UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013 OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to __________
RETROPHIN, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 000-53293 | 27-4842691 | ||
|
(State or other jurisdiction of incorporation or organization) |
(Commission File No.) |
(I.R.S. Employer Identification No.) |
12255 El Camino Real, Suite 250, San Diego, CA 92130
(Address of Principal Executive Offices)
(760) 260-8600
(Issuer Telephone number)
(Former Name or Former Address if Changed Since Last Report)
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| Large accelerated filer | ¨ | Accelerated filer | þ |
| Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The number of shares of outstanding common stock, par value $0.0001 per share, of the Registrant as of June 30, 2015 was 35,072,757.
Explanatory Note
We are filing this amended Form 10-Q/A (“Form 10-Q/A”) to amend our Quarterly Report on Form 10-Q for the period ended September 30, 2013, originally filed with the Securities and Exchange Commission (the “SEC”) on November 13, 2013 (“Original Filing”), to restate our consolidated financial statements and related footnote disclosures for the period ended September 30, 2013.
Restatement Background
| (1) | In September 2013, the Company entered into a consulting agreement and release with an individual that had been an investor in an investment fund previously managed by Martin Shkreli (the “MSMB Entities”), the Company’s former chief executive officer, or that otherwise had financial dealings with Mr. Shkreli. The agreement provided for the issuance of a total of 331,500 shares of common stock of the Company. As its predominant purpose appears to have been to settle and release claims against the MSMB Entities or Mr. Shkreli personally, and not to provide meaningful and sustained consulting services to the Company, it was concluded that the Company should not treat this agreement as a consulting agreement. |
| (2) | As previously discussed in the Form 10-K for the year ended 2013, in the fourth quarter of 2013, we discovered that certain warrants issued to a placement agent in connection with our February 14, 2013 Private Placement Offering (“February Private Placement”) were not recorded and certain expenses were misstated in our condensed consolidated financial statements for the first, second, and third quarters of 2013. |
Impact on Financial Statements
| (1) | The Company previously recognized expense related to the stock issued pursuant to such consulting agreement over the term of such agreement. Had the Company accounted for this arrangement as a settlement, the Company would have recorded, as of the date of such agreement, an expense and a settlement liability related to the entire amount of the stock to be issued under such agreement. The settlement liability would have been revalued at each reporting period based on changes in the Company’s stock price until the stock had been entirely issued. |
| (2) | The Company misstated expenses related to our February Private Placement, certain accruals, consulting fees and changes in the fair value of the unrecorded warrants, which required liability classification. The adjustments necessary to reflect such issuances are reflected in the condensed consolidated financial statements included herein. |
Restatement of Other Financial Statements
In addition to this Form 10-Q/A, we are concurrently filing an amendment to our Annual Report on Form 10-K for the year ended December 31, 2013. We are filing the Form 10-K/A to restate our unaudited condensed consolidated financial statements and related financial information for the periods contained in those reports and to amend certain other items within those reports.
Limited Scope of Amendment
Except for the amendments described above, we have not materially modified or updated disclosures presented in the Original Filing in this amendment. Accordingly, this amendment does not reflect events occurring after the filing of the Original Filing or modify or update those disclosures affected by subsequent events. Information not affected by this amendment remains unchanged and reflects the disclosures made at the time the Original Filing was filed. Therefore, this amendment should be read in conjunction with any documents incorporated by reference therein and our filings made with the SEC subsequent to the Original Filing.
| 2 |
RETROPHIN, INC. AND SUBSIDIARY
Form 10Q/A
September 30, 2013
TABLE OF CONTENTS
| 3 |
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading “Risks Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2012 and under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K/A for the fiscal year ended December 31, 2012, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.
We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
| 4 |
RETROPHIN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2013 | December 31, 2012 | |||||||
| (As Restated) | ||||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 13,409,825 | $ | 11,388 | ||||
| Marketable securities, available-for-sale | 2,957,376 | - | ||||||
| Prepaid expenses and other current assets | 480,647 | 21,830 | ||||||
| Total current assets | 16,847,848 | 33,218 | ||||||
| Property and equipment, net | 38,437 | 23,790 | ||||||
| Patents pending | 23,793 | 18,093 | ||||||
| Due from affiliate | - | 137,547 | ||||||
| Security deposits | 177,547 | - | ||||||
| Deposits on license agreements | 2,250,000 | - | ||||||
| Technology license, net | 2,027,085 | 2,178,617 | ||||||
| Total assets | $ | 21,364,710 | $ | 2,391,265 | ||||
| Liabilities and Stockholders' Deficit | ||||||||
| Current liabilities: | ||||||||
| Technology license liability | $ | - | $ | 1,300,000 | ||||
| Accounts payable | 1,721,511 | 1,023,320 | ||||||
| Accrued expenses | 3,666,598 | 2,467,796 | ||||||
| Settlements payable | 1,691,400 | - | ||||||
| Note payable - related party | - | 884,764 | ||||||
| Investors' deposits | - | 100,000 | ||||||
| Due to related parties | 10,000 | 23,200 | ||||||
| Derivative financial instruments, at estimated fair value - warrants | 23,853,325 | - | ||||||
| Total current liabilities | 30,942,834 | 5,799,080 | ||||||
| Stockholders' Deficit: | ||||||||
| Preferred stock Series A $0.001 par value; 20,000,000 shares authorized; 0 issued and outstanding | - | - | ||||||
| Common stock $0.0001 par value; 100,000,000 shares authorized; 18,376,363 and 8,952,905 issued and outstanding, respectively | 1,838 | 895 | ||||||
| Additional paid-in capital | 46,219,593 | 30,203,402 | ||||||
| Deficit accumulated during the development stage | (55,644,721 | ) | (33,612,112 | ) | ||||
| Accumulated other comprehensive income | (154,834 | ) | - | |||||
| Total stockholders' deficit | (9,578,124 | ) | (3,407,815 | ) | ||||
| Total liabilities and stockholders' deficit | $ | 21,364,710 | $ | 2,391,265 | ||||
| 5 |
RETROPHIN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| For the | ||||||||||||||||||||
| period from | ||||||||||||||||||||
| March 11, | ||||||||||||||||||||
| 2011 | ||||||||||||||||||||
| (inception) | ||||||||||||||||||||
| For the three months ended | For the nine months ended | through | ||||||||||||||||||
| September 30, | September 30, | September | ||||||||||||||||||
| 2013 | 2012 | 2013 | 2012 | 30, 2013 | ||||||||||||||||
| (As Restated) | (As Restated) | (As Restated) | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Compensation and related costs - inclusive of share base compensation $28,519, $4,780,383, $70,189, $7,724,150 and $17,808,002 | $ | 478,741 | $ | 5,068,707 | $ | 1,767,195 | $ | 8,371,481 | $ | 22,127,948 | ||||||||||
| Professional fees - inclusive of share based compensation $362,126, $2,247,292, $571,370, $6,290,252 and $8,501,449 | 1,185,429 | 3,167,242 | 3,114,298 | 7,761,899 | 12,323,637 | |||||||||||||||
| Research and development - inclusive of share based compensation $72,888, $0, $109,571, $0 and $109,571 | 1,399,875 | 110,656 | 2,113,813 | 286,889 | 3,008,326 | |||||||||||||||
| Selling, general and administrative | 2,966,816 | 113,140 | 6,035,941 | 337,622 | 7,392,049 | |||||||||||||||
| Technology license fee | - | - | 100,000 | - | 1,800,000 | |||||||||||||||
| Total operating expenses | 6,030,861 | 8,459,745 | 13,131,247 | 16,757,891 | 46,651,960 | |||||||||||||||
| Operating loss | (6,030,861 | ) | (8,459,745 | ) | (13,131,247 | ) | (16,757,891 | ) | (46,651,960 | ) | ||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest income | 4 | 6,049 | 9 | 15,781 | 21,914 | |||||||||||||||
| Interest expense | - | (26,761 | ) | (41,563 | ) | (70,559 | ) | (147,480 | ) | |||||||||||
| Registration payment obligation income | 360,000 | - | 360,000 | - | 360,000 | |||||||||||||||
| Registration payment obligation expense | (360,000 | ) | - | (360,000 | ) | - | (360,000 | ) | ||||||||||||
| Realized gain on sale of marketable securities | 59,737 | - | 59,737 | - | 59,737 | |||||||||||||||
| Change in fair value of derivative instruments - warrants | (6,040,054 | ) | - | (8,915,672 | ) | - | (8,915,672 | ) | ||||||||||||
| Loss on transactions denominated in foreign currencies | - | (3,873 | ) | (11,260 | ) | |||||||||||||||
| Total other expense, net | (5,980,313 | ) | (20,712 | ) | (8,901,362 | ) | (54,778 | ) | (8,992,761 | ) | ||||||||||
| Net loss | $ | (12,011,174 | ) | $ | (8,480,457 | ) | $ | (22,032,609 | ) | $ | (16,812,669 | ) | $ | (55,644,721 | ) | |||||
| Net loss per common share, basic and diluted | $ | (0.78 | ) | $ | (2.42 | ) | $ | (1.72 | ) | $ | (5.55 | ) | ||||||||
| Weighted average common shares outstanding, basic and diluted | 15,365,631 | 3,510,415 | 12,797,714 | 3,027,468 | ||||||||||||||||
| Net loss | $ | (12,011,174 | ) | $ | (8,480,457 | ) | $ | (22,032,609 | ) | $ | (16,812,669 | ) | $ | (55,644,721 | ) | |||||
| Unrealized loss on marketable securities | (154,834 | ) | - | (154,834 | ) | - | (154,834 | ) | ||||||||||||
| Comprehensive Loss | $ | (12,166,008 | ) | $ | (8,480,457 | ) | $ | (22,187,443 | ) | $ | (16,812,669 | ) | $ | (55,799,555 | ) | |||||
| 6 |
RETROPHIN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM MARCH 11, 2011 (INCEPTION) THROUGH SEPTEMBER 30, 2013
| Common Stock | ||||||||||||||||||||||||||||
| Shares | Amount | Additional
paid in capital | Receivables due from Stockholder | Accumulated other comprehensive loss | Accumulated Deficit | Total Stockholders' deficit | ||||||||||||||||||||||
| Balance – March 11, 2011 (inception) | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||||
| Issuance of common shares | 1,608,300 | 161 | 24,839 | (25,000 | ) | - | - | - | ||||||||||||||||||||
| Issuance of common shares to founders in connection with the initial capital contribution | 50,000 | 5 | 95 | - | - | - | 100 | |||||||||||||||||||||
| Incentive shares granted – employees | 1,758,300 | 176 | (176 | ) | - | - | - | - | ||||||||||||||||||||
| Incentive shares granted – non employees | 381,000 | 38 | (38 | ) | - | - | - | - | ||||||||||||||||||||
| Incentive shares forfeited - employees | (45,835 | ) | (5 | ) | 5 | - | - | - | - | |||||||||||||||||||
| Share based compensation - employees | - | - | 1,724,967 | - | - | - | 1,724,967 | |||||||||||||||||||||
| Share based compensation – non employees | - | - | 254,332 | - | - | - | 254,332 | |||||||||||||||||||||
| Issuance of shares in connection with March 2011 private placement, net of fees of $66,061 | 253,750 | 25 | 658,914 | - | - | - | 658,939 | |||||||||||||||||||||
| Issuance of Series A preferred in connection with March 2011 private placement, net of fees of $1,367, recapitalization to common stock | 36,750 | 4 | 103,629 | - | - | - | 103,633 | |||||||||||||||||||||
| Loan made to stockholder | - | - | - | (10,000 | ) | - | - | (10,000 | ) | |||||||||||||||||||
| Net Loss | - | - | - | - | - | (3,268,256 | ) | (3,268,256 | ) | |||||||||||||||||||
| Balance - December 31, 2011 | 4,042,265 | $ | 404 | $ | 2,766,567 | $ | (35,000 | ) | $ | - | $ | (3,268,256 | ) | $ | (536,285 | ) | ||||||||||||
| Prior Issuance of Series A preferred in connection with January 2012 private place, net of fees of $61,677, exchanged to common stock | 326,963 | 33 | 1,806,644 | - | - | - | 1,806,677 | |||||||||||||||||||||
| Prior Issuance of Series A preferred in connection with May 2012 private place, net of fees of $12,275, exchanged to common stock | 470,764 | 47 | 1,668,979 | - | - | - | 1,669,026 | |||||||||||||||||||||
| Shares transferred to consultants by founder for services | 0 | 0 | 4,400,000 | - | - | - | 4,400,000 | |||||||||||||||||||||
| Shares transferred to employees by founder for services | 0 | 0 | 1,375,000 | - | - | - | 1,375,000 | |||||||||||||||||||||
| Shares issued in accordance with license agreement | 620,000 | 62 | 1,549,938 | - | - | - | 1,550,000 | |||||||||||||||||||||
| Shares outstanding at time of reverse merger date December 12, 2012 | 2,585,583 | 259 | 1,142 | - | - | - | 1,401 | |||||||||||||||||||||
| Incentive shares granted-employees | 866,180 | 86 | (86 | ) | - | - | - | - | ||||||||||||||||||||
| Incentive shares granted-non employees | 87,503 | 9 | (9 | ) | - | - | - | - | ||||||||||||||||||||
| Incentive shares forfeited-employees | (46,353 | ) | (5 | ) | 5 | - | - | - | - | |||||||||||||||||||
| Share based compensation-employees | - | - | 14,637,850 | - | - | - | 14,637,850 | |||||||||||||||||||||
| Share based compensation-non employees | - | - | 1,997,372 | - | - | - | 1,997,372 | |||||||||||||||||||||
| Loan made to stockholder | - | - | - | (372,900 | ) | - | - | (372,900 | ) | |||||||||||||||||||
| Receivable due from stockholder charged to compensation | - | - | - | 407,900 | - | - | 407,900 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (30,343,856 | ) | (30,343,856 | ) | |||||||||||||||||||
| Balance - December 31, 2012 | 8,952,905 | $ | 895 | $ | 30,203,402 | - | - | $ | (33,612,112 | ) | $ | (3,407,815 | ) | |||||||||||||||
| Incentive shares granted - employees (unaudited) | 135,000 | 14 | (14 | ) | - | - | - | - | ||||||||||||||||||||
| Share based compensation - consultants (unaudited) | 194,000 | 19 | 1,282,201 | 1,282,220 | ||||||||||||||||||||||||
| Share based compensation - employees (unaudited) | 179,760 | - | - | - | 179,760 | |||||||||||||||||||||||
| Share based compensation - non employees (unaudited) | (710,850 | ) | (710,850 | ) | ||||||||||||||||||||||||
| Incentive shares forfeited - employees (unaudited) | (20,833 | ) | (2 | ) | 2 | - | - | - | - | |||||||||||||||||||
| Incentive shares forfeited - non employees (unaudited) | (37,500 | ) | (4 | ) | 4 | - | - | - | - | |||||||||||||||||||
| Issuance of common stock in connection with January 2013 private placement at $3.00 per share, net of fees of $0 (unaudited) | 272,221 | 27 | 816,637 | - | - | - | 816,664 | |||||||||||||||||||||
| Issuance of common stock in connection with February 2013 private placement at $3.00 per share, net of fees of $928,986 and registration payment obligation of $360,000 (unaudited) | 3,045,929 | 305 | 2,440,889 | - | - | - | 2,441,194 | |||||||||||||||||||||
| Issuance of common stock in connection with August 2013 private placement at $4.50 per share, net of fees of $2,811,313 and payment made to February investors for inducement to participate in August financing of $2,238,681 (unaudited) | 5,531,401 | 553 | 10,639,270 | - | - | - | 10,639,823 | |||||||||||||||||||||
| Issuance of common stock in connection with payment made to February investors for inducement to participate in August financing, 271,222 shares at $4.50 per share and 20,685 shares at $5.00 per share (unaudited) | 291,907 | 29 | 1,323,894 | - | - | - | 1,323,923 | |||||||||||||||||||||
| Shares issued on behalf of related party | 6,000 | 1 | 44,399 | - | - | - | 44,400 | |||||||||||||||||||||
| Adjustment to existing shareholder (unaudited) | 5,333 | 1 | (1 | ) | - | |||||||||||||||||||||||
| Unrealized loss on marketable securities | - | - | - | - | (154,834 | ) | - | (154,834 | ) | |||||||||||||||||||
| Net loss (unaudited) | - | - | - | - | - | (22,032,609 | ) | (22,032,609 | ) | |||||||||||||||||||
| Ending Balance, at September. 30, 2013 (as restated) | 18,376,363 | $ | 1,838 | $ | 46,219,593 | - | $ | (154,834 | ) | $ | (55,644,721 | ) | $ | (9,578,124 | ) | |||||||||||||
| 7 |
RETROPHIN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the period from | ||||||||||||
| For the nine months ended | March 11, 2011 | |||||||||||
| September 30, | (inception) through | |||||||||||
| 2013 | 2012 | September 30, 2013 | ||||||||||
| (As restated) | (As restated) | |||||||||||
| Cash Flows From Operating Activities: | ||||||||||||
| Net loss | $ | (22,032,609 | ) | $ | (16,812,669 | ) | $ | (55,644,721 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | 159,128 | 73,417 | 284,368 | |||||||||
| Gain on securities available for sale | (59,737 | ) | - | (59,737 | ) | |||||||
| Compensation in lieu of receivable | - | - | 407,900 | |||||||||
| Share based compensation - consultants | 1,282,220 | - | 1,282,220 | |||||||||
| Share based compensation - employees | 179,760 | 7,724,150 | 17,917,577 | |||||||||
| Share based compensation - non-employees | (710,850 | ) | 6,290,252 | 5,940,854 | ||||||||
| Registration payment obligation expense | 360,000 | 360,000 | ||||||||||
| Reversal of registration payment obligation liability | (360,000 | ) | - | (360,000 | ) | |||||||
| Share based payment - Technology license contingent fee | - | - | 1,550,000 | |||||||||
| Change in estimated fair value of derivative financial instruments - warrants | 8,915,672 | - | 8,915,672 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Prepaid expenses | (458,817 | ) | (30,431 | ) | (480,647 | ) | ||||||
| Other assets | - | (8,781 | ) | - | ||||||||
| Technology license fees | - | - | 150,000 | |||||||||
| Settlement payable | 1,691,400 | - | 1,691,400 | |||||||||
| Accounts payable and accrued expenses | 1,841,391 | 675,251 | 5,330,186 | |||||||||
| Net cash used in operating activities | (9,192,442 | ) | (2,088,811 | ) | (12,714,928 | ) | ||||||
| Cash Flows From Investing Activities: | ||||||||||||
| Purchase of fixed assets | (22,243 | ) | (8,471 | ) | (49,889 | ) | ||||||
| Purchase of intangible assets | (5,700 | ) | (1,158,418 | ) | (1,173,793 | ) | ||||||
| Payments for security deposits for exclusivity of certain licenses | (2,250,000 | ) | - | (2,250,000 | ) | |||||||
| Increase in security deposit | (40,000 | ) | - | (40,000 | ) | |||||||
| Repayment of technology license liability | (1,300,000 | ) | - | (1,300,000 | ) | |||||||
| Purchase of marketable securities, available-for-sale | (3,430,418 | ) | - | (3,430,418 | ) | |||||||
| Proceeds from the sale of marketable securities, available-for-sale | 377,945 | - | 377,945 | |||||||||
| Cash received in merger transaction | - | - | 3,721 | |||||||||
| Due from related parties | - | (2,800 | ) | - | ||||||||
| Payments made on behalf of affiliate | - | - | (137,547 | ) | ||||||||
| Loans made to stockholder | - | (399,329 | ) | (382,900 | ) | |||||||
| Net cash used in investing activities | (6,670,416 | ) | (1,569,018 | ) | (8,382,881 | ) | ||||||
| Cash Flows From Financing Activities: | ||||||||||||
| Proceeds from related parties | - | - | 56,500 | |||||||||
| Repayment of net amounts due to related parties | (13,200 | ) | (30,000 | ) | (46,500 | ) | ||||||
| Proceeds from note payable - related party | - | 930,000 | 930,000 | |||||||||
| Repayment of note payable - related party | (884,764 | ) | (15,236 | ) | (930,000 | ) | ||||||
| Investors' deposits | - | - | 100,000 | |||||||||
| Proceeds received from issuance of common stock, net | 31,105,455 | 2,765,201 | 35,343,830 | |||||||||
| Payment to investors participated in August 2013 financing | (946,196 | ) | - | (946,196 | ) | |||||||
| Net cash provided by financing activities | 29,261,295 | 3,649,965 | 34,507,634 | |||||||||
| Net increase in cash | 13,398,437 | (7,864 | ) | 13,409,825 | ||||||||
| Cash, beginning of period | 11,388 | 10,053 | - | |||||||||
| Cash, end of period | $ | 13,409,825 | $ | 2,189 | $ | 13,409,825 | ||||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||||||
| Cash paid for interest | $ | 28,263 | $ | 9,764 | $ | 43,027 | ||||||
| Non-cash investing and financing activities: | ||||||||||||
| Unrealized loss on marketable securities | $ | (154,834 | ) | $ | - | $ | (154,834 | ) | ||||
| Forfeiture of subscription receivable | $ | - | $ | - | $ | 25,000 | ||||||
| Reclassification of due from related parties | $ | - | $ | 500 | $ | - | ||||||
| Technology license liability | $ | - | $ | 1,300,000 | $ | - | ||||||
| Shares issued on behalf of related party | $ | 44,400 | $ | - | $ | 44,400 | ||||||
| Affiliate receivable applied to security deposit | $ | 137,547 | $ | - | $ | 137,547 | ||||||
| 8 |
RETROPHIN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
Organization and Description of Business
Retrophin, Inc. (the “Company”) is an emerging biotechnology company dedicated to developing drugs for rare and life-threatening diseases. The Company’s primary business objective is to develop and commercialize therapies for orphan diseases, such as Duchenne muscular dystrophy, or DMD, focal segmental glomerulosclerosis, and pantothenate kinase-associated neurodegeneration. The Company is considered to be a development stage company and, as such, the Company’s financial statements are prepared in accordance with the Accounting Standards Codification (“ASC”) 915 “Development Stage Entities.” The Company is subject to all of the risks and uncertainties associated with development stage companies.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2012 (the “2012 10-K/A”) filed with the SEC on September 13, 2013. The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and the rules and regulations of the SEC. Accordingly, since they are interim statements, the accompanying condensed consolidated financial statements do not include all of the information and notes required by U.S. GAAP for annual financial statements, but reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The December 31, 2012 balance sheet information was derived from the audited financial statements as of that date.
NOTE 3. LIQUIDITY, FINANCIAL CONDITION AND MANAGEMENT PLANS
The Company incurred a net loss of approximately $55.6 million, including stock-based compensation charge of approximately $26 million for the period from March 11, 2011 (inception) to September 30, 2013. At September 30, 2013, the Company had a cash balance of approximately $13.4 million and a working capital deficit of approximately $14.1 million; however, the working capital deficit includes a derivative liability of approximately $23.9 million for warrants issued in financing transactions. The Company’s accumulated deficit amounted to approximately $55.6 million at September 30, 2013.
The Company has principally financed its operations from inception using proceeds from sales of its equity securities in a series of private placement transactions (see Note 12). The Company to date has no revenues, significantly limited capital resources and is subject to all of the risks and uncertainties that are typical of a development stage enterprise. Significant uncertainties include, among others, whether it will be able to raise the additional capital it needs to finance the start of its planned operations and whether such operations, if launched, will enable the Company to become a profitable enterprise.
On August 14, 2013, the Company and the investors who participated in the private placement transaction that the Company completed on February 14, 2013, entered into the first amendment to the registration rights agreement (the “Amended Registration Rights Agreement”) associated with that transaction. The Amended Registration Rights Agreement provides, among other things, for (i) a waiver of any and all liquidated damages that the Company incurred for its inability to cause the a registration statement to be declared effective within certain contractually defined time-frames stipulated in the original agreement; (ii) a commitment on the part of the investors in the February private placement to participate in a private placement transaction that the Company completed on August 15, 2013, and (iii) a covenant on the part of the Company to proceed with the sale of shares that were issued under the August 15, 2013 private placement transaction. In exchange, the Company paid an aggregate fee to these investors of $2,495,256 consisting of (i) 73,710 shares of the Company’s common stock with an aggregate fair value of $331,695 (based on the selling price of $4.50 per share in the August financing transaction); (ii) cash in the amount of $1,835,000; and (iii) warrants to purchase 98,756 shares of common stock with a fair value of $328,561. The investors were also given the option to purchase shares of the Company’s common stock at $4.50 as a use of the cash portion of the payment arrangement. Accordingly, $946,196 of the cash portion of the fee was settled in cash and the remainder was settled by the issuance of 197,512, shares. Additionally, the Company paid $103,425 to an investor to whom the Company sold shares in a private placement transaction in January 2013 and who participated in the August 2013 private placement transaction. This payment was settled entirely by the issuance of 20,685 shares of the Company’s common stock at a value of $5.00 per share (see Note 12)
| 9 |
On August 16, 2013, the Company announced that it had signed an agreement with a major pharmaceutical company for the exclusive right to negotiate a royalty-bearing U.S. license for a product to be developed for the treatment of Autism and Schizophrenia. Pursuant to the exclusivity agreement, the Company paid the major pharmaceutical company a non-refundable upfront fee of $2 million and will have an exclusive period of 120 days to negotiate a license agreement (see Note 14). The Company is in active negotiations to consummate a license agreement. If a definitive license agreement is consummated, the Company will apply the upfront fee to the license and will make a determination as to whether it should be treated as an asset or research and development expense. If no definitive agreement is consummated, the upfront fee will be expensed.
On September 20, 2013, the Company signed an agreement with an individual for the exclusive right to negotiate a royalty-bearing U.S. license for a product to be developed for the treatment of central nervous system disorders. Pursuant to the exclusivity agreement, the Company paid the individual a non-refundable upfront fee of $250,000 and will have an exclusive period ending on December 31, 2013 (see Note 14). The Company is in active negotiations to consummate a license agreement. If a definitive license agreement is consummated, the Company will apply the upfront fee to the license and will make a determination as to whether it should be treated as an asset or research and development expense. If no definitive agreement is consummated, the upfront fee will be expensed.
Effective October 1, 2013, the Company signed a Sponsored Research Agreement (“SRA”) with St. Jude Children’s Research Hospital (“St. Jude”). Unless otherwise terminated by operation of law or by acts of the parties in accordance with the terms of the agreement, the SRA shall be in full force and effect for a period of two (2) years and shall expire on October 1, 2015. The term may be extended by written agreement between the parties. The Company and St. Jude will collaborate on research focused on the study of PKAN disease and other infectious diseases (see Note 14 and Note 15).
In the second quarter of 2013, the Company, its Chief Executive Officer and a related party became parties to a series of agreements to settle up to $2,284,511 of liabilities, which Company management believes are the primary obligation of the related party. The Company paid $593,111 of these settlements in the second quarter on behalf of the related party and had outstanding liabilities of $1,691,400 as of September 30, 2013, which the Company paid as of the date of this filing. Concurrent with the execution and payment of such settlement agreements, the Company entered into indemnification agreements and received promissory notes from the related party whereby the related party agreed to pay the Company the principal amount of $2,284,511 plus interest at an annualized rate of 5% as reimbursement of payments that the Company made to settle a portion of the agreements. The Chief Executive Officer also agreed to deliver or cause to be delivered 47,128 shares of common stock to one of the counter parties as a separate component of one of these agreements. Accordingly, the Company does not believe it is required to record a liability for the shared-based component of this specific agreement during the third quarter ended September 30, 2013. There is uncertainty as to whether the related party will have sufficient liquidity to repay the Company or fund the indemnification agreements should it become necessary (see Note 11).
In addition, on August 29, 2013, the Company entered into and paid an additional settlement agreement for $300,000.
On September 18, 2013, the Company made a proposal to the board of directors of Transcept Pharmaceuticals, Inc. (“Transcept”) to acquire all of the outstanding shares of Transcept’s common stock for $4.00 per share in cash. The proposal has been rejected by Transcept’s board of directors. The Company has invested approximately $3 million and acquired approximately 4.96% of the outstanding common stock of Transcept as part of the proposal process. If Transcept accepts the Company’s proposal to acquire all of its outstanding shares of common stock, the Company will need to obtain additional equity or debt financing to consummate the acquisition and consolidation (see Note 15).
Management believes the Company’s ability to continue its operations depends on its ability to raise capital. The Company’s future depends on the costs, timing, and outcome of regulatory reviews of its product candidates and the costs of commercialization activities, including product marketing, sales and distribution. During the first quarter of 2013, the Company raised an aggregate of approximately $9.95 million in certain private placement transactions. During the third quarter of 2013, the Company raised an additional $24.92 million in aggregate proceeds in connection with a private placement transaction. The Company expects to continue to finance its cash needs through additional private equity offerings and debt financings, corporate collaboration and licensing arrangements and grants from patient advocacy groups, foundations and government agencies. Although management believes that the Company has access to capital resources, there are no commitments for financing in place at this time, nor can management provide any assurance that such financing will be available on commercially acceptable terms, if at all.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These unaudited condensed consolidated financial statements do not include any adjustments relating to the recovery of assets or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
| 10 |
NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of the accompanying condensed consolidated financial statements follows:
Principles of Consolidation
The unaudited condensed consolidated financial statements represent the consolidation of the accounts of the Company and its subsidiary in conformity with U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation.
Cash
For purposes of the statement of cash flows, the Company considers cash instruments with maturities of less than three months when purchased to be cash equivalents. There are no cash equivalents as of the balance sheet dates.
Marketable Securities
The Company accounts for marketable securities held as “available-for-sale” pursuant to ASC 320 Investments — Debt and Equity Securities (“ASC 320”). The Company classifies these investments as current assets and carry them at fair value. Unrealized gains and losses are recorded as a separate component of stockholders’ equity as accumulated other comprehensive income. Realized gains or losses on marketable security transactions are reported in earnings and computed using the specific identification of cost basis. Marketable securities are maintained at one financial institution and are governed by the Company’s investment policy as approved by our Board of Directors. Fair values of marketable securities are based on quoted market prices. Valuation of marketable securities are further describe in Note 6.
The Company’s current investment policy generally limit security investments for purposes of strategic acquisitions. Based on the liquidity position of the Company, the CEO and CFO are authorized to make various investment transaction decisions for prudent investment of the Company’s excess funds. The ability to conduct investments is limited to the CEO and CFO. The current policy limit marketable securities investments with a maturity, credit quality, and concentration that is authorized only by the CEO and CFO.
Employee Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718 Compensation — Stock Compensation (“ASC 718”). ASC 718 addresses all forms of share-based payment (“SBP”) awards including shares issued under employee stock purchase plans and stock incentive shares. Under ASC 718 awards result in a cost that is measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest and will result in a charge to operations.
Non-Employee Stock-Based Compensation
The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 505, “Equity Based Payments to Non-Employees”, (“ASC 505”) and ASC 718 which requires that such equity instruments are recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest. Non-employee stock-based compensation charges are being amortized over their respective contractual vesting periods.
Use of Estimates
In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Due to inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in these estimates. On an ongoing basis, the Company evaluates its estimates and assumptions. These estimates and assumptions include valuing equity securities in share-based payments, estimating fair value of equity instruments recorded as derivative liabilities, estimating the useful lives of depreciable and amortizable assets and estimating the fair value of long-lived assets to assets whether impairment charges may apply.
Research and Development Costs
Research and development costs are charged to operations as incurred and consist primarily of consulting costs, contract research and development costs, and compensation costs. For the three and nine months ended September 30, 2013 and 2012, and for the period from March 11, 2011 (inception) through September 30, 2013, the Company recognized $1,399,875, $110,656, $2,113,813, $286,889, and $3,008,326, respectively, of research and development costs.
Patents
The Company capitalized external cost, such as filing fees and associated attorney fees, incurred to obtain issued patents and patent applications pending. The Company expense cost associated with maintaining and defending patents subsequent to their issuance in the period incurred. The Company amortizes patent cost once issued on a straight-line basis over the estimate useful lives of the patents. The Company assess the potential impairment to all capitalized patent cost when events or changes in circumstances indicate that the carrying amount of our patent may
| 11 |
not be recoverable. The Company accounts for patent costs in accordance with ASC Topic 350, “Goodwill and Other Intangible Assets” (“ASC 350”) and ASC Topic 805, “Business Combinations” (“ASC 805”).
Basic and diluted Net Loss Per Share
Basic and diluted net loss per share has been computed by dividing net loss by the weighted average number of common shares outstanding during the period. All potentially dilutive common shares have been excluded since their inclusion would be anti-dilutive.
An aggregate of 4,462,426 and 0 warrants were excluded from the computation of diluted net loss per common share for the three and nine months ended September 30, 2013 and 2012, respectively, because their inclusion would have an anti-dilutive effect for the periods presented.
An aggregate of 210,000 and 0 stock options were excluded from the computation of diluted net loss per common share for the three and nine months ended September 30, 2013 and 2012, respectively, because they would have an anti-dilutive effect for the periods presented.
An aggregate of 211,073 and 927,310 incentive shares were excluded from the computation of diluted net loss per common share for the three and nine months ended September 30, 2013 and 2012, respectively, because they were contingent shares subject to recall.
Derivative Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company calculates the fair value of the financial instruments using a probability-weighted Black-Scholes option pricing model, which is comparable to the Binomial Lattice options pricing model at inception and on each subsequent valuation date. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period (see Note 7 and Note 8).
Joint and Several Liability Assessment
The Company measures obligations resulting from joint and several liability arrangements as the sum of the amount that the Company has a) contractually agreed to pay, and b) any additional amounts that the Company expects to pay on behalf of its co-obligors.
Financial Instruments and Fair Value
ASC Topic 820, “Fair Value Measurements and Disclosures,” (“ASC Topic 820”) establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC Topic 820 are described below:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
In estimating the fair value of the Company’s marketable securities available-for-sale, the Company used quoted prices in active markets (see Note 6 and Note 8).
In estimating the fair value of the Company’s derivative liabilities, the Company used a probability-weighted Black-Scholes option pricing model (see Note 7 and Note 8).
Financial assets with carrying values approximating fair value include cash as well as marketable securities, deposits on license agreements, prepaid expenses and other current assets. Financial liabilities with carrying values approximating fair value include accounts payable and accrued expenses.
Registration Payment Arrangement
The Company accounted for registration rights agreements in accordance with ASC 825-20, “Registration Payment Arrangements.” ASC 825-20 addresses an issuer’s accounting for registration payment arrangements. This pronouncement specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument, should be separately recognized and accounted for as a contingency in accordance with ASC 450-20 “Loss Contingencies”.
| 12 |
Reclassifications
Certain prior year financial statement balances have been reclassified to conform to the current year presentation. These reclassifications had no effect on the recorded net loss.
Subsequent Events
The Company follows the provisions of ASC Topic 855-10, “Subsequent Events,” relating to subsequent events. This guidance establishes principles and requirements for subsequent events. This guidance defines the period after the balance sheet date during which events or transactions that may occur would be required to be disclosed in a company’s financial statements. The Company has evaluated subsequent events up to the date of issuance of this report.
Note 5. Restatement of Previously Issued Financial Statements
| (1) | In September 2014, the Company’s board of directors requested that the Company’s outside legal counsel conduct an investigation (the “Investigation”) into the circumstances surrounding the negotiation and execution by the former Chief Executive Officer of the Company, Martin Shkreli, of certain consulting and settlement agreements entered into by the Company. The Investigation also covered additional agreements and other matters involving Mr. Shkreli during his tenure as the Chief Executive Officer of the Company. In January 2015, the Company’s board of directors appointed an Oversight Committee of the board of directors (the “Oversight Committee”), consisting of Gary Lyons and Jeffrey Meckler, each of whom was not a member of the Company’s board of directors during the period of time covered by the Investigation. The Company’s board of directors delegated to the Oversight Committee the independent and plenary authority to oversee and direct the Investigation and make findings and decisions related to the Investigation. |
The following information is the Oversight Committee’s conclusions, which specifically relates to the financial statements for the three and nine month periods ended September 30, 2013:
| · | On September 30, 2013, the Company entered into a consulting agreement and release with an individual who was an investor in investment funds previously managed by Mr. Shkreli (the “MSMB Entities”), or that otherwise had financial dealings with Mr. Shkreli. The agreement provided for the issuance of a total of 331,500 shares of common stock of the Company. The Oversight Committee concluded that the Company should not continue to treat this agreement as a consulting arrangement because its predominant purpose appears to have been to settle and release claims against the MSMB Entities or Mr. Shkreli personally, and not to provide meaningful and sustained consulting services to the Company. |
The Oversight Committee concluded that certain of the transactions described above were consummated without specific approval of the Company’s board of directors or without the Company’s board of directors knowing all of the relevant facts.
The Oversight Committee also determined that the Company made approximately $135,000 of payments to certain third party service providers on behalf of the MSMB Entities, which were charged to results of operations during the nine months ended September 30, 2013. The Related Party Transactions note has been updated to include this disclosure.
As a result of the matters that emerged from the investigation, we have determined that the financial statements contained in the Company’s Form 10-Q for the three months ended September 30, 2013 (the “2013 Q3 Form 10-Q”) contained errors relating to the matters described above.
Specifically, the Company previously recognized expense related to the stock issued pursuant to the consulting agreement as a non-employee share-based payment arrangement. Had the Company accounted for this arrangement as a settlement, the Company would have recorded, as of the date of the agreement, an expense and a settlement liability related to the entire amount of the stock to be issued under such agreement. The settlement liability would have been revalued at each reporting period based on changes in the Company’s stock price until the stock had been entirely issued.
On February 19, 2015, the Company’s board of directors concluded that as a result of the errors related to this agreement, the financial statements contained in the September 30, 2013 Form 10-Q should no longer be relied upon. The Company has corrected such errors, including any related disclosures.
The following table sets forth the effects (in thousands) of the matters identified by the Oversight Committee on affected items within the Company’s previously reported Condensed Consolidated Balance Sheet for the quarter ended September 30, 2013, had the adjustments been made:
| September 30, 2013 | ||||||||
| As Revised* | As Restated | |||||||
| Current liabilities | $ | 28,788 | $ | 30,943 | ||||
| Additional paid in Capital | $ | 47,498 | $ | 46,220 | ||||
The following table sets forth the effects (in thousands) of the matters identified by the Company during the fourth quarter of 2013 and the Oversight Committee in January 2014 on affected items within the Company’s previously reported Condensed Consolidated Statement of Operations for the three months and nine months ended September 30, 2013, had the adjustments been made in the corresponding quarters:
| 13 |
| Three months ended September 30, 2013 | Nine months ended September 30, 2013 | |||||||||||||||
| As Revised* | As Restated | As Revised* | As Restated | |||||||||||||
| Selling, general and administrative | $ | 3,755 | $ | 4,631 | $ | 10,141 | $ | 11,017 | ||||||||
| Operating loss | $ | (5,155 | ) | $ | (6,031 | ) | $ | (12,255 | ) | $ | (13,131 | ) | ||||
| Net loss | $ | (11,135 | ) | $ | (12,011 | ) | $ | (21,156 | ) | $ | (22,033 | ) | ||||
| Net loss per share, basic and diluted | $ | (0.72 | ) | $ | (0.78 | ) | $ | (1.65 | ) | $ | (1.72 | ) | ||||
*For matters identified during the fourth quarter of 2013 described in (2) below.
| (2) | As previously discussed in the Form 10-K for the year ended 2013, in the fourth quarter of 2013, the Company discovered that certain warrants issued to a placement agent in connection with our February Private Placement were not recorded and certain expenses were misstated in our condensed consolidated financial statements for the first, second and third quarters of 2013. The misstatement of expenses include costs related to the February 14, 2013 Private Placement Offering, certain accruals, consulting fees and changes in the fair value of the unrecorded warrants, which required liability classification. The financial statements included herein have been revised to include the effects of these matters. |
The following table (in thousands) sets forth the effects of revisions we made to our previously reported Condensed Consolidated Balance Sheet as of September 30, 2013 with respect to the errors we identified during the fourth quarter of 2013:
| September 30, 2013 | ||||||||
| As Reported | As Revised | |||||||
| Derivative financial instruments, warrants | $ | 22,234 | $ | 23,853 | ||||
| Total liabilities | 27,169 | 28,788 | ||||||
| Additional paid in Capital | 48,650 | 47,498 | ||||||
| Deficit accumulated during the development stage | (54,301 | ) | (54,768 | ) | ||||
| Stockholders’ deficit | $ | (5,804 | ) | $ | (7,423 | ) | ||
The following table (in thousands) sets forth the effects of revisions we made to our previously reported Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2013, with respect to the errors we identified during the fourth quarter of 2013:
| Three months
ended September 30, 2013 | Nine months
ended September 30, 2013 | |||||||||||||||
| As Reported | As Revised | As Reported | As Revised | |||||||||||||
| Selling, general and administrative | $ | 3,755 | $ | 3,755 | $ | 10,391 | $ | 10,141 | ||||||||
| Operating loss | (5,155 | ) | (5,155 | ) | (12,505 | ) | (12,255 | ) | ||||||||
| Change in fair value of derivative financial instruments-warrants | (5,803 | ) | (6,040 | ) | (8,199 | ) | (8,916 | ) | ||||||||
| Net loss | (10,898 | ) | (11,135 | ) | (20,689 | ) | (21,156 | ) | ||||||||
| Net loss per share, basic and diluted | $ | (0.71 | ) | $ | (0.72 | ) | $ | (1.62 | ) | $ | (1.65 | ) | ||||
The cumulative effect of all errors discussed in (1) and (2) on our results of operations for the period from March 11, 2011 through September 30, 2013 for purposes of development stage reporting is that our cumulative loss in the amount of $54.3 million, as reported, is now $55.6 million, as restated.
Recently Issued Accounting Pronouncements
In February 2013, the FASB issued Accounting Standards Updated (“ASU”) 2013-04 “Obligations Resulting from Joint and Several Liability Arrangements for Which the Amount at the Reporting Date is Fixed”) (“ASU 2013-04”). The guidance in this update is effective for fiscal years beginning after December 15, 2013 with early adoption permitted. The guidance in this update requires companies to measure obligations resulting from joint and several liability arrangements as the sum of the amount the entity has a) contractually agreed to pay, and b) any additional amounts that the entity expects to pay on behalf of its co-obligors. The Company early adopted this guidance in the second quarter of 2013 (Note 3 and Note 11).
Except as noted above, management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a significant effect on the accompanying consolidated financial statements.
NOTE 6. MARKETABLE SECURITIES
The Company measures marketable securities on a recurring basis. Generally, the types of securities the Company invests in are traded on a market such as the NASDAQ Global Market, which the Company considers to be Level 1 inputs.
Marketable securities at September 30, 2013 consisted of the following:
| Unrealized | Unrealized | Estimated Fair | ||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Marketable securities available-for-sale: | $ | 3,112,210 | $ | - | $ | 154,834 | $ | 2,957,376 | ||||||||
| 14 |
The Company’s marketable securities is comprised entirely of the common stock of Transcept.
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS
In accordance with ASC Topic 815-40, “Derivative and Hedging – Contracts in Entity’s Own Equity” (“ASC Topic 815-40”), instruments which do not have fixed settlement provisions are deemed to be derivative instruments. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, the warrants issued in connection with the sale of the common stock during the period ended September 30, 2013 that do not have fixed settlement provisions, are not indexed to Company’s own stock. The fair value of the warrants are classified as derivative liabilities due to a ratchet provision that allows for a favorable adjustment to the exercise price if the Company issues additional equity instruments in the future at an effective price per share less than the exercise price then in effect.
The warrants are re-measured at each balance sheet date based on estimated fair value. Changes in estimated fair value are recorded as non-cash valuation adjustments within other income (expense) in the Company’s results of operations. The Company recorded a loss on a change in the estimated fair value of warrants of $6,040,054 and $8,915,672 for the three and nine months ended September 30, 2013, respectively.
The Company calculated the fair value of the warrants using a probability-weighted Black-Scholes option pricing model which is comparable to the Binomial Lattice pricing model. The assumptions used at the date of issuance and at September 30, 2013 are noted in the following table:
| As of | ||||||||
| Date of issuance February 14, 2013 | Date of issuance August 14, 2013 | Date of issuance August 15, 2013 | September 30, 2013 | |||||
| Fair market price of common stock | $3.75 | $4.50 | $4.50 | $6.50 | ||||
| Contractual term | 5 years | 5 years | 5 years | 4.38 – 4.87 years | ||||
| Risk-free interest rate | 0.86% | 1.48% | 1.48% | 1.41% | ||||
| Expected volatility | 101% | 106% | 106% | 96%-102% | ||||
| 15 |
Expected volatility is based on historical stock volatilities of several comparable publicly-traded companies over a period equal to the expected terms of the warrants, as the Company does not have a long trading history to estimate the volatility of its own common stock. The warrants have a transferability provision. Based on guidance provided in SEC Staff Accounting Bulletin No. 107 (“SAB 107”) for options issued with such a provision, the Company used the full contractual term as the initial expected term of the warrants. The risk free interest rate is based on the U.S. Treasury security rates for the remaining term of the warrants at the measurement date.
NOTE 8. FAIR VALUE MEASUREMENTS
The following table presents the Company’s asset and liability that is measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 30, 2013:
| Fair Value Measurements at September 30, 2013 | ||||||||||||||||
| Significant other | Significant | |||||||||||||||
| Total carrying value at | Quoted prices in active | observable inputs | unobservable inputs | |||||||||||||
| September 30, 2013 | markets (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Asset: | ||||||||||||||||
| Marketable securities, available-for-sale | $ | 2,957,376 | $ | 2,957,376 | $ | - | $ | - | ||||||||
| Liability: | ||||||||||||||||
| Derivative liability related to warrants | $ | 23,853,325 | $ | - | $ | - | $ | 23,853,325 | ||||||||
| Settlement agreement | $ | 2,154,750 | $ | 2,154,750 | $ | - | $ | |||||||||
The following table sets forth a summary of changes in the estimated fair value of the Company’s Level 3 liability for the nine months ended September 30, 2013:
| Fair Value Measurements of | ||||
| Common Stock Warrants Using | ||||
| Significant Unobservable Inputs | ||||
| (Level 3) | ||||
| Balance at January 1, 2013 | $ | - | ||
| Issuance of common stock warrants: | ||||
| February 14, 2013 | 5,407,605 | |||
| August 14, 2013 | 328,561 | |||
| August 15, 2013 | 9,201,487 | |||
| Total value upon issuance | 14,937,653 | |||
| Change in fair value of common stock warrant liability | 8,915,672 | |||
| Balance at September 30, 2013 | $ | 23,853,325 | ||
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company performs a detailed analysis of the assets and liabilities that are subject to ASC Topic 820. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.
NOTE 9. LICENSE AGREEMENT
On February 16, 2012 the Company entered into an agreement pursuant to which a biotech company (the “Sublicensor”) with license rights to certain drug technologies agreed to grant us a worldwide sublicense for the development, manufacture and commercialization of a drug technology which is referred to as DARA, which is an Angiotesin Receptor Blocker (“ARB”) and Endothelin Receptor Antagonist (“ERA”) which the Company is initially using in connection with the treatment of focal segmental glomerulosclerosis (“FSGS”) and which we refer to as RE-021. The sublicense agreement also enables the Company to sell the licensed technology as a research product or sublicense the technology to other third parties as potential sources of revenue. Under the license agreement, Sublicensor is obligated to transfer to the Company certain information, records, regulatory filings, materials and inventory controlled by Sublicensor and relating to or useful for developing RE-021. The Company must use commercially reasonable efforts to develop and commercialize RE-021 in specified major market countries and other countries in which the Company believes it is commercially reasonable to develop and commercialize such products. The agreement shall continue until neither party has any obligations under the agreement to make payments to the other party.
| 16 |
In accordance with the agreement as amended most recently as of January 7, 2013, the Company made two non-refundable payments totaling $2,550,000, the first payment of $1,150,000 made upon execution and the second payment of $1,400,000 was made in February 2013, which includes a $250,000 fee payable to the sublicensee in exchange for extended due date of this payment from October 1, 2012 to February 2013. As of September 30, 2013, the Company has recognized $2,300,000 for the cost of the License Agreement which is presented in the accompanying condensed consolidated balance sheet as an intangible asset that is being amortized on a straight-line basis over the term of the License Agreement which expires on September 30, 2023. The $250,000 of extension fees were expensed to operations in February 2013. In addition, the Company issued 620,000 common shares to Ligand valued at $1,550,000 as a result of the merger transaction, the amount of which was expensed to operations in December 2012. For the three and nine months ended September 30, 2013 and 2012, and for the period from March 11, 2011 (inception) through September 30, 2013, the Company recognized amortization expense of the license related to this agreement of $51,065, $34,885, $151,531, $71,466, and $272,914 respectively.
The Company’s sublicense agreement with Ligand specifically provides rights for the global development, manufacture, and commercial utilization of certain compounds, for any and all medical applications. The Company purchased this license in a bargained exchange transaction that was conducted at arm’s length with an unrelated party. ASC 305 states that “Intangible assets that are acquired individually or with a group of assets in a transaction other than a business combination or an acquisition by a not-for-profit entity may meet asset recognition criteria in FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises.”
The sublicense agreement provides broad and exclusive rights to use a technology based intangible that is a legally protected, separable, and has a stand-alone value independent of the Company or any other holder. The Company specifically considered the nature of the license, the rights to its use and whether the license itself meets the legal contractual and/or separability criterion described in under ASC 805 “Business Combinations.”
The specific technology licensed under this agreement is known as DARA. This technology is fully developed, protected by issued patents and pending patent applications; the technology is the product of a long-term development effort that cannot be replicated. The DARA technology embodies unique know-how, including all biological, chemical, pharmacological toxicological, clinical, manufacturing assay and related data. This technology is also not generally known. Under ASC 805, intangible assets whose future economic benefits are legally protected are deemed to have met the legal contractual criteria and would therefore be accounted for as a separately identifiable intangible asset.
In addition to the above, the technology has a stand-alone value that makes it capable of being separated or divided from the Company or any other acquirer. The technology can be sold, transferred, licensed, rented, or exchanged either individually or together with a related contract, identifiable asset, or liability. The Company believes that the purchase of the license and the fact that the Company or any other market participant in possession of this license or a similar type of license would be able to sell, license, or otherwise exchange this technology for something else of value, provides evidence of its separability.
Further, the licensed technology could have use in other stand-alone broad applications outside of the initial intended use for FSGS, including hypertension and other nephrotic conditions. In connection with the acquired rights, the Company also acquired the right to enter into future sublicense agreements and has the right to transfer/sell this right to other third parties. Accordingly, the right to enter into sublicense agreements could be divided from other assets and independently sold. Consequently, this right meets the separability criterion specified in ASC 805-20-55-3 (e.g. it is an acquired intangible asset that is capable of being licensed).
NOTE 10. NOTES PAYABLE
Note Payable - related party
On February 1, 2012, the Company entered into a secured promissory note with a related party in the amount of $900,000, with an interest rate of 12% per annum, compounded monthly. The outstanding principal and interest balance of this note was fully repaid during the first quarter of 2013.
Total interest expense recognized for the three and nine months ended September 30, 2013 and 2012, and for the period from March 11, 2011 (inception) through September 30, 2013 amounted to $0, $26,761, $41,563, $70,559 and $147,480, respectively.
NOTE 11. RELATED PARTY TRANSACTIONS
On December 8, 2011, the Company received advances of funds aggregating $8,500 from entities related through common ownership. Such advances were repaid during the first quarter of 2013.
In August 2012, the Company paid a security deposit on behalf of an affiliate of $137,547 in connection with a building lease entered into by such affiliate. The Company assumed the lease from its affiliate in April 2013, whereby the security deposit was assigned to the Company. The Company leases approximately 4,216 square feet of office space for approximately $275,000 annual base rent plus rent escalations, common area maintenance, insurance, and real estate taxes, under a lease agreement expiring August 2016.
| 17 |
In the second quarter of 2013, the Company, its Chief Executive Officer and a related party, which is a former investor in the Company that was previously managed by the Company’s Chief Executive officer, became party to a series of agreements to settle up to $2,284,511 of liabilities, which Company management believes are the primary obligation of the related party. The Company and the related party have entered into indemnification agreements whereby the related party has agreed to defend and hold the Company harmless against all such obligations and amounts, whether paid or unpaid, arising from these agreements. Notwithstanding the indemnification, the Company recorded a $2,284,511 charge to operations during the quarter ended September 30, 2013 that was offset by a corresponding liability of $1,691,400 for the difference between (a) the aggregate amount of all such settlements, and (b) $593,111 of cash and non-cash consideration that the Company paid to immediately settle a portion of the agreement on behalf of the related party. The $1,691,400 is entirely paid as of the date of this filing. In addition, the Chief Executive Officer also agreed to provide one of the counter parties with 47,128 shares of his common stock in the Company as a separate component of one of the these settlement agreements. Accordingly, the Company does not believe it is required to record a liability for the shared-based component of this specific agreement during the third quarter ended September 30, 2013. There is uncertainty as to whether the related party will have sufficient liquidity to repay the Company or fund the indemnification agreements should it become necessary.
Concurrent with the execution of such settlement agreements, the Company received promissory notes from the related party whereby the related party agreed to pay the Company the principal amount of $593,111 plus interest at an annualized rate of 5% as reimbursement of the payments that the Company made to settle a portion of the agreements.
During the nine months ended September 30, 2013, the Company also made approximately $135,000 of other payments to third party service providers to settle liabilities on behalf of MSMB Entities,that were charged to results of operations during the nine months ended September 30, 2013.
In October 2013, the Company paid $1,655,000 in cash and 5,000 shares of common stock valued at $36,400 to settle agreements on behalf of a related party. Upon payment, the Company and the related party entered into promissory notes whereby the related party agreed to pay the Company the principal amount of $1,691,400 plus interest at an annualized rate of 5% as reimbursement of payments that the Company made to settle a portion of the agreements.
The Company applied the accounting guidance provided in ASU 2013-04. The guidance in this update is effective for fiscal years beginning after December 15, 2013 with early adoption permitted. The guidance in this update requires companies to measure obligations resulting from joint and several liability arrangements as the sum of the amount that the entity has a) contractually agreed to pay, and b) any additional amounts that the entity expects to pay on behalf of its co-obligors. The Company has recorded the full amount of the settlements as a charge to its operations due to uncertainty as to whether the related party will have sufficient liquidity to repay the Company or fund the indemnification agreements should it become necessary. Any amounts that the Company may recover under the note due from the related party or under the terms of the indemnification agreement, if in fact any amounts are recovered at all, would be characterized as a capital contribution at the date such payments are received.
On August 15, 2013, the Company closed a private placement and sold 5,531,401 shares of the Company’s common stock, at a purchase price of $4.50 per share, or $24,891,303 in the aggregate, and warrants to purchase up to an aggregate of 2,765,701 shares of common stock with an exercise price of $6.00 per share underlying each warrant. Members of the Company’s management purchased an aggregate of 10,522 shares of common stock and warrants to purchase up to an aggregate of 5,261 shares of common stock in such private placement. The Warrants are deemed to be derivative instruments due to a ratchet provision that adjusts the exercise price if the Company issues additional equity instruments in the future at an effective price per share less than the exercise price then in effect. The issuance of the shares of common stock in such private placement was not registered under the Securities Act as such issuance was exempt from registration under Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
NOTE 12. STOCKHOLDERS’ DEFICIT
Issuances
Common Stock
In January 2013, the Company sold an aggregate of 272,221 shares of common stock, at a purchase price of $3.00 per share in certain private placement transactions, for an aggregate purchase price of $816,664 in cash. The issuance of such shares of common stock was not registered under the Securities Act as such issuance was exempt from registration under Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
On February 14, 2013, the Company closed a private placement (the “February Private Placement”) of 3,045,929 shares of common stock, at a purchase price of $3.00 per share, or $9,137,787 in the aggregate, and warrants (the “Warrants”) to purchase up to an aggregate of 1,597,969 shares of common stock with an exercise price of $3.60 per such share underlying any Warrant. The Warrants are deemed to be derivative instruments due to a ratchet provision that adjusts the exercise price if the Company issues additional equity instruments in the future at an effective price per share less than the exercise price then in effect. Upon issuance of the warrants, the Company recorded a liability of $4,505,605 to derivative financial instruments in its balance sheet. The issuance of such shares of common stock was not registered under the Securities Act as such issuance was exempt from registration under Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
| 18 |
On August 15, 2013, the Company closed a private placement and sold 5,531,401 shares of the Company’s common stock, at a purchase price of $4.50 per share, or $24,891,303 in the aggregate, and warrants to purchase up to an aggregate of 2,765,701 shares of common stock with an exercise price of $6.00 per share underlying each warrant. The Warrants are deemed to be derivative instruments due to a ratchet provision that adjusts the exercise price if the Company issues additional equity instruments in the future at an effective price per share less than the exercise price then in effect. Upon issuance of the warrants, the Company recorded a liability of $9,201,487 to derivative financial instruments in its balance sheet. The issuance of the shares of common stock in such private placement was not registered under the Securities Act as such issuance was exempt from registration under Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
February Registration Rights Agreement
On February 14, 2013, in connection with the closing of the February Private Placement, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the purchasers in the February Private Placement (the “Purchasers”), which sets forth the rights of the Purchasers to have their shares of common stock purchased in the February Private Placement and shares of common stock issuable upon exercise of the Warrants registered with the SEC for public resale.
Pursuant to the Registration Rights Agreement, the Company was required to file a Registration Statement on Form S-1 (the “Registration Statement”) with the SEC within 30 days of the date of the Registration Rights Agreement registering the total number of shares of common stock purchased in the February Private Placement and shares of common stock issuable upon exercise of the Warrants. The Company further agreed to use its reasonable efforts to have the Registration Statement declared effective within 60 days after the date of the Registration Rights Agreement (or, in the event of a “full review” by the SEC, within 90 days after the date of the Registration Rights Agreement). The Company has also agreed to use reasonable efforts to maintain the effectiveness of the Registration Statement until all of the securities covered by the Registration Statement have or may be sold by investors under Rule 144 of the Securities Act, without volume or manner-of-sale restrictions.
The Registration Rights Agreement provided that in the event the Registration Statement was not filed or declared effective within the prescribed time period or if the Company failed to maintain the effectiveness of the Registration Statement as required for specified time periods, the Company shall pay to the holders of registrable securities, on the date of each such event and on each monthly anniversary thereof until the applicable event is cured, partial liquidated damages equal to 2.0% of the aggregate purchase price paid by such Purchaser in the February Private Placement, up to a maximum of 10.0% of such aggregate purchase price. If the Company fails to pay any partial liquidated damages pursuant to this Section in full within seven days after the date payable, the Company will pay interest thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Purchaser, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full.
The Company determined, as of the date of the financing transaction, that it was probable that it would not be in a position to cause the registration statement to be declared effective within the contractually defined time period. Accordingly, the Company allocated approximately $360,000 of the proceeds to a registration payment arrangement liability on the date that the financing transaction closed, in accordance with the guidelines of ASC 825-20. As described in Note 3, the Company and the investors who are parties to the registration payment arrangement entered into an the Amended Registration Rights Agreement which provides, among other things, for a waiver of the liquidated damages that the Company incurred under the original terms of the registration payment arrangement described herein. The Company recognized $360,000 as income upon the waiver of the liquidated damages.
First Amendment to the February Registration Rights Agreement
As described in Note 3, the Company and the investors who participated in the private placement transaction that the Company completed on February 14, 2013 entered into the Amended Registration Rights Agreement which provides, among other things, for (i) a waiver of any and all liquidated damages that the Company incurred for its inability to cause the a registration statement to be declared effective within certain contractually defined time-frames stipulated in the original agreement; (ii) a commitment on the part of the investors in the February private placement to participate in the private placement transaction that the Company completed on August 15, 2013; and (iii) a covenant on the part of the Company to proceed with the sale of shares that were issued in the August 15, 2013 private placement transaction. In exchange, the Company paid an aggregate fee of $2,495,256 to these investors consisting of (i) 73,710 shares of the Company’s common stock with an aggregate fair value of $331,695 (based on the selling price of $4.50 per share in the August financing transaction); (ii) cash in the amount of $1,835,000; and (iii) warrants to purchase 98,756 shares of common stock with a fair value of $328,561 that were classified as derivative liability instruments. The investors were also given the option to purchase shares of the Company’s common stock at $4.50 per share as a use of the cash portion of the payment arrangement. Accordingly, $946,196 of the cash portion of the fee was settled in cash and the remainder was settled by the issuance of 197,512 shares. Additionally, the Company paid $103,425 to an investor to whom the Company sold shares in a private placement transaction in January 2013 and who participated in the August 2013 private placement transaction. This payment was settled entirely by the issuance of 20,685 shares of the Company’s common stock at a value of $5.00 per share.
| 19 |
The Company recorded the aggregate amount of the payments made to the investors by to allocating approximately $360,000 to the waiver of the original registration payment obligation taken as a charge to operations and the remaining amount of $2,238,681 is treated as reduction of the proceeds received in the August financing transaction.
August Registration Rights Agreement
On August 15, 2013, in connection with the closing of the August 15, 2013 private placement (the “August Private Placement”), the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the purchasers in the August Private Placement (the “Purchasers”), which sets forth the rights of the Purchasers to have their shares of common stock purchased in the Private Placement and shares of common stock issuable upon exercise of the Warrants registered with the SEC for public resale.
Pursuant to the Registration Rights Agreement, the Company was required to file a Registration Statement on Form S-1 (the “Registration Statement”) with the SEC within 30 days of the date of the Registration Rights Agreement registering the total number of shares of common stock purchased in the August Private Placement and shares of common stock issuable upon exercise of the Warrants. The Company further agreed to use its reasonable efforts to have the Registration Statement declared effective within 60 days after the date of the Registration Rights Agreement (or, in the event of a “full review” by the SEC, within 120 days after the date of the Registration Rights Agreement). The Company has also agreed to use reasonable efforts to maintain the effectiveness of the Registration Statement until all of the securities covered by the Registration Statement have or may be sold by investors under Rule 144 of the Securities Act, without volume or manner-of-sale restrictions.
The Registration Rights Agreement provided that in the event the Registration Statement was not filed or declared effective within the prescribed time period or if the Company failed to maintain the effectiveness of the Registration Statement as required for specified time periods, the Company shall pay to the holders of registerable securities, on the date of each such event and on each monthly anniversary thereof until the applicable event is cured, partial liquidated damages equal to 2.0% of the aggregate purchase price paid by such Purchaser in the August Private Placement, up to a maximum of 10.0% of such aggregate purchase price. If the Company fails to pay any partial liquidated damages pursuant to this Section in full within seven days after the date payable, the Company will pay interest thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Purchaser, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full.
On September 13, 2013, the Company submitted the Registration Statement to the SEC on a confidential basis. The Company determined, as of the date of the financing transaction, that it was probable that it would be in a position to cause the registration statement to be declared effective within the contractually defined time period.
Stock Options
On May 13, 2013, the Company issued options (the “Options”) to purchase 120,000 shares of common stock in connection with an employment agreement with Horacio Plotkin, M.D. (the “Plotkin Employment Agreement”) pursuant to which Dr. Plotkin was appointed as Chief Medical Officer of the Company. The options vest quarterly in pro rata portions during the 3 years following the effective date of July 1, 2013. The Company valued these Options using the Black-Scholes options pricing model and the following assumption terms: risk-free interest rate of .83% (based on the US Treasury note yield), expected term (in years) of 5.81 (based on guidance provided in SAB 107 that allows the Company to use the simplified method for “plain vanilla” options for this calculation), expected volatility of 98.56% (based on historical stock volatilities of several comparable publicly-traded companies over a period equal to the expected term of the options, as the Company does not have a long trading history to estimate the volatility of its own common stock), and an exercise price equal to the fair value of the stock on the date of issuance of $8.70 per share. For the three and nine months ended September 30, 2013 the Company recognized $64,716 and $101,399 as compensation expense related to the Options. At September 30, 2013, the unrecognized compensation expense, remaining amortization period, intrinsic value and remaining contract life of the Options are $703,333, 2.5 years, $0 and 9.62 years, respectively.
On September 9, 2013, the Company issued options to purchase 90,000 shares of common stock to two employees. The options vest quarterly in pro rata portions during the 3 years following the effective date of July 1, 2013. The Company valued these options using the Black-Scholes options pricing model and the following assumption terms: risk-free interest rate of 1.71% (based on the US Treasury note yield), expected term (in years) of 5.81 (based on guidance provided in SAB 107 that allows the Company to use the simplified method for “plain vanilla” options for this calculation), expected volatility of 104.78% (based on historical stock volatilities of several comparable publicly-traded companies over a period equal to the expected term of the options, as the Company does not have a long trading history to estimate the volatility of its own common stock), and an exercise price equal to the fair value of the stock on the date of issuance of $6.20 per share. For the three and nine months ended September 30, 2013 the Company recognized $9,606 as compensation expense related to the options. At September 30, 2013, the unrecognized compensation expense, remaining amortization period, intrinsic value and remaining contract life of the options are $438,748, 2.5 years, $0 and 9.94 years, respectively.
NOTE 13. INCENTIVE SHARES
At September 30, 2013, the Company did not have any active share-based compensation plans available for grants to employees, non-employee directors and consultants. Since its inception, the Company has granted incentive shares.
For the three and nine months ended September 30, 2013 and 2012, and for the period from March 11, 2011 (inception) through September 30, 2013, the Company recognized $1,741,908, $7,027,675, $2,029,505, $14,014,402 and $26,419,022 as compensation expense related to incentive shares granted in the consolidated statements of operations, respectively. Share compensation for non-employee awards subject to vesting is being accrued at current fair value. As of September 30, 2013, there was approximately $1,294,232, of unrecognized compensation cost related to incentive shares issued. This amount is expected to be recognized over a weighted average of 2.25 years.
| 20 |
| Employee- number of shares | Non- Employee- Number of shares | Total Number of Shares | Weighted Average Fair Value | |||||||||||||
| Unvested December 31, 2011 | 1,281,225 | 321,165 | 1,602,390 | $ | 4.00 | |||||||||||
| Granted | 866,180 | 87,503 | 953,683 | 12.89 | ||||||||||||
| Vested | (2,048,280 | ) | (193,672 | ) | (2,241,952 | ) | 7.34 | |||||||||
| Forfeited | (46,353 | ) | - | (46,353 | ) | 9.06 | ||||||||||
| Unvested December 31, 2012 | 52,772 | 214,996 | 267,768 | 5.79 | ||||||||||||
| Granted | 135,000 | - | 135,000 | 6.24 | ||||||||||||
| Vested | (17,918 | ) | (115,445 | ) | (133,363 | ) | 5.05 | |||||||||
| Forfeited | (20,833 | ) | (37,500 | ) | (58,333 | ) | 4.00 | |||||||||
| Unvested September 30, 2013 | 149,021 | 62,051 | 211,072 | $ | 6.43 | |||||||||||
All of the Company’s share base payments were originally issued as Retrophin LLC Class B incentive units that represent a profits interest up through the date of Retrophin LLC’s conversation to a C Corporation, which was structured as a tax free exchange transaction.
Shares granted as incentive shares were originally subject to certain conditions at the time of grant. Such conditions specified that upon the occurrence of a Termination Event, as defined in the amended operating agreement the Company shall have the right, but not the obligation, to repurchase, all, of the vested incentive shares owned by such incentive shareholder, at a purchase price based on the fair market value of the incentive shares determined in good faith by the Board of Directors. The aforementioned repurchase option was rescinded upon the Company’s conversion to a corporation.
Effective May 20, 2013, the Company entered into an employment agreement with Marc L. Panoff (the “Panoff Employment Agreement”) pursuant to which Mr. Panoff was appointed as Chief Financial Officer and Chief Accounting Officer of the Company. In accordance with the terms of the Panoff Employment Agreement, Mr. Panoff will be granted 120,000 units of restricted common stock of the Company, a pro rata portion of which will vest quarterly beginning on December 31, 2013 during the 3 years following the effective date.
On July 1, 2013, the Company granted 15,000 units of restricted common stock of the Company to an employee. The stock will vest quarterly in pro rata portions beginning September 30, 2013 during the 3 years following the grant date.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Leases
The Company assumed a building lease from an affiliate in April 2013 for office space at its principal offices in New York, New York and is responsible for rent of approximately $275,000 annually plus rent escalations through August 2016 (see Note 11).
On October 1, 2013, the Company entered into building lease for office space in Cambridge, Massachusetts and is responsible for rent of approximately $216,000 annually plus rent escalations through September 2016.
On October 8, 2013, the Company entered into an amended lease agreement for additional office space at its principal offices in New York, New York and is responsible for additional rent of approximately $225,000 annually plus rent escalations through August 2016.
Exclusivity Agreements
On August 16, 2013, the Company announced that it had signed an agreement with a major pharmaceutical company for the exclusive right to negotiate a royalty-bearing U.S. license for a product to be developed for the treatment of Autism and Schizophrenia. Pursuant to the exclusivity agreement, the Company paid the major pharmaceutical company a non-refundable upfront fee of $2 million and will have an exclusive period of 120 days to negotiate a license agreement (see Note 3). The Company is in active negotiations to consummate a license agreement. If a definitive license agreement is consummated, the Company will apply the upfront fee to the license and will make a determination as to whether it should be treated as an asset or research and development expense. If no definitive agreement is consummated, the upfront fee will be expensed.
On September 20, 2013, the Company signed an agreement with an individual for the exclusive right to negotiate a royalty-bearing U.S. license for a product to be developed for the treatment of central nervous system disorders. Pursuant to the exclusivity agreement, the Company paid the individual a non-refundable upfront fee of $250,000 and will have an exclusive right until December 31, 2013. If an agreement is not executed on or before December 31, 2013, the Company will receive a partial refund of the upfront fee. Upon execution of a license agreement, the Company would receive the exclusive right to the intellectual property to develop, manufacture and sell the product worldwide and would pay
| 21 |
additional fees to the major pharmaceutical company. The Company is in active negotiations to consummate a license agreement. If a definitive license agreement is consummated, the Company will apply the upfront fee to the license and will make a determination as to whether it should be treated as an asset or research and development expense. If no definitive agreement is consummated, the upfront fee will be expensed.
For the three and nine months ended September 30, 2013, the Company has recorded $2,250,000 as exclusivity agreement deposits to secure license exclusivity under current assets (see Note 3).
Research Agreement
Effective October 1, 2013, the Company signed a Sponsored Research Agreement (“SRA”) with St. Jude (see Note 15).
NOTE 15. SUBSEQUENT EVENTS
On October 1, 2013 the Company entered into a building lease for approximately 4,232 square feet of office space located in Cambridge, MA. The Company is responsible for approximately $216,000 annual base rent plus rent escalations, common area maintenance, insurance, and real estate taxes, under a lease agreement expiring in September 2016.
On October 8, 2013, the Company amended its lease agreement for its principal office located in New York City. The Company expanded its principal office and is responsible for additional rent of approximately $225,000 annual base rent plus rent escalations, common area maintenance, insurance, and real estate taxes, under a lease agreement expiring in September 2016.
Research Agreement
Effective October 1, 2013, the Company signed a SRA with St. Jude. The Company is responsible for a total of $780,674 payable in four equal installments on October 19, 2013, March 19, 2014, September 19, 2014, and March 19, 2015. Unless otherwise terminated by operation of law or by acts of the parties in accordance with the terms of the agreement, the SRA shall be in full force and effect for a period of two (2) years and shall expire on October 1, 2015. The term may be extended by written agreement between the parties.
Settlement Payments
In October 2013, the Company paid $1,655,000 in cash and 5,000 shares of common stock valued at $36,400 to settle agreements on behalf of a related party. Upon payment, the Company and the related party entered into promissory notes whereby the related party agreed to pay the Company the principal amount of $1,691,400 plus interest at an annualized rate of 5% as reimbursement of payments that the Company made to settle a portion of the agreements.
The Company applied the accounting guidance provided in ASU 2013-04. The guidance in this update is effective for fiscal years beginning after December 15, 2013 with early adoption permitted. The guidance in this update requires companies to measure obligations resulting from joint and several liability arrangements as the sum of the amount that the entity has a) contractually agreed to pay, and b) any additional amounts that the entity expects to pay on behalf of its co-obligors. The Company has recorded the full amount of the settlements as a charge to its operations due to uncertainty as to whether the related party will have sufficient liquidity to repay the Company or fund the indemnification agreements should it become necessary. Any amounts that the Company may recover under the note due from the related party or under the terms of the indemnification agreement, if in fact any amounts are recovered at all, would be characterized as a capital contribution at the date such payments are received.
On September 18, 2013, the Company made a proposal to the board of directors of Transcept Pharmaceuticals, Inc. (“Transcept”) to acquire all of the outstanding shares of Transcept’s common stock for $4.00 per share in cash. Although Transcept’s board of directors rejected the Company’s proposal, the Company informed Transcept that it will be willing to continue to discuss the proposal. If Transcept accepts the Company’s proposal to acquire all of its outstanding shares of common stock, the Company will need to obtain additional equity or debt financing to consummate the acquisition and consolidation (see Note 3).
| 22 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein. In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
Certain information contained in this Quarterly Report on Form 10-Q of Retrophin, Inc., a Delaware corporation (“we”, “us”, the “Company” or “Retrophin”) include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements herein which are not historical reflect our current expectations and projections about the Company’s future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to the Company and our management and their interpretation of what is believed to be significant factors affecting the businesses, including many assumptions regarding future events. Such forward-looking statements include statements regarding, among other things:
| · | our ability to produce, market and generate sales of our products; |
| · | our ability to develop, acquire and/or introduce new products; |
| · | our projected future sales, profitability and other financial metrics; |
| · | our future financing plans; |
| · | our plans for expansion of our facilities; |
| · | our anticipated needs for working capital; |
| · | the anticipated trends in our industry; |
| · | our ability to expand our sales and marketing capability; |
| · | acquisitions of other companies or assets that we might undertake in the future; |
| · | our operations in the United States and abroad, and the domestic and foreign regulatory, economic and political conditions; and |
| · | competition existing today or that will likely arise in the future. |
Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors, including the ability to raise sufficient capital to continue the Company’s operations. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” on our Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on June 13, 2013 and Form 10-K/A for the year ended December 31, 2012 (the “2012 10-K/A”) filed with the SEC on September 13, 2013 and matters described in this Form 10-Q generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Form 10-Q will in fact occur. Potential investors should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
The specific discussions in this Form 10-Q about the Company include financial projections and future estimates and expectations about the Company’s business. The projections, estimates and expectations are presented in this Form 10-Q only as a guide about future possibilities and do not represent actual amounts or assured events. All the projections and estimates are based exclusively on the Company management’s own assessment of our business, the industry in which it works and the economy at large and other operational factors, including capital resources and liquidity, financial condition, fulfillment of contracts and opportunities. The actual results may differ significantly from the projections.
Potential investors should not make an investment decision based solely on the Company’s projections, estimates or expectations.
| 23 |
Overview
Our results of operations discussed below reflect our operations during the period in which we are in development stage and starting up our operations. As a result, these results should not be considered indicative of our anticipated results of operations on a going forward basis.
Business
We were organized as Desert Gateway, Inc. (“Desert Gateway”), a corporation whose sole purpose was to locate and consummate a merger or acquisition with a private entity and, prior to the merger described below, had no existing operations.
On December 12, 2012, Desert Gateway completed the transactions contemplated under the Agreement and Plan of Merger, dated as of December 12, 2012 (the “Merger Agreement”), by and among Desert Gateway, Desert Gateway Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Desert Gateway, and former Retrophin, our predecessor, in which former Retrophin became a wholly-owned subsidiary and the principal operating subsidiary of the Company. The transactions contemplated by the Merger Agreement are collectively referred to herein as the “Merger”.
Our predecessor, former Retrophin, was formed as a Delaware limited liability company on March 11, 2011 and was converted to a Delaware corporation on September 20, 2012. Former Retrophin was a developmental stage biopharmaceutical company focused on the development and commercialization of therapies for catastrophic diseases.
On February 14, 2013, we changed our name to “Retrophin, Inc.” through a short-form merger pursuant to Section 253 of the Delaware General Corporation Law, with its then wholly owned subsidiary, and our predecessor, former Retrophin, with the Company continuing as the surviving corporation following the merger. On April 1, 2013, the Board of Directors of the Company determined to change the Company’s fiscal year from a fiscal year ending in February of each year to a fiscal year ending on December 31 of each year.
We are a development stage company focused on developing pharmaceutical products primarily for the treatment of rare diseases. Our lead product in development, RE-021, is a small molecule intended to treat focal segmental glomerulosclerosis, and we expect to initiate a Phase 2 clinical study in 2013. We also have a number of programs in preclinical development. Our second most developed program RE-024 for the treatment of pantothenate kinase-associated neurodegeneration is in preclinical testing, and we will seek to initiate clinical trials of this product candidate as soon as is practical. We are also developing a treatment for Duchenne muscular dystrophy. Our focus is to seek treatment for serious, unmet, rare diseases. The diseases on which we focus are considered “orphan” diseases because they affect fewer than 200,000 patients in the United States. However, such diseases have a profound impact on those that suffer from them and on their families. Currently, we believe that we are the only company that is focusing on developing treatments for these rare and ultra-rare diseases.
Plan of Operation
Our plan of operation for the years ending December 31, 2013 and 2014 is to continue implementing our business strategy, including the clinical development of our three drug candidates, focusing primarily on the development of RE-021 for the treatment of focal segmental glomerulosclerosis (FSGS), a disease that causes nephrotic syndrome and kidney failure. We also intend to expand our drug product portfolio by acquiring additional drugs for marketing or development. We expect our principal expenditures during the next 12 months to include:
| · | operating expenses, including expanded research and development and general and administrative expenses; and |
| · | product development expenses, including the costs incurred with respect to applications to conduct clinical trials in the United States for our three products and the costs of ongoing and planned clinical trials. |
As part of our planned expansion, we anticipate hiring additional full-time employees for research and development activities and for general and administrative activities. In addition, we intend to use clinical research organizations and third parties to perform our clinical studies and manufacturing. At our current and desired pace of commercialization and clinical development of our drugs, for the next 12 months, we expect to spend approximately $15 to $20 million on clinical development and research and development activities and approximately $5 to $6 million on general and administrative expenses. We cannot assure you these amounts will be sufficient to fund our operations over the course of the next two years and we may need to expend significantly greater amounts to accomplish our goals.
Research and Development Projects
RE-021 . We plan to initiate a Phase 2 clinical trial of RE-021 in patients with FSGS in 2013, with reduction in proteinuria, which is an excess of serum proteins in the urine, as the primary endpoint. We expect it will take at least three years to complete development and obtain FDA approval of RE-021 for any indication, and we may never obtain such approval. Currently, we anticipate that we will need to expend approximately an additional $5 to $6 million in development costs over the next 12 months and at least an aggregate of approximately $25 to $35 million before we receive FDA approval for RE-021 for treatment of patients with FSGS.
RE-024 . We intend to develop RE-024 as a potential treatment for pantothenate kinase-associated neurodegeneration (PKAN), a degenerative disease of the brain that primarily affects young children due to their inability to process phosphopantothenic acid. RE-024 is a preclinical investigational program. In vivo animal testing of these molecules is ongoing. In August 2013, we announced that we received positive survival results from interim preclinical tests for the treatment of PKAN. RE-024 is a replacement therapy for phosphopantothenate, the substrate that is
| 24 |
missing in patients with PKAN. Tests were conducted on mice that were administered a PANK inhibitor to induce a PKAN-like phenotype.
We expect to initiate a human study for RE-024 in the first quarter of 2014. We expect that it will take an additional five to seven years to complete development and obtain FDA approval of RE-024, if ever. Currently, we anticipate that we will need to expend approximately an additional $2 to $3 million in development costs over the next 12 months and at least an aggregate of approximately $30 to $50 million until we receive FDA approval for RE-024 should we choose to continue development.
RE-001 . RE-001 is a recombinant, modified form of utrophin, a protein similar to the dystrophin protein that is missing in the muscles of DMD patients. RE-001 is a preclinical investigational program. Production scale-up the molecule is underway, and we expect that in vivo evaluation of clinical trial quality material may begin in 2013. Currently, we anticipate that we will need to expend approximately an additional $1 million in development costs over the next 12 months.
Results of Operations for the Three Month Period Ended September 30, 2013 compared to the Three Month Period Ended September 30, 2012
Operating Expenses
We had no revenues during the three month period ended September 30, 2013 and 2012.
Our operating expenses for the three month period ended September 30, 2013 were $6,030,861 compared to $8,459,745 for the three month period ended September 30, 2012 which represents a decrease of $2,428,884. The expense decrease was principally attributable to a decrease in our compensation and related costs in the amount of $4,589,966 as well as a decrease in our professional fees in the amount of $1,981,813 offset by an increase in our research and development expenses in the amount of $1,289,219 and an increase in our selling, general and administrative costs in the amount of $2,853,676 (which includes settlement expenses of $876,375). Included in the decrease in our compensation and related costs is a decrease in stock based compensation to employees of $4,751,864 and an increase in cash compensation to employees of approximately $200,000 due to increase in the number of employees. Included in the decrease in our professional fees is a decrease in stock based compensation to non-employees of $606,791 and an increase in cash compensation to professionals of approximately $100,000 due to an increase in consulting and legal fees associated with business development. Included in selling, general and administrative costs are settlement charges in the amount of $300,000 and an increase in cash expenditures of approximately $300,000 due to an increase in travel and related expenses associated with business development.
Other Income (Expense)
Other expense for the three month period ended September 30, 2013 was $5,980,313 compared to other expense of $20,712 for the three month period ended September 30, 2012 which represents an increase of $5,959,601. The increase was primarily attributable to loss from the change in fair value of derivative financial instruments of $6,040,054, a decrease in interest income of $6,045, offset by a realized gain on the sale of marketable securities of $59,737 and a decrease in interest expense of $26,761. Included in other income is registration payment income of $360,000 relating to a waiver we received for previous liquidated damages and expense of $360,000 from allocating the waiver of the original registration payment from the February 14, 2013 registration rights agreement as a charge to income.
Results of Operations for the Nine Month Period Ended September 30, 2013 compared to the Nine Month Period Ended September 30, 2012
Operating Expenses
We had no revenues during the nine month period ended September 30, 2013 and 2012.
Our operating expenses for the nine month period ended September 30, 2013 were $13,131,247 compared to $16,757,891 for the nine month period ended September 30, 2012 which represents a decrease of $3,626,644. The expense decrease was primarily attributable to a decrease in our compensation and related costs in the amount of $6,604,286 as well as a decrease in our professional fees in the amount of $4,647,601, offset by an increase in our research and development expenses in the amount of $1,826,924, an increase in our selling, general and administrative costs in the amount of $5,698,319 (which includes settlement expenses of $876,375), and an increase in our technology license fee in the amount of $100,000. Included in the decrease in our compensation and related costs is a decrease in stock based compensation to employees of $7,653,961 and an increase in cash compensation to employees of approximately $1 million due to increase in the number of employees. Included in the decrease in our professional fees is a decrease in stock based compensation to non-employees of $4,440,507 and an increase in cash compensation to professionals of approximately $1 million due to an increase in consulting and legal fees associated with business development. Included in selling, general and administrative costs are settlement charges in the amount of $2,584,511 and an increase in cash expenditures of approximately $1.2 million due to an increase in travel and related expenses associated with business development.
Other Income (Expense)
Other expense for the nine month period ended September 30, 2013 was $8,901,362 compared to $54,778 for the nine month period ended September 30, 2012 which represents an increase of $8,846,584. The expense increase was primarily attributable to the expense from the change in fair value of derivative financial instruments of $8,915,672, a decrease in interest income of $15,772, an increase in loss on transactions denominated in foreign currencies of $3,873, offset by a realized gain on the sale of marketable securities of $59,737 and a decrease in interest expense of $28,996. Included in other income is registration payment income of $360,000 related to the waver we received for previous
| 25 |
liquidated damages and expense of $360,000 from allocating the waiver of the original registration payment from the February 14, 2013 registration rights agreement as a charge to income.
Costs and Expenses
Compensation and related costs include salaries, bonuses and benefits to Company executives and employees and vested incentive shares and options granted to members and employees.
Professional fees include vested incentive shares granted to consultants and direct transfers of shares to consultants by members; research and development fees for drug (RE-021 and RE-024), candidates for the treatment of FSGS and PKAN and evaluation of potential new technologies; legal expense related to licensing and production acquisition, employment and consulting agreements and general corporate work; consulting fees; accounting fees; and public and investor relations fees.
Selling, general and administrative include rent expense, depreciation and amortization, settlement charges, travel and entertainment, recruiting, insurance, business developments, advertising and other operating expenses.
Research and development include consulting fees and expenses related to RE-021 (FSGS) and RE-024 (PKAN).
Liquidity and Capital Resources
Management believes that we will continue to incur losses for the foreseeable future. Therefore we will either need additional equity or debt financing, or by entering into strategic alliances on products in development 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 can successfully raise additional funds through equity and/or debt financing. Such additional funds may not become available on acceptable terms, if at all, and we cannot assure you that any additional funding we do obtain will be sufficient to meet our needs in the long term. Since inception, through September 30, 2013, we had raised approximately $38.5 million through capital contributions and notes payable from Retrophin shareholders and related parties.
Since inception through September 30, 2013, we have incurred a net loss of approximately $55.6 million, including stock-based compensation charge of approximately $26 million for the period from March 11, 2011 (inception) to September 30, 2013. At September 30, 2013, we had a working capital deficit of approximately $14.1 million; however, the working capital deficit includes a derivative liability of approximately $23.9 million for warrants issued in financing transactions. Our accumulated deficit amounted to $55.6 million at September 30, 2013.
In January 2013, we sold an aggregate of 272,221 shares of common stock at $3.00 per share in certain private placement transactions, for an aggregate purchase price of $816,664 in cash.
On February 14, 2013, in connection with the closing of a private placement, we issued and sold an aggregate of 3,045,929 shares of common stock at $3.00 per share, for an aggregate purchase price of $9,137,787 in cash, and warrants to purchase up to an aggregate of 1,597,969 shares of common stock.
On August 15, 2013, the Company closed a private placement and sold 5,531,401 shares of the Company’s common stock, at a purchase price of $4.50 per share, or $24,891,303 in the aggregate, and warrants to purchase up to an aggregate of 2,765,701 shares of common stock.
During the nine months ended September 30, 2013, the Company also made approximately $135,000 of other payments to third party service providers to settle liabilities on behalf of MSMB Entities.
Since our inception in 2011, we have generated losses from operations and we anticipate that we will continue to generate losses from operations for the foreseeable future. As of September 30, 2013 and December 31, 2012, our stockholders’ deficit was $9,578,124 and $3,407,815, respectively. Our net loss for the nine month period ended September 30, 2013 was $22,032,609 compared to $16,812,669 for the nine month period ended September 30, 2012. Net cash used in operating activities was $9,192,442 for the nine month period ended September 30, 2013 compared to $2,088,811 for the nine month period ended September 30, 2012. Operations since inception have been funded entirely with the proceeds from equity and debt financings. As of September 30, 2013, we had cash of $13,409,825. We will continue to fund operations from cash on hand and through the similar sources of capital previously described. We can give 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.
On August 14, 2013, the Company and the investors who participated in the private placement transaction that the Company completed on February 14, 2013, entered into the first amendment to the registration rights agreement (the “Amended Registration Rights Agreement”) associated with that transaction. The Amended Registration Rights Agreement provides, among other things, for (i) a waiver of any and all liquidated damages that the Company incurred for its inability to cause the a registration statement to be declared effective within certain contractually defined time-frames stipulated in the original agreement; (ii) a commitment on the part of the investors in the February private placement to participate in a private placement transaction that the Company completed on August 15, 2013, and (iii) a covenant on the part of the Company to proceed with the sale of shares that were issued under the August 15, 2013 private placement transaction. In exchange, the
| 26 |
Company paid an aggregate fee to these investors of $2,495,256 consisting of (i) 73,710 shares of the Company’s common stock with an aggregate fair value of $331,695 (based on the selling price of $4.50 per share in the August financing transaction); (ii) cash in the amount of $1,835,000 (Note 14); and (iii) warrants to purchase 98,756 shares of common stock with a fair value of $328,561. The investors were also given the option to purchase shares of the Company’s common stock at $4.50 as a use of the cash portion of the payment arrangement. Accordingly, $946,196 of the cash portion of the fee was settled in cash and the remainder was settled by the issuance of 197,512 shares. Additionally, the Company paid $103,425 to an investor to whom the Company sold shares in a private placement transaction in January 2013 and who participated in the August 2013 private placement transaction. This payment was settled entirely by the issuance of 20,685 shares of the Company’s common stock at a value of $5.00 per share.
On August 16, 2013, the Company announced that it had signed an agreement with a major pharmaceutical company for the exclusive right to negotiate a royalty-bearing U.S. license for a product to be developed for the treatment of Autism and Schizophrenia. Pursuant to the exclusivity agreement, the Company paid the major pharmaceutical company a non-refundable upfront fee of $2 million and will have an exclusive period of 120 days to negotiate a license agreement (see Note 14). The Company is in active negotiations to consummate a license agreement. If a definitive license agreement is consummated, the Company will apply the upfront fee to the license and will make a determination as to whether it should be treated as an asset or research and development expense. If no definitive agreement is consummated, the upfront fee will be expensed.
On September 20, 2013, the Company signed an agreement with an individual for the exclusive right to negotiate a royalty-bearing U.S. license for a product to be developed for the treatment of central nervous system disorders. Pursuant to the exclusivity agreement, the Company paid the individual a non-refundable upfront fee of $250,000 and will have an exclusive period ending on December 31, 2013 (see Note 14). The Company is in active negotiations to consummate a license agreement. If a definitive license agreement is consummated, the Company will apply the upfront fee to the license and will make a determination as to whether it should be treated as an asset or research and development expense. If no definitive agreement is consummated, the upfront fee will be expensed.
Effective October 1, 2013, the Company signed a Sponsored Research Agreement (“SRA”) with St. Jude. The Company and hospital will collaborate on research focused on the study of PKAN and other infectious diseases. The Company is responsible for a total of $780,674 payable in four equal installments on October 19, 2013, March 19, 2014, September 19, 2014, and March 19, 2015. The Company has paid $195,168.50 to St. Jude under the SRA to date. Unless otherwise terminated by operation of law or by acts of the parties in accordance with the terms of the agreement, the SRA shall be in full force and effect for a period of two (2) years and shall expire on October 1, 2015. The term may be extended by written agreement between the parties (see Note 14 and Note 15).
In the second quarter of 2013, the Company, its Chief Executive Officer and a related party became parties to a series of agreements to settle up to $2,284,511 of liabilities, which Company management believes are the primary obligation of the related party. The Company paid $593,111 of these settlements in the second quarter on behalf of the related party and had outstanding liabilities of $1,691,400 as of September 30, 2013, which the Company paid as of the date of this filing. Concurrent with the execution and payment of such settlement agreements, the Company entered into indemnification agreements and received promissory notes from the related party whereby the related party agreed to pay the Company the principal amount of $2,284,511 plus interest at an annualized rate of 5% as reimbursement of payments that the Company made to settle a portion of the agreements. The Chief Executive Officer also agreed to deliver or cause to be delivered 47,128 shares of common stock to one of the counter parties as a separate component of one of these agreements. Accordingly, the Company does not believe it is required to record a liability for the shared-based component of this specific agreement during the second quarter ended September 30, 2013. There is uncertainty as to whether the related party will have sufficient liquidity to repay the Company or fund the indemnification agreements should it become necessary (see Note 11).
On August 29, 2013, the Company entered into and paid an additional settlement agreement for $300,000 due following execution of the agreement. As of the date of this filing, this settlement has been paid.
At this time, we do not have sufficient capital to cover operating costs for the next twelve month period.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments relating to the recovery of assets or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Cash Flows from Operating Activities
Operating activities used approximately $9,192,442 of cash during the nine month period ended September 30, 2013 compared $2,088,811 for the nine month period ended September 30, 2012. The increase of $7,103,631 was the result of a decrease in non-cash charges of $4,321,626, a net change in operating assets and liabilities of $2,437,935 and an increase in net loss of $5,219,940. Included in cash flows from operating activities is a registration payment obligation expense and reversal of the registration payment obligation liability of $360,000.
Cash Flows from Investing Activities
Cash used in investing activities for the nine month period ended September 30, 2013 was $6,670,416 compared to $1,569,018 for the nine month period ended September 30, 2012. The increase of $5,101,398 was primarily the result of repayment of a technology license liability of $1,300,000, a net purchase of marketable securities of $3,052,473, payments for security deposits for exclusivity of certain licenses of $2,250,000, an increase in the purchase of fixed assets of $13,772, and an increase in our security deposit of $40,000, offset by a decrease in the purchase of intangible assets of $1,152,718, payments made on loans to stockholder of $399,329, and a decrease in a related party note receivable of $2,800.
| 27 |
Cash Flows from Financing Activities
For nine month period ended September 30, 2013, cash provided by financing activities was $29,261,295 compared to $3,649,965 during the nine month period ended September 30, 2012. The increase of $25,611,330 was primarily a result of an increase of $28,340,254 in proceeds received from the private sale of our equity securities, offset by a registration payment of $946,196, and a decrease in activities associated with related party notes payable of $1,782,728.
In January 2013, we sold an aggregate of 272,221 shares of common stock at $3.00 per share in certain private placement transactions, for an aggregate purchase price of $816,664 in cash. The issuance of such shares of common stock was not registered under the Securities Act as such issuance was exempt from registration under Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
On February 14, 2013, we closed a private placement of 3,045,929 shares of our common stock, at a purchase price of $3.00 per share, or $9,137,787 in the aggregate, and Warrants to purchase up to an aggregate of 1,597,969 shares of common stock with an exercise price of $3.60 per such share underlying any warrant. We incurred fees of $678,986 in relation to the financing. The issuance of the shares of common stock in such private placement was not registered under the Securities Act as such issuance was exempt from registration under Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
On August 15, 2013, we closed a private placement and sold 5,531,401 shares of our common stock, at a purchase price of $4.50 per share, or $24,891,303 in the aggregate, and warrants to purchase up to an aggregate of 2,765,701 shares of common stock with an exercise price of $6.00 per share underlying each warrant. We incurred fees of $2,811,313 in relation to the financing. The issuance of the shares of common stock in such private placement was not registered under the Securities Act as such issuance was exempt from registration under Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
The Company entered into registration rights agreements, concurrently with the closings of the February 14, 2013 and August 15, 2013 Private Placements, requiring it to file a registration statement on Form S-1 within 30 days of the closing date of the transaction and cause such registration statement to be declared effective within 60 days thereafter. Each registration rights agreement provides for the payment of certain liquidated damages at the rate of 2% of the gross proceeds per month for each in which the Company is not in compliance with such agreement, not exceeding 10% of gross proceeds in the aggregate. As described elsewhere herein, the Company is not in compliance with the registration payment arrangement for the February 14, 2013 registration rights agreement and therefore recorded $360,000 as registration payment obligation treated as a reduction of the proceeds received in the February financing transaction.
The Company and the investors who participated in the private placement transaction that the Company completed on February 14, 2013, entered into the Amended Registration Rights Agreement. In exchange, the Company paid an aggregate fee to these investors of $2,495,256. Additionally, the Company paid $103,425 to an investor to whom the Company sold shares in a private placement transaction in January 2013 and who participated in the August 2013 private placement transaction. The Company recorded the aggregate amount of the payments made to the investors by to allocating approximately $360,000 to the waiver of the original registration payment obligation taken as a charge to operations and the remaining amount of $2,238,681 is treated as reduction of the proceeds received in the August financing transaction.
On September 13, 2013, the Company submitted the Registration Statement to the SEC on a confidential basis. The Company determined, as of the date of the financing transaction, that it was probable that it would be in a position to cause the registration statement to be declared effective within the contractually defined time period.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of expenses for the periods presented. Judgments must also be made about the disclosure of contingent liabilities. Accordingly, actual results could differ significantly from those estimates. We believe the following discussion addresses the accounting policies that are necessary to understand and evaluate our reported financial results.
Share-Based Payments
We adopted authoritative accounting guidance which establishes standards for share-based transactions in which we receive consultants or employee's services in exchange for equity instruments, such as stock incentive awards. These authoritative accounting standards require that we expense the fair value of stock awards, as measured on the awards' grant date.
If factors change and we employ different assumptions in the application of the relevant accounting guidance in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using fair value to estimate share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the vesting, expiration, early termination or forfeiture of those share-based payments. Stock incentive awards options may expire worthless or otherwise result in zero value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements.
| 28 |
Income Taxes
We follow FASB ASC 740, Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The standard addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FASB ASC 740, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FASB ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of September 30, 2013 and September 30, 2012, the Company does not have a liability for unrecognized tax uncertainties.
Our policy is to record interest and penalties on uncertain tax positions as income tax expense. As of and for the nine month periods ended September 30, 2013 and September 30, 2012, we had no accrued interest or penalties related to uncertain tax positions.
Registration Payment Arrangement
The Company accounted for registration rights agreements in accordance with ASC 825-20, “Registration Payment Arrangements.” ASC 825-20 addresses an issuer’s accounting for registration payment arrangements. This pronouncement specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument, should be separately recognized and accounted for as a contingency in accordance with ASC 450-20 “Loss Contingencies”.
Derivative Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company calculates the fair value of the financial instruments using a probability-weighted Black-Scholes option pricing model, which is comparable to the Binomial Lattice options pricing model at inception and on each subsequent valuation date. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.
Recently Issued Accounting Pronouncements
In February 2013, the FASB issued Accounting Standards Updated (“ASU”) 2013-04 “Obligations Resulting from Joint and Several Liability Arrangements for Which the Amount at the Reporting Date is Fixed”). The guidance in this update is effective for fiscal years beginning after December 15, 2013 with early adoption permitted. The guidance in this update requires companies to measure obligations resulting from joint and several liability arrangements as the sum of the amount the entity has a) contractually agreed to pay, and b) any additional amounts that the entity expects to pay on behalf of its co-obligors. The Company early adopted this guidance in the second quarter of 2013.
Except as noted above, the Company has evaluated recent accounting pronouncements and their adoption has not had or is not expected to have a material impact on the Company’s financial position or operations.
Emerging Growth Company Critical Accounting Policy Disclosure
We qualify as an “emerging growth company” under the 2012 JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. As an emerging growth company, we can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period.
Off Balance Sheet Transactions
None.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are not required to provide the information under this item.
| 29 |
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our Principal Executive Officer and Principal Financial Officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the Evaluation Date, our disclosure controls are not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms and (ii) is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As of September 30, 2013, we identified certain matters that constituted material weaknesses in our internal controls over financial reporting. Specific material weaknesses include the fact that we (i) have experienced difficulty in generating data in a form and format that facilitates the timely analysis of information needed to produce accurate financial reports, (ii) have experienced difficulty in applying complex accounting and financial reporting and disclosure rules required under GAAP and the SEC reporting regulations, (iii) lack the controls needed to ensure that all material agreements, including those entered into with or on behalf of related parties, that have accounting and disclosure implications on our consolidated financial statements have been accounted for on a timely basis, or correctly at all, and (iv) have limited segregation of duties. As a result of these material weaknesses, we have had to restate both interim and annual financials statement to correct errors in our accounting and omissions in our disclosures. We have taken certain steps in an effort to correct these material weaknesses. Although this is an important step towards improving the application of complex accounting principles, the preparation of financial reports and the segregation of duties, additional time is still required to fully implement additional internal controls procedures and test their operating effectiveness before we can definitively conclude that we have remediated our deficiencies. Because these remediation steps have not yet been completed, we have performed additional analyses and other procedures to ensure that our consolidated financial statements contained in this report were prepared in accordance with GAAP and applicable SEC regulations.
We believe that our weaknesses in internal control over financial reporting and our disclosure controls relate in part to the fact that prior to the 2012 merger with Desert Gateway, the Company was a small, privately-held company and was not subject to public company disclosure requirements, including the requirement to report on internal control over financial reporting in compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and Item 308 of Regulation S-K. Our internal controls are still in a state of transition as we work diligently to integrate and assimilate all of our operations and work to remedy the significant deficiencies that together constitute a material weakness in our internal control over financial reporting.
Change In Internal Control Over Financial Reporting
Except for the changes described below, there were no changes in internal control over financial reporting that occurred during the nine months ended September 30, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On May 20, 2013, Marc Panoff became our Chief Financial Officer (CFO) of the Company. Mr. Panoff has extensive experience in accounting and finance, and provides additional depth in each area.
On July 1, 2013, the Company hired a controller to further segregate duties within the Company.
On September 26, 2013, the Company announced the appointment of Cornelius (“Neal”) E. Golding as an independent member of the Board of Directors who will also serve as Chairman of the Audit Committee, effective October 1, 2013. Mr. Golding has more than 44 years of experience in finance and accounting.
We are designing processes and internal controls to address changes in internal controls over financial reporting.
Item 1. Legal Proceedings.
We have no material proceedings pending nor are we aware of any pending investigation or threatened litigation by any third party.
Item 1A. Risk Factors.
There has been no material change to our Risk Factors from those presented in our Form 10-K for the transition period ended December 31, 2012.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In January 2013, we sold an aggregate of 272,221 shares of common stock at $3.00 per share in certain private placement transactions, for an aggregate purchase price of $816,664 in cash. The issuance of such shares of common stock was not registered under the Securities Act as such
| 30 |
issuance was exempt from registration under Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
On February 14, 2013, we closed a private placement of 3,045,929 shares of our common stock, at a purchase price of $3.00 per share, or $9,137,787 in the aggregate, and warrants (the “Warrants”) to purchase up to an aggregate of 1,597,969 shares of common stock with an exercise price of $3.60 per such share underlying any Warrant (the “Private Placement”). The issuance of the shares of common stock in the Private Placement was not registered under the Securities Act as such issuance was exempt from registration under Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
On August 15, 2013, the Company closed a private placement and sold 5,531,401 shares of the Company’s common stock, at a purchase price of $4.50 per share, or $24,891,303 in the aggregate, and warrants to purchase up to an aggregate of 2,765,701 shares of common stock with an exercise price of $6.00 per share underlying each warrant. The issuance of the shares of common stock in such private placement was not registered under the Securities Act as such issuance was exempt from registration under Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
The Company concurrently entered into a registration rights agreements, in connection with the closing of the February 14, 2013 and August 15, 2013 Private Placements, requiring it to file a registration statement on Form S-1 within 30 days of the closing date of the transaction and cause such registration statement to be declared effective within 60 days thereafter. The registration rights agreement provides for the payment of certain liquidated damages at the rate of 2% of the gross proceeds per month for each in which the Company is not in compliance with the agreement, not exceeding 10% of gross proceeds in the aggregate. As described elsewhere herein, the Company is not in compliance with the registration payment arrangement for the February 14, 2013 registration rights agreement and therefore recorded $360,000 as registration payment obligation treated as a reduction of the proceeds received in the February financing transaction.
The Company and the investors who participated in the private placement transaction that the Company completed on February 14, 2013, entered into the Amended Registration Rights Agreement. In exchange, the Company paid an aggregate fee to these investors of $2,495,256. Additionally, the Company paid $103,425 to an investor to whom the Company sold shares in a private placement transaction in January 2013 and who participated in the August 2013 private placement transaction. The Company recorded the aggregate amount of the payments made to the investors by to allocating approximately $360,000 to the waiver of the original registration payment obligation taken as a charge to operations and the remaining amount of $2,238,681 is treated as reduction of the proceeds received in the August financing transaction.
On September 13, 2013, the Company submitted the Registration Statement to the SEC on a confidential. The Company determined, as of the date of the financing transaction, that it was probable that it would be in a position to cause the registration statement to be declared effective within the contractually defined time period.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
(a) Exhibits
| 10.1 | Sponsored Research Agreement between St. Jude Children's Research Hospital and the Company, dated September 1, 2013.*** (Portions of Sections 1, 4, 6, Appendix A and Appendix B of the Exhibit have been omitted pursuant to a request for confidential treatment and filed separately with the SEC.) | |
| 31.1 | Chief Executive Officer’s Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * | |
| 31.2 | Chief Financial Officer’s Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * | |
| 32.1 | Chief Executive Officer’s Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002 * | |
| 32.2 | Chief Financial Officer’s Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002 * | |
| 101.INS | XBRL Instance Document ** | |
| 101.SCH | XBRL Taxonomy Extension Schema Document ** | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document ** | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document ** | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document ** | |
| 101.PRE | Taxonomy Extension Presentation Linkbase Document ** |
| * | Filed herewith. | ||
| ** | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability. | ||
| *** | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on November 13, 2013. |
| 31 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: July 9, 2015 | RETROPHIN, INC. | |||
| By: | /s/ Stephen Aselage | |||
| Name: | Stephen Aselage | |||
| Title: | Chief Executive Officer | |||
| By: | /s/ Laura Clague | |||
| Name: | Laura Clague | |||
| Title: | Chief Financial Officer | |||
| 32 |
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a) OR 15d-14(a)
I, Stephen Aselage, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Retrophin, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: July 9, 2015 | /s/ Stephen Aselage |
| Stephen Aselage | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a) OR 15d-14(a)
I, Laura Clague, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Retrophin, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: July 9, 2015 | /s/ Laura Clague |
| Laura Clague | |
| Chief Financial Officer (Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report on Form 10-Q of Retrophin, Inc. (the “Company”), for the period ending September 30, 2013 (the “Report”), the undersigned officer of the Company hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report, fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: July 9, 2015 | /s/ Stephen Aselage |
| Stephen Aselage | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
EXHIBIT 32.2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report on Form 10-Q of Retrophin, Inc. (the “Company”), for the period ending September 30, 2013 (the “Report”), the undersigned officer of the Company hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report, fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: July 9, 2015 | /s/ Laura Clague |
| Laura Clague | |
| Chief Financial Officer | |
| (Principal Financial Officer) |