[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO 17 C.F.R. § 200.83.
[COOLEY GODWARD KRONISH LLP LETTERHEAD]
| | | | ||
|---|---|---|---|---|
| Glen Y. Sato | ||||
T: (650) 843-5502 gsato@cooley.com |
November 20, 2006 | ||
*FOIA Confidential Treatment Request* Confidential Treatment Requested by Affymax, Inc. In connection with Registration Statement on Form S-1 (File No. 333-136125) |
Mary Mast
Amy Bruckner
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
| | | |
|---|---|---|
| Re: | Affymax, Inc. File 333-136125 Form S-1 filed July 28, 2006 |
Dear Mary and Amy:
Following up on our recent telephone conferences with the staff (the "Staff") this supplemental response amends and supersedes in its entirety our draft letter of November 11. Our response below addresses currently outstanding accounting issues as follows: (a) revised revenue recognition policy and proposed revisions to Notes 2 and 10 to the Company's financial statements (Exhibit A); (b) "loss contract" analysis and review of the February and June 2006 Collaboration and License Agreements with Takeda Pharmaceuticals Company Limited ("Takeda") (collectively, the "Agreements"), including a revised model supporting the loss contract analysis of the Agreements (Exhibit B); (c) confirmation that the milestones under the Agreements are not substantive; (d) confirmation that no upfront payments have been made for contract manufacturing under the Agreements; and (e) SAB No. 108 analysis and disclosure (Exhibit C). The Company also confirms that the correspondence dated October 23, October 28 (two letters, one of which includes a request for confidential treatment for certain identified portions), November 3 and November 8.
In reviewing the revenue recognition policy and its application to the Agreements, the Company plans to revise the provisions related to revenue recognition in those notes as set forth inExhibit A. Specifically, the policy has been revised to address the treatment of payments from Takeda under the Agreements in particular and to clarify the treatment of payments received under the Agreements under EITF 00-21.
2. Loss contract analysis.
In response to the Staff's comments, the Company performed a detailed analysis on the cash flows of several scenarios that the Company believes are the most reasonably possible and determined whether those outcomes would trigger the Agreements with Takeda to yield either an overall profit or loss to the Company. The Company considered the positive cash flows from up front payments received, funding for milestones achieved, reimbursements under both the manufacturing supply arrangement and the research arrangement and product royalties. These positive cash flows were offset by the cash out flows under each scenario which include payments for production of the active pharmaceutical ingredient, or API,under the manufacturing supply arrangement, the Company's responsibility to pay 30% of the U.S. research and development costs, employee compensation and related overhead expenses, traveling costs associated with participation on the steering committee and its various sub committees and co-commercialization costs.
Specifically, the Company focused on the following four scenarios and determined its net cash inflows and cash outflows for each possible scenario:
| Scenario | Outcome | ||
|---|---|---|---|
| 1. | [*]; | ||
| 2. | [*]; | ||
| 3. | [*]; and | ||
| 4. | [*]. | ||
The Company is currently in Phase 2 clinical trials for both the renal and oncology indications. It is anticipated that the Company will move into Phase 3 clinical trials for the renal indication in [*] 2007. Takeda is responsible for conducting the clinical trials related to the oncology indication and the timing of commencement of Phase 3 trials are yet to be finalized, [*], which is [*] the current Phase 2 clinical trials. A summary of the cumulative net cash flow for the four scenarios is as follows:
| | Cumulative Net Cash Inflow (Outflow) ($'000) | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | [*] | [*] | [*] | [*] | [*] | [*] | [*] | |||||||||||||||
| Scenario 1 | $ | [*] | $ | [*] | $ | [*] | $ | [*] | $ | [*] | $ | [*] | $ | [*] | ||||||||
| Scenario 2 | $ | [*] | $ | [*] | $ | [*] | $ | ([*] | ) | $ | ([*] | ) | $ | ([*] | ) | $ | ([*] | ) | ||||
| Scenario 3 | $ | [*] | $ | [*] | $ | [*] | $ | ([*] | ) | $ | [*] | $ | [*] | $ | [*] | |||||||
| Scenario 4 | $ | [*] | $ | [*] | $ | [*] | $ | [*] | $ | [*] | $ | [*] | $ | [*] | ||||||||
[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO 17 C.F.R. § 200.83.
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The analysis of the timing of events under the various scenarios, details of costs by categories including clinical research, manufacturing, sales and marketing, FTE and other expenses is summarized in more detail for each of the scenarios and the models for the four scenarios are provided inExhibit B.
The Company believes it is critical to assess whether the Agreements will yield a profit or loss, or net positive or negative cash flow, at the signing date of the contract and at each reporting period to ensure that at a minimum the remaining undelivered obligations will not result in a loss. This assessment is based on estimates to determine the most likely outcome based on available facts and circumstances at each assessment date. The estimates include consideration of factors such as the progress and timing of clinical trials, competitive agents in the market, drug-related serious adverse events and other safety issues in clinical trials, pricing reimbursement in relevant markets and historical costs incurred compared to original estimates.
Based on the current information available to the Company and the progress made to date, the Company believes it is reasonable to conclude that Scenario 1 is an appropriate model and will not result in a loss.
Based on the above, it is the current expectation of the Company that the Agreements with Takeda will not result in an overall loss to the Company. Therefore, the recognition of revenue based on the proportional performance model will not result in premature recognition of revenue that otherwise would have been allocated to the undelivered elements if there was an overall loss under the Agreements. However, the Company will evaluate the overall economic return of the Agreements at each reporting date. Additional disclosure regarding the Company's planned periodic assessment of profitability of the Agreements is set forth inExhibit A.
3. No substantive milestones.
In response to the Staff's request, the Company confirms its belief that the milestones under the Agreements are not substantive. Specifically, in determining whether the milestone payments are substantive, the Company considered the following factors:
[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO 17 C.F.R. § 200.83.
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Under the February 2006 Agreement with Takeda, which grants Takeda a license for development, manufacture and sale of Hematide in Japan, milestone payments of up to $75 million are not considered to be substantive milestones as the achievement of the milestones are solely dependent upon Takeda's development efforts resulting from the use of the Company's intellectual property under the license.
Under the June 2006 Agreement, Takeda and the Company will collaborate to co-develop and co-commercialize Hematide in the U.S. and Takeda will be solely responsible for development and commercialization in all territories outside the U.S. The collaboration will cover two indications, renal and oncology.
The Company performed an assessment considering the above factors and specifically the required level of performance by the Company that would be required to achieve the milestones and concluded that there is no relation between the milestone payments and the level of effort or participation by the Company. Accordingly, the milestones are deemed to be non-substantive milestones. This conclusion is based on the following factors:
[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO 17 C.F.R. § 200.83.
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The following table illustrates the June 2006 Agreement milestone payments and the Company's specific performance responsibility in achieving each milestone.
June 2006 Agreement with Takeda Agreement
| Milestone Event | Amount of Payment | Effort Expended by the Company | ||||
|---|---|---|---|---|---|---|
| [*] | $ | [*] | • | The Company is responsible for [*]. | ||
| • | Takeda is responsible for [*]. | |||||
| [*] | $ | [*] | • | Solely Takeda's responsibility. | ||
| [*] | $ $ | [*] ([*] [*] | ) | • | The Company is responsible for [*]. | |
| ([*] | ) | • | This program has [*] studies (not including additional studies needed for the safety database). | |||
| • | [*]. | |||||
| • | Clinical and regulatory group is comprised of [*] who will provide a number of functions, including: manage study protocols, manage CROs, support in-house statistical analysis, provide QA, compile clinical documentation to support regulatory submissions, maintain CTAs, and submit data for publishing. | |||||
| [*] | $ $ | [*] ([*] [*] ([*] | ) ) | • | Solely Takeda's responsibility. | |
| [*] | $ $ | [*] ([*] [*] ([*] | ) ) | • | The Company is responsible for assembling, submitting, and maintaining any source regulatory submission components and complied submissions, including [*]. | |
| • | The Company is responsible for providing regulatory materials relating to bulk API. | |||||
| • | The Company will provide the content of [*]. | |||||
| [*] | $ $ | [*] ([*] [*] ([*] | ) ) | • | The Company is responsible for assembling, submitting, and maintaining any source regulatory submission components and complied submissions, including [*]. | |
| • | The Company is responsible for providing regulatory materials relating to bulk API. | |||||
| • | Takeda will provide the content of [*]. | |||||
| [*] • [*] • [*] | $ $ | [*] ([*] [*] ([*] | ) ) | • | Solely Takeda's responsibility. | |
| [*] • [*] • [*] | $ | [*] ([*] | ) | • | Affymax's responsibility is [*]. | |
| $ | [*] ([*] | ) | • | Takeda is solely responsible for [*]. | ||
| [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO 17 C.F.R. § 200.83. | ||||||
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| [*] | $ $ | [*] ([*] [*] ([*] | ) ) | • | The Company's clinical and regulatory group will be responsible for [*] during the review process and for submitting additional data as needed. | |
| [*] | $ | [*] | • | The Company is responsible for providing regulatory materials relating to bulk API. | ||
| • | Takeda is responsible for presentation [*] regulatory requirements. | |||||
| [*] | $ | [*] | • | The Company is responsible for providing regulatory materials relating to bulk API. | ||
| • | Takeda is responsible for presentation [*] regulatory requirements. | |||||
| [*] | $ | [*] | • | Solely Takeda's responsibility. | ||
[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO 17 C.F.R. § 200.83.
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4. No upfront payments for contract manufacturing.
In response to the Staff's comments, the Company confirms that it has not made any upfront payments for contract manufacturing to be performed under the Agreements. The Company continues to assess the performance of multiple vendors and has not made any upfront payments to those vendors.
5. Application of guidance in SAB No. 108.
In response to the Staff's comments, the Company has assessed both qualitatively and quantitatively the application of the guidance set forth in SAB No. 108 on its financial statements and the related disclosures and has proposes revisions to its previously disclosed financial statements as set forth inExhibit C.
As noted in our previous correspondence, once we receive the Staff's comments on the foregoing, we will file the responses on EDGAR with a concurrent request for confidential treatment of specified portions of the response and revise the Registration Statement to substantively reflect the responses.
Confidential Treatment Request
In addition, we hereby request, pursuant to 17 C.F.R. § 200.83 that the identified contents of this letter, be maintained in confidence, not be made part of any public record and not be disclosed to any person as it contains confidential information. In accordance with 17 C.F.R. § 200.83(d)(1), if any person (including any governmental employee who is not an employee of the Commission) should request access to or an opportunity to inspect this letter, we request that we be immediately notified of any such request, be furnished with a copy of all written materials pertaining to such request (including, but not limited to, the request itself) and be given at least ten business days advance notice of any intended release so that the Company may, if deemed necessary or appropriate, pursue any remedies available to it. In such an event, we request that you telephone the undersigned rather than rely upon the United States mail for such notice. The address and telephone number for Glen Y. Sato, the responsible representative, is care of Cooley Godward Kronish LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto, California 94306, telephone number (650) 843-5502.
Sincerely,
/s/ Glen Y. Sato
Glen Y. Sato
| | | |
|---|---|---|
| cc: | Paul B. Cleveland,Affymax, Inc. Grace Shin,Affymax, Inc. Laura A. Berezin,Cooley Godward Kronish LLP Glen Y. Sato,Cooley Godward Kronish LLP Greg N. Vlahos,PricewaterhouseCoopers Tania Devilliers,PricewaterhouseCoopers Bruce K. Dallas,Davis Polk & Wardwell Mischa Travers,Davis Polk & Wardwell |
[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO 17 C.F.R. § 200.83.
7
Exhibit A
Revenue recognition policy
Revisions to Notes 2 and 10 of the Financial Statements.
Note 2. Summary of Significant Accounting Policies
Revenue Recognition.
The Company recognizes revenue in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 104,Revenue Recognition in Financial Statements. When evaluating multiple element arrangements, the Company considers whether the components of the arrangement represent separate units of accounting as defined in Emerging Issues Task Force ("EITF") Issue No. 00-21,Revenue Arrangements with Multiple Deliverables ("EITF 00-21"). Application of this standard requires subjective determinations and requires management to make judgments about the fair value of the individual elements and whether such elements are separable from the other aspects of the contractual relationship.
Takeda Agreements
The Company has entered into two collaboration agreements (the "Arrangement") with Takeda, which have been combined for accounting purposes due to their proximity of negotiation. The Company evaluated the multiple elements under the combined single arrangement in accordance with the provisions of EITF 00-21. As the Company was unable to determine the stand-alone value of the delivered elements and obtain verifiable objective evidence to determine the fair value of the undelivered elements, the Company concluded that there was a single unit of accounting.
The Company is unable to determine the period of its performance obligations under the Arrangement as the Company's required participation on the joint steering committee extends for as long as products subject to the collaboration with Takeda are being sold by either of the parties. Accordingly, the contractual term of the Company's joint steering committee obligations is currently indefinite. As a result, revenue for the single unit of accounting is recorded on a proportional performance basis as long as the overall Arrangement is determined to be profitable.
The Company uses an input based measure, specifically direct costs, to determine proportional performance because the Company believes that the inputs are representative of the value being conveyed to Takeda through the research and development activities and delivery of the active pharmaceutical ingredient ("API"). The Company believes that using direct costs as the unit of measure of proportional performance also most closely reflects the level of effort related to the Company's performance under the Arrangement. Direct costs are those costs that directly result in the culmination of an earnings process for which Takeda receives a direct benefit. The nature of these costs are third party and internal costs associated with conducting clinical trial activities for dialysis and pre-dialysis indications, costs associated with the manufacturing of API and API stability testing, allocated payroll related costs for representatives participating on the joint steering committee and sales and marketing costs during the co-commercialization period. Direct costs specifically exclude costs of a general and administrative nature, cost for API not yet delivered to Takeda, travel and expense related costs, sales and marketing costs during the development period, any research and development costs not associated with Hematide, interest, depreciation and amortization expense. Revenue will be recognized equal to direct cost incurred, but not in excess of cash received or receivable.
[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO 17 C.F.R. § 200.83.
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Amounts resulting from payments received in advance of revenue recognized are recorded as deferred revenue until the earlier of (i) when the Company can meet the criteria for separate recognition of each element under the guidance of EITF 00-21 or (ii) after the Company has fulfilled all of its contractual obligations under the Arrangement.
The Company is required to assess the profitability of the overall Arrangement on a periodic basis throughout the life of the Arrangement when events or circumstances indicate a potential change in facts. Profitability is defined as a net cash inflow resulting from the Arrangement over its life. Such assessment is based on estimates to determine the most likely outcome based on available facts and circumstances at each assessment date. The estimates include the consideration of factors such as the progress and timing of clinical trials, competitive ESA's (erythropoiesis stimulating agents) in the market, drug related serious adverse events and other safety issues in the clinical trials, pricing reimbursement in relevant markets and historical costs incurred compared to original estimates. When the periodic assessment or other events or circumstances indicate a loss will result from performance under the Arrangement, the entire amount of the loss is charged against income in the period in which the determination is made.
The Company will receive reimbursements of third-party U.S. clinical development expenses and will present them on a gross basis in accordance with the provisions of EITF No. 99-19,Reporting Revenue Gross as a Principal versus Net as an Agent. The Company will recognize such reimbursements as revenue under the single unit of accounting method discussed above.
Note 10. Collaboration with Takeda Pharmaceutical Company Limited ("Takeda").
The Company has entered into two collaboration agreements ("Arrangement") with Takeda, which have been combined for accounting purposes due to their proximity of negotiation. Consideration from these collaboration agreements include nonrefundable upfront license fees, reimbursement for sales of active pharmaceutical ingredient ("API"), clinical and regulatory milestone payments, reimbursement of third party U.S. clinical development expenses, product profit share revenues (as co-promotion revenues) and royalties.
In February 2006, the Company issued an exclusive license to Takeda for development and commercialization of Hematide in Japan. Pursuant to this agreement, Takeda paid the Company approximately $27 million, consisting of $17 million in upfront licensing fees and approximately $10 million for the purchase of 2,120,329 shares of the Company's Series E Redeemable Convertible Preferred Stock at a price of $4.7162 per share. In addition, the Company is eligible to receive clinical and regulatory milestone payments of up to an aggregate of $75 million upon Takeda's successful achievement of clinical development and regulatory milestones in Japan. Takeda is responsible for all development and commercialization costs in Japan and will purchase the API for Hematide from the Company. Assuming Hematide is approved and launched in Japan, the Company will receive a royalty from Takeda on Hematide sales in Japan.
[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO 17 C.F.R. § 200.83.
10
In June 2006, the parties expanded their collaboration to develop and commercialize Hematide worldwide, which includes the co-development and co-commercialization of Hematide in the U.S. Takeda received an exclusive license to develop and commercialize Hematide outside of the U.S. Beginning January 1, 2007, Takeda will bear the first $50 million of third-party expenses related to clinical development in pursuit of U.S. regulatory approval of Hematide. Thereafter, Takeda will bear 70% of the third-party U.S. clinical development expenses, while the Company will assume 30% of these expenses. Under the June 2006 agreement, Takeda paid the Company an upfront license fee of $105 million, and the Company is eligible to receive from Takeda up to an aggregate of $280 million upon the successful achievement of clinical development and regulatory milestones. Further, the Company may receive from Takeda up to an aggregate of $150 million upon the achievement of certain worldwide annual net sales milestones. The Company and Takeda will share equally in the net profits and losses of Hematide in the United States. Takeda will pay the Company a variable royalty based on annual net sales of Hematide outside the United States. The June 2006 agreement establishes a joint steering committee to oversee the development, regulatory approval and commercialization of Hematide.
The Company will share responsibility with Takeda for clinical development activities required for U.S. regulatory approval of Hematide. Specifically, the Company has primary responsibility for Hematide's clinical development plan and clinical trials in the dialysis and pre-dialysis indications, while Takeda has primary responsibility in the chemotherapy induced anemia and anemia of cancer indications. The Company is responsible for United States regulatory filings in the dialysis, pre-dialysis, chemotherapy induced anemia and anemia of cancer indications, including holding the NDAs for those indications. Takeda is responsible for regulatory filings outside the United States and the creation of a global safety database.
The Company is also responsible for the manufacture and supply of all quantities of API to be used in the development and commercialization of Hematide worldwide. Takeda is responsible for the fill and finish steps in the manufacture of Hematide worldwide.
The parties have agreed to jointly develop the initial commercial marketing plan for Hematide in the United States pursuant to which the Company and Takeda will divide Hematide promotional responsibilities in the U.S. The Company and Takeda will jointly decide on promotional responsibility for markets outside of these initial indications.
Under the February 2006 agreement, Takeda also obtained a right of first negotiation to any backup products for Hematide developed by the Company or its third-party partners. Specifically, during the first ten years of the agreement, if the Company or third-party partners develop a product that advances to Phase 2 clinical trials and competes with Hematide in the renal or oncology indications, the Company is obligated to offer to Takeda the right to develop and commercialize such product in Japan before offering the product opportunity in Japan to any other third party.
[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO 17 C.F.R. § 200.83.
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Loss contract analysis models:
| R&D Expenses | General Description Scenario 1 | [*] Scenario 2 | [*] Scenario 3 | [*] Scenario 4 | |||||
|---|---|---|---|---|---|---|---|---|---|
| Renal CRO | Third party clinical research organization expenses — The Company pays 100% and Takeda reimburses the Company 70% | This expense ends [*] | This expense ends [*] | The trial ends [*] | |||||
| Oncology CRO | Third party clinical research organization expenses — Takeda pays 100% and the Comany reimburses Takeda 30% | This expense ends [*] | This expense continues | This expense ends [*] | |||||
| API CMO | Third party clinical manufacturing organization expenses — The Company pays 100% and Takeda reimburses the Company 70% | This expense ends [*] | This expense ends [*] | This expense ends [*] | |||||
| Finish and Fill CMO | Third party clinical research manufacturing expenses — The Company pays 100% and Takeda reimburses the Company 70% | This expense ends [*] | This expense continues because it supports [*] | This expense continues because it supports [*] | |||||
| Other | The Company expense for preclinical studies, outside consulting, and regulatory filings. The Company pays 100% and is reimbursed 70% by Takeda. | Clinical consulting ends [*] manufacturing and regulatory consulting ends [*] | Clinical consulting ends [*] manufacturing and regulatory consulting continue because they support [*] | This expense continues because it supports [*] | |||||
| FTE | Includes the Company's manufacturing, clinical, regulatory, QA and research FTEs, not reimbursed by Takeda | Clinical FTE expense ends [*] manufacturing and regulatory FTE expenses end [*] | Clinical FTE expense ends [*] manufacturing and regulatory FTE expenses continue because they support [*] | This expense continues because it supports [*] | |||||
Sales and Marketing Expenses | |||||||||
Sales | Includes the Company's sales force expense — [*] | Sales force FTEs end [*] | Sales force FTEs end [*] | This expense continues as the Company is responsible [*] | |||||
| Marketing | Includes marketing expenses for [*] — the Company pays for 50% of those combined expenses | [*] marketing expenses end [*], [*] marketing expenses end [*] | [*] marketing expenses end [*], [*] marketing expenses [*] | [*] market expense is [*], [*] marketing expense discontinues [*] | |||||
[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO 17 C.F.R. § 200.83.
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[*]
[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO 17 C.F.R. § 200.83.
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Scenario 1
[*]
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Scenario 2
[*]
[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO 17 C.F.R. § 200.83.
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Scenario 2
[*]
[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO 17 C.F.R. § 200.83.
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Scenario 3
[*]
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Scenario 3
[*]
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Scenario 4
[*]
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Scenario 4
[*]
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SAB No. 108 disclosure:
Revisions to previously reported financial information
Common stock valuation
In connection with the preparation of the financial statements necessary for the filing of the Company's initial public offering, the Company reassessed the fair value of its common stock at option grant dates from January 2005 through September 30, 2006. The Company engaged an independent valuation firm to perform a retrospective analysis to determine the fair value of the common stock as of February 13, 2006, utilizing an income approach. Subsequently, the Company reassessed the valuation of common stock related to all other stock option grant dates utilizing a market-based approach.
The reassessed values at each of the option grant dates compared to the originally determined values are as follows:
| Grants to Employees and Directors | ||||||
|---|---|---|---|---|---|---|
| Grant Date | Options Granted | Implied Fair Value ($) | Revised Implied Fair Value ($) | |||
| 1/19/2005 | 16,275 | 3.89 | 4.16 | |||
| 4/20/2005 | 9,750 | 6.55 | 7.80 | |||
| 7/26/2005 | 35,000 | 9.38 | 8.24 | |||
| 10/12/2005 | 8,200 | 11.66 | 8.56 | |||
| 2/7/2006 | 160,721 | 15.11 | 15.20 | |||
| 2/10/2006 | 353,747 | 15.20 | 15.20 | |||
The Company also revised its valuation of common stock warrants issued in connection with the Series D mandatorily redeemable convertible preferred stock in July 2005.
The revised values of the common stock resulted in a difference from the amounts previously reported in the financial statements for the year ended December 31, 2005, the three month period ended March 31, 2006 and the six month period ended June 30, 2006, respectively, for stock-based related charges.
The financial statements for the nine month period ended September 30, 2006 includes adjustments to reflect the revised values and differences computed for the year ended December 31, 2005, the three month period ended March 31, 2006 and the three month period ended June 30, 2006.
In addition, the Company will revise the previously issued first and second quarter 2006 financial statements when it issues the first and second quarter 2007 financial statements to reflect the impact associated with the revised common stock values in the correct periods.
The aggregate effect of the revision for the three month period ending March 31, 2006 is to decrease previously reported net loss by $0.7 million, consisting of $0.3 million representing an out of period adjustment related to the differences computed for 2005 and $0.4 million related to differences computed for the three month period ending March 31, 2006. The aggregate effect of the revision for the six month period ended June 30, 2006 is to decrease previously reported net loss by $2.0 million, which includes the impact of differences computed for the three month period ending June 30, 2006 of $1.3 million, and out of period adjustments related to the year ending December 31, 2005 and the three month period ending March 31, 2006 of $0.7 million. The revisions will not impact net cash flows from operations previously reported.
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Additionally, the nine month period ended September 30, 2006 includes a balance sheet adjustment to reduce mandatorily redeemable convertible preferred stock by $0.2 million as a result of the revised values of common stock noted above. The adjustment is for the allocation of the common stock warrants issued in connection with the Series D mandatorily redeemable convertible preferred stock financing.
The following table presents certain unaudited quarterly and six month financial information as previously reported and as will be reflected in the revised financial statements when reported in 2007 compared to the corresponding period in 2006.
(in $000s, except per share data)
| | March 31, 2006 | June 30, 2006 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance Sheet | |||||||||||||||||||
| (As revised) | (As reported) | Difference | (As revised) | (As reported) | Difference | ||||||||||||||
| Other long term liabilities | $ | 151 | $ | 127 | $ | 24 | $ | 95 | $ | 106 | $ | (11 | ) | ||||||
| Redeemable convertible preferred stock | $ | 179,205 | $ | 178,992 | $ | 213 | $ | 156,321 | $ | 156,120 | $ | 201 | |||||||
| Common stock | $ | 0 | $ | 0 | $ | 0 | $ | 1 | $ | 1 | $ | 0 | |||||||
| Additional paid-in capital | $ | 8,370 | $ | 9,347 | $ | (977 | ) | $ | 33,238 | $ | 35,445 | $ | (2,207 | ) | |||||
| Deferred stock-based compensation | $ | (348 | ) | $ | (347 | ) | $ | (1 | ) | $ | (294 | ) | $ | (351 | ) | $ | 57 | ||
| Deficit accumulated during development stage | $ | (129,865 | ) | $ | (130,607 | ) | $ | 742 | $ | (158,562 | ) | $ | (160,524 | ) | $ | 1,962 | |||
Three Months Ended March 31, 2006 | Six months Ended June 30, 2006 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Statements of Operations | |||||||||||||||||||
| (As revised) | (As reported) | Difference | (As revised) | (As reported) | Difference | ||||||||||||||
| Total operating expenses | $ | 10,072 | $ | 10,837 | $ | (765 | ) | $ | 39,770 | $ | 41,721 | $ | (1,951 | ) | |||||
| Net loss | $ | (9,404 | ) | $ | (10,146 | ) | $ | 742 | $ | (38,101 | ) | $ | (40,063 | ) | $ | 1,962 | |||
| Accretion of madatorily redeemable convertible preferred stock | $ | (192 | ) | $ | (226 | ) | $ | 34 | $ | (408 | ) | $ | (454 | ) | $ | 46 | |||
| Net loss attributable to common stockholders | $ | (9,596 | ) | $ | (10,372 | ) | $ | 776 | $ | (38,509 | ) | $ | (40,517 | ) | $ | 2,008 | |||
| Net loss per common share: basic and diluted | $ | (28.43 | ) | $ | (30.72 | ) | $ | 2.29 | $ | (50.12 | ) | $ | (52.73 | ) | $ | 2.61 | |||
[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO 17 C.F.R. ! 200.83.
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