SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
October 24, 2001
----------------------------------------------------
Date of Report (Date of earliest event reported)
ESSENTIAL THERAPEUTICS, INC.
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(Exact Name of Registrant as Specified in Charter)
DELAWARE 0-28006 94-3186021
- ----------------------------------- ---------------------- -------------------------
(State or Other Jurisdiction of (Commission (IRS Employer
Incorporation) File Number) Identification No.)
1365 Main Street, Waltham, MA 02451
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(Address of Principal Executive Offices) (Zip Code)
(781) 647-5554
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(Registrant's telephone number, including area code)
Microcide Pharmaceuticals, Inc., 850 Maude Avenue, Mountain View, CA 94043
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(Former name or former address, if changed since last report)
Item 2. Acquisition or Disposition of Assets.
This Form 8-K/A amends Essential Therapeutics, Inc.'s Current Report on
Form 8-K dated October 24, 2001, filed on November 8, 2001 ("Essential's
------------
Initial Report"), to include Item 7(a) Financial Statements of Business
- --------------
Acquired, and Item 7(b) Pro Forma Financial Information.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
This Item 7 amends and restates in its entirety Item 7 in Essential's
Initial Report.
(a) Financial Statements of Business Acquired.
INDEX TO FINANCIAL STATEMENTS OF THE ALTHEXIS COMPANY, INC.
Page
----
Report of Independent Auditors.............................................. 3
Balance Sheets as of December 31, 2000 and 1999 and September 30, 2001
(unaudited)................................................................ 4
Statements of Operations for the years ended December 31, 2000 and 1999,
the period October 1, 1998 (date of inception) to December 31, 1998 and
the nine months ended September 30, 2001 and 2000 (unaudited).............. 5
Statements of Stockholders' Equity for the years ended December 31, 2000
and 1999, the period October 1, 1998 (date of inception) to December 31,
1998 and the nine months ended September 30, 2001 (unaudited).............. 6
Statements of Cash Flows for the years ended December 31, 2000 and 1999,
the period October 1, 1998 (date of inception) to December 31, 1998 and
the nine months ended September 30, 2001 and 2000 (unaudited).............. 7
Notes to Financial Statements............................................... 8
2
Report of Independent Auditors
Board of Directors and Stockholders
The Althexis Company, Inc.
We have audited the accompanying balance sheets of The Althexis Company,
Inc. (the "Company") as of December 31, 2000 and 1999, and the related
statements of operations, stockholders' equity, and cash flows for the years
then ended and for the period October 1, 1998 (date of inception) to December
31, 1998. 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 auditing standards generally
accepted in the 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 The Althexis Company, Inc.
as of December 31, 2000 and 1999, and the results of its operations and its
cash flows for the years then ended and for the period October 1, 1998 (date of
inception) to December 31, 1998, in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
Boston, Massachusetts
March 16, 2001
3
THE ALTHEXIS COMPANY, INC.
BALANCE SHEETS
December 31,
--------------------- September 30,
1999 2000 2001
---------- ---------- -------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents.................. $1,548,218 $1,534,336 $ 343,416
Accounts receivable:
Collaborative partner.................... 1,250,000 1,250,000 625,000
Other.................................... 86,568 62,118 115,184
---------- ---------- ----------
1,336,568 1,312,118 740,184
Prepaid expenses........................... 545,245 163,063 232,458
---------- ---------- ----------
Total current assets......................... 3,430,031 3,009,517 1,316,058
Equipment, net............................... 783,494 1,145,896 1,360,341
Other assets................................. 50,700 52,806 58,568
---------- ---------- ----------
Total assets................................. $4,264,225 $4,208,219 $2,734,967
========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses...... $ 110,111 $ 48,364 $1,476,062
Deferred license fee revenue............... 666,667 666,667 167,222
Note payable............................... 130,375 244,643 268,185
Capital lease obligations.................. 64,971 86,932 82,244
Deferred tax liability..................... 145,000 190,000 --
---------- ---------- ----------
Total current liabilities.................... 1,117,124 1,236,606 1,993,713
Capital lease obligations, less current
portion..................................... 149,747 59,308 --
Notes payable, less current portion.......... 348,823 526,942 322,735
Deferred license fee revenue................. 666,666 -- --
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000
shares authorized and designated as:
Series A convertible, 359,885 shares
authorized, issued and outstanding
(liquidation value of $1,399,991)....... 1,399,901 1,399,953 1,399,953
Common stock, $0.01 par value; 10,000,000
shares authorized; 3,600,000 shares issued
and outstanding at December 31, 1999 and
2000, 4,181,065 at September 30, 2001..... 36,000 36,000 41,811
Additional paid-in capital................... 235,424 235,424 520,146
Notes receivable from officers............... -- -- (230,426)
Retained earnings (accumulated deficit)...... 310,540 713,986 (1,312,965)
---------- ---------- ----------
Total stockholders' equity................... 1,981,865 2,385,363 418,519
---------- ---------- ----------
Total liabilities and stockholders' equity... $4,264,225 $4,208,219 $2,734,967
========== ========== ==========
See accompanying notes.
4
THE ALTHEXIS COMPANY, INC.
STATEMENTS OF OPERATIONS
October 1, 1998 Nine months ended
(date of inception) Years ended December 31, September 30,
to December 31, ------------------------ --------------------------
1998 1999 2000 2000 2001
------------------- ---------- ---------- ---------- ------------
(unaudited)
Revenues:
Collaborative
research............. $ -- $3,050,000 $4,050,000 $3,424,996 $ 2,274,442
License fees.......... -- 666,667 666,667 500,000 500,000
Grant revenue......... -- -- 108,097 108,097 --
---------- ---------- ---------- ---------- -----------
-- 3,716,667 4,824,764 4,033,093 2,774,442
Operating expenses:
Research and
development.......... -- 2,161,945 3,181,839 2,410,476 3,486,218
General and
administrative....... 299,703 815,292 1,247,960 596,321 1,474,029
---------- ---------- ---------- ---------- -----------
Total operating
expenses........... 299,703 2,977,237 4,429,799 3,006,797 4,960,247
---------- ---------- ---------- ---------- -----------
Operating income
(loss)................. (299,703) 739,430 394,965 1,026,296 (2,185,805)
Interest income
(expense), net......... -- 45,813 53,481 44,022 (31,146)
---------- ---------- ---------- ---------- -----------
Income (loss) before
provision for income
taxes.................. (299,703) 785,243 448,446 1,070,318 (2,216,951)
Income tax expense
(benefit)................ -- 175,000 45,000 294,000 (190,000)
---------- ---------- ---------- ---------- -----------
Net income (loss)....... $ (299,703) $ 610,243 $ 403,446 $ 776,318 $(2,026,951)
========== ========== ========== ========== ===========
Net income (loss) per
share--basic........... $ (0.08) $ 0.17 $ 0.11 $ 0.22 $ (0.55)
Net income (loss) per
share--diluted......... $ (0.08) $ 0.17 $ 0.10 $ 0.19 $ (0.55)
Shares used to compute
net income (loss) per
share--basic........... 3,600,000 3,600,000 3,600,000 3,600,000 3,664,048
Shares used to compute
net income (loss) per
share--diluted......... 3,600,000 3,675,366 4,122,161 4,099,260 3,664,048
See accompanying notes.
5
THE ALTHEXIS COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Series A
Convertible Retained
Preferred Stock Common Stock Additional Notes Earnings Total
------------------ ----------------- Paid-in Receivable (Accumulated Stockholders'
Shares Amount Shares Amount Capital from Officers Deficit) Equity
------- ---------- --------- ------- ---------- ------------- ------------ -------------
Net loss....................... $ (299,703) $ (299,703)
Issuance of common
stock......................... 3,600,000 $36,000 $235,424 271,424
------- ---------- --------- ------- -------- --------- ----------- -----------
Balance at December 31,
1998.......................... 3,600,000 36,000 235,424 (299,703) (28,279)
Issuance of Series A
convertible preferred
stock........................ 359,885 $1,399,901 1,399,901
Net income.................... 610,243 610,243
------- ---------- --------- ------- -------- --------- ----------- -----------
Balance at December 31,
1999.......................... 359,885 1,399,901 3,600,000 36,000 235,424 310,540 1,981,865
Additional proceeds from
issuance of Series A
convertible preferred
stock........................ 52 52
Net income.................... 403,446 403,446
------- ---------- --------- ------- -------- --------- ----------- -----------
Balance at December 31,
2000.......................... 359,885 1,399,953 3,600,000 36,000 235,424 713,986 2,385,363
Issuance of common
stock (unaudited)............ 581,065 5,811 284,722 $(230,426) 60,107
Net loss (unaudited).......... (2,026,951) (2,026,951)
------- ---------- --------- ------- -------- --------- ----------- -----------
Balance at September 30, 2001
(unaudited)................... 359,885 $1,399,953 4,181,065 $41,811 $520,146 $(230,426) $(1,312,965) $ 418,519
======= ========== ========= ======= ======== ========= =========== ===========
See accompanying notes.
6
THE ALTHEXIS COMPANY, INC.
STATEMENTS OF CASH FLOWS
October 1,
1998 (date of Year ended For the nine months
inception) to December 31, ended September 30,
December 31, ------------------------- ---------------------------
1998 1999 2000 2000 2001
------------- ----------- ---------- ---------- ------------
(unaudited)
Operating activities:
Net income (loss)....... $(299,703) $ 610,243 $ 403,446 $ 776,318 $ (2,026,951)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... -- 71,497 263,530 187,349 251,344
Deferred tax
provision............ -- 145,000 45,000 294,000 (190,000)
Changes in operating
assets and
liabilities:
Accounts
receivable......... (51,000) (1,285,568) 23,950 647,449 571,934
Prepaid expenses and
security deposits.. -- (578,472) 380,575 286,137 (75,157)
Deferred license fee
revenue............ -- 1,333,333 (666,667) (499,445) (499,445)
Organization costs.. (17,472) -- -- -- --
Note payable........ 61,305 -- -- -- --
Accounts payable and
accrued expenses... 42,637 67,474 (61,747) 64,900 1,427,698
--------- ----------- ---------- ---------- ------------
Net cash provided by
(used in) operating
activities............. (264,233) 363,507 388,087 1,756,708 (540,577)
Investing activity:
Purchase of equipment... -- (603,806) (625,932) (575,906) (465,790)
--------- ----------- ---------- ---------- ------------
Net cash used in
investing activity..... -- (603,806) (625,932) (575,906) (465,790)
Financing activities:
Issuance of Series A
convertible preferred
stock.................. -- 1,399,901 52 52 --
Issuance of common
stock.................. 271,424 -- -- -- 60,107
Proceeds from equipment
loan................... -- 479,198 453,283 -- --
Payments on notes
payable................ -- -- (151,566) (93,031) (180,664)
Payments on capital
lease obligations...... -- (36,468) (77,806) (55,459) (63,996)
Payment on notes payable
to stockholders........ -- (61,305) -- -- --
--------- ----------- ---------- ---------- ------------
Net cash provided by
(used in) financing
activities............. 271,424 1,781,326 223,963 (148,438) (184,553)
--------- ----------- ---------- ---------- ------------
Net increase (decrease)
in cash................ 7,191 1,541,027 (13,882) 1,032,364 (1,190,920)
Cash at beginning of
period................. -- 7,191 1,548,218 1,548,218 1,534,336
--------- ----------- ---------- ---------- ------------
Cash at end of period... $ 7,191 $ 1,548,218 $1,534,336 $2,580,582 $ 343,416
========= =========== ========== ========== ============
Noncash investing and
financing activities:
Equipment acquired under
capital lease.......... $ -- $ 251,185 $ -- $ -- $ --
Notes received for
common stock........... -- -- -- -- 230,426
Cash paid for:
Interest.............. -- 21,967 87,445 69,969 76,706
Income taxes.......... -- 92,574 50,456 50,456 25,000
See accompanying notes.
7
THE ALTHEXIS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2000 and September 30, 2001 (unaudited)
1. Basis of Presentation
The Company
The Althexis Company, Inc. (the "Company") was formed on October 1, 1998 as
a limited liability company and converted to a corporation on December 31,
1998. Althexis is a biopharmaceutical company committed to the discovery,
development and commercialization of new medicines to treat human diseases. The
Company's discovery approach is centered on the use of structure-based drug
design ("SBDD"), a powerful method of drug discovery that exploits atomic-level
information about potential disease targets.
Interim Financial Information
The financial information and related notes at September 30, 2001 and for
the nine months ended September 30, 2000 and 2001 are unaudited, but, in the
opinion of management, have been prepared on the same basis as the annual
financial statements and include all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of the financial position at such dates and the operating results
and cash flows for such periods. Operating results for the nine months ended
September 30, 2001 may not be indicative of the results for the year end
December 31, 2001.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. Significant Accounting Policies
Equipment
Equipment is recorded at cost. Depreciation and amortization are calculated
using the straight-line method over the estimated useful lives of the
equipment, which varies from three to seven years.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash equivalents and accounts receivable.
The Company places its cash equivalents with high credit quality financial
institutions and, by policy, limits the credit exposure to any one financial
instrument. Accounts receivable are primarily limited to amounts due from
collaborators.
Revenues
The Company recognizes revenue under collaborative agreements as certain
milestones are achieved or license fees and research support payments are
earned. Federal grant revenues are recognized when reimbursable expenditures
are incurred for the grant.
Revenue is deemed earned when all of the following have occurred: all
obligations of the Company relating to the revenue have been met and the
earning process is complete; the monies received or receivable are not
refundable, irrespective of research results; and there are neither future
obligations nor future milestones to be met by the Company with respect to such
revenue.
8
THE ALTHEXIS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
December 31, 2000 and September 30, 2001 (unaudited)
Initial license fees are deferred and amortized over the period in which
the Company is obligated to participate on a continuing and substantial basis in
the research and development activities outlined in each contract. Research
support payments are recognized over the period in which qualified research
activities are undertaken. Milestone payments are recognized as revenue in the
period in which the parties agree that the milestone has been achieved.
Stock Compensation Arrangements
The Company applies the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"). These provisions require the Company to disclose pro forma net income
(loss) amounts as if compensation expense related to grants of stock options
were recognized based on their fair value.
As permitted under SFAS 123, the Company accounts for its stock compensation
arrangements under the provisions of APB Opinion No. 25, Accounting for Stock
Issues to Employees ("APB 25"). Because the exercise price of options granted
during 2000 and 1999 equals the fair value of the underlying stock on the date
of grant and the number of options is fixed, no compensation expense is
required under APB 25.
Income Taxes
Deferred tax assets and liabilities are determined based on differences
between financial reporting and income tax bases of assets and liabilities, as
well as net operating loss carryforwards, and are measured using the enacted
tax rates and laws that will be in effect when the differences reverse.
Deferred tax assets are reduced by a valuation allowance to reflect the
uncertainty associated with their ultimate realization.
Segment Information
The Company is engaged in the development and commercialization of novel
antibiotic drugs. The Company manages its business and operations as one
segment. There are no revenues to date for any potential products and the
Company's assets are not identifiable to any one potential product.
3. Earnings Per Share
Basic net income (loss) per share represents net income divided by the
weighted average shares of common stock outstanding during the period. Diluted
net income (loss) per share includes the effect of all dilutive, potentially
issuable common shares using the treasury stock method. The difference between
basic and diluted shares used in the computation of net income (loss) per share
is as follows:
Nine months ended
Years ended December 31, September 30,
----------------------------- -------------------
1998 1999 2000 2000 2001
--------- --------- --------- --------- ---------
(unaudited)
Weighted average number of
common shares outstanding
used in computing basic
net income (loss) per
share.................... 3,600,000 3,600,000 3,600,000 3,600,000 3,664,048
Effect of dilutive
securities:
Convertible preferred
stock.................. -- 7,888 359,885 359,885 --
Warrants................ -- 157 3,961 3,375 --
Options................. -- 67,321 158,315 136,000 --
Restricted stock........ -- -- -- -- --
--------- --------- --------- --------- ---------
Weighted average number of
common shares used in
computing diluted net
income (loss) per share.. 3,600,000 3,675,366 4,122,161 4,099,260 3,664,048
========= ========= ========= ========= =========
9
THE ALTHEXIS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and September 30, 2001 (unaudited)
4. Equipment
Equipment consists of the following:
December 31,
--------------------
1999 2000
-------- ----------
Laboratory equipment................................... $692,220 $1,257,369
Office and computer equipment.......................... 162,771 223,554
-------- ----------
854,991 1,480,923
Less accumulated depreciation.......................... (71,497) (335,027)
-------- ----------
$783,494 $1,145,896
======== ==========
5. Lease Commitments
The Company leases its facility under an operating lease that expires at the
end of 2002. The Company also leases certain of its equipment under a
noncancelable capital lease that requires the Company obtain a letter of credit
to secure the lease obligation. Future minimum lease payments under
noncancelable leases as of December 31, 2000 are as follows:
Capital Operating
-------- ---------
2001................................................... $102,432 $218,400
2002................................................... 62,316 218,400
-------- --------
Total minimum lease payments............................. 164,748 $436,800
========
Less amounts representing interest....................... (18,508)
--------
146,240
Less amounts currently due............................... (86,932)
--------
$ 59,308
========
Under the facility lease, the Company is required to pay to the lessor real
estate taxes and all related utility expenses. Rent expense amounted to
$223,314, $130,298 and $0 in 2000, 1999 and 1998, respectively.
At September 30, 2001, the Company was committed to purchase $176,000 of
laboratory equipment under a capital lease facility.
6. Notes Payable
In November 1999, the Company entered into a master loan agreement for the
purpose of financing the purchase of equipment. In December 1999, an initial
loan of $479,198 was obtained through the issuance of a note payable monthly
with interest at 12.4% through May 2003. In October 2000, a second note payable
was issued for the purchase of equipment totaling $453,283. That note is
payable monthly with interest at 12.2% through March 2004. Both notes are
secured by the related equipment. Annual maturities of the notes are as
follows: $244,643 in 2001, $276,524 in 2002, $211,633 in 2003 and $38,785 in
2004.
7. Collaboration Agreement
On December 24, 1998, the Company entered into a Collaboration Agreement
(the "Collaboration Agreement") with PLIVA Pharmaceuticals, Inc. ("PLIVA") to
combine PLIVA'S scientific, drug development and financial resources with the
Company's unique expertise and experience in SBDD in order to discover,
10
THE ALTHEXIS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and September 30, 2001 (unaudited)
select, develop and commercialize novel antibiotic drugs worldwide. The Company
agreed to undertake certain research (the "Research Plan") and license the
resulting technology to PLIVA. PLIVA agreed to license certain of its
technology to the Company and received the right to commercialize any resulting
products. Under the Collaboration Agreement, the Company may receive up to
$14.4 million in license fees, research support and milestone payments over the
three-year term of the Research Plan. The Research Plan may be extended by
mutual consent of both parties.
In January 1999, the Company received a $2,000,000 initial license fee that
is being recognized over the Research Plan term as license fees revenue in the
accompanying statement of operations. In January 1999, the Company began
receiving $7.5 million of research support payments ratably over the term of
the Research Plan. In 1999 and 2000, the Company also earned $550,000 and
$1,550,000, respectively, in milestone payments that have been reflected as
collaborative research revenue in the accompanying statement of operations.
8. Prepaid Expenses
Prepaid expenses consist of the following:
December 31,
-----------------
1999 2000
-------- --------
Rent....................................................... $223,316 $ --
Software license fees...................................... 168,326 63,683
Research expenses.......................................... 54,880 25,000
Professional fees.......................................... 75,194 --
Insurance.................................................. 8,807 13,766
Taxes...................................................... -- 47,437
Other...................................................... 14,722 13,177
-------- --------
$545,245 $163,063
======== ========
9. Income Taxes
From inception through December 31, 1998, the Company was taxed under the
partnership provisions of the Internal Revenue Code. As such, the members of
the Company were required to report their respective shares of the Company's
taxable loss through that date on their respective income tax returns.
Accordingly, no provision for federal or state income taxes has been made in
the 1998 financial statements.
Federal and state income tax expense consisted of the following:
Years ended
December 31,
----------------
1999 2000
-------- -------
Current:
Federal................................................... $ 30,000 $ --
-------- -------
30,000 --
Deferred:
Federal................................................... 104,000 --
State..................................................... 41,000 45,000
-------- -------
145,000 45,000
-------- -------
$175,000 $45,000
======== =======
11
THE ALTHEXIS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and September 30, 2001 (unaudited)
Income tax expense differed from the statutory income tax provision as
follows:
Years ended
December 31,
-------------------
1999 2000
-------- ---------
Statutory provision.................................... $266,983 $ 152,472
Nondeductible expenses................................. 6,282 4,800
Research tax credits................................... (98,265) (112,272)
-------- ---------
Income tax expense..................................... $175,000 $ 45,000
======== =========
The significant components of the Company's deferred tax assets and
liabilities are as follows:
December 31,
--------------------
1999 2000
--------- ---------
Deferred tax assets:
Tax credits......................................... $ 64,341 $ 271,996
Organization costs.................................. -- 12,907
--------- ---------
Total deferred tax assets........................... 64,341 284,903
Less valuation allowance.............................. (24,118) (79,399)
--------- ---------
Net deferred tax assets............................... 40,223 205,504
Deferred tax liabilities:
Accrual to cash adjustment.......................... (150,087) (303,564)
Accelerated depreciation............................ (35,136) (91,940)
--------- ---------
Total deferred tax liabilities...................... (185,223) (395,504)
--------- ---------
Net deferred tax liability............................ $(145,000) $(190,000)
========= =========
Deferred tax accounting requires a valuation allowance to reduce the
deferred tax assets reported if, based on the weight of the evidence, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. After consideration of all the evidence, both positive and
negative, management has determined that a $79,399 valuation allowance at
December 31, 2000 is necessary to reduce the deferred tax asset related to
state tax credits to the amount that will more likely than not be realized. The
change in the valuation allowance for the current year is $55,281. At December
31, 2000, the Company has available tax credits of $271,996 which expire in the
year 2020.
10. Stockholders' Equity
Preferred Stock
Each share of Series A convertible preferred stock is convertible, at the
stockholder's option, into common stock at the rate then in effect (one to one
at December 31, 2000 and December 31, 1999) at any time after the consolidation
or merger of the Company with any other company or the sale of substantially
all of the assets of the Company. The preferred shares will automatically
convert upon the closing of a public offering of the Company's common stock
under the Securities Act of 1933. The holders of Series A convertible preferred
stock are entitled to receive, when and if declared by Althexis' Board of
Directors, dividends in the same amount per share as would be payable on the
number of shares of common stock into which the preferred stock is then
convertible, payable in preference and priority to any payment of any cash
dividend on common stock. The Series A convertible preferred shares are
entitled to that number of votes on any matter submitted to the stockholders of
the Company equal to the number of shares of common stock into which they are
convertible.
12
THE ALTHEXIS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and September 30, 2001 (unaudited)
Upon the liquidation of the Company, the holder of each share of Series A
convertible preferred stock is entitled, before any distribution or payment is
made to the holders of common stock, to be paid $3.89 per share plus any
declared and unpaid dividends thereon.
Restricted Stock
In April 2001, the Company sold 576,065 restricted shares of common stock to
certain officers for $0.50 per share. In connection with the sale, the Company
agreed to provide to the officers recourse loans totaling $230,427 and bearing
interest at 6% per annum. The Company issued the common stock subject to a
repurchase option that lapses generally over four years. The loan and related
interest are secured by a pledge of the shares issued and will also be forgiven
generally over four years so long as the officers remain employed by the
Company.
Shares Reserved for Future Issuance
At December 31, 2000, the Company has reserved the following shares of
common stock for future issuance:
Stock option plan.................................................. 400,000
Conversion of preferred stock...................................... 359,885
Warrants........................................................... 6,567
-------
766,452
=======
11. Stock Option Plan
The Company's 1999 Stock Option Plan (the "Plan") provides the opportunity
for employees, consultants and directors to be granted options to purchase, or
receive awards of up to 400,000 shares of the Company's common stock. Options
granted under the Plan may be "incentive stock options" or "nonqualified
options" under the applicable provisions of the Internal Revenue Code.
Incentive stock options are granted only to employees of the Company. Incentive
stock options granted to employees who own more than 10% of the total combined
voting power of all classes of stock will be granted at 110% of the fair market
value of the Company's common stock on the date of the grant. Nonqualified
options may be granted to officers, employees, consultants and directors of the
Company.
During 2000 and 1999, the Company granted 90,500 and 136,000 options,
respectively, to employees and consultants to purchase shares of the Company's
common stock at an exercise price of $0.50 per share. These options vest
ratably over four years. At December 31, 2000, 24,000 options had vested. No
options were vested as of December 31, 1999. The weighted-average fair value of
the options granted during 2000 and 1999 was $0.13 per share. The fair value
for these options was estimated at the date of grant using the Black-Scholes
option pricing model. The following weighted-average assumptions were used to
determine the fair value for 2000 and 1999: a risk-free interest rate of 6% for
1999 and 5.83% for 2000; an expected dividend yield of 0%; a volatility factor
of 0.7 for 1999 and 0.82 for 2000; and a weighted-average expected life of the
options of five years.
The difference between the pro forma net income (loss) as if the Company had
used the fair value method of SFAS 123 to account for the stock options issued
under the Plan and the net loss reported in the
13
THE ALTHEXIS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and September 30, 2001 (unaudited)
accompanying statement of operations is immaterial. The effects of applying
SFAS 123 are not likely to be representative of the effects on pro forma net
income (loss) for future years.
12. Employee Savings Plan
In 2000, the Company established an employee savings plan, The Althexis
Company, Inc. 401(k) Plan. The plan is available to all full-time salaried and
non-union hourly employees. The plan is funded with contributions by
participants and the Company. The Company did not make any contributions in
2000.
13. Related-Party Transactions
Mass Ventures LLC ("Mass") is one of the co-founders of the Company.
Assuming conversion of all outstanding shares of convertible preferred stock,
Mass had a 21.9% ownership interest in the Company at December 31, 2000. During
2000 and 1999, the Company paid Mass $124,369 and $194,293, respectively, for
legal, accounting and consulting services.
Dailey Capital Management LP ("Dailey Capital") President, Michael E.
Dailey, is one of the co-founders of the Company. Assuming conversion of all
outstanding shares of convertible preferred stock, Mr. Dailey had a 17.9%
ownership interest in the Company at December 31, 2000. During 2000, the
Company paid Dailey Capital $303,659 for consulting services.
14. Subsequent Event
On October 24, 2001, the Company completed a merger with a wholly owned
subsidiary of Essential Therapeutics, Inc. (formerly Microcide Pharmaceuticals,
Inc.), a publicly traded biotechnology company, in which the Company survived
and thereby became a wholly owned subsidiary of Essential. All the outstanding
shares of the Company's common and preferred stock were exchanged for an
aggregate of 5,188,026 shares of Essential common stock.
14
(b) Pro Forma Financial Information.
15
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
reflect the accounting for the merger of California MP Acquisition, Inc. a
wholly owned subsidiary of Essential, with and into Althexis in accordance with
the provisions of the merger agreement. The merger agreement provides that:
. each outstanding share of preferred and common stock of Althexis was
exchanged for 1.1425 shares of Essential common stock;
. each option to purchase Althexis common stock was assumed by Essential and
became an option to purchase a number of shares of Essential common stock
equal to the number of shares of Althexis stock that the option was
exercisable for immediately prior to the completion of the merger
multiplied by an exchange ratio of 1.1425.
The unaudited pro forma condensed combined financial statements are based
upon and should be read in conjunction with the historical financial statements
of Essential included in its report on Form 10-K/A for the year ended December
31, 2000 and report on Form 10-Q for the quarter ended September 30, 2001 and
the historical financial statements of Althexis, which are included herein.
The unaudited pro forma condensed combined balance sheet as of September 30,
2001 gives effect to:
. the merger of California MP Acquisition with and into Althexis and
related transactions as if they occurred on September 30, 2001;
. the exchange of shares described above and in the notes to the unaudited
pro forma condensed combined financial statements; and
. the $60.0 million equity financing that closed concurrently with
the merger.
The unaudited pro forma condensed combined statements of operations for the
year ended December 31, 2000 and the nine months ended September 30, 2001 give
effect to the merger of California MP Acquisition with and into Althexis and
related transactions as if they had occurred on January 1, 2000. The unaudited
pro forma condensed combined statement of operations does not:
. purport to represent what the results of operations actually would have
been if the merger of California MP Acquisition with and into Althexis
and the other transactions described below had occurred as of the date
indicated or what those results will be for any future periods; or
. give effect to certain nonrecurring charges expected to result from the
transaction, including a charge of $13.9 million relating to acquired in-
process research and development and a deemed dividend charge of $23.8
million, which will materially increase net loss attributable to common
stockholders.
The merger of California MP Acquisition with and into Althexis will be
accounted for using the purchase method of accounting, with the total
acquisition cost allocated to the tangible and intangible assets and liabilities
acquired based upon their estimated fair values. The preliminary purchase price
allocation is based on an independent third-party valuation which has not yet
been finalized and is therefore subject to change. Upon completion of the
purchase price allocation, the amount of purchase price allocated to tangible
assets acquired, in-process research and development and liabilities assumed
could differ from the amounts and allocations discussed in the notes to the
unaudited pro forma condensed combined financial statements. Essential and
Althexis are not aware of any significant unrecorded obligations or
contingencies that are not included in the accompanying purchase price
allocation. However, the final allocation of the purchase price will be made
based upon valuations and other studies that have not been completed.
In addition, Essential and Althexis expect to incur approximately $0.975
million in costs directly attributable to the merger and the financing, which
have been included in the determination of the preliminary purchase price.
Essential expects to incur certain expenses as a result of combining the
companies; however, the unaudited pro forma earnings per share data does not
reflect any of these anticipated expenses.
16
ESSENTIAL THERAPEUTICS INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of September 30, 2001
(in thousands)
Essential Financing References Essential Althexis Pro Forma References Pro Forma
Historical Adjustments (Note) Adjusted Historical Adjustments (Note) Combined
---------- ----------- ---------- --------- ---------- ----------- ---------- ---------
ASSETS
------
Current assets:
Cash and cash
equivalents........... $ 7,539 $ 60,000 (I) $ 67,539 $ 343 $ 67,882
Receivables, prepaid
expenses and other
assets................ 800 800 973 1,773
-------- --------- -------- ------- --------
Total current assets... 8,339 60,000 68,339 1,316 $ -- 69,655
Property and equipment,
net.................... 4,409 4,409 1,360 5,769
Other assets:
Deposits and other
assets................ 1,717 1,717 59 1,776
Goodwill and other
intangibles........... -- -- -- 6,532 (B) 6,532
-------- --------- -------- ------- -------- --------
Total assets........... $ 14,465 $ 60,000 $ 74,465 $ 2,735 $ 6,532 $ 83,732
======== ========= ======== ======= ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Current liabilities:
Accounts payable....... $ 1,182 $ 1,182 $ 649 $ 1,831
Accrued compensation... 1,218 1,218 -- 1,218
Other accrued
liabilities........... 1,276 1,276 827 $ 975 (C) 3,078
Current portion of
notes payable......... 662 662 268 930
Current portion of debt
obligations........... -- -- 82 82
Deferred revenue....... 2,442 2,442 167 2,609
-------- -------- ------- -------- --------
Total current
liabilities........... 6,780 6,780 1,993 975 9,748
Long-term portion of
notes payable.......... 61 61 323 384
Accrued rent............ 379 379 379
Convertible redeemable
preferred stock........ $ 60,000 (I) 60,000 60,000
Stockholders' equity:
Preferred stock........ -- -- 1,400 (1,400) (A) --
Common stock........... 68,891 68,891 42 (42) (A) 91,706
22,815 (D)
Additional paid-in
capital............... -- 23,800 (G) 23,800 520 (520) (A) 23,800
Notes receivable from
officers.............. -- -- (230) (230)
Deferred stock
compensation.......... (116) (116) -- (2,709) (F) (2,825)
Accumulated deficit.... (61,530) (23,800) (G) (85,330) (1,313) 1,313 (A)
(13,900) (E) (99,230)
-------- --------- -------- ------- -------- --------
Total stockholders'
equity................ 7,245 -- 7,245 419 5,557 13,221
-------- --------- -------- ------- -------- --------
Total liabilities and
stockholders' equity.. $ 14,465 $ 60,000 $ 74,465 $ 2,735 $ 6,532 $ 83,732
======== ========= ======== ======= ======== ========
17
ESSENTIAL THERAPEUTICS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2001
(In thousands, except per share data)
Essential Althexis Pro Forma References Pro Forma
Historical Historical Adjustments (Note) Combined
---------- ---------- ----------- ---------- ---------
Total revenues.......... $ 7,438 $ 2,774 $ 10,212
Operating expenses:
Research and
development.......... 12,678 3,486 16,164
General and
administrative....... 3,508 1,474 $ 508 (F) 5,490
------- ------- ----- --------
Total operating
expenses........... 16,186 4,960 508 21,654
------- ------- ----- --------
Operating loss.......... (8,748) (2,186) (508) (11,442)
Other income (expense):
Interest income, net.. 406 (31) 375
------- ------- ----- --------
Loss before income
taxes.................. (8,342) (2,217) (508) (11,067)
Income tax benefit...... -- (190) 190 (H) --
------- ------- ----- --------
Net loss............ $(8,342) $(2,027) $(698) $(11,067)
======= ======= ===== ========
Net loss per share--
basic and diluted...... $ (0.73) $ (0.55) -- $ (0.66)
Shares used in computing
basic and diluted net
loss per share......... 11,497 3,664 -- 16,685
18
ESSENTIAL THERAPEUTICS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 2000
(In thousands, except per share data)
Essential Althexis Pro Forma References Pro Forma
Historical Historical Adjustments (Notes) Combined
---------- ---------- ----------- ---------- ---------
Total revenues.......... $ 5,864 $4,825 $ 10,689
Operating expenses:
Research and
development.......... 16,082 3,182 19,264
General and
administrative....... 4,353 1,248 $ 677 (F) 6,278
-------- ------ ----- --------
Total operating
expenses........... 20,435 4,430 677 25,542
-------- ------ ----- --------
Operating income
(loss)................. (14,571) 395 (677) (14,853)
Other income (expense):
Other income.......... 1,110 -- -- 1,110
Interest income, net.. (251) 53 -- (198)
-------- ------ ----- --------
859 53 -- 912
-------- ------ ----- --------
Income (loss) before
income taxes........... (13,712) 448 (677) (13,941)
Income tax expense...... -- 45 (45) (H) --
-------- ------ ----- --------
Income (loss) before
cumulative effect of
change in accounting
principle.............. (13,712) 403 (632) (13,941)
Cumulative effect of
change in accounting
principle.............. (233) -- -- (233)
-------- ------ ----- --------
Net income (loss)... $(13,945) $ 403 $(632) $(14,174)
======== ====== ===== ========
Net income (loss) per
share:
Basic................. $ (1.23) $ 0.11 -- $ (0.86)
Diluted............... (1.23) 0.10 -- (0.86)
Shares used to compute
net income (loss) per
share:
Basic................. 11,320 3,600 -- 16,508
Diluted............... 11,320 4,122 -- 16,508
19
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
Pursuant to the merger agreement, California MP Acquisition, Inc., a wholly
owned subsidiary of Essential, merged with and into Althexis. In connection with
the merger, Essential issued 1.1425 shares of common stock in exchange for each
share of Althexis common and preferred stock outstanding. As of October 24,
2001, there were 4,181,065 Althexis common shares outstanding, 359,885 Althexis
preferred shares outstanding, and 317,000 shares issuable upon exercise of
outstanding stock options. Based on the exchange ratio, Althexis shareholders
received a total of 5,188,026 shares of Essential common stock and holders of
Althexis options have the right to receive 362,169 shares of Essential common
stock.
Essential's total cost to acquire Althexis is $23.8 million, which has been
calculated using the closing market price of Essential's common stock as of July
27, 2001, including approximately $0.975 million of merger related costs.
The cost to acquire Althexis has been allocated to the assets acquired and
liabilities assumed according to their respective fair values, with the excess
purchase price being allocated to goodwill. The allocation of the aggregate
purchase price is based on management's estimate. A formal valuation analysis
for purposes of allocating the fair value of purchased assets and liabilities
has not been completed. As such, adjustments to asset values and liabilities in
the final allocation may differ significantly from these estimates, which could
impact future earnings.
The purchase cost of Althexis is as follows (in thousands):
Value of Essential common stock issued........................ $21,634
Fair value of options assumed................................. 1,181
Estimated transaction costs and expenses...................... 975
-------
$23,790
=======
The purchase price allocation is as follows (in thousands):
Amount
-------
Net tangible assets of Althexis............................... $ 649
Deferred compensation ........................................ 2,709
Intangible assets acquired:
In-process research and development......................... 13,900
Goodwill.................................................... 6,532
-------
Total purchase price allocation........................... $23,790
=======
The fair value assigned to purchased in-process research and development was
estimated by discounting, to present value, the cash flows expected to result
from each Althexis in-process research and development project once it has
reached commercial feasibility. In estimating future cash flows, a charge was
applied to the cash flows, reflecting other tangible and intangible assets
required for the successful development of the product resulting from each
purchased in-process research and development project. The discount rates used
reflect the stage of completion each project has achieved up to the date of the
merger agreement.
20
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS--(Continued)
Below is a brief description of the in-process research and development
projects, including an estimate of when management believes Essential may
realize revenues from the sale of these products in the respective application.
ACTT (Althexis Calorimetric Target Triage). ACTT is a proprietary technology
used to assess the functional activity of proteins that serve as potential drug
targets. The technology allows for an accelerated and more efficient assessment
and characterization of novel genomic targets, resulting in a more timely
approach to discovery of new drugs. Pending completion of improvements to
increase throughput and scale, Althexis hopes to provide services to assist
other biotechnology firms in drug discovery, on a commercial basis, beginning
in late 2002. The future cost of this program is estimated to be approximately
$1.0 million. A discount rate of 35% was utilized in discounting these
estimated cash flows.
PLIVA Project. Althexis' current collaboration with PLIVA d.d. has resulted
in the selection of a new broad spectrum antibacterial agent. An IND submission
is anticipated for early 2002, with product launch expected in 2006-2007,
although there can be no assurance that a product will be launched or that the
launch will occur within this time period. While PLIVA has certain marketing
rights to this product, and is undertaking development in its market territory,
Althexis retains development and marketing rights in the Far East. Althexis
anticipates it will partner with a new firm for the development and marketing
rights in that region.
The future cost of this program is estimated to be approximately $12
million, a majority of which is anticipated to be reimbursed by the licensing
partner. A discount rate of 45% was utilized in discounting these estimated
cash flows.
Narrow Spectrum Antibiotic Project. Althexis has identified a narrow
spectrum antibacterial agent that has demonstrated some antimicrobial efficacy
in small animal tests. An IND submission is anticipated sometime in 2002, with
product launch expected in 2006-2007, although there can be no assurance that a
product will be launched or that the launch will occur within this time period.
Once the project reaches late clinical stage, it is anticipated a development
and marketing partnership will be arranged.
The future cost of this program is estimated to be approximately $33
million, a majority of which is anticipated to be reimbursed by the licensing
partner. A discount rate of 50% was utilized in discounting these estimated
cash flows.
Broad Spectrum Antibiotic Project. A broad spectrum antibiotic targeting an
enzyme involved in bacterial protein synthesis is in the compound testing
phase. An IND submission is anticipated in 2003, with product launch expected
in 2007, although there can be no assurance that a product will be launched or
that the launch will occur within this time period. Once the project reaches
late clinical stage, it is anticipated a development and marketing partnership
will be arranged.
The future cost of this program is estimated to be approximately $33
million, a majority of which is anticipated to be reimbursed by the licensing
partner. A discount rate of 55% was utilized in discounting these estimated
cash flows.
Goodwill represents the excess of the purchase price of an investment in an
acquired business over the fair value of the underlying net identifiable
assets. In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," or SFAS No. 142,
which directed that goodwill and indefinite lived intangible assets will no
longer be amortized, but be reviewed at least annually for impairment. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. The amortization provisions of SFAS
No. 142 apply to goodwill and intangible assets acquired after June 30, 2001.
Accordingly, the goodwill acquired pursuant to the merger has not been
amortized.
21
DESCRIPTION OF PRO FORMA ADJUSTMENTS RECORDED
IN PRO FORMA FINANCIAL INFORMATION
(A) To eliminate Althexis' historical equity accounts.
(B) To reflect the goodwill and intangible assets originating from the
transaction.
(C) To reflect the estimated direct transaction costs recorded as part of the
purchase price.
(D) To reflect the issuance of Essential common stock.
(E) To reflect the estimated purchased in-process research and development
charge.
(F) To reflect the deferred compensation charges associated with the intrinsic
value of unvested options exchanged in the merger and shares held by
employees subject to a lapsing right of repurchase and the amortization
thereof.
(G) To reflect the deemed dividend relating to the beneficial conversion
feature of the convertible redeemable preferred stock.
(H) To reflect tax benefit of combined losses.
(I) Reflects the receipt of $60.0 million of gross proceeds from the issuance
of convertible redeemable preferred stock.
22
(c) Exhibits.
Exhibit
- -------
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger, dated July 27, 2001, by and among
Essential Therapeutics, Inc. and The Althexis Company, Inc.
(incorporated by reference to Exhibit No. 2.1 to the Registrant's
Current Report on Form 8-K filed on November 8, 2001).
3.1 Restated Certificate of Incorporation of Essential Therapeutics, Inc.
(incorporated by reference to Exhibit No. 3.1 to the Registrant's
Registration Statement on Form S-1 (file No. 333-02400), filed May 14,
1996).
3.2 Certificate of Designations to Essential Therapeutics, Inc.'s
Certificate of Incorporation filed with the Secretary of the State of
the State of Delaware on October 24, 2001 (incorporated by reference to
Exhibit No. 3.2 to the Registrant's Current Report on Form 8-K filed on
November 8, 2001).
3.3 Amendment to the Company's Certificate of Incorporation filed with the
Secretary of the State of the State of Delaware on October 24, 2001
(incorporated by reference to Exhibit No. 3.3 to the Registrant's
Current Report on Form 8-K filed on November 8, 2001).
10.1 Form of Subscription Agreement, dated as of July 27, 2001, by and
between Essential Therapeutics, Inc. and each purchaser of Series B
Convertible Redeemable Preferred Stock (incorporated by reference to
Exhibit No. 10.1 to the Registrant's Current Report on Form 8-K filed
on November 8, 2001).
23
10.2 Form of Voting Agreement, dated as of October 24, 2001, by and between
Essential Therapeutics, Inc. and each purchaser of Series B Convertible
Redeemable Preferred Stock (incorporated by reference to Exhibit No. 10.2
to the Registrant's Current Report on Form 8-K filed on November 8, 2001).
23.1 Consent of Ernst & Young LLP, Independent Auditors.
99.1 Press release, dated October 25, 2001 (incorporated by reference to Exhibit
No. 99.1 to the Registrant's Current Report on Form 8-K filed on November
8, 2001).
24
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: December 18, 2001 ESSENTIAL THERAPEUTICS, INC.
By: /s/ Paul J. Mellett
------------------------------
Paul J. Mellett
Chief Financial Officer and Treasurer
(Principal Financial Officer)
25
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger, dated July 27, 2001, by and among
Essential Therapeutics, Inc. and The Althexis Company, Inc.
(incorporated by reference to Exhibit No. 2.1 to the Registrant's
Current Report on Form 8-K filed on November 8, 2001).
3.1 Restated Certificate of Incorporation of Essential Therapeutics, Inc.
(incorporated by reference to Exhibit No. 3.1 to the Registrant's
Registration Statement on Form S-1 (file No. 333-02400), filed May 14,
1996).
3.2 Certificate of Designations to Essential Therapeutics, Inc.'s
Certificate of Incorporation filed with the Secretary of the State of
the State of Delaware on October 24, 2001 (incorporated by reference
to Exhibit No. 3.2 to the Registrant's Current Report on Form 8-K
filed on November 8, 2001).
3.3 Amendment to the Company's Certificate of Incorporation filed with the
Secretary of the State of the State of Delaware on October 24, 2001
(incorporated by reference to Exhibit No. 3.3 to the Registrant's
Current Report on Form 8-K filed on November 8, 2001).
10.1 Form of Subscription Agreement, dated as of July 27, 2001, by and
between Essential Therapeutics, Inc. and each purchaser of Series B
Convertible Redeemable Preferred Stock (incorporated by reference to
Exhibit No. 10.1 to the Registrant's Current Report on Form 8-K filed
on November 8, 2001).
10.2 Form of Voting Agreement, dated as of October 24, 2001, by and between
Essential Therapeutics, Inc. and each purchaser of Series B
Convertible Redeemable Preferred Stock (incorporated by reference to
Exhibit No. 10.2 to the Registrant's Current Report on Form 8-K filed
on November 8, 2001).
23.1 Consent of Ernst & Young LLP, Independent Auditors.
99.1 Press release, dated October 25, 2001 (incorporated by reference to
Exhibit No. 99.1 to the Registrant's Current Report on Form 8-K filed
on November 8, 2001).
26