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| COR > SEC Filings for COR > Form 10-K on 15-Apr-2009 | All Recent SEC Filings |
15-Apr-2009
Annual Report
The following discussion and analysis should be read in conjunction with the audited financial statements and notes related thereto appearing elsewhere herein.
Critical Accounting Policies and Management Estimates
The SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and most demanding of their judgment. Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.
We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. This process forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
In accordance with the SEC's Staff Accounting Bulletin No. 104 ("SAB 104"), amounts received for upfront technology license fees under multiple-element arrangements are deferred and recognized over the period of committed services or performance, if such arrangements require our on-going services or performance. We record grant revenues as we incur expenses related to the grant projects. All amounts received under collaborative research agreements or research grants are nonrefundable, regardless of the success of the underlying research.
Revenues from milestone payments are recognized when earned, as evidenced by written acknowledgment from our collaborator, provided that (i) the milestone event is substantive and its achievement was not reasonably assured at the inception of the agreement, and (ii) our performance obligations after the milestone achievement will continue to be funded by our collaborator at a comparable level to that before the milestone achievement. If both of these criteria are not met, the milestone payment is recognized over the remaining minimum period of our performance obligations under the agreement.
In November 2002, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") reached consensus on Issue 00-21. EITF Issue 00-21 addresses the accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Specifically, Issue 00-21 requires the recognition of revenue from milestone payments over the remaining minimum period of performance obligations. As required, we apply the principles of Issue 00-21 to multiple element agreements that we enter into or modify after July 1, 2003.
Employee Stock Options and Stock-Based Compensation
As required, as of January 1, 2006 we adopted Statement of Financial Accounting Standards No. 123(R) ("SFAS 123(R)"), which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.
In accordance with SFAS 123, "Accounting for Stock-Based Compensation," and EITF Issue 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services," stock options and warrants issued to consultants and other non-employees as compensation for services to be provided to us are accounted for based upon the fair
value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. We recognize this expense over the period the services are provided.
Registration Payment Arrangements
In connection with prior private placements of our common stock and warrants to purchase shares of our common stock, we entered into agreements that committed us to timely register the shares underlying the issued warrants. Those registration agreements specified potential cash penalties if we did not timely register the related shares with the SEC.
In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In a Company's Own Stock," when the potential cash penalties were included in registration payment arrangements, we recorded the estimated fair value of the warrants as a liability, with an offsetting reduction to additional paid-in capital received from the private placement. The fair value of the warrants was estimated using the Black-Scholes option pricing model.
The estimated fair value of the warrants was re-measured at each reporting date and on the date of effectiveness of the related registration statement, with the increase in fair value recorded as other expense in our Statement of Operations. As of the effectiveness of the registration statement, the warrant liability was reclassified to additional paid-in capital, evidencing the non-impact of these adjustments on our financial position and business operations.
In December 2006, the FASB issued FASB Staff Position ("FSP") EITF No. 00-19-2, "Accounting for Registration Payment Arrangements." This FSP specifies that companies that enter into agreements to register securities will be required to recognize a liability if a payment to investors for failing to fulfill the agreement is probable and can be reasonably estimated. This accounting differs from the guidance in EITF 00-19, which required a liability to be recognized and measured at fair value, regardless of probability.
EITF 00-19-2 is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that we enter into or modify after the date of issuance of this FSP. For our registration payment arrangements and financial instruments subject to those arrangements that were entered prior to the issuance of this FSP, the guidance was effective beginning January 1, 2007.
Transition to EITF 00-19-2 was to be achieved by reporting a change in accounting principle through a cumulative-effect adjustment to the opening balance of retained earnings. For purposes of measuring the cumulative-effect adjustment related to the recognition of a contingent liability, we evaluated whether the transfer of consideration under our registration payment arrangements was probable and could be reasonably estimated as of the January 1, 2007 adoption date. Given that we did not deem the transfer of consideration under our existing registration payment arrangements as probable as of December 31, 2006, we did not record a cumulative-effect adjustment in connection with the adoption of this FSP.
In connection with the obligation to maintain effectiveness of the registration statements filed with its prior transactions, the Company has estimated the maximum potential amount of undiscounted payments that it could be required to make under the registration arrangements as approximately $1,814,000. Given that the Company did not deem the transfer of consideration under its existing registration payment arrangements as probable as of December 31, 2007 or 2008, no related expense or liability has been recorded during the years ended December 31, 2007 or 2008.
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the U.S., with no need for management's judgment in their application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. See our audited financial statements and notes thereto which begin
on page F-1 of this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by accounting principles generally accepted in the U.S.
Going Concern
Our independent registered public accounting firm has expressed substantial doubt as to our ability to continue as a going concern, in its report for the fiscal year ended December 31, 2008, based on significant operating losses that we incurred and the fact that we do not have adequate working capital to finance our day-to-day operations. Our continued existence depends upon the success of our efforts to raise additional capital necessary to meet our obligations as they become due and to obtain sufficient capital to execute our business plan. We intend to obtain capital primarily through issuances of debt or equity or entering into collaborative arrangements with corporate partners. There can be no assurance that we will be successful in completing additional financing or collaboration transactions. If we cannot obtain adequate funding, we may be required to significantly curtail or even shut down our operations.
Results of Operations
General
In January 1999, we entered into a research collaboration and exclusive worldwide license agreement with NV Organon ("Organon"). The agreement will allow Organon to develop and commercialize our proprietary AMPAKINE technology for the treatment of schizophrenia and depression. In connection with the agreement, we received a $2,000,000 up-front licensing payment and research support payments of approximately $3,000,000 per year for two years.
The agreement with Organon also includes milestone payments based upon clinical development, plus royalty payments on worldwide sales. Through December 31, 2007, we have received milestone payments totaling $6,000,000 under the agreement with Organon.
In October 2000, we entered into a research collaboration agreement and an exclusive license agreement with Les Laboratoires Servier ("Servier"). The license agreement will allow Servier to develop and commercialize select AMPAKINEŽ compounds for the treatment of (i) declines in cognitive performance associated with aging, (ii) neurodegenerative diseases and (iii) anxiety disorders. The indications covered include, but are not limited to, Alzheimer's disease, mild cognitive impairment, sexual dysfunction, and the dementia associated with multiple sclerosis and Amyotrophic Lateral Sclerosis. In early December 2006, we terminated the research collaboration with Servier and as a result the worldwide rights for the AMPAKINE technology for treatment of neurodegenerative diseases were returned to us, other than three compounds selected by Servier for commercialization.
The agreements with Servier, as amended to date, include a nonrefundable up-front fee of $5,000,000 and research support payments of $2,025,000 per year through early December 2006 (subject to us providing agreed-upon levels of research personnel). The amount of research support was subject to annual adjustment based upon the increase in the U.S. Department of Labor's Consumer Price Index. The agreements also include potential milestone payments, plus royalty payments on sales in licensed territories.
In October 2002, Servier agreed to provide us with $4,000,000 of additional research support, in exchange for rights to our AMPAKINE compounds for the potential treatment of anxiety disorders in Servier's licensed territories. The $4,000,000 was paid in quarterly installments of $500,000 over a two-year period, ending in September 2004.
From inception (February 10, 1987) through December 31, 2008, we sustained losses approximating $107,323,000. Due to projected fluctuations in funding, continuing losses are likely over the next several years, as our ongoing operating expenses will only be offset, if at all, by possible
milestone payments from our agreements with Servier and Organon, or under planned strategic alliances that we are seeking with other pharmaceutical companies for the clinical development, manufacturing and marketing of our products. The nature and timing of payments to us under the Servier and Organon agreements or other planned strategic alliances, if and when entered into, are likely to significantly affect our operations and financing activities and to produce substantial period-to-period fluctuations in reported financial results. Over the longer term, we will require successful commercial development of our products by Servier, Organon, or our other prospective partners to attain sustained profitable operations from royalties or other product-based revenues.
We believe that inflation and changing prices have not had a material impact on our ongoing operations to date.
Years ended December 31, 2008 and 2007
For the fiscal year ended December 31, 2008, our net loss increased by 13% to approximately $14,596,000 compared to a net loss of approximately $12,969,000 for the prior year. Consistent with the prior year, we had no revenues for the year ended December 31, 2008.
Our research and development expenses for the year ended December 31, 2008 increased from approximately $9,327,000 to approximately $10,780,000, or by 16% from the prior year. Most of the increase represented clinical development expenses for our two Phase IIa trials of AMPAKINE CX717 as a treatment for respiratory depression.
Our non-cash stock compensation charges related to research and development for the year ended December 31, 2008 decreased from approximately $1,371,000 to approximately $722,000, or by 47%, relative to the prior year, which partially offset our increased clinical development expenses. The decreased non-cash stock compensation charges resulted from fluctuations in our stock price and the vesting schedules of granted stock options.
Our general and administrative expenses for the year ended December 31, 2008 decreased slightly from approximately $4,320,000 to approximately $4,259,000, or by 1%, compared to the prior year. Our non-cash stock compensation charges produced most of this decrease. Our related charges decreased from approximately $866,000 in the year ended December 31, 2007 to approximately $577,000 in 2008. Increased personnel-related expenses partially offset the decrease and resulted from the appointment of our new President and Chief Executive Officer, Dr. Mark Varney, in mid-August 2008. Dr. Varney's salary and related expenses were previously included in research and development expenses while he served as our former Chief Scientific Officer and Chief Operating Officer.
Net interest income for the year ended December 31, 2008 decreased to approximately $443,000 from approximately $678,000, or by 35%, relative to the prior year, due to a decrease in cash available for investing.
Years ended December 31, 2007 and 2006
For the fiscal year ended December 31, 2007, our net loss decreased by 19% to approximately $12,969,000 compared to a net loss of approximately $16,055,000 for the prior year.
Revenues for the fiscal year ended December 31, 2007 decreased to $0 from approximately $1,177,000 reported in the prior year due primarily to decreased research revenues from our collaboration agreement with Servier. As reported earlier, we terminated the research phase of our collaboration with Servier in early December 2006.
Our research and development expenses for the year ended December 31, 2007 decreased from approximately $13,262,000 to approximately $9,327,000, or by 30%, from the prior year. The decrease in our non-cash stock compensation charges represents approximately $626,000, or 16%, of this decrease.
Most of the remaining decreased expenses reflect prior year clinical expenses incurred before the FDA clinical hold on CX717, and preclinical expenses to address the clinical hold.
As reported earlier, the FDA placed a clinical hold on CX717 in late March 2006 due to concerns over some preclinical animal data and not as a result of data from any human clinical trials. After we provided additional toxicological data, the FDA released the clinical hold in October 2006, but imposed a limited dose range for further clinical testing of the compound.
Our general and administrative expenses for the year ended December 31, 2007 decreased from approximately $4,616,000 to approximately $4,320,000, or by 6%, compared to the prior year, with non-cash stock compensation charges producing the decrease. Total non-cash stock compensation charges for the current year decreased by approximately $368,000 from the prior year.
Net interest income of approximately $678,000 in fiscal year 2007 was consistent with net interest income of approximately $646,000 for the prior year.
Liquidity and Capital Resources
Under the agreements signed with Servier in October 2000, as amended to date,
the collaborative research phase of the agreement ended in early December 2006.
As a result of this termination we regained the worldwide rights for the use of
AMPAKINE compounds for treatment of (a) age related decline in memory and
cognition, (b) mild cognitive impairment and Alzheimer's disease
(c) neurodegenerative diseases, (d) sexual dysfunction and (e) anxiety. Servier
subsequently selected three AMPAKINE compounds that it may develop for potential
commercialization. We remain eligible to receive payments based upon defined
clinical development milestones of the licensed compounds and royalties on sales
in licensed territories. Under the terms of the agreement with Organon, we may
receive additional milestone payments based on clinical development of the
licensed technology and ultimately, royalties on worldwide sales.
In January 2004, we completed a private placement of an aggregate of 6,909,091 shares of our common stock at $2.75 per share and five-year warrants to purchase up to an additional aggregate of 4,490,910 shares at an exercise price of $3.25 per share. We received approximately $17,500,000 in net proceeds from the private placement. The warrants are subject to a call right in our favor to the extent that the closing price of our common stock exceeds $7.50 per share for any 13 consecutive trading day period. As of December 31, 2008, related warrants to purchase up to 3,969,137 shares of common stock remained outstanding. In January 2009, these warrants expired unexercised.
In December 2004, we completed a private placement of an aggregate of 4,233,333 shares of our common stock at $2.66 per share and five-year warrants to purchase up to an additional aggregate of 2,116,666 shares at an exercise price of $3.00 per share. We received approximately $10,385,000 in net proceeds from the private placement. The warrants are subject to a call right in our favor to the extent that the closing price of our common stock exceeds $7.50 per share for any 13 consecutive trading day period. During the year ended December 31, 2006, we received approximately $1,023,000 from the exercise of related warrants. There was no exercise of related warrants during the year ended December 31, 2007 or 2008. If the remaining warrants are fully exercised, of which there can be no assurance, these warrants would provide approximately $5,327,000 of additional capital.
In January 2007, we completed a registered direct offering of an aggregate of 5,021,427 shares of our common stock at $1.12 per share and five-year warrants to purchase up to an additional aggregate of 3,263,927 shares at an exercise price of $1.66 per share. We received approximately $5,080,000 in net proceeds from the offering. The warrants are subject to a call right in our favor to the extent that the closing price of our common stock exceeds $3.35 for any 13 consecutive trading day period. During the year ended December 31, 2007, we received approximately $443,000 from the exercise of related
warrants. There was no exercise of related warrants during the year ended December 31, 2008. If the remaining warrants are fully exercised, of which there can be no assurance, these warrants would provide approximately $4,975,000 of additional capital.
In August 2007, we completed a registered direct offering of an aggregate of 7,075,000 shares of our common stock at $2.00 per share and five-year warrants to purchase up to an additional aggregate of 2,830,000 shares at an exercise price of $2.64 per share. We received approximately $13,135,000 in net proceeds from the offering. There was no exercise of related warrants during the year ended December 31, 2007 or 2008. If the related warrants are fully exercised, of which there can be no assurance, these warrants would provide approximately $8,172,000 of additional capital.
In April 2009, we obtained a commitment for a registered direct offering of preferred stock that is convertible into an aggregate of 8,676,471 shares of our common stock at a conversion price of $0.17 per share. In connection with the anticipated transaction, we expect to issue warrants to purchase up to an additional aggregate of 6,941,176 common shares with an exercise price of $0.3401 per share. We also expect to issue warrants to purchase up to 433,824 shares of our common stock to the placement agent for the transaction. The warrants to be issued to the placement agent will have an exercise price of $0.26 per share and all of the warrants will be exercisable after six months from the date of issuance and will have a three-year term thereafter. We anticipate receiving approximately $1,250,000 in net proceeds from the offering. If the related warrants are fully exercised, of which there can be no assurance, the warrants would provide approximately $2,475,000 of additional capital.
Cash Position
As of December 31, 2008, we had cash, cash equivalents and marketable securities totaling approximately $4,141,000 and working capital of approximately $2,541,000. As of December 31, 2007, we had cash, cash equivalents and marketable securities totaling approximately $17,284,000 and working capital of approximately $15,805,000. The decreases in cash and working capital reflect amounts required to fund operations.
With the proceeds from our anticipated registered direct offering of convertible preferred stock in April 2009, as discussed more fully above, we believe that we have adequate financial resources to conduct our operations late into the third quarter of 2009. This raises substantial doubt about our ability to continue as a going concern, which will be dependent on our ability to obtain additional financing and generate sufficient cash flows to meet our obligations on a timely basis.
We incurred net losses of approximately $14,596,000 during the year ended December 31, 2008. Our ongoing cash requirements will depend on numerous factors, particularly the progress of clinical trials of our AMPAKINE CX1739 and our ability to negotiate and complete collaborative agreements or out-licensing arrangements. In order to help fund our on-going operating cash requirements, we intend to seek new collaborations for our "low impact" and "high impact" AMPAKINE programs that include initial cash payments and on-going development support. We may also seek to raise additional funds and explore other strategic and financial alternatives, such as a merger transaction with another pharmaceutical company.
There are significant uncertainties as to our ability to access potential sources of capital. We may not be able to enter into any collaboration on terms acceptable to us, or at all, due to conditions in the pharmaceutical industry or in the economy in general. Competition for such arrangements is intense, with a large number of biopharmaceutical companies attempting to secure alliances with more established pharmaceutical companies. Although we have been engaged in discussions with candidate companies, there is no assurance that an agreement or agreements will arise from these discussions in a timely manner, or at all, or that revenues that may be generated thereby will offset operating expenses sufficiently to reduce our short-term funding requirements.
Even if we are successful in obtaining a collaboration for our AMPAKINE program, we may have to relinquish rights to technologies, product candidates or markets that we might otherwise seek to develop ourselves. These same risks apply to any attempt to out-license our compounds.
Similarly, due to market conditions, the illiquid nature of our stock and other possible limitations on equity offerings, we may not be able to sell additional securities or raise other funds on terms acceptable to us, if at all. Any additional equity financing, if available, would likely result in substantial dilution to existing stockholders.
Our forecast of the period of time through which our financial resources will be adequate to support our operations is forward-looking information, and actual results could vary.
For the year ended December 31, 2008, net cash used in operating activities was approximately $13,046,000, and included our net loss for the period of approximately $14,596,000, adjusted for non-cash stock compensation charges of approximately $1,299,000, depreciation charges aggregating approximately $165,000, and changes in operating assets and liabilities. Net cash used in operating activities was approximately $10,742,000 during the year ended December 31, 2007, and included our net loss for the period of approximately $12,969,000, adjusted for non-cash stock compensation charges of approximately $2,237,000, depreciation charges aggregating approximately $127,000, and changes in operating assets and liabilities.
Net cash provided by investing activities was approximately $10,448,000 for the year ended December 31, 2008, and resulted from the maturity and sale of marketable securities of approximately $13,757,000, partially offset by the purchases of short-term investments and fixed assets of approximately $3,186,000 and $124,000, respectively. For the year ended December 31, 2007, net cash used in investing activities approximated $5,944,000, and primarily resulted from the purchases of marketable securities and fixed assets of approximately $17,060,000 and $550,000, respectively, partially offset by the maturity and sale of marketable securities of $11,666,000.
For the year ended December 31, 2008, net cash provided by financing activities totaled approximately $9,000, reflecting proceeds from the exercise of options to purchase common stock. Net cash provided by financing activities approximated $19,058,000 for the year ended December 31, 2007, and primarily represented proceeds from the Company's registered direct offerings of its common stock and warrants to purchase shares of its common stock in January and August 2007.
Commitments
We lease approximately 32,000 square feet of research laboratory, office and expansion space under an operating lease that expires May 31, 2012. The commitments under the lease agreement for the years ending December 31, 2009, 2010, 2011 and the five months ending May 31, 2012 are approximately $552,000, $556,000, $581,000 and $238,000, respectively. From inception (February 10, 1987) through December 31, 2008, expenditures for furniture, equipment and leasehold improvements aggregated approximately $3,833,000.
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