UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 2
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004.
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO .
Commission file number 000-31719
POZEN INC.
(Exact name of registrant as specified in its charter)
| Delaware | 62-1657552 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1414 Raleigh Rd, Suite 400, Chapel Hill, NC 27517
(Address of principal executive offices including zip code)
(919) 913-1030
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Title of each class | Name of each exchange on which registered | |
| Common Stock | Nasdaq |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
The aggregate market value of the Common Stock held by non-affiliates computed by reference to the last reported sale price on June 30, 2004 was $168,498,595. As of March 2, 2005 there were outstanding 28,915,511 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the POZEN Inc. definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year are incorporated by reference into Part III of this Form 10-K and certain documents are incorporated by reference into Part IV.
AMENDMENT NO. 2 TO ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
EXPLANATORY NOTE
This Amendment No. 2 to the Annual Report on Form 10-K for the year ended December 31, 2004 of POZEN Inc. is filed solely for the purpose of amending and restating Part II, Item 8 Financial Statements and Supplementary Data, to include a revised Report of Independent Auditors. In addition, in connection with the filing of this Amendment No. 2 to the Annual Report on Form 10-K for the year ended December 31, 2004, and pursuant to the rules of the Securities and Exchange Commission, we are including certain currently dated certifications. Except as described above, no other changes have been made to the Annual Report on Form 10-K for the year ended December 31, 2004, as previously amended. This Amendment No. 2 to the Annual Report on Form 10-K for the year ended December 31, 2004 continues to speak as of the date of the Annual Report on Form 10-K for the year ended December 31, 2004, and we have not updated the disclosures contained in this Amendment No. 2 to the Annual Report on Form 10-K for the year ended December 31, 2004 to reflect any events that occurred at a date subsequent to the filing of the Annual Report on Form 10-K for the year ended December 31, 2004. The filing of this Amendment No. 2 to the Annual Report on Form 10-K for the year ended December 31, 2004 is not a representation that any statements contained in items of the Annual Report on Form 10-K for the year ended December 31, 2004 other than that information being amended are true or complete as of any date subsequent to the date of the Annual Report on Form 10-K for the year ended December 31, 2004.
Item 8.Financial Statements and Supplementary Data
Our financial statements and notes thereto are included elsewhere in this Amendment No. 2 to Annual Report on Form 10-K and incorporated herein by reference. See Item 15 of Part IV.
Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Schedules:
1. Financial Statements
The following financial statements and reports of independent auditors are included herein:
| F-3 | ||
| F-5 | ||
| F-6 | ||
| F-7 | ||
| F-8 | ||
| F-9 |
2. Financial Statement Schedules
Not applicable.
3. List of Exhibits
2
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.
Registrant:
POZEN Inc. | ||||
| Date: January 10, 2006 | By: | /s/ John R. Plachetka | ||
John R. Plachetka Chief Executive Officer | ||||
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 dates indicated.
Signature | Title | Date | ||
/s/ John R. Plachetka John R. Plachetka | Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | January 10, 2006 | ||
/s/ William L. Hodges William L. Hodges | Senior Vice President, Finance and Administration (Chief Financial Officer) | January 10, 2006 | ||
/s/ John E. Barnhardt John E. Barnhardt | Vice President, Finance and Administration (Principal Financial and Accounting Officer) | January 10, 2006 | ||
/s/ James R. Butler James R. Butler | Director | January 10, 2006 | ||
/s/ Arthur S. Kirsch Arthur S. Kirsch | Director | January 10, 2006 | ||
/s/ Kenneth B. Lee, Jr. Kenneth B. Lee Jr. | Director | January 10, 2006 | ||
/s/ Paul J. Rizzo Paul J. Rizzo | Director | January 10, 2006 | ||
/s/ Bruce A. Tomason Bruce A. Tomason | Director | January 10, 2006 | ||
/s/ Peter J. Wise Peter J. Wise | Director | January 10, 2006 | ||
/s/ Ted G. Wood Ted G. Wood | Director | January 10, 2006 | ||
(A Development Stage Company)
Audited Financial Statements
Contents
F-1
Management’s Report on Internal Control Over Financial Reporting
Management of POZEN Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management evaluated the Company’s internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control-Integrated Framework (COSO). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of December 31, 2004, the Company’s internal control over financial reporting was effective.
The Company’s independent auditors, Ernst & Young, LLC, have audited management’s assessment of the Company’s internal control over financial reporting. Their opinion on management’s assessment and their opinions on the effectiveness of the Company’s internal control over financial reporting and on the Company’s financial statements appear on page 34 in this annual report on Form 10-K.
/s/ John R. Plachetka | /s/ William L. Hodges | |
| Chairman, Chief Executive Officer | Chief Financial Officer | |
| March 7, 2005 | ||
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors
POZEN Inc.
We have audited the accompanying balance sheets of POZEN Inc. (a development stage company) as of December 31, 2004 and 2003, and the related statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004 and for the period from September 25, 1996 (inception) through 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 POZEN Inc. (a development stage company) at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 and for the period from September 25, 1996 (inception) through December 31, 2004, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of POZEN Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 7, 2005, except for the revenue recognition section of Note 1 as to which the date is November 9, 2005.
F-3
Report of Independent Registered Public Accounting Firm
The Board of Directors
POZEN Inc.
We have audited management’s assessment that POZEN Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). POZEN Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that POZEN Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, POZEN Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of POZEN Inc. (a development stage company) as of December 31, 2004 and 2003, and the related statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004 and for the period from September 25, 1996 (inception) through December 31, 2004 and our report dated March 7, 2005, except for the revenue recognition section of Note 1 as to which the date is November 9, 2005, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 7, 2005
F-4
(A Development Stage Company)
Balance Sheets
| December 31, | ||||||||
| 2004 | 2003 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 51,764,129 | $ | 60,480,690 | ||||
Prepaid expenses and other current assets | 1,064,032 | 698,209 | ||||||
Total current assets | 52,828,161 | 61,178,899 | ||||||
Equipment, net of accumulated depreciation | 467,688 | 334,096 | ||||||
Total assets | $ | 53,295,849 | $ | 61,512,995 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 2,330,349 | $ | 579,903 | ||||
Accrued compensation | 1,182,848 | 416,053 | ||||||
Accrued expenses | 1,626,829 | 1,103,622 | ||||||
Deferred revenue | 8,680,092 | 7,562,000 | ||||||
Total current liabilities | 13,820,118 | 9,661,578 | ||||||
Long-term liabilities: | ||||||||
Deferred revenue | 7,764,978 | 16,220,978 | ||||||
Total liabilities | 21,585,096 | 25,882,556 | ||||||
Common stock, $0.001 par value, 90,000,000 shares authorized; 28,852,743 and 28,492,201 shares issued and outstanding at December 31, 2004 and December 31, 2003, respectively | 28,853 | 28,492 | ||||||
Additional paid-in capital | 146,161,655 | 144,821,230 | ||||||
Deficit accumulated during the development stage | (114,479,755 | ) | (109,219,283 | ) | ||||
Total stockholders’ equity | 31,710,753 | 35,630,439 | ||||||
Total liabilities and stockholders’ equity | $ | 53,295,849 | $ | 61,512,995 | ||||
See accompanying Notes to Financial Statements.
F-5
(A Development Stage Company)
Statements of Operations
| Year ended December 31, | Period from September 26, 1996 (inception) through December 31, 2004 | |||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||
Revenue | $ | 23,087,908 | $ | 3,717,000 | $ | — | $ | 26,804,908 | ||||||||
Operating expenses: | ||||||||||||||||
General and administrative | 8,660,832 | 9,211,341 | 6,833,336 | 40,887,700 | ||||||||||||
Research and development | 20,398,748 | 9,904,347 | 18,761,630 | 107,239,977 | ||||||||||||
Total operating expenses | 29,059,580 | 19,115,688 | 25,594,966 | 148,127,677 | ||||||||||||
Interest income | 711,200 | 535,370 | 1,040,056 | 7,777,492 | ||||||||||||
Net income (loss) | (5,260,472 | ) | (14,863,318 | ) | (24,554,910 | ) | (113,545,277 | ) | ||||||||
Non-cash preferred stock charge | — | — | — | 27,617,105 | ||||||||||||
Preferred stock dividends | — | — | — | 934,478 | ||||||||||||
Net income (loss) attributable to common stockholders | $ | (5,260,472 | ) | $ | (14,863,318 | ) | $ | (24,554,910 | ) | $ | (142,096,860 | ) | ||||
Basic and diluted net income (loss) per common share | $ | (0.18 | ) | $ | (0.52 | ) | $ | (0.87 | ) | |||||||
Shares used in computing basic and diluted net income (loss) per common share | 28,748,540 | 28,329,339 | 28,110,352 | |||||||||||||
See accompanying Notes to Financial Statements.
F-6
(A Development Stage Company)
Statements of Stockholders’ Equity
| Preferred Stock | Common Stock | Additional Capital | Common Stock Warrants | Receivable From Stockholders | Deferred Compensation | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||
Issuance of common stock | $ | — | $ | 5,814 | $ | (1,504 | ) | $ | — | $ | (4,310 | ) | $ | — | $ | — | $ | — | |||||||||||||
Issuance of preferred stock | 2,106 | — | 6,231,314 | — | (1,000,000 | ) | — | — | 5,233,420 | ||||||||||||||||||||||
Issuance of preferred stock warrants | — | — | — | 242,000 | — | — | — | 242,000 | |||||||||||||||||||||||
Deferred compensation | — | — | 190,385 | — | — | (190,385 | ) | — | — | ||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | — | 28,267 | — | 28,267 | |||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | (101,334 | ) | (101,334 | ) | |||||||||||||||||||||
Balance at December 31, 1996 | 2,106 | 5,814 | 6,420,195 | 242,000 | (1,004,310 | ) | (162,118 | ) | (101,334 | ) | 5,402,353 | ||||||||||||||||||||
Proceeds from stockholders’ receivable | — | — | — | — | 1,004,310 | — | — | 1,004,310 | |||||||||||||||||||||||
Issuance of preferred stock | 1,135 | — | 4,195,865 | — | — | — | — | 4,197,000 | |||||||||||||||||||||||
Issuance of preferred stock warrants | — | — | — | 139,000 | — | — | — | 139,000 | |||||||||||||||||||||||
Deferred compensation | — | — | 1,001,629 | — | — | (1,001,629 | ) | — | — | ||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | — | 214,272 | — | 214,272 | |||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | (3,803,030 | ) | (3,803,030 | ) | |||||||||||||||||||||
Balance at December 31, 1997 | 3,241 | 5,814 | 11,617,689 | 381,000 | — | (949,475 | ) | (3,904,364 | ) | 7,153,905 | |||||||||||||||||||||
Issuance of preferred stock | 567 | — | 2,187,758 | — | — | — | — | 2,188,325 | |||||||||||||||||||||||
Issuance of preferred stock warrants | — | — | — | 35,000 | — | — | — | 35,000 | |||||||||||||||||||||||
Exercise of common stock options | — | 30 | 5,525 | — | — | — | — | 5,555 | |||||||||||||||||||||||
Deferred compensation | — | — | 362,489 | — | — | (362,489 | ) | — | — | ||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | — | 401,468 | — | 401,468 | |||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | (8,737,631 | ) | (8,737,631 | ) | |||||||||||||||||||||
Balance at December 31, 1998 | 3,808 | 5,844 | 14,173,461 | 416,000 | — | (910,496 | ) | (12,641,995 | ) | 1,046,622 | |||||||||||||||||||||
Issuance of preferred stock | 2,594 | — | 11,522,406 | — | — | — | — | 11,525,000 | |||||||||||||||||||||||
Issuance of preferred stock warrants | — | — | — | 925,000 | — | — | — | 925,000 | |||||||||||||||||||||||
Exercise of common stock options | — | 4 | 621 | — | — | — | — | 625 | |||||||||||||||||||||||
Deferred compensation | — | — | 3,045,666 | — | — | (3,045,666 | ) | — | — | ||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | — | 612,909 | — | 612,909 | |||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | (12,145,446 | ) | (12,145,446 | ) | |||||||||||||||||||||
Balance at December 31, 1999 | 6,402 | 5,848 | 28,742,154 | 1,341,000 | — | (3,343,253 | ) | (24,787,441 | ) | 1,964,710 | |||||||||||||||||||||
Proceed from sale of common stock | — | 750 | 10,461,750 | — | — | — | — | 10,462,500 | |||||||||||||||||||||||
Proceeds from sale of common stock in IPO, net of offering costs | — | 5,000 | 67,798,052 | — | — | — | — | 67,803,052 | |||||||||||||||||||||||
Conversion of preferred stock to common stock | (6,402 | ) | 15,488 | 27,347,019 | — | — | — | — | 27,356,105 | ||||||||||||||||||||||
Exercise of common stock options | — | 208 | 74,861 | — | — | — | — | 75,069 | |||||||||||||||||||||||
Exercise of common stock warrants | — | 369 | 1,805,682 | (914,952 | ) | — | — | — | 891,099 | ||||||||||||||||||||||
Preferred stock dividend | — | — | — | — | — | — | (934,478 | ) | (934,478 | ) | |||||||||||||||||||||
Dividends | 69 | 772,114 | — | — | — | — | 772,183 | ||||||||||||||||||||||||
Deferred compensation | — | — | 6,328,492 | — | — | (6,328,492 | ) | — | — | ||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | — | 3,054,286 | — | 3,054,286 | |||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | (22,376,628 | ) | (22,376,628 | ) | |||||||||||||||||||||
Balance at December 31, 2000 | — | 27,732 | 143,330,124 | 426,048 | — | (6,617,459 | ) | (48,098,547 | ) | 89,067,898 | |||||||||||||||||||||
Exercise of common stock options | — | 187 | 109,408 | — | — | — | — | 109,595 | |||||||||||||||||||||||
Exercise of common stock warrants | — | 50 | 115,240 | (115,240 | ) | — | — | — | 50 | ||||||||||||||||||||||
Forfeiture of common stock options | — | — | (42,213 | ) | — | — | 42,213 | — | — | ||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | — | 3,145,870 | — | 3,145,870 | |||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | (21,702,508 | ) | (21,702,508 | ) | |||||||||||||||||||||
Balance at December 31, 2001 | — | 27,969 | 143,512,559 | 310,808 | — | (3,429,376 | ) | (69,801,055 | ) | 70,620,905 | |||||||||||||||||||||
Exercise of common stock options | — | 159 | 224,291 | — | — | — | — | 224,450 | |||||||||||||||||||||||
Exercise and forfeiture of common stock warrants | — | 19 | 310,808 | (310,808 | ) | — | — | — | 19 | ||||||||||||||||||||||
Forfeiture of common stock options | — | — | (11,167 | ) | — | — | 11,167 | — | — | ||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | — | 2,908,079 | — | 2,908,079 | |||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | (24,554,910 | ) | (24,554,910 | ) | |||||||||||||||||||||
Balance at December 31, 2002 | — | 28,147 | 144,036,491 | — | — | (510,130 | ) | (94,355,965 | ) | 49,198,543 | |||||||||||||||||||||
Exercise of common stock options | — | 345 | 784,739 | — | — | — | — | 785,084 | |||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | — | 510,130 | — | 510,130 | |||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | (14,863,318 | ) | (14,863,318 | ) | |||||||||||||||||||||
Balance at December 31, 2003 | $ | — | $ | 28,492 | $ | 144,821,230 | $ | — | $ | — | $ | — | $ | (109,219,283 | ) | $ | 35,630,439 | ||||||||||||||
Exercise of common stock options | $ | 361 | $ | 1,340,425 | $ | 1,340,786 | |||||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | $ | (5,260,472 | ) | $ | (5,260,472 | ) | |||||||||||||||||||
Balance at December 31, 2004 | $ | — | $ | 28,853 | $ | 146,161,655 | $ | — | $ | — | $ | — | $ | (114,479,755 | ) | $ | 31,710,753 | ||||||||||||||
See accompanying Notes to Financial Statements.
F-7
(A Development Stage Company)
Statements of Cash Flows
| Year ended December 31, | Period from September 26, 1996 (inception) through December 31, 2004 | |||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||
Operating activities | ||||||||||||||||
Net income (loss) | $ | (5,260,472 | ) | $ | (14,863,318 | ) | $ | (24,554,910 | ) | $ | (113,545,277 | ) | ||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||||||
Depreciation | 163,129 | 129,560 | 113,513 | 688,458 | ||||||||||||
Loss on disposal of equipment | 6,072 | — | 2,726 | 33,567 | ||||||||||||
Noncash compensation expense | 400,388 | 510,130 | 2,908,079 | 11,275,669 | ||||||||||||
Noncash financing charge | — | — | — | 450,000 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Prepaid expenses and other current assets | (365,823 | ) | (144,838 | ) | (477,185 | ) | (1,064,032 | ) | ||||||||
Accounts payable and accrued expenses | 2,640,060 | 263,130 | (1,686,571 | ) | 4,739,638 | |||||||||||
Deferred revenue | (7,337,908 | ) | 23,782,978 | — | 16,445,070 | |||||||||||
Net cash provided by (used in) operating activities | (9,754,554 | ) | 9,677,642 | (23,694,348 | ) | (80,976,907 | ) | |||||||||
Investment activities | ||||||||||||||||
Purchase of equipment | (302,793 | ) | (38,287 | ) | (432,594 | ) | (1,189,713 | ) | ||||||||
Net cash used in investing activities | (302,793 | ) | (38,287 | ) | (432,594 | ) | (1,189,713 | ) | ||||||||
Financing activities | ||||||||||||||||
Proceeds from issuance of preferred stock | — | — | — | 48,651,850 | ||||||||||||
Proceeds from issuance of common stock | 1,340,786 | 785,084 | 224,469 | 81,436,884 | ||||||||||||
Proceeds from collections of stockholders’ receivables | — | — | — | 1,004,310 | ||||||||||||
Proceeds from notes payable | — | — | — | 3,000,000 | ||||||||||||
Payment of dividend | — | — | — | (162,295 | ) | |||||||||||
Net cash provided by financing activities | 1,340,786 | 785,084 | 224,469 | 133,930,749 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | (8,716,561 | ) | 10,424,439 | (23,902,473 | ) | 51,764,129 | ||||||||||
Cash and cash equivalents at beginning of period | 60,480,690 | 50,056,251 | 73,958,724 | — | ||||||||||||
Cash and cash equivalents at end of period | $ | 51,764,129 | $ | 60,480,690 | $ | 50,056,251 | $ | 51,764,129 | ||||||||
Supplemental schedule of cash flow information | ||||||||||||||||
Cash paid for interest | $ | — | $ | 538 | $ | 2,106 | $ | 191,328 | ||||||||
Supplemental schedule of noncash investing and financing activities | ||||||||||||||||
Conversion of notes payable to preferred stock | $ | — | $ | — | $ | — | $ | 3,000,000 | ||||||||
Preferred stock dividend | $ | — | $ | — | $ | — | $ | 772,183 | ||||||||
Forfeiture of common stock options and warrants | $ | — | $ | — | $ | 272,166 | $ | 314,179 | ||||||||
Conversion of common stock warrants to common stock | $ | — | $ | — | $ | 49,809 | $ | 1,080,001 | ||||||||
See accompanying Notes to Financial Statements.
F-8
(A Development Stage Company)
Notes to Financial Statements
1. Significant Accounting Policies
Development Stage Company
POZEN Inc. (“POZEN” or the “Company”) was incorporated in the State of Delaware on September 25, 1996. The Company is a pharmaceutical company focused primarily on products for the treatment of migraine, acute and chronic pain and other pain-related indications. POZEN’s product development emphasis is on diseases with unmet medical needs where it can improve efficacy, safety and/or patient convenience. Since the Company’s inception, it has focused its efforts primarily on the development or regulatory approval of pharmaceutical products for the treatment of migraine. The Company’s portfolio currently contains three product candidates in the migraine area, MT 400, MT 100 and MT 300. The Company is also exploring the development of product candidates in other pain-related therapeutic areas. POZEN has not obtained regulatory approval for any of its product candidates. Statement of Financial Accounting Standards Board No. (“SFAS”) 7, “Accounting and Reporting by Development Stage Enterprises,” states that an enterprise shall be considered to be in the development stage if either planned principal operations have not commenced or planned principal operations have commenced, but there has been no significant revenue therefrom. The Company will remain a development stage company until such time as significant revenues have been generated from the marketing and sale of the Company’s product candidates.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from the estimates and assumptions used.
Revenue Recognition
The Company’s licensing agreements have terms that include upfront payments upon contract signing, additional payments if and when certain milestones in the product’s development or commercialization are reached, and royalty payments based on future product sales. These agreements are accounted for in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition”, as amended by SAB 104, “Revenue Recognition” (“SAB 101”), and Emerging Issues Task Force 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables.” The non-refundable portion of upfront payments received under the Company’s existing agreements is deferred by the Company upon receipt and recognized on a straightline basis over the period ending on the anticipated date of regulatory approvals, as specified in the agreements relating to the product candidates, or the conclusion of any obligation on the part of the Company. For the Company’s current agreements, these periods are estimated to be as follows:
| • | The June 2003 $500,000 licensing fee for MT 100 received from Nycomed Danamark ApS (“Nycomed”) has been amortized over 30 months. (Note: The Nycomed agreement was terminated in September 2005 and any deferred revenue which the Company is entitled to recognize as income will no longer be deferred, but is being recognized in the third quarter of 2005.) |
| • | The June 2003 initial licensing and patent-issuance milestone payments totaling $25.0 million for MT 400 received from GlaxoSmithKline (“GSK”) have been deferred and was originally being amortized over 42 months. During the third quarter of 2005 the amortization period was decreased to 39 months based upon the August 2005 submission to the U.S. Food and Drug Administration (“FDA”) of the Trexima New Drug Application (“NDA”) which was earlier than anticipated. The decrease in the deferred period resulted in a $357,000 increase in the third quarter amortization from the second quarter 2005 amortization. |
| • | The September 2003 $1.0 licensing fee for MT 300 ($2.0 million non-refundable upfront licensing fee net of a potential termination fee of $1.0 million) received from Valeant Pharmaceuticals North America (“Valeant NA”), a subsidiary of Valeant Pharmaceuticals International (formerly Xcel Pharmaceuticals Inc.), has been amortized over 32 months. As the result of the receipt in October 2003 of a not-approvable letter from the FDA relating to the NDA for MT 300, after three months of amortization, this estimated deferral period was increased from an original estimate of 20 months to 32 months ending in April 2006, resulting in a $14,000 decrease in the fourth quarter 2003 amortization from the third quarter 2003 estimate. |
Milestone payments are recognized as revenue upon the achievement of specified milestones if (i) the milestone is substantive in nature and the achievement of the milestone was not reasonably assured at the inception of the agreement and (ii) the fees are non-refundable. Any milestone payments received prior to satisfying these revenue recognition criteria are recorded as deferred revenue.
F-9
Royalty revenue will be recognized when earned with respect to the manufacture, sale or use of the Company’s products or technology. For those arrangements where royalties are reasonably estimable, the Company will recognize revenue based on estimates of royalties earned during the applicable period and reflect in future revenue any differences between the estimated and actual royalties.
Additionally, the Company’s licensing agreements may include payment for services provided by the Company on an hourly rate and direct expenses. The Company records such revenue in accordance with the agreements which would generally be based upon time spent and materials used on the project.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash is invested in interest-bearing investment-grade securities. Cash is restricted by a $124,000 letter of credit, maintained in compliance with the terms of the Company’s lease.
Cash and cash equivalents include financial instruments that potentially subject the Company to a concentration of credit risk. Cash and cash equivalents are deposited with high credit quality financial institutions which invest primarily in U.S. Government securities, highly rated commercial paper and certificates of deposit guaranteed by banks which are members of the FDIC. The counterparties to the agreements relating to the Company’s investments consist primarily of the U.S. Government and various major corporations with high credit standings.
Equipment
Equipment consists primarily of computer hardware and software and furniture and fixtures and is recorded at cost. Depreciation is computed using the Modified Accelerated Cost Recovery System (MACRS) over the estimated useful lives of the assets ranging from five to seven years. Accumulated depreciation for the period ended December 31, 2003 and 2004 totaled $0.3 million and $0.4 million, respectively.
Research and Development Costs, including clinical trial expenses
Research and development costs are charged to operations as incurred. The Company has included research and development expenses the personnel costs associated with research and development activities and costs associated with pharmaceutical development, clinical trials, toxicology activities, and regulatory matters.
Income Taxes
The Company accounts for income taxes using the liability method. Deferred income taxes are provided for temporary differences between financial reporting and tax bases of assets and liabilities.
Net Loss Per Share
Basic and diluted net loss per common share amounts are presented in conformity with Statement of Financial Accounting Standards No. (“SFAS”) 128, “Earnings per Share.” In accordance with SFAS 128, basic and diluted net loss per common share amounts have been computed using the weighted-average number of shares of common stock outstanding for the years ended December 31, 2004, 2003 and 2002.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents and accounts payable. The carrying values of cash and cash equivalents and accounts payable approximate the fair value due to the short-term nature of such instruments.
Patent Costs
The Company expenses patent costs, including legal expenses, in the period in which they are incurred. Patent expenses are included in general and administrative expenses in the Company’s statements of operations.
Comprehensive Loss
The Company has adopted the provisions of SFAS 130, “Comprehensive Income.” SFAS 130 establishes standards for the reporting and display of comprehensive income and its components for general purpose financial statements. For all periods presented, there were no differences between net loss and comprehensive loss.
F-10
Stock-Based Compensation
The Company accounts for non-cash stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. (“APB”) 25, “Accounting for Stock Issued to Employees,” which states that no compensation expense is recognized for stock options or other stock-based awards that are granted to employees with an exercise price equal to or above the estimated fair value of the Company’s common stock on the grant date. In the event that stock options are granted with an exercise price below the estimated fair market value of the Company’s common stock at the grant date, the difference between the fair market value of the Company’s common stock and the exercise price of the stock option is recorded as deferred compensation and amortized as compensation expense over the vesting period of the options.
In connection with the grant of stock awards to employees, consisting of stock options to employees and a restricted stock unit award made in May 2004 to the Company’s Chief Executive Officer, the Company recorded $400,000 of restricted stock compensation expense for the twelve-month period ended December 31, 2004 and amortized deferred compensation of $-0-, $510,000 and $2,908,000 in the twelve-month periods ended December 31, 2004, 2003, and 2002, respectively. The deferred compensation recognized in these periods related to the grant of stock options and was recorded as a component of stockholders’ equity. This deferred compensation was amortized as charges to operations over the vesting periods of the options using the straight-line method. The vesting periods of the options are generally three or four years. The restricted stock award vests in equal amounts on January 1, 2005, January 1, 2006 and January 1, 2007.
The following table illustrates the effect on net income (loss) and net income (loss) per share as if the Company had applied the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.
| Years Ended December 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
Net loss attributed to common stockholders as reported | $ | (5,260,472 | ) | $ | (14,863,318 | ) | $ | (24,554,910 | ) | |||
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects | 400,388 | 510,130 | 2,908,079 | |||||||||
Deduct: Total stock-based employee compensation expense determined under the fair value-based method for all awards, net of related tax effects | (4,306,553 | ) | (3,338,823 | ) | (5,716,748 | ) | ||||||
Pro forma net loss attributed to common stockholders | $ | (9,166,637 | ) | $ | (17,692,011 | ) | $ | (27,363,579 | ) | |||
Earnings per share | ||||||||||||
Basic net income (loss) per common share as reported | $ | (0.18 | ) | $ | (0.52 | ) | $ | (0.87 | ) | |||
Basic net income (loss) per common share pro forma | $ | (0.32 | ) | $ | (0.62 | ) | $ | (0.97 | ) | |||
Weighted average shares used in computing basic and diluted net loss per common share | 28,748,540 | 28,329,339 | 28,110,352 | |||||||||
Contingencies
Five purported class action lawsuits were filed during 2004 by holders of the Company’s securities against the Company and certain of its current and former officers, in the United States District Court for the Middle District of North Carolina, alleging violations of securities laws. These actions were filed as a single consolidated class action complaint on December 20, 2004. The consolidated complaint alleges, among other claims, violations of federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 and Section 20(a) of the Exchange Act against the Company and a current officer, arising out of allegedly false and misleading statements made by the Company concerning its product candidates, MT 100 and MT 300, during the class period. On January 27, 2005, the Company filed a motion to dismiss the consolidated class action complaint.
On September 13, 2004, two derivative actions were also filed against certain of the Company’s current and former directors and officers in the Superior Court for the County of Orange in the State of North Carolina, alleging violations of state law, including breaches of fiduciary duties and insider sales, relating to the same allegedly misleading statements concerning the Company’s product candidates, MT 100 and MT 300 that are referenced in the various purported class action lawsuits.
The Company and the other defendants believe that the allegations in these actions are without merit and intend to defend these cases vigorously. While the Company cannot predict the outcome or reasonably estimate the range of potential loss, if any, from this litigation, it is the current judgment of management that it is unlikely that this litigation will have a material adverse effect on the Company’s results of operations or financial condition.
F-11
Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”, and revised the interpretation in December 2003 (“FIN 46(R)”). FIN 46(R) requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46(R) is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46(R) must be applied for the first interim or annual period ended after March 15, 2004. The Company did not have any ownership in any variable interest entities as of December 31, 2004. The Company will apply the provisions of FIN 46R in future periods if it owns an interest in any variable interest entity.
As permitted by FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“FASB 123”), the Company currently accounts for share-based payments to employees using APB 25’s intrinsic value method. Accordingly, the adoption of the revised FASB 123’s (“FASB 123(R)”) fair value method will have a significant impact on the Company’s result of operations, although it will have no impact on the Company’s overall financial position. The impact of adoption of FASB 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted FASB 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net loss and loss per share in Note 1 above. FASB 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the decrease in operating cash flows which would have been recognized for such excess tax deductions was $947,600 and $710,600 in 2004 and 2003, respectively
2. License Agreements
The Company has entered into various license agreements to further develop, sell and manufacture its product candidates.
In June 2003, the Company signed a license agreement with Nycomed for the commercialization of MT 100 in four Nordic countries. Under the terms of the agreement, Nycomed will have exclusive rights in Denmark, Sweden, Norway and Finland to commercialize MT 100 upon its approval in these countries. Upon execution of the agreement, Nycomed paid the Company an upfront fee of $500,000. The Company is eligible to receive milestone payments in an aggregate amount of between $500,000 and $1.0 million upon the occurrence and timing of certain regulatory approvals, including the approval of the MAA in the UK and in the other countries where Nycomed has rights. In addition, Nycomed is obligated to pay the Company a specified royalty on all sales of MT 100, based upon the higher of an agreed percentage of sales on a country-by-country basis, subject to reduction in the event of generic competition, or an agreed dollar amount per unit sold subject to reduction under certain conditions, until the latter of the expiration of the last to expire issued applicable patent in the particular country or 15 years. The scheduled expiration date of the patent that is currently applicable in Sweden, Finland and Denmark is November 12, 2016. There is no applicable patent in Norway. The license agreement will expire on a country-by-country basis upon the later of (a) the date of expiration of all royalty obligations in a particular country, which is scheduled for November 12, 2016 in Sweden, Finland and Denmark, and (b) 15 years after the date of first commercial sale of MT 100 in such country under the agreement. Nycomed has the right to terminate the agreement if the Company defaults under the agreement or the MAA is not approved by a specified date or is withdrawn. Nycomed can terminate the applicability of the agreement to a particular country if the Company withdraws the required regulatory application in that country. If the Company withdraws a regulatory application in any of the countries identified in the agreement, it will be required to pay a withdrawal fee in amounts that range from $112,500 to $400,000.In September 2003, the Company received a letter of comments on the MAA from the MHRA Advisory Committee. In March 2004, the Company submitted its complete response to the concerns identified by the MHRA Advisory Committee and met with the MHRA Advisory Committee in January 2005 to answer questions concerning the Company’s response. In January 2005 the Company was notified that the MHRA Advisory Committee was prepared to advise the MHRA that a marketing authorization could be granted for MT 100 in the UK, provided the Company supplied certain additional information and meet certain conditions, as outlined by the MHRA Advisory Committee. The Company has provided the information which it believes addresses all the conditions set forth by the MHRA Advisory Committee. Assuming the issues raised in the September 2003 MAA comment letter are satisfactorily resolved and the Company receives unconditional approval of the MAA from the MHRA, the Company intends to seek approval of MT 100 in Denmark, Sweden, Norway and Finland through the European Union Mutual Recognition Procedure.
Under the agreement, generally, each party must indemnify the other for damages arising from each party’s breach of its representations, warranties and obligations under the agreement. Additionally, Nycomed must indemnify the Company for any claim brought by a third party arising from Nycomed’s development, manufacture or sale of any products, and the Company must indemnify Nycomed for any claim brought by a third party arising from our development, transportation or manufacture of any products. Furthermore, both parties have a duty to maintain commercially reasonable insurance coverage commensurate with its obligations under the agreement.
F-12
At the same time as the Company entered into the license agreement with Nycomed, it entered into a supply agreement with Nycomed under which Nycomed is obligated to purchase from the Company, and the Company is obligated to sell to Nycomed, the MT 100 that Nycomed sells in the countries specified in the agreement, and Nycomed is required to reimburse the Company for certain costs related to the manufacturing of MT 100. The agreement will expire upon an anniversary date of the first commercial sale of MT 100 following final approval by the FDA of the NDA for MT 100. Either party may terminate the agreement in the event of a material breach or default by the other party of the material terms and conditions of the agreement. Among the material breaches that would entitle Nycomed to terminate the agreement would be the Company’s failure to deliver products to Nycomed at a time when Nycomed has established an alternative source of the product.
In June 2003, the Company signed an agreement with GSK for the development and commercialization of proprietary combinations of a triptan (5-HT1B/1D agonist) and a long-acting NSAID. The combinations covered by the agreement are among the combinations of MT 400. Under the terms of the agreement, GSK has exclusive rights in the United States to commercialize all combinations which combine GSK’s triptans, including Imitrex® (sumatriptan succinate) or Amerge® (naratriptan hydrochloride), with a long-acting NSAID. The Company is responsible for development of the combination product, while GSK is to provide formulation development and manufacturing. Pursuant to the terms of the agreement, the Company received $25.0 million in initial payments from GSK following termination of the waiting period under the Hart-Scott-Rodino notification program and the issuance of a specified patent. In May 2004, the Company received a $15.0 million milestone payment as a result of its commencement of Phase 3 clinical trial activities. Additionally, GSK is obligated to make payments to the Company in an amount up to $40.0 million upon the achievement of specified development and regulatory milestones relating to an NDA and commercialization progress for the first product. Up to an additional $10 million is payable upon achievement of milestones relating to other products. GSK will also pay the Company royalties on all sales of marketed products, and in addition, sales performance milestones of up to $80.0 million if certain sales thresholds are achieved, until at least the expiration of the last to expire issued applicable patent, August 14, 2017 based upon the scheduled expiration of currently issued patents. GSK may reduce, but not eliminate, the royalty payable to the Company if generic competitors attain a pre-determined share of the market for the product, or if GSK owes a royalty to one or more third parties for rights it licenses from such third parties to commercialize the product. The agreement terminates on the date of expiration of all royalty obligations unless earlier terminated by either party for a material breach or by GSK at any time upon ninety (90) days’ written notice to the Company for any reason or no reason. Among the contract breaches that would entitle POZEN to terminate the agreement is GSK’s determination not to further develop the combination product under certain circumstances. GSK has the right, but not the obligation, to bring, at its own expense, an action for infringement of certain patents by third parties. If GSK does not bring any such action within a certain time frame, the Company has the right, at its own expense, to bring the appropriate action. With regard to certain other patent infringements, the Company has the sole right to bring an action against the infringing third party. Each party generally has the duty to indemnify the other for damages arising from breaches of each party’s representations, warranties and obligations under the agreement, as well as for gross negligence or intentional misconduct. The Company also has a duty to indemnify GSK for damages arising from our development and manufacture of MT 400 prior to the effective date of the agreement, and each party must indemnify the other for damages arising from the development and manufacture of any combination product after the effective date.
In September 2003, the Company signed an agreement with Xcel for the further development and commercialization of MT 300. Under the terms of the agreement, Xcel will have exclusive rights in the United States to commercialize MT 300 subject to certain minimum commercialization obligations. Pursuant to the terms of the agreement, Xcel paid the Company an upfront fee of $2.0 million. Under certain circumstances, if the Company withdraws the NDA for MT 300, it would be required to pay to Xcel a termination fee of $1.0 million. Potential milestone payments of up to $8.0 million will be due upon certain future regulatory approvals, including the FDA’s approvals relating to MT 300, and the achievement of a predetermined sales threshold on MT 300. Xcel is also obligated to pay the Company royalties on all combined sales of MT 300 and Xcel’s D.H.E. 45® (dihydroergotamine mesylate) Injection, once MT 300 is commercialized, until at least the expiration of the last to expire issued applicable patent (2020, based upon the scheduled expiration of the last to expire currently issued applicable patent), subject to reduction in certain instances for the effects of generic competition, or in the event that Xcel pays royalties to one or more third parties to license rights from such third parties to commercialize MT 300. The agreement terminates on the date of expiration of all royalty obligations (2020, based upon the scheduled expiration of the last to expire currently issued applicable patent) unless earlier terminated by either party for a material breach or in the event that either party determines not to pursue approval of MT 300. Under certain circumstances, the agreement provides for the terminating party to facilitate the assumption of its responsibilities by the non-terminating party. Generally, each party must indemnify the other for damages arising from such party’s breach of its representations, warranties and obligations under the agreement, as well as for the gross negligence or willful misconduct by either party. Additionally, Xcel must indemnify the Company for damages arising from the development, manufacture or use of any product after the effective date of the agreement, while the Company must indemnify Xcel for any damages arising from such development, manufacture or use prior to the effective date. The Company must also indemnify Xcel for any use by the Company or any sublicensee of certain technology owned by Xcel. Based upon the delayed commercialization of MT 300 due to the not-approvable letter for MT 300 and the Company’s efforts to address with the FDA the issues raised in that letter, POZEN and Xcel have mutually agreed, in writing, to extend the time for certain activities under our agreement with Xcel that are dependent on the FDA’s actions with respect to MT 300.
F-13
Management believes current assumptions and other considerations used to estimate the period for revenue recognition are appropriate. However, if regulatory approvals relating to MT 100, MT 300 or MT 400 are accelerated, delayed or not ultimately obtained, then the amortization of revenues for these products will be accelerated or reduced accordingly.
3. Stockholders’ Equity
Prior to 2000, the Company completed five private placement offerings of preferred stock as shown in the table set forth below. In connection with four of these offerings, warrants were issued to certain key advisors for their services related to the offerings. The warrants have been exercised or have expired.
Year of Issuance | Series | Number of Shares | $ Received costs) | Number of Shares Underlying Warrants | Offering Costs Resulting From Warrants | Price at Issuance | |||||||||
1996 | A Convertible Preferred | 2,105,931 | $ | 6,475,420 | 78,776 | $ | 242,000 | $ | 3.15 | ||||||
1997 | B Convertible Preferred | 1,135,000 | $ | 4,336,000 | 36,450 | $ | 139,000 | $ | 4.00 | ||||||
1998 | B Convertible Preferred | 4,377 | $ | 17,512 | — | $ | — | $ | 4.00 | ||||||
1998 | C Convertible Preferred | 563,044 | $ | 2,205,813 | 8,884 | $ | 35,000 | $ | 4.05 | ||||||
1999 | D Convertible Preferred | 2,593,750 | $ | 12,000,000 | 200,000 | $ | 925,000 | $ | 4.80 | ||||||
All outstanding shares of Series A, Series B, Series C and Series D and the related warrants were converted into 8,636,436 shares of the Company’s common stock and warrants for 437,228 shares of the Company’s common stock upon the closing of the Company’s initial public offering in October 2000.
Shares Reserved for Future Issuance
At December 31, 2004, shares of common stock reserved for future issuance are as follows:
Shares available for grant under stock option plans | 2,476,795 | |
Shares issuable pursuant to options granted under stock option plans | 3,138,419 | |
Total reserved | 5,615,214 | |
4. Redeemable Preferred Stock
On March 24, 2000, the Company completed a private placement of 2,589,927 shares of Series E Convertible Preferred Stock (“Series E”) and received cash of $16,875,115, net of offering costs. The Series E holders were entitled to receive cumulative dividends at an annual rate of 8% of the original purchase price payable in cash or shares of Series E at the option of the holder. Dividends were payable when declared by the Board of Directors and upon conversion, liquidation or redemption. The Series E was convertible at a price that decreased from $6.95 to $5.73 since the Company was unable to complete by September 15, 2000 a qualified public offering or to effect a merger or acquisition of the Company that would entitle the holders of the Series E to receive $10.43 or more per share. At the date of issuance, the Company believed the per share price of $6.95 represented the fair value of the preferred stock and was in excess of the deemed fair value of its common stock. Subsequent to the commencement of the Company’s initial public offering process, the Company re-evaluated the deemed fair market value of its common stock as of March 2000 and determined it to be $22.48 per share (on a pre-split basis). Accordingly, the incremental fair value of the Series E was deemed to be the equivalent of a preferred stock dividend. The Company recorded the non-cash preferred stock charge at the date of issuance by offsetting charges and credits to additional paid-in capital of $16,875,115, without any effect on total stockholders’ equity. The non-cash charge was limited to the net proceeds received from the Series E offering.
In conjunction with the issuance of the Series E, the Company issued warrants to purchase 24,485 shares of Series E at an initial exercise price of $6.95 per share to certain key advisors for their services related to the offering. The value of the warrants was recorded as offering costs related to the issuance of Series E at a value calculated using the “Black Scholes” formula at approximately $261,000. During 2002, the warrants expired unexercised and the reduction of value of the warrants was recorded as additional paid-in capital.
On August 28, 2000, the Company completed a private placement of 1,597,285 shares of Series F Convertible Preferred Stock (“Series E”) and received cash of $10,742,000, net of offering costs. The terms of the Series F are substantially similar to those of the Series E. The Company recorded a non-cash preferred stock charge at the date of issuance by offsetting charges and credits to additional paid-in capital of $10,742,000, without any effect on total stockholders’ equity.
F-14
All outstanding shares of Series E and related Series E warrants and Series F were converted into 6,851,207 shares of the Company’s common stock and warrants exercisable for 33,030 shares of the Company’s common stock upon the closing of the Company’s initial public offering in October 2000. The Series E warrants, value at $260,999, were forfeited in October 2002.
5. Accrued Expenses
Accrued expenses consist of the following at December 31:
| 2004 | 2003 | |||||
Research and development costs | $ | 1,384,598 | $ | 836,355 | ||
Other | 242,231 | 267,267 | ||||
| $ | 1,626,829 | $ | 1,103,622 | |||
6. Income Taxes
At December 31, 2004 and 2003, the Company had federal and state net operating loss carryforwards of approximately $80.1 million and $69.1 million, respectively, and research and development credit carryforwards of approximately $7.2 million and $5.5 million, respectively. The federal and state net operating loss carryforwards begin to expire in 2011 and the research and development credit carryforwards begin to expire in 2012. For financial reporting purposes, a valuation allowance has been recognized to offset the deferred tax assets related to the carryforwards. When, and if recognized, the tax benefit for those items will be reflected in current operations of the period in which the benefit is recorded as a reduction of income tax expense. The utilization of the loss carryforwards to reduce future income taxes will depend on the Company’s ability to generate sufficient taxable income prior to the expiration of the net operating loss carryforwards. In addition, the maximum annual use of net operating loss carryforwards is limited in certain situations where changes occur in stock ownership.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows at December 31:
| 2004 | 2003 | |||||||
| ($ in thousands) | ||||||||
Deferred tax assets: | ||||||||
Net operating loss carryforwards | $ | 31,312 | $ | 27,532 | ||||
Research and development credits | 7,178 | 5,483 | ||||||
Revenue recognition | 6,414 | 9,071 | ||||||
Options activity/depreciation/other - net | 195 | 23 | ||||||
Total deferred tax assets | 45,099 | 42,109 | ||||||
Valuation allowance | (45,099 | ) | (42,109 | ) | ||||
Net deferred tax asset | $ | — | $ | — | ||||
The amount of the valuation allowance increased by $3.0 million and $6.4 million as of December 31, 2004 and 2003, respectively. The actual income tax expense for the years ended December 31, 2004, 2003 and 2002, differed from the amounts computed by applying the U.S. federal tax rate of 35% to pretax earnings as a result of the following:
| 2004 | 2003 | 2002 | ||||||||||
| ($ in thousands) | ||||||||||||
Loss before income tax | $ | (5,260 | ) | $ | (14,863 | ) | $ | (24,555 | ) | |||
Federal tax rate | 35 | % | 35 | % | 35 | % | ||||||
Federal income tax provision at statutory rate | (1,841 | ) | (5,202 | ) | (8,594 | ) | ||||||
State tax provision | (210 | ) | (590 | ) | (982 | ) | ||||||
Increase (decrease) in income tax expense resulting from: | ||||||||||||
Research and development credits | (1,326 | ) | (646 | ) | (500 | ) | ||||||
Non-deductible expenses and other | 844 | 55 | 1,111 | |||||||||
Change in reserve | 2,533 | 6,383 | 8,965 | |||||||||
Tax expense | $ | — | $ | — | $ | — | ||||||
F-15
7. Stock Option Plan
On November 20, 1996, the Company established a Stock Option Plan and authorized the issuance of options for up to 1,605,310 shares of common stock to attract and retain quality employees and to allow such employees to participate in the growth of the Company. Awards may be made to participants in the form of incentive and nonqualified stock options. Eligible participants under the Stock Option Plan include executive and key employees of the Company. The vesting periods range from immediate vesting at issuance to four years or immediately upon a significant change in ownership as defined by the plan document. The exercise price for incentive stock options may not be less than 100% of the fair market value of the common stock on the date of grant (110% with respect to incentive stock options granted to optionees who are holders of 10% or more of the Company’s common stock).
In May 2000, the Board of Directors adopted, and in June 2000 the stockholders approved, the POZEN Inc. 2000 Equity Compensation Plan (the “Plan”). The Plan became effective upon the completion of the Company’s initial public offering in October 2000 after which time no further grants were made under the Stock Option Plan. The Plan provides for grants of incentive stock options, nonqualified stock options, stock awards, performance units, and other stock-based awards to employees, non-employee directors, advisors, and consultants. The Plan authorized up to 3,000,000 shares of common stock for issuance under the terms of the Plan. The maximum number of shares for which any individual may receive grants in any calendar year is 1,000,000 shares. The vesting periods range from immediate vesting at issuance to four years or immediately upon a significant change in ownership as defined by the plan document. If options granted under the Plan expire or are terminated for any reason without being exercised, or if stock awards, performance units, or other stock-based awards are forfeited or otherwise terminate, the shares of common stock underlying the grants will again be available for purposes of the Plan.
In May 2004 an award of 98,135 restricted stock units was made to the Company’s Chief Executive Officer under the Plan. Those restricted stock units are reflected as a stock option grant in the discussion below.
In 2004, the Board of Directors adopted and the stockholders approved an amendment to and restatement of the Plan. The amendment to the Plan provided for an increase in the number of shares of common stock authorized for issuance under the Plan from 3,000,000 to 5,500,000, or an increase of 2,500,000 shares. In addition, the amendment to the Plan limited the number of shares that may be issued pursuant to grants other than options under the Plan to 2,000,000 shares and made certain other clarifying changes.
A summary of the Company’s stock option activity, and related information is as follows:
| Number of Shares | Weighted-Average Exercise Price | |||||
Balance at December 31, 1996 | 88,562 | $ | 0.19 | |||
Options granted | 470,127 | 0.19 | ||||
Forfeited | (10,118 | ) | 0.19 | |||
Balance at December 31, 1997 | 548,571 | 0.19 | ||||
Options granted | 194,593 | 0.33 | ||||
Exercised | (29,977 | ) | 0.19 | |||
Forfeited | (104,923 | ) | 0.19 | |||
Balance at December 31, 1998 | 608,264 | 0.23 | ||||
Options granted | 612,221 | 1.12 | ||||
Exercised | (3,373 | ) | 0.19 | |||
Forfeited | (105,222 | ) | 0.88 | |||
Balance at December 31, 1999 | 1,111,890 | 0.66 | ||||
Options granted | 486,762 | 2.87 | ||||
Exercised | (208,334 | ) | 0.36 | |||
Forfeited | (6,745 | ) | 1.48 | |||
Balance at December 31, 2000 | 1,383,573 | 1.49 | ||||
Options granted | 808,591 | 9.45 | ||||
Exercised | (187,837 | ) | 0.58 | |||
Forfeited | (8,545 | ) | 2.48 | |||
Balance at December 31, 2001 | 1,995,782 | 4.79 | ||||
Options granted | 697,453 | 5.08 | ||||
Exercised | (158,987 | ) | 1.41 | |||
Forfeited | (105,452 | ) | 7.18 | |||
Balance at December 31, 2002 | 2,428,796 | 4.99 | ||||
Options granted | 954,792 | 7.01 | ||||
Exercised | (345,162 | ) | 2.27 | |||
Forfeited | (395,124 | ) | 4.71 | |||
Balance at December 31, 2003 | 2,643,302 | 6.11 | ||||
Options granted | 1,073,010 | 9.57 | ||||
Exercised | (360,542 | ) | 3.72 | |||
Forfeited | (217,351 | ) | 6.49 | |||
Balance at December 31, 2004 | 3,138,419 | $ | 7.55 | |||
F-16
The options outstanding and exercisable at December 31, 2004 are as follows:
| Options Outstanding | Weighted-Average | ||||||||
| Exercise Price | Number Outstanding | Exercise Price | Remaining Contractual Life (In years) | Vested Options | |||||
| $ 0.19-$ 3.74 | 294,882 | $ | 0.99 | 3.6 | 294,882 | ||||
| $ 4.25-$ 7.38 | 1,333,754 | $ | 5.41 | 7.4 | 631,194 | ||||
| $ 7.62-$11.84 | 1,206,009 | $ | 10.02 | 8.9 | 125,000 | ||||
| $12.00-$17.45 | 303,774 | $ | 13.47 | 7.1 | 171,568 | ||||
| 3,138,419 | $ | 7.55 | 7.6 | 1,222,664 | |||||
As allowed by the provisions of SFAS 123, the Company has elected to follow APB 25 and related interpretations in accounting for its employee stock options. Pro forma net loss information set forth in Note 1 is required to be disclosed by SFAS 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using the minimum value method with the following weighted-average assumptions:
| 2004 | 2003 | 2002 | 2001 | |||||
Expected dividend yield | 0% | 0% | 0% | 0% | ||||
Risk-free interest rate range | 3.73%-4.32% | 2.72%-4.20% | 1.73%-4.26% | 3.5%-5.0% | ||||
Expected life | 7.4 years | 10 years | 10 years | 10 years | ||||
Expected volatility | 0.98-1.02 | 1.03-1.08 | 1.08 | 1.38 |
8. Leases
The Company leases its office space and certain equipment under cancelable and noncancelable operating lease agreements. Rent expense incurred by the Company was approximately $354,000, 356,000, $230,000, and $1,457,000 for the years ended December 31, 2004, 2003, and 2002 and for the period September 25, 1996 (inception) through December 31, 2004, respectively. The following is a schedule of future minimum lease payments for operating leases at December 31, 2004:
| ($ in thousands) | |||
2005 | $ | 378 | |
2006 | 385 | ||
2007 | 394 | ||
Thereafter | 881 | ||
| $ | 2,038 | ||
9. Retirement Savings Plan
In July 1997, the Company adopted a defined contribution 401(k) plan (the “Plan”) covering substantially all employees who are at least 21 years of age. Based upon management’s discretion, the Company may elect to make contributions to the Plan. For the year ended December 31, 2000, the Company did not make any contribution to the Plan. During the years ended December 31, 2004, 2003, and 2002, and for the period September 25, 1996 (inception) through December 31, 2004, the Company made contributions of $185,132, $123,701, $118,718, and $519,828, respectively, to the Plan.
10. Subsequent Events
On January 3, 2005, pursuant to an incentive program approved by the Compensation Committee of the Company’s Board of Directors, stock options were granted to all of the Company’s employees, including the Company’s executive officers, to purchase an aggregate of 506,772 shares of common stock. Each option will vest in full upon the later to occur of (i) January 3, 2007 or (ii) the receipt by the Company of an action letter from the FDA indicating approval of the NDA for Trexima; provided, however that 25% of each such option will be forfeited if receipt of the FDA approval letter for the Trexima NDA does not occur prior to June 30, 2007, and 100% of each such option will be forfeited if receipt of the FDA approval letter for the Trexima NDA does not occur on or before December 31, 2007. The options, which were granted under the Company’s Equity Compensation Plan, as amended and restated, have a ten-year term and an exercise price equal to the Nasdaq reported market closing price of the common stock on January 3, 2005, the date of grant.
Effective as of January 12, 2005, the Company’s Board of Directors approved a stockholder rights plan (the “Rights Plan”), pursuant to which the Company entered into a Rights Agreement dated January 12, 2005 with StockTrans, Inc., as Rights Agent, and the Board declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of the Company’s Common Stock, $0.001 par value per share, to stockholders of record at the close of business on January 28, 2005. Each Right, when exercisable, will entitle the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, $0.001 par value per share, at a purchase price of $80.00, subject to adjustment. The Rights Plan is similar to plans adopted by many other publicly-traded companies.
F-17
11. Summary of Operations by Quarters (Unaudited)
| 2004 | ||||||||||||||||
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
Revenue | $ | 1,889,500 | $ | 16,889,500 | $ | 1,891,499 | $ | 2,417,409 | ||||||||
Operating expenses | 4,370,016 | 5,679,553 | 7,925,188 | 11,084,823 | ||||||||||||
Net income loss | (2,354,366 | ) | 11,344,770 | (5,831,320 | ) | (8,419,556 | ) | |||||||||
Net loss per share of common stock Basic and diluted | $ | (0.08 | ) | $ | 0.39 | $ | (0.20 | ) | $ | (0.29 | ) | |||||
Number of shares used in per share calculation Basic and diluted | 28,555,654 | 28,786,486 | 28,799,277 | 28,852,743 | ||||||||||||
| 2003 | ||||||||||||||||
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
Revenue | $ | — | $ | — | $ | 1,886,998 | $ | 1,830,002 | ||||||||
Operating expenses | 4,976,015 | 4,803,996 | 5,747,273 | 3,588,404 | ||||||||||||
Net loss | (4,832,746 | ) | (4,680,704 | ) | (3,731,966 | ) | (1,617,902 | ) | ||||||||
Net loss per share of common stock Basic and diluted | $ | (0.17 | ) | $ | (0.17 | ) | $ | (0.13 | ) | $ | (0.06 | ) | ||||
Number of shares used in per share calculation Basic and diluted | 28,150,319 | 28,270,902 | 28,407,093 | 28,489,043 | ||||||||||||
Because of the method used in calculating per share data, the quarterly per share data will not necessarily add to the per share data as computed for the year.
F-18
EXHIBIT INDEX
| Exhibit No. | Description | |
| 3.1 | Amended and Restated Certificate of Incorporation of the Registrant.* | |
| 3.2 | Amended and Restated Bylaws of the Registrant.* | |
| 3.3 | Certificate of Designations of Series A Junior Participating Preferred Stock (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed January 12, 2005). | |
| 4.1 | See Exhibits 3.1, 3.2 and 3.3 for provisions of the Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws of the Registrant defining rights of the holders of Common Stock and Series A Junior Participating Preferred Stock of the Registrant. | |
| 4.2 | Rights Agreement dated January 12, 2005 between Registrant and StockTrans, Inc. (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed January 12, 2005). | |
| 10.2 | Stock Option Plan of the Registrant.* | |
| 10.3 | First Amendment to Stock Option Plan dated February 14, 1997.* | |
| 10.4 | License Agreement dated September 24, 1999 between the Registrant and F. Hoffman-La Roche Ltd. * | |
| 10.7 | 2000 Equity Compensation Plan of the Registrant, as amended and restated (filed as Exhibit 10.1 to the Registrant’s Form 10-Q filed July 30, 2004).*** | |
| 10.8 | Form of incentive stock option agreement under Registrant’s 2000 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.2 to the Registrant’s Form 10-Q filed July 30, 2004).*** | |
| 10.9 | Form of nonqualified stock option agreement under Registrant’s 2000 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.3 to the Registrant’s Form 10-Q filed July 30, 2004).*** | |
| 10.10 | Supply Agreement dated January 17, 2001 by and between the Registrant and DSM Pharmaceuticals, Inc. (formerly Catalytica Pharmaceuticals, Inc.) (filed as Exhibit 10.1 to the Registrant’s Form 10-Q filed May 14, 2001). † | |
| 10.11 | Amended and Restated Executive Employment Agreement with John R. Plachetka dated July 25, 2001 (filed as Exhibit 10.1 to the Registrant’s Form 10-Q filed October 31, 2001).*** | |
| 10.12 | Executive Employment Agreement with Kristina M. Adomonis dated July 25, 2001 (filed as Exhibit 10.3 to the Registrant’s Form 10-Q filed October 31, 2001).*** | |
| 10.13 | Executive Employment Agreement with John E. Barnhardt dated July 25, 2001 (filed as Exhibit 10.5 to the Registrant’s Form 10-Q filed October 31, 2001).*** | |
| 10.14 | Executive Employment Agreement with William L. Hodges dated August 3, 2004 (filed as Exhibit 10.1 to the Registrant’s Form 10-Q filed October 27, 2004).*** | |
| 10.15 | Executive Employment Agreement with Marshall E. Reese dated November 8, 2004 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 12, 2004).*** | |
| 10.16 | POZEN Inc. 2001 Long Term Incentive Plan (filed as Exhibit 10.6 to the Company’s Form 10-Q filed October 31, 2001).*** | |
| 10.17 | Certificate of Award dated August 1, 2001 issued to John R. Plachetka pursuant to POZEN Inc. 2001 Long Term Incentive Plan (filed as Exhibit 10.7 to the Registrant’s Form 10-Q filed October 31, 2001).*** | |
| 10.18 | Commercial Supply Agreement dated October 2001 by and between Registrant and Lek Pharmaceuticals Inc. (filed as Exhibit 10.2 to the Registrant’s Form 10-K filed April 1, 2002).† | |
| 10.19 | Lease Agreement between The Exchange at Meadowmont LLC and the Registrant dated as of November 21, 2001 (filed as Exhibit 10.21 to the Registrant’s Form 10-K filed April 1, 2002). | |
| 10.20 | First Amendment of 2000 Equity Compensation Plan (filed as Exhibit 10.19 to the Registrant’s Form 10-K filed March 28, 2003).*** | |
| 10.21 | Product Development and Commercialization Agreement dated June 11, 2003 between the Registrant and Glaxo Group Ltd. (filed as Exhibit 10.1 to the Registrant’s Form 10-Q filed August 12, 2003).† | |
| Exhibit No. | Description | |
| 10.22 | License Agreement dated June 11, 2003 between the Registrant and Glaxo Group Ltd. (filed as Exhibit 10.2 to the Registrant’s Form 10-Q filed August 12, 2003).† | |
| 10.23 | License Agreement dated June 30, 2003 between the Registrant and Nycomed Danmark ApS. (filed as Exhibit 10.3 to the Registrant’s Form 10-Q filed August 12, 2003).† | |
| 10.24 | Collaboration and Licensing Agreement dated September 3, 2003 between POZEN and Xcel Pharmaceuticals, Inc. (filed as Exhibit 10.1 to the Registrant’s Form 10-Q filed November 6, 2003).† | |
| 10.25 | Form of Non-Qualified Stock Option Agreement Under Registrant’s Equity Compensation Plan, as amended and restated (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 7, 2005).*** | |
| 21.1 | List of subsidiaries of the Registrant (filed as Exhibit 21.1 to the Registrant’s Form 10-K filed March 9, 2005). | |
| 23.1 | Consent of Ernst & Young LLP, Independent Auditors.** | |
| 31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.** | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.** | |
| 32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** | |
| 32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** | |
| * | Incorporated by reference to the same-numbered exhibit of the Registrant’s Registration Statement on Form S-1, No. 333-35930. | |
| ** | Filed herewith. | |
| *** | Compensation Related Contract. | |
| **** | The Exhibit attached to this Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing. | |
| † | Confidential treatment requested. Confidential materials omitted and filed separately with the Securities and Exchange Commission. |
