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| CGRB > SEC Filings for CGRB > Form 10KSB on 2-Apr-2007 | All Recent SEC Filings |
2-Apr-2007
Annual Report
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this Annual Report. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under "Risk Factors" in Item 1 of this Annual Report, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We are a Los Angeles, California based development stage biopharmaceutical company focused on the acquisition, development and commercialization of innovative products to enhance cancer care. We aim to acquire proprietary rights to these products, by license or otherwise, fund their research and development and bring the products to market. Since our inception in May 2003, our efforts and resources have been focused primarily on acquiring and developing our pharmaceutical technologies, raising capital and recruiting personnel. As a development stage company, we have had no product sales to date and we will not receive any product sales until we receive approval from the FDA or equivalent foreign regulatory bodies to begin selling our pharmaceutical candidates. Developing pharmaceutical products, however, is a lengthy and very expensive process. Assuming we do not encounter any unforeseen safety issues during the course of developing our product candidates, we do not expect to complete the development of a product candidate until approximately 2011.
Currently, a large portion of the development expenses have related to our lead product candidate, CB-7630. As we proceed with the clinical development of CB-7630 and as we further develop CB-3304 and CB-1089, our second and third product candidates, respectively, our research and development expenses will further increase. To the extent we are successful in acquiring additional product candidates for our development pipeline, our need to finance further research and development will continue increasing. 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. Our major sources of working capital have been proceeds from various private financings, primarily private sales of our common stock and other equity securities.
On April 3, 2006, SRKP Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of SRKP 4, Inc., a Delaware corporation ("SRKP"), merged with and into us, with Cougar remaining as the surviving corporation and a wholly owned subsidiary of SRKP. Cougar stockholders received, in exchange for all of our outstanding shares of capital stock, shares of capital stock of SRKP representing 100% of the outstanding capital stock of SRKP, on a fully-diluted basis, after giving effect to the merger and a redemption, completed contemporaneously with the closing of the merger, of all shares of SRKP capital stock held by SRKP's former stockholders immediately prior to the merger. In addition, at the time of effectiveness of the merger, the board of directors of SRKP was reconstituted, such that the directors of SRKP immediately prior to the merger resigned and were replaced by the directors of Cougar immediately prior to the merger. Further, upon the effective time of the merger, the business of SRKP was abandoned and our business plan adopted. The transaction was therefore accounted for as a reverse acquisition with Cougar as the acquiring party and SRKP as the acquired party. Accordingly, when we refer to our business and financial information relating to periods prior to the merger, we are referring to the business and financial information of Cougar, unless otherwise indicated.
Research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for manufacturing, regulatory consulting and clinical trial monitoring services, fees paid to acquire licenses to drug compounds, and other expenses relating to the manufacture, development, testing and enhancement of our product candidates. We expense our research and development cost as they are incurred.
General and administrative expenses consist primarily of salaries and related personnel costs, professional fees, business insurance, rent, general legal activities, and other corporate expenses.
Our results include non-cash compensation expense as a result of the issuance of stock and stock option grants. Prior to January 1, 2006, we accounted for stock-based employee compensation arrangements using the intrinsic method in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and complied with the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). As the exercise price of our employee stock options was equal to the fair value of the underlying common stock on the date of grant, the options had no intrinsic value and we did not record any compensation expense. On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment," and began to record compensation expense for all employee stock options based on the fair value of the options on the grant date over the related service period. We were not required to adjust our financial statements for prior periods although we are recording charges related to options granted prior to January 1, 2006, on a prospective basis. Compensation for options granted to consultants for all periods has been determined in accordance with SFAS No. 123 also based on the fair value of the equity instruments issued. The expense is included in the respective categories of expense in the statement of operations. We expect to record additional non-cash compensation expenses in the future, which may be significant.
Results of Operations
Years Ended December 31, 2006 and 2005
General and administrative expenses: For the year ended December 31, 2006, general and administrative expenses were $3,926,795 compared to $1,266,620 for the year ended December 31, 2005. This increase of approximately $2,660,000 is primarily attributable to increases in employee stock based compensation of approximately $799,800, consulting fees of approximately $714,900, audit fees of approximately $297,600, legal fees of approximately $258,300, rent expense of approximately $132,500, board of directors expense of approximately $107,300, recruiting expense of approximately $101,500, additional franchise tax fees of approximately $64,200, and an increase in insurance expense of approximately $59,000. The increase in stock based compensation resulted primarily from the implementation of SFAS 123R, which requires share based payments to employees to be recorded at fair value and recognized over the requisite service period. Approximately $797,500 of the stock based compensation was for services rendered during 2006. Stock based compensation will continue to increase as additional stock options grants are awarded to current and future employees. However, this increase will not have an impact on our cash flow. The primary increase in consulting fees resulted from stock-based compensation for service rendered in the year ended December 31, 2006 and preliminary work on Sarbanes-Oxley compliance. Consulting expenses will remain high as we continue to implement the requirements of Sarbanes-Oxley. The increase in audit fees was a result of expediting the year-end audit, and review of SEC filings related to our equity placement and the reverse merger noted above as well as the review of SEC filings related to being a public company in 2006 and not in 2005. The increased legal fees are associated with work on the reverse merger and review of SEC filings. During 2006 we implemented a Board of Directors compensation plan resulting in expenses of approximately $107,300 of which approximately $70,800 represent stock-based compensation. In April 2006, we moved our corporate offices to our current location and are currently leasing approximately 7,300 square feet of office space resulting in additional rent expense. We hired additional general and administrative personnel in 2006 and currently have two active searches for additional professionals resulting in an increase in recruiting fees. We experienced an increase in franchise taxes as result of our increased shareowner base resulting from the April 3, 2006 private equity placement and the increase in corporate assets resulting from the private placement. The increase in insurance cost reflects the increased insurance requirements of being a public company.
Research and development expenses: For the year ended December 31, 2006, research and development expenses were approximately $6,698,500 compared to $6,256,700 for the year ended December 31, 2005, representing an increase of approximately $441,800. During 2006, we experienced major increases in clinical trial expenses and third party manufacturing expenses. Clinical trial expenses increased approximately $1,127,000 as clinical trials were initiated at two sites. This cost will continue to increase as our product candidates progress through the various phases of clinical trials. Third party manufacturing expense increased
approximately $715,600 to support the clinical trials that were initiated in 2006. As the number of clinical trials expands, manufacturing cost will continue to increase. With the initiation of clinical trials during 2006, our cost for pre-clinical testing decreased approximately $335,300 compared to 2005. Third party regulatory affairs/quality assurance assistance expenses declined approximately $887,900 during 2006. The decline in regulatory affairs/quality assurance assistance from the 2005 expenditure level was the result of a lack of substantial assistance in writing protocols for product testing and in preparing IND submissions in 2006 as compared to the need for such assistance during 2005. We hired an experienced regulatory affairs/quality assurance individual during 2006, thus reducing the amount of assistance required from the outside vendor. Staffing increased from 1 person in 2005 to 4 full-time and 2 part-time individuals resulting in an increase in payroll and payroll related cost of approximately $75,000. The increase in personnel and on-going searches for additional positions to be filled in 2007 resulted in an increase in recruiting expenses of approximately $143,900. We anticipate hiring at least 8 additional individuals during 2007. Licensing fees decreased approximately $270,000 from 2005 as no new products were licensed during 2006 compared to one product during 2005. Stock based compensation for consultants decreased approximately $214,900 reflecting changes in valuation assumptions. We acquired approximately $85,600 of software to support the on-going and future clinical trials.
Interest income: For the year ended December 31, 2006, we recognized approximately $1,244,400 in interest income compared to approximately $14,300 of interest income for the same period last year. The increase is attributed to the proceeds of the private placement being placed in an asset management account.
Interest expense: For the year ended December 31, 2006, interest expense was approximately $1,012,700. For the same period last year interest expense was approximately $299,200. The interest expense for the years ended December 31, 2006 and 2005 includes a non-cash charge for amortization of note discounts of approximately $377,000 and $110,100, respectively. The note discounts were associated with the promissory notes issued in June 2005 and convertible notes issued in November 2005 and January 2006. During the year ended December 31, 2006, we recorded a favorable charge to interest expense for the revaluation of the outstanding warrants classified as liabilities of approximately $69,000 compared to an unfavorable charge of approximately $20,000 in 2005. With the conversion of promissory and convertible notes into equity in April 2006, the remaining balance of the note discounts of approximately $332,500 was expensed to interest expense and variable accounting for the warrants was no longer required. Interest on the promissory and convertible notes of approximately $80,000 and $51,400 was recorded for the years ended December 31, 2006 and 2005, respectively. Interest expense for 2006 also includes non-cash charges for amortization of debt issuance costs of approximately $613,000 compared to $89,600 for 2005. Interest on the credit facility opened in October 2005 of approximately $13,000 and $10,100 was recorded for the years ended December 31, 2006 and 2005, respectively. The year ended December 31, 2005, includes interest on trade accounts payable of approximately $18,100 which did not occur in 2006.
Other expense: Contemporaneously with the closing of the merger, SRKP redeemed an aggregate of 2,700,000 shares of its common stock from its stockholders in consideration of an aggregate cash payment of $200,000. This transaction was considered as a capital transaction in substance, rather than a business combination, resulting in a charge of $200,000 for consideration paid. We incurred approximately $1,228,900 of liquidated damages in 2006 as a registration rights penalty for not having the resale of certain shares of common stock issued in our April 2006 private placement offering registered within 180 days of the completion of the offering. A majority of the stockholders entitled to receive a liquidated damages payment agreed to accept stock in lieu of cash for such liquidated damages. Effective February 2, 2007, our registration statement was declared effective and our common stock began trading on the OTCBB. In addition we were obligated to pay additional liquidated damages through February 2, 2007 of approximately $481,200.
Liquidity and Capital Resources
The Company reported a net loss of $11,861,384 and negative cash flow from operating activities of $9,166,052 for the year ended December 31, 2006. The net loss from date of inception, May 14, 2003 to December 31, 2006 amounted to $23,211,233.
We have financed our operations since inception primarily through equity and debt financing. During the year ended December 31, 2006, we had a net increase in cash and cash equivalents of $13,089,047. This increase resulted from net cash provided by financing activities of $39,051,742, substantially all of which was derived from our private placement offering of units of preferred and common stock which provided us with net proceeds of $37,251,520. The increase in cash provided by financing activities was reduced by net cash used in operating activities of $9,166,052 and net cash used in investing activities of $16,796,643 for the year ended December 31, 2006. Total cash resources as of December 31, 2006, including securities available for sale were $30,809,713 compared to $1,040,864 at December 31, 2005. The net cash used in operating activities includes a net loss of $11,861,384 adjusted for non-cash items of approximately $3,761,000, an increase in accounts payable and accrued expenses of approximately $13,300, and an increase in prepaid expenses and other assets of approximately $1,079,000. The major non-cash items were: stock based compensation for non-employees of $851,000, employee stock based compensation of $870,600, liquidated damages paid in stock of approximately $801,500, expensing of note issuance costs of $613,000, and expensing of note discounts of $377,000. The increase in prepaid expenses and other assets resulted from: progress payments for the manufacture of product for the clinical trials of approximately $823,700, progress payments in support of on-going clinical trials of approximately $275,200, and progress payments for a pre-clinical study of approximately $22,900. Also, since closing of the equity placement, we have maintained our accounts payable aging in line with vendor terms. The net cash used in investing activities is a result of purchasing securities available for sale of approximately $16,642,000 and the purchase of a phone system, computers and furniture of approximately $154,600 to support the move into our new office location and the addition of personnel.
Management believes that we will continue to incur losses for the foreseeable future and will need additional equity or debt financing or will need to generate revenue from licensing of our products or by entering into strategic alliances to sustain our operations until we can achieve profitability and positive cash flows from operating activities, if ever.
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 may not become available on acceptable terms 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. Through December 31, 2006, a significant portion of our financing has been through private placements of common and preferred stock and debt financing.
We will continue to fund operations from cash on hand and through the similar sources of capital previously described. We can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs. There can be no assurance that such capital will be available to us on favorable terms or at all. If we are unable to raise additional funds in the future on acceptable terms, or at all, we may be forced to curtail our desired development. In addition, we could be forced to delay or discontinue product development, and forego attractive business opportunities. Any additional sources of financing will likely involve the sale of our equity securities, which will have a dilutive effect on our stockholders.
Financings
On July 15, 2005, we entered into a credit facility with a commercial bank that allowed for borrowing under a line of credit of up to $1,000,000. The credit facility was guaranteed by Dr. Lindsay Rosenwald, one of our directors and the managing member of Horizon BioMedical Ventures, a significant stockholder. In return for such guaranty, we agreed to grant Dr. Rosenwald warrants to purchase a number of shares of our common stock determined based upon the amount of the credit facility that was drawn upon. Prior to terminating the credit facility in 2006, we utilized a maximum of $600,000 of the credit facility, and issued Dr. Rosenwald a five-year warrant to purchase 31,732 shares of common stock at an exercise price of $8.28 per share (as adjusted pursuant to the merger) in consideration of the guaranty. Using the Black-Scholes option pricing model, we recorded a debt issuance cost of approximately $91,000 for the value of the warrants. The model assumed a risk free rate of 4.33%, a five-year term, and stock volatility of 72%. The warrants are exercisable upon written notice of exercise
to us together with the payment of the exercise price. The warrants do not include any cashless exercise or redemption provisions. The warrants (and the common stock issuable upon exercise of the warrants) are not registered, and include restrictions upon transfer. We have no obligation to settle any exercise of the warrants in cash or registered shares; we intend to settle only in unregistered shares. We have provided the warrantholders piggyback registration rights relating to the resale of the common stock issuable upon exercise of the warrants.
On June 30, 2005, we issued unsecured promissory notes to six individuals, including Dr. Arie Belldegrun, a director, in the aggregate amount of $1,000,000. The Note issued to Dr. Arie Belldegrun totaled $675,000. In addition to the promissory notes, we issued the six individuals five-year warrants to purchase an aggregate of 52,887 shares of common stock at an exercise price of $8.28 per share (as adjusted pursuant to the merger). Of these warrants, warrants to purchase 35,699 shares of common stock were issued to the Belldegrun Children's Trust, a trust created for the benefit of Dr. Belldegrun's children, of which Dr. Belldegrun would be deemed a beneficial owner. The warrants issued to the noteholders were valued at approximately $131,000 using the Black-Scholes option pricing model and recorded as debt discount. The model assumed a risk-free rate of 4.2%, a five-year term and stock volatility of 72%. The warrants are exercisable upon written notice of exercise to the Company together with the payment of the exercise price. The warrants do not include any cashless exercise or redemption provisions. The warrants (and the common stock issuable upon exercise of the warrants) are not registered, and include restrictions upon transfer. We have no obligation to settle any exercise of the warrants in cash or registered shares; we intend to settle only in unregistered shares. We have also provided the warrantholder piggyback registration rights relating to the resale of the common stock issuable upon exercise of the warrants. Concurrent with the April 3, 2006 private placement, $950,000 of the notes and associated interest was converted into 22,012 shares of our common stock and 198,113 shares of our Series A Convertible Preferred. The remaining $50,000 note and associated interest was paid to the noteholder.
In two closings on November 23, 2005 and January 24, 2006, we sold an aggregate of $6,145,120 in aggregate principal amount of senior convertible notes, referred to herein as bridge notes, to certain institutional and individual accredited investors in a private placement transaction, referred to herein as the bridge offering. The bridge note holders received five-year warrants to purchase an aggregate of 148,460 shares of our common stock at a price of $8.28 per share (as adjusted pursuant to the merger). These warrants were valued at $669,303 using the Black-Scholes option pricing model and recorded as debt discount. The model assumed a five-year term, risk free rate of 4.3% and stock volatility of 72%. The warrants are exercisable upon written notice of exercise to the Company together with the payment of the exercise price. The warrants are redeemable at our option if our common stock is traded on the OTCBB, Nasdaq or a national securities exchange and the common stock has had an average closing price per share over a period of thirty consecutive calendar days equal to or greater than the exercise price of the warrants, as adjusted, which was initially $8.28, provided that, the common shares underlying the warrants must be registered for resale at the time of redemption. The warrants do not provide for cashless exercise. The warrants (and the common stock issuable upon exercise of the warrants) were not registered, and include restrictions upon transfer. We have no obligation to settle any exercise of the warrants in cash or registered shares; we intend to settle such exercises only in unregistered shares. We have, however, provided the holders of the warrants piggyback and demand registration rights relating to the resale of common stock issuable upon exercise of the warrant. Additionally, we issued warrants to purchase an aggregate of 74,221 shares of common stock at an exercise price of $8.28 per share to Paramount BioCapital, Inc., our placement agent, and its designees and paid commissions of approximately $430,000 and other offering-related expenses aggregating approximately $31,000 to Paramount BioCapital. These warrants were valued at approximately $212,500 using the Black-Scholes option pricing model and recorded as debt issuance cost. Dr. Lindsay A. Rosenwald, one of our directors and the managing member of Horizon BioMedical Ventures, LLC, a significant stockholder, is the Chairman and Chief Executive Officer of Paramount BioCapital, Inc. We have no obligation to settle any exercise of the placement warrants in cash or registered shares; we intend to settle such exercises only in unregistered shares however the warrants have a cashless exercise provision. We have, however, provided the holders of the warrants piggyback and demand registration rights relating to the resale of common stock issuable upon exercise of the placement warrant. The principal balance of $6,145,120, together with accrued and unpaid interest of approximately $89,000 thereon, was automatically converted into units of our
securities on April 3, 2006 at a price per share of $4.50, pursuant to the terms of such private placement offering. Accordingly, the holders of the bridge notes received an aggregate of 138,416 shares of common stock and 1,245,746 shares of preferred stock upon conversion (as adjusted pursuant to the merger). We have no obligation to settle any conversion of the preferred stock in registered shares; we intend to settle only in unregistered shares. The holders of the bridge securities are entitled to piggy back registration rights with respect to the shares of common stock issued or issuable upon conversion of preferred stock.
On April 3, 2006, immediately prior to the closing of the merger with SRKP, we completed a private placement offering whereby we raised gross proceeds of approximately $39,650,000 through the sale of 7,922,998 shares of preferred stock and 880,334 shares of common stock. Paramount BioCapital, Inc. and Cowen & Co. acted as placement agents in the offering. Each placement agent received a placement fee of approximately $1,387,750 and was issued a five-year warrant to purchase 440,172 shares of our common stock at an exercise price of $4.95 per share. The value of the warrants, which was determined using the Black-Scholes option pricing model, was approximately $2,400,000. The model assumed a risk-free interest rate of 4.78%, a five-year term and stock volatility of 72%. The warrants are exercisable upon written notice of exercise to the Company together with the payment of the exercise price or with a duly executed notice of cashless exercise. The warrants (and the common stock issued upon exercise of the warrants) are not registered and include restrictions upon transfer. We have no obligation to settle any exercise of the placement agent warrants in cash or registered shares; we intend to settle only in unregistered shares. Reimbursable expenses associated with the placement were approximately $76,000, $26,000 of which was reimbursed to Paramount. The Chairman and Chief Executive Officer of Paramount BioCapital, Inc. is Lindsay A. Rosenwald, M.D., one of our directors. Paramount BioCapital is an affiliate of Horizon BioMedical Ventures, LLC, of which Dr. Rosenwald is the managing member and which is one of our substantial stockholders. Additionally, on terms similar to that in the offering, we sold 13,322 shares of common stock and 119,895 shares of preferred stock (as adjusted pursuant to the merger) in consideration of cash in the amount of approximately $600,000 to Lindsay A. Rosenwald. Each share of preferred stock, designated as Series A Convertible Preferred Stock, is convertible, in whole or in part, at the option of the holder at any time into shares of our common stock initially on a one-for-one basis and at an initial conversion price of $4.50 per share. Additionally, any outstanding shares of preferred stock are subject to mandatory conversion into shares of our common stock if the price per share of common stock trades at or above 200% of the conversion price of the preferred stock (initially, $4.50) for a period of twenty consecutive trading days on any securities exchange, automated quotation system or any other over-the-counter market. The holders of the preferred stock have the rights under certain circumstances to demand redemption after the tenth anniversary of the original . . .
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