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Chelsea Therapeutics International 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission file number: 000-51462

 


CHELSEA THERAPEUTICS INTERNATIONAL, LTD.

(Exact name of Registrant as specified in its charter)

 


 

Delaware   20-3174202

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

13950 Ballantyne Corporate Place, Suite 325, Charlotte, North Carolina 28277

(Address of principal executive offices, including zip code)

(704) 341-1516

(Registrant’s telephone number, including area code)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  ¨    Accelerated Filer  ¨    Non-accelerated Filer  x

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of July 31, 2007, there were 22,512,954 shares of registrant’s Common Stock outstanding.

 



Table of Contents

Index

 

          Page

PART I FINANCIAL INFORMATION

  
Item 1.    Condensed Consolidated Financial Statements    1
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    11
Item 3.    Quantitative and Qualitative Disclosures about Market Risk    15

Item 4.

   Controls and Procedures    15

PART II OTHER INFORMATION

  
Item 4.    Submission of Matters to a Vote of Security Holders    16
Item 6.    Exhibits    16
   Signatures    17


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    

June 30,

2007

   

December 31,

2006

 
     (unaudited)     (Note 1)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 23,005,329     $ 15,897,329  

Prepaid contract research and manufacturing

     98,614       167,606  

Other prepaid expenses and other current assets

     143,105       49,214  
                

Total current assets

     23,247,048       16,114,149  

Property and equipment, net

     32,074       42,938  

Other assets

     13,461       13,461  
                
   $ 23,292,583     $ 16,170,548  
                

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 260,521     $ 41,255  

Accrued compensation and related expenses

     307,043       409,955  

Accrued contract research and manufacturing

     2,558,806       1,448,470  

Other accrued expenses

     330,525       134,312  
                

Total liabilities

     3,456,895       2,033,992  
                

Commitments

    

Stockholders’ equity:

    

Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding

     —         —    

Common stock, $0.0001 par value, 45,000,000 shares authorized, 22,459,006 and 19,707,129 shares issued and outstanding, respectively

     2,246       1,971  

Additional paid-in capital

     46,436,406       33,738,242  

Deficit accumulated during the development stage

     (26,602,964 )     (19,603,657 )
                

Total stockholders’ equity

     19,835,688       14,136,556  
                
   $ 23,292,583     $ 16,170,548  
                

See accompanying notes to condensed consolidated financial statements.

 

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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     For the three months ended June 30,     For the six months ended June 30,     Period from
April 3, 2002
(inception) to
 
     2007     2006     2007     2006     June 30, 2007  

Operating expenses:

          

Research and development

   $ 2,155,547     $ 1,434,881     $ 5,322,836     $ 3,129,652     $ 19,511,439  

Sales and marketing

     602,805       66,392       819,420       310,531       2,154,759  

General and administrative

     722,694       590,283       1,372,106       1,093,153       6,487,348  
                                        

Total operating expenses

     3,481,046       2,091,556       7,514,362       4,533,336       28,153,546  
                                        

Operating loss

     (3,481,046 )     (2,091,556 )     (7,514,362 )     (4,533,336 )     (28,153,546 )

Interest income

     317,619       247,630       515,055       393,451       1,584,602  

Interest expense

     —         —         —         —         (34,020 )
                                        

Net loss

   $ (3,163,427 )   $ (1,843,926 )   $ (6,999,307 )   $ (4,139,885 )   $ (26,602,964 )
                                        

Net loss per basic and diluted share of common stock

   $ (0.14 )   $ (0.09 )   $ (0.33 )   $ (0.23 )  
                                  

Weighted average number of basic and diluted common shares outstanding

     22,404,328       19,608,096       21,196,442       17,838,791    
                                  

See accompanying notes to condensed consolidated financial statements.

 

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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENT OF

STOCKHOLDERS’ EQUITY

(unaudited)

 

     Common stock   

Additional

paid-in

   Deficit
accumulated
during the
development
   

Total

stock-

holders’

 
     Shares    Amount    capital    stage     equity  

Balance at January 1, 2007

   19,707,129    $ 1,971    $ 33,738,242      (19,603,657 )   $ 14,136,556  

Common stock issued in February 2007, at par, pursuant to net-share (cashless) exercise of common stock warrants

   4,928      —        —        —         —    

Sale and issuance of common stock with detachable warrants in March 2007 at approximately $4.33 per share, net of issuance costs

   2,648,306      265      11,476,412      —         11,476,677  

Fair value of warrants issued in May 2006 in consideration of finder’s fee at approximately $1.75 per share for which vesting was conditioned on an event that occurred in January 2007

   —        —        433,750      —         433,750  

Common stock issued in April 2007, at approximately $5.63 per share, for license fee

   26,643      3      149,997      —         150,000  

Common stock issued in June 2007, at $4.20 per share, pursuant to exercise of common stock warrants

   60,000      6      251,994      —         252,000  

Employee stock options exercised

   12,000      1      306      —         307  

Stock-based compensation

           385,705        385,705  

Net loss

              (6,999,307 )     (6,999,307 )
                                   

Balance at June 30, 2007

   22,459,006    $ 2,246    $ 46,436,406    $ (26,602,964 )   $ 19,835,688  
                                   

See accompanying notes to condensed consolidated financial statements.

 

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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

     For the six months ended
June 30,
   

Period from

April 3, 2002

(inception) to

 
     2007     2006     June 30, 2007  

Operating activities:

      

Net loss

   $ (6,999,307 )   $ (4,139,885 )   $ (26,602,964 )

Adjustments to reconcile net loss to net cash used in operating activities:

      

Non-cash stock-based compensation

     385,705       122,054       770,536  

Non-cash stock-based variable accounting compensation

     —         4,074       62,786  

Depreciation and amortization

     18,088       16,270       90,375  

Stock issued for license agreement

     150,000       274,621       425,023  

Non-cash interest expense

     —         —         34,020  

Fair value of warrants for finder’s agreement

     433,750       —         433,750  

Changes in operating assets and liabilities:

      

Prepaid expenses and other current assets

     (24,899 )     (850,613 )     (241,719 )

Accounts payable, accrued contract research and manufacturing expenses and other accrued expenses

     1,525,815       550,165       3,149,853  

Accrued compensation and related expenses

     (102,912 )     (22,302 )     307,043  
                        

Net cash used in operating activities

     (4,613,760 )     (4,045,616 )     (21,571,297 )
                        

Investing activities:

      

Acquisitions of property and equipment

     (7,224 )     (33,580 )     (122,450 )

Security deposits

     —         —         (13,461 )
                        

Net cash used in investing activities

     (7,224 )     (33,580 )     (135,911 )
                        

Financing activities:

      

Proceeds from borrowings from affiliate

     —         —         1,745,000  

Proceeds from sales of equity securities, net of issuance costs

     11,476,677       19,855,652       43,104,526  

Proceeds from exercise of employee stock options

     307       5,080       6,386  

Proceeds from exercise of common stock warrants

     252,000       —         252,000  

Recapitalization of the Company

     —         —         (400,000 )

Receipt of cash for stock subscription receivable

     —         —         4,625  
                        

Net cash provided by financing activities

     11,728,984       19,860,732       44,712,537  
                        

Net increase in cash and cash equivalents

     7,108,000       15,781,536       23,005,329  

Cash and cash equivalents, beginning of period

     15,897,329       3,173,434       —    
                        

Cash and cash equivalents, end of period

   $ 23,005,329     $ 18,954,970     $ 23,005,329  
                        

See accompanying notes to condensed consolidated financial statements.

 

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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Supplemental disclosure of non-cash investing and financing activities:

During 2004, the Company converted a loan with an affiliate for aggregate principal of $1,745,000 and accrued interest of $34,020 into shares of the Company’s $0.0001 par value common stock, issuing 677,919 shares, at approximately $2.62 per share in lieu of repayment of this obligation.

During 2002, the Company issued 5,428,217 shares of its $0.0001 par value common stock for a subscription receivable of $4,625.

In conjunction with the merger and recapitalization of the Company dated February 11, 2005, the Company issued 11,911,357 shares of its $0.0001 par value common stock in exchange for all of the issued and outstanding shares of Chelsea Therapeutics, Inc. In addition, in conjunction with and as compensation for facilitating the merger, the Company issued warrants for the purchase of 105,516 shares of its $0.0001 par value common stock at an exercise price of $2.62 per share and an aggregate fair value of $26,700.

In December 2004, in conjunction with and as compensation for activities related to the December 2004 sale of equity securities, the Company issued warrants to purchase 483,701 shares of its $0.0001 par value common stock, with a purchase price of approximately $2.88 per share and an aggregate fair value of $14,400. In February 2007 and March 2006, 4,928 shares and 15,461 shares, respectively, of the $0.0001 par value common stock of the Company were issued to holders upon exercise of warrants issued in December 2004 per the net share settlement provisions contained in the terms of the warrants.

In February 2006, in conjunction with and as compensation for activities related to the February 2006 sale of equity securities, the Company issued warrants to purchase 716,666 shares of its $0.0001 par value common stock, with a purchase price of $3.30 per share and an aggregate fair value of approximately $705,000.

In May 2006, in conjunction with and as compensation for activities related to a licensing agreement and under a Finder’s Agreement, the Company issued warrants to purchase 250,000 shares of its $0.0001 par value common stock, with an exercise price of $4.31 per share. The exercise of these warrants was conditioned on an event that occurred in January 2007 and, accordingly, the Company recorded a charge based on the warrants’ fair value determined at January 2007 of $433,750 (see Note 6).

See accompanying notes to condensed consolidated financial statements.

 

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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2007

(Unaudited)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS

The Company

Chelsea Therapeutics International, Ltd. (the “Company”) is a specialty pharmaceutical company focused on the acquisition, development and commercialization of innovative pharmaceutical products. The Company’s currently licensed compounds target a variety of prevalent medical conditions; particularly rheumatoid arthritis, psoriasis, cancer, other immunological disorders, neurogenic orthostatic hypotension and other autonomic disorders. The Company’s operating subsidiary, Chelsea Therapeutics, Inc., was incorporated in the State of Delaware on April 3, 2002 as Aspen Therapeutics, Inc., with the name changed in July 2004. In February 2005, Chelsea Therapeutics, Inc. merged with a wholly-owned subsidiary of our predecessor company, Ivory Capital Corporation, a Colorado public company with no operations. The Company reincorporated into the State of Delaware in July 2005, changing its name to Chelsea Therapeutics International, Ltd.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company and its operating subsidiary, which shall collectively be referred to as the “Company”. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results for the interim periods have been included. Operating results for the three and six months ended June 30, 2007 are not necessarily indicative of the results for the year ending December 31, 2007 or future periods. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K filed on March 12, 2007 and available on the website of the United States Securities and Exchange Commission (www.sec.gov). The accompanying condensed consolidated balance sheet as of December 31, 2006 has been derived from the audited balance sheet as of that date included in the Form 10-K.

Since inception, the Company has focused primarily on organizing and staffing, negotiating in-licensing agreements with its partners, acquiring, developing and securing its proprietary technology, participating in regulatory discussions with the FDA, the EMEA and other regulatory agencies and undertaking pre-clinical trials and clinical trials of its product candidates. The Company is a development stage company and has generated no revenue since inception.

The Company has sustained operating losses since its inception and expects such losses to continue over the next several years. Management plans to continue financing the operations with a combination of equity issuances and debt arrangements. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs, or cease operations.

Basis of Consolidation

All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments. Management bases estimates on its historical experience and on various other factors that it believes are reasonable under the

 

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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2007

(Unaudited)

 

circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results might differ from these estimates under different assumptions or conditions.

NOTE 2 STOCK-BASED COMPENSATION

The Company has a stock incentive plan (the “Plan”) under which incentive stock options may be granted. On April 26, 2007, the Board of Directors approved an increase of 1,500,000 shares in the number of shares available for grant under the Plan, increasing the shares available for grant to 4,145,000 shares of the Company’s $0.0001 par value common stock. The increase was approved by stockholders at the Company’s annual meeting of stockholders held on June 8, 2007. Grants under the Plan may be made to employees (including officers), directors, consultants, advisors or other independent contractors who provide services to the Company or its subsidiary.

There were no stock options granted to employees and non-employee directors during the three months ended June 30, 2007. During the three months ended June 30, 2006, the Company granted stock options to employees and non-employee directors for the purchase of 167,585 shares of its $0.0001 par value common stock. These grants had a weighted average exercise price of approximately $3.90 per share, a weighted average grant date fair value of approximately $1.62 per share and an intrinsic value of approximately $0.5 million as of June 30, 2007.

During the six months ended June 30, 2007 and 2006, the Company granted stock options to employees and non-employee directors for the purchase of 630,500 and 618,085 shares of its $0.0001 par value common stock, respectively. The grants made during the six months ended June 30, 2007 had a weighted average exercise price of approximately $5.65 per share, a weighted average grant date fair value of approximately $3.35 per share and aggregate intrinsic value as of June 30, 2007 of approximately $0.7 million. The grants made during the six months ended June 30, 2006 had a weighted average exercise price of $3.59 per share, a weighted average grant date fair value of approximately $1.47 per share and aggregate intrinsic value as of June 30, 2007 of approximately $1.9 million.

Each option granted to employees and non-employee directors during the three and six months ended June 30, 2007 and 2006 vest as to 25% of the shares on the first, second, third and fourth anniversary of the vesting commencement date. Following the vesting periods, options are exercisable until the earlier of 90 days after the employee’s termination with the Company or the ten-year anniversary of the initial grant, subject to adjustment under certain conditions.

The Company utilizes the Black-Scholes-Merton valuation model for estimating the fair value of the stock options granted. The table below summarizes the assumptions utilized in estimating the fair value of the stock options granted for the three and six months ended June 30, 2007 and 2006:

 

     For the three months ended June 30,    For the six months ended June 30,
     2007    2006    2007    2006

Risk-free interest rate

   n/a    5.12%    4.76% to 4.82%    4.31% to 5.12%

Expected life of options

   n/a    5 years    5 years    5 years

Expected dividend yield

   n/a    0%    0%    0%

Expected volatility

   n/a    37.66%    66.01%    37.66%

Estimated forfeitures

   n/a    0%    0%    0%

The Company recorded compensation expense for the three and six months ended June 30, 2007 of $214,886 and $385,705, respectively and compensation expense for the three and six months ended June 30, 2006 of $67,512 and $122,054, respectively, in conjunction with option grants made to employees and non-employee directors. As of June 30,

 

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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2007

(Unaudited)

 

2007, the Company had total unrecognized compensation expense related to options granted to employees and non-employee directors of approximately $2.7 million, which will be recognized over a remaining average period of 3.1 years.

In November 2005, the Company granted a stock option to a third-party contractor to purchase 5,000 shares of its $0.0001 par value common stock at an exercise price of $3.10 per share. The option vested 25% at each calendar quarter end date from the date of issuance. For the three months ended June 30, 2006, based on the fair value of these options, the Company recorded a reduction in compensation expense of $3,213 and for the six months ended June 30, 2006 recorded total compensation expense of $4,074.

As of June 30, 2007, there were 2,251,040 options outstanding under the Plan with a weighted average remaining contractual life of 8.43 years, a weighted average exercise price of approximately $3.56 per share and an intrinsic value of approximately $3.5 million. Also, options for 741,956 shares had vested and were exercisable at June 30, 2007 with a weighted average remaining contractual life of 7.67 years, a weighted average exercise price of approximately $2.20 per share and an intrinsic value of approximately $3.3 million. During the three and six months ended June 30, 2007, options for 12,000 shares were exercised with a weighed average exercise price of approximately $0.03 per share and an aggregate intrinsic value as of the date of exercise of approximately $63,000. During the three and six months ended June 30, 2006, options for 78,683 shares were exercised with a weighted average exercise price of approximately $0.06 per share and an aggregate intrinsic value as of the dates of exercise of approximately $0.3 million.

NOTE 3 LOSS PER SHARE

Basic net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. For the periods presented, basic and diluted net loss per common share are identical. Potentially dilutive securities from stock options and stock warrants would be antidilutive as the Company incurred a net loss. The number of shares of common stock potentially issuable at June 30, 2007 and 2006 upon exercise or conversion that were not included in the computation of net loss per share totaled 6,651,541 and 5,266,782 shares, respectively.

NOTE 4 PRIVATE PLACEMENT OF COMMON STOCK

On March 22, 2007, the Company raised gross proceeds of approximately $12.5 million through the sale of 2,648,306 shares of its $0.0001 par value common stock plus warrants for the purchase of 794,492 shares of its $0.0001 par value common stock (the “2007 Placement”). The aggregate fair value of these warrants was approximately $1,281,000. The warrants permit the holders to purchase the underlying common shares at $5.66 each and are exercisable in whole at any time, or in part from time to time, for five years from the date of issuance. The exercise of the warrants must be in cash unless there is no effective registration statement covering the resale of the common stock underlying the warrants, in which case, cashless exercise is permitted. The warrants are redeemable at par value at the Company’s option in the event that the Company’s volume weighted-average closing bid price of its common stock is greater than $12.00 per share for any twenty (20) consecutive trading days provided that the Company gives sixty (60) business days’ written notice to the holders and simultaneously calls all warrants on the same terms. Under the terms of the 2007 Placement, the Company agreed to and filed a registration statement with the SEC within 30 days of the closing of the 2007 Placement.

In connection with this offering, the Company paid commissions and other offering-related expenses of approximately $1.0 million in cash.

NOTE 5 EXERCISE OF COMMON STOCK WARRANTS

On February 1, 2007, a warrant holder exercised the right to purchase 9,431 shares of the $0.0001 par value common stock of the Company pursuant to a cashless exercise whereby the Company, in a net share settlement, issued 4,928 shares of

 

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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2007

(Unaudited)

 

its $0.0001 par value common stock to the warrant holder based on the excess of the market price of $6.05 per share over the exercise price of $2.88 per share.

On June 6, 2007, a warrant holder exercised the right to purchase 60,000 shares of the $0.0001 par value common stock of the Company on a cash basis at an exercise price of $4.20 per share. The Company recorded aggregate cash proceeds of $252,000 in conjunction with this transaction.

NOTE 6 LICENSING AGREEMENTS

In March 2004, the Company entered into a license agreement with Dr. M. Gopal Nair, Ph.D., of the University of South Alabama College of Medicine, for the rights to use, produce, distribute and market products derived from an invention by Dr. Nair, claimed in US Patent # 5,912,251, entitled “metabolically inert anti-inflammatory and antitumor antifolates”, designated by Chelsea as CH-1504 and related compounds. The license provides the Company exclusive, worldwide (excluding India) rights for CH-1504. The Company made an upfront payment in May 2004 of $150,000 and milestone payments as required by the agreement of $100,000 each in March 2006 and 2005. In April 2007, the Company issued 26,643 shares of its $0.0001 par value common stock, subject to trading restrictions, at a value of approximately $5.63 per share, in settlement of the $150,000 annual milestone payment liability recorded at March 31, 2007. The Company is required to make additional payments upon the achievement of specific development and regulatory approval milestones. The Company is also obligated to pay royalties under the agreement until the later of the expiration of the applicable patent or the applicable last date of market exclusivity after the first commercial sale, on a country-by-country basis. Future potential milestone and anniversary payments total approximately $1,750,000 and there are no minimum royalties required under the agreement.

In May 2006, the Company entered into an agreement with Dainippon Sumitomo Pharma Co., Ltd. (“DSP”) for a worldwide, exclusive, sub-licensable license and rights to certain intellectual property and proprietary information (the “DSP Agreement”) relating to L-threo-3,4-dihydroxyphenylserine (“L-DOPS” or “droxidopa”) including, but not limited to all information, formulations, materials, data, drawings, sketches, designs, testing and test results, records and Regulatory Documentation. As consideration for these rights, the Company paid DSP $100,000 and issued 63,131 shares of its $0.0001 par value common stock, with a value of approximately $4.35 per share, or $274,621. As additional consideration, the Company agreed to pay DSP and or its designees (1) royalties on the sales should any compound be approved for commercial sale; and (2) milestone payments, payable upon achievement of milestones as defined in the DSP Agreement. During the six months ended June 30, 2007, the Company made a milestone payment under the agreement of $250,000 and has remaining future milestone payments, subject to the Company’s right to terminate the license agreement, totaling $3.75 million. The Company and DSP have also initiated, and the Company has agreed to fund, activities focused on modifying the manufacturing capabilities of DSP in order to expand capacity and comply with regulations and requirements of the United States Food and Drug Administration. Such activities are currently ongoing and shall continue over a two-year period. Based on work performed by DSP as of June 30, 2007, the Company had recorded an accrued liability of approximately $1.5 million.

In conjunction with and as consideration for activities related to the execution of the DSP Agreement, the Company entered into a Finder’s Agreement with Paramount BioCapital, Inc. (“Paramount”). In May 2006, pursuant to the Finder’s Agreement, the Company issued warrants for the purchase of 250,000 shares of its $0.0001 par value common stock at an exercise price of $4.31 per share. The exercise of these warrants is conditioned on an event that occurred in January 2007 and, accordingly, the Company recorded a charge for the fair value of the warrants at January 2007 of $433,750. The Company utilized the Black-Scholes-Merton valuation model for estimating the fair value of the warrants at the date the condition lapsed, based on a risk-free interest rate of 4.79%, an expected life of three (3) years, an expected dividend yield of 0%, an expected volatility of 66.01% and no estimated forfeitures. As additional consideration, the Company agreed to (1) make future milestone payments, upon achievement of milestones as defined in the Finder’s Agreement, to Paramount; (2) pay royalties on sales should any licensed compound become available for commercial sale; and (3) compensate a stated third-party consultant for services rendered in the evaluation of the transaction with DSP. During the six months ended June

 

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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2007

(Unaudited)

 

30, 2007, the company made a milestone payment to Paramount under the Finder’s Agreement of $35,000 and has remaining future milestone payments under the Finder’s Agreement of $150,000.

NOTE 7 DEVELOPMENT AND COMMERCIALIZATION AGREEMENT

Effective May 2006, the Company entered into a development and commercialization agreement (the “Development Agreement”) with Active Biotech AB to co-develop and commercialize the I-3D portfolio of orally active, Dihydroorotate dehydrogenase (DHODH) inhibiting compounds for the treatment of autoimmune diseases and transplant rejection. Under the terms of the license and co-development agreement, an initial payment of $1.0 million was made to AB during the quarter ended June 30, 2006 with such funds utilized to cover the initial costs of research and development efforts jointly approved by both parties. During the three and six months ended June 30, 2007, the Company expensed approximately $0.2 million and $0.4 million, respectively, pursuant to its agreement with Active Biotech. The Company had also recorded a net accrued liability of approximately $0.1 million at June 30, 2007. In addition to sharing development costs, both the Company and Active Biotech will pay the other partner royalty payments on sales in their respective markets. Active Biotech will also receive certain defined milestone payments related to clinical development and receipt of revenue from commercialization of the compounds. Unless terminated by either party with six months written notice, the agreement shall remain in effect until the earlier of (1) the expiration of the last to expire patent rights indicated under the Development Agreement or (2) fifteen (15) years from the date of the first commercial sale of the product. As of June 30, 2007, remaining future milestone payments, subject to the Company’s right to terminate the Development Agreement, totaled $15.5 million.

NOTE 8 SUBSEQUENT EVENTS

In July 2007, various warrant holders exercised rights to purchase 90,241 shares of the $0.0001 par value common stock of the Company, with an average exercise price of approximately $2.90 per share, pursuant to cashless exercises whereby the Company, in net share settlements, issued 53,948 shares of its $0.0001 par value common stock to the various warrant holders based on the excess of the average market price on the dates of exercise of approximately $7.21 per share over the average exercise price.

 

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Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The statements contained in this Quarterly Report on Form 10-Q that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. We intend that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements that reflect our current views with respect to future events and financial performance. We use words such as we “expect,” “anticipate,” “believe,” and “intend” and similar expressions to identify forward-looking statements. A number of important factors could, individually or in the aggregate, cause actual results to differ materially from those expressed or implied in any forward-looking statement.

Overview

Since inception we have focused primarily on organizing and staffing our company, negotiating in-licensing agreements with our partners, acquiring, developing and securing our proprietary technology, participating in regulatory discussions with the FDA, the EMEA and other regulatory agencies and undertaking pre-clinical trials and clinical trials of our product candidates. We are a development stage company and have generated no revenue since inception. We do not anticipate generating any revenue until and unless we successfully obtain approval from the FDA or equivalent foreign regulatory bodies to begin selling our pharmaceutical candidates. However, developing pharmaceutical products is a lengthy and expensive process. Even if we do not encounter unforeseen safety issues or timing or other delays during the course of developing our currently licensed product candidates, we would not anticipate receiving regulatory approval to market such products until at least 2009. Development expenses have and are being funded with proceeds from private equity financings completed in December 2004, February 2006 and March 2007. To the extent we are successful in acquiring additional product candidates for our development pipeline and as we move our products into more extensive clinical trials, our need to finance research and development costs will continue to increase. Accordingly, our success depends not only on the safety and efficacy of our product candidates, but also on our ability to finance the development of the products.

Critical Accounting Policies

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are more fully described in Note 1 to the financial statements. The following accounting policies are critical in fully understanding and evaluating our reported financial results.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements as well as the reported revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments. Management bases estimates on historical experience and on various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results might differ from these estimates under different assumptions or conditions.

Research and Development Expense. Research and development expenditures are expensed as incurred. We often contract with third parties to facilitate, coordinate and perform agreed upon research and development activities. To ensure that research and development costs are expensed as incurred, we measure expense based on work performed for the underlying contract, typically utilizing a percentage-of-completion approach, and record prepaid assets or accrue expenses on a monthly basis for such activities based on the measurement of liability from expense recognition and the receipt of invoices.

These contracts typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain milestones. In the event that we prepay fees for future milestones, we record the prepayment as a prepaid asset and amortize the asset into research and development expense over the period of time the contracted research and development services are performed. Most fees are incurred throughout the contract period and are expensed based on their percentage of completion at a particular date.

 

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These contracts generally include pass through fees. Pass through fees include, but are not limited to, regulatory expenses, investigator fees, travel costs, and other miscellaneous costs including shipping and printing fees. Because these fees are incurred at various times during the contract term and they are used throughout the contract term, we record a monthly expense allocation to recognize the fees during the contract period. Fees incurred to set up the clinical trial are expensed during the setup period.

Costs related to the acquisition of technology rights and patents for which development work is still in process are expensed as incurred and considered a component of research and development costs.

Accounting for Stock-Based Compensation. We account for our employee stock options and warrants using the fair value method as prescribed in Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), Share-based Payment. SFAS 123R defines a fair value based method of accounting for employee stock options or similar equity instruments. In determining the fair value of the equity instrument, we considered, among other factors, (i) the risk-free interest rate, (ii) the expected life of the options granted, (iii) the anticipated dividend yield, (iv) the estimated future volatility of the underlying shares and (v) anticipated future forfeitures. To determine the risk-free interest rate, we utilized the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected term of our awards. We estimated the expected life of the options granted based on anticipated exercises in future periods assuming the success of our business model as currently forecasted. The expected dividends reflect our current and expected future policy for dividends on our common stock. To determine the expected stock price volatility for our stock options, we examined historical volatilities for industry peers closely related to the current status of our business, but with sufficient trading history to be able to determine volatility. Utilizing a weighted average calculation to account for the limited price history of our stock, we utilized the historical volatility of our stock price in combination with the historical volatility of the industry peers selected to determine an appropriate volatility factor. We will continue to analyze the expected stock price volatility and expected term assumption at each grant date as more historical data for our common stock becomes available. Given the limited service period for our current employees and the senior nature of the roles for those employees, we currently estimate that we will experience no forfeitures for those options currently outstanding. Our results include non-cash compensation expense as a result of the issuance of stock option grants utilizing this method. We expect to record additional non-cash compensation expense in the future, which might be significant. Due to the limited amount of historical data available to us, particularly with respect to stock-price volatility, employee exercise patterns and forfeitures, actual results could differ from our assumptions.

Results of Operations

Three Months Ended June 30, 2007 and 2006

The table below sets forth, for the periods indicated, certain items in our consolidated statements of income and other pertinent financial and operating data (in thousands).

 

     For the three months ended    $
Increase
   %
Change
 
     June 30,
2007
   June 30,
2006
     

Research and development expense

   $ 2,156    $ 1,435    $ 721    50 %

Sales and marketing expense

     603      66      537    814 %

General and administrative expense

     723      590      133    23 %

Interest income

     318      248      70    28 %

Research and development expenses for each period consisted primarily of expenses incurred for compensation and related expenses and amounts paid to outside contract manufacturing and contract research organizations relating to our product candidates. Although, as a percentage of operating expenses, research and development costs decreased to 62% from 69% for the three months ended June 30, 2007 and 2006, respectively, actual research and development spending increased. During the three months ended June 30, 2007, we recorded expenses related to our manufacturing, Phase I and Phase II activities for CH-1504 as well as costs for our manufacturing and pre-clinical activities for additional antifolates, droxidopa and a portfolio of therapeutics in partnership with Active Biotech. During the three months ended June 30, 2007, such expenses were approximately $1.5 million, an increase of approximately $1.0 million when compared to expenses of a

 

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similar nature for the three months ended June 30, 2006. Licensing costs decreased when comparing the three months ended June 30, 2007 and 2006 as we recorded no expense for licensing during the three months ended June 30, 2007. We recorded approximately $0.4 of licensing costs during the three months ended June 30, 2006, primarily for droxidopa. There were also increases in compensation and related expenses and travel costs during the three months ended June 30, 2007 when compared to the three months ended June 30, 2006 that contributed to the increase in research and development costs.

Sales and marketing expenses. We had no formalized selling activities for the three months ended June 30, 2007. Sales and marketing expenses are primarily the costs of business development activity and, during 2007, expenses incurred in the initiation and development of marketing and branding programs for droxidopa. Such costs include compensation and related costs, promotional activities, contractor expenses and certain legal expenses. The significant increase in sales and marketing expenses for the three months ended June 30, 2007 compared to June 30, 2006 is primarily related to approximately $0.4 million of costs for branding activities, investor symposium costs and non-advertising publication activities for droxidopa. Also contributing to the increase are increases in compensation and related expenses and higher legal expenditures, principally for intellectual property and patent activities, incurred during the three months ended June 30, 2007.

General and administrative expenses. General and administrative expenses focus on support of administrative activities and consisted primarily of compensation and related expenses, consulting and professional fees, travel costs, insurance and facility expenses. Contributing to the increase in general and administrative expenses for the three months ended June 30, 2007 compared to June 30, 2006 were increases in compensation and related expenses, travel costs and governmental fees and taxes, offset by decreases in legal fees and stock exchange fees.

Interest income. During the three months ended June 30, 2007, our cash available for investment had increased reflecting the gross proceeds of approximately $12.5 million received from our March 2007 financing. In addition, cash available for investment includes the remaining proceeds from our February 2006 financing after funding operations during 2006. Accordingly, interest earned on short-term, cash equivalent, liquid investments from cash on deposit increased for the three months ended June 30, 2007.

Six Months Ended June 30, 2007 and 2006

The table below sets forth, for the periods indicated, certain items in our consolidated statements of income and other pertinent financial and operating data (in thousands).

 

     For the six months ended            
     June 30,
2007
   June 30,
2006
   $
Increase
   %
Change
 

Research and development expense

   $ 5,323    $ 3,130    $ 2,193    70 %

Sales and marketing expense

     819      311      508    163 %

General and administrative expense

     1,372      1,093      279    26 %

Interest income

     515      393      122    31 %

Research and development expenses for each period consisted primarily of expenses incurred for compensation and related expenses, licensing fees and amounts paid to outside contract manufacturing and contract research organizations relating to our product candidates. As a percentage of operating expenses, research and development costs increased slightly to 71% from 69% for the six months ended June 30, 2007 and 2006, respectively. During the six months ended June 30, 2007, we continued our manufacturing, pre-clinical, Phase I and Phase II activities for CH-1504 as well as our manufacturing and pre-clinical activities for additional antifolates, droxidopa and a portfolio of therapeutics in partnership with Active Biotech. We also incurred additional licensing costs for CH-1504, licensing costs for droxidopa and an expense of approximately $0.4 million related to warrants for 250,000 shares of our common stock, dated May 2006, the vesting of which was conditioned on an event that occurred in January 2007. During the six months ended June 30, 2007, such expenses were approximately $4.2 million, an increase of approximately $2.0 million when compared to similar expenses for the six months ended June 30, 2006. Also contributing to the increase in research and development costs were increases in compensation and related expenses, travel costs and insurance expenses.

Sales and marketing expenses. We had no formalized selling activities for the six months ended June 30, 2007. Sales and marketing expenses are primarily the costs of business development activity and, during 2007, expenses incurred in the

 

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initiation and development of marketing and branding programs for droxidopa. Such costs include compensation and related costs, promotional activities, contractor expenses and certain legal expenses. The significant increase in sales and marketing expenses for the six months ended June 30, 2007 compared to June 30, 2006 is primarily related to approximately $0.4 million of costs for branding activities, investor symposium costs and non-advertising publication activities for droxidopa. Also contributing to the increase are increases in compensation and related expenses, offset by a decrease in legal expenditures.

General and administrative expenses. General and administrative expenses focus on support of administrative activities and consisted primarily of compensation and related expenses, consulting and professional fees, travel costs, insurance and facility expenses. Contributing to the increase in general and administrative expenses for the six months ended June 30, 2007 compared to June 30, 2006 were increases in compensation and related expenses, accounting fees and governmental fees and taxes, offset by decreases in legal fees, recruiting costs and stock exchange fees.

Interest income. During the six months ended June 30, 2007, our cash available for investment had increased reflecting the gross proceeds of approximately $12.5 million received from our March 2007 financing. In addition, cash available for investment includes the remaining proceeds from our February 2006 financing after funding operations during 2006. Accordingly, interest earned on short-term, cash equivalent, liquid investments from cash on deposit increased for the six months ended June 30, 2007.

Liquidity and Capital Resources

From inception to June 30, 2007, we have incurred an aggregate net loss of approximately $26.6 million, as a result of expenses similar in nature to those described above.

We have financed our operations since inception primarily through equity and debt financing. As of June 30, 2007, we had working capital of approximately $19.8 million and cash and cash equivalents of approximately $23.0 million. Cash on hand results from net proceeds from financing activities in March 2007, February 2006 and December 2004, offset by funds utilized for operating activities.

We have incurred negative cash flows from operations since inception. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development efforts, our clinical trials and our continuing efforts to secure in-licensing opportunities. Our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing. Such additional funds might not become available on acceptable terms, or at all, and there can be no assurance that any additional funding that we do obtain will be sufficient to meet our needs in the long term. From inception through June 30, 2007 we had losses of $26.6 million, and we anticipate losses in the range of $21 million to $46 million during the 12 to 18 months commencing July 2007.

Actual losses will depend on a number of considerations, including:

 

   

the pace and success of pre-clinical development and clinical trials for our droxidopa, CH-1504 and other product candidates;

 

   

the rates charged by contract research organizations and clinical investigators;

 

   

obtaining European Orphan Drug approval for droxidopa from the EMEA;

 

   

discussions with regulatory agencies concerning the design of our clinical trials;

 

   

possible out-licensing of certain of our product candidates;

 

   

in-licensing and development of additional product candidates;

 

   

the number and scope of our research programs;

 

   

the costs involved in prosecuting and enforcing patent claims and other intellectual property rights;

 

   

implementing additional internal systems and infrastructure; and

 

   

hiring additional personnel.

We have based our estimate on assumptions that might prove to be incorrect. Potential sources of financing include strategic relationships, public or private sales of equity or debt and other sources. We might seek to access the public or private equity markets when and if conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time, and it is uncertain whether additional funding will be available when we need it

 

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on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we might be unable to carry out our business plan. As a result, we might have to significantly delay certain activities or limit our operations and our business, financial condition and results of operations would be materially harmed.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Due to the nature of our short-term investments and our lack of material debt, we have concluded that we face no material market risk exposure. Therefore, no quantitative tabular disclosures are required.

 

Item 4. Controls and Procedures

(a) Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed only to provide reasonable assurance that they will meet their objectives. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

(b) No change in our internal control over financial reporting occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We will be subject to the internal control requirements of Section 404 of the Sarbanes-Oxley Act of 2002 beginning with our Annual Report on Form 10-K for fiscal year 2007.

 

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PART II – OTHER INFORMATION

 

Item 4. Submission of Matters to a Vote of Security Holders

 

  (a) On June 8, 2007, the Company held its Annual Meeting of Stockholders.

 

  (b) At that Annual Meeting, Simon Pedder, Michael Weiser, Kevan Clemens, Neil Herskowitz, Johnson Y.N. Lau and Jason Stein were re-elected for one-year terms as members of the Board of Directors.

 

  (c) In total, three matters were voted on at the Annual Meeting: (1) the re-election of the six directors as described in item (b) above; (2) the approval of an amendment of the Company’s 2004 Stock Plan; and (3) the ratification of J.H. Cohn, LLP as the Company’s independent registered public accounting firm for 2007. A tabulation for each matter is as follows:

 

  1) The stockholders elected the following directors to serve for the ensuing year and until their successors are elected by the following votes:

 

     FOR    WITHHELD

Simon Pedder

   15,200,490    111

Michael Weiser

   15,095,141    105,460

Kevan Clemens

   14,020,568    1,180,033

Neil Herskowitz

   14,663,477    537,124

Johnson Y. N. Lau

   14,020,568    1,180,033

Jason Stein

   14,118,280    1,082,321

 

  2) The stockholders approved an amendment to the Company’s 2004 Stock Plan increasing the number of shares of common stock reserved for issuance thereunder from 2,645,000 to 4,145,000 shares as follows:

 

FOR

   AGAINST    ABSTAIN    BROKER NON-VOTES

10,229,332

   2,744,405    18,687    2,208,177

 

  3) The stockholders ratified the appointment of J. H. Cohn, LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2007 as follows:

 

FOR

     AGAINST      ABSTAIN   

BROKER NON-VOTES

15,200,491

   -0-    110   

 

Item 6. Exhibits

 

Exhibit

Number

 

Description of Document

   Registrant’s
Form
   Dated    Exhibit
Number
   Filed
Herewith
31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.             X
31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.             X
32.1   Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.             X
32.2   Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.             X

 

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SIGNATURES

In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Chelsea Therapeutics International, Ltd.
Date: August 6, 2007   By:  

/s/ J. Nick Riehle

    J. Nick Riehle
    Vice President, Administration and
    Chief Financial Officer

 

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