UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| | For the quarterly period ended: June 30, 2008 |
| o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number 000-49730
DOV PHARMACEUTICAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) | | 22-3374365 (I.R.S. Employer Identification No.) |
150 Pierce Street
Somerset, New Jersey 08873
(Address of principal executive office)
(732) 907-3600
(Registrant’s telephone number, including area code)
Indicate by check mark whether 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
| | |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
On August 9, 2008, there were outstanding 111,353,889 shares of the registrant’s common stock, par value $0.0001 per share.
DOV PHARMACEUTICAL, INC.
Form 10-Q
For the Quarter Ended June 30, 2008
Table of Contents
| | | PAGE NUMBER |
| | | |
PART I - | FINANCIAL INFORMATION | |
| | | |
| ITEM 1. | Financial Statements (Unaudited) | |
| | | |
| | Condensed Balance Sheets as of June 30, 2008 and December 31, 2007 | 4 |
| | | |
| | Condensed Statements of Operations for the three and six months ended June 30, 2008 and 2007 | 5 |
| | | |
| | Condensed Statements of Cash Flows for the six months ended June 30, 2008 and 2007 | 6 |
| | | |
| | Notes to Unaudited Condensed Financial Statements | 7 |
| | | |
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 |
| | | |
| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk | 18 |
| | | |
| ITEM 4T. | Controls and Procedures | 19 |
| | | |
PART II - | OTHER INFORMATION | |
| | | |
| ITEM 1. | Legal Proceedings | 20 |
| | | |
| ITEM 1A. | Risk Factors | 20 |
| | | |
| ITEM 4. | Submission of Matters to a Vote of Security Holders | 20 |
| | | |
| ITEM 6. | Exhibits | 21 |
| | | |
| Signatures | 22 |
Special Note Regarding Forward-Looking Statements
Special Note Regarding Forward-Looking Statements
This Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, each as amended, including statements regarding our expectations with respect to the progress of and level of expenses for our clinical trial programs. You can also identify forward-looking statements by the following words: may, will, should, expect, intend, plan, anticipate, believe, estimate, predict, potential, continue or the negative of these terms or other comparable terminology. We caution you that forward-looking statements are inherently uncertain and are simply point-in-time estimates based on a combination of facts and factors about which we cannot be certain or even relatively confident. Actual results or events will surely differ and may differ materially from the forward-looking statements contained herein as a result of many factors, some of which we may not be able to predict or may not be within our control. Some of the most significant challenges we presently face include the following:
| | l | our need to raise substantial additional capital in order to fund operations; |
| | | |
| | | our need to seek and evaluate strategic alternatives, including with respect to collaborations and partnerships for certain of our development programs and product candidates; |
| | | the need to obtain, maintain and protect all necessary patents, licenses and other intellectual property rights; |
| | | the need to demonstrate the safety and efficacy of product candidates at each stage of development; |
| | | our need to meet our development schedule for our product candidates, including with respect to drug supply and clinical trial initiation, enrollment and completion; |
| | | the need to meet applicable regulatory standards and receive required regulatory approvals on a timely basis or at all; and |
| | | our need to fulfill our obligations to our strategic partners so we can receive timely payment of milestones and royalties, if any, under our agreements with them. |
If we are unable to successfully deal with these and other challenges, for example if we fail to identify additional sources of capital in the very near term, our business, results of operations and financial condition would be harmed and the market value of our common stock would likely decline even further. You should refer to “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2007, for a more detailed discussion of some of the factors that may cause our actual results to differ materially from our forward-looking statements. We qualify all our forward-looking statements by reference to these cautionary statements. As a result of the foregoing, you should not place undue reliance on our forward-looking statements.
We have a number of trademarks, including DOV, DOV Pharmaceutical, Inc. and the DOV Pharmaceutical logo. All other trademarks used or referred to in this Quarterly Report on Form 10-Q are the property of their respective owners.
PART I – FINANCIAL INFORMATION
ITEM I. Financial Statements
DOV PHARMACEUTICAL, INC.
CONDENSED BALANCE SHEETS
| | | June 30, 2008 | | December 31, 2007 | |
| | | (unaudited) | | (1) | |
Assets | | | | | | | |
| Cash and cash equivalents | | $ | 6,230,720 | | $ | 9,236,449 | |
| Marketable securities—short-term | | | — | | | 400,000 | |
| Prepaid rent | | | 1,028,839 | | | 237,404 | |
| Prepaid expenses and other current assets | | | 778,081 | | | 545,542 | |
| Total current assets | | | 8,037,640 | | | 10,419,395 | |
| Restricted cash—long-term | | | — | | | 4,211,109 | |
| Property and equipment, net | | | 522,521 | | | 899,960 | |
| Total assets | | $ | 8,560,161 | | $ | 15,530,464 | |
| | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable | | $ | 427,276 | | $ | 576,145 | |
| Accrued expenses | | | 1,366,050 | | | 1,171,805 | |
| Deferred credit – current | | | — | | | 257,313 | |
| Total current liabilities | | | 1,793,326 | | | 2,005,263 | |
| Deferred credits – non-current | | | — | | | 2,101,419 | |
| Series D convertible preferred stock, $1.00 par value, 560,000 authorized shares, 100,000 shares issued and outstanding at June 30, 2008 and December 31, 2007 | | | 6,326,980 | | | 6,326,980 | |
| Commitments and contingencies | | | | | | | |
| Stockholders’ equity: | | | | | | | |
| Preferred stock—undesignated preferred stock, $1.00 par value, 6,550,357 shares authorized, 0 shares issued and outstanding at June 30, 2008 and December 31, 2007 | | | — | | | — | |
| Common stock, $.0001 par value, 260,000,000 shares authorized, 110,753,889 issued at June 30, 2008 and December 31, 2007 | | | 11,075 | | | 11,075 | |
| Treasury stock, at cost; 31,450 common shares at June 30, 2008 and December 31, 2007 | | | (66,985 | ) | | (66,985 | ) |
| Additional paid-in capital | | | 205,216,046 | | | 204,367,735 | |
| Accumulated deficit | | | (204,720,281 | ) | | (199,215,023 | ) |
| Total stockholders’ equity | | | 439,855 | | | 5,096,802 | |
| Total liabilities and stockholders’ equity | | $ | 8,560,161 | | $ | 15,530,464 | |
(1) Derived from the Company’s audited financial statements for the year ended December 31, 2007.
The accompanying notes are an integral part of these condensed financial statements.
DOV PHARMACEUTICAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
| | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | | 2008 | | 2007 | | 2008 | | 2007 | |
| | | (Unaudited) | | (Unaudited) | |
| | | | | | | | | | |
| Revenue | | $ | 1,600,000 | | $ | 288,284 | | $ | 1,600,000 | | $ | 8,255,998 | |
| Operating expenses: | | | | | | | | | | | | | |
Research and development expense | | | 1,621,100 | | | 2,467,697 | | | 3,508,191 | | | 9,326,841 | |
General and administrative expense | | | 1,920,897 | | | 1,830,113 | | | 3,682,014 | | | 6,343,739 | |
License expense | | | — | | | — | | | — | | | 5,500,000 | |
| | | | | | | | | | | | | | |
Loss from operations | | | (1,941,997 | ) | | (4,009,526 | ) | | (5,590,205 | ) | | (12,914,582 | ) |
| Interest income | | | 28,578 | | | 261,912 | | | 104,545 | | | 774,876 | |
| Interest expense | | | — | | | — | | | — | | | (90,924 | ) |
| Gain on revaluation of warrants | | | — | | | 1,350,000 | | | — | | | 1,350,000 | |
| Gain on extinguishment of convertible debentures | | | — | | | — | | | — | | | 8,390,182 | |
| Other income (expense), net | | | (25,052 | ) | | (3,211 | ) | | (19,598 | ) | | 7,247 | |
Net loss | | $ | (1,938,471 | ) | $ | (2,400,825 | ) | $ | (5,505,258 | ) | $ | (2,483,201 | ) |
| | | | | | | | | | | | | | |
| Basic and diluted net loss per share | | $ | (0.02 | ) | $ | (0.05 | ) | $ | (0.05 | ) | $ | (0.07 | ) |
| | | | | | | | | | | | | | |
| Weighted average shares used in computing basic and diluted net loss per share | | | 110,753,889 | | | 44,284,255 | | | 110,753,889 | | | 35,534,473 | |
The accompanying notes are an integral part of these condensed financial statements.
DOV PHARMACEUTICAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
| | | Six Months Ended June 30, | |
| | | 2008 | | 2007 | |
| | | (Unaudited) | |
| | | | | | |
Cash flows from operating activities | | | | | | | |
| Net loss | | $ | (5,505,258 | ) | $ | (2,483,201 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | |
| Gain on debt extinguishment | | | — | | | (8,390,182 | ) |
| Gain on warrant revaluation | | | — | | | (1,350,000 | ) |
Non-cash amortization of premium paid on marketable securities | | | — | | | (31,169 | ) |
Depreciation | | | 377,439 | | | 164,933 | |
Amortization of deferred credits | | | — | | | (58,471 | ) |
Non-cash compensation charges | | | 848,311 | | | 5,906,593 | |
| Changes in operating assets and liabilities: | | | | | | | |
Prepaid rent and deferred credits | | | (3,387,571 | ) | | — | |
Prepaid expenses and other current assets | | | 4,865 | | | 1,063,046 | |
Accounts payable | | | (148,869 | ) | | (1,464,276 | ) |
Accrued expenses | | | 194,245 | | | (3,159,066 | ) |
Net cash used in operating activities | | | (7,616,838 | ) | | (9,801,793 | ) |
Cash flows from investing activities | | | | | | | |
| Purchases of marketable securities | | | — | | | (40,929,695 | ) |
| Sales of marketable securities | | | 400,000 | | | 38,769,361 | |
| Release of restricted cash for property lease | | | 4,211,109 | | | — | |
Net cash (used in)/provided by investing activities | | | 4,611,109 | | | (2,160,334 | ) |
Cash flows from financing activities | | | | | | | |
| Redemption of convertible debentures | | | — | | | (17,779,458 | ) |
Net cash used in financing activities | | | — | | | (17,779,458 | ) |
Net decrease in cash and cash equivalents | | | (3,005,729 | ) | | (29,741,585 | ) |
| Cash and cash equivalents, beginning of period | | | 9,236,449 | | | 35,088,467 | |
| | | | | | | | |
| Cash and cash equivalents, end of period | | $ | 6,230,720 | | $ | 5,346,882 | |
NON-CASH FINANCING ACTIVITIES
On March 15, 2007 the Company exchanged $67.5 million in principal amount of its 2.5% convertible subordinated debentures for (i) 439,784 shares of its series C convertible preferred stock with an estimated value at the time of $38.1 million, (ii) 100,000 shares of series D convertible preferred stock with an estimated value at the time of $7.5 million, and (iii) cash of $13.5 million. In addition, the Company issued warrants to purchase up to 30,000,000 shares of common stock at a price of $0.53 per share, having an estimated valued at the time of $4.6 million, to the holders of its common stock. All shares of the series C convertible preferred stock issued in connection with the 2007 Exchange Offer were converted into a total of 84,010,232 shares of common stock on June 11, 2007.
The accompanying notes are an integral part of these condensed financial statements.
DOV PHARMACEUTICAL, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. The Company
Organization
DOV Pharmaceutical, Inc. (“DOV” or the “Company”) was incorporated in May 1995 in New Jersey and reincorporated in Delaware in November 2000.
DOV is a biopharmaceutical company focused on the discovery, in-licensing and development of novel drug candidates for central nervous system disorders. The Company has product candidates in various stages of clinical development. The Company has established strategic alliances with select partners to access their unique technologies and their commercialization capabilities. The Company operates principally in the United States but conducts clinical studies outside of the United States from time to time.
2. Liquidity/Going Concern
The Company estimates that it has sufficient cash and cash equivalents to fund operations through December 2008. There are a number of circumstances, however, which could result in the Company needing additional capital even sooner than anticipated, such as unexpected costs associated with a Phase II clinical trial that is currently being conducted in Eastern Europe and the United States. While the Company intends to continue to actively seek additional capital in 2008 through public or private financing or collaborative agreements, , there is no assurance that such financing will be obtained on acceptable terms, if at all. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
3. Significant Accounting Policies
Basis of Presentation
The financial statements are presented on the basis of accounting principles that are generally accepted in the United States for interim financial information and in accordance with the instructions of the Securities and Exchange Commission (“SEC”) on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented.
The results of operations for the interim periods shown in this report are not necessarily indicative of results expected for the full year or any future period. The financial statements should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 2007, included in the Company’s Annual Report on Form 10-K as filed with the SEC on March 31, 2008.
Certain prior period amounts have been reclassified to conform to the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that can affect the reported amounts of assets, liabilities, revenues, earnings, financial position and various disclosures. Significant estimates have included the value of convertible preferred stock and warrants issued in the Company’s 2007 Exchange Offer as described elsewhere herein, the value of investments, the valuation allowance recorded for deferred tax assets and the development period for the Company’s products. Actual results could differ from these estimates and the differences could be material.
Prepaid Rent and Deferred Credit
In February 2008, the Company renegotiated its lease on its operating facility by reducing the monthly amounts payable as well as accelerating the expiration of the term from June 2016 to January 2009. In exchange, the Company agreed to release to the landlord the $4.2 million restricted cash previously held as collateral for the lease. Deferred credits include the tenant allowance received from DOV’s landlord and the straight-lining of future rent escalations under the operating lease agreement. Both of these items were being amortized over the life of the lease. This transaction resulted in the offset of the deferred credits and the establishment of a net prepaid rent of $1.7 million which will be amortized through the remaining lease life, or January 2009. In addition, remaining balances of leasehold improvements will be amortized over the revised remaining lease life. The balance of prepaid rent at June 30, 2008 was approximately $1 million.
Net Loss Per Share
Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. The Company has excluded the shares issuable on conversion of its series D convertible preferred stock, outstanding options, warrants and restricted stock units to purchase common stock from the calculation of diluted net loss per share, as such securities are anti-dilutive as indicated in the table below.
| | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | | 2008 | | 2007 | | 2008 | | 2007 | |
| | | (Unaudited) | | (Unaudited) | |
Net loss | | $ | (1,938,471 | ) | $ | (2,400,825 | ) | $ | (5,505,258 | ) | $ | (2,483,201 | ) |
| Basic and diluted: | | | | | | | | | | | | | |
| Weighted –average shares used in computing basic and diluted net loss per share | | | 110,753,889 | | | 44,284,255 | | | 110,753,889 | | | 35,534,473 | |
| Basic and diluted net loss per share | | $ | (0.02 | ) | $ | (0.05 | ) | $ | (0.05 | ) | $ | (0.07 | ) |
| | | | | | | | | | | | | | |
| Antidilutive securities not included in basic and diluted net loss per share calculation: | | | | | | | | | | | | | |
| Series D convertible preferred stock | | | 19,102,612 | | | 19,102,612 | | | 19,102,612 | | | 19,102,612 | |
| Options | | | 9,745,715 | | | 4,123,928 | | | 9,745,715 | | | 4,123,928 | |
| Warrants | | | 29,792,842 | | | 29,792,842 | | | 29,792,842 | | | 29,792,842 | |
| Restricted stock units | | | 1,902,000 | | | — | | | 1,902,000 | | | — | |
| | | | 60,543,169 | | | 53,019,382 | | | 60,543,169 | | | 53,019,382 | |
Comprehensive Loss
| | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | | 2008 | | 2007 | | 2008 | | 2007 | |
| | | (Unaudited) | | (Unaudited) | |
| Net loss | | $ | (1,938,471 | ) | $ | (2,400,825 | ) | $ | (5,505,258 | ) | $ | (2,483,201 | ) |
| Net unrealized gains on marketable securities and investments | | | — | | | 960 | | | — | | | 5,170 | |
Comprehensive loss | | $ | (1,938,471 | ) | $ | (2,399,865 | ) | $ | (5,505,258 | ) | $ | (2,478,031 | ) |
Concentration of Credit Risk
Cash and cash equivalents are deposited with financial institutions. The Company has not experienced any losses on its deposits of cash and cash equivalents. Management believes that the financial institutions are financially sound and, accordingly, minimal credit risk exists. Approximately $519,000 of the Company's cash balance was uninsured at June 30, 2008.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159 which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted SFAS No. 159 on January 1, 2008. The adoption of this statement did not have a material impact on its financial position or results of operations.
In June 2007, the FASB ratified EITF 07-03, "Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities", which requires nonrefundable advance payments for future research and development activities to be capitalized and recognized as an expense as the goods are delivered or services are performed. The Company adopted EITF-07-03 on January 1, 2008. The adoption of EITF 07-03 did not have a material impact on the Company’s financial position or results of operations.
Refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding recent accounting pronouncements.
Income Taxes
In July 2006, the FASB issued FASB Interpretation No.48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in practices associated with certain aspects of recognition and measurement related to accounting for income taxes. The Company adopted the provisions of FIN 48 as of January 1, 2007, and has analyzed its filing positions in all open tax years in jurisdictions where it may be obligated to file returns. The Company has identified its Federal tax return and its state tax return in New Jersey as “major” tax jurisdictions, as defined. The Company believes that its income tax filing position and deductions would be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties at June 30, 2008. As of January 1, 2007 the Company had no unrecognized tax benefit and there was no significant change during the three and six month periods ended June 30, 2008. In addition, future changes in unrecognized tax benefit will have no impact on the effective tax rate due to the existence of the valuation allowance.
Since its inception, the Company has generated net operating losses (“NOLs”) for tax purposes and to date has not utilized its NOLs to offset income tax liabilities. Hence all prior tax return years of the Company remain open for audit purposes.
4. Stock-Based Compensation
2000 Stock Option and Grant Plan
The Company’s 2000 Stock Option and Grant Plan (the “2000 Plan”) was adopted by the Company’s board of directors on November 18, 2000, was amended and restated several times through May 30, 2006. Under the 2000 Plan, the Company has granted options and restricted stock, or RSAs, to certain employees and non-employee advisors. The 2000 Plan provides the Company’s board of directors with the discretion to accelerate exercisability of any award. In May 2006, the Company amended the 2000 Plan providing for the full acceleration and vesting of all outstanding options and RSAs immediately prior to a change of control of the Company. This change did not impact the fair value of the options and did not impact expense recognized under SFAS 123(R). The Exchange Offer completed on March 15, 2007 discussed in Note 6 below constituted a change of control under the 2000 Plan and all outstanding options issued prior to January 2007 and restricted stock awards were immediately accelerated pursuant to the terms of the 2000 Plan. As a result, the Company recorded unrecognized compensation expense of $5.9 million for certain outstanding awards that were accelerated in the first quarter of 2007.
2007 Stock Award and Incentive Plan
The Company’s board of directors adopted the Company’s 2007 Stock Award and Incentive Plan (“the 2007 Plan”) on June 15, 2007. The 2007 Plan was subsequently approved by the Company’s stockholders on July 30, 2007. The 2007 Plan replaced the 2000 Plan and is administered by the compensation committee of the board of directors. The 2007 Plan authorizes a broad range of awards giving greater flexibility to implement equity awards. The remaining available shares under the 2000 Plan are available under the 2007 Plan as well as shares covered by any forfeited awards under the 2000 Plan. The 2007 Plan also includes an “evergreen” provision, which provides for automatic annual increases in the number of shares reserved under the 2007 plan equal to 3.5% of the total outstanding common stock of the Company at the end of each fiscal year, plus 3.5% of any increase in the number of outstanding shares of common stock during the year, provided that these increases may not add shares to the extent that the aggregate added under the evergreen provision would exceed 20% of the then outstanding class of common stock. On May 16, 2008 the Company modified, by changing the vesting period and exercise price, approximately 7.4 million previously granted options, canceled approximately 6.0 million options and granted additional options. The Company recognized $511,000 non-cash compensation expense for the options that were cancelled during the three and six months ended June 30, 2008. In addition, the modification to outstanding options during the three and six months ended June 30, 2008 resulted in an unrecognized incremental compensation cost of $14,000 which will be recognized over the modified vesting period. The weighted average fair value of options granted during the three and six months ended June 30, 2008 was $0.04 per option. As of June 30, 2008, there were approximately 10.5 million shares available for issuance under the 2007 Plan.
| | | Options | | Weighted Average Options Exercise Price | | Aggregate Intrinsic Value (millions) | |
| Options Outstanding, December 31, 2007 | | | 15,162,471 | | $ | 2.06 | | | | |
| Granted | | | 1,864,500 | | | .04 | | | | |
| Exercised | | | — | | | — | | | | |
| Forfeited/Cancelled | | | 7,281,256 | | | 3.63 | | | | |
| Options Outstanding, June 30, 2008 | | | 9,745,715 | | | 0.51 | | | — | |
| Options Exercisable, June 30, 2008 | | | 436,200 | | | 9.24 | | | — | |
The total intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock for the options that were in-the-money as of June 30, 2008. The following is a summary of outstanding stock options at June 30, 2008:
| | | Options Outstanding as of June 30, 2008 | | Options Exercisable as of June 30, 2008 | |
| | | Weighted Average Remaining Contractual Life | | Number Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Number Exercisable | | Weighted Average Exercise Price | |
| | | | | | | | | | | | | | |
| Price range $0.04 - $0.10 | | | 9.2 years | | | 7,209,515 | | $ | 0.06 | | | | | | — | | | — | |
| Price range $0.11 - $0.20 | | | 9.1 years | | | 1,050,000 | | $ | 0.20 | | | | | | — | | | — | |
| Price range $0.21 - $0.30 | | | 9.1 years | | | 1,050,000 | | $ | 0.25 | | | | | | — | | | — | |
| Price range $0.31 - $13.49 | | | 4.7 years | | | 436,200 | | $ | 9.24 | | | 4.7 years | | | 436,200 | | | 9.24 | |
| | | | | | | 9,745,715 | | | | | | | | | 436,200 | | | | |
At June 30, 2008 the Company had approximately $677,000 of total unrecognized compensation expense, net of estimated forfeitures, related to stock options that will be recognized over the weighted average period of six months.
RSU activity was as follows:
| | | RSUs | | Weighted Average Grant Date Fair Value | |
| Outstanding, December 31, 2007 | | | 920,000 | | $ | 0.20 | |
| Granted | | | 1,166,500 | | | 0.04 | |
| Exercised | | | — | | | — | |
| Forfeited | | | 184,500 | | | 0.19 | |
| RSUs Outstanding, June 30, 2008 | | | 1,902,000 | | | 0.10 | |
| RSUs Exercisable, June 30, 2008 | | | — | | | — | |
At June 30, 2008 the Company had approximately $66,000 of total unrecognized compensation expense, net of estimated forfeitures, related to RSUs that will be recognized over the weighted average period of thirteen months.
5. Research and Development Expense
Research and development costs are expensed when incurred and include allocations for payroll and related costs and other corporate overhead.
The following represents a detail of amounts included in research and development expense:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | | 2008 | | 2007 | | 2008 | | 2007 | |
| | | (Unaudited) | | (Unaudited) | |
| Payroll related and associated overhead | | $ | 943,083 | | $ | 1,440,536 | | $ | 1,733,935 | | $ | 6,551,425 | |
| Clinical and preclinical development costs and manufacturing supplies | | | 553,277 | | | 884,238 | | | 1,439,714 | | | 2,478,072 | |
| Professional fees | | | 124,740 | | | 142,923 | | | 334,542 | | | 297,344 | |
| Total research and development expense | | $ | 1,621,100 | | $ | 2,467,697 | | $ | 3,508,191 | | $ | 9,326,841 | |
6. Convertible Subordinated Debentures and Equity Issuance
In December 2004 and January 2005, the Company completed a private placement of $80.0 million in aggregate principal amount of 2.5% convertible subordinated debentures due January 15, 2025, of which $70.0 million in aggregate principal amount remained outstanding as of December 31, 2006 and none remained outstanding as of December 31, 2007 and June 30, 2008.
In March 2007, the Company consummated the 2007 Exchange Offer pursuant to which $67.5 million in principal amount of its convertible subordinated debentures were exchanged for (i) 439,784 shares of series C, (ii) 100,000 shares of series D convertible preferred stock, and (iii) $14.3 million in cash, which included accrued interest of $843,000. Additionally, the $2.5 million in principal amount of debentures that remained outstanding after the consummation of the 2007 Exchange Offer was repaid for $2.6 million (an amount equal to unpaid principal plus accrued interest). On June 11, 2007, the 439,784 shares of series C convertible preferred stock issued in connection with the exchange offer were converted into 84,010,232 shares of common stock. In addition, on May 24, 2007, the Company distributed to holders of its common stock additional warrants to purchase 29,417,546 shares of its common stock at an exercise price of $0.523 per share. The warrants are exercisable until December 31, 2009, unless sooner redeemed.
The 2007 Exchange Offer has been recorded pursuant to SFAS No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructurings”. The difference between the amount of the face value of the debentures and the fair value of the assets given to the debenture holders in the 2007 Exchange Offer of $8.4 million was recorded as a gain on debt extinguishment in the first quarter of 2007. The fair value of the series C and the series D convertible preferred stock was estimated at $38.1 million and $7.5 million, respectively, with a significant amount of the value reflecting the value of the underlying common stock. The balance reflected for the series D convertible preferred stock is reduced by the attributable portion of the 2007 Exchange Offer expenses of $288,000 and the estimated value of the warrants to be issued to common shareholders of approximately $602,000. The Company estimated the fair value of the warrants using the Black-Scholes methodology. The liability was revalued at the date that the registration statement for the shares underlying the warrants was deemed effective, or June 25, 2007. The liability value was reduced by $1.4 million and was recorded as other income during the quarter ended June 30, 2007. The warrants were then reclassified from a liability to equity and, as such, the value is reflected in additional paid in capital.
Terms of Series D Preferred Stock. The 100,000 shares of series D convertible preferred stock have no voting rights and no liquidation preference. The series D convertible preferred stock is convertible but may not convert into common stock if such conversion would result in beneficial ownership in excess of 9.9% of the Company’s voting capital stock for the converting holder. Accordingly, the Series D convertible preferred stock is classified as temporary equity on the balance sheet. The series D is convertible into 191.02612 shares of common stock per share, or a total of 19,102,612 shares as of June 30, 2008.
8. Significant Agreements
XTL Agreement
In January 2007, the Company entered into an agreement with XTL Biopharmaceuticals, Ltd. relating to its proprietary compound bicifadine. Under the agreement, the Company granted XTL the exclusive right to develop products incorporating bicifadine for the treatment of all human diseases, disorders and conditions, except for the treatment of symptoms in certain areas of women’s health. The Company received an up-front payment of $6.5 million, of which $5.0 million was paid to Wyeth as a result of the acceleration of a milestone payment. XTL later made an additional $1.0 million payment to the Company in February 2007.
Milestone and Royalty Monetization
In May 2008, the Company sold to a private investor the right to receive $1.6 million, or 24.62%, of a $6.5 million contingent milestone payment that may become due to the Company under the XTL Agreement. The milestone may be payable perhaps as early as the fourth quarter of 2008, although there can be no assurance that the milestone payment will be payable in 2008, if ever. In the same transaction, the Company also sold a fractional interest in future royalties otherwise payable to the Company. The Company received a non-refundable $1.6 million payment upon closing of the transaction which has been recorded as revenue in the second quarter of 2008 as the transaction qualifies as a sale as there are no further obligations of the Company pertaining to this payment. Under certain circumstances if and when the $6.5 million milestone becomes payable, the investor has the right, among other options, to “put” the fractional royalty interest back to the Company for $1.6 million. Since the receipt of the milestone and the investor’s put right are both contingent on separate events, the Company will not recognize this liability until and unless the milestone is received and the investor exercises the put right.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our results of operations and financial condition together with our unaudited financial statements and related notes contained elsewhere in this report.
Liquidity/Going Concern
We estimate that we have cash and cash equivalents sufficient to fund our operations through December 2008. There are a number of circumstances, however, which could result in our needing additional capital even sooner than anticipated, such as unexpected costs associated with the Phase II clinical trial we are currently conducting in Eastern Europe and the United States. Based upon projected enrollment rates, this trial was expected to be completed as early as the fourth quarter of 2008. However, as the actual enrollment rate has been lower than anticipated, we now expect this trial will be completed in the second half of 2009. This delay will add additional costs to the trial that will require financing for completion.We intend to continue to actively seek additional capital in 2008 through public or private financing or collaborative agreements but there is no assurance that financing will be obtained on acceptable terms, if at all. These matters raise substantial doubt about our ability to continue as a going concern.
Executive Overview
We are a biopharmaceutical company focused on the development of novel drug candidates for disorders of the central nervous system. Since our inception, we have incurred significant operating losses and we expect to continue to incur significant operating losses for the foreseeable future. As of June 30, 2008, we had an accumulated deficit of $204.7 million. We have historically depended upon equity and debt financings and license fee and milestone payments from our collaborative partners and licensees to fund our research and product development programs.
We anticipate that our quarterly results of operations will fluctuate for several reasons, including the timing and extent of research and development efforts and, the timing of milestone payments, if any, under our sublicense agreements. In pursuing our strategy, we have entered into strategic collaboration and/or license agreements. We currently have such agreements with XTL, Blue Note, Wyeth and Neurocrine.
In January 2007, we granted XTL the exclusive right to develop products incorporating our proprietary compound bicifadine in return for the right to receive future milestone payments and royalties based on product development and future sales, if any. We received an up-front payment of $6.5 million, of which $5.0 million was paid to Wyeth, from whom we licensed bicifadine. In addition, we paid Elan $500,000 pursuant to a prior agreement with them. XTL later made an additional $1.0 million payment to us upon transfer to XTL of an existing IND and certain program documentation relating to bicifadine. As the up-front payment was not associated with continuing obligations from us, the payment was recorded as revenue in the first quarter of 2007. In May 2008, we sold to a private investor the right to receive $1.6 million, or 24.62%, of a $6.5 million contingent milestone payment that may become due to DOV under the XTL Agreement. In the same transaction, we also sold a fractional interest in future royalties otherwise payable to us. We received a non-refundable $1.6 million payment upon closing of the transaction which has been recorded as revenue in the second quarter of 2008 as the transaction qualifies as a sale as there are no further obligations of DOV pertaining to this payment. Under certain circumstances if and when the $6.5 million milestone becomes payable, the investor has the right, among other options, to “put” the fractional royalty interest back to us for $1.6 million. Since the receipt of the milestone and the investor’s put right are both contingent on separate events, we will not recognize this liability until and unless the milestone is received and the investor exercises the put right.
Our revenue consists primarily of license fees and milestone payments from our collaborative partners. We record revenue on an accrual basis when amounts are realized or realizable and earned. In accordance with EITF 00-21, we evaluate all new agreements to determine if they are a single unit of accounting or separable. Revenue received in advance of performance obligations, or in cases where we have a continuing obligation to perform services, is deferred and amortized over the performance period. Revenue from milestone payments that represent the culmination of a separate earnings process is recorded when the milestone is achieved. Contract revenues are recorded as the services are performed. License and milestone revenues are typically not consistent or recurring in nature. Our revenue has fluctuated from year-to-year and quarter-to-quarter and this will likely continue.
Our operating expenses consist primarily of license expense, costs associated with research and development and general and administrative costs associated with our operations. Research and development expense consists primarily of compensation and other related costs of our personnel dedicated to research and development activities, clinical and preclinical trial expenses, including toxicology studies, costs of manufacturing clinical and preclinical trial materials and professional fees related to clinical trials and patent strategy and prosecution. General and administrative expense consists primarily of the costs of our senior management, finance and administrative staff, business insurance and professional fees.
Exchange Offer
In March 2007, we consummated an exchange offer, or the “2007 Exchange Offer”, pursuant to which $67.5 million in principal amount of DOV’s outstanding convertible subordinated debentures were exchanged for 439,784 shares of series C and 100,000 shares of series D convertible preferred stock and $14.3 million in cash, which included $843,000 of accrued interest. Additionally, the $2.5 million in principal amount of debentures that remained outstanding after the consummation of the 2007 Exchange Offer was repaid for $2.6 million (an amount equal to par plus accrued interest). Please refer to Note 6 to our financial statements included under Part I, Item 1 of this Form 10-Q.
Stock-based Compensation
We account for stock options under the provisions of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123(R), which requires the recognition of the fair value of stock-based compensation. Under the fair value recognition provisions for SFAS 123(R), stock-based compensation cost is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisite service period of the award. We have used the Black-Scholes valuation model, or BSM, to estimate fair value of our stock-based awards, which requires various judgmental assumptions including estimating stock price volatility, forfeiture rates, and expected life. Our computation of expected volatility is based on our historical volatility. In addition, we consider many factors when estimating expected forfeitures and expected life, including types of awards and historical experience. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.
We adopted SFAS 123(R) using the modified prospective method which requires the application of the accounting standard as of January 1, 2006. The 2007 Exchange Offer effected a technical change of control and, as a result, pursuant to the 2000 Plan all outstanding options issued prior to January 2007 and restricted stock awards were immediately accelerated. Thus the Company recognized a non-cash compensation charge in the first quarter of 2007 of approximately $5.9 million.
Results of Operations
Three Months Ended June 30, 2008 and 2007
Revenue. Revenue was $1.6 million and $288,000 for the three months ended June 30, 2008 and 2007, respectively. In May 2008, we sold to a private investor the right to receive $1.6 million, or 24.62%, of a $6.5 million contingent milestone payment that may become due to DOV under the XTL Agreement. In the same transaction, we also sold a fractional interest in future royalties otherwise payable to us. We received a non-refundable $1.6 million payment upon closing of the transaction which has been recorded as revenue in the second quarter of 2008 as the transaction qualifies as a sale as there are no further obligations of DOV pertaining to this payment. Under certain circumstances if and when the $6.5 million milestone becomes payable, the investor has the right, among other options, to “put” the fractional royalty interest back to us for $1.6 million. Since the receipt of the milestone and the investor’s put right are both contingent on separate events, we will not recognize this liability until and unless the milestone is received and the investor exercises the put right. Our revenue for the three months ended June 30, 2007 was comprised solely of reimbursement of certain costs incurred by us for services provided to our partner XTL.
Research and Development Expense. Research and development expense decreased $847,000 to $1.6 million for the second quarter of 2008 from $2.5 million for the comparable period in 2007. Approximately $497,000 of the decrease related to decreased payroll and associated overhead expense $600,000 of direct costs for our preclinical programs due primarily to the restructuring we announced in January 2008 as well as decreased clinical development costs of $76,000 for bicifadine as XTL is now responsible for these costs. These decreases were offset by an increase in expenses of $344,000 for DOV 21,947 as we progressed our Phase II clinical trial.
General and Administrative Expense. General and administrative expense increased $91,000 to $1.9 million for the second quarter of 2008 from $1.8 million for the comparable period in 2007. The increase is primarily attributable to an increase in non-cash compensation expense of $358,000, increased depreciation expense of $57,000 and increased rent expense of $134,000. These increases were offset by decreased payroll and payroll related expenses of $226,000, lower office and office related expenses of $184,000 due to the restructuring we announced in January 2008 and decreased professional fees of $50,000.
Interest Income. Interest income decreased $233,000 to $29,000 in the second quarter of 2008 from $262,000 in the comparable period in 2007 primarily due to lower average cash balances, offset by higher effective interest rate yield.
Gain on Revaluation of Warrants. At March 31, 2007 we estimated the fair value of the warrants to be distributed to common stockholders pursuant to the 2007 Exchange Offer at $4.6 million using a Black-Scholes methodology. The liability was revalued at the date the registration statement for the shares underlying the warrants was deemed effective on June 25, 2007. The liability value was reduced by $1.4 million and was recorded as other income during the quarter ended June 30, 2007. The warrants were then reclassified from a liability to equity and, as such, no further revaluation is required. Please refer to Note 6 of our financial statements included under Part I, Item 1 of this Form 10-Q.
Six Months Ended June 30, 2008 and 2007
Revenue. Our revenue for the six months ended June 30, 2008 is comprised of the $1.6 million received from an investor upon the closing of the bicifadine milestone and royalty monetization described above. Our revenue for the six months ended June 30, 2007 is comprised of the $7.5 million received from XTL pursuant to the licensing of bicifadine on January 15, 2007 and from reimbursement of certain costs incurred by us for services provided during the transition period following the consummation of the licensing transaction.
Research and Development Expense. Research and development expense decreased $5.8 million to $3.5 million for the six months ended June 30, 2008, from $9.3 million for the comparable period in 2007. Approximately $4.8 million of the decrease related to decreased payroll and associated overhead expense. The first quarter of 2007 included non-cash stock compensation of $3.1 million related to the acceleration of certain stock options as a result of the change of control effected by the consummation of the 2007 Exchange Offer. The remaining decrease in research and development expense was associated with decreased payroll and associated overhead expense of $1.7 million, and $1.2 million for our preclinical programs primarily due to the restructuring we announced in January 2008 and decreased clinical development costs of $604,000 for bicifadine as XTL is now responsible for these costs. These decreases were offset by an increase in expenses of $784,000 for DOV 21,947 as we progressed our Phase II clinical trial.
General and Administrative Expense. General and administrative expense decreased $2.6 million to $3.7 million for the six months ended June 30, 2008, from $6.3 million for the comparable period in 2007. The decrease was primarily attributable to a decrease in payroll and related benefits as the first quarter of 2007 included non-cash stock compensation of $2.4 million related to the acceleration of certain stock options as a result of the change of control effected by the consummation of the 2007 Exchange Offer and the remainder related to an overall reduction in personnel.
License Expense. License expense for the first quarter of 2007 was comprised of the $5.0 million paid to Wyeth and $500,000 paid to Elan in connection with the licensing of certain rights to bicifadine to XTL in January 2007. As these milestone payments were prior to FDA approval, the entire amount was expensed in the first quarter of 2007.
Interest Income. Interest income decreased $670,000 to $105,000 in the six months ended June 30, 2008 from $775,000 in the comparable period in 2007 primarily due to lower average cash balances and lower effective interest rate yield.
Interest Expense. Interest expense decreased $91,000 to $0 from $91,000 in the comparable period in 2007 primarily due to the completion of the 2007 Exchange Offer which reduced our outstanding debentures to zero. Please refer to Note 6 of our financial statements included under Part I, Item 1of this Form 10-Q.
Gain on Revaluation of Warrants. At March 31, 2007 we estimated the fair value of the warrants to be distributed to common stockholders pursuant to the 2007 Exchange Offer at $4.6 million using a Black-Scholes methodology. The liability was revalued at the date the registration statement for the shares underlying the warrants was deemed effective on June 25, 2007. The liability value was reduced by $1.4 million and was recorded as other income during the six months ended June 30, 2007. The warrants were then reclassified from a liability to equity and, as such, no further revaluation is required. Please refer to Note 6 of our financial statements included under Part I, Item 1 of this Form 10-Q.
Gain on Extinguishment of Convertible Debentures. In March 2007, we consummated the 2007 Exchange Offer. The exchange transaction falls under the guidance of SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings. The difference between the amount of the face value of the debentures and the fair value of the assets given up in the exchange of $8.4 million was recorded as a gain on debt extinguishment in the first quarter of 2007. Please refer to Note 6 to our financial statements included under Part I, Item 1 of this Form 10-Q.
Liquidity and Capital Resources
At June 30, 2008, our cash and cash equivalents and marketable securities totaled $6.2 million as compared with $9.6 million at December 31, 2007. Although we estimate that we have capital to fund operations through the end of 2008, we will continue to have capital needs. There are a number of circumstances, however, which could result in our needing additional capital even sooner than anticipated, such as unexpected costs associated with the Phase II clinical trial we are currently conducting in Eastern Europe and the United States. We intend to continue to actively seek additional capital in 2008 through public or private financing or collaborative agreements however there is no assurance that such financing will be obtained. These matters raise substantial doubt about our ability to continue as a going concern.
Net cash used in operations during the six months ended June 30, 2008 amounted to $7.6 million as compared to $9.8 million in the same period of 2007. The decrease in cash used in operations was primarily related to the restructuring of our operations in January 2008 to reduce headcount and spending on research projects. This reduction was offset by the restructuring of our facility lease. In February 2008, we renegotiated our facility lease by reducing the monthly rent payment and accelerating the termination of the lease from June 2016 to January 2009. In exchange, we agreed to release to the landlord the $4.2 million restricted cash previously held as collateral for the lease and utilized a portion of this amount to prepay rent. Net non-cash expense related to stock-based compensation and depreciation and amortization expenses was $1.2 million in the six months ended June 30, 2008 and $6.0 million in the comparable period in 2007.
Net cash provided by investing activities during the six months ended June 30, 2008 was $4.6 million as compared to $2.2 million used in investing activities during the same period in 2007. This fluctuation resulted primarily from the timing differences in investment purchases, sales and maturities and the fluctuations in our portfolio mix between cash equivalents and short-term investment holdings and the release of the restricted cash in connection with our lease amendment. In February 2006, we committed to a ten-year operating lease for a 133,686 square foot facility in Somerset, New Jersey which has served as our corporate headquarters and principal place of business since June 2006. In connection with this lease, we restricted $4.2 million to serve as collateral for our performance under the lease. Effective February 25, 2008, we entered into an amendment to this lease and in connection with this amendment we released the $4.2 million restricted cash.
Net cash used in financing activities during the six months ended June 30, 2008 was $0 as compared to $17.8 million in the comparable period in 2007. In March 2007, we consummated the 2007 Exchange Offer pursuant to which $67.5 million in principal amount of our convertible subordinated debentures were exchanged for 439,784 shares of series C and 100,000 shares of series D convertible preferred stock and $14.3 million in cash, which included $843,000 of accrued interest which is not classified as a financing activity. Additionally, the $2.5 million in principal amount of Debentures that remained outstanding after the consummation of the 2007 Exchange Offer was repaid for $2.6 million (an amount equal to par plus accrued interest). The Company incurred approximately $1.8 million for costs related to the 2007 Exchange Offer.
Factors That May Affect Future Financial Condition and Liquidity
We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated operating expenses and capital requirements through the end of 2008. Our ongoing cash requirements and future capital uses and requirements depend on numerous factors, including:
| | | our progress with research and development activities; |
| | | our ability to maintain and establish, and the scope of, collaborations that finance research and development on our clinical candidates; |
| | | the progress and success of clinical trials and preclinical studies of our product candidates; |
| | | the costs and timing of obtaining, enforcing and defending our patent and intellectual rights; and |
| | | the costs and timing of regulatory approvals. |
In addition to the foregoing, our cash needs and requirements are also dependent in part on the ability of our licensees and collaborative partners to meet their obligations to us, including the fulfillment of their development and commercialization responsibilities in respect of our product candidates. Our sublicensee partners, XTL, Blue Note and Neurocrine, may encounter conflicts of interest, changes in business or clinical strategy, or they may acquire or develop rights to competing products, all of which could adversely affect their ability or willingness to fulfill their obligations to us and, consequently, require us to satisfy, through the commitment of additional funds or personnel or both, any shortfalls in their performance.
To continue to operate in 2009, we will need to raise additional funds through equity or debt financings, collaborative agreements with corporate partners or from other sources. If adequate funds are not available, or not available on an acceptable basis, we will be required to curtail or delay significantly our remaining product development programs or possibly discontinue operations. In addition, future milestone payments under some of our collaborative or license agreements are contingent upon our meeting particular research or development goals. The amount and timing of future milestone payments are contingent upon the terms of each collaborative or license agreement. Milestone performance criteria are specific to each agreement and based upon future performance. Therefore, we are subject to significant variation in the timing and amount of our revenues, milestone expenses and results of operations from period to period.
Contractual Obligations
Future minimum payments for all contractual obligations for years subsequent to June 30, 2008, are as follows:
| | | Payments Due by Period | | | |
| | | Less than 1 Year | | 1- 3 Years | | 3- 5 Years | | More Than 5 Years | | Total | |
| | | | | | | | | | | | |
| Operating leases(1) | | $ | 581,944 | | $ | 432 | | $ | — | | $ | — | | $ | 582,376 | |
| Total (2) | | $ | 581,944 | | $ | 432 | | $ | — | | $ | — | | $ | 582,376 | |
(1) In February 2008, we renegotiated our facility lease included in the operating lease line by reducing the term to January 2009 as well as the monthly rent payments. In exchange, we agreed to release to the landlord the $4.2 million letter of credit previously held as collateral for the lease. Thus the remaining lease payments due under the amended lease as of June 30, 2008 total $567,000.
(2) The table excludes legal expenses to be reimbursed on behalf of a board member related to an inquiry by regulatory authorities into trading in our common stock in April 2006. While the board of directors has granted contractual indemnification, the amounts are neither certain nor quantifiable at this time.
The table also excludes any severance or termination payments that would be due to certain of our employees under their employment contracts should they be terminated without cause or following a change of control, as these terms are defined in each such employee’s agreement, prior to the expiration of each employee’s contract term because the amounts are not determinable at this time. As of June 30, 2008, the maximum aggregate amount of severance or termination payments that may be payable under these employment agreements is $1.6 million. Our employment agreements with our current and former executive officers are on file with the SEC and available at www.sec.gov.
The table above also excludes future milestones and royalties (as summarized in the table below) that may be owed to Wyeth, Elan and Biovail, under terms of existing agreements as payments are contingent upon future events. The table does not reflect the amounts that may be received from our collaborative partners with respect to these payments. We do not expect to pay any royalties or milestones under these agreements in 2008.
| | | Milestone Payments | | | |
| | | NDA Filing | | NDA Approval or Marketing Authorization | | Upon License or Introduction to Market | | Royalty/Payments on Net Sales, if Any | |
| Bicifadine | | | — | | $ | 4,500,000 | | $ | 500,000 | | | 10.0 | % |
| DOV 21,947(1) | | | — | | $ | 2,250,000 | | | — | | | — | |
| DOV 102,677(1) | | | — | | $ | 2,250,000 | | | — | | | — | |
| DOV 216,303(1) | | | — | | $ | 4,500,000 | | | — | | | 3.5 | % |
| DOV Diltiazem | | | — | | $ | 3,000,000 | | | — | | | Up to $7.5 million | |
| Ocinaplon | | $ | 2,500,000 | | $ | 4,500,000 | | $ | 2,000,000 | | | 3.5 | % |
(1) We are obligated to pay milestones upon NDA (or equivalent) approval in the U.S., Europe or Japan, but only if such milestone becomes payable prior to payment of the $4.5 million milestone payable on an NDA (or equivalent) approval for DOV 216,303. Any milestone payments made with respect to DOV 21,947 or DOV 102,677 reduce, dollar-for-dollar, our $4.5 million milestone obligation for DOV 216,303.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159 which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, which for us was as of the beginning of fiscal 2008. The adoption of this Statement did not have a material impact on the company's financial position or results of operations.
In June 2007, the FASB ratified EITF 07-03, "Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities", which requires nonrefundable advance payments for future research and development activities to be capitalized and recognized as an expense as the goods are delivered or services are performed. Earlier application is not permitted. EITF 07-03 is effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. The adoption of EITF 07-1 did not have a material impact on our financial position or results of operations.
In September 2007, the FASB ratified Emerging Issues Task Force Issue No. 07-1 "Accounting for Collaborative Agreements", ("EITF 07-1"). EITF 07-1 defines collaborative agreements as contractual arrangements that involve a joint operating activity. These arrangements involve two (or more) parties who are both active participants in the activity and that are exposed to significant risks and rewards dependent on the commercial success of the activity. EITF 07-1 provides that a company should report the effects of adoption as a change in accounting principle through retrospective application to all periods and requires additional disclosures about a company's collaborative arrangements. EITF 07-1 is effective for us as of January 1, 2009. The adoption of EITF 07-1 is not expected to have a material impact on our financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141(R) "Business Combinations" ("SFAS 141(R)"). SFAS 141(R) changes several underlying principles in applying the purchase method of accounting. Among the significant changes, SFAS 141(R) requires a redefining of the measurement date of a business combination, expensing direct transaction costs as incurred, capitalizing in-process research and development costs as an intangible asset and recording a liability for contingent consideration at the measurement date with subsequent re-measurements recorded in the results of operations. SFAS 141(R) also requires that costs for business restructuring and exit activities related to the acquired company will be included in the post-combination financial results of operations and also provides new guidance for the recognition and measurement of contingent assets and liabilities in a business combination. In addition, SFAS 141(R) requires several new disclosures, including the reasons for the business combination, the factors that contribute to the recognition of goodwill, the amount of acquisition related third-party expenses incurred, the nature and amount of contingent consideration, and a discussion of pre-existing relationships between the parties. SFAS 141(R) is effective for the Company as of January 1, 2009. SFAS 141(R) will only have an impact on our financial position or results of operations if we enter into a business combination.
In December 2007, the FASB issued SFAS No. 160 "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51", ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires noncontrolling interests in subsidiaries initially to be measured at fair value and classified as a separate component of equity. SFAS 160 also requires a new presentation on the face of the consolidated financial statements to separately report the amounts attributable to controlling and non-controlling interests. SFAS 160 is effective for the Company as of January 1, 2009. Management is currently evaluating the impact of adopting this Statement, but we do not expect it to have a material impact on our financial position or results of operations.
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 161, Disclosures about Derivative Instruments and Hedging Activities –an amendment of SFAS 133. SFAS 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS 161 requires: (1) the disclosure of the fair value of derivative instruments and gains and losses in a tabular format; (2) the disclosure of derivative features that are credit risk-related; and (3) cross-referencing within the footnotes. SFAS 161 is effective for us on January 1, 2009. We are in the process of evaluating the new disclosure requirements under SFAS 161.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks
To date, we have invested our cash balances with substantial financial institutions. The primary objective of our investment activities is to preserve the principal and maximize the income we receive with acceptable risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To mitigate this risk, we intend to maintain our portfolio of cash equivalents and investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and corporate obligations. Due to the short holding period of these types of investments, we have concluded that at the present time we do not have a material financial market risk exposure.
ITEM 4T. Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Management has used the framework set forth in Internal Control - Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of the Company's internal control over financial reporting. This evaluation was carried out by management as of June 30, 2008, under the supervision and with the participation of our chief executive officer. Based upon that evaluation, our chief executive officer concluded that our disclosure controls and procedures are effective.
There was no significant change in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time we may become involved in litigation incidental to the conduct of our business. We are not currently a party to any material legal proceedings.
ITEM 1A. Risk Factors
The nature of our business, particularly when combined with our extremely limited financial resources, subjects us to a number of significant risks which affect our ability to execute our business strategy and build our business. Some of the most significant challenges we presently face include the following:
| | | our need to raise substantial additional capital in order to fund operations; |
| | | |
| | | our need to seek and evaluate strategic alternatives, including with respect to collaborations and partnerships for certain of our development programs and product candidates; |
| | | |
| | | the need to obtain, maintain and protect all necessary patents, licenses and other intellectual property rights; |
| | | |
| | | the need to demonstrate the safety and efficacy of product candidates at each stage of development; |
| | | |
| | | our need to meet our development schedule for our product candidates, including with respect to drug supply and clinical trial initiation, enrollment and completion; |
| | | |
| | | the need to meet applicable regulatory standards and receive required regulatory approvals on a timely basis or at all; and |
| | | |
| | | our need to fulfill our obligations to our strategic partners so we can receive timely payment of milestones and royalties, if any, under our agreements with them. |
If we are unable to successfully deal with these and other challenges, for example if we fail to identify additional sources of capital in the very near term, our business, results of operations and financial condition would be harmed and the market value of our common stock would likely decline even further. You should refer to “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2007, for a more detailed discussion of some of the challenges and the associated risks we face.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) DOV’s annual meeting of stockholders was held on May 16, 2008.
(b) The following Class III directors were elected at the 2008 annual meeting to serve for a period of three years and until their respective successors are duly elected and qualified:
Name | | Position | | Term Expires |
| Arnold Lippa | | Class III Director | | 2011 |
| Patrick Ashe | | Class III Director | | 2011 |
The following Class I and II directors continue to serve their respective terms, which expire on our annual meeting of stockholders in the year noted:
| | Position | | Term Expires |
| Dennis Podlesak | | Class I Director | | 2009 |
| Daniel S. Van Riper | | Class I Director | | 2009 |
| Barbara Duncan | | Class I Director | | 2009 |
| | Class II Director | | 2010 |
| Zola Horovitz | | Class II Director | | 2010 |
At the 2008 annual meeting, stockholders voted on three propositions: (i) the election of two Class III directors for a term of three years expiring in 2011, (ii) the authorization of the Company’s board of directors, in its discretion, to amend the Company’s Fourth Amended and Restated Certificate of Incorporation, to effect a reverse stock split of the issued and outstanding shares of the Company’s common stock, and (iii) the ratification of the selection of Amper, Politziner & Mattia as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2008. All matters were approved by the Company’s stockholders. The voting results were:
Proposition 1: Election of Directors | | For | | Withheld | |
| | | | | | |
| Arnold Lippa | | | 59,055,882 | | | 40,572,863 | |
| Patrick Ashe | | | 91,128,204 | | | 8,500,541 | |
Proposition 2: | | For | | Against | | Abstain | |
| | | | | | | | |
| Authorization of the Board of Directors to Effect a Reverse Stock Split | | | 96,011,473 | | | 3,512,266 | | | 106,006 | |
Proposition 3: | | For | | Against | | Abstain | |
| | | | | | | | |
| Ratification of Selection of Registered Independent Public Accounting Firm | | | 99,315,183 | | | 271,948 | | | 41,614 | |
ITEM 6. Exhibits
The following is a complete list of exhibits filed or incorporated by reference as part of this report.
Exhibit No. |
| 10.60 | Form of Stock Option Agreement for stock options granted under the 2007 Stock Award and Incentive Plan. |
| 10.61 | Form of Restricted Stock Unit Agreement for restricted stock units granted under the 2007 Stock Award and Incentive Plan. |
| 31.1 | Certification of Chief Executive Officer and Principal Financial Officer of DOV Pharmaceutical, Inc., pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32 | Certification of Chief Executive Officer and Principal Financial Officer of DOV Pharmaceutical, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | DOV PHARMACEUTICAL, INC. |
| Date: August 13, 2008 | By: | /s/ BARBARA DUNCAN |
| | | Name: Barbara Duncan Title: Chief Executive Officer and Principal Financial Officer |
| | | |
| | DOV PHARMACEUTICAL, INC. |
| Date: August 13, 2008 | By: | /s/ WILLIAM C. KALTNECKER |
| | | Name: William C. Kaltnecker Title: Chief Accounting Officer and Controller |
