EXHIBIT 99.2
FINANCIAL STATEMENTSOF
MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
Report of Singer Lewak Greenbaum & Goldstein LLP, Independent Registered Accounting Firm of Orion Acquisition Corp. II | ||
Balance Sheet as of December 31, 2004 | ||
Statements of Operations for the Year Ended December 31, 2004, from Inception (September 4, 2003) to Fiscal Year Ended December 31, 2003, and from Inception (September 4, 2003) to Year Ended December 31, 2004 | ||
Statements of Stockholders’ Equity from Inception (September 4, 2003) to Year Ended December 31, 2004 | ||
Statements of Cash Flows for the Year Ended December 31, 2004, from Inception (September 4, 2003) to Year Ended December 31, 2003, and from Inception (September 4, 2003) to Year Ended December 31, 2004 | ||
Notes to Financial Statements of Medivation, Inc. | ||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Medivation, Inc.
(a development stage company)
We have audited the accompanying balance sheet of Medivation, Inc. (a development stage company) as of December 31, 2004, and the related statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2004, the period from September 4, 2003 (inception) to December 31, 2003, and the period from September 4, 2003 (inception) to December 31, 2004. 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, the financial statements referred to above present fairly, in all material respects, the financial position of Medivation, Inc. (a development stage company) as of December 31, 2004, and the results of its operations and its cash flows for the year ended December 31, 2004, the period from September 4, 2003 (inception) to December 31, 2003, and the period from September 4, 2003 (inception) to December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
January 25, 2005
MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 2004
| ASSETS | ||||
Current assets | ||||
Cash and cash equivalents | $ | 1,825,586 | ||
Prepaid expenses and other current assets | 268,511 | |||
Total current assets | 2,094,097 | |||
Intellectual property (net of amortization) | 144,628 | |||
TOTAL ASSETS | $ | 2,238,725 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
Current liabilities | ||||
Accounts payable | 352,794 | |||
Other current liabilities | 2,400 | |||
Total current liabilities | 355,194 | |||
COMMITMENTS AND CONTINGENCIES | ||||
Stockholders’ equity | ||||
Common stock, $0.001 par value per share 5,000,000 shares authorized 100 shares issued and outstanding | — | |||
Additional paid-in capital | 126,770 | |||
Investment from parent | 5,032,357 | |||
Deficit accumulated during the development stage | (3,275,596 | ) | ||
Total stockholders’ equity | 1,883,531 | |||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,238,725 | ||
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
2
MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004
INCEPTION (SEPTEMBER 4, 2003) TO DECEMBER 31, 2003
INCEPTION (SEPTEMBER 4, 2003) TO DECEMBER 31, 2004
| Year Ended December 31, 2004 | Inception (Sept. 4, 2003) to December 31, 2003 | Inception (Sept. 4, 2003) to December 31, 2004 | ||||||||||
Operating expenses: | ||||||||||||
General and administrative | $ | 1,062,017 | $ | 174,815 | $ | 1,236,832 | ||||||
Research and development | 1,613,569 | 217,322 | 1,830,891 | |||||||||
Stock-based compensation | 109,265 | — | 109,265 | |||||||||
Total operating expenses | 2,784,851 | 392,137 | 3,176,988 | |||||||||
Loss from operations | (2,784,851 | ) | (392,137 | ) | (3,176,988 | ) | ||||||
Other expense: | ||||||||||||
Interest expense (net) | 70,191 | 8,512 | 78,703 | |||||||||
Warrants issued to guarantors | 17,505 | — | 17,505 | |||||||||
Total other expense | 87,696 | 8,512 | 96,208 | |||||||||
Loss before provision for income taxes: | (2,872,547 | ) | (400,649 | ) | (3,273,195 | ) | ||||||
Provision for income taxes: | 1,600 | 800 | 2,400 | |||||||||
Net loss: | $ | (2,874,147 | ) | $ | (401,449 | ) | $ | (3,275,596 | ) | |||
Basic and diluted loss per share: | $ | (1.11 | ) | $ | (0.22 | ) | $ | (1.36 | ) | |||
Weighted average common shares outstanding: | 2,596,442 | 1,800,000 | 2,401,866 | |||||||||
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS’ EQUITY
INCEPTION (SEPTEMBER 4, 2003) TO DECEMBER 31, 2004
| COMMON STOCK | APIC AND INV. FROM PARENT | ACCUMULATED (DEFICIT) | TOTAL STOCKHOLDERS’ EQUITY | |||||||||||||||
| SHARES | AMOUNT | |||||||||||||||||
Balances at inception (September 4, 2003) | — | $ | — | $ | — | $ | — | $ | — | |||||||||
Common stock issued for: | ||||||||||||||||||
Cash | 1,800,000 | 1,800 | 1,800 | |||||||||||||||
Intellectual property | 900,000 | 900 | 900 | |||||||||||||||
Net loss | (401,449 | ) | (401,449 | ) | ||||||||||||||
Balances as of December 31, 2003 | 2,700,000 | 2,700 | — | (401,449 | ) | (398,749 | ) | |||||||||||
Warrants issued to guarantors | 17,505 | 17,505 | ||||||||||||||||
Stock-based compensation expense | 109,265 | 109,265 | ||||||||||||||||
Reverse merger transaction: | ||||||||||||||||||
Investment from parent | 5,032,357 | 5,032,357 | ||||||||||||||||
Exchange of common stock in merger | (2,699,900 | ) | (2,700 | ) | (2,700 | ) | ||||||||||||
Net loss | (2,874,147 | ) | (2,874,147 | ) | ||||||||||||||
Balances as of December 31, 2004 | 100 | $ | — | $ | 5,159,127 | $ | (3,275,596 | ) | $ | 1,883,531 | ||||||||
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2004
INCEPTION (SEPTEMBER 4, 2003) THROUGH DECEMBER 31, 2003
INCEPTION (SEPTEMBER 4, 2003) THROUGH DECEMBER 31, 2004
| Year ending Dec. 31, 2004 | Inception (Sep. 4, 2003) to Dec. 31, 2003 | Inception (Sep. 4, 2003) to Dec. 31, 2004 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (2,874,147 | ) | $ | (401,449 | ) | $ | (3,275,596 | ) | |||
Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||||||
Impairment of intellectual property | 75,000 | — | 75,000 | |||||||||
Depreciation and amortization | 5,940 | 332 | 6,272 | |||||||||
Stock-based compensation | 109,265 | — | 109,265 | |||||||||
Warrants issued to guarantors | 17,505 | — | 17,505 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Prepaid expenses and other current assets | (260,801 | ) | (7,710 | ) | (268,511 | ) | ||||||
Accounts payable | 329,813 | 23,780 | 353,593 | |||||||||
Other current liabilities | (8,525 | ) | 10,125 | 1,600 | ||||||||
Net cash provided by (used in) operating activities: | (2,605,950 | ) | (374,922 | ) | (2,980,872 | ) | ||||||
Cash flows from investing activities: | ||||||||||||
Purchase of intellectual property | (200,000 | ) | (25,000 | ) | (225,000 | ) | ||||||
Net cash provided by (used in) investing activities: | (200,000 | ) | (25,000 | ) | (225,000 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Cash transfers from parent | 3,775,519 | — | 3,775,519 | |||||||||
Proceeds from sale of common stock for cash | 1,800 | 1,800 | ||||||||||
Proceeds from issuance of convertible notes | 850,000 | 1,000,000 | 1,850,000 | |||||||||
Repayment of convertible notes | (595,861 | ) | — | (595,861 | ) | |||||||
Net cash provided by (used in) financing activities: | 4,029,658 | 1,001,800 | 5,031,458 | |||||||||
Net increase in cash | 1,223,708 | 601,878 | 1,825,586 | |||||||||
Cash at beginning of period | 601,878 | — | — | |||||||||
Cash at end of period | $ | 1,825,586 | $ | 601,878 | $ | 1,825,586 | ||||||
Supplemental schedule of non-cash investing and financing activities: | ||||||||||||
Shares issued to purchase intellectual property | — | 900 | 900 | |||||||||
Transfer of convertible notes to parent | $ | 1,254,139 | — | 1,254,139 | ||||||||
| $ | — | $ | 900 | $ | 900 | |||||||
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENT
December 31, 2004
1. DESCRIPTION OF BUSINESS
Medivation, Inc. (Medivation or the Company) is a life sciences company based in San Francisco, California, and a wholly-owned subsidiary of Orion Acquisition Corp. II (Orion). The Company’s corporate strategy is to identify and acquire development stage medical technologies—including both pharmaceuticals and medical devices—that have promising scientific, clinical and commercial prospects and strong intellectual property positions, and to develop those technologies through a largely outsourced model to achieve valuation-enhancing milestone events. The Company currently has acquired and is developing two technologies, both of which are small molecule drugs targeted at Alzheimer’s disease. The Company’s lead drug candidate—Dimebon—is scheduled to enter a randomized, double-blind, placebo-controlled Phase II efficacy study in Alzheimer’s disease patients in Russia in the second or third quarter of 2005. The Company’s second drug candidate—NT0904—is in the preclinical research phase. The Company also is evaluating other medical technologies for potential acquisition.
2. THE MERGER
(a) Description of the Merger
On December 17, 2004, Medivation Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Orion, merged with and into Medivation pursuant to an Agreement and Plan of Merger, dated as of December 17, 2004. Pursuant to the merger (the Merger), Medivation became a wholly owned subsidiary of Orion, the issued and outstanding shares of common stock of Medivation held by its stockholders were converted into an aggregate of 331,925 shares of the Series B Preferred Stock of Orion, which is convertible into an aggregate of 6,638,490 shares of Orion’s Common Stock. After the Merger, the former Medivation stockholders owned approximately 81% of Orion’s issued and outstanding Common Stock, and the issued and outstanding stock of Medivation consisted of 100 shares of common stock, all of which were owned by Orion. Following the Merger, the business conducted by the Company is the business conducted by Medivation prior to the Merger.
(b) Financial Statement Presentation
The financial statements presented in this Report are those of Medivation on a stand-alone basis.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Inter-company Transactions
Medivation is a wholly-owned subsidiary of Orion. All inter-company transactions with Orion are reflected in the “investment from parent” account in the stand-alone financial statements of Medivation.
(b) Development Stage Company
For the period from inception (September 4, 2003) to date, the Company has been a development stage enterprise, and accordingly, the Company’s operations have been directed primarily toward developing its
6
MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS—(Continued)
December 31, 2004
proprietary technologies. The Company has experienced net losses since its inception and as of December 31, 2004, had an accumulated deficit of $3,275,596. Such losses and accumulated deficit resulted from the Company’s absence of revenue and significant costs incurred in the development of the Company’s proprietary technologies. The Company expects to incur substantial losses as it continues its research and development activities, particularly the conduct of clinical trials.
(c) Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions principally relate to services performed by third parties but not yet invoiced. Actual results could differ from those estimates.
(d) Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 2004, cash and cash equivalents included $1,825,586 in cash and money market securities. The Company deposits cash and cash equivalents with high credit quality financial institutions and is insured to the maximum limitations.
(e) Property and Equipment
Property and equipment purchases incurred to date have been minor and have thus been expensed through December 31, 2004. Property and equipment purchases are recorded at cost. Repairs and maintenance costs are expensed in the period incurred. Items of property and equipment with costs greater than $5,000 will be capitalized and depreciated or amortized on a straight-line basis over the estimated useful lives of the assets as follows:
Description | Estimated Useful Life | |
Office equipment; furniture and fixtures | 2-5 years | |
Leasehold improvements | Lesser of estimated useful life or life of lease |
(f) Intellectual Property
Intellectual property acquired from third parties is recorded at historical acquisition cost, and at December 31, 2004 consisted of issued patents and pending patent applications. Any milestone payments that become due to third parties from whom the Company has acquired patent rights will be added to intellectual
7
MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS—(Continued)
December 31, 2004
property acquisition cost and capitalized. Intellectual property consisting of issued patents is amortized over the period beginning on the acquisition date and ending on the expiration date of the patent. Intellectual property consisting of patent applications is amortized over the period beginning on the acquisition date and ending on the expiration date of any patent that may issue on that application. Legal and other costs of prosecuting and maintaining patent rights are expensed as incurred.
(g) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.
(h) Research and Development
Research and development costs are charged to expense when incurred.
(i) Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents and trade payables. At December 31, 2004 the fair values of cash and cash equivalents and trade payables approximated their financial statement carrying amounts.
(j) Stock Based Compensation
The Company accounts for its stock-based compensation arrangements for employees, contractors and directors using the intrinsic value method pursuant to Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” as clarified by Financial Accounting Standards Board (FASB) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation.” As such, compensation expense is recorded when, on the date of grant, the fair value of the underlying common stock exceeds the exercise price for stock options or the purchase price for issuances or sales of common stock. Statement of Financial Accounting Standard (SFAS) No. 123 “Accounting for Stock-Based Compensation,” established a fair value based method of accounting for stock-based compensation plans. The Company has adopted the disclosure only alternative under SFAS 123 which requires disclosure of the pro-forma effects of using the fair value method of accounting for stock-based compensation arrangements on earnings and earnings per share as if SFAS 123 had been adopted. The Company records compensation expense for the fair value of options granted to non-employees.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123.” SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial reports about the method of accounting for stock-based compensation and the effect of the method used on reported results. To date, the Company has not issued stock options to employees.
8
MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS—(Continued)
December 31, 2004
(k) Impairment or Disposal of Long-lived Assets
The Company evaluates its long-lived assets, primarily its intellectual property, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. In the year ended December 31, 2004, the Company wrote off $75,000 of its historical patent acquisition costs to reflect management’s decision to stop work on a patent application that does not cover either of the Company’s Dimebon or NT0904 product candidates. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. The impairment amount is included in research and development expenses.
(l) Loss per Common Share
The Company calculates loss per share in accordance with SFAS No. 128, “Earnings per Share.” Basic loss per share is computed by dividing the loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
(m) Recently Issued Accounting Pronouncements
SFAS No. 151
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” SFAS No. 151 amends the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) under the guidance in ARB No. 43, Chapter 4, “Inventory Pricing.” Paragraph 5 of ARB No. 43, Chapter 4, previously stated that “…under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges.... ” This Statement requires that those items be recognized as current-period charges regardless of whether they meet
9
MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS—(Continued)
December 31, 2004
the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not expect adoption of SFAS No. 151 to have any impact on the Company’s financial statements.
SFAS No. 152
In December 2004, the FASB issued SFAS No. 152, “Accounting for Real Estate Time-Sharing Transactions.” The FASB issued this Statement as a result of the guidance provided in AICPA Statement of Position (SOP) 04-2, “Accounting for Real Estate Time-Sharing Transactions.” SOP 04-2 applies to all real estate time-sharing transactions. Among other items, the SOP provides guidance on the recording of credit losses and the treatment of selling costs, but does not change the revenue recognition guidance in SFAS No. 66, “Accounting for Sales of Real Estate,” for real estate time-sharing transactions. SFAS No. 152 amends Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS No. 152 also amends SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects”, to state that SOP 04-2 provides the relevant guidance on accounting for incidental operations and costs related to the sale of real estate time-sharing transactions. SFAS No. 152 is effective for years beginning after June 15, 2005, with restatements of previously issued financial statements prohibited. This statement is not applicable to the Company.
SFAS No. 153
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” an amendment to Opinion No. 29, “Accounting for Nonmonetary Transactions.” Statement No. 153 eliminates certain differences in the guidance in Opinion No. 29 as compared to the guidance contained in standards issued by the International Accounting Standards Board. The amendment to Opinion No. 29 eliminates the fair value exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Such an exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in periods beginning after December 16, 2004. Management does not expect adoption of SFAS No. 153 to have any impact on the Company’s financial statements.
SFAS No. 123(R)
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS 123(R) amends SFAS No. 123, “Accounting for Stock-Based Compensation,” and APB Opinion 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires that the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. SFAS No. 123(R) applies to all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share options, or other equity instruments (except for those held by an ESOP) or by incurring liabilities (1) in amounts based (even in part) on the price of the entity’s shares or other equity instruments, or (2) that require (or may require) settlement by the issuance of an entity’s shares or other equity instruments. This statement is effective (1) for public companies qualifying as SEC small business issuers, as of the first interim period or fiscal year beginning after December 15, 2005, or (2) for all other public companies, as of the first interim period or fiscal year beginning after June 15, 2005, or (3) for all nonpublic entities, as of the first fiscal year beginning after December 15, 2005. Management is currently assessing the effect of SFAS No. 123(R) on the Company’s financial statements.
10
MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS—(Continued)
December 31, 2004
4. INTELLECTUAL PROPERTY
At December 31, 2004, intellectual property consisted of three patent families—one covering the use of Dimebon and certain related compounds to treat neurodegenerative diseases, one covering the use of Dimebon and certain related compounds for anti-aging purposes, and one covering the NT0904 family of compounds and uses thereof. Cash purchases of patent rights totaled $200,000 in the year ended December 31, 2004 and $25,000 in the period from inception (September 4, 2003) to December 31, 2003. This intellectual property is being amortized over periods ranging from 156 months to 248 months. Amortization expense on the Company’s intellectual property was $5,940 in the year ended December 31, 2004, and $332 in the period from inception (September 4, 2003) to December 31, 2003. Total amortization expenses under the foregoing schedule in the years ended December 31, 2005 through December 31, 2009 for intellectual property costs capitalized on or before December 31, 2004 will be $8,274 per year.
5. CONVERTIBLE NOTES WITH WARRANTS
Between October 10, 2003 and September 1, 2004, Medivation issued convertible promissory notes, with associated warrant coverage, in a series of transactions with two investors. The notes bore interest at a rate of 4.5% per year, were convertible into the class of equity securities issued by Medivation at its next equity financing at the same price per share as paid by investors in that equity financing, and matured on October 10, 2004. The associated warrants were exercisable to purchase shares of the class of equity securities issued by Medivation in its next equity financing at the same price per share as paid by investors in that equity financing. Using the Black-Scholes option pricing model and the following assumptions as of the dates these warrants were issued—stock price of $0.0004; historical volatility of 90%; risk free rate of approximately 4.5%; dividend yield of 0%; and warrant life of 10 years—the warrants were assigned no value. Accordingly, 100% of the proceeds received by Medivation in these financing transactions were allocated to the convertible notes. The following table summarizes these convertible note transactions.
Date | Principal Balance of Note | ||
October 10, 2003 | $ | 1,000,000 | |
April 1, 2004 | 250,000 | ||
June 8, 2004 | 200,000 | ||
August 1, 2004 | 200,000 | ||
September 1, 2004 | 200,000 | ||
The outstanding principal balance of these convertible notes as of December 17, 2004 was $1,850,000. Prior to December 31, 2004, $595,861 of this amount was repaid by Medivation and the remaining $1,254,139 was assumed by Orion. The associated warrants were assumed by Orion in the Merger and became exercisable to purchase an aggregate of 238,709 shares of Orion’s Common Stock at an exercise price of $1.55 per share.
11
MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS—(Continued)
December 31, 2004
6. STOCKHOLDER’S EQUITY
(a) Common Stock
In October 2003, Medivation sold 1,800,000 shares of its Common Stock, $0.001 par value per share, for an aggregate of $1,800 in cash, and 900,000 shares of its Common Stock in return for intellectual property. After giving effect to the Merger, 100 shares of Medivation Common Stock remained issued and outstanding, all of which are owned by Orion.
(b) Warrants
On November 16, 2004, Medivation issued warrants to purchase its equity securities to two officers in return for their agreement to guarantee specified professional fees incurred by Medivation related to the Merger. These warrants were assumed by Orion in the Merger, and became exercisable to purchase an aggregate of 12,904 shares of Orion’s Common Stock at a price of $1.55 per share. The fair value of these warrants in the amount of $17,505 (based on the Black-Scholes option pricing model and the following assumptions: stock price of $1.55; historical volatility of 90%; risk free rate of approximately 4.5%; dividend yield of 0%; and warrant life of 10 years) was recorded as an expense in Medivation’s statement of operations for the year ended December 31, 2004.
(c) Equity Incentive Plan
Pursuant to the Merger, Orion assumed the Medivation Equity Incentive Plan (the Equity Incentive Plan), and reserved an aggregate of 1,106,415 shares of Orion’s Common Stock for issuance upon the exercise of awards granted under the Equity Incentive Plan.
The Equity Incentive Plan provides for the issuance of options and other equity-based awards, including restricted stock and stock appreciation rights. Options granted under the Equity Incentive Plan may be nonqualified or qualified incentive stock options under Section 422A of the Internal Revenue Code of 1986, as amended. The Equity Incentive Plan is administered by our board of directors, or a committee appointed by the Board, which determines recipients and types of options to be granted, including the vesting schedule, the number of shares subject to the options and the exercisability of the options. The term of the stock options granted under the Equity Incentive Plan may not exceed ten years. The exercise price for all options is determined by our board of directors, or by a committee appointed by the board, at the time of grant. The options may, but need not, contain provisions for early exercise and the right of first refusal. No incentive stock option may be granted to any person who, at the time of the grant, owns, or is deemed to own, stock constituting more than 10% of our total combined voting power, unless the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant, and the term of the option does not exceed five years from the date of grant.
Options granted under the Equity Incentive Plan vest at the rate specified in each optionee’s option agreement. Unless determined otherwise by the administrator of the Equity Incentive Plan, no stock option may be transferred by the optionee other than by will or the laws of descent or distribution and may be exercised during the lifetime of the optionee only by the optionee. An optionee whose relationship with us or any affiliate ceases for any reason, other than by death or permanent or total disability, may exercise options within the period of time as is specified in the optionee’s option agreement, which typically is at least thirty days. If no period of time is specified in the optionee’s option agreement, then the option is exercisable for a period of three months. When an optionee’s relationship with us or any affiliate ceases due to death or permanent or total disability, options may be exercised within the period of time as is specified in the optionee’s option agreement, which typically is at least six months. If no period of time is specified in the optionee’s option agreement, then the option is exercisable for a period of twelve months.
12
MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS—(Continued)
December 31, 2004
Upon our change in control, all outstanding options under the Equity Incentive Plan will be accelerated and become immediately exercisable. A change of control is defined in the Equity Incentive Plan to include, subject to certain exceptions (i) the acquisition, directly or indirectly, by any “person” or “group” (as defined in the Securities Exchange Act of 1934, as amended, and the rules thereunder) of “beneficial ownership” (as defined in the Securities Exchange Act of 1934, as amended, and the rules thereunder) of our voting securities that represent 50% or more of our combined outstanding voting power; (ii) during any period of two consecutive years, individuals who, at the beginning of such period, constitute our board of directors together with any new director(s), cease for any reason to constitute a majority thereof; (iii) the consummation, whether directly or indirectly and subject to certain exceptions, of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of our assets or (z) our acquisition of assets or stock of another entity and (iv) our liquidation or dissolution. The Merger and the Offering did not constitute a change of control under the Equity Incentive Plan.
A summary of the status of the Equity Incentive Plan as of December 31, 2004 and the year then ended is presented below. All outstanding options are exercisable for shares of the Common Stock of Orion.
| 2004 | ||||||
Fixed Options | Orion Shares | Weighted-Average Exercise Price | ||||
Outstanding at beginning of year | 0 | — | ||||
Granted | 616,556 | $ | 0.85 | |||
Exercised | 0 | — | ||||
Forfeited | 0 | — | ||||
Outstanding at year end | 616,556 | $ | 0.85 | |||
Weighted-average fair value of options granted during the year | $ | 1.43 | ||||
Weighted-average fair value of exercisable options | $ | 1.43 | ||||
The following table summarizes information about fixed stock options outstanding at December 31, 2004:
| Options Outstanding | Options Exercisable | |||||||||||
Exercise Prices | Number Outstanding at 12/31/04 | Weighted-Average Remaining Contractual Life | Weighted-Average Exercise Price | Number Exercisable at 12/31/04 | Weighted-Average Exercise Price | |||||||
$0.02 | 280,717 | 9.5 years | $ | 0.02 | 280,717 | $ | 0.02 | |||||
$1.55 | 335,839 | 10 years | $ | 1.55 | 335,839 | $ | 1.55 | |||||
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MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS—(Continued)
December 31, 2004
All of the 616,556 options outstanding under the Equity Incentive Plan as of December 31, 2004 were issued by Medivation to its consultants. As of December 31, 2004, all 616,556 options were exercisable, but the shares of Common Stock issuable upon exercise of those options remained subject to repurchase at the option exercise price if the optionee’s term of service for Medivation ends. At December 31, 2004, 489,859 options were available for future grants under the Equity Incentive Plan.
For the year ended December 31, 2004, the Company recorded a stock-based compensation expense of $109,265 to reflect the appropriate portion of the total cost of the 616,556 options granted in 2004. All such options were granted to consultants as partial or total compensation for services to be provided under consulting agreements.
These options were assigned an aggregate value of $882,719 as of December 31, 2004 using the Black-Scholes option pricing model and the following assumptions: stock price of $1.55; historical volatility of 90%; risk free rate of approximately 4.5%; dividend yield of 0%; and option life of approximately 9.5 years. In accordance with Emerging Issues Task Force (EITF) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” and EITF Issue No. 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees,” the stock-based compensation expense recorded in the Company’s Statement of Operations for the year ended December 31, 2004, in the amount of $109,265, reflected the portion of the aggregate option value corresponding to the aggregate number of shares vested on the options through that date. As further portions of these options are earned in the future, the Company will recognize additional expense based on their then-current fair market value.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under a non-cancelable operating lease that expires in October 2005. Total rent expense under this operating lease for the year ended December 31, 2004 and for the period from inception (September 4, 2003) through December 31, 2003 was $62,517 and $10,420, respectively. Future lease obligations under this non-cancelable operating lease as of December 31, 2004 are $52,098.
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MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS—(Continued)
December 31, 2004
The Company’s intellectual property at December 31, 2004 consisted of three patent families purchased by the Company from third parties (Note 4). The purchase agreements require the Company to make certain milestone payments upon the occurrence of stated events, and to pay royalties on the sale of any products covered by such purchased patent rights.
8. INCOME TAXES
The tax effects of temporary differences which give rise to the deferred tax provision at December 31, 2004 consisted of the following:
Deferred tax assets | ||||
Net operating loss carryforward | $ | 1,344,429 | ||
Warrant based compensation | 54,308 | |||
State tax-deferred | (97,842 | ) | ||
Less valuation allowance | (1,300,895 | ) | ||
Net deferred tax assets | $ | — | ||
The following table presents the current and deferred income tax provision for (benefit from) federal and state income taxes for the year ended December 31, 2004 and for the period from inception (September 4, 2003) to December 31, 2003:
| Year ended Dec. 31, 2004 | Inception (Sept. 4, 2003) to Dec. 31, 2003 | |||||
Current | ||||||
Federal | $ | — | $ | — | ||
State | 800 | 800 | ||||
| 800 | 800 | |||||
Deferred | ||||||
Federal | — | — | ||||
State | — | — | ||||
| $ | 800 | $ | 800 | |||
The provision for income taxes differs from the amount that would result from applying the federal statutory rate for the year ended December 31, 2004 and for the period from inception (September 4, 2003) to December 31, 2003 as follows:
| Year ended Dec. 31, 2004 | Inception (Sept. 4, 2003) to Dec. 31, 2003 | |||||
Statutory regular federal income benefit rate | (34.0 | )% | (34.0 | )% | ||
State taxes | (5.8 | )% | (2.8 | )% | ||
Change in valuation allowance | 39.7 | % | 36.9 | % | ||
Other | 0.1 | % | (0.1 | )% | ||
Total | 0.0 | % | 0.0 | % | ||
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MEDIVATION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS—(Continued)
December 31, 2004
The valuation allowance increased by $1,115,982 and $147,749 during the year ended December 31, 2004, and for the period from inception (September 4, 2003) to December 31, 2003, respectively. The deferred income tax benefit of the loss carryforward is the only significant deferred income tax asset or liability of the Company and has been offset by a valuation allowance since management does not believe the recoverability of this deferred tax asset during the next fiscal year is more likely than not. Accordingly, a deferred income tax benefit for the year ended December 31, 2004 has not been recognized in these financial statements.
As December 31, 2004, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $3,207,000 and $1,961,000, respectively. The net operating loss carryforwards begin expiring in 2022 and 2012, respectively.
16