year then ended are presented below.
| | | | | | | | |
| | | | | Weighted Average
| |
| | | | | Grant Date
| |
| | Number of Shares | | | Fair Value | |
|
Unvested, October 1, 2005 | | | 250,000 | | | $ | 14.22 | |
Granted | | | 57,250 | | | $ | 11.34 | |
Vested | | | (83,335 | ) | | $ | 14.22 | |
Forfeited | | | — | | | $ | — | |
| | | | | | | | |
Unvested, September 30, 2006 | | | 223,915 | | | $ | 13.48 | |
| | | | | | | | |
The grant-date fair value of restricted stock awards granted fiscal 2006 was $649,000. No restricted stock awards were granted in fiscal 2005 and 2004. As of September 30, 2006, the total unrecognized compensation cost related to unvested shares was $2.4 million, which is expected to be recognized over a weighted-average period of 1.7 years.
During fiscal 2006, 2005 and 2004, we received a total of $3.3 million, $126,000 and $161,000, respectively, in cash from exercised options and restricted stock awards under all share-based payment arrangements. No tax benefit was realized for the tax deductions from option exercise of the share-base payment arrangements in fiscal 2006, 2005 and 2004.
Review of Stock Options Practices and Related Accounting. On July 28, 2006, the Public Company Accounting Oversight Board (PCAOB) issued Staff Audit Practice Alert No. 1 entitled,“Matters Relating to Timing and Accounting for Options Grants.” Prompted by the PCAOB release, the Company and the independent audit committee of the Board of Directors authorized a review of the Company’s historical stock option practices. The review was conducted with the assistance of an outside law firm and an outside consulting firm.
As a result of this review one exception was found in which the measurement date for 50,000 fully vested common stock options should have been November 30, 1999 instead of October 30, 1999. Based on this, the Company should have recorded a non-cash charge of $302,500 and a corresponding increase in common stock in the first quarter of fiscal year 2000. The Company has concluded that this adjustment is not material to the Company’s consolidated financial statements in any interim or annual period presented in this or any previously filedForm 10-K. Therefore, the charge was recognized in the quarter ended September 30, 2006.
Based upon this review, management and the independent audit committee of the Board of Directors were satisfied that no evidence was found that indicated that the Company otherwise intentionally manipulated stock option grant dates or was remiss in communicating grants to optionees in a timely manner. Further, the Company’s documentation and practices followed the intent of the Board of Directors in granting such options and that the methods of approval and the Company’s practices did not provide for management discretion in selecting or manipulating the option grant dates.
| |
17. | Research and Licensing Agreements |
Eurand, Inc. In August 2006, we entered into a development and license agreement (“Eurand Agreement”) with Eurand, Inc. (“Eurand”), under which Eurand will provide research and development services (“R&D”) using
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AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Eurand’s certain proprietary technology to develop aonce-a-day controlled release capsule, a new formulation, of Zenvia for the treatment of IEED/PBA (“Controlled-Release Zenvia”). Under the terms of the Eurand Agreement, we will pay Eurand for development services on a time and material basis. We will be required to make payments up to $7.6 million contingent upon achievement of certain development milestones and up to $14.0 million contingent upon achievement of certain sales targets. In addition, we will be required to make royalty payments based on sales of Controlled-Release Zenvia. We have recorded $283,000 in fees and services relating to the Eurand Agreement in fiscal 2006.
CIMA Labs Inc. Royalty Agreement In connection with the Alamo Acquisition, we acquired a development, license and supply agreement with CIMA Labs Inc., which holds intellectual property rights related to certain aspects of the development and production of FazaClo (the “FazaClo Supply Agreement”). The FazaClo Supply Agreement grants, through our Alamo subsidiary, an exclusive license to us to market, distribute and sell FazaClo. The FazaClo Supply Agreement provides royalty rates of 5% to 6%, based on annual net revenue and minimum annual royalty targets set forth in the agreement. Minimum future annual royalty payments under the agreement are as follows:
| | | | |
Twelve-month period ending December 31: | | | | |
2006 | | $ | 250,000 | |
2007 | | $ | 300,000 | |
2008 and each year thereafter | | $ | 400,000 | |
Royalty expense is recognized in cost of product sales when revenue from FazaClo shipments is recognized. As of September 30, 2006, $106,000 in royalty costs were paid but not recognized as expense and are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets.
| |
18. | License and Research Collaboration Agreements |
AstraZeneca UK Limited (“AstraZeneca”). In July 2005, we entered into an exclusive license and research collaboration agreement with AstraZeneca regarding the license of certain compounds for the potential treatment of cardiovascular disease. Under the terms of the agreement, we will be eligible to receive royalty payments, assuming the licensed product is successfully developed by AstraZeneca and approved for marketing by the FDA. We are also eligible to receive up to $330 million in milestone payments contingent upon AstraZeneca’s performance and achievement of certain development and regulatory milestones, which could take several years of further development, including achievement of certain sales targets, if a licensed compound is approved for marketing by the FDA. Pursuant to the agreement with AstraZeneca, we will also perform certain research activities directed and funded by AstraZeneca.
Under this agreement, we received a license fee of $10 million in July 2005 that we recognized as revenue upon delivery of certain physical quantities of compounds, the designs of the compounds and structure-activity relationships, the conceptual framework and mechanism of action, and the rights to the patents or patents pending for such compounds. In determining whether the license has standalone value from the research activities, which is one of the necessary conditions for allocating revenue under a multiple deliverable arrangement, we concluded that AstraZeneca had the ability to continue development of the licensed compounds without our expertise and knowledge. AstraZeneca controls all aspects of development of the lead compound and other compounds that were provided by us under the agreement, and is solely responsible for ongoing development costs and efforts. We are not obligated to, and do not, take part in the ongoing development of any of the compounds, nor is our expertise and knowledge necessary for AstraZeneca’s continued development.
Also under the agreement, AstraZeneca is paying us for certain research services of between $2.5 million and $4.0 million a year for a period of up to three years. Such research services that we provide to AstraZeneca are for specific projects and research activities assigned and directed by AstraZeneca that are primarily in connection with discovery of a screening assay, which is a unique method of testing or screening for additional compounds that
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AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
could be used for the same therapeutic target. Such additional research and testing activities performed by us are not necessary for the successful development of the licensed compounds. Further, a reduction in, or termination of, the research services under the agreement would not affect other rights and obligations under the agreement, including the license grant to AstraZeneca, our right to keep the license fees already received from AstraZeneca, and the milestone and royalty payments that we would be entitled to receive if the licensed compounds are successfully developed and commercialized by AstraZeneca. The rate being billed by us for the services represents fair value for such services, and is consistent with average rates charged by contract research organizations and other similar service providers in the biopharmaceutical industry.
In accordance with EITF00-21, we determined that the license fee and research and development services are separate units of accounting, because the license has value to AstraZeneca on a standalone basis, there is objective and reliable evidence of the fair value of the undelivered research collaboration services and there is no right of return or refund relative to the license. We determined that the license fee has a standalone value because similar technology is sold separately by other vendors and AstraZeneca has the ability to sell or transfer the license. Revenue from research and development services is recognized during the period in which the services are performed and is based upon the number of FTE personnel working on the project at theagreed-upon rates. Payments related to substantive, performance-based milestones are recognized as revenue upon the achievement of the milestones as specified in the agreement.
As of September 30, 2005, we had delivered the license and therefore, we recognized the $10.0 million up-front payment as revenue in fiscal 2005. In fiscal 2006, we recognized $5.0 million revenue upon achievement of the first milestone. In addition, we have recorded research and development services and direct cost reimbursement revenues of approximately $5.8 million and $825,000 in fiscal 2006 and 2005, respectively.
Novartis International Pharmaceutical Ltd. (“Novartis”). In April 2005, we entered into an exclusive license and research collaboration agreement with Novartis regarding the license of certain compounds that regulate macrophage migration inhibitory factor (“MIF”) in the treatment of various inflammatory diseases. Under the terms of the agreement, we will be eligible to receive royalty payments, assuming the licensed product is successfully developed by Novartis and approved for marketing by the FDA. We are also eligible to receive up to $198 million in milestone payments contingent upon Novartis’ performance and achievement of certain development and regulatory milestones, including approval for certain additional indications, and regulatory milestones, which could take several years of further development by Novartis, including achievement of certain sales targets, if a licensed compound is approved for marketing by the FDA. Pursuant to the agreement with Novartis, we will also perform certain research activities directed and funded by Novartis.
Under this agreement, we received a data transfer fee of $2.5 million that we recognized as revenue in May 2005 upon the transfer and delivery of certain physical quantities of compounds that regulate MIF, the designs of the compounds and structure-activity relationships, the conceptual framework and mechanism of action, and the rights to the patents or patents pending for such compounds. In determining whether the license has standalone value from the research activities, we concluded that Novartis had the ability to continue development of the licensed compounds without our expertise and knowledge. Novartis controls all aspects of development of the licensed compounds that were provided by us under the agreement, and is solely responsible for ongoing development costs and efforts. We are not obligated to, and do not, take part in the ongoing development of any of the compounds, nor is our expertise and knowledge necessary for Novartis’ continued development.
Also under the agreement, Novartis is paying us for certain research services of between $1.5 million and $2.5 million a year for two years from the date of the agreement. Such research services that we provide to Novartis are for specific projects and research activities assigned and directed by Novartis. Such additional research and testing activities performed by us are not necessary for the successful development of the licensed compounds. Further, a reduction in, or termination of, the research services under the agreement would not affect other rights and obligations under the agreement, including the license grant to Novartis, our right to keep the data transfer fee already received from Novartis, and the milestone and royalty payments that we would be entitled to receive if one
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AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
or more of the licensed compounds are successfully developed and commercialized by Novartis. The rate being billed by us for the services represents fair value for such services, and is consistent with average rates charged by contract research organizations and other similar service providers in the biopharmaceutical industry.
In accordance with EITF00-21, we determined that the license fee and research and development services are separate units of accounting, because the license has value to Novartis on a standalone basis, there is objective and reliable evidence of the fair value of the undelivered research collaboration services and there is no right of return or refund relative to the license. We determined that the license fee has a standalone value because similar technology is sold separately by other vendors and Novartis has the ability to sell or transfer the license. Revenue from research and development services is recognized during the period in which the services are performed and is based upon the number of FTE personnel working on the project at the agreed- upon rates. Payments related to substantive, performance-based milestones are recognized as revenue upon the achievement of the milestones as specified in the agreement.
As of September 30, 2005, we had delivered the license and therefore, we recognized the $2.5 million up-front payment as revenue in fiscal 2005. In addition, we have recorded research and development services revenue of approximately $2.0 million and $682,000 in fiscal 2006 and 2005, respectively.
HBI Docosanol License Agreement — In July 2006, we entered into an exclusive license agreement with Healthcare Brands International, pursuant to which we granted to HBI the exclusive rights to develop and commercialize docosanol 10% in the following countries: Austria, Belgium, Czech Republic, Estonia, France, Germany, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Russia, Slovakia, Slovenia, Spain, Ukraine and the United Kingdom. The HBI License Agreement automatically expires on acountry-by-country basis upon the later to occur of (a) the 15th anniversary of the first commercial sale in each respective country in the Licensed Territory or (b) the date the last claim of any patent licensed under the HBI License Agreement expires or is invalidated that covers sales of licensed products in each such country in the Licensed Territory.
Kobayashi Docosanol License Agreement — In January 2006, we signed an exclusive license agreement with Kobayashi Pharmaceutical Co., Ltd., a Japanese corporation, to allow Kobayashi to market in Japan medical products that are curative of episodic outbreaks of herpes simplex or herpes labialis and that contain a therapeutic concentration of our docosanol 10% cream either as the sole active ingredient or in combination with any other ingredient, substance or compound. The Kobayashi License Agreement automatically expires upon the latest to occur of (1) the tenth anniversary of the first commercial sale in Japan, (2) the last expiration date of any patent licensed under the Kobayashi License Agreement, or (3) the last date of expiration of the post marketing surveillance period in Japan.
CTS Chemical Industries, Ltd. (“CTS”). In July 1993, we entered into a license agreement with CTS giving them the rights to manufacture and sell docosanol 10% cream as a topical cold sore treatment in Israel. The five-year period of the license began in June 2002, the date of approval of the product by regulatory agencies in Israel. Under the terms of the agreement, CTS is responsible for manufacturing, marketing, sales and distribution of docosanol 10% cream in Israel, and paying a royalty to us on product sales. The agreement includes a supply provision under which CTS purchases its entire requirement of active ingredient from us for use in the manufacture of topical docosanol 10% cream. CTS launched the product, Abrax, in January 2003.
Boryung Pharmaceuticals Company Ltd (“Boryung”). In March 1994, we entered into a12-year exclusive license and supply agreement with Boryung, giving them the rights to manufacture and sell docosanol 10% cream in the Republic of Korea. Under the terms of the agreement, Boryung is responsible for manufacturing, marketing, sales and distribution of docosanol 10% cream, and paying a royalty to us on product sales. The agreement includes a supply provision under which Boryung purchases from us its entire requirement of active ingredient for use in the manufacture of topical docosanol 10% cream. Boryung launched the product, Herepair, in June 2002.
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AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
GlaxoSmithKline Subsidiary, SB Pharmco Puerto Rico, Inc. (“GlaxoSmithKline”). On March 31, 2000, we signed an exclusive license agreement with GlaxoSmithKline (NYSE: GSK) for rights to manufacture and sell Abreva (docosanol 10% cream) as anover-the-counter product in the United States and Canada as a treatment for recurrent oral-facial herpes. Under the terms of the license agreement, GlaxoSmithKline Consumer Healthcare is responsible for all sales and marketing activities and the manufacturing and distribution of Abreva in North America. The terms of the license agreement provide for us to earn royalties on product sales. In October 2000 and August 2005, GlaxoSmithKline launched Abreva in the United States and Canada, respectively. All milestones under the agreement were earned and paid prior to fiscal 2003. During fiscal 2003, we sold an undivided interest in the GlaxoSmithKline license agreement to Drug Royalty with a term until the later of December 13, 2013 or until the expiration of the patent for Abreva. (See Note 13, “Deferred Revenue.”)
Bruno Farmaceutici (“Bruno”). In July 2002, we entered into an agreement with Bruno giving them the rights to manufacture and sell docosanol 10% cream in Italy, Europe’s fourth largest market for the topical treatment of cold sores. The agreement requires that Bruno purchase its entire requirement of raw materials from us and pay us a royalty on product sales. Docosanol 10% cream is not yet approved for marketing in Italy. Bruno is responsible for obtaining regulatory approval in Italy. This agreement will continue until the fifteenth anniversary of the first shipment date.
P.N. Gerolymatos SA. (“Gerolymatos”). In May 2004, we signed an exclusive agreement with Gerolymatos giving them the rights to manufacture and sell docosanol 10% cream as a treatment for cold sores in Greece, Cyprus, Turkey and Romania. Under the terms of the agreement, Gerolymatos will be responsible for all sales and marketing activities, as well as manufacturing and distribution of the product. The terms of the agreement provide for us to receive a license fee, royalties on product sales and milestones related to product approvals in Greece, Cyprus, Turkey and Romania. This agreement will continue until the latest of the 12th anniversary of the first commercial sale in each of those respective countries, or the date that the patent expires, or the last date of the expiration of any period of data exclusivity in those countries. Gerolymatos is also responsible for regulatory submissions to obtain marketing approval of the product in the licensed territories.
ACO HUD. In September 2004, we signed an exclusive agreement with ACO HUD giving them the rights to manufacture and sell docosanol 10% cream as a treatment for cold sores in Sweden, Norway, Denmark and Finland. Stockholm-based ACO HUD is the Scandinavian market leader in sales of cosmetic and medicinal skincare products. ACO HUD launched the product in fiscal 2005. Under the terms of the agreement, ACO HUD will be responsible for all sales and marketing activities, as well as manufacturing and distribution of the product. The terms of the agreement provide for us to receive a license fee, royalties on product sales and milestones related to product approvals in Norway, Denmark and Finland. This agreement will continue until either: 15 years from the anniversary of the first commercial sale in each of those respective countries, or, until the date that the patent expires, or, the last date of the expiration of any period of data exclusivity in those countries, whichever occurs last. ACO HUD is also responsible for regulatory submissions to obtain marketing approval of the product in the licensed territories.
Government research grants. We are also engaged in various research programs funded by government research grants. The government research grants are to be used for conducting research on various docosanol-based formulations for a potential genital herpes product and development of antibodies to anthrax toxins. In June 2006, we were notified that we had been awarded a $2.0 million research grant from the NIH for ongoing research and development related to our anthrax antibody. Under the terms of the grant, the NIH will reimburse us for up to $2.0 million in certain expenses (including expenses incurred in the 90 days preceding the grant award date) related to the establishment of a cGMP manufacturing process and the testing of efficacy of the anthrax antibody. The balance remaining under the research grants as of September 30, 2006 and 2005 was approximately $2.0 million and $161,000, respectively.
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AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
19. | Related Party Transactions |
IriSys Research and Development, LLC
License Agreement. On August 1, 2000, we entered into an agreement with IriSys Inc. (formerly IriSys Research and Development, LLC) to sublicense the exclusive worldwide rights to a patented drug formulation, Zenvia, to treat multiple central nervous system disorders (“Sublicense Agreement”). IriSys held exclusive rights to Zenvia under an Exclusive Patent License Agreement with the Center for Neurologic Study (“CNS”), dated April 2, 1997 (the “License Agreement”). Under the Sublicense Agreement, we were obligated to make certain payments upon achieving certain specified milestones, royalties on product sales and a specified percentage of any future royalties that we might have received from potential licensees. We had never made any payments nor were any payments due to IriSys under the Sublicense Agreement.
In March 2005, we entered into an Asset Purchase Agreement, pursuant to which our wholly owned subsidiary, Avanir Holding Company, acquired from IriSys certain additional contractual rights to Zenvia. As a result, through our wholly owned subsidiary we hold the exclusive worldwide marketing rights to Zenvia for certain indications as set forth under the License Agreement and have no further license arrangements with IriSys. We will be obligated to pay CNS milestone payments upon achievement of certain future events relating to the FDA’s regulatory approval process for Zenvia and a royalty on commercial sales of Zenvia, if and when the drug is approved by the FDA for commercialization. Under certain circumstances, we may have the obligation to pay CNS a share of net revenues received if we sublicense Zenvia to a third party.
Pursuant to the Asset Purchase Agreement, we paid IriSys a purchase price of $7.2 million including $1.9 million in cash and 500,000 shares of our Class A common stock with a fair value of $5.3 million. The value of the acquired assets was determined based on various financial models for the commercialization of Zenvia for different indications, as well as the projected discounted cash flow and net present value under each such model. The fair value of the common stock issued in the transaction was calculated at $10.60 per share using the5-day average closing price of our common stock, beginning two days before and ending two days after the close and announcement of the agreement on March 9, 2005. Because of the uncertainty of receiving future economic benefits from the acquired contractual rights, particularly given that Zenvia had not been approved by the FDA for commercialization at the time of this transaction, the purchase price was immediately charged to research and development expense in accordance with United States generally accepted accounting principles.
Dr. Yakatan, our former president and chief executive officer, was a founder and the majority shareholder of IriSys. As required by the Asset Purchase Agreement, Dr. Yakatan resigned as a director of IriSys effective April 9, 2005. In May 2005, Dr. Yakatan resigned as our president and chief executive officer and director. In connection with Dr. Yakatan’s resignation, we agreed to pay him severance payments in the aggregate amount of approximately $496,000, which included health benefits for a period of 12 months. We also agreed to pay him a bonus of $88,000 for fiscal 2005 which was paid in full as of September 30, 2005. The severance payment obligations were expensed during fiscal 2005 and were paid in 26 installments over the period of one year from May 16, 2005. The balance of accrued but unpaid severance payment obligations for Dr. Yakatan is approximately $0 and $319,000 as of September 30, 2006 and 2005, respectively.
Dr. Yakatan was retained by us as a consultant at anagreed-upon hourly rate until May 15, 2006 to advise us on FDA regulatory matters, if and as needed. Additionally, the vesting of options to purchase 227,580 shares of Class A common stock, held by Dr. Yakatan as of the resignation date, was accelerated to become immediately vested. No compensation charge had been recorded in the fiscal year ended September 30, 2005 for the accelerated vesting, because the acceleration did not result in any of thein-the-money options vesting that otherwise would have expired unvested at the conclusion of the consulting agreement.
Fair Value Analysis. Standard & Poor’s Corporate Value Consulting group (“S&P”) served as the financial advisor to the Corporate Governance Committee, which negotiated the contract on behalf of the Board and the Company. S&P reviewed the terms of the Asset Purchase Agreement and provided the Committee with a favorable
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AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
opinion regarding the fairness, from a financial point of view, of the agreement toAvanir and its shareholders. In assessing the value of the assets acquired pursuant to the agreement, S&P considered various financial models for the commercialization of Zenvia for different indications, as well as the projected discounted cash flow and net present value under each such model.
Research and development. In June 2003, we engaged IriSys to continue Zenvia stability studies previously being carried out for us by another company that was no longer in the business of providing such services. The service arrangement was transferred to IriSys following termination with the other company because IriSys was already familiar with the stability protocol. During fiscal 2006, 2005 and 2004, we paid IriSys $0, $0 and $4,200, respectively, related to continuation of the stability testing.
Components of the income tax benefit (provision) are as follows for the fiscal years ended September 30:
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
|
Current: | | | | | | | | | | | | |
State and foreign | | $ | (2,430 | ) | | $ | (1,813 | ) | | $ | (2,664 | ) |
| | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | |
Federal | | | 20,625,828 | | | | 10,143,270 | | | | 10,900,106 | |
State | | | (540,800 | ) | | | 5,017,269 | | | | 246,528 | |
| | | | | | | | | | | | |
| | | 20,085,028 | | | | 15,160,539 | | | | 11,146,634 | |
| | | | | | | | | | | | |
Increase in deferred income tax asset valuation allowance | | | (20,085,028 | ) | | | (15,160,539 | ) | | | (11,146,634 | ) |
| | | | | | | | | | | | |
Total income tax provision | | $ | (2,430 | ) | | $ | (1,813 | ) | | $ | (2,664 | ) |
| | | | | | | | | | | | |
A reconciliation of the federal statutory income tax rate and the effective income tax rate is as follows for the fiscal years ended September 30:
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
|
Federal statutory rate | | | (34 | )% | | | (34 | )% | | | (34 | )% |
Increase in deferred income tax asset valuation allowance | | | 32 | | | | 50 | | | | 40 | |
State income taxes, net of federal effect | | | (5 | ) | | | (6 | ) | | | (6 | ) |
Research and development credits | | | (2 | ) | | | (5 | ) | | | (4 | ) |
Expired net operating loss and other tax credits | | | 2 | | | | — | | | | 1 | |
Other | | | 7 | | | | (5 | ) | | | 3 | |
| | | | | | | | | | | | |
Effective income tax rate | | | 0 | % | | | 0 | % | | | 0 | % |
| | | | | | | | | | | | |
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AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred income taxes reflect the income tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our net deferred income tax balance were as follows:
| | | | | | | | |
| | September 30, | |
| | 2006 | | | 2005 | |
|
Net operating loss carryforwards | | $ | 64,594,100 | | | $ | 46,522,001 | |
Deferred revenue | | | 9,274,407 | | | | 7,631,558 | |
Research credit carryforwards | | | 9,682,998 | | | | 8,799,375 | |
Capitalized research and development costs | | | 1,800,079 | | | | 2,216,029 | |
Capitalized license fees and patents | | | 4,037,033 | | | | 2,959,707 | |
Share-based compensation and options | | | 1,136,117 | | | | — | |
Purchased intangible assets | | | 450,751 | | | | — | |
Foreign tax credits | | | 595,912 | | | | 595,912 | |
Other | | | 2,036,885 | | | | 779,763 | |
| | | | | | | | |
Deferred income tax assets | | | 93,608,282 | | | | 69,504,345 | |
Less valuation allowance for net deferred income tax assets | | | (93,608,282 | ) | | | (69,504,345 | ) |
| | | | | | | | |
| | $ | — | | | $ | — | |
| | | | | | | | |
We have provided a full valuation allowance against the net deferred income tax assets recorded as of September 30, 2006 and 2005 as we concluded that they are unlikely to be realized. The net operating loss and research credit carryforwards expire on various dates through 2026. We also have foreign tax credit carryforwards of $596,000, which begin to expire in 2011, unless previously utilized. In the event of certain ownership changes, the Tax Reform Act of 1986 imposes certain restrictions on the amount of net operating loss carry forwards that we may use in any year. As of September 30, 2006, we had $175.7 million and $91.5 million of Federal and State net operating loss carryforwards, respectively. As of September 30, 2006, we had $5.9 million and $5.3 million of Federal and California research and development credit carryforwards, respectively.
| |
21. | Employee Savings Plan |
We have established an employee savings plan pursuant to Section 401(k) of the Internal Revenue Code. The plan allows participating employees to deposit into tax deferred investment accounts up to 50% of their salary, subject to annual limits. We are not required to make matching contributions under the plan. However, we voluntarily contributed $132,000 in fiscal 2006, $96,000 in fiscal 2005 and $56,000 in fiscal 2004 to the plan.
We operate our business on the basis of a single reportable segment, which is the business of discovery, development and commercialization of novel therapeutics for chronic diseases. Our chief operating decision-maker is the Chief Executive Officer, who evaluates our company as a single operating segment.
We categorize revenues by geographic area based on selling location. All our operations are currently located in the United States; therefore, total revenues for fiscal 2006, 2005 and 2004 are attributed to the United States. All long-lived assets at September 30, 2006 and 2005 are located in the United States.
Revenues derived from our license agreements with AstraZeneca and Novartis accounted for approximately 71% and 13%, respectively, of our total revenues in fiscal 2006 and 66% and 19%, respectively, of our total revenues in fiscal 2005. Approximately 13%, 10% and 48% of our total revenues in fiscal 2006, 2005 and 2004, respectively, are derived from our license agreement with GlaxoSmithKline and the sale of rights to royalties under that agreement. Net receivables from AstraZeneca and Novartis accounted for approximately 26% and 3%,
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AvanirPharmaceuticals
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
respectively, of our net receivables at September 30, 2006 and 81% and 5%, respectively, of our total net receivables at September 30, 2005.
The wholesale value of FazaClo shipments, net of returns, to McKesson Corporation, AmeriSourceBergen Corporation and Cardinal Health were 53%, 18% and 16%, respectively, of our total net shipments totaling $6.2 million in fiscal 2006. Net receivables from McKesson Corporation, AmeriSourceBergen Corporation and Cardinal Health accounted for 27%, 11% and 14%, respectively, of our total net receivables at September 30, 2006.
Approvable Letter — On October 30, 2006, we received an “approvable letter” from the FDA for our NDA submission for Zenvia for the treatment of IEED/PBA. An approvable letter is an official notification from the FDA that certain additional conditions must be satisfied prior to obtaining U.S. marketing approval for a new drug. The approvable letter that we received from the FDA outlined concerns that the agency has regarding the efficacy and safety data contained in our NDA submission, which may require additional clinical trials and data in order to obtain marketing approval. The principal questionsand/or concerns raised in the approvable letter related to the following: (i) the choice of statistical methods used to analyze a secondary endpoint in the ALS trial and whether the requirements of the combination drug policy have been met and (ii) safety concerns relating to Zenvia’s active ingredients, dextromethorphan and quinidine sulfate, particularly for the patient population that would be prescribed Zenvia.
Because the approvable letter did not specify the exact data and what additional clinical trials may be required, if any, we have requested a meeting with the FDA in the first quarter of 2007 to clarify what would be needed for marketing approval. Until we meet with the FDA, we will not know how extensive any required additional dataand/or trials are likely to be. However, we believe that it is likely that the FDA’s requirements for additional data may be substantial and that we may be required to undertake additional trials that would be costly and time consuming. Accordingly, we cannot be certain that, once we have met with the FDA, we will continue the development of Zenvia as previously planned. We submitted the NDA for Zenvia in January 2006, seeking to market Zenvia for the treatment of IEED/PBA in patients with neurologic diseases and brain injuries.
Following receipt of the approvable letter from the FDA for Zenvia, we have taken several steps intended to significantly reduce on-going operating expenses. Effective November 9, 2006, we have suspended all commercial initiatives focused on Zenvia for the treatment of IEED and have reduced research and development expenses including placing on hold activities associated with the selective cytokine inhibitor clinical development program.
Sale of Common Stock and Warrants — On November 3, 2006, we entered into a securities purchase agreement with certain investors pursuant to which we issued and sold 5,265,000 shares of Class A common stock at a price of $2.85 per share (the “Offering”). As part of the Offering, the purchasers also received warrants to purchase a total of 1,053,000 shares of Class A common stock at an exercise price of $3.30 per share. The warrants become exercisable six months after the closing on November 7, 2006 and then remain exercisable for a period of six months. The gross proceeds of the offering were approximately $15.0 million, before offering expenses and commissions, and the net offering proceeds were approximately $14.4 million. The offering was made pursuant to our shelf registration statement onForm S-3 filed on July 22, 2005. Pursuant to the terms of the Notes, $2.9 million of the funds raised were used to repay the first note.
* * * * *
F-50
Exhibit Index
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| 3 | .1 | | Restated Articles of Incorporation of the Registrant, dated April 1, 2004(13) |
| 3 | .2 | | Amended and Restated Bylaws of the Registrant, dated September 25, 2005(14) |
| 4 | .1 | | Form of Class A Common Stock Certificate(1) |
| 4 | .2 | | Certificate of Determination with respect to Series C Junior Participating Preferred Stock of the Registrant(2) |
| 4 | .3 | | Rights Agreement, dated as of March 5, 1999, with American Stock Transfer & Trust Company(2) |
| 4 | .4 | | Form of Rights Certificate with respect to the Rights Agreement, dated as of March 5, 1999(2) |
| 4 | .5 | | Amendment No. 1 to Rights Agreement, dated November 30, 1999, with American Stock Transfer & Trust Company(4) |
| 4 | .6 | | Form of Class A Stock Purchase Warrant, issued in connection with the Securities Purchase Agreement dated July 21, 2003(10) |
| 4 | .7 | | Form of Class A Stock Purchase Warrant, issued in connection with the Securities Purchase Agreement dated November 25, 2003(11) |
| 10 | .1 | | License Agreement, dated March 31, 2000, by and betweenAvanir Pharmaceuticals and SB Pharmco Puerto Rico, a Puerto Rico Corporation(5) |
| 10 | .2 | | License Agreement, dated November 22, 2002, by and betweenAvanir Pharmaceuticals and Drug Royalty USA, Inc.(17) |
| 10 | .3 | | Research, Development and Commercialization Agreement, dated April 27, 2005, by and betweenAvanir Pharmaceuticals and Novartis International Pharmaceutical Ltd.*(18) |
| 10 | .4 | | Research Collaboration and License Agreement, dated July 8, 2005, by and between Avanir Pharmaceuticals and AstraZeneca UK Limited*(23) |
| 10 | .5 | | Standard Industrial Net Lease by and betweenAvanir Pharmaceuticals and BC Sorrento, LLC, effective September 1, 2000(6) |
| 10 | .6 | | Standard Industrial Net Lease by and betweenAvanir Pharmaceuticals (“Tenant”) and Sorrento Plaza, a California limited partnership (“Landlord”), effective May 20, 2002(8) |
| 10 | .7 | | Office lease agreement by and between RREEF AMERICA REIT II CORP. FFF andAvanir Pharmaceuticals, dated April 28, 2006 |
| 10 | .8 | | License Agreement, dated August 1, 2000, by and betweenAvanir Pharmaceuticals (“Licensee”) and Irisys Research and Development, LLC, a California limited liability company(6) |
| 10 | .9 | | Sublease agreement betweenAvanir Pharmaceuticals and Sirion Therapeutics, Inc., dated September 5, 2006 |
| 10 | .10 | | License Agreement, dated April 2, 1997, by and between Irisys Research & Development, LLC and the Center for Neurologic Study(16) |
| 10 | .11 | | Amendment to License Agreement, dated April 11, 2000, by and between IriSys Research & Development, LLC and the Center for Neurologic Study(16) |
| 10 | .12 | | Clinical Development Agreement, dated March 22, 2005, by and betweenAvanir Pharmaceuticals and SCIREX Corporation(16) |
| 10 | .13 | | Unit Purchase Agreement by and among AVANIR Pharmaceuticals, the Sellers and Alamo Pharmaceuticals, LLC, dated May 22, 2006*(24) |
| 10 | .14 | | Senior Note for $14.4 million payable to Neal R. Cutler, dated May 24, 2006(24) |
| 10 | .15 | | Senior Note for $6,675,000 payable to Neal R. Cutler, dated May 24, 2006(24) |
| 10 | .16 | | Senior Note for $4.0 million payable to Neal R. Cutler, dated May 24. 2006(24) |
| 10 | .17 | | Registration Rights Agreement between Avanir Pharmaceuticals and Neil Cutler, dated May 24, 2006(24) |
| 10 | .18 | | Amended and Restated Development, License and Supply Agreement by and between CIMA Labs Inc. and Alamo Pharmaceuticals, LLC, dated August 22, 2005*(24) |
| 10 | .19 | | Amendment #1 to Amended and Restated Development, License and Supply Agreement by and between CIMA Labs Inc. and Alamo Pharmaceuticals, LLC, dated October 19, 2005*(24) |
| 10 | .20 | | Docosanol License Agreement between Kobayashi Pharmaceutical Co., Ltd. and AVANIR Pharmaceuticals, dated January 5, 2006*(28) |
| | | | |
| 10 | .21 | | Docosanol Data Transfer and Patent License Agreement between AVANIR Pharmaceuticals and Healthcare Brands International Limited, dated July 6, 2006* |
| 10 | .22 | | Development and License Agreement between Eurand, Inc. and AVANIR Pharmaceuticals, dated August 7, 2006* |
| 10 | .23 | | Amended and Restated 1998 Stock Option Plan(7) |
| 10 | .24 | | Amended and Restated 1994 Stock Option Plan(7) |
| 10 | .25 | | Amended and Restated 2000 Stock Option Plan(9) |
| 10 | .26 | | Form of Restricted Stock Grant Notice for use with Amended and Restated 2000 Stock Option Plan(9) |
| 10 | .27 | | 2003 Equity Incentive Plan(9) |
| 10 | .28 | | Form of Non-qualified Stock Option Award Notice for use with 2003 Equity Incentive Plan(9) |
| 10 | .29 | | Form of Restricted Stock Grant for use with 2003 Equity Incentive Plan(9) |
| 10 | .30 | | Form of Restricted Stock Grant Notice (cash consideration) for use with 2003 Equity Incentive Plan(9) |
| 10 | .31 | | Form of Indemnification Agreement with certain Directors and Executive Officers of the Registrant(12) |
| 10 | .32 | | 2005 Equity Incentive Plan(23) |
| 10 | .33 | | Form of Stock Option Agreement for use with 2005 Equity Incentive Plan(20) |
| 10 | .34 | | Form of Restricted Stock Unit Agreement for use with 2005 Equity Incentive Plan and 2003 Equity Incentive Plan |
| 10 | .35 | | Form of Restricted Stock Agreement for use with 2005 Equity Incentive Plan |
| 10 | .36 | | Form of Change of Control Agreement(26) |
| 10 | .37 | | Employment Agreement with Eric Brandt, dated August 15, 2005*(23) |
| 10 | .38 | | Employment Agreement with Keith Katkin, dated June 13, 2005(23) |
| 10 | .39 | | Employment Agreement with Michael J. Puntoriero, dated May 4, 2006 |
| 10 | .40 | | Employment Agreement with Randall Kaye, dated December 23, 2005(25) |
| 10 | .41 | | Employment Agreement with Theresa Hope-Reese, dated August 7, 2006(27) |
| 18 | .1 | | Letter regarding change in accounting principle |
| 21 | .1 | | List of Subsidiaries |
| 23 | .1 | | Consent of Independent Registered Public Accounting Firm |
| 31 | .1 | | Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
| 31 | .2 | | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
| 31 | .3 | | Certification of Chief Accounting Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
| 32 | .1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32 | .2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32 | .3 | | Certification of Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
* | | Certain confidential portions of this exhibit have been retracted. A complete copy of this exhibit has been filed with the Secretary of the Securities and Exchange Commission pursuant to an application requesting confidential treatment underRule 246-2 of the Securities Exchange Act of 1934. |
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(1) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Registration Statement onForm S-1, File No.33-32742, declared effective by the Commission on May 8, 1990. |
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(2) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed March 11, 1999. |
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(3) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed April 1, 1999. |
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(4) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed December 3, 1999. |
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(5) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed May 4, 2000. |
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(6) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report onForm 10-Q, filed August 14, 2000. |
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(7) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Annual Report onForm 10-K, filed December 21, 2001. |
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(8) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report onForm 10-Q, filed August 13, 2002. |
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(9) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report onForm 10-Q, filed May 13, 2003. |
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(10) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Registration on FromS-3, FileNo. 333-107820, declared effective by the Commission on August 19, 2003. |
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(11) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed December 11, 2003. |
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(12) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Annual Report onForm 10-K, filed December 23, 2003. |
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(13) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed on April 6, 2004. |
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(14) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed September 28, 2005. |
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(15) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed September 21, 2004. |
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(16) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 10-Q, filed May 13, 2005. |
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(17) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed January 7, 2003. |
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(18) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 10-Q, filed August 12, 2005. |
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(19) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed March 23, 2005. |
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(20) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed October 24, 2005. |
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(21) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Annual Report onForm 10-K, filed December 14, 2005. |
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(22) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 10-Q, filed August 9, 2006. |
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(23) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 10-Q, filed February 9, 2006. |
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(24) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed June 26, 2006. |
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(25) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 8-K, filed August 10, 2006. |
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(26) | | Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report onForm 10-Q, filed May 10, 2006. |