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results will not be negatively affected by CPI’s ongoing operations. The Company has no obligation to fund future operating losses nor has any guarantees on any of CPI’s obligations. There is no material difference between the Company’s carrying value for CPI and underlying equity in CPI’s net assets. There is no quoted market price for CPI’s net assets. There is no quoted market price for CPI’s shares.
Royalty Agreement
The Company has entered into an agreement with Dr. Stegmann, one of its directors, Co-President and the Company’s Chief Medical Officer, whereby the Company will pay Dr. Stegmann a royalty of one percent (1%) of the Company’s net revenue (as defined) from commercial sales of all inventions relating to growth factors in exchange for rights granted to the Company to utilize the results of Dr. Stegmann’s German clinical trials. This agreement terminates on December 31, 2013. The Company has made no payments to Dr. Stegmann under this agreement.
Asia Exclusive Patent License and Distribution Agreement
On December 15, 2000, the Company entered into an agreement, which has been superseded by a new exclusive license agreement dated February 20, 2007, with Korea Biotechnology Development Co., Ltd. (“KBDC”) to commercialize its future products. The Company transferred to KBDC the rights to market its products for 99 years in all of the Republic of Korea, China, and Taiwan. The Company did this by exclusively licensing its patents to KBDC in Korea, China and Taiwan in the field of: any angiogenic or wound healing compositions and methods of use for which the Company has received marketing approval in the United States, Europe or Japan (including in particular, but without limitation, all FGF species, fragments, derivatives, and analogs thereof), and methods of making the approved angiogenic or wound healing compositions, including any nucleic acid sequences encoding said compositions and any vectors and/or host cells comprising said nucleic acid sequences. The agreement further provides that any improvements, in the form of modifications to methods, processes, compositions or products within the license field, are the property of the Company, but shall be within the license granted. The parties shall inform each other in writing of any such improvements.
In exchange, KBDC arranged for the subscription for 8,750,000 of the Company’s shares of Common Stock for $3,602,000 by Cardio Korea Co. Ltd. KBDC agreed to fund all of the regulatory approval process in the Republic of Korea for any of the Company’s products.
In addition, KBDC agreed to pay a royalty of ten percent (10%) of net revenues to the Company. The royalties will be paid for the life of the joint Patent Ownership Agreement, then nine percent (9%) thereafter. The agreement contemplates the expiration or abandonment of the licensed rights, at which point the royalty paid by KBDC is adjusted. Either party may terminate the agreement for material breach that is uncured 30 days after receipt of written notice.
Daniel C. Montano, the Company’s chairman, owns seventeen percent (17%) of KBDC and is a former member of the KBDC Board of Directors.
Other Related Party Transactions
During the years ended December 31, 2005, 2006 and 2007 and the period from March 11, 1998 (inception) to December 31, 2007, the Company paid Daniel C. Montano, Chairman of the Board, Co-President and Chief Executive Officer, consulting fees in the amount of $0, $0, $0 and $200,000, respectively.
During the years ended December 31, 2005, 2006 and 2007 and the period from March 11, 1998 (inception) to December 31, 2007, the Company paid Daniel C. Montano, Chairman of the Board, Co-President and Chief Executive Officer, for employment services in the amount of $431,538, $480,000, $483,062 and $2,299,210 respectively.
During the years ended December 31, 2005, 2006 and 2007, and the period from March 11, 1998 (inception) to December 31, 2007, the Company paid Vizier Management Company, Inc. controlled by Daniel C. Montano, Chairman of the Board, Co-President and Chief Executive Officer, consulting fees in the amount of $0, $0, $0 and $116,000, respectively.
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The Company paid commissions to GHL Financial Services Ltd. (“GHL”), in which Grant Gordon, a director of the Company, is a principal and owns 6.6% of the Company, for the overseas sale of the Company’s convertible notes payable and Preferred Stock. During the years ended December 31, 2005, 2006, 2007 and the period from March 11, 1998 (inception) to December 31, 2007, the Company paid GHL $15,500, $40,000 $165,000 and $2,390,255, respectively.
The Company paid consulting fees to Dr. Thomas Stegmann M.D., the Company’s co-founder and Co-President, to assist in the development process of its products. During the years ended December 31, 2005, 2006, 2007 and the period from March 11, 1998 (inception) to December 31, 2007, the Company paid Dr. Stegmann $587,300, $500,000, $500,730 and $1,990,030, respectively.
During the years ended December 31, 2005, 2006 and 2007 and the period from March 11, 1998 (inception) to December 31, 2007, the Company paid Dr. Wolfgang Priemer, the Company’s co-founder, to assist in the development process of its products. The Company paid Dr. Priemer $55,500, $80,000, $80,000 and $361,555, respectively.
Daniel C. Montano Guaranties
On March 20, 2006, Daniel C. Montano, the Company’s Chairman, Co-President and CEO, entered into a Guaranty Agreement whereby he guaranteed all of the Company’s obligations resulting from the sale on March 20, 2006 of $20,000,000 of senior secured notes and warrants. The guaranty remains in effect the first date on which the Company receives revenue from the sale of drugs after the FDA approves such drugs, provided that on such date the Company is not in default of any provisions of the obligations or triggering events contained in the agreements for the senior secured notes and warrants and such default is not continuing. However, the guaranty will terminate upon the payment in full of the notes including conversion of the notes into the Company’s common stock.
After the Company’s obligations contained in the agreements for the senior secured notes and warrants have been paid in full, if Daniel C. Montano was required to make any payments pursuant to this guaranty prior to the payment in full of the Company’s obligations, the Company will reimburse Daniel C. Montano for any such payments plus simple interest at 7% per annum from the date of the advance by Daniel C. Montano to the date reimbursed by the Company.
Daniel C. Montano owes a fiduciary duty of loyalty to the Company. However, there is potential for conflicts of interest between Daniel C. Montano’s personal interests and the Company’s whether Daniel C. Montano’s guaranty is called upon or not. No assurance can be given that material conflicts will not arise that could be detrimental to the Company’s operations and financial prospects.
On March 18, 2008, the Company began a Private Placement of debt and warrants in an effort to raise up to $15,000,000 in promissory notes that mature within 18 months from the date of issuance. The notes are unsecured, guaranteed by the Company’s CEO, Daniel C. Montano and serve as consideration for the issuance of warrants issued in conjunction with the notes. As of April 1, 2008, the Company has received gross proceeds of $200,000.
Item 14. Principal Accountant Fees and Services
The following table presents fees for professional services rendered by Singer Lewak Greenbaum & Goldstein LLP for the audit of the Company’s financial statements for the years ended December 31, 2007 and 2006, and fees for other services rendered by such firm during those periods.
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 | | | | |
| | 2007 | | 2006 |
| Audit Fees(1) | | $ | 705,315 | (5) | | $ | 485,207 | |
| Audit-Related Fees(2) | | $ | 18,318 | | | $ | 59,363 | |
| Tax Fees(3) | | $ | 9,610 | | | $ | 5,591 | |
| All Other Fees(4) | | $ | 44,983 | | | $ | 30,328 | |
| Total | | $ | 778,226 | | | $ | 580,489 | |
| (1) | Audit fees represent fees for professional services provided in connection with the audit of the Company’s financial statements and audit services provided in connection with other statutory or regulatory filings. |
| (2) | Audit-related fees consist of services related to SEC filings. |
| (3) | Tax fees consist of fees for professional services rendered for assistance with federal, state, local and international tax compliance and planning. |
| (4) | All other fees consist of miscellaneous offices expenses, for example, copying and postage. |
| (5) | This includes $156,053 in one-time fees for services in conjunction with restatement of financial statements in May 2007, $139,590 for review of the three quarterly reports on Form 10-Q and $409,672 for the annual audit in conjunction with the Annual Report on Form 10-K and AIM listing efforts all of which occurred in 2007. |
All of the foregoing fees, which were incurred throughout 2007 were approved or ratified by the Company’s Audit Committee.
PART IV
Item 15. Exhibits and Financial Statements and Schedules
The following documents are filed as part of this report:
1. Financial statements:
Report of Independent Registered Public Accounting Firm
Balance Sheets for the years ended December 31, 2006 and 2007
Statements of Operations for the years ended December 31, 2005, 2006 and 2007
Statements of Stockholders’ Equity (Deficit) for the period from March 11, 1998 (inception) to December 31, 2007
Statements of Cash Flows for the years ended December 31, 2005, 2006 and 2007
Notes to the Financial Statements
2. Financial statement schedules required to be filed by Item 8 of this Form:
Not applicable.
All other schedules are omitted as the required matter is not present, the amounts are not significant or the information is shown in the Financial Statements or the notes thereto.
3. Exhibits:
The exhibits listed on the accompanying index to exhibits immediately follow the financial statements are filed as part of, or hereby incorporated by reference into, this Form 10-K.
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
(Formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)
(A Development Stage Company)
As of December 31, 2007 and 2006 and
For the Years Ended December 31, 2005, 2006 and 2007 and for the Period
From March 11, 1998 (Inception) to December 31, 2007
CONTENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
CardioVascular BioTherapeutics, Inc.
(formerly Cardiovascular Genetic Engineering, Inc.)
(A Development Stage Company)
Las Vegas, Nevada
We have audited the balance sheets of CardioVascular BioTherapeutics, Inc. (formerly Cardiovascular Genetic Engineering, Inc.) (a development stage company) (the “Company”) as of December 31, 2007 and 2006, and the related statements of operations, stockholders’ deficit and cash flows for each of the three years in the period ended December 31, 2007, and the period from March 11, 1998 (date of inception) to December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CardioVascular BioTherapeutics, Inc. (formerly Cardiovascular Genetic Engineering, Inc.) (a development stage company) as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, and the period from March 11, 1998 (date of inception) to December 31, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 4 to the financial statements, the Company has adopted the provisions of Statement Financial Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — as Interpretation of FASB Statement No. 109” on January 1, 2007.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations, and its total liabilities exceed its total assets. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We were not engaged to examine management’s assertion about the effectiveness of CardioVascular BioTherapeutics, Inc.’s internal control over financial reporting as of December 31, 2007 included in the accompanying Management’s Report on Assessment of Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.
Singer Lewak Greenbaum & Goldstein LLP
Los Angeles, California
May 5, 2008
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
(Formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)
(A Development Stage Company)
BALANCE SHEETS
December 31, 2006 and 2007
| | | | |
| | For the Year Ended December 31, |
| | | 2006 | | 2007 |
| | | (Dollars in Thousands
Except Share Amounts) |
ASSETS
| | | | | | | | |
Current Assets:
| | | | | | | | |
| Cash and cash equivalents | | $ | 8,503 | | | $ | 310 | |
| Restricted cash | | | 172 | | | | 60 | |
| Due from an affiliate | | | 38 | | | | 139 | |
| Prepaid and Other current assets (including related party amounts of $396 and $0, as of December 31, 2006 and 2007) | | | 1,266 | | | | 543 | |
| Total Current Assets | | $ | 9,979 | | | $ | 1,052 | |
| Property and equipment, net of accumulated depreciation ($164 in 2006, $448 in 2007 respectively) | | | 887 | | | | 662 | |
| Deferred financing costs, net of amortization ($403 in 2006, $1,503 in 2007) | | | 1,481 | | | | 50 | |
| Other assets | | | 80 | | | | 81 | |
| Total Assets | | $ | 12,427 | | | $ | 1,845 | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT
| | | | | | | | |
Current Liabilities:
| | | | | | | | |
| Accrued interest payable | | $ | 557 | | | $ | 129 | |
| Due to affiliates | | | 111 | | | | 24 | |
Accounts payable (Including $0 and $373 due to officers, directors,
and related parties at December 31, 2006 and 2007.) | | | 861 | | | | 3,625 | |
| Short term loans, net of debt discount of $0 and $432, as of December 31, 2006 and 2007 | | | — | | | | 1,068 | |
| Short term loans from officers | | | — | | | | 160 | |
| Accrued payroll and payroll taxes (includes $15, and $238 due to officers, as of December 31, 2006 and 2007) | | | 223 | | | | 519 | |
| Deferred rent | | | 158 | | | | 215 | |
| Total current liabilities | | $ | 1,910 | | | $ | 5,740 | |
Derivative Liabilities
| | | | | | | | |
| Convertible notes payable and embedded derivatives | | | 11,635 | | | | 4,205 | |
| Warrant derivatives | | | 366 | | | | 4,118 | |
| Option derivatives | | | 1,406 | | | | 867 | |
| Total Liabilities | | $ | 15,317 | | | $ | 14,930 | |
Commitments and contingencies
| | | | | | | | |
STOCKHOLDERS’ DEFICIT
| | | | | | | | |
Convertible preferred stock, $0.001 par value; 10,000,000 shares
authorized; 52,850 shares issued; and no shares outstanding at December 31, 2006 and December 31, 2007, respectively | | | — | | | | — | |
| Common stock, $0.001 par value, 400,000 shares authorized; 125,458 and 149,920 shares issued and outstanding at December 31, 2006 and December 31, 2007, respectively | | | 125 | | | | 150 | |
| Additional paid in capital | | | 31,713 | | | | 57,499 | |
| Deficit accumulated during the development stage | | | (34,728 | ) | | | (70,734 | ) |
| Total stockholders’ deficit | | | (2,890 | ) | | | (13,085 | ) |
| Total Liabilities and Stockholders’ Deficit | | $ | 12,427 | | | $ | 1,845 | |
The accompanying notes are an integral part of these financial statements
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
(Formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2005, 2006 and 2007
And for the Period from March 11, 1998 (Inception) to December 31, 2007
| | | | | | | | |
| |
For the Year Ended December 31, | | For the Period
from
March 11, 1998
(Inception) to
December 31, 2007 |
| | | 2005 | | 2006 | | 2007 |
| | | (Dollars in Thousands, Except per Share Data) |
Operating expenses
| | | | | | | | | | | | | | | | |
| Research and development (A) | | $ | 3,091 | | | $ | 7,135 | | | $ | 6,191 | | | $ | 22,804 | |
| Selling, general and administrative (B) | | | 7,979 | | | | 11,734 | | | | 14,544 | | | | 40,807 | |
| Total operating expenses | | | 11,070 | | | | 18,869 | | | | 20,735 | | | | 63,611 | |
| Operating loss | | | (11,070 | ) | | | (18,869 | ) | | | (20,735 | ) | | | (63,611 | ) |
Other income (expenses)
| | | | | | | | | | | | | | | | |
| Interest income | | | 298 | | | | 695 | | | | 141 | | | | 1,196 | |
| Interest expense | | | (1,594 | ) | | | (5,961 | ) | | | (8,201 | ) | | | (19,652 | ) |
| Other income (expenses) | | | — | | | | — | | | | — | | | | (5 | ) |
| Adjustment to Fair Value of Derivatives | | | — | | | | 8,174 | | | | (8,009 | ) | | | 165 | |
Adjustment to Fair Value of Derivatives – Warrant and Option
Derivatives | | | — | | | | 10,390 | | | | 798 | | | | 11,188 | |
| Equity in loss of unconsolidated investee | | | — | | | | — | | | | — | | | | (15 | ) |
| Net other income (expenses) | | | (1,296 | ) | | | 13,298 | | | | (15,271 | ) | | | (7,123 | ) |
| Net loss before provision for income taxes | | | (12,366 | ) | | | (5,571 | ) | | | (36,006 | ) | | | (70,734 | ) |
| Provision for income taxes | | | — | | | | — | | | | | | | | | |
| Net loss | | $ | (12,366 | ) | | $ | (5,571 | ) | | $ | (36,006 | ) | | $ | (70,734 | ) |
Loss per share
| | | | | | | | | | | | | | | | |
| Basic (loss) per share | | | (0.10 | ) | | | (0.04 | ) | | | (0.27 | ) | | | | |
| Diluted (loss) per share | | | (0.10 | ) | | | (0.04 | ) | | | (0.27 | ) | | | | |
Shares used to calculate loss per share
| | | | | | | | | | | | | | | | |
| Basic (loss) per share | | | 120,374 | | | | 124,181 | | | | 134,070 | | | | | |
| Diluted (loss) per share | | | 120,374 | | | | 124,181 | | | | 134,070 | | | | | |
| (A) Research and development with related parties (Notes 3 and 12) | | | 1,221 | | | | 2,975 | | | | 2,152 | | | | 8,250 | |
| (B) General and Administrative with related parties (Notes 3 and 12) | | | 731 | | | | 1,883 | | | | 685 | | | | 7,966 | |
The accompanying notes are an integral part of these financial statements
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
(Formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
For the Period from March 11, 1998 (Inception) to December 31, 2007
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Date | | Price per
Equity
Unit | | Preferred Stock
Series A,
Convertible | | Common Stock | | Committed
Stock | | Additional
Paid-In Capital | | Accumulated
Deficit | | Total |
| | | Shares | | Amount | | Shares | | Amount |
| | | (In Thousands Except Price per Equity Unit Data) |
| Balance, March 11, 1998 (date of inception) | | | | | | | | | | | — | | | $ | — | | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Issuance of common stock to founders | | | (1 | ) | | $ | 0.001 | | | | | | | | | | | | 93,050 | | | | 93 | | | | — | | | | (92 | ) | | | | | | | 1 | |
| Issuance of common stock for cash | | | 7/9/1998 | | | | 0.10 | | | | | | | | | | | | 300 | | | | — | | | | | | | | 30 | | | | | | | | 30 | |
| Issuance of preferred stock for cash | | | (1 | ) | | | 9.85 | | | | 53 | | | | — | | | | | | | | | | | | | | | | 520 | | | | | | | | 520 | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (568 | ) | | | (568 | ) |
| Balance, December 31, 1998 | | | | | | | | | | | 53 | | | | — | | | | 93,350 | | | | 93 | | | | — | | | | 458 | | | | (568 | ) | | | (17 | ) |
| Issuance of common stock to founders | | | (2 | ) | | $ | 0.001 | | | | | | | | | | | | 4,580 | | | | 5 | | | | — | | | | (5 | ) | | | | | | | — | |
| Issuance of common stock for cash | | | 6/25/1999 | | | | 0.30 | | | | | | | | | | | | 67 | | | | — | | | | | | | | 20 | | | | | | | | 20 | |
| Issuance of common stock for cash | | | 6/25/1999 | | | | 0.30 | | | | | | | | | | | | 100 | | | | — | | | | | | | | 30 | | | | | | | | 30 | |
| Issuance of common stock for cash | | | 10/5/1999 | | | | 0.30 | | | | | | | | | | | | 340 | | | | — | | | | | | | | 102 | | | | | | | | 102 | |
| Issuance of stock options for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 82 | | | | | | | | 82 | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (655 | ) | | | (655 | ) |
| Balance, December 31, 1999 | | | | | | | | | | | 53 | | | | — | | | | 98,437 | | | | 98 | | | | — | | | | 687 | | | | (1,223 | ) | | | (438 | ) |
| Issuance of common stock to founders | | | (3 | ) | | $ | 0.001 | | | | | | | | | | | | 2,120 | | | | 2 | | | | — | | | | (2 | ) | | | | | | | — | |
| Issuance of common stock for cash | | | 12/21/2000 | | | | 0.4117 | | | | | | | | | | | | 8,750 | | | | 9 | | | | | | | | 3,593 | | | | | | | | 3,602 | |
| Issuance of common stock for conversion of convertible preferred stock | | | (4 | ) | | | 0.10 | | | | (2 ) | | | | — | | | | 150 | | | | — | | | | | | | | — | | | | | | | | — | |
| Issuance of common stock for services | | | (5 | ) | | | | | | | | | | | | | | | 583 | | | | 1 | | | | | | | | (1 | ) | | | | | | | — | |
| Issuance of stock options for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 74 | | | | | | | | 74 | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (2,233 | ) | | | (2,233 | ) |
| Balance, December 31, 2000 | | | | | | | | | | | 51 | | | | — | | | | 110,040 | | | | 110 | | | | — | | | | 4,351 | | | | (3,456 | ) | | | 1,005 | |
| Issuance of common stock for cash | | | 8/10/2001 | | | | 0.80 | | | | | | | | | | | | 150 | | | | — | | | | — | | | | 120 | | | | — | | | | 120 | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,665 | ) | | | (1,665 ) | |
| Balance, December 31, 2001 | | | | | | | | | | | 51 | | | | — | | | | 110,190 | | | | 110 | | | | — | | | | 4,471 | | | | (5,121 | ) | | | (540 ) | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,328 | ) | | | (1,328 ) | |
| Balance, December 31, 2002 | | | | | | | | | | | 51 | | | | — | | | | 110,190 | | | | 110 | | | | — | | | | 4,471 | | | | (6,449 ) | | | | (1,868 ) | |
| Issuance of stock options for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 47 | | | | | | | | 47 | |
| Issuance of warrants for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 120 | | | | | | | | 120 | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (2,329 | ) | | | (2,329 ) | |
| Balance, December 31, 2003 | | | | | | | | | | | 51 | | | | — | | | | 110,190 | | | | 110 | | | | — | | | | 4,638 | | | | (8,778 ) | | | | (4,030 ) | |
| Issuance of common stock for conversion of convertible notes | | | (6 | ) | | | | | | | | | | | | | | | 1,650 | | | | 2 | | | | | | | | 4,529 | | | | | | | | 4,531 | |
| Conversion of convertible preferred stock | | | (7 | ) | | | | | | | (28 | ) | | | — | | | | 810 | | | | 1 | | | | 2 | | | | (3 | ) | | | | | | | — | |
Interest on benefit
conversion feature | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,050 | | | | | | | | 2,050 | |
| Issuance of stock options for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 79 | | | | | | | | 79 | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (8,013 | ) | | | (8,013 | ) |
| Balance, December 31, 2004 | | | | | | | | | | | 23 | | | $ | — | | | | 112,650 | | | | 113 | | | | 2 | | | $ | 11,293 | | | $ | (16,791 | ) | | $ | (5,383) | |
The accompanying notes are an integral part of these financial statements
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| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Date | | Price per
Equity
Unit | | Preferred Stock
Series A,
Convertible | | Common Stock | | Committed
Stock | | Additional
Paid-In Capital | | Accumulated
Deficit | | Total |
| | | Shares | | Amount | | Shares | | Amount |
| | | (In Thousands Except Price per Equity Unit Data) |
| Issuance of common stock for cash | | | (8 | ) | | | | | | | | | | | | | | | 1,725 | | | | 2 | | | | | | | | 14,709 | | | | | | | | 14,711 | |
| Conversion of convertible notes | | | (6 | ) | | | | | | | | | | | | | | | 4,228 | | | | 4 | | | | | | | | 10,327 | | | | | | | | 10,331 | |
| Conversion of convertible preferred stock | | | (7 | ) | | | | | | | (23 | ) | | | — | | | | 4,325 | | | | 4 | | | | (2 | ) | | | (2 | ) | | | | | | | — | |
| Exercise of options | | | (10 | ) | | | | | | | | | | | | | | | 123 | | | | — | | | | | | | | 83 | | | | | | | | 83 | |
| Issuance of warrant for cash | | | (9 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | | | | | | — | |
| Issuance of stock options for services | | | (11 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,812 | | | | | | | | 1,812 | |
| Warrants exercised | | | (12 | ) | | | | | | | | | | | | | | | 848 | | | | 1 | | | | | | | | (1 | ) | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (12,366 | ) | | | (12,366 | ) |
| Balance, December 31, 2005 | | | | | | | | | | | — | | | $ | — | | | | 123,899 | | | $ | 124 | | | | — | | | $ | 38,221 | | | $ | (29,157 | ) | | $ | 9,188 | |
| Warrants exercised | | | (12 | ) | | | | | | | — | | | | — | | | | 89 | | | | — | | | | | | | | — | | | | | | | | — | |
| Exercise of options | | | (10 | ) | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Options and warrants derivative | | | (14 | ) | | | | | | | — | | | | — | | | | | | | | | | | | | | | | (12,278 | ) | | | — | | | | (12,278 | ) |
| Reclassification of option derivative for options exercise | | | (16 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,318 | | | | | | | | 1,318 | |
Reclassification of
conversion and interest conversion derivative on note conversion | | | (17 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,332 | | | | | | | | 1,332 | |
Reclassification of
Interest conversion derivative on actual interest paid | | | (18 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | 482 | | | | | | | | 482 | |
| Exercise of options | | | (10 | ) | | | | | | | | | | | | | | | 465 | | | | — | | | | | | | | 230 | | | | | | | | 230 | |
| Issuance of stock for services | | | (13 | ) | | | | | | | | | | | | | | | — | | | | — | | | | | | | | — | | | | | | | | — | |
| Conversion of convertible notes | | | (15 | ) | | | | | | | | | | | | | | | 987 | | | | 1 | | | | — | | | | 1,896 | | | | | | | | 1,897 | |
| Stock based compensation | | | (11 | ) | | | | | | | — | | | | — | | | | | | | | | | | | | | | | 479 | | | | | | | | 479 | |
| Issuance of common stock for interest payments | | | (21 | ) | | | | | | | | | | | | | | | 18 | | | | — | | | | | | | | 33 | | | | | | | | 33 | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (5,571 | ) | | | (5,571 | ) |
| Balance, December 31, 2006 | | | | | | | | | | | — | | | $ | — | | | | 125,458 | | | $ | 125 | | | | — | | | $ | 31,713 | | | $ | (34,728 | ) | | $ | (2,890 | ) |
| Exercise of options | | | (10 | ) | | | | | | | — | | | | — | | | | 440 | | | | 1 | | | | — | | | | 131 | | | | — | | | | 132 | |
| Stock based compensation | | | (11 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | 574 | | | | | | | | 574 | |
| Options and warrants derivative | | | (14 | ) | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (279 | ) | | | — | | | | (279 | ) |
| Conversion of convertible notes | | | (15 | ) | | | | | | | | | | | | | | | 19,151 | | | | 19 | | | | — | | | | 14,203 | | | | | | | | 14,222 | |
Reclassification of
conversion and interest conversion derivative on note conversion | | | (17 | ) | | | | | | | | | | | | | | | — | | | | — | | | | — | | | | 585 | | | | — | | | | 585 | |
Reclassification of
Interest conversion derivative on actual interest paid | | | (18 | ) | | | | | | | | | | | | | | | — | | | | — | | | | — | | | | 6,455 | | | | — | | | | 6,455 | |
| Issuance of stock for services as independent directors | | | (19 | ) | | | | | | | | | | | | | | | 48 | | | | — | | | | — | | | | 48 | | | | — | | | | 48 | |
| Sale of common shares | | | (20 | ) | | | | | | | | | | | | | | | 3,650 | | | | 4 | | | | — | | | | 3,256 | | | | — | | | | 3,260 | |
| Issuance of common stock for interest payments | | | (21 | ) | | | | | | | — | | | | — | | | | 973 | | | | 1 | | | | — | | | | 607 | | | | — | | | | 608 | |
| Issuance of warrant for cash | | | (22 | ) | | | | | | | — | | | | — | | | | | | | | | | | | — | | | | 6 | | | | — | | | | 6 | |
| Issuance of common shares for services | | | (23 | ) | | | | | | | | | | | | | | | 200 | | | | | | | | — | | | | 200 | | | | — | | | | 200 | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (36,006 | ) | | | (36,006 | ) |
| Balance, December 31, 2007 | | | | | | | | | | | — | | | $ | — | | | | 149,920 | | | $ | 150 | | | | — | | | $ | 57,499 | | | $ | (70,734 | ) | | $ | (13,085 | ) |
| (1) | Multiple transactions valued at the per share price in the year ended December 31, 1998 |
| (2) | Multiple transactions valued at the per share price in the year ended December 31, 1999 |
| (3) | Multiple transactions valued at the per share price in the year ended December 31, 2000 |
| (4) | Preferred stock converted to common stock |
The accompanying notes are an integral part of these financial statements
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| (6) | Multiple transactions at $2.00 and $4.00 in the year ended December 31, 2004 and 2005 |
| (7) | Multiple transactions at 100:1 conversion rate in the year ended December 31, 2004 and 2005 |
| (8) | Public offering of 1,725,000 common shares at $10.00 per share |
| (9) | Underwriters warrants sold with the public offering |
| (10) | Multiple employee option exercises (exercise price range $0.30-$2.00) |
| (11) | Stock options and warrants issued for services. |
| (12) | Warrants exercised (exercise price $0.80) |
| (13) | Issuance of 20 commemorative shares to directors and executives. |
| (14) | Reclassification of option and warrant derivatives from equity to liability in accordance with EITF 00-19. |
| (15) | Conversion of senior secured convertible notes and interest related to those notes at various prices. During the years ended December 31, 2005, 2006 and 2007 in addition to the period from March 11, 1998 (inception) to December 31, 2007, $0, $1,897,514, $14,222,486 and $16,120,000 of senior secured convertible notes payable were converted into 0, 987,219, 19,150,903 and 20,138,122 shares of uncommitted common stock and also $0, $103,161, $0 and $103,161 of senior secured convertible notes payable were converted into 0, 74,518, 0 and 74,518 shares of committed common stock, respectively. During the year ended December 31, 2006 and 2007, $33,028 and $607,811 of interest on senior secured convertible notes were paid with common stock. |
| (16) | Reclassification of option derivative from liability to equity for options exercised |
| (17) | Reclassification of interest conversion derivative from liability to equity on interest paid in cash |
| (18) | Reclassification of adjustment to embedded derivatives, conversion and interest conversion feature, from liability to equity for conversion of notes and interest related to those notes to common stock |
| (19) | Issuance of stock for services as independent directors |
| (20) | Sale of common stock at $1.00 each |
| (21) | Issue of common stock for interest payments on senior secured notes |
| (22) | Issue of warrants for cash |
| (23) | Issuance of shares to a vendor as per contract terms. |
The accompanying notes are an integral part of these financial statements
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TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
(Formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)
(A Development Stage Company)
STATEMENTS OF CASH FLOW
For the Years Ended December 31, 2005, 2006, and 2007
and for the Period from March 11, 1998 (Inception) to December 31, 2007
| | | | | | | | |
| |
For the Years Ended December 31, | | For the Period
from
March 11, 1998
(Inception) to
December 31,
2007 |
| | | 2005 | | 2006 | | 2007 |
| | | (Dollars in Thousands) |
Cash flows from operating activities:
| | | | | | | | | | | | | | | | |
| Net loss | | $ | (12,366 | ) | | $ | (5,571 | ) | | $ | (36,006 | ) | | $ | (70,734 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities:(a)
| | | | | | | | | | | | | | | | |
| Depreciation | | | 12 | | | | 150 | | | | 284 | | | | 454 | |
| Termination of financing cost | | | — | | | | — | | | | 466 | | | | 466 | |
| Amortization of beneficial conversion feature | | | 710 | | | | — | | | | — | | | | 2,050 | |
| Amortization of deferred debt financing costs | | | 713 | | | | 403 | | | | 930 | | | | 3,468 | |
| Interest paid in common stock | | | — | | | | 33 | | | | 608 | | | | 641 | |
| Issue of stock options in kind | | | — | | | | — | | | | 200 | | | | 200 | |
| Stock based compensation and other payments | | | 1,812 | | | | 479 | | | | 574 | | | | 3,147 | |
| Stock issued for services rendered | | | — | | | | — | | | | 48 | | | | 48 | |
| Warrants issued for services rendered | | | — | | | | 1,202 | | | | 3,225 | | | | 4,547 | |
| Amortization of discount related to warrants derivatives | | | — | | | | 618 | | | | 794 | | | | 1,412 | |
| Amortization of conversion feature | | | — | | | | 1,617 | | | | 2,804 | | | | 4,422 | |
Amortization of interest on conversion
feature | | | — | | | | 1,284 | | | | 2,226 | | | | 3,511 | |
| Amortization of discount debt in connection with short term notes | | | — | | | | — | | | | 75 | | | | 75 | |
| Adjustment to fair value of derivatives | | | — | | | | (8,174 | ) | | | 8,009 | | | | (165 | ) |
Adjustment to fair value of derivatives – warrant and option
derivatives | | | — | | | | (10,390 | ) | | | (798 | ) | | | (11,188 | ) |
| Equity in loss of unconsolidated investee | | | — | | | | — | | | | — | | | | 15 | |
(Increase) decrease in:
| | | | | | | | | | | | | | | | |
| Due from an affiliate | | | (2 | ) | | | (36 | ) | | | (101 | ) | | | (139 | ) |
| Prepaid and Other current assets (including $396 paid to related party in 2006, none paid in 2007) | | | 30 | | | | (817 | ) | | | 723 | | | | (543 | ) |
| Other assets | | | (21 | ) | | | (53 | ) | | | — | | | | (96 | ) |
(Increase) decrease in:
| | | | | | | | | | | | | | | | |
| Due to an affiliate | | | — | | | | 111 | | | | (87 | ) | | | 24 | |
| Accounts payable | | | (539 | ) | | | 687 | | | | 2,764 | | | | 3,625 | |
| Accrued payroll and payroll taxes | | | 107 | | | | 98 | | | | 296 | | | | 519 | |
| Accrued interest | | | (1,187 | ) | | | 556 | | | | (428 | ) | | | 129 | |
| Deferred rent | | | — | | | | 158 | | | | 57 | | | | 215 | |
| Net cash used in operating activities | | | (10,731 | ) | | | (17,645 | ) | | | (13,337 | ) | | | (53,897 | ) |
Cash flows from investing activities
| | | | | | | | | | | | | | | | |
| Purchase of investment – restricted cash | | | (52 | ) | | | (35 | )�� | | | 112 | | | | (60 | ) |
| Proceeds from sale of restricted cash | | | — | | | | — | | | | — | | | | — | |
| Purchase of property and equipment | | | (181 | ) | | | (837 | ) | | | (60 | ) | | | (1,116 | ) |
Net cash (used in) investing
activities(b) | | | (233 | ) | | | (872 | ) | | | 52 | | | | (1,176 | ) |
Cash flows from financing activities
| | | | | | | | | | | | | | | | |
| Proceeds from sale of preferred stock – Pre IPO | | | — | | | | — | | | | — | | | | 520 | |
| Proceeds from sale of common stock – Pre IPO | | | — | | | | — | | | | — | | | | 3,904 | |
| Proceeds from issuance of notes payable – Pre IPO | | | — | | | | — | | | | — | | | | 14,092 | |
The accompanying notes are an integral part of these financial statements
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| | | | | | | | |
| |
For the Years Ended December 31, | | For the Period
from
March 11, 1998
(Inception) to
December 31,
2007 |
| | | 2005 | | 2006 | | 2007 |
| | | (Dollars in Thousands) |
| Proceeds from notes payable issued under Reg D – Pre IPO | | | — | | | | — | | | | — | | | | 800 | |
| Proceeds from sale of common stock – IPO | | | 15,548 | | | | — | | | | | | | | 15,548 | |
| Proceeds from notes payable issued under Reg D – Post IPO | | | — | | | | 20,000 | | | | — | | | | 20,000 | |
| Proceeds from sale of common shares under Reg S | | | | | | | | | | | 3,650 | | | | 3,650 | |
| Financing costs for Reg S paid in cash | | | — | | | | — | | | | (176 | ) | | | (176 | ) |
| Proceeds from the issuance of warrants | | | | | | | | | | | 6 | | | | 6 | |
| Proceeds from exercise of options and warrants | | | 82 | | | | 230 | | | | 132 | | | | 444 | |
| Proceeds from issuance of short term notes | | | — | | | | — | | | | 1,885 | | | | 1,885 | |
| Payment of short term notes | | | — | | | | — | | | | (225 | ) | | | (225 | ) |
| Payment of financing cost – Pre IPO | | | | | | | (1,884 | ) | | | (180 | ) | | | (4,199 | ) |
| Cash paid for deferred offering costs | | | — | | | | — | | | | | | | | (866 | ) |
| Due to net increase/(decrease) in affiliates | | | (522 | ) | | | — | | | | — | | | | — | |
| Net cash provided by financing activities(c) | | | 15,108 | | | | 18,346 | | | | 5,092 | | | | 55,383 | |
| Increase (decrease) in cash and cash equivalents | | | 4,144 | | | | (171 | ) | | | (8,193 | ) | | | 310 | |
| Cash and cash equivalents beginning of year | | | 4,530 | | | | 8,674 | | | | 8,503 | | | | — | |
| Cash and cash equivalents end of year | | $ | 8,674 | | | $ | 8,503 | | | $ | 310 | | | $ | 310 | |
Supplemental disclosures of cash flow information
| | | | | | | | | | | | | | | | |
| Interest paid | | $ | 1,357 | | | $ | 1,306 | | | $ | 1,185 | | | $ | 3,853 | |
| Income taxes paid | | $ | — | | | $ | — | | | $ | — | | | $ | 6 | |
| (a) | Including amount with related parties of $1,952, $4,858, $2,836, and $16,216, respectively. |
| (b) | Including amount with related parties of $0, $0, $0 and $0, respectively. |
| (c) | Including amount with related parties of $ $(523), $(1,850), $360, and $ (3,626), respectively. |
The accompanying notes are an integral part of these financial statements
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TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
(Formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)
(A Development Stage Company)
STATEMENTS OF CASH FLOW - (continued)
For the Years Ended December 31, 2005, 2006, and 2007
And for the Period from March 11, 1998 (Inception) to December 31, 2007
Supplemental Disclosure of Non-Cash Financing Activities
| (1) | In February 2007, 48,000 shares were issued to the independent directors for their services. |
| (2) | In January 2007, the Company paid in cash the interest on the convertible note. A pro-rata amount of the interest convertibility feature derivative was fair valued using the Black-Scholes Model, resulting in a reclassification of $531,923 from the derivative to paid-in-capital. |
| (3) | In March 2006, 100,000 warrants, with an exercise price of $0.80, were exercised on a cashless basis in exchange for 89,116 shares of common stock. The remaining balance of $3.00 was paid in cash upon exercise of the warrants on a cashless basis. |
| (4) | In May 2006, 20 commemorative shares that had a total fair value of $122 were issued to the founders and the executives. |
| (5) | In December 2002, the Company disposed of fully depreciated assets with value of $6,026. |
| | | | | | | | |
Supplemental Disclosure of Non-Cash
Financing Activities | | For the Year
Ended
December 31, 2005 | | For the Year
Ended
December 31, 2006 | | For the Year
Ended
December 31, 2007 | | For the Period
from
March 11, 1998 to
December 31, 2007 |
| 1) Number of shares of post-split adjusted common stock to founders | | | — | | | | — | | | | — | | | | 99,750,000 | |
| 2) Number of shares of post-split adjusted common stock for services | | | — | | | | — | | | | — | | | | 583,000 | |
| 3) Beneficial conversion feature in connection with issuance of convertible notes payable Series I, II, and IIa | | $ | — | | | $ | — | | | $ | — | | | $ | 2,050,000 | |
4) Number of convertible preferred stock converted to
common stock | | | — | | | | — | | | | — | | | | 52,850 | |
| 5) Convertible preferred stock converted to common stock – See line 4 – (b) | | | — | | | | — | | | | — | | | | 5,285,000 | |
| 6) Convertible notes payable converted to common stock | | $ | — | | | | — | | | $ | — | | | $ | 14,862,200 | |
| 7) Convertible notes payable converted to common stock – See line 6 | | | — | | | | — | | | | — | | | | 5,877,550 | |
| 8) Amount of Senior secured convertible notes payable converted to uncommitted common stock – (a) | | $ | — | | | | 1,929,470 | | | $ | 14,222,486 | | | $ | 16,151,956 | |
| 9) Senior secured convertible notes payable converted to uncommitted common – See line 8 | | | — | | | | 1,004,953 | | | | 19,430,966 | | | | 20,435,919 | |
| 10) Amount of senior secured convertible notes payable converted to committed common | | | — | | | | 100,269 | | | | — | | | | — | |
| 11) Senior secured convertible notes payable converted to committed common – See line 10 | | | — | | | | 74,518 | | | | — | | | | — | |
| 12) Interest on Senior Secured notes paid in common stock | | | — | | | | 33,030 | | | | 607,118 | | | | — | |
| 13) Fair Market Value of Warrants issued in connection with short term notes | | $ | — | | | $ | — | | | $ | 507,000 | | | $ | 507,000 | |
| (a) | In addition, the amount of converted notes was valued using the Black-Scholes Model resulting in $6,454,831 of the embedded derivatives being reclassified from liability to paid in capital. |
| (b) | During the period ended December 31, 2005, 2,000,000 shares of committed common stock relating to the conversion of preferred shares in fiscal 2004 were issued. |
| (6) | In July 2007, 3,650,000 shares of common stock were sold at $1.00 per share. |
| (7) | In December 2007, 200,000 shares of common stock at $1.00 per share were issued to a vendor as per the consulting agreement for their consulting fees. |
The accompanying notes are an integral part of these financial statements
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TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 1. Description of Business
CardioVascular BioTherapeutics, Inc. (formerly CardioVascular Genetic Engineering, Inc.) (“Cardio” or the “Company”) is a development stage biopharmaceutical company focused on developing and marketing protein drug candidates that are designed to be used in the treatment of cardiovascular disease. Cardio was incorporated in Delaware on March 11, 1998 (“Inception”) as CardioVascular Genetic Engineering, Inc. and in February 2004, changed its name to CardioVascular BioTherapeutics, Inc. Since inception, the Company has been engaged in research and development activities associated with bringing its products to market.
Note 2. Management’s Plan
The company requires additional capital in order to continue its operations at the planned level. Here are selected information as of December 31, 2005, December 31, 2006, and December 31, 2007:
| | | | | | |
| | As of |
| | | December 31,
2005 | | December 31,
2006 | | December 31,
2007 |
| | | (In Thousands) |
| Cash and cash equivalent | | | 8,674 | | | | 8,503 | | | | 310 | |
| Restricted cash | | | 137 | | | | 172 | | | | 60 | |
| Stockholders' deficit | | | 9,188 | | | | (2,890 | ) | | | (13,085 | ) |
| Net Loss | | | (12,366 | ) | | | (5,571 | ) | | | (36,006 | ) |
Historically, the Company has successfully obtained external financing through public offerings, private placements of equity and private placements of convertible debt. The Company plans to raise additional capital through a private placement of common stock.
The Company is also taking actions to address both short-term and long-term liquidity in the following ways:
| • | On March 18, 2008, the Company began a Private Placement of debt and warrants in an effort to raise up to $15,000,000 in promissory notes that mature within 18 months from the date of issuance. The notes are unsecured and serve as consideration for the issuance of warrants issued in conjunction with the notes. As of April 1, 2008, the Company has received gross proceeds of $200,000. |
| • | On May 21, 2007, the company entered into an agreement to sell 15,000,000 of the Company’s common stock at a purchase price of $1.00 per share in connection with a Private Placement to the investor and certain other subscribers pursuant to a subscription agreement. As of December 31, 2007, the Company issued 3,650,000 shares and received gross proceeds in the amount of $3,650,000. The agreement, as amended, provides for commissions of 10% of the amount placed in addition to warrants to purchase 3,700,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The investor paid $3,700 for the warrants. The agreement, as amended, expired November 9, 2007. The Company has extended this agreement from November 9, 2007 to January 31, 2008 and, in addition, the Company has received an additional $725,000 subsequent to December 31, 2007. |
| • | Developing additional sources of debt and equity financing to satisfy the Company's current and future operating requirements. |
| • | Pursuing opportunities for licensing of drug indications for co-development, clinical trials, marketing and distribution. |
| • | Pursuing opportunities for partnerships and joint ventures for co-development, clinical trials, marketing and distribution. |
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TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 2. Management’s Plan – (continued)
There can be no assurance that sufficient funds required during the next year or thereafter will be generated from operations or that funds will be available from external sources such as debt or equity financing or other potential sources. The lack of additional capital resulting from the Company's inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on the Company's business. Furthermore, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significant dilutive effect on the Company's existing stockholders.
Note 3. Transactions and Contractual Relationships with Affiliated Entities
The Company is a member of an affiliated group through common management that includes Phage Biotechnology Corporation (“Phage”), Cardio Phage International (“CPI”), Sribna Culya Biopharmaceuticals Inc. (“Sribna”), Proteomics Biopharmaceuticals Technologies Inc. (“Proteomics”), Zhittya Stem Cell Medical Research Company Inc. (“Zhittya”), Qure Biopharmaceuticals, Inc. (“Qure”), known collectively as the “affiliates”. The common management of the Company and Phage spend a sufficient amount of their time with the Company and Phage to satisfy the needs for the Company and Phage, and the remaining balance to other interests.
Daniel C. Montano, John W. Jacobs and Mickael A. Flaa are, respectively, President/Chairman of the Board/Chief Executive Officer, Chief Operating Officer/Chief Scientific Officer, and Chief Financial Officer of both the Company and Phage. Upon completion of the public offering, Mr. Flaa and Dr. Jacobs joined the Company’s Board of Directors. Daniel C. Montano is a principal stockholder in Cardio, Phage, Proteomics, Zhittya, and Qure. Daniel C. Montano, Dr. Thomas J. Stegmann and Dr. Jacobs are members of the Board of Directors of CPI. Mr. Grant Gordon, one of the Company’s current Board members, is a member of the Board of Directors of CPI and is CPI’s President. Mr. Flaa, one of the Company’s current Board members and the Company’s CFO, is CPI’s CFO.
The following are or were the business activities performed by each affiliate:
Active Affiliated Companies:
| • | Phage is a developer of recombinant protein pharmaceuticals; certain of the Company's officers and directors, and the Company control percentages of the common stock of Phage; |
| | | | |
| Ownership in Phage | | Cardio’s
Directors and
Officers % | | Cardio % |
| Percentage of ownership in Phage | | | 29.3 | | | | 4.3 | |
| • | CPI is a distributor for the future products for both Cardio and Phage in locations throughout the world other than United States and Canada, Europe, Japan, and, with respect to the Company only, the Republic of Korea, China, and Taiwan. Cardio and Phage each own approximately 43% of CPI and each has the right to appoint 45% of CPI's directors. |
Inactive Affiliated Companies:
| • | Sribna was developing a treatment for cancer utilizing cancer cell apoptosis (currently inactive); |
| • | Proteomics was developing a non-injection method for medical protein (currently inactive); |
| • | Zhittya was researching adult stem cells (currently inactive); and |
| • | Qure was developing commercial medical applications (currently inactive); Qure owns less than 1% of the Company's common stock. |
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TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 3. Transactions and Contractual Relationships with Affiliated Entities – (continued)
During the period from 1999 through 2001, the Company entered into transactions with these entities affiliated with the Company's CEO (Proteomics, Zhittya, Qure and Sribna). These companies paid expenses on behalf of the Company aggregating $187,600. That amount was repaid without interest. These entities are all currently inactive. Additionally, Qure owns 630,000 shares of common stock of the Company.
In 2006, the Company became a co-sponsor of the Regenerative Medicine Organization, a non-profit educational organization that focuses on providing information and education to the healthcare community and the public about regenerative medicine.
Joint Patent Agreement
The Company entered into a joint patent agreement with Phage as of February 28, 2007 (the “Joint Patent Agreement”). The Company plans to develop and commercialize therapeutic methods related to the induction of angiogenesis or wound healing by administration of Fibroblast Growth Factor (“FGF”); and, Phage plans to develop and commercialize recombinant DNA methods for producing peptides/proteins. The Company and Phage entered into a joint patent ownership and license agreement dated as of August 16, 2004, which was later amended and restated as of May 23, 2006 (the “Joint Ownership Agreement”) pursuant to which Phage granted the Company a 50% ownership interest in certain patents and patents applications listed in the Joint Ownership Agreement, as well as certain future patent rights, and the parties acknowledge that the Company would have exclusive rights within a defined field, while Phage would have exclusive rights outside that field. The Company and Phage superseded the Joint Ownership Agreement with the Joint Patent Agreement to specify those future patents and patent applications that are to be subject to joint ownership and to restate the licenses granted in the Joint Ownership Agreement. The Company and Phage acknowledge that the jointly owned and cross-licensed rights are vital to the parties' respective plans for development and commercialization and further clarified the parties' respective rights and provided for continued access to the necessary rights in the event of insolvency. In consideration for the grant of the exclusive right to the patent rights in the field, the Company agreed to pay a 6% royalty to Phage on the net sales price of finished product to the end customer or distributor. The rights and obligations set forth in the Joint Patent Agreement end upon the later of (a) the expiration of the last to expire jointly owned patent and (b) the abandonment of the last pending jointly owned patent application.
Currently it is the Company's intention to contract with Phage for manufacturing of its drug candidates for the ongoing FDA trials and for further commercial production. However, the Company has the right to and may choose to use a third party for manufacturing and is exploring additional contract manufacturers for its drug candidates.
The Company paid Phage for technical development services and for manufacture of its drug candidates for clinical trials:
| | | | | | | | |
| | | |
For the Year Ended
December 31, | | For the
Period from
March 11,
1998
(Inception) to
December 31,
2007 |
| | | 2005 | | 2006 | | 2007 |
| | | (In Thousands) |
| Technical development services | | $ | 578 | | | $ | 2,373 | | | $ | 1,571 | | | $ | 5,507 | |
Phage has provided the Company with administrative support in Phage's research facility and billed the Company for Phage's actual costs incurred plus the Company's pro-rata share (This is based on costs incurred for the Company as compared to total Phage overhead costs) of Phage's overhead costs.
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TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 3. Transactions and Contractual Relationships with Affiliated Entities – (continued)
| | | | | | | | |
| | | |
For the Year Ended
December 31, | | For the
Period from
March 11,
1998
(Inception) to
December 31,
2007 |
| | | 2005 | | 2006 | | 2007 |
| | | (In Thousands) |
| Administrative support provided by Phage | | $ | 264 | | | $ | 145 | | | $ | 37 | | | $ | 1,197 | |
Distribution Agreement
The Company and Phage have entered into a distribution agreement with CPI, a Bahamian company, to handle future distribution of the Company’s drugs and any other products licensed to CPI when available for commercial distribution. CPI's territory is limited to areas other than the United States, Canada, Europe (defined as the Ural Mountains west including Iceland, excluding Turkey and Cyprus), Japan and with respect to the Company only, the Republic of Korea, the Republic of China and Taiwan. Phage and Cardio each own approximately 43% of the CPI outstanding stock and the companies have the right to each appoint 45% of the CPI board. The Company has made no payments to CPI and does not anticipate making any payments in the near future.
As of December 31, 2003, the Company accounted for its 43% interest in Cardio Phage International (CPI) under the equity method. As of December 31, 2004, the Company's Statement of Operations includes a loss of $15,000, which represents the Company's equity in loss on its investment in CPI. The loss reduced the Company's investment in CPI to zero and, as a consequence, CPI's ongoing operations will not negatively affect the Company's future financial results. The Company has no obligation to fund future operating losses nor has any guarantees on any of CPI's obligations. There is no material difference between the Company's carrying value for CPI and underlying equity in CPI's net assets. There is no quoted market price for CPI's net assets. There is no quoted market price for CPI's shares.
Royalty Agreement
The Company has entered into an agreement with Dr. Thomas J Stegmann, one of the Company’s directors, Co-President and Chief Clinical Officer, whereby the Company will pay Dr. Stegmann a royalty of one percent of the Company’s net revenue (as defined) from commercial sales of the Company’s drugs in exchange for rights granted to the Company to utilize the results of Dr. Stegmann’s German clinical trials. This agreement terminates on December 31, 2013. The Company has made no payments to Dr. Stegmann under this agreement.
Asia Exclusive Patent License and Distribution Agreement
On December 15, 2000, the Company entered into an agreement, which has been superseded by a new exclusive license agreement dated February 20, 2007, with Korea Biotechnology Development Co., Ltd. (“KBDC”) to commercialize its future products. The Company transferred to KBDC the rights to market its products for 99 years in all of the Republic of Korea, China, and Taiwan. The Company did this by exclusively licensing its patents to KBDC in Korea, China and Taiwan in the field of: any angiogenic or wound healing compositions and methods of use for which the Company has received marketing approval in the United States, Europe or Japan (including in particular, but without limitation, all FGF species, fragments, derivatives, and analogs thereof), and methods of making the approved angiogenic or wound healing compositions, including any nucleic acid sequences encoding said compositions and any vectors and/or host cells comprising said nucleic acid sequences. The agreement further provides that any improvements, in the form of modifications to methods, processes, compositions or products within the license field, are the property of the Company, but shall be within the license granted. The parties shall inform each other in writing of any such improvements.
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 3. Transactions and Contractual Relationships with Affiliated Entities – (continued)
In exchange, KBDC arranged for the subscription for 8,750,000 of the Company’s shares of Common Stock for $3,602,000 by Cardio Korea Co. Ltd. KBDC agreed to fund all of the regulatory approval process in the Republic of Korea for any of the Company’s products.
In addition, KBDC agreed to pay a royalty of 10% of net revenues to the Company. The royalties will be paid for the life of the joint Patent Ownership Agreement, then 9% thereafter. The agreement contemplates the expiration or abandonment of the licensed rights, at which point the royalty paid by KBDC is adjusted. Either party may terminate the agreement for material breach that is uncured 30 days after receipt of written notice.
Daniel C. Montano, the Company’s chairman, owns 17% of KBDC and is a former member of the KBDC Board of Directors. KBDC invested $200,000 in each of Sribna, Proteonics and Zhittya and invested $60,000 in CPI.
Guaranty of Rental Agreements for Phage (Now Terminated)
On May 23, 2007, Canta Rana Ranch, L.P., a California limited partnership (“Canta Rana”), released CardioVascular BioTherapeutics, Inc. from its obligations under the Standard Lease Guaranty, executed by the Company on March 15, 2006, in connection with the Standard Industrial Net Lease, dated March 15, 2006, between Phage Biotechnology Corporation, a Delaware Corporation and Canta Rana. The Agreement Exchanging Lease Guaranties, executed by Canta Rana and the Company, among other parties, became effective on May 23, 2007 when the terms therein were satisfied and which effectiveness thereby terminated and superseded the Guaranty, which released the Company of any and all obligations of Phage under the Phage Lease. Also in relation to the termination of the Guaranty, the Indemnity and Reimbursement Agreement, dated March 15, 2006, between the Company and Phage that was executed in exchange for the Guaranty, automatically terminated on May 21, 2007, the effective date of the exchange of guaranties referenced in the Agreement.
The Company entered into a Standard Lease Guaranty (the “Lease Guaranty”) dated March 15, 2006 with Canta Rana Ranch, L.P., a California limited partnership and Phage (the “Lease Agreement”). Phage is an affiliated private biotechnology company that manufactures recombinant protein drugs and is the Company's supplier of drug products. Pursuant to the Lease Guaranty, the Company guarantees full performance of all of Phage's obligations under the Lease Agreement.
Terms of Rental Agreement Prior to Release on May 23, 2007
In exchange for the Company's guarantee of the Lease Agreement, Phage entered into an Indemnity and Reimbursement Agreement dated as of March 15, 2006. Phage will pay the Company certain fees payable on the first day of each calendar month that will be the sum of the following amounts (collectively, “Guaranty Fees”): (a) one-tenth (1/10 th) of one percent (1%) of the remaining aggregate amount of the Minimum Monthly Rent due under the Lease Agreement from the period from May 1, 2006 to the expiration date of the Lease Agreement; and (b) one-tenth (1/10 th) of one percent (1%) of the remaining aggregate amount of Additional Rent due under the Lease Agreement following the payment of additional rent. Any amount of guaranty fees not paid by Phage on the first calendar day of each month shall accrue interest at the lesser of twelve percent (12%) per annum or the maximum rate allowable by law until paid.
If Phage defaulted on payment of the Minimum Monthly Rent or the Additional Rent, which monthly payments aggregate approximately $20,000, the Company was obligated pursuant to the Lease Guaranty to pay to the lessor the rents in default. The Company's maximum contingent liability was approximately $1,137,000 as of May 22, 2007, but was terminated as of May 23, 2007 as set forth above.
Phage indemnified the Company for any amounts required to be paid by the Company pursuant to the Lease Guaranty in the Indemnity and Reimbursement Agreement dated as of March 15, 2006.
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 3. Transactions and Contractual Relationships with Affiliated Entities – (continued)
The lease guarantee is irrevocably released when Phage provides to Canta Rana Ranch, L.P. a bank statement showing a balance of $5,000,000.
During August 2004, the Company guaranteed Phage's obligations under a non-cancelable operating lease for laboratory and office space at the University Of California Irvine Research Center. The lease was for 11,091 rentable square feet for the period March 1, 2004 through August 31, 2006 and provided for a monthly rent of approximately $35,500 plus shared building operating expenses. During 2004 and 2005, the Company subleased space from Phage for approximately $2,800 per month as part of the agreement for administrative services. The lease term expired September 30, 2006 without any event of default. The Company's guarantee expired along with the expiration of the lease.
Guaranty from Daniel C. Montano
On March 20, 2006, Daniel C. Montano, the Company's Chairman, Co-President and CEO, entered into a Guaranty Agreement whereby he guaranteed any and all obligations of the Company resulting from the sale on March 20, 2006 of $20,000,000 of senior secured notes and warrants. The guaranty remains in effect until the first date on which the Company receives revenue from the sale of the drugs in which FGF-1141 is the active pharmaceutical ingredient after such drug has been approved by the FDA provided that on such date the Company is not in default of any provisions of the obligations or triggering events contained in the agreements for the senior secured notes and warrants and such default is not continuing. However, the guaranty will terminate upon the payment in full of the notes including conversion of the notes into the Company's common stock.
After the Company's obligations contained in the agreements for the senior secured notes and warrants have been paid in full, if Daniel C. Montano was required to make any payments pursuant to this guaranty prior to the payment in full of obligations, the Company will reimburse Daniel C. Montano for any such payments plus simple interest at 7% per annum from the date of the advance by Daniel C. Montano to the date reimbursed by the Company.
Note 4. Summary of Significant Accounting Policies
Development Stage Enterprise
The Company is a development stage company as defined in Statement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises”. The Company is devoting substantially all of its present efforts to its formation, fundraising and product development and approval. Its planned principal operations of selling its pharmaceutical products have not yet commenced. For the period from March 11, 1998 (inception) through December 31, 2007, the Company has accumulated a deficit of approximately $70.7 million. There can be no assurance that the Company will; (a) have sufficient funds available to complete its research and development programs or (b) be able to commercially manufacture or market any products in the future, (c) be successful to attain significant future revenue, (d) or that any sales will be profitable. The Company expects operating losses to increase for at least the next several years due principally to the anticipated expenses associated with the proposed product development, clinical trials and various research and development activities.
Stock Split
In February 2004, the Board of Directors approved, with the approval of the shareholders, a 100-to-1 common stock split. The accompanying financial statements and notes to the financial statements have been retrospectively restated to reflect this split.
Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 4. Summary of Significant Accounting Policies – (continued)
of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates relate to compensation expense for options, warrants and common stock issued for services.
Cash and Cash Equivalent
For purposes of the statements of cash flow, the Company considers all highly liquid investments purchased with original maturity of three months or less to be cash equivalents.
Restricted Cash
The restricted cash is required as collateral for the Company's credit card facilities.
| | | | | | |
| | As of |
| | | December 31,
2005 | | December 31,
2006 | | December 31,
2007 |
| | | (In Thousands) |
| Restricted cash | | $ | 137 | | | $ | 172 | | | $ | 60 | |
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful life of the related asset, which management believes is 3 to 5 years. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments and renewals are capitalized.
Deferred Rent
The Company accounts for property leases with escalation provisions and tenant improvement allowances on a straight-line basis, resulting in a consistent charge to the Statement of Operations over the life of the lease. In the early years of the lease, the Company recognizes a liability for excess straight-line amounts over the actual rent paid. This liability begins to reduce in the later years of the lease.
Income Taxes
The Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB” Statement No. 109 (“FIN 48) FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments. At the adoption date of January 1, 2007, we did not record any liabilities for uncertain tax position.
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 4. Summary of Significant Accounting Policies – (continued)
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For specific Company financial instruments, including cash and cash equivalents, accounts payable and accrued expenses, and accrued compensation, the carrying amounts approximate fair value due to their short maturities.
Valuation of Derivative Instruments
FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” requires bifurcation of embedded derivative instruments and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes Model. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as an Adjustment to Fair Value of Derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are valued using the Black-Scholes Model.
Research and Development Costs
The Company accounts for research and development costs in accordance with SFAS No. 2, “Accounting for Research and Development Costs.” Research and development costs are charged to operations as incurred. Research and development costs consist of expenses incurred by third party consultants, contractors, clinical research organizations and suppliers in support of pre-clinical research and FDA clinical trials.
Non-Monetary Transactions
Common stock issued for goods or services is recorded at estimated market value of the common stock issued or the services performed, whichever is more readily determinable.
Deferred Financing Costs
Costs incurred in connection with the issuance of convertible notes payable are capitalized as deferred financing costs. These costs primarily include commissions paid to the placement agent. Deferred financing costs relating to obtaining the convertible notes financing were capitalized and amortized over the term of the related debt using the straight-line method and as redemptions occur the Company charges off a proportional amount of the original deferred financing costs to interest expense. This combined method of amortizing debt discount approximates the effective interest method.
| | | | |
| | As of |
| | | December 31,
2006 | | December 31,
2007 |
| | | (In Thousands) |
| Deferred financing cost (a) | | $ | 1,883 | | | $ | 1,553 | |
| Amortization of the deferred costs | | | 402 | | | | 1,503 | |
| Deferred financing cost, net of amortization | | | 1,481 | | | | 50 | |
| (a) | The deferred financing costs during the third quarter of 2007 included $215,000 associated with the Private Placement of common stock to the investor, which was recorded in additional paid in capital and certain other subscribers pursuant to a subscription agreement. As of December 31, 2007, the Company issued 3,650,000 shares of the Company’s common stock at a purchase price of $1.00 per share. The Company received gross proceeds in the amount of $3,650,000 and net proceeds in the amount of $3,285,000 towards completion of the Private Placement. |
At June 30, 2007, the Company determined that $1.2 million of deferred finance costs associated with its AIM listing (Alternative Investment Market of the London Stock Exchange) may not have future value;
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 4. Summary of Significant Accounting Policies – (continued)
however, it is managements' intent to continue its effort to list on AIM. Subsequently the Company has written off $1.2 million of deferred finance costs to general and administrative expenses.
Marketing Expense
The Company has been engaged in an advertising program consisting of corporate recognition and image development within the medical and medical reimbursement industries. These marketing costs and advertising expenses are recognized as they occur in accordance with SOP 93-7.
| | | | | | |
| | As of |
| | | December 31,
2005 | | December 31,
2006 | | December 31,
2007 |
| | | (In Thousands) |
| Marketing expenses | | $ | 1,485 | | | $ | 2,733 | | | $ | 219 | |
Concentrations of Credit Risk
The Company places its cash and cash equivalent with high quality financial institutions and at times they may exceed the Federal Deposit Insurance Corporation $100,000 insurance limit. As of December 31, 2006 and 2007, uninsured portion of cash is as follow:
| | | | | | |
| | As of |
| | | December 31,
2005 | | December 31,
2006 | | December 31,
2007 |
| | | (In Thousands) |
| Uninsured Cash | | $ | 8,596 | | | $ | 8,475 | | | $ | 207 | |
Loss per Share
The Company calculates loss per share in accordance with SFAS No. 128, “Earnings per Share”. Basic loss per share is computed by dividing the loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Due to the Company incurring net losses, basic and diluted loss per share are the same.
The following potential common shares have been excluded from the computation of diluted net loss per share for the year ended December 31, 2005, December 31, 2006, and December 31, 2007 since their effect would have been anti-dilutive:
| | | | | | |
| | December 31,
2005 | | December 31,
2006 | | December 31,
2007 |
| | | (Shares in Thousands) |
| Stock options | | | 3,161 | | | | 2,455 | | | | 858 | |
| Warrants | | | 375 | | | | 110 | | | | — | |
| Convertible notes payable | | | — | | | | 467 | | | | 1,327 | |
Stock-Based Compensation
In December 2004, the FASB issued “Share Based Payment” SFAS 123 (R) and in March 2005 the SEC issued “Staff Accounting Bulletin” SAB No. 107. The Company has applied and adopted the provisions of these documents. The Company has used the Black-Scholes Model to estimate the fair value of stock options granted to employees and consultants since its inception and therefore, this method represents no significant change in the Company's accounting for options and warrant issuances.
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 4. Summary of Significant Accounting Policies – (continued)
SFAS 123(R) requires companies to estimate the fair value of share based payment awards to employees and directors on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's Statements of Operations. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the method as allowed under SFAS No. 123, “Accounting for Stock-Based Compensation (SFAS 123)”.
The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006. Based on the terms of its plans, the Company did not have a cumulative effect related to its plans. The Company also elected to continue to estimate the fair value of stock options using the Black-Scholes Model. The Black-Scholes Model is a financial model in determining the fair value of a stock option using calculation based on a defined set of assumptions. Since the Company's policy has always been to expense the issuance of options using the fair value based method using the Black-Scholes Model, there is no difference in the basic and diluted loss per share.
Stock-Based Compensation
| | | | |
| | For the Year Ended December 31, |
| | | 2006 | | 2007 |
| | | (In Thousands) |
| Research and development | | $ | 369 | | | $ | 196 | |
| General and administration | | $ | 110 | | | $ | 174 | |
| Total Stock-based compensation expense (options) | | $ | 479 | | | $ | 370 | |
| Stock-based compensation (warrants) | | $ | — | | | $ | 204 | |
| Total Stock-based compensation | | $ | 479 | | | $ | 574 | |
Stock Based Compensations for Options Granted in 2006 and 2007:
| | | | | | | | | | |
| Period | | Estimated
Fair
Market Value | | Expected
Volatility
(%) | | Risk-Free
Interest
Rate
(%) | | Weighted
Average
Expected Life
(Years) | | Expected
Dividend
Yield
(%) |
| 1stQuarter – 2006 | | $ | 240,254 | | | | 76 | | | | 4.785 | | | | 5 | | | | — | |
| 2nd Quarter – 2006 | | | 13,270 | | | | 79 | | | | 5.125 | | | | 5 | | | | — | |
| 3rd Quarter – 2006 | | | 11,272 | | | | 77 | | | | 4.570 | | | | 10 | | | | — | |
| 4th Quarter – 2006 | | | 235,920 | | | | 77 | | | | 4.670 | | | | 10 | | | | — | |
| Total – 2006 | | $ | 500,716 | | | | | | | | | | | | | | | | — | |
| 1st Quarter – 2007 | | | 309 | | | | 68 | | | | 4.640 | | | | 10 | | | | — | |
| 2nd Quarter – 2007 | | | 1,982 | | | | 68 | | | | 4.480 | | | | 10 | | | | — | |
| 3rd Quarter – 2007 | | | 377 | | | | 68 | | | | 5.030 | | | | 10 | | | | — | |
| 4th Quarter – 2007 | | | 275,346 | | | | 67 | | | | 3.83 | | | | 10 | | | | — | |
| Total – 2007 | | $ | 278,014 | | | | | | | | | | | | | | | | | |
The Company determined the fair value of share based payment awards to employees and directors on the date of grant using the Black-Scholes Model, which is affected by the Company's stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company's expected stock price volatility over the term of the awards. Prior to 2006, when valuing awards, the Company used the Award's contractual term as a proxy for its expected terms. For new
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 4. Summary of Significant Accounting Policies – (continued)
grants after December 31, 2005, the Company estimated an expected term using the “safe harbor” provisions provided in SAB 107. The Company used historical data to estimate forfeitures, of which the Company estimated to be none.
The Company has elected to adopt the detailed method provided in SFAS 123(R) for calculating the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation and to determine the subsequent impact on the APIC pool and Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).
Recently Issued Accounting Pronouncements
In January 2008, the SEC released SAB No. 110, which amends SAB No. 107 which provided a simplified approach for estimating the expected term of a “plain vanilla” option, which is required for application of the Black-Scholes-Model (and other models) for valuing share options. At the time, the Staff acknowledged that, for companies choosing not to rely on their own historical option exercise data (i.e., because such data did not provide a reasonable basis for estimating the term), information about exercise patterns with respect to plain vanilla options granted by other companies might not be available in the near term; accordingly, in SAB No. 107, the Staff permitted use of a simplified approach for estimating the term of plain vanilla options granted on or before December 31, 2007. The information concerning exercise behavior that the Staff contemplated would be available by such date has not materialized for many companies. Thus, in SAB No. 110, the Staff continues to allow use of the simplified rule for estimating the expected term of plain vanilla options until such time as the relevant data do become widely available. The Company has adopted SAB 110.
In December 2007, the FASB issued FASB Statement No 141(R) which replaces FASB Statement No. 141,Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called thepurchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. Statement 141 did not define the acquirer, although it included guidance on identifying the acquirer, as does this Statement. This Statement's scope is broader than that of Statement 141, which applied only to business combinations in which control was obtained by transferring consideration. By applying the same method of accounting — the acquisition method — to all transactions and other events in which one entity obtains control over one or more other businesses, this Statement improves the comparability of the information about business combinations provided in financial reports. The company does not believe SFAS No 141 will have a significant impact on its financial position or results of operations.
In December 2007, the FASB issued FASB Statement No 160 which mends ARB 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Before this Statement was issued, limited guidance existed for reporting non-controlling interests. This Statement requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent's owners and the interests of the non-controlling owners of a subsidiary. Those expanded disclosures include a reconciliation of the beginning and ending balances of the equity attributable to the parent and the non-controlling owners and a schedule showing the effects of changes in a parent's ownership interest in a subsidiary on the equity attributable to the parent. This Statement therefore improves the completeness, relevance, and transparency of the information provided in the consolidated financial statements. The company does not believe SFAS No 160 will have a significant impact on its financial position or results of operations
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 4. Summary of Significant Accounting Policies – (continued)
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This option is available to all entities, including not-for-profit organizations. Most of the provisions in Statement 159 are elective; however, the amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. Some requirements apply differently to entities that do not report net income. The FASB’s stated objective in issuing this standard is as follows: “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 fair value option established by Statement 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. A not-for-profit organization will report unrealized gains and losses in its statement of activities or similar statement. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. The Company does not believe SFAS No. 159 will have an immediate significant impact on its financial position or results of operations.
In September 2006, FASB Statement No. 157, “Fair Value Measurements,” was issued by the FASB. This new standard provides guidance for using fair value to measure assets and liabilities. The FASB believes the standard also responds to Investors’ requests for expanded information about the extent to which company’s measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. Statement 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. Currently, over 40 accounting standards within GAAP require (or permit) entities to measure assets and liabilities at fair value. Prior to Statement 157, the methods for measuring fair value were diverse and inconsistent, especially for items that are not actively traded. The standard clarifies that for items that are not actively traded, such as certain kinds of derivatives, fair value should reflect the price in a transaction with a market participant, including an adjustment for risk, not just the company’s mark-to-model value. Statement 157 also requires expanded disclosure of the effect on earnings for items measured using unobservable data. Under Statement 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, Statement 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The Company is evaluating how SFAS 157 will impact its results of operation and financial position.
F-22
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 5. Cash, Cash Equivalents and Restricted Cash
Cash, Cash Equivalents and Restricted Cash Consisted of the Following at December 31, 2006 and 2007:
| | | | |
| | December 31, |
| | | 2006 | | 2007 |
| | | (Dollars in Thousands) |
| Cash in bank | | $ | 8,503 | | | $ | 310 | |
| Restricted cash | | | 172 | | | | 60 | |
| Total | | $ | 8,675 | | | $ | 370 | |
Note 6. Prepaid and Other Current Assets
Prepaid Assets Consisted of the Following at December 31, 2006 and 2007:
| | | | |
| | December 31, |
| | | 2006 | | 2007 |
| | | (Dollars in Thousands) |
| Prepaid clinical trial costs(a) | | $ | 142 | | | $ | 184 | |
| Prepaid related party(b) | | | 396 | | | | — | |
| Prepaid insurance(c) | | | 83 | | | | 75 | |
| Prepaid legal fees(d) | | | 312 | | | | 10 | |
| Prepaid trade shows(e) | | | 51 | | | | — | |
| Prepaid other and other current assets(f) | | | 282 | | | | 274 | |
| Total | | $ | 1,266 | | | $ | 543 | |
Prepaid Expenses at December 31, 2007 include:
| (a) | Includes prepaid amounts associated with studies conducted by Florida State University and Orthopaedic Education. These amounts are to be applied against the final invoices and will be recognized in “Statement of Operations” as Research and Development upon the completion of these trials. |
| (c) | Includes prepaid insurance associated with directors and officers which is amortized over a 12 month period to the “Statement of Operations” as general and administrative expense. |
| (d) | Includes prepaid insurance associated with professional fees paid to Cotton & Gundzik, and Baker & McKenzie. |
| (f) | Includes $115,000 prepaid amount to Phage Biotechnology, a related party, and $45,622 for prepaid January 2008 rent. These items will be recognized in “Statement of Operations” as general and administrative expense as they occur. |
Prepaid Expenses at December 31, 2006 Include:
| (a) | Includes prepaid amounts associated with clinical trials conducted by contractors such as: bioRasi and Catheter and Disposables Technologies, Inc. These amounts are to be applied against the final invoices and will be recognized in the “Statement of Operations” as research and development upon the completion of these trials. |
| (b) | Is a prepaid amount to Phage Biotechnology a related party. In August 2006, the Company requested Phage conduct the pack-and-fill of the drug product for the PAD Phase I clinical trial. The Company agreed to have Phage conduct the pack-and-fill provided Phage does not exceed the amount of the third-party proposal the Company received. The total project cost is estimated to be $528,000. The |
F-23
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 6. Prepaid and Other Current Assets – (continued)
| | Company has paid $396,000 to Phage for this project as of December 31, 2006. The Company will recognize this expense in the “Statement of Operations” as research and development upon transfer of the goods in 2007. |
| (c) | Includes prepaid insurance associated with directors and officers which is amortized over a 12 month period to the “Statement of Operations” as general and administrative expense (includes $350,000 insurance paid on February 15, 2006). |
| (d) | Includes prepaid legal fees associated with investor relations programs, SEC Counsel, tax advisory services and legal retainer fees. Legal prepayments are retainer amounts that are required by legal providers to initiate services. These retainers remain recorded as prepaid until the relationship or the project is completed. At that time, these retainers will be recognized in the “Statement of Operations” as legal expense. |
| (e) | Includes prepaid amounts associated with trade shows in San Francisco, London, Las Vegas, and Washington D.C. These items will be recognized in “Statement of Operations” as general and administrative expense as they occur. |
| (f) | Includes $50,848 of prepaid amounts associated with consultants who are paid in the beginning of each month and $47,704 of rent. These items will be recognized in the “Statement of Operations” as general and administrative expense as they occur. |
Note 7. Property and Equipment
Property and equipment consisted of the following:
| | | | |
| | December 31, |
| | | 2006 | | 2007 |
| | | (Dollars in Thousands) |
| Furniture, fixtures, and equipment | | $ | 679 | | | $ | 737 | |
| Scientific equipment | | | 86 | | | | 85 | |
| Leasehold Improvements | | | 286 | | | | 288 | |
| Less accumulated depreciation | | | (164 | ) | | | (448 | ) |
| Property and equipment net of accumulated depreciation | | $ | 887 | | | $ | 662 | |
Depreciation expense (in thousands) for the years ended December 31, 2005, 2006, 2007, and the period from March 11, 1998 (inception) to December 31, 2007 were $12, $150, $284 and $454 respectively.
The company disposed of fully depreciated assets with a value of $6 on December 31, 2002.
Note 8. Due to and from Affiliates
Due to/from affiliates at December 31, 2006, and 2007 consisted of the following:
| | | | |
| | December 31, |
| | | 2006 | | 2007 |
| | | (Dollars in Thousands) |
| Due to Phage | | $ | (111 | ) | | $ | (24 | ) |
| Due from Phage | | | 38 | | | | 139 | |
| Total | | $ | (73 | ) | | $ | 115 | |
F-24
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 9. Demand Notes with Stock Purchase Warrants
The Company issued unsecured demand notes to investors during the year ended December 2007 in exchange for gross proceeds of $1,575,000 and net proceeds of $1,533,000 in cash. Some of these notes were issued with detachable warrants. These demand notes have various interest rate terms ranging from 10% to 16%. At December 31, 2007, $11,444 of interest was accrued for these notes. These notes are due upon demand, and not due until demand is made. Commissions earned for the sale of these notes was $42,000, of which $12,000 was earned by a related party.
The Company issued unsecured demand notes to principal officers during the year ended December 2007. At December 31, 2007 there were $160,000 of notes issued to principal officers which have no stated maturity and have an interest at a rate of 6%per annum. The interest accrued on these notes to the principal officers is $1,946.
| | | | | | | | | | | | |
| Short Term Notes | | Short Term
Notes Issued | | Fees | | Interest % | | Term of the
Note (Days) | | Repayment
of the Short
Term Notes | | Short Term
Notes
Outstanding
as of
December 31,
2007 |
| October 2007(a) | | | 60,000 | | | | — | | | | 6 | % | | | 30 | | | | — | | | | 60,000 | |
| October 2007(a) | | | 100,000 | | | | — | | | | 6 | % | | | 30 | | | | — | | | | 100,000 | |
| November 2007(a) | | | 150,000 | | | | — | | | | — | | | | 61 | | | | 150,000 | | | | — | |
| | | | 310,000 | | | | | | | | | | | | | | | | | | | | 160,000 | |
| October 2007(i) | | | 75,000 | | | | — | | | | 81 | % | | | 30 | | | | 75,000 | | | | — | |
| November 2007(b)(i) | | | 100,000 | | | | — | | | | 16 | % | | | 45 | | | | — | | | | 100,000 | |
| November 2007(b)(i) | | | 200,000 | | | | — | | | | 16 | % | | | 45 | | | | — | | | | 200,000 | |
| December 2007(b) | | | 300,000 | | | | — | | | | 10 | % | | | 91 | | | | — | | | | 300,000 | |
| December 2007(b) | | | 300,000 | | | | — | | | | 10 | % | | | 91 | | | | — | | | | 300,000 | |
| December 2007(b) | | | 100,000 | | | | 7,000 | | | | 10 | % | | | 91 | | | | — | | | | 93,000 | |
| December 2007(b) | | | 50,000 | | | | 3,500 | | | | 10 | % | | | 91 | | | | — | | | | 46,500 | |
| | | | 50,000 | | | | 3,500 | | | | 10 | % | | | 91 | | | | — | | | | 50,000 | |
| December 2007(b) | | | 300,000 | | | | 21,000 | | | | 10 | % | | | 91 | | | | — | | | | 300,000 | |
| December 2007(b) | | | 100,000 | | | | 7,000 | | | | 10 | % | | | 91 | | | | — | | | | 100,000 | |
| | | | 1,575,000 | | | | 42,000 | | | | | | | | | | | | 75,000 | | | | 1,500,000 | |
| (i) | These Notes were issued with stated interest amounts. The interest rates shown above were calculated on an annual rate basis. |
| (a) | These Notes from principal officers. |
| (b) | These Notes issued to investors with detachable warrants. |
F-25
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 9. Demand Notes with Stock Purchase Warrants – (continued)
The warrants are for the purchase of 1,400,000 shares of the Company's common stock at $1.00 per share. The warrants have a term of five years and are exercisable upon issue. The Company allocated the fair value of the warrants against the amount of the Notes. The relative fair value of the warrants was determined to be approximately $507,000, which was determined using the Black-Scholes Model, was recorded as additional paid-in capital and reduced the carrying value of the notes (see (a) below). The discount on debt is being amortized to interest expense over the initial term of the notes. The Black-Scholes Model calculation incorporated the following assumptions in the table summarized at December 31, 2007:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Warrants Granted | | Warrants
Issued for
Purchase of
Common
Stock | | Estimated
Fair Market
Value | | Exercise
Price per
Share ($) | | Expected Life
(Years) | | Risk Free
Interest % | | Approximate
Volatility % | | Expected
Dividend
Yield % | | Initial
Term Days | | Amortization
for
December
2007 |
| November 2007 | | | 200,000 | | | | 44,000 | | | | 1 | | | | 5 | | | | 3.99 | % | | | 63.34 | % | | | — | | | | 42 | | | | 10,476 | |
| November 2007 | | | 100,000 | | | | 22,000 | | | | 1 | | | | 5 | | | | 3.99 | % | | | 63.34 | % | | | — | | | | 42 | | | | 5,238 | |
| December 2007 | | | 300,000 | | | | 75,000 | | | | 1 | | | | 5 | | | | 3.28 | % | | | 63.36 | % | | | — | | | | 91 | | | | 22,253 | |
| December 2007 | | | 200,000 | | | | 90,000 | | | | 1 | | | | 5 | | | | 3.65 | % | | | 64.05 | % | | | — | | | | 91 | | | | 9,890 | |
| December 2007 | | | 187,500 | | | | 84,375 | | | | 1 | | | | 5 | | | | 3.64 | % | | | 64.05 | % | | | — | | | | 91 | | | | 17,617 | |
| December 2007 | | | 50,000 | | | | 22,500 | | | | 1 | | | | 5 | | | | 3.64 | % | | | 64.05 | % | | | — | | | | 91 | | | | 4,945 | |
| December 2007 | | | 37,500 | | | | 16,875 | | | | 1 | | | | 5 | | | | 3.64 | % | | | 64.05 | % | | | — | | | | 91 | | | | 3,523 | |
| December 2007 | | | 25,000 | | | | 11,250 | | | | 1 | | | | 5 | | | | 3.64 | % | | | 64.05 | % | | | — | | | | 91 | | | | 1,360 | |
| December 2007 | | | 300,000 | | | | 141,000 | | | | 1 | | | | 5 | | | | 3.45 | % | | | 64.12 | % | | | — | | | | 91 | | | | — | |
| | | | 1,400,000 | | | | 507,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 75,302 | |
For the year ended December 31, 2007, debt discount of $75,302 was amortized to interest expense.
(a) The warrants associated with the notes were fair valued upon their issuance and again on December 31, 2007. The following table explains these transactions and their subsequent net increase or decrease recorded through results of operations as income (loss) to adjustment to fair value of derivatives through December 31, 2007.
The Company revalues the derivatives at the end of each quarter to determine if the values of these derivatives have changed from period to period, until the notes are redeemed or converted. An increase in value of these derivatives will result in the Company having to record an expense to the Adjustment to Fair Value of Derivatives on the Statement of Operations. Conversely, a decrease in the value of these derivatives will result in the Company having to record income to the Adjustment to Fair Value of Derivatives on the Statement of Operations.
In accordance with FAS 133, Accounting for Derivative Instruments and Hedging Activities, EITF 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company's Own Stock, and EITF 05-04, The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, the amounts allocated to the warrant represent a derivative liability that has been recorded in the accompanying balance sheet at December 31, 2007.
| | | | | | |
| Change Period | | Fair Valued
at Issuance | | Fair Valued
from
Issuance to
December 31,
2007 | | Net Change in
Fair Value
Between
Periods |
| | | (In Thousands) |
| Total fair value of derivatives at respective periods | | $ | 507 | | | $ | 658 | | | $ | (151 | ) |
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TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 9. Demand Notes with Stock Purchase Warrants – (continued)
The following table summarizes the assumptions used to measure the fair value of derivatives:
| | | | | | | | | | |
| Derivatives | | Dividend
Yield % | | Expected
Volatility % | | Risk-Free
Interest % | | Expected Life
(Years) | | CVBT Stock
Price |
Warrant derivative
| | | | | | | | | | | | | | | | | | | | |
| At issuance | | | — | | | | 63.34% – 64.12% | | | | 3.28% – 3.99% | | | | 4.85 – 5.00 | | | | $0.53 – $0.88 | |
| As of December 31, 2007 | | | — | | | | 64.12 | | | | 3.450 | | | | 4.95 | | | $ | 0.88 | |
Note 10. Convertible Notes Payable
Convertible Senior Secured Notes
On March 20, 2006, the Company entered into a Securities Purchase Agreement with accredited investors for the issue of an aggregate of $20,000,000 principal amount of convertible notes with offering costs of $1,553,000 representing approximately 7.8% of the principal amount. In connection with the closing of the sale of the notes, the Company received net proceeds of $18,447,000. The fixed conversion price of the Senior Secured Notes, the number of shares and exercise price of the warrants are subject to an adjustment according to provisions in the Securities Purchase Agreement. On May 21, 2007, the Company entered into an agreement to sell 15,000,000 of the Company’s common stock at a purchase price of $1.00 per share in connection with a Private Placement to the investor and certain other subscribers pursuant to a subscription agreement. This transaction triggered the adjustment provisions in the Securities Purchase Agreement; and thus the fixed conversion price of $12.00 in the Senior Secured Notes and the exercise price of $8.50 for the warrants (“original terms”) were both reset to $1.00 per share as of May 21, 2007 (“re-pricing”), subject to anti-dilution and other customary adjustments. All other terms of the Senior Secured Notes remain unchanged.
As of December 31, 2007, the Company had $3,880,000 principal amount outstanding of such convertible notes, which was convertible at the option of the holders into 3,880,000 shares of common stock based on the re-set Fixed Conversion Price of $1.00 per share. However, the notes are convertible at 94% of the average of the preceding five days' weighted average trading price, if the result is lower than $1 per share. Conversion of the senior secured notes into the Company's common stock at other than the Fixed Conversion Price is limited to no more than 10% of the original $20,000,000 note balance per month. The notes mature in March 2009, and bear a resetting floating interest rate of three months LIBOR plus 7%. Substantially all of the Company's assets secure the notes.
On May 21, 2007, the Convertible Senior Secured Notes were fair valued according to the original terms of the agreement for the period starting April 1, 2007, through May 21, 2007. On May 21, 2007 the Convertible Notes were fair valued for the re-pricing. On June 30, 2007, the Senior Secured Notes were fair valued reflecting the re-pricing of the convertible notes. The following table explains these transactions and their subsequent net increase or decrease recorded through results of operations as income (loss) to adjustment to fair value of derivatives through December 31, 2007.
| | | | | | | | | | | | |
| Period | | Fair Valued
at March 31,
2007 | | Fair Valued
from
March 31,
2007 to
May 21, 2007
| | Fair Valued
from May 21,
2007 to
21-May-07 | | Fair Valued
from May 21,
2007 to
30-Jun-07 | | Fair Valued
from
June 30, 2007
to 30-Sep-07 | | Fair Valued
from
September 30,
2007 to
31-Dec-07 |
| | | (In Thousands) |
| Warrants | | $ | 61 | | | $ | 7 | | | $ | 1,566 | | | $ | 2,058 | | | $ | 132 | | | $ | 881 | |
| Convertibility Feature | | | 84 | | | | 8 | | | | 3,433 | | | | 3,998 | | | | 293 | | | | 631 | |
| Interest Convertibility Feature | | | 40 | | | | 14 | | | | 15 | | | | 414 | | | | 35 | | | | 47 | |
| Total fair value of derivatives at respective periods | | $ | 185 | | | $ | 29 | | | $ | 5,014 | | | $ | 6,470 | | | $ | 460 | | | $ | 1,559 | |
F-27
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 10. Convertible Notes Payable – (continued)
| | | | | | | | | | |
| Net Decrease (Increase) Recorded as Adjustment to Fair Value | | Quarter Ended
March 31,
2007 | | Quarter Ended
June 30,
2007 | | Quarter Ended
September 30, 2007 | | Quarter Ended
December 31,
2007 | | For the
Year Ended
December 31,
2007 |
| | | (In Thousands) |
| Change between reporting periods | | $ | 406 | | | $ | (6,285 | ) | | $ | 6,010 | | | $ | (1,099 | ) | | $ | (968 | ) |
| Reclass of derivative from liability to equity due to actual interest paid | | | (264 | ) | | | (269 | ) | | | (53 | ) | | | — | | | | (586 | ) |
| Reclass of derivatives from liability to equity due to conversion | | | (2,088 | ) | | | (1,584 | ) | | | (1,238 | ) | | | (1,545 | ) | | | (6,455 | ) |
| Total | | $ | (1,946 | ) | | $ | (8,138 | ) | | $ | 4,719 | | | | (2,644 | ) | | $ | (8,009 | ) |
In connection with the Securities Purchase Agreement, the Company also issued warrants to purchase an aggregate of 705,882 shares of its common stock. On May 21, 2007, the aggregate number of shares acquirable upon exercise of such warrants increased to 5,999,997 due to a price reset. The term of the warrants is three years and they may be exercised at any time up to March 2009. The warrant exercise price was $8.50 per share, until the price was re-set as of May 21, 2007 to $1.00 per share.
Conversion of Senior Secured Notes:
| | | | | | | | |
| Period | | Amount of
Senior Secured
Notes Converted | | Converted to
Number of
Shares | | Average
Share Price | | Interest Paid
During the
Period with
Common Stock |
| 3rd quarter – 2006 | | $ | 295,723 | | | | 107,716 | | | $ | 2.75 | | | $ | 7,573 | |
| 4th quarter – 2006 | | | 1,601,791 | | | | 879,503 | | | | 1.82 | | | | 25,455 | |
| Total – 2006 | | $ | 1,897,514 | | | | 987,219 | | | | | | | $ | 33,028 | |
| 1st quarter – 2007 | | | 3,493,266 | | | | 3,653,980 | | | | 0.96 | | | | 72,225 | |
| 2nd quarter – 2007 | | | 3,250,441 | | | | 3,415,227 | | | | 0.95 | | | | 32,409 | |
| 3rd quarter – 2007(a) | | | 3,703,497 | | | | 4,954,215 | | | | 0.75 | | | | 222,578 | |
| 4th quarter – 2007(b) | | | 3,775,282 | | | | 7,127,481 | | | | 0.53 | | | | 280,589 | |
| Total – 2007 | | $ | 14,222,486 | | | | 19,150,903 | | | | | | | $ | 607,811 | |
| Total – 2006 and 2007 | | $ | 16,120,000 | | | | 20,138,122 | | | | | | | $ | 640,839 | |
| (a) | The amount of $222,578 includes $164,556 interest paid for the second quarter in common stock of 194,972 during the third quarter. |
| (b) | The amount of $280,100 includes $239,247 interest paid for the third quarter in common stock of 497,710 during the fourth quarter. |
The Company sold the notes under the exemption from registration pursuant to Rule 506 of Regulation D under the Securities Act of 1933 (“Regulation D”). The Company subsequently registered the Notes on a Form S-3 registration statement with an effective date of June 12, 2006.
The Company may incur certain penalties if it fails to file and obtain and maintain the effectiveness of a registration statement covering the notes and warrants (collectively “the Securities”), such as cash payments to the note holders calculated under formulas based on the principal amount of the notes and aggregate exercise price of the warrants. The Company may also incur cash damages if the Company fails to issue and deliver certificates of its common stock in a timely manner upon receipt of a notice from a note holder to convert all or a portion of the note holder's note. The Company may also be required to redeem all or a portion of the principal amount of a note in the event a conversion fails. Under certain triggering events, the
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TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 10. Convertible Notes Payable – (continued)
Company may be required to redeem all or a portion of the principal amount of a note in the sum of 120% of the principal plus applicable interest. Examples of triggering events are: (i) delisting of the Company's securities; (ii) failure of a registration statement to be filed; (iii) failure of a registration statement to become effective; (iv) other triggering events. Other terms and conditions that are material to the Company are: (i) after a triggering event the holder of a note has the option to require the Company to pay a redemption price at the option of a note holder; (ii) a redemption in the event of a change in control at the option of a note holder, (iii) certain events of default; and (iv) the acceleration of payment of a note upon the occurrence of an event of default. To satisfy the above requirements, the Company filed a registration statement on form S-1/A on June 26, 2007 that was declared effective by the SEC on June 28, 2007.
From March 20, 2006 until the first date on which there are no notes outstanding, the Company will have certain restrictions on the payment of dividends or distributions, whether in cash, stock, equity securities or property, in respect to any capital stock or split, combination or reclassification of any capital stock or issuance or authorization of the issuance of any other securities in respect of, in lieu of or in substitution for any capital stock, or set any record date with respect to any of the foregoing.
In connection with this financing, closing costs of: (i) $200,000 to purchasers of the notes for legal fees relating to transaction, (ii) an investment banking fee in the amount of $1,200,000 to CK Cooper & Company, and (iii) other expenses related to legal fees in the amount of $153,000. A total of $1,553,000 in transaction fees and expenses were paid by the Company such that the Company realized net proceeds in the amount of $18,447,000.
The following table summarizes Convertible notes discounts and derivative values outstanding at December 31, 2007:
| | |
| | (In Thousands) |
| Convertible Notes at face value at March 20, 2006 | | $ | 20,000 | |
| Notes converted into common stock | | | (16,120 | ) |
| Convertible notes at face value at December 31, 2007 | | | 3,880 | |
Discount on Notes:
| | | | |
| Embedded derivatives | | | (8,196 | ) |
| Warrant derivatives | | | (2,383 | ) |
| Net convertible notes on December 31, 2007 | | | (6,699 | ) |
| Amortization of discount from derivatives | | | 9,345 | |
| Convertible notes at December 31, 2007 | | | 2,646 | |
| Embedded derivatives at fair value at December 31, 2007 | | | 678 | |
| Warrant derivatives at fair value at December 31, 2007 | | | 881 | |
Net Convertible notes, embedded derivatives and warrant derivatives at
December 31, 2007 | | $ | 4,205 | |
The following table defines derivatives:
| | | | |
| Item # | | Derivatives | | Definition |
| 1 | | Warrants Derivative | | The Company sold warrants in connection with the sale of senior secured convertible notes on March 20, 2006. The warrants were fair valued at March 20, 2006 and subsequently are revalued at the end of each quarter. |
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TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 10. Convertible Notes Payable – (continued)
| | | | |
| Item # | | Derivatives | | Definition |
| 2 | | Conversion Feature Embedded Derivative | | As part of the sale of the senior secured convertible notes on March 20, 2006, the buyer has the right to convert up to 10% of the initial balance in to common stock each month starting August 20, 2006. The conversion feature derivatives were fair valued at March 20, 2006 and subsequently have been and are revalued at the end of each quarter. |
| 3 | | Interest Conversion Embedded Derivative | | As part of the sale of the senior secured convertible notes at March 20, 2006, the Company has the right to pay interest with its common stock upon the registration effective June 12, 2006. The interest conversion derivatives were fair valued at March 20, 2006 and subsequently have been and are revalued at the end of each quarter. |
| 4 | | Options issued to non-employees Derivatives | | As part of the sale of the senior secured convertible notes at March 20, 2006, the Company was required to reclassify previously and subsequently issued options to non-employees as option derivatives, which are revalued at the end of each quarter. |
| 5 | | Warrants issued to non-employees Derivatives | | As part of the sale of the senior secured convertible notes at March 20, 2006, the Company was required to reclassify previously and subsequently issued warrants to non-employees as warrant derivatives, which are revalued at the end of each quarter. |
The following table summarizes the assumptions used to measure the fair value of derivatives:
| | | | | | | | | | |
| Derivatives | | Dividend
Yield % | | Expected
Volatility % | | Risk-Free
Interest % | | Expected
Life (Years) | | CVBT Stock
Price |
Warrant derivative – Convertible Note
| | | | | | | | | | | | | | | | | | | | |
| As of March 20, 2006 | | | — | | | | 74.6 | | | | 4.59 | | | | 3 | | | $ | 7.15 | |
| As of December 31, 2006 | | | — | | | | 71.44 – 84.04 | | | | 4.62 – 4.83 | | | | 2 | | | $ | 1.48 | |
| March 31, 2007 – May 21, 2007 | | | — | | | | 79.65 | | | | 4.74 | | | | 2 | | | $ | 0.75 | |
| May 21, 2007 – May 21, 2007 | | | — | | | | 79.65 | | | | 4.74 | | | | 2 | | | $ | 0.75 | |
| May 21, 2007 – June 30, 2007 | | | — | | | | 78.21 | | | | 4.89 | | | | 2 | | | $ | 0.89 | |
| As of September 30, 2007 | | | — | | | | 44.56 | | | | 3.97 | | | | 1.5 | | | $ | 0.50 | |
| As of December 31, 2007 | | | — | | | | 45.35 | | | | 3.34 | | | | 1.25 | | | $ | 0.88 | |
Conversion feature embedded derivative – Convertible Note
| | | | | | | | | | | | | | | | | | | | |
| As of March 20, 2006 | | | — | | | | 74.6 | | | | 4.59 | | | | 3 | | | $ | 7.15 | |
| As of December 31, 2006 | | | — | | | | 71.44 – 84.04 | | | | 4.62 – 4.83 | | | | 2 | | | $ | 1.48 | |
| March 31, 2007 – May 21, 2007 | | | — | | | | 79.65 | | | | 4.74 | | | | 2 | | | $ | 0.75 | |
| May 21, 2007 – May 21, 2007 | | | — | | | | 79.65 | | | | 4.74 | | | | 2 | | | $ | 0.75 | |
| May 21, 2007 – June 30, 2007 | | | — | | | | 78.21 | | | | 4.89 | | | | 2 | | | $ | 0.89 | |
| As of September 30, 2007 | | | — | | | | 44.56 | | | | 3.97 | | | | 1.5 | | | $ | 0.50 | |
| As of December 31, 2007 | | | — | | | | 45.35 | | | | 3.34 | | | | 1.25 | | | $ | 0.88 | |
F-30
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 10. Convertible Notes Payable – (continued)
| | | | | | | | | | |
| Derivatives | | Dividend
Yield % | | Expected
Volatility % | | Risk-Free
Interest % | | Expected
Life (Years) | | CVBT Stock
Price |
Interest Conversion embedded derivative – Convertible Note
| | | | | | | | | | | | | | | | | | | | |
| As of March 20, 2006 | | | — | | | | 74.6 | | | | 4.59 | | | | 3 | | | $ | 7.15 | |
| As of December 31, 2006 | | | — | | | | 71.44 – 84.04 | | | | 4.62 – 4.83 | | | | 2 | | | $ | 1.48 | |
| March 31, 2007 – May 21, 2007 | | | — | | | | 79.65 | | | | 4.74 | | | | 2 | | | $ | 0.75 | |
| May 21, 2007 – May 21, 2007 | | | — | | | | 79.65 | | | | 4.74 | | | | 2 | | | $ | 0.75 | |
| May 21, 2007 – June 30, 2007 | | | — | | | | 78.21 | | | | 4.89 | | | | 2 | | | $ | 0.89 | |
| As of September 30, 2007 | | | — | | | | 44.56 | | | | 3.97 | | | | 1.5 | | | $ | 0.50 | |
| As of December 31, 2007 | | | — | | | | 45.35 | | | | 3.34 | | | | 1.25 | | | $ | 0.88 | |
Options issued to non-employees
derivative
| | | | | | | | | | | | | | | | | | | | |
| As of March 20, 2006 | | | — | | | | 74.6 | | | | 4.59 | | | | (a) | | | $ | 7.15 | |
| As of December 31, 2006 | | | — | | | | 71.44 – 84.04 | | | | 4.62 – 4.83 | | | | (a) | | | $ | 1.48 | |
| March 31, 2007 – May 21, 2007 | | | — | | | | 79.65 | | | | 4.74 | | | | 2 | | | $ | 0.75 | |
| May 21, 2007 – May 21, 2007 | | | — | | | | 79.65 | | | | 4.74 | | | | 2 | | | $ | 0.75 | |
| May 21, 2007 – June 30, 2007 | | | — | | | | 78.21 | | | | 4.89 | | | | 2 | | | $ | 0.89 | |
| As of September 30, 2007 | | | — | | | | 44.56 | | | | 3.97 | | | | 1.5 | | | $ | 0.50 | |
| As of December 31, 2007 | | | — | | | | 47.61 – 67.22 | | | | 3.05 – 4.04 | | | | 1.58 – 9.90 | | | $ | 0.88 | |
Warrants issued to non-employees
derivative
| | | | | | | | | | | | | | | | | | | | |
| As of March 20, 2006 | | | — | | | | 74.6 | | | | 4.59 | | | | (a) | | | $ | 7.15 | |
| As of December 31, 2006 | | | — | | | | 71.44 – 84.04 | | | | 4.62 – 4.83 | | | | (a) | | | $ | 1.48 | |
| March 31, 2007 – May 21, 2007 | | | — | | | | 79.65 | | | | 4.74 | | | | 2 | | | $ | 0.75 | |
| May 21, 2007 – May 21, 2007 | | | — | | | | 79.65 | | | | 4.74 | | | | 2 | | | $ | 0.75 | |
| May 21, 2007 – June 30, 2007 | | | — | | | | 78.21 | | | | 4.89 | | | | 2 | | | $ | 0.89 | |
| As of September 30, 2007 | | | — | | | | 44.56 | | | | 3.97 | | | | 1.5 | | | $ | 0.50 | |
| As of December 31, 2007 | | | — | | | | 63.48 – 67.22 | | | | 3.45 – 4.04 | | | | 4.78 – 9.90 | | | $ | 0.88 | |
| (a) | The range of the expected life and exercise prices are consistent with each individual instrument. |
The following table summarizes the “Adjustments to Fair Value of Derivatives” for all derivatives:
| | | | | | | | | | |
| Adjustments to Fair Value of Derivatives | | Balance as of
December 31,
2006 | | Adjustment
to Fair Value
of Derivative | | Net
Additions/
Deletions for
New Issuance
Exercise | | Adjustment
to Paid in
Capital for
Conversion | | Balance as of
December 31,
2007 |
| | | (In Thousands) |
| Warrant derivative – convertible note (A) | | $ | 172 | | | $ | 709 | | | $ | — | | | $ | — | | | $ | 881 | |
| Embedded derivatives (B) | | | 419 | | | | 7,300 | | | | — | | | | (7,041 | ) | | | 678 | |
| Change in fair value (C) = A+B | | | 591 | | | | 8,009 | | | | — | | | | (7,041 | ) | | | 1,559 | |
| Option derivative – non-employees | | | 1,406 | | | | (818 | ) | | | 154 | | | | 125 | | | | 867 | |
| Warrant derivative – non-employees | | | 366 | | | | 20 | | | | 3,225 | | | | 507 | | | | 4,118 | |
| Change in fair value (D) | | | 1,772 | | | | (798 | ) | | | 3,379 | | | | 632 | | | | 4,985 | |
| Total warrant and options derivative non-employees (E) = C+D | | | 2,363 | | | | 7,211 | | | | 3,379 | | | | (6,409 | ) | | | 6,544 | |
The Company revalues the derivatives at the end of each quarter to determine if the values of these derivatives have changed from period to period, until the notes are redeemed or converted. An increase in value of these derivatives will result in the Company having to record an expense to the Adjustment to Fair
F-31
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 10. Convertible Notes Payable – (continued)
Value of Derivatives on the Statement of Operations. Conversely, a decrease in the value of these derivatives will result in the Company having to record income to the Adjustment to Fair Value of Derivatives on the Statement of Operations.
For the year ended December 31, 2006, and December 31, 2007 conversion by note holders of convertible notes and interest into common stock and payment of interest in cash each resulted in reclassifying the fair value of the respective derivative feature on the transaction date from liability to equity in an amount aggregating $1,813,832 and $6,620,143.
In accordance with FAS 133, “Accounting for Derivative Instruments and Hedging Activities,” EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company's Own Stock,” and EITF 05-04, “The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19,” the amounts allocated to the warrant represent a derivative liability that has been recorded in the accompanying balance sheet at December 31, 2007.
The primary components of the “Change in Fair Value of Derivatives” calculations are the changes in the Company's stock price during the reported period as well as assumptions regarding a number of complex and subjective variables used in the Black-Scholes Model. If the Company's stock price decreases sufficiently, the Company may show “Other Income” conversely, if it increases the Company may show “Other Expense.” Additionally, if the volatility in the stock prices of comparable companies used in the Black-Scholes Model increases sufficiently, the Company may show “Other Income.” Conversely, if it decreases the Company may show “Other Expense.” Since the issuance of the convertible notes to the period ended December 31, 2007, the Company's stock price has decreased from $7.15 to $0.45 and was $0.88 at December 31, 2007. For the same period, the volatility in the stock price of comparable companies used in the Black-Scholes Model decreased from 44.56% to 84.04%. As of December 31, 2007, the Company shows $11,188,380 of adjustment to the fair value of derivatives as Other Income as of December 31, 2007.
The convertible note agreements entered into on March 20, 2006 contain variable share settlement provisions. These provisions require the Company to include the “fair value” of issued and vested non-employee options and warrants in derivative liability accounts on the balance sheet in accordance with EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock.” The reason for this classification is the possibility that the Company may not have enough authorized unissued common stock to meet all of its commitments in the delivery of the Company's common stock to honor both the contracts related to the convertible notes and the issued and vested non-employee option and warrant contracts. In order to be in the situation of not having enough unissued shares to deliver to the non-employee option and warrant holders, the fair market value of the common stock of the Company would have to be lower than all of the exercise prices of all the option and warrant contracts. In such case, an option or warrant holder would have to exercise his or her options or warrants at a price that would require him or her to pay more than the fair market value of the common stock on the open market. Nonetheless, according to EITF 00-19 the fair value of these option and warrant contracts must be reclassified as a liability. In addition, the issued and vested non-employee options and warrants identified as derivative instruments require separate valuation under FAS 133 “Accounting for Derivative Instruments and Hedging Activities” at each balance sheet date and at the date of each exercise or grant of new non-employee options and warrants.
F-32
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 10. Convertible Notes Payable – (continued)
Options derivative transactions – Non-employees for options granted and transferred:
| | | | | | | | | | |
| Period | | Options
Granted | | Exercise
Price – Non-
Employees | | Estimated
Fair Value on
the Date
Options
Granted or
Transferred | | Option
Derivatives
as of
December 31,
2007 | | Transfer of
Fully Vested
Employee
Stocks to
Non-Employee |
| During quarter ended December 31, 2006(a) | | | 150,000 | | | $ | 10 | | | $ | 228,000 | | | $ | 126,401 | | | | — | |
| During the quarter ended March 31, 2007(b) | | | — | | | | 0.3 | | | | 435,600 | | | | — | | | | 440,000 | |
| During quarter ended December 31, 2007(c) | | | 310,000 | | | | 1 | | | | 125,240 | | | | 96,865 | | | | — | |
All options were issued for future services and will be expensed over the vesting period. The Black-Scholes Model is used to estimate the fair value of the options.
| (a) | Expected life of 10 years, volatility of 77%, risk free rate of interest of 4.58% – 4.67% and an expected dividend yield of zero. |
| (b) | Expected life of 10 years, volatility of 71.22%, risk free rate of interest of 4.85% and an expected dividend yield of zero. Transaction is done as a function of law. |
| (c) | Expected life of 10 years, volatility of 67.22%, risk free rate of interest of 4.04% and an expected dividend yield of zero. Transaction is done as a function of law. |
Change in the fair value of options and warrant derivatives:
| | | | | | | | | | |
| Adjustments to Fair Value of Derivatives – Options and Warrants | | At
March 31,
2007 | | At
June 30,
2007 | | At
September 30,
2007 | | At
December 31,
2007 | | Total |
| | | | | (In Thousands) | | |
| Adjustment to the fair value of option derivatives(a) | | $ | (64 | ) | | $ | (727 | ) | | $ | (454 | ) | | $ | 427 | | | $ | (818 | ) |
| Adjustment to the fair value of warrant derivatives | | | (488 | ) | | | (121 | ) | | | (100 | ) | | | 729 | | | | 20 | |
| Total adjustments to fair value | | $ | (552 | ) | | $ | (848 | ) | | $ | (554 | ) | | $ | 1,156 | | | $ | (798 | ) |
| (a) | Assumptions for Quarter ended March 31, 2007 were as follow:(1) dividend yield of 0%, (2) the range of the expected volatility of 64.83% to 76.30%, (3) the range of the risk-free interest rate of 4.87% to 5.03% and (4) the range of the expected life and exercise prices consistent. See previous tables for assumptions used for June 30, September 30, 2007 and December 31, 2007. |
| | | | | | | | | | | | |
Stock Option
Transactions –
Non-Employees | | Number of
Option
Exercised | | Dividend
Yield % | | Expected
Volatility % | | Risk Free
Interest Rate % | | Expected
Remaining Life
(Years) | | Decrease In the
Fair Value of
Option
Derivatives |
| Quarter 1 – 2007 | | | 160,000 | | | | 0 | | | | 70.86 – 71.25 | | | | 4.45 – 4.87 | | | | 2.75 | | | $ | 122,698 | |
| Quarter 2 – 2007 | | | 180,000 | | | | 0 | | | | 69.58 – 70.94 | | | | 4.55 – 4.98 | | | | 2.50 | | | | 163,400 | |
| Quarter 3 – 2007 | | | 40,000 | | | | 0 | | | | 73.36 | | | | 4.56 | | | | 2.25 | | | | 24,640 | |
| Quarter 4 – 2007 | | | — | | | | 0 | | | | — | | | | — | | | | — | | | | — | |
| Total – 2007 | | | 380,000 | | | | | | | | | | | | | | | | | | | $ | 310,738 | |
Non-employee option holders' exercise will result in a reduction of the option derivative liability. A decrease in the fair value of the option derivative liability is recorded to additional paid in capital.
F-33
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 10. Convertible Notes Payable – (continued)
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Warrant Transactions –
Non Employee | | Warrant
Issued | | Dividend
Yield % | | Expected
Volatility % | | Risk Free
interest % | | Expected Life
(Years) | | Fair Value on
the Date of
Warrants
Granted | | Exercise Price | | Warrants
Issued with the
Short Term
Notes |
| April – 2006(a) | | | 250,000 | | | | 0 | | | | 79 | | | | 5.125 | | | | 10 | | | $ | 1,602,500 | | | $ | 10 | | | | No | |
| October – 2007(c) | | | 3,700,000 | | | | 0 | | | | 63 | | | | 4.42 | | | | 5 | | | $ | 1,374,065 | | | $ | 1 | | | | No | |
| November – 2007(b) | | | 550,000 | | | | 0 | | | | 67 | | | | 3.83 | | | | 10 | | | $ | 223,987 | | | $ | 1 | | | | No | |
| November – 2007(d) | | | 200,000 | | | | 0 | | | | 63 | | | | 3.99 | | | | 5 | | | $ | 44,058 | | | $ | 1 | | | | Yes | |
| November – 2007(d) | | | 100,000 | | | | 0 | | | | 63 | | | | 3.99 | | | | 5 | | | $ | 22,029 | | | $ | 1 | | | | Yes | |
| December – 2007(d) | | | 300,000 | | | | 0 | | | | 63 | | | | 3.28 | | | | 5 | | | $ | 76,705 | | | $ | 1 | | | | Yes | |
| December – 2007(d) | | | 200,000 | | | | 0 | | | | 64 | | | | 3.64 | | | | 5 | | | $ | 90,132 | | | $ | 1 | | | | Yes | |
| December – 2007(d) | | | 187,500 | | | | 0 | | | | 64 | | | | 3.64 | | | | 5 | | | $ | 84,499 | | | $ | 1 | | | | Yes | |
| December – 2007(d) | | | 50,000 | | | | 0 | | | | 64 | | | | 3.64 | | | | 5 | | | $ | 22,533 | | | $ | 1 | | | | Yes | |
| December – 2007(d) | | | 37,500 | | | | 0 | | | | 64 | | | | 3.64 | | | | 5 | | | $ | 16,900 | | | $ | 1 | | | | Yes | |
| December – 2007(d) | | | 25,000 | | | | 0 | | | | 64 | | | | 3.64 | | | | 5 | | | $ | 11,267 | | | $ | 1 | | | | Yes | |
| December – 2007(d) | | | 300,000 | | | | 0 | | | | 64 | | | | 3.45 | | | | 5 | | | $ | 141,681 | | | $ | 1 | | | | Yes | |
| December – 2007(c)(i) | | | 1,200,000 | | | | 0 | | | | 67 | | | | 4.04 | | | | 10 | | | $ | 754,928 | | | $ | 1 | | | | No | |
| December – 2007(c) | | | 500,000 | | | | 0 | | | | 64 | | | | 3.52 | | | | 5 | | | $ | 235,633 | | | $ | 1 | | | | No | |
| December – 2007(c) | | | 500,000 | | | | 0 | | | | 64 | | | | 3.52 | | | | 5 | | | $ | 235,633 | | | $ | 1 | | | | No | |
| (a) | These warrants were issued for past services and were expensed over a one-year vesting period. The fair value of the vested portion of these warrants for the three months ended March 31, 2007 was $400,643 and $1,602,500 in aggregate was reclassified as part of the warrant derivative. |
| (b) | These warrants were issued in connection with consulting services rendered. These warrants were fully vested on the date of the grant and have a ten year term. These warrants will expire in November 2012. The vested fair value of these warrants for the year ended December 31, 2007 was $140,283 and was reclassified as part of the warrant derivative. |
| (c) | These warrants were for future services. These warrants were fully vested on the date of grant have a five year term and expired in December 2012. |
| (c)(i) | These warrants were for future services. These warrants were fully vested on the date of the grant and have a ten year term. These warrants will expire in December 2017. |
| (d) | These detachable warrants were issued in conjunction with the issuance of short term notes. These warrants were fully vested in year ended December 31, 2007 for $658,000 and was recorded as warrant derivative. The discount on debt is being amortized to interest expense over the term of the notes. |
The Company filed an S-3, which became effective on June 12, 2006 upon which the Company could have chosen to pay the interest in-kind with registered common stock or in cash. Interest on the convertible note has been paid as follows:
| | | | | | | | |
| Years | | Interest Paid
in Cash | | Interest Paid
with Stock | | Total Interest | | Shares
Issued in
Lieu of Cash Payment |
| 2006 | | $ | 1,863,159 | | | | — | | | $ | 1,863,159 | | | | — | |
| 2007 | | $ | 627,700 | | | $ | 521,753 | | | $ | 1,149,453 | | | | 692,682 | |
F-34
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 10. Convertible Notes Payable – (continued)
The accounting for the notes and warrants resulted in deferred financing costs, discount for warrant derivatives and discount for embedded derivatives. These amounts, determined as of March 20, 2006 (close date), will be amortized on a straight-line basis into interest expense over the life of notes and warrants. The following table summarizes these amounts as of December 31, 2007:
| | | | | | | | |
Transactions from March 30, 2006
Through December 31, 2007 | | Deferred Finance Costs | | Discount for Warrant Derivative | | Discount for Embedded Derivatives | | Addition to Interest Expense |
| | | (In Thousands) |
| Balance March 20, 2006 (close date) | | $ | 1,553 | | | $ | 2,383 | | | $ | 8,196 | | | $ | — | |
| Proration of derivatives at December 31, 2007(a) | | | (918 | ) | | | — | | | | — | | | | (918 | ) |
| Amortization for the period March 20, 2006 (close date) through December 31, 2007 charged to interest expense | | | (585 | ) | | | (1,412 | ) | | | (7,932 | ) | | | (9,929 | ) |
| Remaining deferred costs and discount to be amortized | | $ | 50 | | | $ | 971 | | | $ | 264 | | | $ | (10,848 | ) |
| (a) | The proration of derivatives is a reduction in the deferred financing cost due to the conversion of the convertible notes into common stock. |
Senior Secured Convertible Notes
Daniel C. Montano Guaranty
On March 20, 2006, Daniel C. Montano, the Company’s Chairman, Co-President and CEO, entered into a Guaranty Agreement whereby he guaranteed any and all obligations of the Company resulting from the sale on March 20, 2006 of $20,000,000 of senior secured notes and warrants.
The guaranty remains in effect until the later of March 20, 2007 or the first date on which the Company receives revenue from sale of drugs in which FGF-1 is the active ingredient after such drug has been approved by the FDA, provided that on such date the Company is not in default of any provisions of the obligations or triggering events contained in the agreements for the senior secured notes and warrants and such default is not continuing. However, the guaranty will terminate upon the payment in full of the notes including conversion of the notes into the Company’s common stock.
After obligations contained in the agreements for the senior secured notes and warrants have been paid in full, if Daniel C. Montano was required to make any payments pursuant to this guaranty prior to the payment in full of obligations, the Company will reimburse Daniel C. Montano for any such payments plus simple interest at 7% per annum from the date of the advance by Daniel C. Montano to the date reimbursed by the Company.
Pre IPO Debt
The Company issued convertible debt in the years ended December 31, 2002, 2003 and 2004, payable to various individuals, as summarized below. During the year ended December 31, 2005, the Series I, Series II and Series IIa convertible promissory notes were converted into 4,228,000 shares of common stock. Four note holders of convertible notes chose not to convert their notes into common stock and these notes with a total of $30,000 were paid during the year ended December 31, 2005.
F-35
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 10. Convertible Notes Payable – (continued)
Convertible promissory notes series I, II, IIa
These convertible promissory notes had a reset provision upon the completion of the IPO, the Company retested the convertible notes payable for the beneficial conversion feature. Where the Company has issued convertible notes payable with beneficial conversion feature, the difference between the conversion price and the fair value of the common stock, at the effective initial public offering date, will be recorded as a debt discount and will be amortized to interest expense over the redemption period of the convertible notes payable in accordance with EITF Issue No. 98-5, “Accounting for Securities with Beneficial Conversion Feature or Contingently Adjustable Conversion Ratio,” and EITF Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”. No additional Beneficial Conversion feature was required to be recovered.
| | | | | | | | |
| | December 31,
2005 | | December 31,
2006 | | December 31,
2007 | | For the
Period from March 11, 1998
(Inception) to
December 31,
2007
(Inception) |
| | | (In Thousands) |
| Interest expense from the beneficial conversion feature | | $ | 710 | | | $ | — | | | $ | — | | | $ | 2,050 | |
| Total Financing Cost | | $ | 713 | | | $ | — | | | $ | — | | | $ | 2,136 | |
| Interest expense – Series I, II and IIa | | $ | 171 | | | $ | — | | | $ | — | | | $ | 1,303 | |
| Total | | $ | 1,594 | | | $ | — | | | $ | — | | | $ | 5,489 | |
Series I Convertible Promissory Notes
The Series I Convertible Promissory Notes were payable in one installment on the earlier of (i) thirty-six months from the date of issuance or (ii) 30 days after the successful completion of the Company’s IPO. The notes were convertible at the option of the holder into the Company’s common stock. Interest at 7% per annum, compounded annually, was payable within 30 days of when the notes payable were due or converted into shares of the Company’s common stock. The conversion price for each share equaled $2 per share, provided however, if the purchase price of shares at the completion of the IPO was less than $4 per share, the conversion price would have been adjusted to equal 50% of the IPO price.
Series II Convertible Promissory Notes
The Series II Convertible Promissory Notes were payable in one installment on the earlier of (i) thirty-six months from the date of issuance or (ii) 30 days after the successful completion of the Company’s IPO. The notes were convertible at the option of the holder into the Company’s common stock. Interest at 7% per annum, compounded annually, was payable within 30 days of when the notes payable were due or converted into shares of the Company’s common stock. The conversion price for each share equaled $4 per share, provided however, if the purchase price of shares at the completion of the initial public offering was less than $8 per share, the conversion price would have been adjusted to equal 50% of the initial public offering price.
These notes have been converted into common shares.
Series IIa Convertible Promissory Notes
In July 2004, the Company sold $800,000 of convertible notes payable Series IIa. The terms of the convertible notes payable Series IIa are identical to the terms of the convertible notes payable Series II, as discussed above.
The convertible promissory notes were payable in one installment on the earlier of (i) thirty-six months from the date of issuance or (ii) 30 days after the successful completion of the Company’s initial public
F-36
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 10. Convertible Notes Payable – (continued)
offering. The notes were convertible at the option of the holder into the Company’s common stock. Interest at 7% per annum, compounded annually, was payable within 30 days of when the convertible notes payable were due or converted into shares of the Company’s common stock. The conversion price for each share equaled $4 per share, provided however, if the purchase price of shares at the completion of the initial public offering was less than $8 per share, the conversion price would have been adjusted to equal 50% of the IPO price.
Components of Interest Expense
During the year ended December 31, 2004, the Company issued Series II and Series IIa convertible promissory notes with an imbedded beneficial conversion feature. As such, in accordance with EITF Issue No. 98-5, “Accounting for Securities with Beneficial Conversion Feature or Contingently Adjustable Conversion Ratio,” and EITF Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” the difference between the conversion price and the Company’s estimated fair market value of its stock price on the commitment date of the notes was calculated to be $2,050,000. The Company’s estimate of fair market value resulting in a beneficial conversion feature was based on the “Letter of Intent” with the underwriters. This amount will be recognized in the statement of operations as interest expense during the period from the commitment date of the notes to the maturity dates of the notes.
Senior Secured Convertible Notes
| | | | | | |
| | December 31,
2006 | | December 31,
2007 | | For the Period
from
March 11, 1998
(Inception) to
December 31, 2007 |
| | | | | (In Thousands) | | |
| Interest expense | | $ | 2,816 | | | $ | 1,372 | | | $ | 4,187 | |
| Amortization of Derivatives | | $ | 2,743 | | | $ | 5,824 | | | $ | 8,567 | |
| Amortization of Deferred Financing cost | | $ | 403 | | | $ | 930 | | | $ | 1,333 | |
| Total | | $ | 5,962 | | | $ | 8,126 | | | $ | 14,087 | |
Debt Discount on Short Term Notes
The debt discount is for the fair value of the warrants issued with the short term notes. The debt discount is being amortized on a straight line basis over the life of the notes which range in maturity for 42 to 91 days. At December 31, 2007, the unamortized debt discount associated with these warrants is approximately $431,000.
| | | | | | |
| | December 31,
2006 | | December 31,
2007 | | For the Period
from
March 11, 1998
(Inception) to
December 31, 2007 |
| | | | | (In Thousands) | | |
| Amortization of Debt discount on short term notes | | $ | — | | | | 75 | | | $ | 75 | |
| Total | | $ | — | | | $ | 75 | | | $ | 75 | |
F-37
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 11. Stockholders’ Equity
Preferred Stock
On May 1, 1998, the Company sold 52,850 shares of the Company’s Non-Voting Convertible Preferred Stock, $0.001 par value (the “Preferred Stock”). Each share is convertible into 100 shares of the Company’s common stock, prior to the Company completing an Initial Public Offering. Once the Company completes an Initial Public Offering, the conversion price of the Preferred Stock shall be the lower of $0.10 per share or 50% of the initial offering price. The preferred stockholders shall not be entitled to dividends and shall have no voting rights. The aggregate of 52,850 preferred shares were sold at approximately $10 per share and the Company realized $520,400 in gross proceeds. Offering costs were paid to various consultants for their assistance in helping the Company issues these shares. For their assistance in completing these transactions the Company paid $52,040 to the consultants.
On June 5, 2000, a holder of 1,500 shares of preferred stock converted their preferred stock to 150,000 shares of common stock.
During the year ended December 31, 2004, 11 convertible preferred shareholders elected to convert 28,100 of their convertible preferred shares into 2,810,000 shares of common stock. At December 31, 2004, 2,000,000 shares of common stock had not been issued, and were classified as committed common stock.
During the year ended December 31, 2005, nine convertible preferred shareholders elected to convert 23,250 of their preferred shares into 2,325,000 shares of common stock. The 2,000,000 shares of common stock, which as of December 31, 2004 had not been issued, but were classified as committed common stock, were issued during this period. At December 31, 2005 all issued preferred stock has been converted into common stock.
Common Stock
| | | | | | | | | | |
| | For the Year Ended | | Amount
Converted to
Common
Stock | | Number of
Shareholders | | Number of
Preferred
Stock | | Converted to
Common
stock |
| Convertible preferred shareholders(a) | | | December 31, 2004 | | | | | | | | 11 | | | | 28,100 | | | | 2,810,000 | |
| Convertible Series I, II, IIa (notes) | | | December 31, 2004 | | | $ | 4,531,200 | | | | | | | | | | | | 1,649,550 | |
| Convertible notes payables(b) | | | December 31, 2005 | | | | | | | | 9 | | | | 23,250 | | | | 2,325,000 | |
| (a) | At December 31, 2004, 2,000,000 shares of common stock were subsequently issued in 2005. |
| (b) | In addition, six stock option holders’ exercised options to purchase 123,466 shares of common stock during year ended 2005. |
On May 21, 2007, the company entered into an agreement to sell 15,000,000 of the Company’s common stock at a purchase price of $1.00 per share in connection with a Private Placement to the investor and certain other subscribers pursuant to a subscription agreement. As of December 31, 2007, the Company issued 3,650,000 shares and received gross proceeds in the amount of $3,650,000 and net proceeds in the amount of $3,285,000 towards completion of the Private Placement. The agreement, as amended, provides for commissions of 10% of the amount placed in addition to warrants to purchase 3,700,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The investor paid $3,700 for the warrants. The Warrant is exercisable for a period commencing on October 12, 2007 and terminating on the fifth anniversary of the issuance of such warrant. The Warrant issued as of December 31, 2007, and any future Securities issuances, are exempt from registration pursuant to Regulation S set forth by the Securities and Exchange Commission pursuant to the Securities Act of 1933 (“Regulation S”). The agreement, as amended, expired November 9, 2007. The Company has extended this agreement from November 9, 2007 to January 31, 2008 and, in addition, the Company has received an additional gross proceeds of $725,000 subsequent to December 31, 2007.
In May 2006, 20 commemorative shares, which had a fair value of $122, were issued to the founders and the executives.
F-38
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 11. Stockholders’ Equity – (continued)
On February 11, 2005, the Company's S-1 registration statement for the issuance of 1,500,000 new common shares was declared effective. On February 16, 2005, the Company's Initial Public Offering (IPO) was closed. The Company received gross proceeds of $15,693,000 and incurred underwriting discounts, expenses and commissions of $1,681,875 and offering expenses payable by the Company of $655,500, resulting in net proceeds of $13,622,500.
On March 10, 2005, the underwriter exercised its option for the over-allotment and the Company issued 225,000 common shares for proceeds to the Company of $2,030,625.
At December 31, 2005, the convertible notes payable have been converted into common stock, except $30,000 for which holders elected to be repaid. All common stock to be issued resulting from the conversion has been issued.
Conversion of senior secured notes:
See page F-28 for details.
Stock Option Transactions
Recent option and warrant transactions:
| | | | | | | | |
| Date | | Number of
Option or
Warrant
Holders | | Number of
Options
Exercised | | Number of
Warrants
Exercised | | Exchange for
Shares of
Common Stock |
| December 2005 | | | 1 | | | | — | | | | 933,330 | | | | 848,482 | |
| Total – 2005 | | | | | | | — | | | | 933,330 | | | | 848,482 | |
| 1st quarter – 2006 | | | 1 | | | | — | | | | 100,000 | | | | 89,116 | |
| 2nd quarter – 2006 | | | 2 | | | | 55,000 | | | | — | | | | 55,000 | |
| 3rd quarter – 2006 | | | 1 | | | | 210,000 | | | | — | | | | 210,000 | |
| 4th quarter – 2006 | | | 1 | | | | 200,000 | | | | — | | | | 200,000 | |
| Total – 2006 | | | | | | | 465,000 | | | | 100,000 | | | | 554,116 | |
| 1st quarter – 2007 | | | 1 | | | | 220,000 | | | | — | | | | 220,000 | |
| 2nd quarter – 2007 | | | 1 | | | | 180,000 | | | | — | | | | 180,000 | |
| 3rd quarter – 2007 | | | 1 | | | | 40,000 | | | | — | | | | 40,000 | |
| 4th quarter – 2007 | | | 1 | | | | — | | | | — | | | | — | |
| Total – 2007 | | | | | | | 440,000 | | | | — | | | | 440,000 | |
The Company may issue stock options to both employees and non-employees outside of its formal stock option plan. It is Management's intent to grant all options at exercise prices not less than 85% of the fair value of the Company's common stock, as the Board of Directors determines on the date of grant. Options typically expire ten years from the date of grant. During the period from March 11, 1998 (inception) through December 31, 2007, the Company had granted options to both employees and consultants. The Company accounts for stock option transactions in accordance with SFAS 123(R) as discussed in Note 4.
F-39
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 11. Stockholders’ Equity – (continued)
Stock option granted for 2006 and 2007:
| | | | | | | | | | |
| Stock Option Transactions | | Options
Granted | | Exercise
Price | | Estimated
Fair Value | | Weighted
Average
Expected Life
(Years) | | Approximate
Volatility (%) |
| February 2006(a) | | | 50,000 | | | $ | 10.00 | | | $ | 234,830 | | | | 5 | | | | 76 | |
| March 2006(b) | | | 1,250 | | | | 10.00 | | | | 5,424 | | | | 5 | | | | 76 | |
| 2nd quarter – 2006(b) | | | 3,000 | | | | 10.00 | | | | 13,270 | | | | 5 | | | | 79 | |
| 3rd quarter – 2006(b) | | | 4,800 | | | | 10.00 | | | | 11,272 | | | | 10 | | | | 77 | |
| 4th quarter – 2006(b) | | | 156,000 | | | | 10.00 | | | | 235,920 | | | | 10 | | | | 77 | |
| Total – 2006 | | | 215,050 | | | | | | | $ | 500,716 | | | | | | | | | |
| 1st quarter – 2007(b) | | | 500 | | | | 10.00 | | | | 309 | | | | 10 | | | | 69 | |
| 2nd quarter – 2007(b) | | | 3,000 | | | | 10.00 | | | | 1,982 | | | | 10 | | | | 68 | |
| 3rd quarter – 2007(b) | | | 1,000 | | | | 10.00 | | | | 377 | | | | 10 | | | | 68 | |
| 4th quarter – 2007(b) | | | 681,550 | | | | 1.00 | | | | 275,346 | | | | 10 | | | | 67 | |
| Total – 2007 | | | 686,050 | | | | | | | $ | 278,014 | | | | | | | | | |
All options were granted from the 2004 Stock Plan (defined on the next page). The fair value was estimated using Black-Scholes Model with an expected dividend yield of zero.
| (a) | All options were issued for the past services and therefore expensed on the date of grant. |
| (b) | All options were issued for future services and will be expensed over the vesting life of the options. |
| (c) | At December 31, 2007 the unexpensed value for unvested options is approximately $303,000 with an average vesting period of 1.85 years. |
| | | | | | | | | | | | |
Stock Option
Transactions
Non-Employees | | Number of
Options
Exercised | | Dividend
Yield % | | Expected
Volatility % | | Risk Free
Interest
Rate | | Expected
Remaining
Life | | Decrease
In the Fair
Value of Option
Derivatives |
| 1st quarter – 2007 | | | 160,000 | | | | — | | | | 70.86 – 71.25 | | | | 4.49 – 4.91 | | | | 2.75 | | | $ | 122,698 | |
| 2nd quarter – 2007 | | | 180,000 | | | | — | | | | 69.58 – 70.94 | | | | 4.55 – 4.98 | | | | 2.50 | | | | 163,400 | |
| 3rd quarter – 2007 | | | 40,000 | | | | — | | | | 73.36 | | | | 4.56 | | | | 2.25 | | | | 24,640 | |
| 4th quarter – 2007 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total – 2007 | | | 380,000 | | | | | | | | | | | | | | | | | | | $ | 310,738 | |
Non-employee option holders' exercise will result in a reduction of the option derivative liability. A decrease in the fair value of the option derivative liability is recorded to additional paid-in-capital.
Stock option transactions for the year ended December 31, 2005 and prior years:
In July 2004, the Company established the Cardiovascular BioTherapeutics, Inc. 2004 Stock Plan (the “2004 Stock Plan”) permitting the awards of (a) incentive stock options within the meaning of section 422 of the Code, (b) non-qualified stock options, (c) stock appreciation rights and (c) restricted stock to directors, officers, employees and consultants. The Company reserved 5,000,000 shares for the 2004 Stock Plan and limited the maximum number of shares to be granted to any one individual in one year to 500,000.
F-40
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 11. Stockholders’ Equity – (continued)
| | | | | | | | | | | | |
Stock Option
Transactions
Non-Employees | | Options
Granted | | Exercise
Price | | Estimated
Fair Value | | Weighted
Average
Expected Life
(Years) | | Risk Free
Rate of
Interest (%) | | Approximate
Volatility (%) |
During the year ended
December 31, 2005(a) | | | 550,500 | | | $ | 10.00 | | | $ | 2,387,574 | | | | 5 | | | | 4.06 | | | | 76 | |
During the year ended
December 31, 2004(b) | | | 40,000 | | | | 8.00 – 10.00 | | | | 57,792 | | | | 5 | | | | 1.03 to 1.50 | | | | 76 | |
During the year ended
December 31, 2004(c) | | | 25,000 | | | | 4.00 | | | | 21,385 | | | | 5 | | | | 1.02 | | | | 76 | |
During the year ended
December 31, 2003 | | | 90,000 | | | | 2.00 | | | | 47,120 | | | | 5 | | | | 1.39 | | | | 76 | |
During the year ended
December 31, 2002(d) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| (a) | Options granted to employees and directors from the 2004 Stock Plan. Six stock option holders executed their options to purchase 124,500 shares of common stock, of the total 124,500 stock options exercised, 20,000 stock options were exercised in a cashless conversion. |
| (b) | Options granted to employees for past services and expensed on the date granted. |
| (c) | Options granted to non-employees for past services and expensed on the date granted. |
| (d) | Options granted to employees. The Company used Black-Scholes Model to estimate the fair value of the options granted. All options were granted for past services and expensed on the date granted. |
Except as noted above, no other compensation expense has been recognized in connection with grants of employee and non-employee stock options. Stock option activity for the year ended December 31, 2005, 2006 and December 31, 2007 is as follows:
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Employees | | Non-Employees | | Total |
| | | Shares | | Exercise
Price | | Shares | | Exercise
Price | | Shares | | Exercise
Price |
Outstanding at
December 31, 2004 | | | 1,040,000 | | | $ | 0.30 – $10.00 | | | | 1,715,000 | | | $ | 0.30 – $4.00 | | | | 2,755,000 | | | $ | 0.30 – $10.00 | |
| Granted | | | 150,500 | | | $ | 10.00 | | | | 400,000 | | | $ | 10.00 | | | | 550,500 | | | $ | 10.00 | |
| Exercised | | | — | | | $ | — | | | | 124,500 | | | $ | 0.30 – $2.00 | | | | 124,500 | | | $ | 0.30 – $2.00 | |
| Forfeitures | | | 20,000 | | | $ | 10.00 | | | | — | | | | — | | | | 20,000 | | | $ | 10.00 | |
Outstanding at
December 31, 2005 | | | 1,170,500 | | | $ | 0.30 – $10.00 | | | | 1,990,500 | | | $ | 0.30 – $10.00 | | | | 3,161,000 | | | $ | 0.30 – $10.00 | |
| Granted | | | 15,050 | | | $ | 10.00 | | | | 200,000 | | | $ | 10.00 | | | | 215,050 | | | $ | 10.00 | |
| Exercised | | | — | | | $ | — | | | | 465,000 | | | $ | 0.30 – $0.50 | | | | 465,000 | | | $ | 0.30 – $0.50 | |
| Forfeited | | | — | | | $ | — | | | | — | | | | — | | | | — | | | | — | |
Outstanding at
December 31, 2006 | | | 1,185,550 | | | $ | 0.30 – $10.00 | | | | 1,725,500 | | | $ | 0.30 – $10.00 | | | | 2,911,050 | | | $ | 0.30 – $10.00 | |
| Granted | | | 376,050 | | | $ | 1.00 – $10.00 | | | | 310,000 | | | $ | 1.00 | | | | 686,050 | | | $ | 1.00 – $10.00 | |
| Terminated | | | 2,000 | | | $ | 10.00 | | | | — | | | | — | | | | 2,000 | | | $ | 10.00 | |
| Reclassified | | | 440,000 | | | $ | 0.30 | | | | 440,000 | | | $ | 0.30 – $0.50 | | | | — | | | | 0.30 | |
| Exercised | | | 60,000 | | | $ | 0.30 | | | | 380,000 | | | $ | 0.30 | | | | 440,000 | | | $ | 0.30 – $0.50 | |
| Cancelled | | | 2,090 | | | $ | 10.00 | | | | 150,000 | | | $ | 10.00 | | | | 152,090 | | | $ | 10.00 | |
Outstanding at
December 31, 2007 | | | 1,057,510 | | | $ | 0.30 – $10.00 | | | | 1,945,500 | | | $ | 0.30 – $10.00 | | | | 3,003,010 | | | $ | 0.30 – $10.00 | |
F-41
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 11. Stockholders’ Equity – (continued)
Weighted average exercise price of options granted, exercisable and the weighted average remaining contractual life for options outstanding as of December 31, 2005, 2006 and December 31, 2007 was as follows:
| | | | | | | | |
| | Number of
Shares | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Life Years | | Intrinsic
Value |
As of December 31, 2005
| | | | | | | | | | | | | | | | |
| Employees – Outstanding | | | 1,170,500 | | | $ | 1.70 | | | | 4.56 | | | | 4,250,000 | |
| Employees – Expected to Vest | | | 101,991 | | | | 1.70 | | | | 4.56 | | | | — | |
| Employees – Exercisable | | | 1,068,509 | | | | 1.70 | | | | 4.02 | | | | 4,250,000 | |
| Non-Employees – Outstanding | | | 1,990,500 | | | | 2.50 | | | | 5.26 | | | | 6,465,775 | |
| Non-Employees – Expected to Vest | | | — | | | | — | | | | — | | | | — | |
| Non Employees – Exercisable | | | 1,990,500 | | | | 2.50 | | | | 5.26 | | | | 6,465,775 | |
As of December 31, 2006
| | | | | | | | | | | | | | | | |
| Employees – Outstanding | | | 1,185,550 | | | | 1.80 | | | | 3.86 | | | | 1,180,000 | |
| Employees – Expected to Vest | | | 229,758 | | | | 1.80 | | | | 3.86 | | | | — | |
| Employees – Exercisable | | | 955,792 | | | | 1.80 | | | | 3.86 | | | | 1,180,000 | |
| Non-Employees – Outstanding | | | 1,725,500 | | | | 3.61 | | | | 6.21 | | | | 1,221,300 | |
| Non-Employees – Expected to Vest | | | 112,500 | | | | 10.00 | | | | 9.75 | | | | — | |
| Non Employees – Exercisable | | | 1,613,000 | | | | 3.61 | | | | 6.21 | | | | 1,221,300 | |
As of December 31, 2007
| | | | | | | | | | | | | | | | |
| Employees – Outstanding | | | 1,057,510 | | | | 2.23 | | | | 5.83 | | | | 290,000 | |
| Employees – Expected to Vest | | | 285,078 | | | | 1.02 | | | | 9.57 | | | | — | |
| Employees – Exercisable | | | 772,432 | | | | 2.13 | | | | 5.83 | | | | 290,000 | |
| Non-Employees – Outstanding | | | 1,945,500 | | | | 2.60 | | | | 5.77 | | | | 635,100 | |
| Non-Employees – Expected to Vest | | | 145,291 | | | | 4.37 | | | | 9.41 | | | | — | |
| Non Employees – Exercisable | | | 1,800,209 | | | | 2.53 | | | | 5.77 | | | | 635,100 | |
During the first quarter of 2007, as a function of law, 440,000 existing fully vested employee stock options with an exercise price of $0.30 were reclassified to a non-employee. The Company estimated the fair value on the date of transfer of the options to be $435,600 using the Black-Scholes Model and has reclassified the estimated fair value from equity to option derivative liability. The Black-Scholes Model assumptions were as follows: Expected life of 10 years, volatility of 71.22%, risk free rate of interest of 4.85% and an expected dividend yield of zero.
F-42
TABLE OF CONTENTS
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 11. Stockholders’ Equity – (continued)
Warrants
Warrants have only been issued to outside parties and to employees:
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Warrants Granted | | Warrants
Issued for
Purchase of
Common
Stock | | Estimated
Fair Market
Value | | Exercise
Price Per
Share ($) | | Expected Life
(Years) | | Risk Free
Interest % | | Approximate
Volatility % | | Expected
Dividend
Yield % |
| December 2000(a) | | | 933,330 | | | | 115,475 | | | | 0.40 | | | | 3.5 | | | | 5.02 | % | | | — | | | | — | |
| January 2001(b) | | | 100,000 | | | | — | | | | 0.80 | | | | 5 | | | | 4.89 | % | | | — | | | | — | |
| June 2003(c) | | | 200,000 | | | | 119,744 | | | | 2.00 | | | | 5 | | | | 0.94 | % | | | 76 | | | | — | |
| February 2005(d) | | | 75,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| March 2006(e) | | | 5,999,997 | | | | 2,057,955 | | | | 1.00 | | | | 3 | | | | 4.89 | % | | | 78 | | | | — | |
| April 2006(f) | | | 250,000 | | | | 1,602,500 | | | | 10.00 | | | | 10 | | | | 5.12 | % | | | 79 | | | | — | |
| October 2007(g)(i) | | | 3,700,000 | | | | 1,374,065 | | | | 1.00 | | | | 5 | | | | 4.42 | % | | | 63 | | | | — | |
| November 2007(h) | | | 550,000 | | | | 223,987 | | | | 1.00 | | | | 10 | | | | 3.83 | % | | | 66.54 | | | | — | |
| November 2007(i) | | | 500,000 | | | | 203,624 | | | | 1.00 | | | | 10 | | | | 3.83 | % | | | 66.54 | | | | — | |
| November 2007(g)(ii) | | | 200,000 | | | | 44,058 | | | | 1.00 | | | | 5 | | | | 3.99 | % | | | 63 | | | | — | |
| November 2007(g)(ii) | | | 100,000 | | | | 22,029 | | | | 1.00 | | | | 5 | | | | 3.99 | % | | | 63 | | | | — | |
| December 2007(g)(ii) | | | 300,000 | | | | 76,705 | | | | 1.00 | | | | 5 | | | | 3.28 | % | | | 63 | | | | — | |
| December 2007(g)(ii) | | | 200,000 | | | | 90,132 | | | | 1.00 | | | | 5 | | | | 3.64 | % | | | 64 | | | | — | |
| December 2007(g)(ii) | | | 187,500 | | | | 84,499 | | | | 1.00 | | | | 5 | | | | 3.64 | % | | | 64 | | | | — | |
| December 2007(g)(ii) | | | 50,000 | | | | 22,533 | | | | 1.00 | | | | 5 | | | | 3.64 | % | | | 64 | | | | — | |
| December 2007(g)(ii) | | | 37,500 | | | | 16,900 | | | | 1.00 | | | | 5 | | | | 3.64 | % | | | 64 | | | | — | |
| December 2007(g)(ii) | | | 25,000 | | | | 11,267 | | | | 1.00 | | | | 5 | | | | 3.64 | % | | | 64 | | | | — | |
| December 2007(g)(ii) | | | 300,000 | | | | 141,681 | | | | 1.00 | | | | 5 | | | | 3.45 | % | | | 64 | | | | — | |
| December 2007(g)(iii) | | | 1,200,000 | | | | 754,928 | | | | 1.00 | | | | 10 | | | | 4.04 | % | | | 67 | | | | — | |
| December 2007(g)(i) | | | 500,000 | | | | 224,540 | | | | 1.00 | | | | 5 | | | | 3.52 | % | | | 64 | | | | — | |
| December 2007(g)(i) | | | 500,000 | | | | 224,540 | | | | 1.00 | | | | 5 | | | | 3.52 | % | | | 64 | | | | | |
| (a) | The warrants fully vested in December 2001 and were to expire in December 2005. However, prior to the expiration date in December 2005 the holder of the warrants elected to exercise 933,330 warrants in exchange for 848,482 shares of common stock. The exercise of these warrants was cashless. |
| (b) | The warrant was fully vested on the date of the grant and was exercised in March 2006. |
| (c) | The warrant issued to an individual in connection with consulting services rendered. The warrant fully vested on the date of the grant and expires in June 2013. |
| (d) | The Company sold a warrant for 75,000 shares of common stock at 125% of the IPO price for $75.00 to the underwriter pursuant to the underwriting agreement. The warrants have a term of six months commencing on the effective date of the IPO, February 11, 2005. |
| (e) | Issued as part of the sale of senior secured convertible notes issued in March 2006 for 705,882 warrants at $8.50 as per the original terms of the agreement were fair valued for re-pricing from April 1, 2007, through May 21, 2007 for 5,999,997 warrants at $1.00 per share. |
| (f) | Warrants issued for past services and are expensed over a one year vesting period. The fair value of the portion of these warrants that vested during the three months ended March 31, 2007 of $400,643 and in aggregate $1,602,500 has been reclassified as part of the warrant derivative. |
| (g)(i) | The warrants issued for future services. These warrants are fully vested on the date of the grant, have a five year term and expire in December 2012. |
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 11. Stockholders’ Equity – (continued)
| (g)(ii) | These warrants were issued along with short term notes, are detachable and are fully vested on the date of the grant and have a five year term. |
| (g)(iii) | The warrants issued for future services. These warrants are fully vested on the date of the grant and have a ten (10) year term. The warrants will expire in December 2017. |
| (h) | These warrants were issued in connection with consulting services rendered. These warrants are fully vested on the date of the grant and have a ten year term. The warrants will expire in November 2017. The fair value of the fully vested warrants during the year ended December 31, 2007 of $223,987 has been reclassified as part of the warrant derivative. |
| (i) | The warrants were issued to an employee in connection with the research and development services rendered. The warrants are fully vested on the date of the grant, have a ten year term and expire in November 2017. |
Warrant activity for the year ended December 31, 2005, 2006, and 2007 is as follows:
| | | | |
| | Warrants
Outstanding | | Weighted
Average
Exercise Price |
| Outstanding at December 31, 2005 | | | 375,000 | | | $ | 3.78 | |
| Granted | | | 250,000 | | | | 10.00 | |
| Sold | | | 705,882 | | | | 8.50 | |
| Exercised | | | (100,000 | ) | | | 0.80 | |
| Forfeited | | | — | | | | — | |
| Outstanding at December 31, 2006 | | | 1,230,882 | | | $ | 7.88 | |
| Granted | | | 8,350,000 | | | | 1.00 | |
| Sold/Reissued(a) | | | 5,999,997 | | | | 1.00 | |
| Exercised | | | — | | | | — | |
| Forfeited/Cancelled(a) | | | (705,882 | ) | | | 8.50 | |
| Outstanding at December 31, 2007 | | | 14,874,997 | | | $ | 1.22 | |
| Warrants exercisable at December 31, 2005 | | | 375,000 | | | | 3.78 | |
| Warrants exercisable at December 31, 2006 | | | 1,168,382 | | | | 7.88 | |
| Warrants exercisable at December 31, 2007 | | | 14,874,997 | | | | 1.22 | |
| (a) | In connection with the Securities Purchase Agreement, the Company issued warrants to purchase an aggregate of 705,882 shares of its common stock. On May 21, 2007, the aggregate number of shares acquirable upon exercise of such warrants increased to 5,999,997. The term of the warrants is three years and they may be exercised at any time up to March 2009. The warrant exercise price was $8.50 per share, until the price was re-set as of May 21, 2007 at $1.00 per share. |
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 11. Stockholders’ Equity – (continued)
The following table summarizes information about warrants outstanding at December 31, 2007:
| | | | | | | | | | |
| Exercise Prices | | Warrants
Outstanding | | Weighted
Average
Remaining
Life (Years) | | Weighted
Average
Exercise
Price | | Warrants
Exercisable | | Weighted
Averag
e Exercise
Price |
| $2.00 | | | 200,000 | | | | 5.48 | | | $ | 2.00 | | | | 200,000 | | | $ | 2.00 | |
| 1.00(a) | | | 5,999,997 | | | | 1.22 | | | | 1.00 | | | | 5,999,997 | | | | 1.00 | |
| 10.00 | | | 250,000 | | | | 8.29 | | | | 10.00 | | | | 250,000 | | | | 10.00 | |
| 12.50 | | | 75,000 | | | | 1.13 | | | | 12.50 | | | | 75,000 | | | | 12.50 | |
| 1.00 | | | 8,350,000 | | | | 4.94 | | | | 1.00 | | | | 8,350,000 | | | | 1.00 | |
| Total | | | 14,874,997 | | | | | | | | | | | | 14,874,997 | |
| (a) | In connection with the Securities Purchase Agreement, the Company issued warrants to purchase an aggregate of 705,882 shares of common stock. On May 21, 2007, the aggregate number of shares acquirable upon exercise of such warrants increased to 5,999,997. The term of the warrants is three years and they may be exercised at any time up to March 2009. The warrant exercise price was $8.50 per share, until the price was re-set as of May 21, 2007 at $1.00 per share. |
Authorized Shares
At the Company's 2005 Annual Meeting of Stockholders held on May 23, 2005, the shareholders approved to amend the Certificate of Incorporation to increase the number of authorized shares of Common Stock to 400,000,000 shares.
Note 12. Related Party Transactions
| | | | | | | | |
| | December 31, | | For the Period
from
March 11, 1998
(Inception) to
December 31, |
| Fees Paid to: | | 2005 | | 2006 | | 2007 | | 2007 |
| | | (In Thousands) |
| Daniel C. Montano (Chairman of the Board, Co-President and Chief Executive Office)(a) | | | — | | | | — | | | | — | | | | 200 | |
| Daniel C. Montano (Chairman of the Board, Co-President and Chief Executive Office)(b) | | | 432 | | | | 480 | | | | 483 | | | | 2,299 | |
| Vizier Management Company(c) | | | — | | | | — | | | | — | | | | 116 | |
| GHL Financial Services Ltd. (“GHL”)(d) | | | 16 | | | | 40 | | | | 165 | | | | 2,390 | |
| Dr. Thomas J. Stegmann M.D. (the Company's Co-founder, Co-President, and Chief Medical Officer(a) | | | 587 | | | | 500 | | | | 501 | | | | 1,990 | |
| C.K. Capital International and C&K Capital Corporation(f) | | | 20 | | | | 1,218 | | | | — | | | | 1,763 | |
| Dr. Wolfgang Priemer (the Company's founder)(e) | | | 56 | | | | 80 | | | | 80 | | | | 362 | |
| Total | | | 1,111 | | | | 2,318 | | | | 1,229 | | | | 9,120 | |
| (c) | Vizier Management Company is controlled by Daniel C. Montano. The Company paid Vizier for consulting. |
| (d) | A director is a principal and owns 4.12% of the Company for the overseas sale of the Company's convertible notes payable and Preferred Stock. |
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 12. Related Party Transactions – (continued)
| (e) | Fees were paid for assisting the Company with the European Compliance Committee which monitors the Company's activities in Europe from the legal, regulatory and tax compliance perspectives. |
| (f) | C.K. Capital International and C&K Capital Corporation are controlled by Alex Montano, son of Daniel C. Montano. Alex Montano resigned from the Board of Directors as of August 26, 2006. |
On March 15, 2006, the Company entered into a Standard Lease Guaranty (the “Lease Guaranty”) of the Standard Industrial Net Lease between Canta Rana Ranch, L.P., a California Limited Partnership and Phage (the “Lease Agreement”). Pursuant to the Lease Guaranty which was terminated on May 23, 2007. The Company guarantees full performance of all of Phage's obligations under the Lease Agreement. (See note 13).
During August, 2006, the Company requested Phage conduct the pack-and-fill of the drug product for the PAD Phase I clinical trial. Phage obtained a third-party proposal as a benchmark for the pack-and-fill. The Company agreed to have Phage conduct the pack-and-fill provided Phage does not exceed the amount of the third-party proposal. Phage has completed the manufacturing run of a clinical lot of FGF-1 as of May 19, 2007. Phage has done the final fill of this product for the upcoming Phase I clinical trial in peripheral artery disease. Phage will continue to store the product at its facility until further instruction from the Company. The Company has paid $396,000 to Phage for this project as of December 31, 2007.
The Company entered into an engagement agreement with GHL Financial Services, Ltd. (“GHL”) on August 16, 2007 (the “Engagement Agreement”). Under the Engagement Agreement, GHL shall act as lead placement agent in the proposed offering, issuance and sale of the Company’s securities, including the Securities issued and any future Securities issuances by the Company in connection with the Private Placement. In connection with its engagement, GHL will perform services which are normal and customary for a placement agent to perform in any transaction, including the Private Placement. Any financing arranged by GHL will be as the Company’s agent (on a best efforts basis) and not on an underwritten basis. The Company agrees to pay GHL 10% of aggregate gross proceeds received or to be received by the Company from the sale of the Company’s securities in any transaction during the term for its services pursuant to the Engagement Agreement. GHL is responsible for paying commissions to sub-placing, if any, agents. The President of GHL is Grant Gordon, a director on the Company’s Board of Directors since February 2005 and the son-in-law of Daniel C. Montano, the Chairman of the Board of Directors, Co-President and Chief Executive Officer. Pursuant to the Engagement Agreement between the Company and GHL, GHL earned a commission of $73,000 (2% of the aggregate purchase price of the common stock sold to the investor and the subscribers) in connection with the Private Placement as of October 12, 2007, GHL also earned a commission of $12,000 on the funds received from the short term notes.
Note 13. Income Taxes
The Company files income tax returned in the U.S. federal jurisdiction and various state jurisdictions.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) on January 1, 2007. The Company assessed the potential liability for all uncertain tax positions as required by FIN 48 at January 1, 2007 and, December 31, 2007 and the Company concluded that it has no uncertain tax positions that might give rise to potential tax liabilities or to amend the accumulated tax losses available to carry forward for application against future taxable income in each of the Company's taxing jurisdictions.
No interest or penalty related to uncertain tax positions in income tax expense is required to be recognized for the year ended December 31, 2007. The Company is in the development stage and has incurred losses since its inception. All tax years from inception are subject to examination by the federal and state taxing authorities, respectively. There are no income tax examinations currently in process.
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 13. Income Taxes – (continued)
The adoption of FIN 48 created a reduction of the federal and state net operating loss carryforwards of approximately $950,000 respectively. A reduction of $255,660 in the federal research and development credit carryforward was also recognized in the current year. Typically under audit by federal taxing authorities these credits are reduced by thirty percent and as such the company has reflected this likelihood. In the current year the company reduced its federal research and development credit carryforward from $852,201 to $596,541.
As the Company has significant net operating loss carryforwards, even if certain of the Company’s tax positions were disallowed, it is not foreseen that the Company would have to pay any taxes in the near future. Consequently, the Company does not calculate the impact of interest or penalties on amounts that might be disallowed.
Included in the Company’s net operating loss carryforward at December 31, 2007, are tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Due to the impact of deferred tax accounting, the disallowance of the shorter deductibility period would not affect the annual effective tax rate.
Significant components of the provision for income taxes for the years ended December 31, 2005, 2006, and 2007 were as follows:
| | | | | | |
| | December 31, |
| | | 2005 | | 2006 | | 2007 |
| | | (Dollars in Thousands) |
Current
| | | | | | | | | | | | |
| Federal | | $ | — | | | $ | — | | | $ | — | |
| State | | | — | | | | — | | | | — | |
Deferred
| | | | | | | | | | | | |
| Federal | | | — | | | | — | | | | — | |
| State | | | — | | | | — | | | | — | |
| Provision for income taxes | | $ | — | | | $ | — | | | $ | — | |
A reconciliation of the expected income tax (benefit) computed using the federal statutory income tax rate to the Company’s effective income tax rate is as follows for the years ended December 31, 2005, 2006, and 2007:
| | | | | | |
| | December 31, |
| | | 2005 | | 2006 | | 2007 |
| Income tax computed at federal statutory tax rate | | | 34.00 % | | | | 34.00 % | | | | 34.00 % | |
| State taxes, net of federal benefit | | | 5.49 | | | | 5.85 | | | | — | |
| Deferred stock compensation | | | — | | | | 4.29 | | | | — | |
| Change in valuation allowance | | | (38.91 ) | | | | (42.28 ) | | | | (34.49 ) | |
| Other | | | (0.59 ) | | | | (1.86 ) | | | | .49 | |
| Total | | | (0.01 )% | | | | (0.00 )% | | | | (0.00 )% | |
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 13. Income Taxes – (continued)
Significant components of the Company’s deferred tax assets (liability) at December 31, 2005, 2006, and 2007 consisted of the following:
| | | | | | |
| | December 31, |
| | | 2005 | | 2006 | | 2007 |
| | | (Dollars in Thousands) |
Deferred tax assets (liabilities)
| | | | | | | | | | | | |
| Net operating loss carry-forwards | | $ | 10,740 | | | $ | 19,256 | | | $ | 25,546 | |
| Accrual to cash | | | (64 ) | | | | (22 ) | | | | 1,312 | |
| Deferred stock compensation | | | 964 | | | | 1,673 | | | | 1,416 | |
| Accrued interest payable | | | — | | | | 238 | | | | 48 | |
| Derivative instruments | | | — | | | | (2,771 ) | | | | 433 | |
| Other | | | (3 ) | | | | (21 ) | | | | 57 | |
| Tax Credits | | | 173 | | | | 592 | | | | 599 | |
| State taxes | | | (816 ) | | | | (1,265 ) | | | | (1,328 ) | |
| Valuation allowance | | | (10,994 ) | | | | (17,680 ) | | | | (28,088 | ) |
| | | $ | — | | | $ | — | | | $ | — | |
| | | | |
| | As of |
| | | December 31,
2006 | | December 31,
2007 |
| | | (In Thousands) |
Net Operating Loss carry forward:
| | | | | | | | |
| Federal income taxes | | $ | 44,164 | | | $ | 69,357 | |
| State income taxes (California) | | | 34,599 | | | | 59,792 | |
These losses will expire through 2008 to 2018.
The utilization of net operating loss carry forwards may be limited due to the ownership change under the provisions of Internal Revenue Code Section 382 and similar state provisions. The Company is undergoing a study to determine how the increase in ownership by the public may affect the Company’s net operating loss carryover under Internal Revenue Code Section 382 and similar state provisions.
| | |
| | As of
December 31,
2007 |
| | | (In Thousands) |
| Federal research and development credit carry forward | | $ | 597 | |
The net operating loss carry-forwards are the only significant deferred income tax assets of the Company. They have been offset by a valuation allowance since management does not believe the recoverability of this deferred tax assets during the next fiscal year is more likely than not. Accordingly, a deferred income tax benefit for the years ended December 31, 2005, 2006 and 2007, has not been recognized in these financial statements.
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 14. Commitments and Contingencies
Leases
In April 2004, the Company entered into a non-cancelable operating lease agreement for office space that requires monthly payments of $5,882 which expired in October 2005. On May 2004, the Company gave a deposit of $5,900. The Company vacated this facility in October 2005 and subsequently the deposit was refunded.
During 2004 and 2005, the Company sub-leased space from Phage for approximately $2,800 per month as part of the agreement for administrative services.
In November 2005, the Company entered into a five year operating lease for its corporate headquarters commencing on March 1, 2006. The lease provides for a renewal option for an additional five years. The lease provides for increases in annual rental payments of approximately 3%. Also, the agreement requires the Company to pay its share of certain common operating costs that are to be assessed annually. On May 23, 2007, Canta Rana Ranch, L.P., a California Limited Partnership (“Canta Rana”), released CardioVascular BioTherapeutics, Inc. (the “Company”) from its obligations under the Standard Lease Guaranty, executed by the Company on March 15, 2006 (the “Guaranty”), in connection with the Standard Industrial Net Lease (the “Phage Lease”), dated March 15, 2006, between Phage Biotechnology Corporation, a Delaware Corporation (“Phage”) and Canta Rana. The Agreement Exchanging Lease Guaranties (the “Agreement”), executed by Canta Rana and the Company, among other parties, became effective on May 23, 2007 when the terms therein were satisfied and which effectiveness thereby terminated and superseded the Guaranty, which released the Company of any and all obligations of Phage under the Phage Lease. Also in relation to the termination of the Guaranty, the Indemnity and Reimbursement Agreement, dated March 15, 2006, between the Company and Phage that was executed in exchange for the Guaranty, automatically terminated on May 21, 2007, the effective date of the exchange of guaranties referenced in the Agreement.
The Company entered into a Second Amendment dated September 8, 2006 (to be effective as of September 1, 2006) for the expansion space use of administrative offices in Las Vegas. The Second Amendment commences on August 29, 2006 and shall run coterminous with the term of that certain lease, dated November 1, 2005 for the space, consisting of 7,348 square feet of rentable space and expires on February 28, 2011. In total, including the annual base rent the Company will pay approximately $381,000 in base rent for the expansion space throughout the term of the lease.
The Company entered into a Lease Agreement dated August 7, 2006 with Nancy Ridge LLC, a Delaware Limited Liability Company, for the use of general office and laboratory space in San Diego, CA. The lease commences on September 1, 2006 and expires on May 13, 2013, at which time the Company will have the option of extending the lease by five years on the same terms and conditions of the lease. The Company has paid Nancy Ridge a fully refundable security deposit in the amount of $58,000, and further agrees to pay $15,000 per month for the term of the lease for the use of 6,768 square feet of general office and laboratory space. The security deposit is refundable thirty days upon termination of the lease.
The Company concluded that it would be more cost effective to continue outsourcing certain research and development activities than to increase its business activities in the San Diego laboratory facility. Accordingly, on March 14, 2008 the Company terminated its lease of the facility in San Diego in exchange for the amount of the security deposit of $57,805. There is no future liability after this date.
| | | | |
| | December 31, |
| Paid Rent: | | 2006 | | 2007 |
| | | (In Thousands) |
| Total rent paid(a) | | $ | 225 | | | $ | 465 | |
(a) Total rent paid for the corporate office in Las Vegas and the San Diego lab facility.
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 14. Commitments and Contingencies – (continued)
| | |
| Accrued Rent as of December 31, 2007 | | Amount |
| | | (In Thousands) |
| Corporate headquarters | | $ | 36 | |
| Expanded space – corporate headquarters | | | 8 | |
| San Diego lab facility | | | 132 | |
Security deposit is refundable thirty days upon termination of the lease.
The following is a schedule of future minimum rental payments required under the lease agreements:
| | |
| Year | | Amount |
| | | (In Thousands) |
| 2007 | | $ | — | |
| 2008 | | | 523 | |
| 2009 | | | 541 | |
| 2010 | | | 559 | |
| 2011 | | | 275 | |
| Thereafter | | | 322 | |
| Total | | $ | 2,220 | |
The company bills related party approximately $6,000 per month for use of space.
Phage Lease Guaranty (Now Terminated)
On May 23, 2007, Canta Rana Ranch, L.P., a California Limited Partnership (“Canta Rana”), released CardioVascular BioTherapeutics, Inc. (the “Company”) from its obligations under the Standard Lease Guaranty, executed by the Company on March 15, 2006 (the “Guaranty”), in connection with the Standard Industrial Net Lease (the “Phage Lease”), dated March 15, 2006, between Phage Biotechnology Corporation, a Delaware Corporation (“Phage”) and Canta Rana. The Agreement Exchanging Lease Guaranties (the “Agreement”), executed by Canta Rana and the Company, among other parties, became effective on May 23, 2007 when the terms therein were satisfied and which effectiveness thereby terminated and superseded the Guaranty, which released the Company of any and all obligations of Phage under the Phage Lease. More specifically, the Company is no longer liable for the full performance of each and every obligation of Phage under the Phage Lease.
The Company entered into a Standard Lease Guaranty (the “Lease Guaranty”) dated March 15, 2006 of the Standard Industrial Net Lease dated March 15, 2006, entered into by Canta Rana Ranch, L.P., a California Limited Partnership and Phage, an affiliated private biotechnology company that manufactures recombinant protein drugs for the Company (the “Lease Agreement”). Pursuant to the Lease Guaranty, the Company guaranteed full performance of all of Phage's obligations under the Lease Agreement. This guaranty was terminated on May 23, 2007, whereby the Company was released from these obligations.
In August 2004, the Company guaranteed Phage's obligations under a non-cancelable operating lease for laboratory and office space at University of California Irvine Research Center. The lease is for 11,091 rentable square feet for the period March 1, 2004 through August 31, 2006, and provided for a monthly rent of approximately $35,500 plus shared building operating expenses. The lease along with the Company's guarantees expired during the third quarter of 2006.
In exchange for the Company's guarantee of the Lease Agreement, Phage entered into an Indemnity and Reimbursement Agreement dated as of March 15, 2006 (the “Indemnity Agreement”) under which it paid the Company certain guarantee fees. This Indemnity Agreement also terminated on May 23, 2007.
For the year ended December 31, 2007, the company earned $2,757 of guaranty fees from Phage.
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 14. Commitments and Contingencies – (continued)
Phage is an affiliated private biotechnology company that manufactures recombinant protein drugs for the Company and is the Company's sole supplier of its drug candidates formulated with FGF-1141.
If Phage defaults on payment of the minimum monthly rent or the additional rent, which monthly payments aggregate approximately $20,000, the Company is obligated, pursuant to the Lease Guaranty, to pay to the lessor the rents in default. The Company's maximum contingent liability is approximately $1,137,000 as of June 30, 2007 and will decrease by approximately $20,000 per month as minimum monthly rent and the additional rent are paid by Phage.
Phage has indemnified the Company for any amounts required to be paid by the Company pursuant to the Lease Guaranty in the Indemnity and Reimbursement Agreement dated as of March 15, 2006.
The lease guarantee is irrevocably released when Phage provides to Canta Rana Ranch, L.P. a bank statement showing a balance of $5,000,000.
In relation to the termination of the Guaranty, the Indemnity and Reimbursement Agreement, dated March 15, 2006, between the Company and Phage that was executed in exchange for the Guaranty, automatically terminated on May 21, 2007, the effective date of the exchange of guaranties referenced in the Agreement.
Employment Agreements
In July 2004, the Company entered into an employment agreement with a non-executive employee, effective August 1, 2004, under the terms of which the Company will pay a monthly salary of $10,000. The agreement was for three years and expired July 31, 2007.
Consulting Agreements
The Company entered into numerous consulting agreements whereby the consultants assisted the Company in the development process, regulatory affairs and financial management. Consulting fees related to the various agreements are as follow:
Consulting fees:
| | | | | | | | |
| | December 31,
2005 | | December 31,
2006 | | December 31,
2007 | | For the Period from March 11, 1998 (Inception) to December 31,
2007 |
| | | (In Thousands) |
| Consulting agreements | | $ | 686 | | | $ | 1,480 | | | $ | 2,459 | | | $ | 5,264 | |
In addition to the consulting fees, the Company issued 2,715,000 non-employee stock options, with an exercise price range of $0.30-$4.00 per share. The options vested immediately and have a contract life of 10 years. The Company also issued 300,000 warrants with an exercise price range of $0.80-$2.00 per share. The warrants are exercisable immediately and have a contract life of 5 to 10 years, respectively.
List of consulting agreements:
| | | | | | | | |
| Item # | | Contract | | Agreement Name | | Start | | End Date |
| 1 | | Mickael Flaa | | Chief Financial Officer | | 1-Jun-2003 | | Ongoing |
| 2 | | Investor relation consultant | | Investor Relations | | 20-Mar-1998 | | Ongoing |
| 3 | | Investor Awareness | | Public Relation | | 1-Nov-2004 | | 1-Jun-06 |
| 4 | | Schwartz Communications | | Public Relation | | 1-Jul-2006 | | Ongoing |
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 14. Commitments and Contingencies – (continued)
| | | | | | | | |
| Item # | | Contract | | Agreement Name | | Start | | End Date |
| 5 | | VP Corporate Development | | VP Corporate Development | | 1-Sep-2006 | | Ongoing |
| 6 | | Marketing director | | Director of Corporate
Development | | 1-Dec-2006 | | Ongoing |
| 7 | | Medical consultant | | Medical Expert | | 1-Oct-2006 | | Ongoing |
| 8 | | Medical consultant | | Medical Expert | | 1-Sep-2006 | | Ongoing |
| 9 | | Medical consultant | | Medical Expert | | 1-Aug-2006 | | Ongoing |
| 10 | | IT Director | | Director of Information
Technology | | 5-Jun-2007 | | Ongoing |
| 11 | | Tanaka International LLC | | Partnering Consultant-Asia | | 1-Feb-2007 | | Ongoing |
Service Agreements
The Company has entered several service agreements as follow:
These service fees for the obligations below were determined through a process of competitive bids and negotiation. The major outstanding contractual obligations are summarized below:
| | | | | | | | |
| Item # | | Contract | | Agreement Name | | Start | | End Date |
| 1 | | Phage Biotechnology | | Joint patent agreement | | 28-Feb-2007 | | 1-Mar-2020 |
| 2 | | Cardio Phage International (“CPI”) | | Distribution agreement | | 16-Aug-2004 | | 16-Aug-2103 |
| 3 | | Korea Bio-Development Corporation | | Manufacturing and
distribution agreement | | 15-Dec-2000 | | 15-Dec-2099 |
| 4 | | Hesperion, Inc. (TouchStone, formerly “Clinical
CardioVascular Research, LLC”) | | Clinical development of
investigational drugs and devices for Cardiovascular indications | | 24-Oct-2001 | | Ongoing |
| 5 | | CVBT Founder | | Royalty agreement | | 16-Aug-2004 | | 31-Dec-2013 |
| 6 | | Catheter and Disposables Technologies, Inc | | Product development | | 1-Jun-2004 | | 31-Dec-2006 |
| 1) | The Company entered into a joint patent agreement with Phage as of February 28, 2007. The Company plans to develop and commercialize therapeutic methods related to the induction of angiogenesis or wound healing by administration of Fibroblast Growth Factor (“FGF”); and, Phage plans to develop and commercialize recombinant DNA methods for producing peptides/proteins. The Company and Phage entered into a joint patent ownership and license agreement dated as of August 16, 2004, which was later amended and restated as of May 23, 2006 (the “Joint Ownership Agreement”), for consideration the sufficiency of which was acknowledged in each agreement, pursuant to which Phage granted Cardio a 50% ownership interest in certain patents and patent applications listed in the Joint Ownership Agreement, as well as certain future patent rights, and the parties acknowledge that the Company would have exclusive rights within a defined field, while Phage would have exclusive rights outside that field. Cardio and Phage entered a new agreement as of February 28, 2007 superseding the Joint Ownership Agreement so as to specify those future patents and patent applications that are to be subject to joint ownership and so as to restate the licenses granted in the Joint Ownership Agreement. Cardio and Phage acknowledged that the jointly owned and cross-licensed rights are vital to the parties' respective plans for development and commercialization and further clarified the parties' respective rights and provided for continued access to the necessary rights in the event of insolvency. In consideration for the grant of the |
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 14. Commitments and Contingencies – (continued)
| | exclusive right to the patent rights in the field, the Company shall pay a 6% royalty to Phage on the net sales price of finished product to end customer or distributor. The rights and obligations set forth in this agreement shall commence as of the effective date of this agreement and end upon the later of (a) the expiration of the last to expire Jointly Owned Patent and (b) the abandonment of the last pending Jointly Patent Application. |
| 2) | CPI will act as distributor for the products of both Phage and the Company in locations throughout the world other than United States, Canada, Europe, Japan, China, and the Republic of Korea. CPI is obligated to pay the Company an amount equal to 50% of CPI's gross revenue from sales of the Company's products less CPI's direct and indirect costs. |
| 3) | As part of this agreement, KBDC arranged the purchase of 8,750,000 shares of the Company's common stock for $3,602,000 by Cardio Korea, Ltd. KBDC agreed to fund all of the regulatory approval process in Korea for any of the Company's products. In addition, KBDC agreed to pay the Company a royalty of ten percent net revenue from sales in its Asian territories. |
| 4) | Hesperion will assist the Company with the FDA approval process for drug. |
| 5) | The Company's royalty agreement with its Founder will provide him with a one percent royalty on net revenue from the sale of the Company's drug candidates, if any, measured quarterly and payable 90 days after quarter end. |
| 6) | Catheter and Disposables Technologies, Inc. will design, develop, and fabricate two different prototype catheter products that will facilitate the administration of CVBT-141A by catheter delivery. |
These service fees for the obligations below were determined through a process of competitive bids and negotiation. major outstanding contractual obligations are summarized below (continued):
| | | | | | | | |
| Item # | | Contract | | Agreement Name | | Start | | End Date |
| 7 | | bioRASI, LLC | | CRO agreement | | 8-Aug-2005 | | 20-Aug-2007 |
| 8 | | Phage Biotechnology
Corporation | | Lease Guarantee – San Diego | | 15-Mar-2006 | | 15-Aug-13 |
| 9 | | Promethean | | Convertible Notes | | 20-Mar-2006 | | 19-Mar-09 |
| 10 | | Chief Executive Officer | | Guarantee agreement | | 20-Mar-2006 | | First date of
generating revenue on repayment of notes. |
| 11 | | Chief Executive Officer | | Guarantee reimbursement agreement | | 20-Mar-2006 | | First date of
generating revenue on repayment of notes. |
| 12 | | Kendle (formerly Charles River Laboratories) | | CRO agreement | | 8-Aug-2006 | | Completion of Phase II Severe Coronary Heart Disease |
| 13 | | The Bruckner Group | | Feasibility Study | | 4-Aug-2006 | | Upon completion of study |
| 14 | | Investment Banking | | Investment Banker | | 6-Jun-2006 | | Ongoing |
| 15 | | Public Accounting Firm | | Professional Services | | 1-July-2006 | | Ongoing |
| 7) | This agreement is for the purpose of assisting in the Company's clinical trials in Russia. bioRASI is the |
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 14. Commitments and Contingencies – (continued)
| | strategic initiative of the Russian Academy of Sciences (RAS) and is responsible for commercializing RAS’ bio-sciences and clinical resources. bioRASI is a contract research organization (CRO) providing services for its collaborative R&D clients in the areas of drug development, biologicals, and medical devices. This contract is now terminated. |
| 8) | This agreement is for a new manufacturing facility in San Diego, CA. The lease provides for minimum monthly rent and additional rent for shared costs, which aggregate approximately $20,000 per month. |
| 9) | The Company entered into a Securities Purchase Agreement with certain Investors to place $20,000,000 of senior secured notes together with warrants to purchase 705,882 shares of the Company's common stock. On May 21, 2007, the aggregate number of shares acquirable upon exercise of such warrants increased to 5,999,997. The notes are convertible into shares of the Company's common stock at any time at $12 per share until the price re-set as of May 21, 2007 at $1.00 per share (the “Fixed Conversion Price”). In addition, the notes are convertible after five months from the closing date at 94% of the average of the preceding five days weighted average trading price, if the result is lower than $12 per share. Conversion of the senior secured notes into the Company's common stock at other than the Fixed Conversion Price is limited to no more than 10% of the original $20,000,000 note balance per calendar month. The notes mature in March 2009, and bear a resetting floating interest rate of three month LIBOR plus 7%. The warrants may be exercised anytime up to March 2009. The warrant exercise price is $8.50 per share until the price was re-set as of May 21, 2007 at $1.00 per share. Substantially all of the Company's assets secure the notes. |
| 10) | Daniel C. Montano, Chairman, Co-President and CEO of the Company, entered into a Guaranty Agreement whereby he guaranteed any and all of the Company's obligations resulting from the sale on March 20, 2006 of $20,000,000 of senior secured notes and warrants. The guaranty remains in effect until the first date on which the Company receives revenue from the sale of drugs with FGF-1141 as API after such drug has been approved by the FDA, provided that on such date the Company is not in default of any provisions of the obligations or triggering events contained in the agreements for the senior secured notes and warrants and such default is not continuing. However, the guaranty will terminate upon the payment in full of the notes including conversion of the notes into common stock. |
| 11) | After the Company's obligations contained in the agreements for the senior secured notes and warrants have been paid in full, if Daniel C. Montano was required to make any payments pursuant to this guaranty prior to the payment in full of the Company's obligations, the Company will reimburse Daniel C. Montano for any such payments plus simple interest at 7% per annum from the date of the advance by Daniel C. Montano to the date reimbursed by the Company. |
| 12) | Kendle (formerly Charles River Laboratories Clinical Services International Ltd. or “Charles River Laboratories”) will support the Company in its Phase II Severe Coronary Heart Disease clinical trial ensuring that the protocol and study adhere to FDA regulatory requirements. |
| 13) | The Bruckner Group Incorporated has been assisting the Company in exploring the potential economic consequences of applying FGF-1 141 to a variety of clinical scenarios and patent types. There are three distinct components in this project that will be performed simultaneously by the Bruckner Group. This project has an approximate total cost of $450,000. |
| 14) | The purpose of this agreement is to act as advisor for listing on the London Stock Exchange's Alternative Investment Market (“AIM”). The Company paid 100,000 GBP before admission to AIM and another 50,000 GBP in January 2007. |
| 15) | A provider of accountancy and business services to audit and review the Company’s financial reports for listing on the London Stock Exchange's Alternative Investment Market, or AIM. |
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 14. Commitments and Contingencies – (continued)
| | | | | | | | |
| |
As of December 31, | | For the Period
from March 11,
1998
(Inception) to
December 31, 2007 |
| | | 2005 | | 2006 | | 2007 |
| | | (Dollars in Thousands) |
Service Fees Paid for Major Contractual
Obligations:
| | | | | | | | | | | | | | | | |
| Hesperion (formerly TouchStone Research, Inc.) | | $ | 1,170 | | | $ | 1,565 | | | $ | 447 | | | $ | 4,882 | |
| Catheter and Disposables Technologies | | | 50 | | | | 32 | | | | 0 | | | | 81 | |
| bioRASI | | | 91 | | | | 535 | | | | 169 | | | | 795 | |
Kendle (formerly Charles River
Laboratories) | | | 0 | | | | 927 | | | | 638 | | | | 1,565 | |
| Bruckner Group | | | 0 | | | | 238 | | | | 573 | | | | 811 | |
| Investment Banker | | | 0 | | | | 195 | | | | 101 | | | | 296 | |
| Public Accounting Firm | | | 0 | | | | 168 | | | | 372 | | | | 540 | |
| Total | | $ | 1,311 | | | $ | 3,660 | | | $ | 2,300 | | | $ | 8,970 | |
Securities Act Compliance
Commencing in 2001 and ending in August 2004, the Company sold two series of convertible notes to investors who, with a few exceptions, were not residents or citizens of the United States. The Company made these sales in reliance on the fact that either the sales occurred outside the United States and were thus not subject to the jurisdiction of the Securities Act or were made to accredited investors pursuant to an exemption from registration provided by the Securities Act. The Company's counsel has advised that the availability of those exemptions cannot be determined with legal certainty and that it is possible that the sale of some of the series of convertible notes may have violated the registration requirements of the Securities Act. As to most of those sales, a right of rescission may exist on which the statute of limitation has run out as of August 2007.
For those note holders that elected to convert to common stock and who have not sold that stock, the Company may have a contingent liability arising from the original purchase of the convertible notes that such note holders converted. That liability would extend for up to six years after the date of the sale of the applicable convertible note that was converted to common stock. The notes were converted at either $2.00 per share or $4.00 per share. All of the notes have been either converted into common stock or repaid in full.
The Company is unable to accurately estimate the likelihood or amount of potential liability that, if any, may arise for this contingency.
Government Regulation
Regulation by government authorities in the United States and foreign countries is a significant factor in the development, manufacture and marketing of drug products and in ongoing research and product development activities. Drug candidates will require regulatory approval by government agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous pre-clinical studies and clinical trials and other approval procedures of the FDA and similar regulatory authorities in foreign countries. Various federal and state statutes and regulations also govern or influence testing, manufacturing, safety, labeling, storage and record keeping related to such products and their marketing. The process of obtaining these approvals and the subsequent substantial compliance with appropriate federal and state statutes and regulations require the expenditure of substantial time and financial resources.
Pre-clinical studies are generally conducted in laboratory animals to evaluate the potential safety and the efficacy of a product. Drug developers submit the results of pre-clinical studies to the FDA as a part of an
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 14. Commitments and Contingencies – (continued)
investigational new drug application, which must be approved before clinical trials in humans may begin. Typically, clinical development of a new drug candidate involves three phases of clinical trials that are costly and time consuming. These Phases include:
| | |
| Phase I | | Clinical trials are conducted with a small number of subjects to determine the early safety profile, maximum tolerated dose and pharmacokinetics of the product in human volunteers. |
| Phase II | | Clinical trials are conducted with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. |
| Phase III | | Large scale, multi-center, comparative trials are conducted with patients afflicted with a target disease in order to provide enough data to demonstrate with substantial evidence the efficacy and safety the FDA requires. |
The FDA closely monitors the progress of clinical trials that are conducted in the United States and may, at its discretion, reevaluate, alter, suspend or terminate the testing based upon the data accumulated to that point and the FDA's assessment of the risk/benefit ratio to the patient.
Litigation
The Company may become involved in various legal proceedings and claims which arise in the ordinary course of its business. The Company is not involved in any litigation at this time that is material to its business and is unaware of any material claims that may be filed against it.
Note 15. Selected Quarterly Financial Data
The following table presents summarized quarterly financial data:
| | | | | | | | |
| | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| | | (Dollars in Thousands Except per Share Data) |
Fiscal 2007
| | | | | | | | | | | | | | | | |
| Operating loss | | $ | (5,144 | ) | | $ | (6,356 | ) | | $ | (2,767 | ) | | $ | (6,468 | ) |
| Net (loss) earnings | | $ | (7,857 | ) | | $ | (16,412 | ) | | $ | 1,052 | | | $ | (10,685 | ) |
| Basic (loss) earnings per share | | $ | (0.06 | ) | | $ | (0.12 | ) | | $ | 0.01 | | | $ | (0.10 | ) |
| Diluted (loss) earnings per share | | $ | (0.06 | ) | | $ | (0.12 | ) | | $ | 0.01 | | | $ | (0.10 | ) |
Fiscal 2006
| | | | | | | | | | | | | | | | |
| Operating loss | | $ | (4,128 ) | | | $ | (4,724 ) | | | $ | (4,706 ) | | | $ | (5,311 ) | |
| Net (loss) earnings | | $ | (6,947 ) | | | $ | 5,312 | | | $ | 1,724 | | | $ | (5,660 ) | |
| Basic (loss) earnings per share | | $ | (0.06 ) | | | $ | 0.04 | | | $ | 0.01 | | | $ | (0.04 ) | |
| Diluted (loss) earnings per share | | $ | (0.06 ) | | | $ | 0.04 | | | $ | 0.01 | | | $ | (0.04 ) | |
Fiscal 2005
| | | | | | | | | | | | | | | | |
| Operating loss | | $ | (1,760 ) | | | $ | (2,649 ) | | | $ | (4,435 ) | | | $ | (2,226 ) | |
| Net loss | | $ | (3,265 ) | | | $ | (2,573 ) | | | $ | (4,386 ) | | | $ | (2,141 ) | |
| Basic loss per share | | $ | (0.03 ) | | | $ | (0.02 ) | | | $ | (0.04 ) | | | $ | (0.02 ) | |
| Diluted loss per share | | $ | (0.03 ) | | | $ | (0.02 ) | | | $ | (0.04 ) | | | $ | (0.02 ) | |
Note 16. Subsequent Events
| (a) | On May 21, 2007 we entered into an agreement to sell 15,000,000 of the Company’s Common Stock at a purchase price of $1.00 per share in connection with Private Placement to the investor and certain other subscribers pursuant to a subscription agreement. We received $725,000 in proceeds from this agreement after December 31, 2007. |
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CARDIOVASCULAR BIOTHERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 16. Subsequent Events – (continued)
| (b) | On March 14, 2008 the Company terminated its lease of the facility in San Diego in exchange for the amount of the security deposit of $57,805. There is no future liability after this date. |
| (c) | On March 18, 2008, the Company began a Private Placement of debt and warrants in an effort to raise up to $15,000,000 in promissory notes that mature within 18 months from the date of issuance. The notes are unsecured, guaranteed by the Company’s CEO, Daniel C. Montano and serve as consideration for the issuance of warrants issued in conjunction with the notes. As of April 1, 2008, the Company has received gross proceeds of $200,000. |
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INDEX TO EXHIBITS
| | |
Exhibit
No. | | Description |
| 3.1 | | Restated Certificate of Incorporation, dated July 22, 2004 (incorporated by reference to
Exhibit 3.1 of the Registrant’s Registration Statement on Form S-1, File No. 333-119199, filed with the Securities and Exchange Commission on September 23, 2004 (“2004 S-1”) |
| 4.1 | | Form of Series I Convertible Notes outstanding (incorporated by reference to Exhibit 3.4 to the 2004 S-1) |
| 4.2 | | Form of Series II Convertible Notes outstanding (incorporated by reference to Exhibit 3.5 to the 2004 S-1) |
| 4.3 | | Form of Series IIa Convertible Notes outstanding (incorporated by reference to Exhibit 3.6 to the 2004 S-1) |
| 10.1 | | Underwriter’s Warrant (incorporated by reference to Exhibit 10.1 of the Registrant’s Amended Registration Statement on Form S-1/A, File No. 333-119199, filed with the Securities and Exchange Commission on January 13, 2005 (“2004 S-1/A second update “) |
| 10.2 | | Joint Patent Ownership and License Agreement between CardioVascular BioTherapeutics, Inc. and Phage Biotechnology, Inc., dated August 16, 2004 (incorporated by reference to Exhibit 10.2 to the 2004 S-1) |
| 10.3 | | 2004 Stock Plan and associated form of Stock Option Award Agreement (incorporated by
reference to Exhibit 10.3 to the 2004 S-1) |
| 10.4 | | Agreement on Technology & Business Right Transfer between CardioVascular Genetic
Engineering, Inc. and Korea Biotechnology Development Co., Ltd., dated December 15, 2000* (incorporated by reference to Exhibit 10.4 of the 2004 S-1 first amendment) |
| 10.5 | | Agreement between CardioVascular BioTherapeutics, Inc. and Dr. Thomas Joseph Stegmann, dated August 30, 2004 (incorporated by reference to Exhibit 10.5 to the 2004 S-1) |
| 10.6 | | Tenant’s Assignment of Lease with Consent by Landlord and Assumption by Assignee, dated April 30, 2004 and underlying sublease for premises at 1700 W. Horizon Ridge Parkway,
Suite 100, Henderson, Nevada 89012 (incorporated by reference to Exhibit 10.6 to the 2004 S-1) |
| 10.7 | | Guarantee of Sublease between Phage Biotechnology Corporation and The Regents of the
University of California, dated August 24, 2004 (incorporated by reference to Exhibit 10.7 to the 2004 S-1) |
| 10.8 | | Distributorship Agreement among CardioVascular BioTherapeutics, Inc., Phage Biotechnology Corporation and Cardio Phage International Inc., dated as of August 16, 2004 (incorporated by reference to Exhibit 10.8 to the 2004 S-1) |
| 10.9 | | Clinical Research Services Agreement between Clinical Cardiovascular Research, LLC (acquired by Touchstone Research, Inc. nka Hesperion, Inc.) and CardioVascular Genetic Engineering
(nka CardioVascular BioTherapeutics, Inc.), dated October 24, 2001, and amendments 1, 2 and
3 thereto (incorporated by reference to Exhibit 10.9 to the 2004 S-1) |
| 10.10 | | Engagement Agreement, dated March 2, 2006, between CardioVascular BioTherapeutics, Inc. and C.K. Cooper & Company, Inc. (incorporated by reference to Exhibit 10.10 of the Registrant’s Annual Report on Form 10-K, File No. 000-51172, filed with the Securities and Exchange
Commission on March 31, 2006 (“2005 10-K”) |
| 10.11 | | Agreement, dated June 23, 2004, between Catheter and Disposable Technology Inc. and
CardioVascular BioTherapeutics, Inc. (incorporated by reference to Exhibit 10.11 to the 2004 S-1) |
| 10.12 | | Agreement, dated February 15, 2004, between DaVinci Biomedical Research Products, Inc. and CardioVascular Genetic Engineering (nka CardioVascular BioTherapeutics, Inc.) (incorporated by reference to Exhibit 10.12 to the 2004 S-1) |
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| | |
Exhibit
No. | | Description |
| 10.13 | | Agreement, dated March 11, 2004, between DaVinci Biomedical Research and CardioVascular Genetic Engineering (nka CardioVascular BioTherapeutics, Inc.) (incorporated by reference to Exhibit 10.13 to the 2004 S-1) |
| 10.14 | | Master Agreement between MPI Research, Inc. and Phage Biotechnology Corporation dated March 2004 (incorporated by reference to Exhibit 10.14 to the 2004 S-1) |
| 10.14(a) | | Services Agreement Addendum No. 1, dated November 17, 2004, between MPI Research, Inc. and Phage Biotechnology Corporation (incorporated by reference to Exhibit 10.14(a) of the 2004 S-1 second amendment) |
| 10.14(b) | | Services Agreement Addendum No. 2, dated December 31, 2004, between MPI Research, Inc. and Phage Biotechnology Corporation (incorporated by reference to Exhibit 10.14(b) to the 2004 S-1 second amendment) |
| 10.15 | | Lease Agreement, dated November 1, 2005, between Howard Hughes Properties, Limited
Partnership and CardioVascular BioTherapeutics, Inc. (incorporated by reference to Exhibit 10.15 to the 2005 10-K) |
| 10.16 | | Voting Agreement and Proxy, dated January 9, 2004, among Daniel Montano, Cardio Korea Ltd. and CardioVascular Genetic Engineering (incorporated by reference to Exhibit 10.16 of the 2004 S-1 third amendment) |
| 10.17 | | Sublease Agreement, dated November 2005, between CardioVascular BioTherapeutics, Inc. and Phage Biotechnology Corporation (incorporated by reference to Exhibit 10.17 to the Annual Report on Form 10-K for fiscal year ended December 31, 2005) |
| 10.18 | | Securities Purchase Agreement, dated March 20, 2006 (incorporated by reference to Exhibit 10.1 of the March 2006 8-K”) |
| 10.19 | | Registration Rights Agreement dated March 20, 2006 (incorporated by reference to Exhibit 10.2 to the March 2006 8-K) |
| 10.20 | | Security Agreement dated March 20, 2006 (incorporated by reference to Exhibit 10.3 to the March 2006 8-K) |
| 10.21 | | Patent Security Agreement dated March 20, 2006 (incorporated by reference to Exhibit 10.4 to the March 2006 8-K) |
| 10.22 | | Guaranty of Daniel C. Montano dated March 20, 2006 (incorporated by reference to Exhibit 10.5 to the March 2006 8-K) |
| 10.23 | | Pledge Agreement dated March 20, 2006 (incorporated by reference to Exhibit 10.6 to the March 2006 8-K) |
| 10.24 | | Form of Note attached as Exhibit A to Exhibit 10.18 (incorporated by reference to Exhibit 10.7 to the March 2006 8-K) |
| 10.25 | | Standard Industrial Net Lease, dated March 15, 2006, between Canta Rana Ranch, L.P. and Phage Biotechnology Corporation (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, File No. 000-51172, filed with the Securities and Exchange
Commission on March 21, 2006 (“March 21, 2006 8-K”) |
| 10.26 | | Indemnity and Reimbursement Agreement for the Standard Industrial Net Lease of March 15, 2006, dated March 15, 2006, between CardioVascular BioTherapeutics, Inc., as guarantor, and Phage Biotechnology Corporation (incorporated by reference to the March 21, 2006 8-K) |
| 10.27 | | Controlling Stockholders Agreement, dated as of August 30, 2004, by and among each of the Controlling Stockholders of CardioVascular BioTherapeutics, Inc. (incorporated by reference to Exhibit 9 to the 2004 S-1) |
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| | |
Exhibit
No. | | Description |
| 10.28 | | Amendment No. 1 to the Controlling Stockholders Agreement, dated as of April 13, 2006, by and among each of the Controlling Stockholders of CardioVascular BioTherapeutics, Inc.
(incorporated by reference to Exhibit 9.1 of the Registrant’s Current Report on Form 8-K,
File No. 000-51172, filed with the Securities and Exchange Commission on May 26, 2006 (“May 2006 8-K”) |
| 10.29 | | Amended and Restated Joint Patent Ownership and License Agreement, dated August 16, 2006, between CardioVascular BioTherapeutics, Inc. and Phage Biotechnology Corporation
(incorporated by reference to Exhibit 10.1 of the May 20, 2006 8-K) |
| 10.30 | | Lease Agreement, dated August 7, 2006, by and between BMR-6828 Nancy Ridge LLC and CardioVascular BioTherapeutics, Inc. (incorporated by reference to Exhibit 10.1 of the
Registrant’s Current Report on Form 8-K, File No. 000-51172, filed with the Securities and Exchange Commission on August 11, 2006) |
| 10.31 | | First Amendment, dated January 11, 2006, to the November 1, 2005 Lease Agreement by and between Howard Hughes Properties and CardioVascular BioTherapeutics, Inc. (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K, File No. 000-51172, filed with the Securities and Exchange Commission on September 6, 2006 (“September 2006 8-K”) |
| 10.32 | | Second Amendment, dated August 29, 2006, to the November 1, 2005 Lease Agreement by and between Howard Hughes Properties and CardioVascular BioTherapeutics, Inc. (incorporated by reference to Exhibit 10.1 of the September 2006 8-K) |
| 10.33 | | First Amendment, dated September 1, 2006, to the August 7, 2006 Lease Agreement by and between BMR-6828 Nancy Ridge LLC and CardioVascular BioTherapeutics, Inc. (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, File No. 000-51172, filed with the Securities and Exchange Commission on September 14, 2006) |
| 10.34 | | Joint Patent Agreement, dated February 28, 2007 between Cardiovascular BioTherapeutics, Inc. and Phage BioTechnology Corporation (incorporated by reference to Exhibit 10.34 on Form 8-K, filed with the Securities and Exchange Commission on March 27, 2007). |
| 10.35 | | FirmInvest, AG Private Placement offer dated May 20, 2007 (incorporated by reference to Exhibit 10.1 to the form 8-K filed on May 24, 2007). |
| 10.36 | | Engagement Agreement, dated August 16, 2007, between CardioVascular BioTherapeutics, Inc. and GHL Financial Services LTD., Inc. (incorporated by reference to Exhibit 10.36 on
Form 10-Q 3rd Quarter 2007 filed with the Securities and Exchange Commission on November 29, 2007). |
| 10.37 | | Amendment to FirmInvest, AG Commitment Letter dated August 17, 2007 (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on August 17, 2007). |
| 10.38 | | Amendment II to FirmInvest, AG Commitment Letter dated October 12, 2007 (incorporated by reference to Exhibit 10.38 on Form 10-Q 3rd Quarter 2007 filed with the Securities and Exchange Commission on November 29, 2007). |
| 10.39 | | FirmInvest, AG warrant dated October 12, 2007 to purchase 3,700,000 shares of CardioVascular BioTherapeutics, Inc. Common Stock (incorporated by reference to Exhibit 10.39 on Form 10-Q 3rd Quarter 2007 filed with the Securities and Exchange Commission on November 29, 2007). |
| 10.40 | | Form of Subscription Agreement for Reg S Offering (incorporated by reference to Exhibit 10.40 on Form 10-Q 3rd Quarter, 2007 filed with the Securities and Exchange Commission on
November 29, 2007). |
| 10.41 | | Termination of Lease Agreement, dated March 14, 2008 (incorporated by reference to
Exhibit 10.01 to the form 8-K filed on March 24, 2008). |
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| | |
Exhibit
No. | | Description |
| 23 | | Consent of Singer, Lewak, Greenbaum & Goldstein LIP, Independent Registered Public
Accounting Firm |
| 24 | | Power of Attorney (included on signature page of this registration statement) |
| 31.1 | | Certification of Principal Executive Officer |
| 31.2 | | Certification of Principal Financial Officer |
| 32 | | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to § 906 of the Sarbanes Oxley Act of 2002 |
| 99.1 | | Governance Policies (incorporated by reference from Exhibit 99.1 to 2004 S-1) |
| 99.5 | | Compensation Committee Charter (incorporated by reference from Exhibit 99.5 to 2004 S-1) |
| 99.6 | | Nominating and Corporate Governance Committee Charter (incorporated by reference from Exhibit 99.6 to 2004 S-1 |
The registrant will send its annual report to security holders and proxy solicitation material subsequent to the filing of this form and shall furnish copies of both to the Commission when they are sent to security holders.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CARDIOVASCULAR BIOTHERAPEUTICS, INC.
| By: | /s/ Daniel C. Montano
Daniel C. Montano
Co-President, Chief Executive Officer and
Chairman of the Board |
May 5, 2008
Each person whose signature appears below on this Annual Report on Form 10-K hereby constitutes and appoints Daniel C. Montano and Mickael A. Flaa, and either of them, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities (unless revoked in writing) to sign any and all amendments to this Annual Report on Form 10-K of CardioVascular BioTherapeutics, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | |
| Name | | Title | | Date |
/s/ Daniel C. Montano
Daniel C. Montano | | Co-President, Chief Executive Officer and
Chairman of Board of Directors | | May 5, 2008 |
/s/ John W. Jacobs
John W. Jacobs, Ph.D. | | Vice President, Chief Operating Officer,
Chief Scientific Officer and Director | | May 5, 2008 |
/s/ Mickael A. Flaa
Mickael A. Flaa | | Vice President, Chief Financial Officer
(Principal Accounting Officer) and Director | | May 5, 2008 |
/s/ Thomas J. Stegmann
Thomas J Stegmann, M.D., Ph.D. | | Co-President, Chief Medical Officer, and
Director | | May 5, 2008 |
Wolfgang Priemer, Ph.D. | | Director | | |
/s/ Gary B. Abromovitz
Gary B. Abromovitz | | Director | | May 5, 2008 |
/s/ Thomas L. Ingram
Thomas L. Ingram | | Director | | May 5, 2008 |
/s/ Robert Levin
Robert Levin | | Director | | May 5, 2008 |
