EXHIBIT 99.1
INDEPENDENT AUDITORS’ REPORT
Board of Directors and Shareholders of
Montigen Pharmaceuticals, Inc.
Salt Lake City, Utah
We have audited the accompanying balance sheet of Montigen Pharmaceuticals, Inc. (a development stage company) as of December 31, 2005 and the related statements of operations, statements of stockholders equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides 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 Montigen Pharmaceuticals, Inc. (a development stage company) as of December 31, 2005 and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying statements of income, stockholders’ equity and cash flows for the year ended December 31, 2004 and 2003 and from inception of the development stage on June 27, 2003 through December 31, 2004 have not been audited or reviewed by us and, accordingly, we do not express an opinion or any other form of assurance on them.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information is presented for purposes of additional analysis and is not a required part of the basic financial statements. We did not audit the supplemental statements as a whole and, accordingly, we express no opinion on such supplemental financial statements.
/s/ HJ & Associates, LLC |
Salt Lake City, Utah |
April 20, 2006 |
MONTIGEN PHARMACEUTICALS, INC.
(A Development Stage Company)
Balance Sheet
ASSETS
| | December 31, | |
| | 2005 | |
| | | |
CURRENT ASSETS | | | |
| | | |
Cash | | $ | 1,345,265 | |
Related party receivables (Note 4) | | 5,008 | |
Prepaid assets | | 100,354 | |
| | | |
Total Current Assets | | 1,450,627 | |
| | | |
FIXED ASSETS, NET (Note 2) | | 325,148 | |
| | | |
OTHER ASSETS | | | |
| | | |
Deposits | | 5,000 | |
| | | |
TOTAL ASSETS | | $ | 1,780,775 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES | | | |
| | | |
Accounts payable | | $ | 260,649 | |
Accrued expenses (Note 6) | | 285,378 | |
| | | |
Total Current Liabilities | | 546,027 | |
| | | |
COMMITMENTS AND CONTINGENCIES (Note 5) | | | |
| | | |
SHAREHOLDERS’ EQUITY | | | |
| | | |
Preferred stock, $0.0001 per value, authorized 5,500,000 shares;
5,438,737 shares issued and outstanding | | 544 | |
Common stock, $0.0001 par value, authorized 15,000,000
shares; 5,016,667 shares issued and outstanding | | 502 | |
Additional paid in capital | | 5,314,445 | |
Retained earnings | | (4,080,743 | ) |
| | | |
Total Shareholders’ Equity | | 1,234,748 | |
| | | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 1,780,775 | |
| | | | | |
The accompanying notes are an integral part of these financial statements.
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MONTIGEN PHARMACEUTICALS, INC.
(A Development Stage Company)
Statements of Operations
| | For the Year
Ended
December 31,
2005 | | From Inception
on June 27,
2003 to
December 31,
2005 | |
| | | | | |
REVENUES | | $ | — | | $ | — | |
| | | | | |
OPERATING EXPENSES | | | | | |
| | | | | |
Salaries and wages | | 673,497 | | 1,378,702 | |
Payroll taxes | | 40,460 | | 86,723 | |
Research and development | | 614,336 | | 1,067,081 | |
Amortization | | 78,950 | | 137,383 | |
Depreciation | | 64,006 | | 84,787 | |
Rent expense | | 56,891 | | 127,426 | |
General and administrative | | 676,225 | | 1,242,285 | |
| | | | | |
Total Operating Expenses | | 2,204,365 | | 4,124,387 | |
| | | | | |
OPERATING (LOSS) | | (2,204,365 | ) | (4,124,387 | ) |
| | | | | |
OTHER INCOME (EXPENSES) | | | | | |
| | | | | |
Interest income | | 51,755 | | 58,293 | |
Interest expense | | (493 | ) | (14,429 | ) |
| | | | | |
Total Other Income (Expenses) | | 51,262 | | 43,864 | |
| | | | | |
LOSS BEFORE INCOME TAX EXPENSE | | (2,153,103 | ) | (4,080,523 | ) |
| | | | | |
Income tax expense | | 220 | | 220 | |
| | | | | |
NET LOSS | | $ | (2,153,323 | ) | $ | (4,080,743 | ) |
| | | | | |
BASIC AND FULLY DILUTED (LOSS) PER SHARE | | $ | (0.43 | ) | | |
| | | | | |
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | | 5,016,667 | | | |
The accompanying notes are an integral part of these financial statements.
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MONTIGEN PHARMACEUTICALS, INC.
(A Development Stage Company)
Statements of Shareholders’ Equity
| | Preferred Stock | | Common Stock | | Additional
Paid-in | | Retained | |
| | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | |
| | | | | | | | | | | | | |
Balance, January 1, 2003 | | — | | $ | — | | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | | | | |
Preferred stock issued | | 75,000 | | 8 | | — | | — | | 74,993 | | — | |
| | | | | | | | | | | | | |
Issuance of Common Stock | | — | | — | | 5,016,667 | | 502 | | — | | — | |
| | | | | | | | | | | | | |
Net loss for the year ended December 31, 2003 | | — | | — | | — | | — | | — | | (288,625 | ) |
| | | | | | | | | | | | | |
Balance, December 31, 2003 | | 75,000 | | 8 | | 5,016,667 | | 502 | | 74,993 | | (288,625 | ) |
| | | | | | | | | | | | | |
Preferred stock issued per investment letters | | 3,442,973 | | 344 | | — | | — | | 3,430,129 | | — | |
| | | | | | | | | | | | | |
Warrant conversion | | 173,514 | | 18 | | — | | — | | 145,996 | | — | |
| | | | | | | | | | | | | |
Finders fees issued in preferred stock | | 163,500 | | 16 | | — | | — | | 163,484 | | — | |
| | | | | | | | | | | | | |
Net loss for the year ended December 31, 2004 | | — | | — | | — | | — | | — | | (1,638,795 | ) |
| | | | | | | | | | | | | |
Balance, December 31, 2004 | | 3,854,987 | | 386 | | 5,016,667 | | 502 | | 3,814,602 | | (1,927,420 | ) |
| | | | | | | | | | | | | |
Preferred stock issued for cash | | 1,508,750 | | 151 | | — | | — | | 1,499,850 | | — | |
| | | | | | | | | | | | | |
Preferred stock issued for offering costs | | 75,000 | | 7 | | — | | — | | 74,993 | | — | |
| | | | | | | | | | | | | |
Offering costs | | — | | — | | — | | — | | (75,000 | ) | — | |
| | | | | | | | | | | | | |
Net loss for the year ended December 31, 2005 | | — | | — | | — | | — | | — | | (2,153,323 | ) |
| | | | | | | | | | | | | |
Balance, December 31, 2005 | | 5,438,737 | | $ | 544 | | 5,016,667 | | $ | 502 | | $ | 5,314,445 | | $ | (4,080,743 | ) |
The accompanying notes are an integral part of these financial statements.
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MONTIGEN PHARMACEUTICALS, INC.
(A Development Stage Company)
Statements of Cash Flows
| | For the Year
Ended
December 31,
2005 | | From Inception
on June 27,
2003 to
December 31,
2005 | |
| | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
| | | | | |
Net loss | | $ | (2,153,323 | ) | $ | (4,080,743 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
Depreciation | | 64,006 | | 84,787 | |
Amortization of computer software | | 78,950 | | 137,383 | |
Changes in operating assets and liabilities: | | | | | |
(Increase) in accounts receivable | | (5,008 | ) | (5,008 | ) |
(Increase) in prepaid expenses | | (100,354 | ) | (100,354 | ) |
(Increase) Decrease in other assets | | 5,900 | | (5,000 | ) |
Increase in accounts payable & accrued liabilities | | 419,159 | | 546,027 | |
| | | | | |
Net Cash (Used in) Operating Activities | | (1,690,670 | ) | (3,422,908 | ) |
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
| | | | | |
Purchase of fixed assets | | (301,351 | ) | (547,318 | ) |
| | | | | |
Net Cash Used by Investing Activities | | (301,351 | ) | (547,318 | ) |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
| | | | | |
Net proceeds from preferred stock sale | | 1,500,001 | | 5,315,491 | |
| | | | | |
Net Cash Provided by Financing Activities | | 1,500,001 | | 5,315,491 | |
| | | | | |
NET INCREASE (DECREASE) IN CASH | | (492,020 | ) | 1,345,265 | |
| | | | | |
CASH AT BEGINNING OF YEAR | | 1,837,285 | | — | |
| | | | | |
CASH AT END OF YEAR | | $ | 1,345,265 | | $ | 1,345,265 | |
| | | | | |
NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | |
| | | | | |
Cash Paid For: | | | | | |
| | | | | |
Interest | | $ | 493 | | $ | 14,430 | |
Income taxes | | $ | 220 | | $ | 220 | |
The accompanying notes are an integral part of these financial statements.
7
MONTIGEN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to the Financial Statements
December 31, 2005
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Montigen Pharmaceuticals, Inc. is a development stage company that was organized on June 27, 2003 in the state of Delaware. The Company is a privately-held oncology-focused drug discovery and development company headquartered in Salt Lake City, Utah. It is engaged in the pharmaceutical research business. The Company’s assets include its research and development team, a proprietary drug discovery technology platform and optimization process, CLIMB™, and late-stage pre-clinical compounds targeting aurora-A kinase and members of the tyrosine kinase receptor family. One of the Company’s compounds is expected to be the subject of a pre-IND meeting with the FDA later this year. The summary of significant accounting policies of the Company are presented to assist in the understanding of the Company’s financial statements. The Company’s accounting policies reflect practices of the pharmaceutical industry and conform to generally accepted accounting principles. The fiscal year of the Company ends on December 31. The following policies are considered to be significant:
a. Recognition of Income
The Company currently has no income or revenue to recognize. It has no established revenue recognition policy. The policy will be determined once there is revenue to recognize.
b. Depreciation
Depreciation is provided principally on the half year convention method over the estimated useful lives of the assets, which are generally from three to seven years.
c. Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Financial instruments that potentially subject the company to concentrations of credit risk consist principally of cash deposits in excess of federally insured amounts. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. At December 31, 2005 the company had approximately $1,232,991 in excess of FDIC insured limits, respectively.
d. Advertising and Promotion
The Company follows the policy of charging the costs of advertising to expense as incurred. Advertising & promotion expense for the year ended December 31, 2005 was $899.
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f. Income Taxes
Deferred income taxes are recognized for the future tax consequences of temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities. The Company’s temporary differences arise principally from the recognition of income and expenses on long-term contracts and depreciation in different periods for financial purposes than for tax purposes.
g. Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
h. Basic Loss Per Share
The computation of loss per share of common stock is based on the weighted average number of shares outstanding during the period of the financial statements as follows:
| | 2005 | |
| | | |
Net Loss (Numerator) | | $ | (2,153,323 | ) |
Shares (Denominator) | | 5,016,667 | |
| | | |
Per share (Loss) amount | | $(0.43 | ) |
| | | | |
As of December 31, 2005 the Company had 1,785,714 outstanding common stock options issued and reserved.
9
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2005 is detailed in the following summary:
| | Cost | | Accumulated
Depreciation | | Net Book
Value | |
| | | | | | | |
Lab equipment | | $ | 230,643 | | $ | 51,497 | | $ | 179,146 | |
Lab furniture & fixtures | | 43,363 | | 3,242 | | 40,121 | |
Leasehold improvements | | 37,176 | | 9,166 | | 28,010 | |
Research equipment | | 15,078 | | 1,678 | | 13,400 | |
Computer software | | 160,200 | | 137,383 | | 22,817 | |
Computer equipment | | 56,439 | | 18,876 | | 37,563 | |
Office equipment | | 4,419 | | 327 | | 4,092 | |
| | | | | | | |
| | $ | 547,318 | | $ | 222,169 | | $ | 325,149 | |
| | | | | | | | | | | | | |
Depreciation expense is computed on the half life convention method in amounts sufficient to write off the costs of depreciable assets over their estimated useful lives. Depreciation and amortization expense for the year ended December 31, 2005 amounted to $142,956.
NOTE 3 - INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax assets consist of the following components as of December 31, 2005:
| | 2005 | |
| | | |
Deferred tax assets: | | | |
NOL carryover | | $ | 1,584,800 | |
Accrued expenses | | 2,700 | |
| | | |
Deferred tax liabilities: | | — | |
| | | |
Valuation allowance | | (1,587,500 | ) |
| | | |
Net deferred tax asset | | $ | — | |
10
The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rates of 39% to pretax income from continuing operations for the years ended December 31, 2005 due to the following:
| | 2005 | |
| | | |
Book income | | $ | (839,796 | ) |
Officer life | | 2,245 | |
M & E | | 1,745 | |
Accrued expenses | | 2,660 | |
Valuation allowance | | 833,146 | |
| | | |
| | $ | — | |
At December 31, 2005, the Company had net operating loss carryforwards of approximately $4,100,000 that may be offset against future taxable income from the year 2005 through 2025. No tax benefit has been reported in the December 31, 2005 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company has two outstanding receivable balances recorded for the year ended December 31, 2005, from shareholders of the Company related to personal expenses charged to the Company credit cards by the shareholders. The balances recorded are as follows:
Dallin Anderson | | $ | 2,355 | |
James Clarke | | 2,653 | |
| | | |
Total related party receivables | | $ | 5,008 | |
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NOTE 5 - LEASE COMMITMENT AND TOTAL RENT EXPENSE
During the year ended December 31, 2005, the company entered into a two year operating lease agreement for the rental of office and laboratory space. The lease expires on July 31, 2007, and requires monthly rental payments of $4,575, plus the payment of personal property tax, fire and liability insurance on the property as well for the first year, and monthly rental payments of $4,712, plus the payment of personal property tax, fire and liability insurance on the property for the second year. A $5,000 security deposit was also required at the signing of the lease. The total minimum rental commitment under the lease is $88,572, which is due as follows:
Year Ending | | | |
December 31, | | | |
| | | |
2006 | | $ | 55,586 | |
2007 | | 32,986 | |
| | | |
| | $ | 88,572 | |
NOTE 6 - ACCRUED EXPENSES
Accrued expenses at December 31, 2005 are summarized below:
Accrued liabilities | | $ | 270,943 | |
Accrued vacation | | 7,619 | |
Accrued wages & salaries | | 1,326 | |
Accrued expenses | | 5,490 | |
| | | |
| | $ | 285,378 | |
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151 “Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by Statement 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Company has evaluated the impact of the adoption of SFAS 151, and does not believe the impact will be significant to the Company’s overall results of operations or financial position.
12
In December 2004, the FASB issued SFAS No.152, “Accounting for Real Estate Time-Sharing Transactions—an amendment of FASB Statements No. 66 and 67” (“SFAS 152) The amendments made by Statement 152 This Statement amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. The Company has evaluated the impact of the adoption of SFAS 152, and does not believe the impact will be significant to the Company’s overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.”The amendments made by Statement 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. Opinion 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. The Board believes that exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. By focusing the exception on exchanges that lack commercial substance, the Board believes this Statement produces financial reporting that more faithfully represents the economics of the transactions. The Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this Statement shall be applied prospectively. The Company has evaluated the impact of the adoption of SFAS 153, and does not believe the impact will be significant to the Company’s overall results of operations or financial position.
13
In December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment”. Statement 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply Statement 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. The Company adopted Statement 123(R) in December of 2005.
In December 2004, the Financial Accounting Standards Board issued two FASB Staff Positions - FSP FAS 109-1, Application of FASB Statement 109 “Accounting for Income Taxes” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, and FSP FAS 109-2 Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. Neither of these affected the Company as it does not participate in the related activities.
In March 2005, the SEC released Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”), which provides interpretive guidance related to the interaction between SFAS 123(R) and certain SEC rules and regulations. It also provides the SEC staff’s views regarding valuation of share-based payment arrangements. In April 2005, the SEC amended the compliance dates for SFAS 123(R), to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. Management is currently evaluating the impact SAB 107 will have on our consolidated financial statements.
14
In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”). FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than the end of fiscal years ending after December 15, 2005. The Company will adopt FIN 47 beginning the first quarter of fiscal year 2006 and does not believe the adoption will have a material impact on its consolidated financial position or results of operations or cash flows.
In May 2005, the FASB issued FASB Statement No. 154, “Accounting Changes and Error Corrections.” This new standard replaces APB Opinion No. 20, “Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,” and represents another step in the FASB’s goal to converge its standards with those issued by the IASB. Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005. The Company has evaluated the impact of the adoption of Statement 154 and does not believe the impact will be significant to the Company’s overall results of operations or financial position.
In February of 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”, which is intended to simplify the accounting and improve the financial reporting of certain hybrid financial instruments (i.e., derivatives embedded in other financial instruments). The statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125.” SFAS No. 155 is effective for all financial instruments issued or acquired after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is currently evaluating the impact SFAS No. 155 will have on its consolidated financial statements, if any.
NOTE 8 - PREFERRED STOCK
In November 2005 the Company amended its Articles of Incorporation so as to authorize 5,500,000 shares of preferred stock, designated as “Series A Convertible Preferred Stock”. As of December 31, 2005, 5,438,737 shares of the preferred stock are issued and outstanding.
15
Dividends
The holders of the Series A Preferred Stock are entitled to dividends at the rate of $.07 per year of the liquidation preference of $1.00 per share, payable annually, if and when declared by the board of directors. Dividends are not cumulative and the board of directors are under no obligation to declare dividends.
Convertibility
Each share of preferred stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share. Series A Preferred Stock may be convertible into the Company’s common stock by dividing the original issuance price ($1.00) for the relevant series by the conversion price ($1.00) for such series.
During the year the Company sold 1,583,750 shares of Series A Convertible Preferred Stock in exchange for proceeds of $1,500,001.
NOTE 9 - OUTSTANDING STOCK OPTIONS
In January 2004, the Board of Directors of the Company adopted the 2004 Stock Plan, under which the Company may issue stock, or grant options to employees, consultants, advisors, or other individuals. The total number of shares as to which the Company may issue or grant options under this plan is 1,785,714. The Company has granted 719,210 shares under this plan. The per share exercise price for the shares to be issued upon exercise of an option shall be such price as is determined by the Administrator, but shall be subject to the following: If an employee at the time of the grant of the options, owns stock representing more than 10% of the voting power of all classes of stock, the exercise price shall be no less than 110% of the fair market value per share on the date of the grant. Or, if the shares are granted to any other employee, the per share exercise price shall be no less than 100% of the fair market value per share on the date of the grant. If the shares are granted to any other service provider, the per share exercise price shall be no less than 85% of the fair market value per share on the date of grant.
Exercise of Option
Any option granted shall be exercisable according to the terms hereof at such times and under such conditions as determined by the administrator and set forth in the option agreement. An option may not be exercised for a fraction of a share, except in the case of options granted to Officers, Directors and Consultants. Options shall become exercisable at a rate of no less than 20% per year over five years from the date the options are granted.
16
A summary of the status of the Company’s stock option plan as of December 31, 2005 and December 31, 2004 and changes during the years are presented below:
| | Shares | | Weighted Average
Exercise Price | |
| | | | | |
Outstanding, January 1, 2005 | | 526,085 | | $0.036 | |
Granted | | 270,000 | | 0.200 | |
Canceled/Expired | | (76,875 | ) | 0.036 | |
Exercised | | — | | — | |
| | | | | |
Outstanding, December 31, 2005 | | 719,210 | | | |
| | | | | |
Exercisable, December 31, 2005 | | 719,210 | | | |
NOTE 10 - SUBSEQUENT EVENTS
On April 4, 2006 SuperGen completed its acquisition of Montigen, for an aggregate purchase price of $40 million. Initially the Montigen stockholders will receive $9 million in cash and $9 million in shares of SuperGen’s common stock in connection with the merger. An additional $22 million in shares of SuperGen common stock will be payable to the Montigen stockholders contingent upon the achievement of specific regulatory milestones.
17
SUPPLEMENTAL INFORMATION
THREE YEAR COMPARATIVE FINANCIALS
MONTIGEN PHARMACEUTICALS, INC.
(A Development Stage Company)
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
ASSETS
| | December 31, | |
| | 2005 | | 2004 | | 2003 | |
| | Audited | | Unaudited | | Unaudited | |
| | | | | | | |
CURRENT ASSETS | | | | | | | |
| | | | | | | |
Cash and cash equivalents | | $ | 1,345 | | $ | 1,837 | | $ | 33 | |
Prepaid expenses and other current assets | | 106 | | 11 | | 6 | |
| | | | | | | |
Total Current Assets | | 1,451 | | 1,848 | | 39 | |
| | | | | | | |
PROPERTY, PLANT AND EQUIPMENT, Net | | 325 | | 167 | | 8 | |
| | | | | | | |
OTHER ASSETS | | 5 | | — | | — | |
| | | | | | | |
TOTAL ASSETS | | $ | 1,781 | | $ | 2,015 | | $ | 47 | |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | | | | | |
CURRENT LIABILITIES | | | | | | | |
| | | | | | | |
Accounts payable and accrued liabilities | | $ | 537 | | $ | 126 | | $ | 58 | |
Loan payable—current portion | | — | | — | | 162 | |
Accrued payroll and employee benefits | | 9 | | — | | — | |
| | | | | | | |
Total Current Liabilities | | 546 | | 126 | | 220 | |
| | | | | | | |
LOAN PAYABLE | | | | | | | |
| | | | | | | |
Loan payable | | — | | — | | 40 | |
| | | | | | | |
Total Liabilities | | 546 | | 126 | | 260 | |
| | | | | | | |
COMMITMENTS AND CONTINGENCIES | | | | | | | |
| | | | | | | |
STOCKHOLDERS’ EQUITY | | | | | | | |
| | | | | | | |
Preferred stock, $0.0001 par value; 5,500,000 shares authorized; 5,348,737, 3,854,987 and 75,000 issued and outstanding at December 31, 2005, 2004, and 2003 respectively | | — | | — | | — | |
Common stock, $0.0001 par value; 15,000,000 shares authorized; 5,016,667 shares issued and outstanding at December 31, 2005, 2004, and 2003, respectively | | 1 | | 1 | | 1 | |
Additional paid in capital | 5,314 | | 3,815 | | 75 | |
Accumulated deficit | | (4,080 | ) | (1,927 | ) | (289 | ) |
| | | | | | | |
Total Stockholders’ Equity | | 1,235 | | 1,889 | | (213 | ) |
| | | | | | | |
| | | | | | | |
TOTAL LIABILITES AND STOCKHOLDERS’ EQUITY | | $ | 1,781 | | $ | 2,015 | | $ | 47 | |
19
MONTIGEN PHARMACEUTICALS, INC.
(A Development Stage Company)
Statements of Operations
(In thousands, except per share amounts)
| | | | | | | | From Inception
on June 27, | |
| | | | | | | | 2003 to | |
| | Years Ended December 31, | | December 31, | |
| | 2005 | | 2004 | | 2003 | | 2005 | |
| | Audited | | Unaudited | | Unaudited | | | |
| | | | | | | | | |
REVENUES | | | | | | | | | |
| | | | | | | | | |
Net product revenue | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | |
Total Revenue | | — | | — | | — | | — | |
| | | | | | | | | |
COSTS AND OPERATING EXPENSES | | | | | | | | | |
| | | | | | | | | |
Research and development | | 614 | | 430 | | 23 | | 1,067 | |
Selling, general, and administrative | | 1,590 | | 1,284 | | 264 | | 3,058 | |
| | | | | | | | | |
Total Costs and Operating Expenses | | 2,204 | | 1,634 | | 287 | | 4,125 | |
| | | | | | | | | |
LOSS FROM OPERATIONS | | (2,204 | ) | (1,634 | ) | (287 | ) | (4,125 | ) |
| | | | | | | | | |
OTHER INCOME (EXPENSES) | | | | | | | | | |
| | | | | | | | | |
Interest income | | 51 | | 7 | | — | | 58 | |
Interest expense | | — | | (12 | ) | (2 | ) | (14 | ) |
| | | | | | | | | |
NET LOSS | | $ | (2,153 | ) | $ | (1,639 | ) | $ | (289 | ) | $ | (4,081 | ) |
| | | | | | | | | |
NET LOSS PER COMMON SHARE | | $ | (0.43 | ) | $ | (0.33 | ) | $ | (0.06 | ) | | |
| | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | | 5,017 | | 5,017 | | 5,017 | | | |
20
MONTIGEN PHARMACEUTICALS, INC.
(A Development Stage Company)
Statement of Changes in Stockholders’ Equity
(Unaudited)
(In thousands)
| | | | | | | | | | Additional | | | | | |
| | Preferred Stock | | Common Stock | | Paid in | | Accumulated | | | |
| | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Total | |
| | | | | | | | | | | | | | | |
Balance, January 1, 2003 | | — | | $ | — | | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | | | | | | |
Issuance of common stock | | — | | — | | 5,017 | | 1 | | — | | — | | 1 | |
| | | | | | | | | | | | | | | |
Sale of preferred stock | | 75 | | — | | — | | — | | 75 | | — | | 75 | |
| | | | | | | | | | | | | | | |
Net loss for the year ended December 31, 2003 | | — | | — | | — | | — | | — | | (289 | ) | (289 | ) |
| | | | | | | | | | | | | | | |
Balance, December 31, 2003 | | 75 | | — | | 5,017 | | 1 | | 75 | | (289 | ) | (213 | ) |
| | | | | | | | | | | | | | | |
Issuance of common stock | | — | | — | | — | | — | | — | | — | | — | |
| | | | | | | | | | | | | | | |
Sale of preferred stock | | 3,405 | | — | | — | | — | | 3,405 | | — | | 3,405 | |
| | | | | | | | | | | | | | | |
Issuance of preferred stock from conversion of debt | | 175 | | — | | — | | — | | 175 | | — | | 175 | |
| | | | | | | | | | | | | | | |
Compensation expense from placement of preferred stock | | 125 | | — | | — | | — | | 125 | | — | | 125 | |
| | | | | | | | | | | | | | | |
Issuance of preferred stock from conversion of debt | | 75 | | — | | — | | — | | 35 | | — | | 35 | |
| | | | | | | | | | | | | | | |
Rounding | | — | | — | | — | | — | | — | | 1 | | 1 | |
| | | | | | | | | | | | | | | |
Net loss for the year ended December 31, 2004 | | — | | — | | — | | — | | — | | (1,639 | ) | (1,639 | ) |
| | | | | | | | | | | | | | | |
Balance, December 31, 2004 | | 3,855 | | $ | — | | 5,017 | | $ | 1 | | $ | 3,815 | | $ | (1,927 | ) | $ | 1,889 | |
21
MONTIGEN PHARMACEUTICALS, INC.
(A Development Stage Company)
Statement of Changes in Stockholders’ Equity
(Unaudited)
(In thousands)
| | | | | | | | | | Additional | | | | | |
| | Preferred Stock | | Common Stock | | Paid in | | Accumulated | | | |
| | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Total | |
| | | | | | | | | | | | | | | |
Balance, December 31, 2004 | | 3,855 | | $ | — | | 5,017 | | $ | 1 | | $ | 3,815 | | $ | (1,927 | ) | $ | 1,889 | |
| | | | | | | | | | | | | | | |
Issuance of common stock | | — | | — | | — | | — | | — | | — | | — | |
| | | | | | | | | | | | | | | |
Sale of preferred stock | | 1,500 | | — | | — | | — | | 1,499 | | — | | 1,499 | |
| | | | | | | | | | | | | | | |
Issuance of preferred stock from conversion of debt | | 9 | | — | | — | | — | | — | | — | | — | |
| | | | | | | | | | | | | | | |
Compensation expense from placement of preferred stock | | 75 | | — | | — | | — | | — | | — | | — | |
| | | | | | | | | | | | | | | |
Net loss for the year ended December 31, 2005 | | — | | — | | — | | — | | — | | (2,153 | ) | (2,153 | ) |
| | | | | | | | | | | | | | | |
Balance, December 31, 2005 | | 5,439 | | $ | — | | 5,017 | | $ | 1 | | $ | 5,314 | | $ | (4,080 | ) | $ | 1,235 | |
22
MONTIGEN PHARMACEUTICALS, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(In thousands)
| | | | | | | | From Inception | |
| | | | | | | | on June 27, | |
| | | | | | | | 2003 to | |
| | Years Ended December 31, | | December 31, | |
| | 2005 | | 2004 | | 2003 | | 2005 | |
| | Audited | | Unaudited | | Unaudited | | | |
| | | | | | | | | |
OPERATING ACTIVITIES | | | | | | | | | |
| | | | | | | | | |
Net loss | | $ | (2,153 | ) | $ | (1,639 | ) | $ | (289 | ) | $ | (4,081 | ) |
Adjustments to reconcile net loss to cash used in operating activities: | | | | | | | | | |
Depreciation | | 143 | | 72 | | 7 | | 222 | |
Changes in operating assets and liabilities: | | | | | | | | | |
(Increase in prepaid expenses and other assets | | (100 | ) | (4 | ) | (6 | ) | (110 | ) |
Increase in accounts payable and other liabilities | | 419 | | 67 | | 59 | | 545 | |
| | | | | | | | | |
Net Cash Used in Operating Activities | | (1,691 | ) | (1,504 | ) | (229 | ) | (3,424 | ) |
| | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | | |
| | | | | | | | | |
Purchases of property and equipment | | (301 | ) | (231 | ) | (15 | ) | (547 | ) |
| | | | | | | | | |
Net Cash Used in Investing Activities | | (301 | ) | (231 | ) | (15 | ) | (547 | ) |
| | | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | | |
| | | | | | | | | |
Proceeds from issuance of common stock, net of issuance costs | | — | | — | | 1 | | 1 | |
Proceeds from issuance of preferred stock | | 1,500 | | 3,740 | | 75 | | 5,315 | |
Proceeds from loan | | — | | (201 | ) | 201 | | — | |
| | | | | | | | | |
Net Cash Provided by Financing Activities | | 1,500 | | 3,539 | | 277 | | 5,316 | |
| | | | | | | | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | (492 | ) | 1,804 | | 33 | | 1,345 | |
| | | | | | | | | |
CASH AT BEGINNING OF PERIOD | | 1,837 | | 33 | | — | | — | |
| | | | | | | | | |
CASH AT END OF PERIOD | | $ | 1,345 | | $ | 1,837 | | $ | 33 | | $ | 1,345 | |
23
