NOTES TO FINANCIAL STATEMENTS
Cadence Pharmaceuticals, Inc. (the Company) was incorporated in the state of Delaware
in May 2004. The Company is a biopharmaceutical company focused on acquiring, in-licensing, developing and commercializing proprietary products principally for use in the hospital setting. In March 2006, the Company in-licensed the exclusive U.S.
and Canadian rights to OFIRMEV
®
(acetaminophen) injection, an intravenous (IV) formulation of
acetaminophen, from Bristol-Myers Squibb Company (BMS). In November 2010, the Food and Drug Administration (FDA) approved the Companys New Drug Application (NDA) for OFIRMEV for the management of mild to
moderate pain, the management of moderate to severe pain with adjunctive opioid analgesics, and the reduction of fever in adults and children two years of age and older. In January 2011, the Company commenced commercial sales of the product in the
U.S.
2.
|
|
Summary of Significant Accounting Policies
|
Management Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases
its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Examples of such estimates include, but are not limited to, the fair value of property and equipment, inventory
obsolescence and valuation, restructuring liabilities, stock-based compensation, reserve for sales returns, and commitments and contingencies. On a regular basis, the Company reviews its estimates to ensure the estimates appropriately reflect
changes in its business or as new information becomes available. Management believes that these estimates are reasonable, however, actual results could materially differ from these estimates.
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence that an arrangement exists, title has passed, collection is reasonably assured and the price is fixed or determinable. It sells OFIRMEV
mostly to wholesalers who, in-turn, sell the product to hospitals and other end-user customers. Sales to wholesalers provide for selling prices that are fixed on the date of sale, although the Company offers discounts to certain group purchasing
organizations, end-user hospitals, and government programs. The wholesalers take title to the product, bear the risk of loss of ownership, and have economic substance to the inventory. Further, the Company has no significant obligations for future
performance to generate pull-through sales, however, it does allow wholesalers to return product that is damaged or received in error. In addition, the Company allows for product to be returned beginning six months prior to, and ending twelve months
following, product expiration.
OFIRMEV, which was launched in January 2011, is the Companys first and only commercially
available product. Because the Company initially had limited product return data, it deferred the recognition of revenue on sales to wholesalers and, instead, recognized revenue at the time that product was sold by a wholesaler to an end-user
customer. Shipments of product that were not recognized as revenue were treated as deferred revenue. However, as of January 1, 2013, the Company determined that it had obtained sufficient product return history to reasonably estimate future
wholesaler returns. Since that time, the Company has recognized revenue at the time product is sold to a wholesaler. As a result of this change, the Company recorded a one-time adjustment to recognize revenue that had previously been deferred,
resulting in additional net revenue of $2,616,000 and cost of sales of $919,000 for the year ended December 31, 2013. The corresponding impact of this one-time adjustment was a reduction of $1,697,000 in both the Companys loss from
continuing operations and net loss for the year ended December 31, 2013, and the per share net impact of the adjustment was a reduction in net loss of
83
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
$0.02 per share for the year. There was no similar impact on the reported revenue, cost of sales or loss per share for the years ended December 31, 2012 and 2011.
The Company records certain sales reserves and allowances as a reduction to gross revenue. These reserves and allowances include
distribution service fees, a prompt payment discount, a group purchasing discount and administrative service fee, discounts to certain end-user customers and governmental programs and a reserve for estimated product returns based on historical
return rates, as applicable. Distribution service fees arise from contractual agreements the Company has with certain wholesalers for distribution services they provide with respect to OFIRMEV. These fees are generally a fixed percentage of the
price of the product purchased by these wholesalers. The Company offers a prompt payment discount to certain wholesalers as an incentive to meet certain payment terms. It accounts for these cash discounts at the time the sale is made to the
wholesalers and reduces its accounts receivable accordingly. The group purchasing discount and chargeback reserve is based upon contracted discounts the Company provides to members of certain purchasing groups. The Company estimates the sales from
its wholesalers to these group purchasing organizations and accrues for the chargebacks it anticipates from its wholesalers for the difference between the current retail price and the reduced price paid by the members of the group
purchasing organizations. Administrative service fees for these transactions are also recorded at the time of sale. The Company also provides predetermined discounts under certain government programs, which are recorded at the time of sale.
Revenue from the Companys data license agreement with Terumo Corporation (Terumo) is recognized separately
for each element of the arrangement. Revenue from the data and services element that was provided to Terumo by the Company in 2011 and 2012 has been recognized upon delivery of the goods and services provided, based upon the consideration allocated
to each deliverable, or the termination of the service period. The Company allocated the consideration from the data and services element to each deliverable based upon its review of the agreement pursuant to multiple-element arrangement guidance.
Revenue from the first commercial sales milestone payment was recognized in November 2013 as the Company was able to confirm that the initial sale of Terumos IV acetaminophen product had occurred in Japan. Royalties on subsequent sales will be
recorded at the time the royalties can be reliably measured and collectability is reasonably assured. See Note 9 for further discussion.
Accounts Receivable
The Company extends credit to its customers in
the normal course of business based upon an evaluation of the customers credit history, financial condition and other factors. Trade accounts receivable are recorded on gross sales to wholesalers, net of allowances for prompt payment and other
discounts, wholesaler fees, chargebacks and doubtful accounts. Estimates of allowances for doubtful accounts are determined by evaluating individual customer circumstances, historical payment patterns, length of time past due and economic and other
factors. At December 31, 2013 and 2012, the Companys allowance for uncollectible receivables was $19,000 and $56,000, respectively. During the years ended December 31, 2013, 2012 and 2011 charges of $3,000, $56,000 and $0,
respectively, were taken to reserve for past due accounts. During the year ended December 31, 2013, past due accounts totaling $40,000 that were previously reserved were written off. No past due accounts were written off during the years ended
December 31, 2012 and 2011.
Fair Value Reporting
The Companys financial instruments consist of cash and cash equivalents, marketable securities, restricted cash, trade receivables
and payables, accrued liabilities and long-term debt. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be
84
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
determined with precision. The carrying amount of cash and cash equivalents, restricted cash, trade receivables and payables and accrued liabilities are generally considered to be representative
of their respective fair values because of the short-term nature of those instruments. Further, based upon the borrowing rates currently available to the Company for loans with similar terms, the Company believes the fair value of long-term debt
approximates its carrying value. The fair value of marketable securities is based upon market prices quoted on the last day of the fiscal period.
Current accounting guidance defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and requires certain disclosures about fair value measurements. The valuation
techniques included in the guidance are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect market assumptions and are classified into the
following fair value hierarchy:
|
|
|
|
|
|
|
Level 1 Inputs
|
|
|
|
|
|
Quoted prices for identical instruments in active markets.
|
|
|
|
Level 2 Inputs
|
|
|
|
|
|
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which
all significant inputs and significant value drivers are observable.
|
|
|
|
Level 3 Inputs
|
|
|
|
|
|
Valuation derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
The following tables present further detail of the financial instruments carried at fair value on the
Companys balance sheet as of December 31, 2013 and 2012. The tables do not include assets and liabilities that are measured at historical cost or on any basis other than fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2013
|
|
|
Fair Value Measurements
as of December 31, 2013
|
|
Description
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
48,975
|
|
|
$
|
48,975
|
|
|
$
|
|
|
|
$
|
|
|
Investments in marketable securitiesshort-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt instrumentsMunicipal debt obligations
|
|
|
1,326
|
|
|
|
|
|
|
|
1,326
|
|
|
|
|
|
Certificates of deposit
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at fair value
|
|
$
|
51,301
|
|
|
$
|
48,975
|
|
|
$
|
2,326
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
December 31, 2012
|
|
|
Fair Value Measurements
as of December 31, 2012
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
55,736
|
|
|
$
|
55,736
|
|
|
$
|
|
|
|
$
|
|
|
Investments in marketable securitiesshort-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt instrumentsCorporate debt obligations
|
|
|
1,398
|
|
|
|
|
|
|
|
1,398
|
|
|
|
|
|
Debt instrumentsMunicipal debt obligations
|
|
|
1,347
|
|
|
|
|
|
|
|
1,347
|
|
|
|
|
|
Certificates of deposit
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at fair value
|
|
$
|
59,481
|
|
|
$
|
55,736
|
|
|
$
|
3,745
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
The Companys Level 2 financial instruments are valued using market prices on less
active markets and model-derived valuations with observable valuation inputs such as interest rates and yield curves. The Company obtains the fair value of Level 2 financial instruments from a third-party pricing service, which the Company validates
through independent valuation testing and review of portfolio valuations provided by the Companys investment managers.
Cash Equivalents
The Company considers all highly liquid investments purchased with maturities of three months or less from the date of purchase to be cash equivalents. These investments may include money market funds,
U.S. Government agencies, corporate debt securities and commercial paper. As of December 31, 2013 and 2012, the Companys cash equivalents were $48,975,000 and $55,736,000, respectively.
Marketable Securities
The Company determines the appropriate classification of its investments at the time of acquisition and reevaluates such determination at each balance sheet date. The Company has classified its investment
holdings as available-for-sale, as the sale of such securities may be required prior to maturity to implement management strategies. The Companys investment policy set minimum credit quality criteria and maximum maturity limits on its
investments to provide for safety of principle, liquidity and a reasonable rate of return. Available-for-sale securities are recorded at fair value, based on current market valuations. Unrealized holding gains and losses on available-for-sale
securities are excluded from earnings and are reported as a separate component of other comprehensive income (loss) until realized. Realized gains and losses are included in non-operating other income (expense) on the statement of operations and are
derived using the specific identification method for determining the cost of the securities sold. During the years ended December 31, 2013, 2012 and 2011, no realized gains or losses were recorded on the sale or maturity of the Companys
marketable securities. Further, no impairments to reduce the value of an available-for-sale equity security were taken during the years ended December 31, 2013, 2012 and 2011. See Note 3 for further discussion.
Concentration Risk
Credit Risk.
Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash, cash equivalents, restricted cash, marketable
securities and accounts receivable. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. However, management believes the Company is not exposed to significant credit risk due to the
financial position of the depository institutions in which those deposits are held. Additionally, the Company has established guidelines regarding diversification of its investments and their maturities, which are designed to maintain safety and
liquidity. To date, the Company has not experienced any material realized losses on its cash, cash equivalents, restricted cash and marketable securities. Further, the Company specifies credit quality standards for its customers that are designed to
limit the Companys credit exposure to any single party.
Manufacturing.
The Company depends on an
outsourced manufacturing strategy for its products. It has contracts in place with one third-party manufacturer that is approved for the production of OFIRMEV and one third-party manufacturer which is pending FDA approval.
Customers.
The Company has entered into distribution agreements with major pharmaceutical wholesalers to supply OFIRMEV
across the U.S. through their distribution centers, and a majority of the Companys sales are to these customers. The Companys three primary wholesaler customers represented approximately 94% of the Companys product revenue for the
year ended December 31, 2013, and 95% of the Companys accounts receivable balance at December 31, 2013. See Note 12 for further detail of the Companys significant customers.
86
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
Inventories
The Company states its inventories at the lower of cost or market. The Company uses a combination of standard and actual costing
methodologies to determine its cost basis for its inventories. These methodologies approximate actual costs on a first-in, first-out basis. In addition to stating inventory at the lower of cost or market, the Company also evaluates inventory each
period for excess quantities and obsolescence. This evaluation includes identifying those items specifically identified as obsolete and reserving them, analyzing forecasted demand versus quantities on hand and reserving for the excess, and
identifying other specific reserves. During the years ended December 31, 2012 and 2011, the Company recorded charges for inventory losses of $163,000 and $5,574,000, respectively, in cost of sales to write-down certain inventory manufactured to
its estimated net realizable value. No charges for inventory losses were incurred for the year ended December 31, 2013. See Supply Agreements in Note 8 below for further information.
Royalty and License Payments
Pursuant to the terms of its license agreement with BMS, the Company is required to make royalty payments based upon net sales of OFIRMEV, subject to annual minimums, that range from the mid-teens to the
mid-twenties, depending on the aggregate amount of net sales. The Company accrues for these payments as the product is sold, or otherwise deemed obligated. Additionally, the Company paid $15,000,000 under the license agreement upon the NDA approval
of OFIRMEV in November 2010 and may be required to make future milestone payments of up to $25,000,000 based on the achievement of certain levels of annual net sales. The Company has capitalized the $15,000,000 payment as an intangible asset on its
balance sheet and is amortizing this balance over the estimated useful life of the licensed patents. As of December 31, 2013, the Company had amortized an aggregate $4,253,000 of the payment and the estimated aggregate amortization expense of
the payment for each of the five succeeding fiscal years is approximately $1,343,000. With respect to future milestone payments, at December 31, 2013, the Company had not yet achieved the levels of annual net sales necessary to require it to
make payments under these milestone obligations, and therefore had not accrued for such potential payments in its financial statements. The Company will accrue for future milestone payments as they are anticipated and recognize the related expense
in the period in which the milestone is achieved. See Note 9 for further discussion.
Advertising Expense
The Company records the cost of its advertising efforts when services are performed or goods are delivered. The
Company incurred advertising costs of approximately $1,290,000, $1,594,000 and $2,181,000, respectively, for the years ended December 31, 2013, 2012 and 2011.
Shipping and Handling Costs
The costs incurred by the Company for
shipping and handling are classified as cost of product sales. The Company does not charge its customers shipping and handling costs.
Property and Equipment
Property and equipment, including leasehold
improvements, are stated at cost or, if the assets are impaired, at fair value. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which are generally as follows: seven years for manufacturing
equipment; five years for furniture and fixtures; and three years for computer equipment and software. Leasehold improvements are amortized over the shorter of their useful lives or the terms of the related leases. Asset lives are reviewed
periodically to determine if appropriate and adjustments are made as necessary. Depreciation begins at the time the asset is placed in service. Maintenance and repairs are expensed as incurred.
87
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
For the years ended December 31, 2013, 2012 and 2011, the Company recorded
depreciation expense of $213,000, $1,560,000 and $1,670,000, respectively.
Impairment of Long-Lived Assets
Long-lived assets such as property and equipment are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to
be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be
disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or the fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
During the year
ended December 31, 2012, the Company recorded a charge of $6,973,000 to impair the value of its manufacturing assets and certain construction-in-process to their estimated fair value. The charge was due to the termination of a supply agreement
with one of its third-party manufacturers. Additionally, the Company fully impaired its estimated asset retirement obligation related to the removal of the equipment located at that manufacturers facility, resulting in an additional charge of
$750,000. During 2013, the Company removed its assets from the facility and fulfilled its asset retirement obligation for less than the estimated cost. As a result, the Company recorded a credit of $136,000 during the year ended December 31,
2013, to relieve the accrued balance. No similar charges or credits were recorded during the year ended December 31, 2011. See Note 6 and Note 8 for further discussion.
Research and Development
The Companys research and
development expenses consist primarily of salaries and related employee benefits, costs associated with clinical trials managed by the Companys contract research organizations (CROs), and costs associated with non-clinical
activities, such as regulatory and pre-commercialization manufacturing expenses. The Company uses external service providers and vendors to conduct clinical trials, to manufacture product candidates to be used in clinical trials and to provide
various other research and development related products and services. The Company accounts for research and development expenditures as incurred and accrues expenses based upon estimates of work performed, patient enrollment and experience with
similar contracts.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized. A valuation allowance is recorded when it
is more likely than not that some, or all, of the deferred tax assets will not be realized. In determining the need for valuation allowances the Company considers projected future taxable income and the availability of tax planning strategies.
88
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
The Company assesses its income tax positions and record tax benefits for all years
subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, the Company has
recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood
that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.
Stock-Based
Compensation
The Company has stock-based compensation plans, which are described in Note 11. As of December 31,
2013, the Company had issued both stock option awards and restricted stock units under its stock-based compensation plans. As of December 31, 2013 and 2012, all stock-based compensation awards were classified as equity awards.
Stock option awards.
Stock options are valued using the Black-Scholes option pricing model. The Company values option
awards on the date of grant or, if the awards are classified as liability awards, it revalues the awards each reporting period using this model until the awards are subsequently classified as equity awards, or otherwise vest. The Black-Scholes
option pricing model involves a number of estimates, including the expected lives of stock options, the Companys anticipated stock volatility and interest rates. The following table summarizes the average estimates the Company used in the
Black-Scholes option pricing model for the years ended December 31, 2013, 2012 and 2011, to determine the fair value of stock options granted during each period:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
Risk free interest rates
|
|
1.2%
|
|
0.9%
|
|
2.2%
|
Expected life in years
|
|
6.0 years
|
|
5.7 years
|
|
6.2 years
|
Expected dividend yield
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
Expected volatility
|
|
65.4%
|
|
72.0%
|
|
73.9%
|
The Company determines its risk-free interest rate assumption based on the U.S. Treasury yield for
obligations with contractual lives similar to the expected lives of the Companys share-based payment awards being valued. The weighted-average expected life of options has historically been calculated using the simplified method, as prescribed
by the Securities and Exchange Commission (SEC), due to the lack of relevant historical exercise data. The expected volatility is determined by incorporating the Companys historical stock price volatility and the implied volatility
of its exchanged traded options. The assumed dividend yield is based on the Companys expectation of not paying dividends in the foreseeable future. Forfeitures are estimated based upon the historical and anticipated future experience.
Based upon these assumptions, the Company has estimated the per share weighted-average grant date fair value of its options
granted for the years ended December 31, 2013, 2012 and 2011 at $3.45, $1.86 and $5.67, respectively.
Restricted
stock unit awards.
Restricted stock units (RSUs) are valued based on the fair market value of the Companys stock on the date of grant. The weighted-average grant date fair value of the RSUs granted in 2013 was $8.31. There
were no RSUs granted in 2012 or 2011.
Compensation expense for its service-based equity awards is recognized using the
straight-line method. Stock-based compensation expense recognized during the period is based on the value of the portion of awards that is ultimately expected to vest. Hence, the gross expense is reduced for estimated forfeitures and adjusted for
89
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
the probability of achieving performance criteria. If awards are forfeited prior to vesting, all previous expense recognized is recovered during the period in which the forfeiture occurs.
The table below summarizes the total stock-based compensation expense included in the Companys statements of operations
for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Cost of product sales
|
|
$
|
277
|
|
|
$
|
343
|
|
|
$
|
297
|
|
Research and development
|
|
|
742
|
|
|
|
1,651
|
|
|
|
2,308
|
|
Selling, general and administrative
|
|
|
6,050
|
|
|
|
6,615
|
|
|
|
6,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense included in loss from operations
|
|
$
|
7,069
|
|
|
$
|
8,609
|
|
|
$
|
9,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The compensation expense related to unvested stock options and RSUs not yet recognized was approximately
$11,308,000 at December 31, 2013. This expense is expected to be recognized over a weighted-average period of approximately 32 months. The total fair value of shares vested during the years ended December 31, 2013, 2012 and 2011 was
$6,647,000, $9,212,000 and $9,852,000, respectively.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from
non-owner sources. Components of comprehensive income (loss) includes, among other items, unrealized gains and losses on the changes in fair value of investments. These components are added, net of their related tax effect, to the reported net
income (loss) to arrive at comprehensive income (loss). The balance of accumulated other comprehensive income at December 31, 2011 was comprised of the net unrealized net holding gains on the Companys investments in marketable securities.
There was no similar accumulated other comprehensive income or loss at December 31, 2013 and 2012. See Note 3 for further detail of the unrealized holdings gains and losses on the Companys investments in marketable securities.
Net Loss Per Share
Net loss per share is presented as basic and diluted net loss per share. Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding for the
period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock
method. For purposes of this calculation, stock options, restricted stock units and warrants are considered to be common stock equivalents and are not included in the calculations of diluted net loss per share as their effect is anti-dilutive.
Additionally, the restricted stock units outstanding during 2013, 2012 and 2011 were excluded from the basic net loss calculation as these units do not include dividend rights and therefore are not considered to be participating securities.
The actual net loss per share amounts for the years ended December 31, 2013, 2012 and 2011 were computed based on the
weighted average shares of common stock outstanding during the respective periods. The net loss per share for the years presented include the effect of the 21,800,000 common shares issued pursuant to a public offering in the fourth quarter of 2011.
As a result of the issuance of these common shares, there is a lack of comparability in the basic and diluted net loss per share amounts for the periods presented.
90
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
The Company incurred net losses for all periods presented and there were no reconciling
items for potentially dilutive securities. More specifically, at December 31, 2013, 2012 and 2011, options, restricted stock units and warrants totaling approximately 16,734,000 shares, 16,677,000 shares and 14,457,000 shares, respectively,
were excluded from the calculation as their effect would have been anti-dilutive.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) No. 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
. ASU 2013-11 provides explicit guidance on the financial
statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective prospectively for fiscal years, and interim periods within those years,
beginning after December 15, 2013, with an option for early adoption. The Companys adoption of this guidance during the fourth quarter of 2013 did not have an impact on the Companys financial statements for the period ended
December 31, 2013.
3.
|
|
Investments in Marketable Securities
|
In accordance with the Companys investment policy, it has invested funds in marketable securities. The cost,
gross unrealized holding gains, gross unrealized holding losses and fair value of these investments by types and classes of security at December 31, 2013 and December 31, 2012 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
Amortized
Cost Basis
|
|
|
Other-than-
temporary
Impairments
|
|
|
Gross
Unrealized
Holding Gains
|
|
|
Gross
Unrealized
Holding Losses
|
|
|
Fair Value
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt instrumentsMunicipal debt obligations
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,326
|
|
Certificates of deposit
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,326
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
Amortized
Cost Basis
|
|
|
Other-than-
temporary
Impairments
|
|
|
Gross
Unrealized
Holding Gains
|
|
|
Gross
Unrealized
Holding Losses
|
|
|
Fair Value
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt instrumentsCorporate debt obligations
|
|
$
|
1,398
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,398
|
|
Debt instrumentsMunicipal debt obligations
|
|
|
1,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,347
|
|
Certificates of deposit
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,745
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
Investments by contractual maturity are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
Due or callable in one year or less
|
|
$
|
2,326
|
|
|
$
|
2,326
|
|
|
$
|
3,745
|
|
|
$
|
3,745
|
|
Due after one year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
As of December 31, 2013 and 2012, there were no investments in unrealized loss positions.
4.
|
|
Selected Financial Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Accounts receivable (in thousands):
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
$
|
9,319
|
|
|
$
|
6,208
|
|
Allowance for doubtful accounts
|
|
|
(19
|
)
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,300
|
|
|
$
|
6,152
|
|
|
|
|
|
|
|
|
|
|
Inventory (in thousands):
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
83
|
|
|
$
|
83
|
|
Finished goods
|
|
|
8,563
|
|
|
|
6,415
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,646
|
|
|
$
|
6,498
|
|
|
|
|
|
|
|
|
|
|
Property and equipment (in thousands):
|
|
|
|
|
|
|
|
|
Manufacturing equipment
|
|
$
|
2,801
|
|
|
$
|
2,999
|
|
Leasehold improvements
|
|
|
1,639
|
|
|
|
1,639
|
|
Computer equipment and software
|
|
|
1,613
|
|
|
|
1,489
|
|
Furniture and fixtures
|
|
|
478
|
|
|
|
478
|
|
Construction-in-process
|
|
|
961
|
|
|
|
724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,492
|
|
|
|
7,329
|
|
Less accumulated depreciation
|
|
|
(5,432
|
)
|
|
|
(5,362
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,060
|
|
|
$
|
1,967
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities (in thousands):
|
|
|
|
|
|
|
|
|
Accrued personnel costs
|
|
$
|
9,510
|
|
|
$
|
6,560
|
|
Accrued royalties payable
|
|
|
4,992
|
|
|
|
2,652
|
|
Accrued clinical trial costs
|
|
|
703
|
|
|
|
20
|
|
Accrued sales returns
|
|
|
369
|
|
|
|
|
|
Accrued asset retirement obligation
|
|
|
|
|
|
|
750
|
|
Other accrued liabilities
|
|
|
2,468
|
|
|
|
2,987
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,042
|
|
|
$
|
12,969
|
|
|
|
|
|
|
|
|
|
|
On June 21, 2010, the Company entered into an option agreement (the Option Agreement) with Incline
Therapeutics, Inc. (Incline), a privately held specialty pharmaceutical company, pursuant to which the Company obtained an exclusive, irrevocable option (the Option) to acquire Incline, which was developing IONSYS
(fentanyl iontophoretic transdermal system), an investigational product candidate intended to provide
92
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
patient-controlled analgesia for adult inpatients requiring opioids following surgery. As consideration for the Option, the Company paid Incline a $3,500,000 upfront option fee in June 2010
and made a second payment of $3,500,000 in September 2011. Additionally, in consideration of the Companys expenditure of funds in connection with conducting its initial due diligence on IONSYS, the Company received $500,000 of Incline
Series A preferred stock, or 500,000 shares, on terms generally consistent with Inclines other Series A preferred stock investors.
In December 2012, the Company and Incline entered into a Waiver, Consent and Option Termination Agreement (the Waiver Agreement) pursuant to which the Company agreed to the buy-out and
termination of its Option, contingent upon the closing of a separate agreement and plan of merger between Incline and The Medicines Company whereby The Medicines Company agreed to acquire Incline (the Incline Acquisition). In January
2013, The Medicines Company completed its acquisition of Incline. As consideration for entering into the Waiver Agreement and relinquishing its Option, the Company received a payment of $13,125,000 upon the closing of the Incline Acquisition. The
Company also received an additional payment of $1,529,000 as consideration for the 500,000 shares of Incline Series A preferred stock held by the Company. The Company could also receive future milestone payments related to potential future
licensing, regulatory approval and sales of the product candidate. Such milestones, if any, will be recorded as they are earned.
At the time the Option Agreement was entered, the Company determined that Incline was a variable interest entity (VIE). However, because it would not absorb a disproportionate amount of
Inclines expected losses or receive a disproportionate amount of Inclines expected residual returns, the Company was not the primary beneficiary of this entity. Further, the Company did not have oversight of the day-to-day operations of
Incline, nor did it have sufficient rights or voting representation to influence the operating or financial decisions of Incline, and the Company was not a founder of Incline and had no additional equity or funding requirements in future financings
or otherwise. As such, the Company did not consolidate Incline into its financial statements. Alternatively, it valued its investment in the option, and the shares received from the due diligence, using the cost method and classified these
investments as Level 3 in the fair value hierarchy with a carrying value of $7,000,000. No adjustments were made to the carrying value of these assets prior to the closing of the Incline Acquisition in January 2013, and, as a result, the Company
recorded a gain of $7,654,000 in other income during the year ended December 31, 2013. No similar gains were recorded during the years ended December 31, 2012 and 2011.
The $7,000,000 carrying value of the Companys Incline investment was recorded as other long-term assets on the Companys
balance sheet at December 31, 2012.
6.
|
|
Restructuring and Impairment Charges
|
In February 2012, the Company observed particulate matter during routine product stability testing of OFIRMEV that was
manufactured at one of its third-party manufacturers, Baxter. As a result, the Company decided to suspend further production by Baxter. In March 2013, the Company and Baxter mutually agreed to terminate the supply agreement for OFIRMEV. As a result,
the Company reduced the carrying value of its manufacturing assets and its manufacturing equipment and facility construction assets in process to their current estimated fair value as of December 31, 2012, resulting in an impairment charge of
$6,973,000 during the year. The fair value of these assets was determined through a third-party valuation assessment based upon research of market prices for similar equipment and the Companys prior experience with asset disposals. The
determination of the fair value of the manufacturing assets was considered a Level 3 measurement. The Company also fully impaired the retirement obligation asset related to the removal of the equipment as of December 31, 2012, resulting in a
charge of $750,000 during the year. No such obligation had been recorded as of December 31, 2011. See further discussion of the Baxter agreement in Note 8.
93
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
In November 2011, the Company restructured its workforce to focus its resources on the
commercialization of OFIRMEV and reduce program costs not directly associated with such efforts. As a result of the 2011 restructuring, the Company recorded one-time employee termination charges of $1,142,000 in connection with the termination of 17
employees. During 2012, the Company disbursed the remaining severance benefits and as of December 31, 2012, no restructuring liability remained on the balance sheet.
7.
|
|
Loan and Security Agreement
|
In December 2012, the Company entered into a First Amendment to Second Amended and Restated Loan and Security Agreement
(the 2012 Amendment) with Oxford Finance LLC, Silicon Valley Bank and General Electric Capital Corporation (collectively, the Lenders), which amended and restated the Companys previous Second Amended and Restated Loan
and Security Agreement entered into in December 2011 (the 2011 Amendment). Pursuant to the terms of the 2012 Amendment, the Company made interest-only payments through December 2013, and in January 2014, began to make equal monthly
principal and interest payments to fully amortize the balance over the remaining 30-month term. The stated interest rate under the 2012 Amendment is 10.9545% and the Company will be required to make a final payment of 6% of the total advance at the
termination of the loan.
At the time of closing the 2012 Amendment, the Company made a term loan final payment of $752,000 in
accordance with the terms of the 2011 Amendment, which had been amortized over the term of the 2011 Amendment, and paid customary closing fees and expenses of $18,000 in connection with the closing of the 2012 Amendment. Additionally, the Company
issued warrants to purchase 154,638 shares of the Companys common stock, as detailed below, to the Lenders in connection with the 2012 Amendment at an exercise price $3.88 per share. The warrants are immediately exercisable, and excluding
certain mergers or acquisitions, will expire on the seven-year anniversary of the date of issuance. The Company determined the relative fair value of these warrants, as detailed below, and has classified the warrants as equity, recognizing the cost
as a discount on the loan issuance.
The credit facility contains customary default and acceleration provisions and is secured
by the Companys assets, excluding intellectual property. Further, the Company was required to make a negative pledge of its intellectual property, which generally prohibits the Company from granting liens on its intellectual property. Under
the terms of the 2012 Amendment, the Company may be precluded from entering into certain financing and other transactions, including disposing of certain assets and paying dividends, and is subject to prepayment penalties and certain financial and
non-financial covenants, including the maintenance of minimum quarterly product revenue of at least $12,500,000. Upon the occurrence of an event of default, including a Material Adverse Change (as defined in the 2011 Amendment), the lenders may
declare all outstanding amounts due and payable under the 2012 Amendment. As of December 31, 2013, the Company was in compliance with all covenants under the 2012 Amendment.
The Company determined that the terms of the 2012 Amendment were not substantially different than the 2011 Amendment and accounted for
the transaction as a loan modification. As such, the fair value of the warrants issued in connection with the 2012 Amendment and the carrying value of the issuance costs and discount related to the 2011 Amendment were aggregated and are being
amortized to interest expense throughout the life of the 2012 Amendment using an effective interest rate of 15.30%. Similarly, in connection with the 2011 Amendment, the Company determined that the terms were not substantially different than the
2010 Amendment and therefore accounted for the transaction as a loan modification of the 2010 Amendment. The 2011 Amendment provided the Company with $3,434,000 of additional net capital after deducting a $954,000 term loan final payment paid under
the 2010 Amendment and customary closing fees and expenses of $63,000 paid in connection with the closing of the 2011 Amendment. As part of the 2011 Amendment, the Company issued
94
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
warrants to purchase an aggregate of 158,311 shares of the Companys common stock to the Lenders, as detailed below, and classified the warrants as equity, recognizing the fair value as
a discount on the loan issuance. The fair value of the warrants was aggregated with the carrying value of the issuance costs and discount related to the 2010 Amendment, and was being amortized over the term of the 2011 Amendment using an effective
interest rate of 15.31% prior to the 2012 Amendment.
As of December 31, 2013 and 2012, the aggregate outstanding
principal balance of the loans included on the Companys balance sheets for each period was $30,000,000. Future maturities and interest payments under the Companys 2012 Amendment as of December 31, 2013 were as follows (in
thousands):
|
|
|
|
|
2014
|
|
$
|
13,772
|
|
2015
|
|
|
13,772
|
|
2016
|
|
|
8,686
|
|
|
|
|
|
|
Total future payments
|
|
|
36,230
|
|
Less amount representing interest and fees
|
|
|
(6,230
|
)
|
|
|
|
|
|
Gross balance of long-term debt
|
|
|
30,000
|
|
Less unamortized discount
|
|
|
(685
|
)
|
|
|
|
|
|
Total carrying value of long-term debt
|
|
|
29,315
|
|
Less current portion
|
|
|
(10,777
|
)
|
|
|
|
|
|
Long-term portion
|
|
$
|
18,538
|
|
|
|
|
|
|
Warrants
In connection with the establishment of the Companys credit facilities and related amendments, including the 2012 Amendment, the Company has issued warrants to the Lenders to purchase shares of the
Companys common stock. The table below summarizes the issuances of such warrants currently outstanding, including the Black-Scholes valuation model assumptions used to determine the fair value of the warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of Issuance
|
|
|
|
December
2012
|
|
|
December
2011
|
|
|
June
2010
|
|
|
November
2007
|
|
Aggregate shares pursuant to warrants issued
|
|
|
154,638
|
|
|
|
158,311
|
|
|
|
254,793
|
|
|
|
50,331
|
|
Per share exercise price of warrants issued
|
|
$
|
3.88
|
|
|
$
|
3.79
|
|
|
$
|
7.0645
|
|
|
$
|
12.67
|
|
Fair value of warrants issued
|
|
$
|
416,000
|
|
|
$
|
390,000
|
|
|
$
|
1,237,000
|
|
|
$
|
474,000
|
|
Expiration date of warrants
|
|
|
December 9, 2019
|
|
|
|
December 22, 2018
|
|
|
|
June 18, 2017
|
|
|
|
November 30, 2014
|
|
Black-Scholes valuation inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
70.17
|
%
|
|
|
72.40
|
%
|
|
|
76.50
|
%
|
|
|
70.00
|
%
|
Risk-free interest rate
|
|
|
1.02
|
%
|
|
|
1.40
|
%
|
|
|
2.70
|
%
|
|
|
3.64
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected term
|
|
|
7 years
|
|
|
|
7 years
|
|
|
|
7 years
|
|
|
|
7 years
|
|
95
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
As of December 31, 2013, the aforementioned warrants to purchase 618,073 shares of
the Companys common stock were outstanding.
8.
|
|
Commitments and Contingencies
|
Leases
In May 2006, the Company entered into an operating lease for corporate office space. In December 2011, the Company amended the lease to reduce the monthly rent charge, extend the lease term and terminate
a portion of the lease, returning space to the lessor. Pursuant to the terms of the amended agreement, the basic monthly per square foot fee was reduced commencing in April 2012 and the Company returned a portion of the leased space in September
2012. In September 2013, the Company entered into a third amendment to the lease agreement (the Third Amendment), pursuant to which the Company expanded its rented space for a term from January 1, 2014, through May 31, 2019.
The Company also has the right to renew the lease for one additional five-year term. The terms of the lease include a one-time tenant improvement allowance of up to $475,000, which the Company will record as the improvements are completed, and which
will be amortized ratably over the shorter of the useful life or the remaining life of the lease. As of December 31, 2013, no such improvements had been completed.
As security for the initial lease, the landlord required a letter of credit, which is collateralized by a certificate of deposit in the same amount, and which the Company has classified as restricted cash
on its balance sheet. As of December 31, 2013 and 2012, the amount of each of the letter of credit and the corresponding certificate of deposit was $190,000. The security deposit required by the landlord will be reduced pursuant to the Third
Amendment to $92,000, effective January 1, 2014.
The Company also leases certain office equipment under capital and
operating leases. Its current capital lease has a term of four years and expires in 2016. As of December 31, 2013 and 2012, the assets under its current capital lease had a gross value of $56,000. During the years ended December 31, 2013
and 2012, the Company recorded amortization expense of $14,000 and $1,000, respectively, related to these assets. The remaining obligation under its capital lease at December 31, 2013 is recorded on the Companys balance sheet in accrued
expenses and other long-term liabilities at $12,000 and $29,000, respectively. No assets were recorded under capital leases as of December 31, 2011.
As of December 31, 2013, the total future minimum payments under its operating and capital leases, including rent and office equipment, were as follows (in thousands):
|
|
|
|
|
2014
|
|
$
|
600
|
|
2015
|
|
|
1,006
|
|
2016
|
|
|
1,030
|
|
2017
|
|
|
1,043
|
|
2018
|
|
|
1,074
|
|
Thereafter
|
|
|
461
|
|
|
|
|
|
|
Total
|
|
$
|
5,214
|
|
|
|
|
|
|
Rent expense for operating leases is recorded on a straight-line basis over the life of the lease term.
If a lease has a fixed and determinable escalation clause, the difference between the rent expense and rent paid is recorded as deferred rent. Rent expense under the Companys facility and equipment leases for the years ended December 31,
2013, 2012 and 2011 was $709,000, $927,000 and $928,000, respectively.
96
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
Corporate Credit Card
In 2009, the Company entered into a pledge agreement pursuant to the establishment of a corporate credit card program whereby the Company
pledged $150,000 in a certificate of deposit as collateral. During 2011, the Company increased its pledged amount by $300,000 related to an increase in its credit limit. At December 31, 2013, the Company maintained the pledge agreement and the
funds under the agreement are classified as restricted cash on the Companys balance sheet at December 31, 2013 and 2012, respectively.
Supply Agreements
Lawrence Laboratories
In February 2013, the Company entered into an Amended and Restated Supply Agreement (the Supply Agreement) with Lawrence
Laboratories, an operating division of Swords Laboratories, and a member of the BMS group of companies, which amended and restated the original agreement entered into between the parties in December 2010, for the manufacture of commercial supplies
of the finished drug product for OFIRMEV packaged in vials (the Product), for sale and distribution by the Company in the United States and Canada. Bristol-Myers Squibb Srl (BMS Anagni), an indirect subsidiary of BMS located
in Anagni, Italy, manufactures the Product on behalf of Lawrence Laboratories. BMS Anagni is currently the Companys sole supplier of OFIRMEV.
Pursuant to the terms of the Supply Agreement, the Company pays Lawrence Laboratories a set price for each unit of Product purchased, based upon the aggregate quantity of Product the Company has specified
that it intends to order during a calendar year, and whether Lawrence Laboratories has implemented certain agreed-upon manufacturing capacity increase improvements. The Company is obligated to purchase a minimum number of units each year, or pay
Lawrence Laboratories an amount equal to the shortfall between the minimum purchase requirement and the number of units of Product actually ordered during such year, multiplied by a pre-set amount that also varies depending upon whether Lawrence
Laboratories has implemented certain agreed-upon manufacturing capacity increase improvements. The Company is obligated to purchase at least 75% of its annual Product requirements from Lawrence Laboratories each contract year. The Supply Agreement
also requires the Company to pay Lawrence Laboratories for additional services requested by the Company at a specified hourly rate and for any validation batches that may be required by the Company, not to exceed a specified rate. All amounts
payable under the Supply Agreement are paid in U.S. dollars.
The term of the Supply Agreement extends through
December 31, 2018, unless extended by mutual agreement of the Company and Lawrence Laboratories, or unless the Supply Agreement is terminated sooner: (1) by the mutual agreement of the parties, (2) by either party for convenience
following 24 months prior written notice of termination to the other party, (3) upon the termination of the Companys license agreement for the Product with BMS, or (4) upon the dissolution or termination of the Company, other
than in connection with or following the assignment of the Supply Agreement. In addition, either party may terminate the Supply Agreement: (a) within 60 days, after written notice in the event of a material uncured breach of the Supply
Agreement by the other party, or (b) immediately, if the other party becomes insolvent or admits in writing its inability to pay its debts as they become due, files a petition for bankruptcy, makes an assignment for the benefit of its creditors
or has a receiver or other court officer appointed for its properties or assets.
If the Supply Agreement is terminated by the
Company for its convenience or by Lawrence Laboratories due to the Companys material breach of the Supply Agreement, the Company will reimburse Lawrence Laboratories for: (1) any Product ordered under a firm order and received by the
Company, and (2) any inventory of materials used to manufacture the Product that are specific to the Product and that Lawrence Laboratories is unable to reasonably utilize. Additionally, the Companys minimum purchase requirement for the
year in which
97
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
the termination takes effect will be reduced proportionally, and the Company will not be required to fulfill the minimum purchase requirement for any subsequent contract year. If the Supply
Agreement is terminated for any reason other than by the Company for its convenience or by Lawrence Laboratories due to the Companys material breach of the Supply Agreement, the Company will not be required to reimburse Lawrence Laboratories
for any inventory of materials used to manufacture the Product, and will have no obligation to purchase the minimum purchase requirement for the year in which the termination takes effect, or for any subsequent contract year.
Purchases under the current agreement were $17,600,000 during the year ended December 31, 2013, which was sufficient to meet the
minimum purchase commitment. Future minimum purchase requirements under this agreement at December 31, 2013 are as follows (in thousands):
|
|
|
|
|
2014
|
|
$
|
16,050
|
|
2015
|
|
|
15,750
|
|
2016
|
|
|
15,750
|
|
2017
|
|
|
15,750
|
|
2018
|
|
|
15,750
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
79,050
|
|
|
|
|
|
|
Grifols
In March 2013, the Company entered into an agreement with Laboratorios Grifols, S.A. (Grifols), a division of Grifols, S.A., a global healthcare company headquartered in Barcelona, Spain, for
the development, manufacture and supply of commercial quantities of OFIRMEV in flexible IV bags. Grifols has supplied IV acetaminophen in flexible plastic bags to BMS for distribution in certain markets outside of the U.S. and Canada since 2010. The
Company submitted a supplemental NDA to the FDA in the fourth quarter of 2013 seeking approval of the product to be manufactured by Grifols.
Pursuant to the terms of the agreement, the Company will pay Grifols a set price for the OFIRMEV it purchases, which may be adjusted annually by Grifols, subject to specified limitations. In addition, the
Company will be obligated to pay Grifols a reservation fee, in lieu of any minimum purchase commitment, calculated by multiplying the shortfall between the annual production capacity it has reserved with Grifols and the amount of product actually
ordered during that year by a fixed amount. Pending review and subsequent approval of the submission by the FDA, the agreement will terminate on the sixth anniversary of the approval by the FDA of the product manufactured by Grifols, unless it is
terminated sooner by the Company upon the termination of its license agreement for the product with BMS, or after 60 days written notice following the discontinuation of the distribution of the product by the Company. In addition, either party
may terminate the agreement after 60 days written notice in the event of a material uncured breach of the agreement by the other party (or 30 days in the case of a payment default), or immediately upon an insolvency event.
Baxter Healthcare Corporation
In July 2007, the Company entered into a development and supply agreement (the Baxter Supply Agreement) with Baxter for the completion of pre-commercialization manufacturing development
activities and the manufacture of commercial supplies of the finished drug product for OFIRMEV with an initial term of five years. In January 2011, the Company amended and restated the Baxter Supply Agreement (the Amended Supply
Agreement) in connection with a plan to expand the manufacturing capacity for OFIRMEV at Baxter.
98
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
In February 2012, the Company announced a voluntary recall of a single lot of OFIRMEV
that was manufactured at Baxters facility due to the presence of an unidentified, visible particle in that lot during routine stability testing. The Company also placed certain finished product inventory of OFIRMEV manufactured by Baxter on
indefinite hold and decided to suspend further production by Baxter. In July 2012, the Company announced a second voluntary recall of the remaining 41 unexpired lots of OFIRMEV manufactured at Baxters facility due to the presence of
unidentified, visible particles in a limited number of vials from one lot of the product, which were detected during routine stability testing. Although the Company received no adverse event reports associated with the particulate matter, and no
product complaints involving similar particulate matter have been received, the Company decided to recall the remaining lots of OFIRMEV manufactured by Baxter as a precautionary measure. All of the 41 recalled lots, which were manufactured between
January and March 2011, had expired by December 31, 2012. In March 2013, the Company and Baxter mutually agreed to terminate the Amended Supply Agreement for OFIRMEV. As part of the settlement and termination with Baxter, the Company agreed
that it would be responsible for the removal of the equipment, which the Company estimated would cost approximately $750,000. Accordingly, it recorded this retirement obligation on its balance sheet at December 31, 2012 as the conditions
existed under the terms of the Amended Supply Agreement at that time. Further, as of December 31, 2012, the Company fully impaired this retirement obligation asset and recognized a charge of $750,000 in its statement of operations for the year
ended December 31, 2012. The Company subsequently completed the removal of the equipment and released the remaining balance of the accrued obligation, resulting in a gain of $136,000 during the third quarter of 2013, which was recorded in other
operating expenses. No similar gains were recorded during the years ended December 31, 2012 and 2011. Also pursuant to the settlement, a previously accrued liability of $317,000 related to an outstanding product order was canceled, which was
recorded in cost of sales during the first quarter of 2013.
As a result of the initial recall, the Company recorded charges
of $5,574,000 for the fourth quarter of 2011 and $163,000 for the first quarter of 2012 to fully write-down the value of the inventory placed on hold. As a result of the second recall, the Company decided to destroy the product that was previously
placed on hold and accrued for estimated destruction charges, recording $290,000 and $50,000 in other operating expenses for the years ended December 31, 2012 and 2013, respectively. In addition, the Company incurred costs associated with these
recalls, including administration costs, of approximately $300,000 through December 31, 2013. As of December 31, 2013, the recall had been substantially completed and further returns are expected to be minimal, if any. The costs related to
the recalls are being recognized as selling, general and administrative expenses on the Companys statement of operations as they are incurred. The charge to reduce the value of the inventory was recorded as a cost of product sales on the
Companys statement of operations during the period in which the impairment was taken. As of December 31, 2013, no accrued destruction charges remained on the Companys balance sheet.
Due to the termination of the Amended Supply Agreement with Baxter, the Company reduced the carrying value of its manufacturing assets
and its manufacturing equipment and facility construction assets in process to their current estimated fair value, resulting in an impairment charge of $6,973,000 for the year ended December 31, 2012. The fair value of these assets was
determined through a third-party valuation assessment and market prices for similar assets. Further, in December 2012, the Company sold a construction-in-process asset resulting in a loss on the disposal of $858,000. These assets were classified as
held and used at December 31, 2012, as a formal plan to sell the assets, or otherwise dispose of them, had not been implemented at that time. The Company continues to assess the classification of these assets and has determined that, based upon
relevant guidance, the assets continue to be considered held and used at December 31, 2013.
99
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
9.
|
|
License Agreements and Acquired Development and Commercialization Rights
|
In March 2006, the Company in-licensed the technology and the exclusive development and commercialization rights to
OFIRMEV in the U.S. and Canada from BMS. BMS sublicensed these rights to the Company under a license agreement with SCR Pharmatop S.A. (Pharmatop) and the Company has the right to grant sublicenses to third parties. As consideration for
the license, the Company paid a $25,000,000 up-front fee in March 2006 and, as a result of the approval of the Companys NDA for OFIRMEV in the fourth quarter of 2010, the Company paid an additional milestone payment of $15,000,000 in the
fourth quarter of 2010. The Company may be required to make future milestone payments totaling up to $25,000,000 upon the achievement of certain levels of net sales. In addition, the Company is obligated to pay a royalty on net sales of the licensed
products which range from the mid-teens to the mid-twenties, depending on the aggregate amount of net sales, and is subject to annual minimum royalty obligations. The $25,000,000 up-front fee was recognized as research and development expense at the
time the payment was made. The $15,000,000 milestone payment was recorded as an intangible asset on the Companys balance sheets and is being amortized over the estimated useful life of the licensed patents. Royalty liabilities are recognized
at the time the product is sold or, for minimum royalty obligations that are not anticipated to be met, over the period in which the minimum liability is incurred. In June 2013, Health Canada issued a Notice of Compliance that granted marketing
approval for OFIRMEV in Canada. The Company has not determined the commercial feasibility of launching the product in Canada, either independently or in collaboration with a company with an existing Canadian commercial presence, because it has not
yet received a pricing review from the Canadian Patented Medicine Prices Review Board (PMPRB). The Company submitted a pricing review application for OFIRMEV to the PMPRB in October 2013.
In November 2010, the Company entered into a data license agreement among Terumo Corporation (Terumo), the Company and
Pharmatop. Under the data license agreement, the Company provided to Terumo certain data and information resulting from the Companys clinical development program for OFIRMEV for Terumos use in obtaining regulatory approval for, and
commercialization of, the same IV formulation of acetaminophen in Japan. Further, the Company provided technical assistance and consulting services to Terumo at no charge regarding the licensed technical information, data and know-how, to assist
Terumo in obtaining regulatory approval and manufacturing capacity for the product candidate. In April 2011, the Company received an upfront payment of $5,329,000 under the terms of the data license agreement.
In accordance with multiple-element arrangement guidance, the Company determined both the data license and consulting service
deliverables were separate units of accounting, each having value on a standalone basis. The Company estimated the fair value of the data license based upon similar proposals from third parties and internal costs incurred in developing the data and
obtaining similar rights. The value of the consulting services was based on contracts the Company had engaged with third parties for similar services. The Company allocated the value of the payment received on a relative fair value basis and
recognized the consideration allocated to the data license upon delivery and recognized the consideration allocated to the consulting services as such services were rendered. There is no right of return or similar refund provisions in the data
license agreement. During 2011, the Company transferred the data and related information to Terumo and provided a portion of the consulting hours and in April 2011, the Company recognized $5,210,000 of license revenue pursuant to the agreement for
the data transfer and consulting hours provided. During 2012, the Company recognized the remaining balance of $118,000 as license revenue.
In June 2013, the Company was notified that Terumo received regulatory approval for its IV acetaminophen product from the Japanese Ministry of Health, Labour & Welfare. In November 2013, Terumo
commenced commercial sales of its product and pursuant to the terms of the data license agreement, the Company received from Terumo a non-refundable payment of $2,027,000 which was recorded as licensing revenue during the year ended
December 31, 2013. In addition, the Company is entitled to royalty payments on the products commercial sales in
100
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
Japan, which will be recognized as royalty revenue in the quarter in which Terumo provides the necessary sales information. No royalty revenue was recognized for the years ended December 31,
2013, 2012 and 2011.
222 and 218 Patent Litigation: Exela Pharma Sciences, LLC and Paddock Laboratories, Inc. (Perrigo
Company)
In August 2011, the Company and Pharmatop filed suit in the United States District Court for the District of
Delaware against Paddock Laboratories, Inc., Perrigo Company and Paddock Laboratories, LLC, collectively referred to herein as Perrigo, and against Exela Pharma Sciences, LLC, Exela PharmaSci, Inc. and Exela Holdings, Inc., collectively referred to
herein as Exela. The lawsuit followed the notices that the Company received in July 2011 from each of Perrigo and Exela concerning their filings of Abbreviated New Drug Applications, or ANDAs, containing a Paragraph IV patent
certification with the FDA for a generic version of OFIRMEV. In the lawsuit, the Company alleged that Perrigo and Exela each infringed the 222 patent and the 218 patent by filing their respective ANDAs seeking approval from the FDA to
market a generic version of OFIRMEV prior to the expiration of these patents. The 222 and the 218 patents are listed in the FDAs Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book.
The patent infringement lawsuit was filed within 45 days of receipt of the pertinent notice letters, thereby triggering a stay of FDA approval of the Perrigo ANDA and the Exela ANDA until the earlier of the expiration of a 30-month period, the
expiration of the 222 and 218 patents, the entry of a settlement order or consent decree stating that the 222 and 218 patents are invalid or not infringed, a decision in the case concerning infringement or validity that is
favorable to Perrigo or Exela, or such shorter or longer period as the Court may order. Each of Perrigo and Exela filed an answer in the case asserting, among other things, non-infringement and invalidity of the asserted patents, as well as certain
counterclaims.
The Company settled with Perrigo and the case against Perrigo was dismissed on November 30, 2012. In
connection with the settlement and license agreements entered into in November 2012, Perrigo was granted the exclusive right of first refusal to negotiate an agreement with the Company to market an authorized generic version of OFIRMEV in the U.S.
in the event that the Company elects to launch an authorized generic version of the product. The license agreement also provides that, if the Company enters into an agreement for Perrigo to market an authorized generic version of OFIRMEV during the
license period, Perrigo would purchase the product exclusively from the Company. The Company would receive product costs plus an administrative fee, as well as a royalty payment based on the net profits achieved by Perrigo from the sale of the
authorized generic product. Additionally, the Company granted Perrigo the non-exclusive right to market a generic IV acetaminophen product in the U.S. under Perrigos ANDA after December 6, 2020, or earlier under certain circumstances. The
Federal Trade Commission, or FTC, or the Department of Justice, or DOJ, could seek to challenge the Companys settlement with Perrigo, or a competitor, customer or other third-party could initiate a private action under antitrust or other laws
challenging the Companys settlement with Perrigo.
A bench trial for the lawsuit with Exela was held in May 2013, with
one additional trial date held in early July 2013. In November 2013, the court ruled in favor of us and found that Exelas ANDA for a generic version of OFIRMEV infringed the 222 and 218 patents. An appeal of the decision in favor
of us was filed by Exela on December 20, 2013. It is not possible to predict the outcome of this appeal, and an adverse outcome could result in the launch of one or more generic versions of OFIRMEV before the expiration of the last of the
listed patents on June 6, 2021 (or December 6, 2021 if pediatric exclusivity is granted), which could adversely affect the Companys ability to successfully maximize the value of OFIRMEV, and would negatively impact the Companys
financial condition and results of operations, including causing a significant decrease in the Companys revenues and cash flows.
101
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
222 and 218 Patent Litigation: Fresenius Kabi USA, LLC, Sandoz, Inc. and
Wockhardt USA LLC
In January 2013, the Company filed suit in the United States District Court for the Southern District of
California against Fresenius Kabi USA, LLC, or Fresenius, following receipt of a December 2012 notice from Fresenius concerning its submission of an NDA containing a Paragraph IV patent certification with the FDA for a generic version of OFIRMEV. In
February 2013, the Company filed suit in the United States District Court for the Southern District of California against Sandoz, Inc., or Sandoz, following receipt of a December 2012 notice from Sandoz concerning its submission of an ANDA
containing a Paragraph IV patent certification with the FDA for a generic version of OFIRMEV. In October 2013, the Company filed a motion to amend the complaint against Sandoz to join Sandoz AG, Neogen International N.V., APC Pharmaceuticals, LLC,
and DIACO, S.p.A. (together with Sandoz, the Sandoz Parties) to the lawsuit against Sandoz due to the involvement of each of these companies in the preparation of the Sandoz ANDA and related matters.
In the lawsuits against Fresenius and the Sandoz Parties, which were coordinated for purposes of discovery and other pretrial proceedings
in the Southern District of California, the Company alleged that Fresenius and the Sandoz Parties each infringed the 222 patent and the 218 patent by filing an NDA, in the case of Fresenius, or an ANDA, in the case of the Sandoz Parties,
seeking approval from the FDA to market a generic version of OFIRMEV prior to the expiration of these patents. Both Fresenius and the Sandoz Parties filed answers in the Southern District of California asserting, among other things, non-infringement
and invalidity of the asserted patents, as well as certain counterclaims. Both the Fresenius and Sandoz lawsuits were filed within 45 days of receipt of the respective notice letters, thereby triggering a stay of FDA approval of the Fresenius NDA
and the Sandoz ANDA until the earlier of the expiration of a 30-month period, the expiration of the 222 and 218 patents, the entry of a settlement order or consent decree stating that the 222 and 218 patents are invalid or
not infringed, a decision in the case concerning infringement or validity that is favorable to Fresenius and/or the Sandoz Parties, or such shorter or longer period as the court may order.
In January 2014, the Company entered into a settlement agreement and a binding term sheet for a license agreement with the Sandoz
Parties. The settlement agreement includes a stipulation by the parties requesting dismissal with prejudice of the lawsuit filed by the Company relating to the ANDA filed by Sandoz. Under the terms of the license, the Company granted to the holder
of the Sandoz ANDA and its affiliates the non-exclusive right to market a generic intravenous acetaminophen product in the United States under the Sandoz ANDA beginning December 6, 2020, or earlier under certain circumstances. The Company also
agreed that in the event that it determines to launch an authorized generic version of OFIRMEV (i.e., a generic version marketed under its NDA) in the U.S. and Perrigo elects not to exercise its right of first refusal to become the distributor of
the authorized generic version of the product, the Company will grant a similar right of first refusal to the holder of the Sandoz ANDA on substantially the same terms as those previously granted to Perrigo. In addition, the license agreement will
contain provisions regarding indemnification, confidentiality and other customary provisions for agreements of these kinds. The settlement documents are subject to submission to the Federal Trade Commission and the U.S. Department of Justice.
Litigation remains ongoing against Fresenius, and the bench trial for such lawsuit is tentatively scheduled to commence on July 14, 2014.
In December 2013, the Company received a notice from Wockhardt USA LLC, or Wockhardt, stating that Wockhardt filed an ANDA containing a Paragraph IV patent certification with the FDA for a generic version
OFIRMEV. This notice stated that the Paragraph IV patent certification was made with respect to both the 222 patent and the 218 patent. The Company filed suit against Wockhardt Limited, Wockhardt BIO AG and Wockhardt on January 22,
2014 in the U.S. District Court of Delaware, and on January 23, 2014, in the U.S. District Court of New Jersey.
The
Company intends to vigorously enforce its intellectual property rights relating to OFIRMEV to prevent the marketing of infringing generic products prior to the expiration of its patents. The 222 patent expires
102
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
August 5, 2017 (or February 5, 2018 if pediatric exclusivity is granted) and the 218 patent expires June 6, 2021 (or December 6, 2021 if pediatric exclusivity is
granted). However, given the unpredictability inherent in litigation, the Company cannot predict the outcome of these matters or any other litigation.
222 and 218 Patents: Ex Parte Reexamination
In September 2012,
an unidentified third party (subsequently identified as Exela) filed with the United States Patent and Trademark Office, or USPTO, a Request for Ex Parte Reexamination of the 222 patent. In December 2012, the Company received notice that the
USPTO had granted the Request for Reexamination. The reexamination process is provided for by law and requires the USPTO to consider the scope and validity of the patent based on substantial new questions of patentability raised by a third party or
the USPTO. In February 2013, Cadence and Pharmatop filed with the USPTO a patent owners statement commenting on the reexamination request, and in April 2013, Exela filed comments in response to the patent owners statement. In a
non-final, initial office action issued by the USPTO on August 13, 2013, the USPTO rejected certain claims of the 222 patent. A response to the first office action was filed in November 2013.
In addition, in January 2014, an unidentified third party filed with the USPTO a Request for Ex Parte Reexamination of the 218
patent. All of the claims of the 222 and 218 patents remain valid and in force during the reexamination proceedings. Because the Company and Pharmatop believe that the scope and validity of the patent claims in these patents are
appropriate and that the USPTOs prior issuances of the patents were correct, the Company, in conjunction with Pharmatop, will vigorously defend these patents. The Company cannot predict whether it and Pharmatop ultimately will succeed in
maintaining the scope and validity of the claims of these patents during reexamination. If any of the patent claims in these patents ultimately are narrowed during prosecution before the USPTO, the extent of the patent coverage afforded to OFIRMEV
could be impaired, which could potentially harm the Companys business and operating results.
218 Patent
Litigation: Exela Pharma Sciences, LLC
In April 2012, Exela filed suit against David J. Kappos and the USPTO in the United
States District Court for the Eastern District of Virginia for declaratory judgment seeking a reversal of the USPTOs decision not to act on a petition by Exela to vacate the USPTOs April 2003 order reviving the international application
for the 218 patent. The lawsuit followed the USPTOs rejection of Exelas petition to the USPTO filed in November 2011, which sought to vacate the April 23, 2003 order granting Pharmatops petition to revive the 218
patent. The USPTO determined that Exela lacked standing to seek such relief. Exela also seeks declaratory judgment that the USPTOs rules and regulations that allow for revival of abandoned, international patent applications under the
unintentional standard are invalid, and similar relief in connection with one or more counterclaims it has filed in the Delaware litigation. The Companys motion to intervene in this lawsuit was granted in October 2012. In December
2012, the district court dismissed the case with prejudice as barred by the applicable statute of limitations. In February 2013, Exela appealed the district courts decision to the Court of Appeals for the Federal Circuit. The Court of Appeals
heard oral argument on the appeal in February 2014. A decision by the Court of Appeals in favor of Exela could result in the invalidation of the 218 patent.
Stockholder Class-Action Litigation Regarding the Companys Pending Acquisition by Mallinckrodt plc
Following the February 11, 2014, announcement that the Company had entered into an agreement and plan of merger with Mallinckrodt plc and a subsidiary of Mallinckrodt, six putative class-action
lawsuits were filed in the Court of Chancery of the State of Delaware:
Wolfson v. Cadence Pharmaceuticals, Inc., et al.
, No. 9341-VCP (filed February 12, 2014);
Goode v. Garner, et al
., No. 9361-VCP (filed
February 18, 2014);
Bushansky v.
103
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
Cadence Pharmaceuticals Inc., et al
., No. 9365-VCP (filed February 19, 2014);
Bokol v. Cadence Pharmaceuticals Inc., et al
., No. 9367 (filed February 19, 2014);
Elvir v. Cadence Pharmaceuticals Inc., et al
., No. 9370-VCP (filed February 19, 2014); and
Nguyen v. Cadence Pharmaceuticals, Inc., et al
., No. 9376-VCP (filed February 21, 2014). Two substantially identical
putative class-action lawsuits were filed in the Superior Court of California, County of San Diego:
Denny v. Cadence Pharmaceuticals, Inc., et al
., No. 37-2014-00002579-CU-BT-CTL (filed February 13, 2014) and
Militello v. Cadence
Pharmaceuticals, Inc., et al.
, No. 37-00003634-CU-BT-CTL (filed February 20, 2014). The complaints allege that members of the Companys board of directors breached their fiduciary duties to the Companys stockholders in
connection with the proposed transaction and that the merger agreement involves an unfair price, an inadequate sales process, and unreasonable deal protection devices that purportedly preclude competing offers. The complaints other than
Bushansky
further allege that the Company, Mallinckrodt, and/or its subsidiary aided and abetted the alleged breaches of fiduciary duties. The lawsuits seek an injunction against the consummation of the merger and rescission of the
merger agreement to the extent the merger may already be consummated prior to the entry of the courts final judgment, and an award of costs and expenses, including attorneys and experts fees.
The Company intends to vigorously defend against these claims. The outcome of this litigation cannot be predicted at this time and any
outcome in favor of the plaintiffs could have an adverse effect on the proposed transaction, the Companys financial condition, and the Companys results of operations.
At this time, the Company is unable to estimate possible losses or ranges of losses for any of its current litigation, and it has not
accrued any amounts for current litigation other than ongoing attorneys fees.
Authorized Shares
In June 2012, following approval by the Companys stockholders, the Company filed a Certificate of Amendment of Amended and Restated Certificate of Incorporation with the Secretary of State of the
State of Delaware, which increased the number of authorized shares of common stock of the Company from 100,000,000 to 200,000,000.
Public Offerings
In November 2011, the Company issued an aggregate
of 21,800,000 shares of its common stock at a purchase price of $3.75 per share pursuant to a public offering. The 2011 offering raised proceeds, net of offering costs and underwriting discounts and commissions, of $77,302,000.
Private Placement
In February 2009, the Company issued 12,039,794 shares of its common stock at a purchase price of $7.13 per share pursuant to a private placement. In addition to the shares of the Companys
common stock, warrants to purchase up to 6,019,897 additional shares of the Companys common stock were also issued as part of the transaction at a price of $0.125 per warrant. Each warrant is immediately exercisable and has a five-year term.
The warrants may be exercised through either cash or net exercise for one share of common stock at a price of $7.84 and have been accounted for as permanent equity. During December 2013, warrants to purchase an aggregate of 590,893 shares of the
Companys common stock were exercised at a price of $10.01, resulting in a total of 128,095 shares issued on a net exercise basis. As of December 31, 2013, warrants related to the private placement to purchase up to 5,429,004 additional
shares of the Companys common stock remained outstanding.
104
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
The private placement raised proceeds, net of offering costs, of $86,243,000. The
purchasers in the offering consisted of new investors and existing stockholders of the Company, including six funds affiliated with three directors of the Company. In March 2009, the Company filed a registration statement covering the resale of the
shares of common stock acquired by the investors in this offering, which was declared effective by the SEC in May 2009. The Company is required to maintain the effectiveness of the registration statement and may be subject to liquidated damages of
one percent per month of the aggregate purchase price of the common shares then held by the investor that are registrable securities, subject to an aggregate cap of eight percent per calendar year. The Company has not recorded a liability for the
potential damages associated with these liquidated damages provisions as it does not currently believe that the transfer of consideration is probable under the agreement.
Equity Awards
In 2006, the Company adopted the 2006 Equity
Incentive Award Plan (the 2006 Plan) in connection with the Companys initial public offering which became effective on October 24, 2006. Upon adoption of the 2006 Plan, the Company restricted future grants from its 2004 Equity
Incentive Award Plan (the 2004 Plan). The 2006 Plan was amended and restated in 2010 to preserve the ability to deduct compensation associated with future performance-based awards made under the plan to certain executives. The term of
the 2006 Plan was also extended under the 2010 amendment to 2020.
The 2006 Plan initially reserved 2,100,000 shares of
common stock for future issuance and allowed for the initial number of reserved shares to be increased by (1) the 90,772 shares of common stock that remained available for issuance under the 2004 Plan as of the effective date of the
2006 Plan and (2) the number of shares under the 2004 Plan that are repurchased, forfeited, expired or cancelled on or after the effective date of the 2006 Plan. As of December 31, 2013, options to purchase 75,816 shares issued under the
2004 Plan have been repurchased, forfeited and/or cancelled since the effective date of the 2006 Plan, increasing the number of shares reserved for issuance under the 2006 Plan accordingly.
Beginning on January 1, 2008, the 2006 Plan allows for an annual increase in the number of shares available for issuance under the
2006 Plan by the lesser of (1) 4% of the outstanding common stock on January 1 and (2) a lesser amount determined by the board of directors, subject to an aggregate of 20,000,000 shares of common stock that may be issued through
January 1, 2016. Through December 31, 2013, the board of directors approved the amount of shares authorized for future issuance under the 2006 Plan to be increased by an aggregate 11,853,707 shares under this provision.
As of December 31, 2013, the Company had issued both stock options and restricted stock units (RSUs) under the 2006 Plan
and only stock options under the 2004 Plan. The following table presents shares authorized, available for future grant and outstanding under each of the Companys plans at December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
Available
|
|
|
Outstanding
|
|
2004 Equity Incentive Plan
|
|
|
2,708,412
|
|
|
|
|
|
|
|
742,685
|
|
2006 Equity Incentive Plan
|
|
|
14,120,295
|
|
|
|
3,125,966
|
|
|
|
9,944,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,828,707
|
|
|
|
3,125,966
|
|
|
|
10,686,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company issues new shares of common stock upon the exercise of stock options and vesting of RSUs.
RSUs that are tendered or withheld to satisfy the tax withholding obligation pursuant to the award are returned to the pool of available shares for future grant.
105
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
Stock Options
Stock options granted under the 2006 Plan expire no later than 10 years from the date of grant and generally vest over a four-year
period. Vesting generally occurs at the rate of 25% at the end of the first year, and thereafter in 36 equal monthly installments, however certain grants to the Companys executive officers have been made in lieu of their annual bonus
awards and vest over a term of generally less than one-year. In addition, annual grants to the Companys board members vest over a period of one-year. The exercise price of the Companys stock options shall not be less than 100% of the
fair value of the Companys common stock on the date of grant. Further, the exercise price of any option granted to a 10% stockholder may not be less than 110% of the fair value of the Companys common stock on the date of grant.
The following table summarizes the Companys stock option activity as of December 31, 2013, and changes for the
year then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life - Years
|
|
|
Aggregate
Intrinsic Value
|
|
Options outstanding at beginning of period
|
|
|
10,037,984
|
|
|
$
|
6.81
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,208,750
|
|
|
$
|
5.84
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(922,141
|
)
|
|
$
|
4.65
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(640,688
|
)
|
|
$
|
8.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at end of period
|
|
|
10,683,905
|
|
|
$
|
6.72
|
|
|
|
6.83
|
|
|
$
|
28,675,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of period
|
|
|
6,729,953
|
|
|
$
|
7.39
|
|
|
|
5.81
|
|
|
$
|
14,926,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options exercised during 2013, 2012 and 2011 was $2,921,000, $175,000
and $2,774,000, respectively. During 2013, the Company received $4,292,000 upon the exercise of stock options in satisfaction of the exercise price.
Restricted Stock Units
The Company has granted a limited number of
RSUs with vesting schedules based upon performance criteria, service conditions or a combination of both performance criteria and service conditions. During 2013, the Company granted 3,000 RSUs, all of which remained outstanding as of
December 31, 2013.
The following table summarizes the Companys RSU activity as of December 31, 2013, and
changes for the year then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-Average
Grant Date Fair
Value per
Share
|
|
|
Aggregate
Intrinsic Value
|
|
Restricted stock units outstanding at beginning of period
|
|
|
938
|
|
|
$
|
10.38
|
|
|
|
|
|
Granted
|
|
|
3,000
|
|
|
$
|
8.31
|
|
|
|
|
|
Vested
|
|
|
(938
|
)
|
|
$
|
10.38
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units outstanding at end of period
|
|
|
3,000
|
|
|
$
|
8.31
|
|
|
$
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
The aggregate intrinsic value of RSUs vested during 2013, 2012 and 2011 was $5,000,
$6,000 and $716,000, respectively. During 2013, a total of 126 vested shares were withheld from distribution in satisfaction of statutory minimum tax obligations and the Company used less than $1,000 to satisfy such tax obligations.
Operating segments are identified as components of an enterprise for which separate discrete financial information is
available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions regarding resource allocation and assessing performance. The Company operates and manages its business as one segment. It sells its only
product, OFIRMEV, primarily to established wholesale distributors in the pharmaceutical industry, including the nations three leading wholesale pharmaceutical distributors: Cardinal Health, Inc., AmerisourceBergen Corporation and McKesson
Corporation.
The Company had three major customers, each representing 10% or more of total gross product revenue for the
periods presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
AmerisourceBergen Corporation.
|
|
|
35
|
%
|
|
|
33
|
%
|
|
|
33
|
%
|
Cardinal Health, Inc.
|
|
|
32
|
%
|
|
|
33
|
%
|
|
|
37
|
%
|
McKesson Corporation
|
|
|
27
|
%
|
|
|
27
|
%
|
|
|
23
|
%
|
Receivables from these customers at December 31, 2013 and 2012 amounted to the following percentages
of total gross accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
AmerisourceBergen Corporation
|
|
|
36
|
%
|
|
|
32
|
%
|
Cardinal Health, Inc.
|
|
|
32
|
%
|
|
|
31
|
%
|
McKesson Corporation
|
|
|
27
|
%
|
|
|
31
|
%
|
The Company is subject to taxation in the U.S. and various state jurisdictions. The Companys tax years for 2004
and forward are subject to examination by the federal and state tax authorities due to the carryforward of unutilized net operating losses and research and development credits. The Companys practice is to recognize interest and/or penalties
related to income tax matters in income tax expense. The Company had no accrued interest and/or penalties related to income tax matters in the Companys balance sheets at December 31, 2013 and 2012, and has recognized no interest and/or
penalties in the Companys statement of operations for the years ended December 31, 2013, 2012 and 2011.
Pursuant
to Internal Revenue Code (IRC) Sections 382 and 383, annual use of the Companys net operating loss and research and development credit carryforwards may be limited in the event of a cumulative change in ownership of more than 50%
within a three-year period. During the second quarter of 2013, the Company completed an analysis under IRC Sections 382 and 383 through December 31, 2012, and determined that it experienced an ownership change in March 2006. However, this
ownership change did not result in the forfeiture of any net operating losses or research and development credits. Therefore, the Company has reinstated
107
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
the (1) deferred tax assets for net operating losses of approximately $149,071,000 and (2) research and development credits of approximately $6,809,000 generated through 2012 to its
deferred tax asset schedule. Further, the Company has recorded a corresponding increase to its valuation allowance. The analysis did not have any impact on the Companys unrecognized tax benefits. There is risk that additional changes in
ownership have occurred since the completion of the Companys analysis, which was through December 31, 2012. If a change in ownership were to have occurred, additional net operating loss and tax credit carryforwards could be eliminated or
restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance.
A valuation allowance has been established as realization of such deferred tax assets has not met the more likely than not threshold requirement. Other significant components of the Companys net
deferred tax assets for federal and state income taxes at December 31, 2013 and 2012 are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
157,484
|
|
|
$
|
|
|
Tax credit carryforwards
|
|
|
5,781
|
|
|
|
|
|
Stock-based compensation
|
|
|
13,983
|
|
|
|
12,876
|
|
Capitalized research and development
|
|
|
4,535
|
|
|
|
5,348
|
|
Other, net
|
|
|
4,208
|
|
|
|
5,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,991
|
|
|
|
24,178
|
|
Valuation allowance for deferred tax assets
|
|
|
(185,987
|
)
|
|
|
(23,272
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
4
|
|
|
$
|
906
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(4
|
)
|
|
|
(906
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(4
|
)
|
|
$
|
(906
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the Companys effective tax rate and federal statutory tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Federal income taxes
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes
|
|
|
3.3
|
%
|
|
|
4.7
|
%
|
|
|
4.3
|
%
|
Research and development credits
|
|
|
(4.3
|
)%
|
|
|
0.3
|
%
|
|
|
0.9
|
%
|
Stock-based compensation
|
|
|
(1.8
|
)%
|
|
|
(1.0
|
)%
|
|
|
(0.7
|
)%
|
Change in valuation allowance
|
|
|
(28.1
|
)%
|
|
|
(5.6
|
)%
|
|
|
0.0
|
%
|
State rate change
|
|
|
(2.1
|
)%
|
|
|
0.6
|
%
|
|
|
(0.0
|
)%
|
Removal of net operating loss and research and development tax credits
|
|
|
0.0
|
%
|
|
|
(32.4
|
)%
|
|
|
(37.8
|
)%
|
Other, net
|
|
|
(2.0
|
)%
|
|
|
(1.6
|
)%
|
|
|
(1.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013, the Company had federal and state net operating loss carryforwards of
approximately $392,129,000 and $387,589,000, respectively. The federal and state tax loss carryforwards will
108
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
begin to expire in 2024 and 2014, respectively, unless previously utilized. The Company also had federal research and development tax credit carryforwards of approximately $4,140,000 which will
begin expiring in 2025 unless previously utilized, and state research and development tax credit carryforwards of approximately $2,524,000 which carryforward indefinitely.
Included in the net operating loss carryforwards is approximately $975,000 of losses attributable to excess stock option deductions. Under current accounting guidance concerning when tax benefits related
to excess stock option deductions can be credited to paid in capital, the related valuation allowance cannot be reversed, even if the facts and circumstances indicate that it is more likely than not that the deferred tax asset can be realized. The
valuation allowance will only be reversed as the related deferred tax asset is applied to reduce taxes payable.
We recognize
the impact of an uncertain income tax position on our income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained.
Following is a tabular reconciliation of the unrecognized tax benefit activity
for the two years ended December 31, 2013 (excluding interest and penalties, in thousands):
|
|
|
|
|
Beginning balance, January 1, 2012
|
|
$
|
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
Reductions due to tax positions that reversed in the current year and completion of research and development
study
|
|
$
|
|
|
|
|
|
|
|
Ending balance December 31, 2012
|
|
|
|
|
Additions based on tax positions related to the current year
|
|
|
3,756
|
|
Reductions due to tax positions that reversed in the current year and completion of research and development
study
|
|
|
|
|
|
|
|
|
|
Ending balance December 31, 2013
|
|
$
|
3,756
|
|
|
|
|
|
|
14.
|
|
Employee Benefit Plan
|
The Company has a qualified retirement plan under the provisions of Section 401(k) of the Internal Revenue Code
covering substantially all employees. Employees may contribute up to 100% of their annual compensation up to the maximum annual amount prescribed by the Internal Revenue Service. The Company may elect to make a discretionary contribution or match a
discretionary percentage of employee contributions. During 2013, 2012 and 2011, the Company elected not to make any contributions to the plan.
15.
|
|
Summarized Quarterly Data (Unaudited)
|
The following financial information reflects all normal recurring adjustments, which are, in the opinion of management,
necessary for a fair statement of the results of the interim periods. Summarized quarterly data for the years ended December 31, 2013 and 2012 are as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2013 Quarters
|
|
|
|
1st
(3
)
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
(4
)
|
|
|
Total
|
|
Revenues
|
|
$
|
23,612
|
|
|
$
|
24,674
|
|
|
$
|
28,957
|
|
|
$
|
35,313
|
|
|
$
|
112,556
|
|
Gross profit
(1)
|
|
$
|
15,445
|
|
|
$
|
16,380
|
|
|
$
|
18,993
|
|
|
$
|
23,765
|
|
|
$
|
74,583
|
|
Net loss
|
|
$
|
(1,363
|
)
|
|
$
|
(11,875
|
)
|
|
$
|
(6,938
|
)
|
|
$
|
(4,118
|
)
|
|
$
|
(24,294
|
)
|
Basic and diluted net loss per share
(2)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.28
|
)
|
109
CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2012 Quarters
|
|
|
|
1st
(5
)
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
(6
)
|
|
|
Total
|
|
Revenues
|
|
$
|
8,004
|
|
|
$
|
11,108
|
|
|
$
|
13,898
|
|
|
$
|
17,174
|
|
|
$
|
50,184
|
|
Gross profit
(1)
|
|
$
|
3,758
|
|
|
$
|
5,352
|
|
|
$
|
7,822
|
|
|
$
|
9,996
|
|
|
$
|
26,928
|
|
Net loss
|
|
$
|
(22,673
|
)
|
|
$
|
(20,989
|
)
|
|
$
|
(15,890
|
)
|
|
$
|
(21,421
|
)
|
|
$
|
(80,973
|
)
|
Basic and diluted net loss per share
(2)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.95
|
)
|
(1)
|
Determined by subtracting cost of sales from net revenue.
|
(2)
|
Loss per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly net loss per share may not necessarily
equal the total for the year.
|
(3)
|
During the first quarter of 2013, the Company recognized $2,616 of previously deferred revenue and related cost of sales of $919. Further, it recorded
a gain of $7,654 on the sale of its Incline option and preferred shares.
|
(4)
|
During the fourth quarter of 2013, the Company recognized $2,027 of license revenue under its data license agreement with Terumo Corporation, related
to their first commercial sale of its IV acetaminophen product in Japan.
|
(5
)
|
During the first quarter of 2012, the Company recorded a charge of $163 to write-down the value of certain inventory.
|
(6
)
|
During the fourth quarter of 2012, the Company recorded charges of $6,973 to impair certain manufacturing equipment and construction-in-process to
their fair values and, a related asset retirement obligation impairment charge of $750 for the removal of the equipment. Additionally, the Company recorded a loss on the sale of one of its construction-in-process assets of $858 and a charge of $290
to accrue for inventory destruction costs.
|
Agreement and Plan of Merger with Mallinckrodt plc
On February 10, 2014, the Company entered into an agreement and plan of merger (Merger Agreement) with Mallinckrodt plc
(Parent) and Madison Merger Sub, Inc., a wholly owned indirect subsidiary of Parent (Merger Sub), pursuant to which, and on the terms and subject to the conditions thereof, among other things, Merger Sub commenced a tender
offer (Offer) on February 19, 2014 to acquire all of the outstanding shares of common stock of the Company at a purchase price of $14.00 per share in cash, without interest (the Offer Price). The Merger Agreement
includes a remedy of specific performance and is not subject to a financing condition.
The obligation of Merger Sub to
purchase the shares of common stock of the Company validly tendered pursuant to the Offer is subject to the satisfaction or waiver of a number of conditions set forth in the Merger Agreement, including (1) that there shall have been validly
tendered and not validly withdrawn a number of shares of common stock of the Company that, when added to the shares then owned by Parent and its subsidiaries, represents one more than 50% of the total number of shares of common stock of the Company
outstanding at the time of the expiration of the Offer, (2) the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (3) the accuracy of the representations and
warranties and compliance with covenants contained in the Merger Agreement, (4) the absence of any law, order, injunction or decree by any government, court or governmental entity that would make illegal or otherwise prohibit the Offer or the
Merger, (5) there not having been a material adverse effect with respect to the Company, (6) the delivery of certain audited and unaudited financial statements, and (7) other customary conditions.
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CADENCE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTSContinued
The Merger Agreement contains certain termination rights in favor of each the Company
and Parent, including under certain circumstances, the requirement for the Company to pay to Parent a termination fee of approximately $20,200,000, or approximately 1.5% of the Offer Price. The Company has also agreed (1) to cease any existing,
and agreed not to solicit or initiate any additional, discussions with third parties regarding other proposals to acquire the Company and (2) to certain restrictions on its ability to respond to such proposals, subject to fulfillment of certain
fiduciary requirements of the board of directors of the Company.
Following the completion of the Offer and subject to the
satisfaction or waiver of certain conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company, with the Company surviving as an indirect wholly owned subsidiary of Parent, pursuant to the procedure provided for
under Section 251(h) of the Delaware General Corporation Law without any stockholder approvals (the Merger). At the effective time of the Merger (the Effective Time), by virtue of the Merger and without any action on the
part of the holders of any shares of common stock of the Company, each outstanding share of common stock of the Company, other than any shares owned by Parent, Merger Sub or any wholly owned subsidiary of Parent or held in the treasury of the
Company, or any stockholders who are entitled to and who properly exercise appraisal rights under Delaware law, will be canceled and converted into the right to receive an amount in cash equal to the Offer Price. In addition, (1) effective as
of immediately prior to the Effective Time, each outstanding Company stock option will fully vest and automatically be canceled and terminated as of the Effective Time and the holder thereof will be entitled to receive an amount in cash, without
interest and less the amount of any tax withholding, equal to the product of (a) the number of shares of common stock of the Company underlying such option multiplied by (b) the excess, if any, of the Offer Price over the exercise price
per share of such option, (2) effective as of immediately prior to the Effective Time, each outstanding Company restricted stock unit, other than any Company restricted stock unit issued or awarded on or after January 1, 2014
(collectively, the Specified Restricted Stock Units), will fully vest and the restrictions thereon will lapse, and each such restricted stock unit will be canceled and converted into the right to receive an amount in cash, without
interest and less the amount of any tax withholding, equal to the product of (a) the Offer Price multiplied by (b) the number of shares of common stock of the Company underlying such restricted stock unit, and (3) at the Effective
Time, each outstanding Specified Restricted Stock Unit will be canceled and converted into an award (a Converted Award) representing the right to receive an amount in cash equal to the product of (a) the Offer Price multiplied by
(b) the number of shares of Common Stock of the Company underlying such Specified Restricted Stock Unit. Each Converted Award shall continue to vest and be settled in cash in accordance with the terms of the applicable Specified Restricted
Stock Unit award agreement, subject to accelerated vesting under certain circumstances, including in the event of the holders death or disability or an involuntary termination of employment that would otherwise qualify the holder to severance
under any employment or severance plan or agreement to which the holder is a party or in which the holder is eligible to participate as of the date of grant. The foregoing treatment of the Specified Restricted Stock Unit Awards will supersede any
more favorable vesting provisions in the Companys equity plan or any employment or severance plan or agreement to which the holder is a party or in which the holder is eligible to participate (including the executive employment agreements).
The Merger Agreement contains customary representations, warranties and covenants, including covenants obligating the Company
to continue to conduct its business in the ordinary course and to cooperate in seeking regulatory approvals.
The board of
directors of the Company has unanimously (1) determined that the Merger Agreement and the transactions contemplated thereby are advisable and fair to, and in the best interests of, the Companys stockholders, (2) approved and declared
advisable the Merger Agreement and the transactions contemplated thereby and (3) resolved to recommend acceptance of the Offer by the Companys stockholders. The board of
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directors of Parent has also unanimously approved the transaction. The Company expects to complete the Merger in mid to late March 2014, subject to the satisfaction of the closing conditions.
Exercise of Warrants
In January and February 2014, warrants to purchase an aggregate of 5,909,457 shares of the Companys common stock were exercised on a net exercise basis, which resulted in the issuance of a total of
2,454,472 shares of the Companys common stock. As of February 28, 2014, warrants to purchase an aggregate of 137,620 shares of the Companys common stock remained outstanding with an average exercise price of $7.08 per share.
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