FORM
8-K/A
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
Date of
Report (Date of earliest event reported): March 8, 2010
Manhattan
Pharmaceuticals, Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware
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001-32639
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36-3898269
|
||
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(State
or other jurisdiction
of
incorporation)
|
(Commission
File
Number)
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(IRS
Employer
Identification
No.)
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48
Wall Street, Suite 1110
New
York, New York 10005
(Address
of principal executive offices) (Zip Code)
(212)
582-3950
(Registrant's
telephone number, including area code)
Not
applicable
(Former
name or former address, if changed since last report)
Check the appropriate box below if the
Form 8-K filing is intended to simultaneously satisfy the filing obligation of
the registrant under any of the following provisions:
|
¨
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Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|
|
¨
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
|
¨
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
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¨
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
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Item
2.01 Completion
of Acquisition or Disposition of Assets.
On March
12, 2010 Manhattan Pharmaceuticals, Inc. (the “Company” or "Manhattan") filed a
Current report on Form 8-K to report that on March 8, 2010, the Company entered
into an Agreement and Plan of Merger (the "Merger Agreement") by
and among the Company, Ariston Pharmaceuticals, Inc., a Delaware corporation
("Ariston") and
Ariston Merger Corp., a Delaware corporation and wholly-owned subsidiary of the
Company (the "Merger
Sub"). Pursuant to the terms and conditions set forth in the
Merger Agreement, on March 8, 2010, the Merger Sub merged with and into Ariston
(the "Merger"),
with Ariston being the surviving corporation of the Merger. As a
result of the Merger, Ariston became a wholly-owned subsidiary of the Company.
The Company is filing this amendment to the March 12, 2010 Current Report to
include the financial information required by Item 9.01.
Under the
terms of the Merger Agreement, the consideration payable by the Company to the
stockholders and note holders of Ariston consists of the issuance of 7,062,423
shares of the Company's common stock, par value $0.001 per share, ("Common Stock") at
Closing (as defined in the Merger Agreement) plus the right to receive up
to an additional 24,718,481 shares of Common Stock (the “Milestone Shares”) upon
the achievement of certain product-related milestones described
below. In addition, the Company has reserved 38,630,723 shares of its
Common Stock for possible future issuance in connection with the conversion of
$15.45 million of outstanding Ariston convertible promissory
notes. The note holders will not have any recourse to the Company for
repayment of the notes (their sole recourse being to Ariston), but the note
holders will have the right to convert the notes into shares of the Company's
Common Stock at the rate of $0.40 per share. Further, the Company has
reserved 5,000,000 shares of its Common Stock for possible future issuance in
connection with the conversion of $1.0 million of outstanding Ariston
convertible promissory note issued in satisfaction of a trade
payable. The note holder will not have any recourse to the Company
for repayment of the note (their sole recourse being to Ariston), but the note
holder will have the right to convert the note into shares of the Company's
Common Stock at the rate of $0.20 per share.
Upon the
achievement of the milestones described below, the Company would be obligated to
issue portions of the Milestone Shares to the former Ariston stockholders and
noteholders
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·
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Upon
the affirmative decision of the Company’ Board of Directors, provided that
such decision is made prior to March 8, 2011, to further develop the
AST-914 metabolite product candidate, either internally or through a
corporate partnership, the Company would issue 8,828,029 of the Milestone
Shares.
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·
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Upon
the acceptance by the FDA of the Company's filing of the first New Drug
Application for the AST-726 product candidate, the Company would issue
7,062,423 of the Milestone Shares.
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·
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Upon
the Company receiving FDA approval to market the AST-726 product candidate
in the United States of America, the Company would issue 8,828,029 of the
Milestone Shares.
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Certain
members of the Company's board of directors and principal stockholders of the
Company owned Ariston securities. Timothy McInerney, a director of
Manhattan, owned 16,668 shares of Ariston common stock which represented less
than 1% of Ariston’s outstanding common stock as of the closing of the
Merger. Neil Herskowitz, a director of Manhattan, indirectly owned
convertible promissory notes of Ariston with interest and principal in the
amount of $192,739. Michael Weiser, a former director of Manhattan,
owned 117,342 shares of Ariston common stock, which represented approximately
2.1% of Ariston’s outstanding common stock as of the closing of the
Merger. Lindsay Rosenwald, a more than 5% beneficial owner of
Manhattan common stock, in his individual capacity and indirectly through trusts
and companies he controls owned 511,552 shares of Ariston common stock, which
represented approximately 9.2% of Ariston’s outstanding common stock as of the
closing of the Merger and indirectly owned convertible promissory notes of
Ariston in the amount of $141,438.
The
description of the Merger and Merger Agreement contained in this Current Report
on Form 8-K does not purport to be complete and is qualified in its entirety by
reference to the Merger Agreement filed as Exhibit 2.1 hereto,
which is incorporated herein by reference.
The
Merger Agreement has been included to provide investors with information
regarding its terms. Except for its status as a contractual document that
establishes and governs the legal relations among the parties thereto with
respect to the transactions described above, the Merger Agreement is not
intended to be a source of factual, business or operational information about
the parties. The Merger Agreement contains representations and
warranties made by the parties to each other regarding certain matters. The
assertions embodied in the representations and warranties are qualified by
information in confidential disclosure schedules that the parties have exchanged
in connection with signing the Merger Agreement. The disclosure schedules
contain information that modifies, qualifies and creates exceptions to the
representations and warranties. Moreover, certain representations and warranties
may not be complete or accurate as of a particular date because they are subject
to a contractual standard of materiality that is different from those generally
applicable to stockholders and/or were used for the purpose of allocating risk
among the parties rather than establishing certain matters as facts.
Accordingly, you should not rely on the representations and warranties as
characterizations of the actual state of facts at the time they were made or
otherwise.
Item
9.01. Financial Statements and Exhibits.
(a)
Financial statements of business acquired
1. Ariston’s
audited consolidated financial statements at and for the years ended December
31, 2009 and 2008 are attached as Exhibit 99.1 and are incorporated herein by
reference.
(b) Pro
Forma Financial Information
1. Unaudited
pro forma condensed financial information for the year ended December 31, 2009
is attached as Exhibit 99.2 and are incorporated herein by
reference.
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(d)
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Exhibits
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23.1
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Consent
of Independent Registered Public Accounting
Firm.
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99.1
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Audited
consolidated financial statements at and for the years ended December 31,
2009 and 2008.
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99.2
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Unaudited
pro forma condensed financial information for the year ended December 31,
2009.
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SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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MANHATTAN
PHARMACEUTICALS, INC.
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||
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Date: May 24,
2010
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By:
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/s/ Michael G.
McGuinness
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Michael
G. McGuinness
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||
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Chief
Operating and Financial
Officer
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INDEX TO
EXHIBITS
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Exhibit No.
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Description
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23.1
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Consent
of Independent Registered Public Accounting Firm.
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99.1
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Audited
consolidated financial statements at and for the years ended December 31,
2009 and 2008.
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99.2
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Unaudited
pro forma condensed financial information for the year ended December 31,
2009.
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Exhibit
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
hereby consent to the inclusion in the Current Report on Form 8-K/A, to
be filed by Manhattan Pharmaceuticals, Inc. on or about May 24, 2010, of our
report dated May 22, 2010 relating to the consolidated balance sheets of Ariston
Pharmaceuticals, Inc. ( a development stage company) as of December 31, 2009 and
2008 and the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for the years then ended and the period
from May 8, 2003 (Inception) to December 31, 2009 which contains an explanatory
paragraphs relating to the Company's ability to continue as a going
concern.
/s/J.H.
Cohn LLP
Roseland,
New Jersey
May 22,
2010
Exhibit
99.1
Ariston
Pharmaceuticals, Inc.
(A
Development Stage Company)
Report
on Consolidated Financial Statements
Years
Ended December 31, 2009 and 2008
and
the Period from May 8, 2003 (Inception)
to
December 31, 2009
ARISTON
PHARMACEUTICALS, INC.
(A
Development Stage Company)
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Page
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|
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Report
of Independent Registered Public Accounting Firm
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2
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Consolidated
Balance Sheets
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|
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December
31, 2009 and 2008
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3
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Consolidated
Statements of Operations
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|
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Years
ended December 31, 2009 and 2008 and Period from
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|
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May
8, 2003 (Inception) to December 31, 2009
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4
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Consolidated
Statement of Changes in Stockholders' Equity (Deficiency)
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Period
from May 8, 2003 (Inception) to December 31, 2009
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5 -
6
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Consolidated
Statements of Cash Flows
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|
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Years
ended December 31, 2009 and 2008 and Period
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|
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from
May 8, 2003 (Inception) to December 31, 2009
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7
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Notes
to Consolidated Financial Statements
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8 -
16
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Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Ariston
Pharmaceuticals, Inc.
We have
audited the accompanying consolidated balance sheets of Ariston Pharmaceuticals,
Inc. and subsidiary (A Development Stage Company) as of December 31, 2009 and
2008, and the related consolidated statements of operations, changes in
stockholders’ equity (deficiency) and cash flows for the years then ended, and
the period from May 8, 2003 (Inception) to December 31, 2009. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Ariston Pharmaceuticals,
Inc. and subsidiary as of December 31, 2009 and 2008, and their results of
operations and cash flows for the years then ended, and the period from May 8,
2003 (Inception) to December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company incurred a net loss of
$2,212,543 for the year ended December 31, 2009 and, as of that date, it had a
deficit accumulated during the development stage of
$40,027,739. These matters, among others, raise substantial doubt
about the Company’s ability to continue as a going
concern. Management’s plans concerning these matters are also
described in Note 1. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ J.H.
Cohn LLP
Roseland,
New Jersey
May 22,
2010
2
ARISTON
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Consolidated
Balance Sheets
|
December
31,
2009
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December
31,
2008
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|||||||
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ASSETS
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||||||||
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$ | 592,364 | $ | 1,019,380 | ||||
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Note
receivable
|
27,000 | - | ||||||
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Prepaid
expenses
|
- | 16,124 | ||||||
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Total
current assets
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619,364 | 1,035,504 | ||||||
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Office
equipment, net of accumulated depreciation of $32,174 and
$35,585
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9,118 | 15,920 | ||||||
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Other
assets
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120,932 | 88,075 | ||||||
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Total
assets
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$ | 749,414 | $ | 1,139,499 | ||||
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LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
||||||||
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Current
liabilities:
|
||||||||
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Accounts
payable and accrued expenses
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$ | 1,459,128 | $ | 1,147,350 | ||||
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Senior
convertible notes
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5,000,000 | 5,000,000 | ||||||
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Interest
payable – senior convertible notes
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1,849,116 | 1,175,343 | ||||||
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Senior
notes
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6,500,000 | 6,500,000 | ||||||
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Interest
payable – senior notes
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1,961,735 | 1,130,697 | ||||||
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Note
payable – related party
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117,376 | 117,376 | ||||||
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Interest
payable – related party
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24,566 | 18,697 | ||||||
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Total
current liabilities
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16,911,921 | 15,089,463 | ||||||
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Commitments
|
||||||||
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Stockholders’
deficiency:
|
||||||||
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Preferred
stock, $.001 par value; 6,000,000 shares authorized; none
issued
|
- | - | ||||||
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Common
stock, $.001 par value; 20,000,000 shares authorized; 4,464,291 shares
issued and outstanding
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4,464 | 4,464 | ||||||
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Additional
paid-in capital
|
23,860,768 | 23,860,768 | ||||||
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Deficit
accumulated during the development stage
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(40,027,739 | ) | (37,815,196 | ) | ||||
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Total
stockholders’ deficiency
|
(16,162,507 | ) | (13,949,964 | ) | ||||
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Total
liabilities and stockholders’ deficiency
|
$ | 749,414 | $ | 1,139,499 | ||||
See Notes
to Consolidated Financial Statements
3
ARISTON
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Consolidated
Statements of Operations
|
Year Ended
December 31,
2009
|
Year Ended
December 31,
2008
|
Period from
May 8, 2003
(Inception) to
December 31,
2009
|
||||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development
|
$ | 577,175 | $ | 1,946,953 | $ | 11,173,562 | ||||||
|
In-process
research and development
|
- | - | 8,983,339 | |||||||||
|
General
and administrative
|
127,396 | 790,895 | 6,091,684 | |||||||||
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Loss
from operations
|
(704,571 | ) | (2,737,848 | ) | (26,248,585 | ) | ||||||
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Interest
and other income
|
2,708 | 53,517 | 372,257 | |||||||||
|
Interest
expense, including amortization of debt discount and deferred financing
costs
|
(1,510,680 | ) | (1,809,246 | ) | (14,151,411 | ) | ||||||
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Net
loss
|
$ | (2,212,543 | ) | $ | (4,493,577 | ) | $ | (40,027,739 | ) | |||
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Basic
and diluted net loss per common share
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$ | (.50 | ) | $ | (1.01 | ) | ||||||
|
Weighted
average common shares outstanding – basic and diluted
|
4,464,291 | 4,464,291 | ||||||||||
See Notes
to Consolidated Financial Statements
4
ARISTON
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Consolidated
Statement of Changes in Stockholders’ Equity (Deficiency)
Period
from May 8, 2003 (Inception) to December 31, 2009
|
Deficit
|
||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||
|
Stock
|
Additional
|
During the
|
||||||||||||||||||||||
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Common Stock
|
Subscription
|
Paid-in
|
Development
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Receivable
|
Capital
|
Stage
|
Total
|
|||||||||||||||||||
|
Issuance
of common stock to investor at $.81 per share
|
1,233,333 | $ | 1,233 | $ | 998,767 | $ | 1,000,000 | |||||||||||||||||
|
Issuance
of common stock pursuant to license agreement at $.81 per
share
|
100,000 | 100 | 80,900 | 81,000 | ||||||||||||||||||||
|
Issuance
of common stock pursuant to consulting agreement for services rendered at
$.81 per share
|
33,333 | 33 | (33 | ) | - | |||||||||||||||||||
|
Issuance
of common stock to officer at $.81 per share
|
95,666 | 96 | $ | (287 | ) | 191 | - | |||||||||||||||||
|
Stock-based
compensation
|
13,110 | 13,110 | ||||||||||||||||||||||
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Net
loss
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$ | (224,532 | ) | (224,532 | ) | |||||||||||||||||||
|
Balance,
at December 31, 2003
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1,462,332 | 1,462 | (287 | ) | 1,092,935 | (224,532 | ) | 869,578 | ||||||||||||||||
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Payment
received for stock subscription by officer
|
287 | 287 | ||||||||||||||||||||||
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Issuance
of common stock to investor at $3.00 per share
|
1,333,333 | 1,333 | 3,998,667 | 4,000,000 | ||||||||||||||||||||
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Stock-based
compensation
|
230,513 | 230,513 | ||||||||||||||||||||||
|
Net
loss
|
(2,029,219 | ) | (2,029,219 | ) | ||||||||||||||||||||
|
Balance,
at December 31, 2004
|
2,795,665 | 2,795 | - | 5,322,115 | (2,253,751 | ) | 3,071,159 | |||||||||||||||||
|
Stock-based
compensation
|
195,959 | 195,959 | ||||||||||||||||||||||
|
Net
loss
|
(3,842,861 | ) | (3,842,861 | ) | ||||||||||||||||||||
|
Balance,
at December 31, 2005
|
2,795,665 | 2,795 | - | 5,518,074 | (6,096,612 | ) | (575,743 | ) | ||||||||||||||||
See Notes
to Consolidated Financial Statements
5
ARISTON
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Consolidated
Statement of Changes in Stockholders’ Equity (Deficiency)
Period
from May 8, 2003 (Inception) to December 31, 2009
|
Deficit
|
||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||
|
Stock
|
Additional
|
During the
|
||||||||||||||||||||||
|
Common Stock
|
Subscription
|
Paid-in
|
Development
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Receivable
|
Capital
|
Stage
|
Total
|
|||||||||||||||||||
|
Balance,
at December 31, 2005 (carried forward)
|
2,795,665 | $ | 2,795 | $ | - | $ | 5,518,074 | $ | (6,096,612 | ) | $ | (575,743 | ) | |||||||||||
|
Issuance
of common stock in connection with the merger with Pyrenees at $5.27 per
share
|
1,666,626 | 1,667 | 8,781,452 | 8,783,119 | ||||||||||||||||||||
|
Warrants
issued to placement agent in connection with senior convertible
notes
|
339,382 | 339,382 | ||||||||||||||||||||||
|
Debt
discount on senior convertible notes
|
1,187,841 | 1,187,841 | ||||||||||||||||||||||
|
Stock-based
compensation
|
158,948 | 158,948 | ||||||||||||||||||||||
|
Net
loss
|
(14,653,787 | ) | (14,653,787 | ) | ||||||||||||||||||||
|
Balance,
at December 31, 2006
|
4,462,291 | 4,462 | - | 15,985,697 | (20,750,399 | ) | (4,760,240 | ) | ||||||||||||||||
|
Debt
discount related to an extension of the term of the senior convertible
notes and additional warrant coverage
|
1,484,504 | 1,484,504 | ||||||||||||||||||||||
|
Debt
discount on senior notes
|
5,761,050 | 5,761,050 | ||||||||||||||||||||||
|
Warrants
issued to placement agent in connection with senior notes
|
576,105 | 576,105 | ||||||||||||||||||||||
|
Stock-based
compensation
|
43,590 | 43,590 | ||||||||||||||||||||||
|
Net
loss
|
(12,571,220 | ) | (12,571,220 | ) | ||||||||||||||||||||
|
Balance,
at December 31, 2007
|
4,462,291 | 4,462 | - | 23,850,946 | (33,321,619 | ) | (9,466,211 | ) | ||||||||||||||||
|
Options
exercise
|
2,000 | 2 | 5,998 | 6,000 | ||||||||||||||||||||
|
Stock-based
compensation
|
3,824 | 3,824 | ||||||||||||||||||||||
|
Net
loss
|
(4,493,577 | ) | (4,493,577 | ) | ||||||||||||||||||||
|
Balance,
at December 31, 2008
|
4,464,291 | 4,464 | - | 23,860,768 | (37,815,196 | ) | (13,949,964 | ) | ||||||||||||||||
|
Net
loss
|
(2,212,543 | ) | (2,212,543 | ) | ||||||||||||||||||||
|
Balance,
at December 31, 2009
|
4,464,291 | $ | 4,464 | $ | - | $ | 23,860,768 | $ | (40,027,739 | ) | $ | (16,162,507 | ) | |||||||||||
See Notes
to Consolidated Financial Statements
6
ARISTON
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Consolidated
Statements of Cash Flows
|
Year ended
December
31, 2009
|
Year ended
December
31, 2008
|
Period from
May 8, 2003
(Inception) to
December 31,
2009
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
loss
|
$ | (2,212,543 | ) | $ | (4,493,577 | ) | $ | (40,027,739 | ) | |||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
|
Stock-based
compensation
|
- | 3,824 | 645,944 | |||||||||
|
Common
stock issued in connection with license agreement
|
- | - | 81,000 | |||||||||
|
Charge
for in-process research and development
|
- | - | 8,983,339 | |||||||||
|
Amortization
of debt discount
|
- | 404,865 | 8,433,395 | |||||||||
|
Amortization
of deferred financing
|
- | - | 1,870,302 | |||||||||
|
Other
|
(235 | ) | (341 | ) | ||||||||
|
Depreciation
|
6,037 | 9,812 | 41,533 | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Prepaid
expenses
|
16,124 | 18,691 | - | |||||||||
|
Other
current assets
|
- | - | (67,326 | ) | ||||||||
|
Other
assets
|
(32,856 | ) | - | (120,932 | ) | |||||||
|
Accounts
payable and accrued expenses
|
311,777 | (219,721 | ) | 1,459,127 | ||||||||
|
Interest
payable – senior convertible notes
|
673,773 | 611,593 | 1,849,116 | |||||||||
|
Interest
payable – senior debt
|
831,038 | 786,919 | 1,961,735 | |||||||||
|
Interest
payable – related party
|
5,869 | 5,869 | 22,986 | |||||||||
|
Net
cash used in operating activities
|
(401,016 | ) | (2,871,725 | ) | (14,867,861 | ) | ||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchase
of office and computer equipment
|
- | (4,889 | ) | (51,415 | ) | |||||||
|
Cash
acquired in merger
|
- | - | 4,191 | |||||||||
|
Note
receivable
|
(27,000 | ) | (27,000 | ) | ||||||||
|
Cash
from sale of fixed assets
|
1,000 | - | 1,000 | |||||||||
|
Net
cash used in investing activities
|
(26,000 | ) | (4,889 | ) | (73,224 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Net
proceeds received from senior convertible notes
|
- | - | 4,641,000 | |||||||||
|
Net
proceeds received from senior debt
|
- | - | 5,990,000 | |||||||||
|
Payments
for deferred financing costs
|
- | - | (103,838 | ) | ||||||||
|
Proceeds
from issuance of common stock
|
- | 6,000 | 5,006,287 | |||||||||
|
Net
cash provided by financing activities
|
- | 6,000 | 15,533,449 | |||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(427,016 | ) | (2,870,614 | ) | 592,364 | |||||||
|
Beginning
of period
|
1,019,380 | 3,889,994 | - | |||||||||
|
End
of period
|
$ | 592,364 | $ | 1,019,380 | $ | 592,364 | ||||||
|
Supplemental
schedule of noncash investing and
financing activities:
|
||||||||||||
|
Debt
assumed in merger with Pyrenees
|
$ | - | $ | - | $ | 117,482 | ||||||
|
Interest
payable assumed in merger with Pyrenees
|
$ | - | $ | - | $ | 1,580 | ||||||
|
Warrants
issued to placement agent
|
$ | - | $ | - | $ | 915,487 | ||||||
|
Debt
discount
|
$ | - | $ | - | $ | 8,433,395 | ||||||
See Notes
to Consolidated Financial Statements
7
ARISTON
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
|
Note
1 -
|
Organization,
Business and Basis of Presentation:
|
Organization
and business:
Ariston
Pharmaceuticals, Inc. (f/k/a VitaMed, Inc.) (“Ariston” or the “Company”) was
incorporated in the State of Delaware on May 8, 2003. Ariston is a
clinical-stage specialty biopharmaceutical company based in Framingham,
Massachusetts that in-licenses, develops and intends to market novel
therapeutics for treatment of serious disorders of the central and peripheral
nervous systems.
In
February 2006, the Company acquired Pyrenees Pharmaceuticals, Inc.
(“Pyrenees”). The merger agreement provided that PPAP Acquisition
Corp., a wholly-owned subsidiary of the Company, would merge with and into
Pyrenees, with Pyrenees remaining as the surviving corporation and a
wholly-owned subsidiary of the Company. Pyrenees is a specialty
pharmaceutical company focused on the acquisition, development and
commercialization of human therapeutics in the Neurology and Central Nervous
System area. The Pyrenees’ current clinical-stage compounds targets
the treatment of anxiety and movement disorders.
Basis
of presentation:
The
Company’s primary activities since incorporation have been organizational
activities, including recruiting personnel, establishing office facilities,
acquiring licenses for its pharmaceutical compound pipeline, performing business
and financial planning, performing research and development and raising funds
through the issuance of debt and common stock. The Company has not generated any
revenues and, accordingly, the Company is considered to be in the development
stage.
The
Company’s consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement of
liabilities and commitments through the normal course of
business. For the year ended December 31, 2009, the Company incurred
a net loss of $2,212,543 and it had an accumulated deficit for the period from
May 8, 2003 (Inception) through December 31, 2009 of $40,027,739. The Company
has a stockholders’ deficiency as of December 31, 2009 of
$16,162,507. Management believes that the Company will continue to
incur losses for the foreseeable future and will need additional equity or debt
financing or will need to generate revenue from the licensing of its products or
by entering into strategic alliances to be able to sustain its operations until
it can achieve profitability and positive cash flows, if
ever. Management plans to seek additional debt and/or equity
financing for the Company, but cannot assure that such financing will be
available on acceptable terms. These matters raise substantial doubt
about the Company’s ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
The
Company evaluated subsequent events through May 22, 2010, the date of financial
statement issuance.
Note
2 – Summary of Significant Accounting Policies:
Principles
of consolidation:
The
accompanying consolidated financial statements include the accounts of
Ariston and its wholly owned subsidiary, Pyrenees. All
intercompany accounts and transactions have been eliminated in
consolidation.
Cash
and cash equivalents:
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents. The Company
considers all highly-liquid investments with maturity of three months or
less when purchased to be cash equivalents. The Company maintains its
cash and temporary cash investments in bank deposit and other accounts, the
balances of which, at times, may exceed federally insured limits.
8
ARISTON
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
Note
2 – Summary of Significant Accounting Policies (continued):
Use
of estimates:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
Office
equipment:
Office
equipment is stated at cost and depreciated using the straight-line method over
the estimated useful life of the related assets of five to seven
years.
Debt
issuance costs and debt discount:
Debt
issuance costs and debt discount incurred in connection with the issuance of
senior convertible notes and senior notes are being amortized over the terms of
the debt on a straight-line basis.
Fair
value measurements:
The
carrying value of the senior convertible notes, senior debt and related party
notes approximate fair value due to the short-term nature of these items and
since the related interest rate approximates market rates.
Accounting
for warrants issued with convertible debt:
The
Company accounts for the value of warrants and beneficial conversion rights
arising from the issuance of convertible debt instruments with nondetachable
conversion rights pursuant to the Financial Accounting Standards Board
Accounting Standards Codification No. 470 (“ASC 470”), “Debt”. Such values are
determined by first allocating an appropriate portion of the proceeds received
from the debt instruments to the warrants or any other detachable instruments
included in the exchange. The fair value of the warrants is allocated to
additional paid-in capital and to debt discount, which is amortized to interest
expense over the term of the debt instrument. The intrinsic value of
the beneficial conversion rights at the commitment date may also be recorded as
additional paid-in capital or liabilities and debt discount as of that date or,
if the terms of the debt instrument are contingently adjustable, may only be
recorded if a triggering event occurs and the contingency is
resolved.
Stock
based compensation:
The
Company accounts for stock options granted to employees according to the
Financial Accounting Standards Board Accounting Standards Codification No. 718
(“ASC 718”), “Compensation – Stock Compensation”. Under ASC 718,
share-based compensation cost is measured at grant date, based on the estimated
fair value of the award, and is recognized as expense over the employee’s
requisite service period on a straight-line basis.
The
Company accounts for stock options granted to non-employees on a fair value
basis using the Black-Scholes option pricing method in accordance with ASC
718. The initial non-cash charge to operations for non-employee
options with vesting are revalued at the end of each reporting period based upon
the change in the fair value of the options and amortized to consulting expense
over the related vesting period.
No
options were issued during the years ended December 31, 2009 and
2008.
Research
and development:
Research
and development costs, including license fees, are expensed as
incurred. License fee expense for the years ended December 31,
2009 and 2008 and the period from May 8, 2003 (inception) to December 31, 2009
was approximately $0, $0 and $653,000, respectively.
9
ARISTON
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
Note
2 – Summary of Significant Accounting Policies (continued):
Income
taxes:
Under
Financial Accounting Standards Board Accounting Standards Codification No. 740
(“ASC 740”), “Income Taxes”, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. 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. Under ASC 740, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are established
when it is more likely than not that some or all of the deferred tax assets will
not be realized.
Loss
per common share:
Basic
earnings (loss) per common share excludes dilution and is computed by dividing
net income (loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings per common share reflect the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Since the Company
has only incurred losses, basic and diluted loss per share are the
same. The amount of potentially dilutive securities excluded from the
calculation was 285,999 options at December 31, 2009 and 2008 since such
securities would be antidilutive. Additionally the amount of warrants
that are potentially dilutive and are excluded from the calculation since such
securities would be antidilutive related to the issuance of senior convertible
notes and senior debt (see Note 8), based upon an exercise price of $3.00
(lowest possible conversion price), at December 31, 2009 and 2008 are
3,800,001.
Note
3 – Related Party Transactions:
Administrative
services:
Effective
May 2004, the Company began paying monthly fees for administrative services
ranging from $450 to $1,000 per month to Paramount BioCapital Investments,
LLC (“Paramount”), an affiliate of a significant stockholder of the
Company. Administrative service fees were $0, $8,000 and $41,700 for
the years ended December 31, 2009 and 2008 and for the period from May 8,
2003 (Inception) to December 31, 2009. As of December 31, 2009 and
2008, the Company had $8,000 and $8,000, respectively, payable to Paramount
pursuant to this agreement. This agreement was terminated as of August 31,
2008.
Note
payable:
On
February 24, 2005, Pyrenees issued a 5% promissory note payable to
Paramount. This note and all accrued interest was to mature on
February 24, 2008 or earlier if certain events occur. The note
payable was issued to Paramount for expenses that Paramount has paid on behalf
of Pyrenees. As of December 31, 2009 and 2008, the principal balance
of this note was $117,376. This debt was assumed by the Company in
connection with the acquisition of Pyrenees during February 2006. On
December 31, 2006, this note was assigned to Paramount BioSciences, LLC, an
affiliate of a significant stockholder of Pyrenees and the
Company. The maturity date of this agreement was extended several
times. See Note 10.
10
ARISTON
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
Note
4 – Income Taxes:
There was
no current or deferred income tax provision for the years ended December 31,
2009 and 2008.
The
Company’s deferred tax assets as of December 31, 2009 and 2008 consist of the
following:
|
2009
|
2008
|
|||||||
|
Net
operating loss carryforwards – Federal
|
$ | 7,688,000 | $ | 6,935,000 | ||||
|
Net
operating loss carryforwards - State
|
1,356,000 | 1,224,000 | ||||||
|
Totals
|
9,044,000 | 8,159,000 | ||||||
|
Less
valuation allowance
|
(9,044,000 | ) | (8,159,000 | ) | ||||
|
Deferred
tax assets
|
$ | - | $ | - | ||||
The effective tax rate varied from the
statutory rate as follows:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Statutory
federal tax rate
|
(34.0 | )% | (34.0 | )% | ||||
|
State
income tax rate (net of federal)
|
(6.0 | )% | (6.0 | )% | ||||
|
Debt
discount amortization
|
- | % | 2.0 | % | ||||
|
Effect
of valuation allowance
|
40.0 | % | 38.0 | % | ||||
|
Effective
tax rate
|
— | % | — | % | ||||
At
December 31, 2009, the Company had potentially utilizable Federal and state net
operating loss tax carryforwards of approximately $23,000,000, expiring through
2029.
The
utilization of the Company’s net operating losses may be subject to a
substantial limitation due to the “change of ownership provisions” under Section
382 of the Internal Revenue Code and similar state provisions. Such
limitation may result in the expiration of the net operating loss carryforwards
before their utilization. See Note 10.
A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
net change in the total valuation allowance for the years ended December
31, 2009 and 2008 and for the period from May 8, 2003 (inception) to December
31, 2009 was $885,000, $1,635,000 and $9,044,000, respectively. The
tax benefit assumed the Federal statutory tax rate of 34% and a state tax rate
of 6% and has been fully offset against the aforementioned valuation
allowance.
In July
2006, Financial Accounting Standards Board Accounting Standards Codification No.
740 (“ASC 740”), “Income Taxes”, was issued and is effective for nonpublic
entities for fiscal years beginning after December 15, 2008. The
Company adopted ASC 740 as of January 1, 2007. The adoption of that
guidance did not result in the recognition of any unrecognized tax benefits and
the Company has no unrecognized tax benefits at December 31, 2009. The Company
recognizes interest and penalties to uncertain tax positions in income tax
expense in the statement of operations. The Company’s U.S. Federal
and state income tax returns prior to fiscal year 2006 are closed and management
continually evaluates expiring statutes of limitations, audits, proposed
settlements, changes in tax law and new authoritative rulings.
Note
5 – Commitments:
Operating
lease:
In June
2004, the Company signed an agreement to lease office space. The lease commenced
on July 1, 2004 and initially expired on June 30, 2006. During
February 2006, the Company entered into an agreement to extend its lease through
June 2007. Subsequently, this lease was amended again to extend the
expiration date to January 31, 2009. Rent expense for the years ended
December 31, 2009 and 2008 and the period from May 8, 2003 (inception) to
December 31, 2009 was approximately $7,000, $88,000 and $292,000,
respectively. This lease agreement was terminated in January
2009.
11
ARISTON
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
Note
5 – Commitments (continued):
Employment
agreements:
The
Company has an employment agreement with a certain key executive. At
December 31, 2009, future employment contract commitments for such key executive
total approximately $23,000.
Note
6 – Stockholders’ Equity:
Common
Stock:
On July
8, 2003, the Company sold 1,233,333 shares of its common stock to an investor,
whose managing member is a director and Chief Executive Officer of Paramount and
affiliates, at a price of $.81 per share resulting in proceeds of
$1,000,000. The Company also issued 100,000 shares of its common
stock pursuant to a license agreement, which resulted in a charge of $81,000 to
research and development expense in 2003 (see Note 7).
On
September 1, 2003, pursuant to a consulting agreement, the Company issued 33,333
shares of its common stock valued at $27,000 which was amortized to research and
development expense over the term of the contract. Pursuant to this
agreement, for the year ended December 31, 2004 and for the period from May 8,
2003 (Inception) to December 31, 2003, the Company recorded consulting expense
of $18,000 and $9,000, respectively.
On
December 15, 2003, pursuant to an employment agreement, the Company issued
95,666 shares of its common stock at a price of $.81 per share, which was
amortized over the term of the contract on a straight-line
basis. Pursuant to this agreement, the Company fully expensed this by
December 31, 2007.
On March
5, 2004, the Company sold 1,333,333 shares of its common stock to an investor,
whose managing member is a director and Chief Executive Officer of Paramount and
affiliates, at a price of $3.00 per share resulting in proceeds of
$4,000,000.
On
February 10, 2006, pursuant to a merger agreement with Pyrenees, the Company
issued 1,666,626 shares of its common stock at a price of $5.27 per share, which
the Company recorded as in-process research and development
expense.
Stock
options:
In 2003,
the Company established a stock option plan (the “Plan”) under which incentive
stock and/or options may be granted to officers, directors, consultants and key
employees of the Company for the purchase of up to 1,000,000 shares of common
stock. The options have a maximum term of ten years, vest over a
period to be determined by the Company’s Board of Directors and have an exercise
price at or above fair market value on the date of grant.
During
the years ended December 31, 2009 and 2008, the Company did not issue any
additional stock or options under the plan.
12
ARISTON
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
Note
6 – Stockholders’ Equity (continued):
Stock
options (continued):
A summary
of the Company’s stock option activity and related information is as
follows:
|
2009
|
2008
|
|||||||||||||||
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||
|
Outstanding
at beginning of year
|
285,999 | $ | 2.57 | 291,332 | $ | 2.31 | ||||||||||
|
Expired
|
- | $ | - | (3,333 | ) | $ | 3.00 | |||||||||
|
Exercised
|
- | $ | - | (2,000 | ) | $ | 3.00 | |||||||||
|
Granted
|
- | $ | - | - | $ | - | ||||||||||
|
Outstanding
at end of year
|
285,999 | $ | 285,999 | $ | ||||||||||||
|
Options
exercisable at year – end
|
285,999 | $ | 2.57 | 285,999 | $ | 2.57 | ||||||||||
The
weighted average remaining contractual term of options outstanding at December
31, 2009 is 4.1 years.
As of
December 31, 2008, all of the options outstanding had completely vested and
therefore all expense related to these options has been recognized.
Note
7 – License Agreements:
In June
2003, the Company licensed the exclusive worldwide rights to AST-726, a nasally
delivered form of natural Vitamin B12, from Dr. Franciscus Merkus (“Inventor”),
its academic inventor. In consideration for the rights to AST-726,
the Company paid an initial license fee of approximately $98,000 and agreed to
make additional payments in the aggregate amount of up to $400,000 upon the
achievement of certain clinical and regulatory milestones. The
Company also agreed to pay commercially reasonable royalties based on a
percentage of net sales. In addition, the Company issued 100,000
shares of common stock valued at $81,000 to the Inventor which was expensed to
research and development expense. During the years ended December 31,
2009 and 2008 and the period from May 8, 2003 (inception) to December 31,
2009 the Company recorded research and development expenses of $0, $0 and
$248,000, respectively, under this agreement.
During
September 2005, Pyrenees entered into a three-year Cooperative Research and
Development Agreement (“CRADA”). This agreement had a termination
date of September 26, 2008 but was renewed, at no additional cost to Ariston,
for an additional three year period. For the years ended December 31,
2009 and 2008 and for the period from May 8, 2003 (inception) to December
31, 2009 the Company has recorded research and development expenses of $0, $0
and $273,565 in connection with this agreement.
During
August 2005, Pyrenees entered into an exclusive license agreement for the rights
to Enol-IPA. In consideration for the rights to Enol-IPA, Pyrenees
has agreed to make payments in the aggregate amount of up to $5,500,000 upon the
achievement of certain clinical and regulatory milestones. Pyrenees
has also agreed to pay royalties based on a percentage of net sales if and when
they are achieved. On October 20, 2008, the Company terminated this
license agreement. As of that date, none of the milestones in the
agreement had been reached and therefore there has been no amounts expensed
under this agreement.
13
ARISTON
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
Note
8 – Senior Notes:
During
May 2007, the Company issued 8% senior convertible notes in connection with a
private placement in the aggregate principal amount of $6,500,000 (the “Senior
Notes”). The Senior Notes were to mature on November 15,
2008. The Senior Convertible Notes maturity date may be extended at
the Company’s discretion to May 15, 2009 at an increased interest rate of
10%. The maturity date of these Senior Notes was extended several
times. See Note 10.
The
Senior Notes may be redeemed by the Company at any time, in whole or in
part, prior to their maturity, at a redemption price equal to 100% of their
principal amount, plus accrued but unpaid interest thereon until the end of
the term.
The
Company shall be obligated to redeem the Senior Notes at the Redemption Price
upon the consummation of a Qualified Financing, a Sale of the Company or a
Reverse Merger. For purposes hereof, (i) “Qualified Financing” means the closing
of an equity financing or series of related equity financings (including an
initial public equity offering) by the Company resulting in aggregate gross cash
proceeds (before commissions or other expenses) to the Company of at least
$12,000,000; (ii) “Sale of the Company” shall mean a transaction (or series of
related transactions) with one or more non-affiliates, pursuant to which such
party or parties acquire (x) capital stock of the Company or the surviving
entity possessing the voting power to elect a majority of the board of directors
of the Company or the surviving entity (whether by merger, consolidation, sale
or transfer of the Company’s capital stock or otherwise); or (y) all or
substantially all of the Company’s assets determined on a consolidated basis;
and (iii) “Reverse Merger” means the consummation by the Company of a merger,
share exchange, or other transaction (or series of related transactions) in
which (x) the Company merges into or otherwise becomes a wholly-owned subsidiary
of a company subject to the public company reporting requirements of the
Securities Exchange Act of 1934, as amended, and (y) the aggregate consideration
payable to the Company or its stockholders in such transaction(s) (i.e., the
cash or securities paid to the Company or the stockholders to acquire the
Company’s capital stock) is greater than or equal to $12,000,000.
In
addition, each noteholder received warrants to purchase a number of the
Company’s common stock equal to 100% of the principal amount of the Senior Notes
purchased divided by the greater of the lowest price paid for securities in a
Qualified Financing or $3.00, if a Qualified Financing or other qualifying event
does not occur prior to May 17, 2008. Each warrant issued as a result
of a Qualified Financing would be exercisable at a price per share equal to the
greater of 110% of the price per share of the securities in the Qualified
Financing or $3.00, if a Qualified Financing does not occur prior to May 17,
2008, and would be exercisable for a period of seven years. The
Company allocated proceeds of $5,761,050 from the sale of the Senior Notes to
the warrants, determined by using the Black-Scholes option pricing model, at the
time of issuance which was recorded as a debt discount, and reduced the carrying
values of the Senior Notes. As of December 31, 2008, the remaining
unamortized debt discount is $0. Since a Qualified Financing has not
taken place by May 17, 2008, each noteholder received warrants equal to 100% of
the principal amount of the Notes purchased divided by $3.00 at an exercise
price of $3.00. In the aggregate, warrants to purchase 2,166,667
shares of common stock were issued with an exercise price of $3.00 in connection
with this offering.
In
connection with the offering of the Senior Notes, Paramount BioCapital, Inc.
(“PCI”), an affiliate of a significant stockholder of Pyrenees and the Company,
and the Company entered into a placement agency agreement dated April 6, 2007,
pursuant to which the Company paid PCI and third party agents cash commissions
of $228,130 and $226,870, respectively, for its services. The Company
also has agreed to pay to PCI a commission on sales by the Company of securities
during the 18-month period subsequent to May 17, 2007 to the purchasers of the
Senior Convertible Notes who were introduced to the Company by
PCI. This agreement has been terminated.
14
ARISTON
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
Note
8 – Senior Notes (continued):
In
addition, PCI and third party agents received warrants (the “Placement
Warrants”) to purchase, at an exercise price of 110% of the lowest price paid
for securities in a Qualified Financing, a number of shares of the Company’s
common stock equal to 10% of the principal amount of the Senior Notes purchased
divided by the lowest price paid for securities in a Qualified Financing prior
to expiration of the term of the Senior Notes. If the Qualified
Financing does not occur on or before the expiration of the term of the Senior
Notes, the Placement Warrants will be exercisable for a number of shares of the
Company’s common stock equal to 10% of the principal amount of the Senior Notes
purchased divided by $3.00, at a per share exercise price of $3.00 and are
exercisable for seven years. The Company estimated the value of the
warrants using the Black-Scholes option pricing model at approximately $576,000
which was amortized to interest expense over the term of the
Notes. Since a Qualified Financing has not taken place by May 17,
2008, PCI and third party placement agents received warrants equal to 10% of the
principal amount of the Senior Notes purchased divided by $3.00 at an exercise
price of $3.00. In the aggregate, warrants to purchase 216,667 shares
of common stock were issued with an exercise price of $3.00 in connection with
this financing.
Note
9 – Senior convertible notes:
During
2006, the Company issued 5% senior convertible notes in connection with a
private placement in the aggregate principal amount of $5,000,000 (the “Senior
Notes”). The Senior Notes were to mature on April 7,
2007. The Senior Notes maturity date may be extended at the Company’s
discretion to April 7, 2008 at an increased interest rate of 8%. In
April 2008, the Company, with noteholder approval, extended the maturity date
until April 7, 2009 and extended the maturity again in April 2009 until October
7, 2009 at an increased interest rate of 12%. The maturity date of
these Senior Notes was extended several times. See Note
10.
Upon the
closing of an equity financing transaction from which the Company receives
proceeds of at least $8,000,000 (“Qualified Financing”) on or before December
31, 2007, the Senior Notes, plus all accrued interest, will automatically
convert into the same securities issued in the equity financing transaction at a
price per security equal to the lowest price paid per unit of securities in such
Qualified Financing. The Senior Notes will also automatically convert
into equity securities of the Company immediately prior to a sale of the
Company, as defined.
In
addition, each noteholder received warrants to purchase a number of the
Company’s common stock equal to 35% of the principal amount of the Senior Notes
purchased divided by the lowest price paid for securities in a Qualified
Financing. Each warrant issued as a result of a Qualified Financing
would be exercisable at a price per share equal to 110% of the price per share
of the securities in the Qualified Financing and would be exercisable for a
period of seven years. Since a Qualified Financing has not taken
place by December 31, 2007, each noteholder received warrants equal to an
additional 40% of the principal amount of the Senior Notes purchased divided by
$3.00 at an exercise price of $3.00. In the aggregate, warrants to
purchase 583,333 shares of common stock were issued with an exercise price of
$3.00 in connection with this offering.
In
accordance with the placement agency agreement related to the senior convertible
notes, since a Qualified Financing has not taken place by December 31, 2007, PCI
and third party agents received warrants equal to 10% of the principal amount of
the Notes purchases divided by $3.00 at an exercise price of
$3.00. In the aggregate, warrants to purchase 166,667 shares of
common stock were issued with an exercise price of $3.00 in connection with this
offering.
Note
10 – Subsequent event:
On March
8, 2010 the Company entered into an Agreement and Plan of Merger (the “Merger
Agreement”) by and among the Company, Manhattan Pharmaceuticals, Inc.
(“Manhattan”), a Delaware corporation, and Ariston Merger Corp., A Delaware
corporation and a wholly owned subsidiary of Manhattan (the “Merger
Sub”). Pursuant to the terms and conditions set forth in the Merger
Agreement, on March 8, 2010, the Merger Sub merged with and into the Company
(the “Merger”), with the Company being the surviving corporation of
the Merger. As a result of the Merger, the Company became a
wholly-owned subsidiary of Manhattan.
15
ARISTON
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to Consolidated Financial Statements:
Note
10 – Subsequent event (continued)
In order
to facilitate the Merger the holders of the Senior Convertible Notes, the Senior
Notes and the Note Payable – Related Party agreed to modifications of their
debt. Those modifications were that interest would cease to accrue
after November 30, 2009 and that their debt and accrued and unpaid interest
thereon would be exchanged for new debt upon the consummation of the
Merger. On March 8, 2010 the holders of the Senior Convertible Notes,
the Senior Note and the Note Payable – Related Party exchanged $6,849,116,
$8,461,735 and $141,942, respectively, of principal and accrued and unpaid
interest thereon into new debt (the “New Notes”). The New Notes are
five-year notes with interest at 5% per year payable at maturity and compounding
annually. The New Notes have no recourse to Manhattan. The
Company is obligated to set aside 50% of the net proceeds resulting from the
sale of products, receipt of royalties, receipt of sublicensing fees or other
non-development payments received by the Company from the commercialization of
the Company’s AST-726 or AST-915 (formerly AST-914) programs for the repayment
of the New Notes. The New Notes are convertible at the option of the
holder into shares of common stock of Manhattan at the rate of $0.40 per
Manhattan common share.
In
addition, all outstanding placement agent warrants were converted into 84,667
shares of the Company’s common stock and 1,015,658 shares of common stock were
issued to certain directors, an officer, a former officer and certain employees
of Paramount just prior to the Merger.
At
December 21, 2009 the Company entered into a Future Advance Promissory Note (the
“Note Receivable”) with Manhattan under which Manhattan may withdraw up to
$67,000. Interest accrues at a rate of 8% per annum and is payable at
maturity. As of December 31, 2009 Manhattan had withdrawn $27,000
from the Company subject to the terms of the Note Receivable, and is included in
the accompanying consolidated balance sheet as of December 31, 2009 as a current
asset, Note receivable. On each of January 13, 2010 and January 28,
2010, Manhattan wthdrew an additional $20,000 subject to the Note
Receivable. On March 4, 2010 Manhattan repaid the Company the $67,000
withdrawn subject to the Note Receivable together with accrued interest of
$816.
16
Exhibit
99.2
Unaudited
Pro Forma Condensed Consolidated Financial Statements of Manhattan
Pharmaceuticals, Inc.
On March
8, 2010, Manhattan Pharmaceuticals Inc. (“Manhattan” or the “Company”) completed
the merger with Ariston Pharmaceuticals, Inc. (“Ariston”)(the “Merger”).
Manhattan paid approximately $1.5 million in aggregate consideration, as
described below, for all of the outstanding shares of Ariston.
Under the
terms of the Merger, the consideration payable by Manhattan to the stockholders
and note holders of Ariston consists of the issuance of 7,062,423 shares of
Manhattan's common stock, par value $0.001 per share, at closing plus the right
to receive up to an additional 24,718,481 shares of Common Stock (the “Milestone
Shares”) upon the achievement of certain product-related milestones described
below. In addition, the Company has reserved 38,630,723 shares of its
Common Stock for possible future issuance in connection with the conversion of
$15.45 million of outstanding Ariston convertible promissory
notes. The note holders do not have any recourse to Manhattan for
repayment of the notes (their sole recourse being to Ariston), but the note
holders will have the right to convert the notes into shares of Manhattan's
common stock at the rate of $0.40 per share. Further, Manhattan has
reserved 5,000,000 shares of its common stock for possible future issuance in
connection with the conversion of $1.0 million of outstanding Ariston
convertible promissory note issued in satisfaction of a trade
payable. The note holder will not have any recourse to Manhattan for
repayment of the note (their sole recourse being to Ariston), but the note
holder does have the right to convert the note into shares of Manhattan's common
stock at the rate of $0.20 per share.
Upon the
achievement of the milestones described below, the Manhattan is obligated to
issue portions of the Milestone Shares to the former Ariston stockholders and
noteholders:
|
|
·
|
Upon
the affirmative decision of the Company’ Board of Directors, provided that
such decision is made prior to March 8, 2011, to further develop the
AST-914 metabolite product candidate (now called AST-915), either
internally or through a corporate partnership, the Company would issue
8,828,029 of the Milestone Shares.
|
|
|
·
|
Upon
the acceptance by the FDA of the Company's filing of the first New Drug
Application for the AST-726 product candidate, the Company would issue
7,062,423 of the Milestone Shares.
|
|
|
·
|
Upon
the Company receiving FDA approval to market the AST-726 product candidate
in the United States of America, the Company would issue 8,828,029 of the
Milestone Shares.
|
Manhattan
believes that the Milestone Shares associated with AST-726, 15,890,452 shares,
are probable of being issued. Manhattan, therefore, calculated the
aggregate consideration paid based on 22,952,875 shares of its common stock at
the closing market price of its stock of $0.065 per share on March 8, 2010, the
Merger date (“Merger Date”).
The
acquisition has been accounted for as a business combination, and as such the
Ariston assets acquired and liabilities assumed have been recorded at their
respective fair values. The determination of fair value for the identifiable
tangible and intangible assets acquired and liabilities assumed requires
extensive use of accounting estimates and judgments. Significant estimates and
assumptions include, but are not limited to: determining the timing and
estimated costs to complete the in-process research and development projects,
projecting the likelihood and timing of regulatory approval, estimating future
cash flows and determining the appropriate discount rate. The estimated fair
values of the assets acquired and liabilities assumed at the Merger
Date included in the unaudited pro forma condensed consolidated
financial statements is provisional.
The
unaudited pro forma financial information included herein gives effect to
Manhattan’s acquisition of Ariston. The Unaudited Pro Forma Condensed
Consolidated Statement of Operations is based on historical data as reported by
the separate companies, and reflect adjustments prepared as if the acquisition
had occurred on January 1, 2009. The Unaudited Condensed Consolidated
Balance Sheet contained in the Manhattan’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2010 reflects the Merger with Ariston and thus, is
not included in this report. As used herein, the terms “the Company,”
“Manhattan”,“we,” and “our” refer to Manhattan Pharmaceuticals, Inc., and, where
applicable, its consolidated subsidiaries.
The
Unaudited Pro Forma Condensed Consolidated Statement of Operations contained
herein (the “Statements”) includes adjustments having a continuing impact on the
consolidated company as a result of using the acquisition method of accounting
for the acquisition.
The
Statements have been prepared based on available information, using assumptions
that our management believes are reasonable. The Statements do not purport to
represent the actual results of operations that would have occurred if the
acquisition had taken place on the date specified. The Statements are not
necessarily indicative of the results of operations that may be achieved in the
future. The Statements do not reflect any adjustments for the effect of
non-recurring items or operating synergies that we may realize as a result of
the acquisition. The Statements include certain reclassifications to conform the
historical financial information of Ariston to our presentation.
The
assumptions used and adjustments made in preparing the Statement are described
in the Notes, which should be read in conjunction with the Statement. The
Statement and related Notes contained herein should be read in conjunction with
the financial statements and related notes included in our Annual Report on Form
10-K for the year ended December 31, 2009 and our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2010.
Manhattan
Pharmaceuticals, Inc.
Unaudited
Pro Forma Condensed
Consolidated
Statement of Operations
Year
Ended December 31, 2009
|
Historical
|
Pro
forma
|
Pro
forma
|
|||||||||||||||
|
Manhattan
|
Ariston
|
adjustments
|
Notes
|
combined
|
|||||||||||||
|
Revenue
|
- | - | - | ||||||||||||||
|
Costs
and expenses:
|
|||||||||||||||||
|
Research
and development
|
40,376 | 577,175 | 617,551 | ||||||||||||||
|
General
and administrative
|
1,731,182 | 127,396 | (6,037 | ) |
A
|
1,852,541 | |||||||||||
|
Total
operating expenses
|
1,771,558 | 704,571 | (6,037 | ) | 2,470,092 | ||||||||||||
|
Operating
loss
|
(1,771,558 | ) | (704,571 | ) | 6,037 | (2,470,092 | ) | ||||||||||
|
Other
(income) expense:
|
|||||||||||||||||
|
Equity
in loss of Hedrin JV
|
500,000 | 500,000 | |||||||||||||||
|
Interest
and other income
|
(586,697 | ) | (2,708 | ) | 9,118 |
A
|
(580,287 | ) | |||||||||
|
Change
in fair value of derivatives
|
560,065 | 560,065 | |||||||||||||||
|
Interest
and amortization expense
|
548,359 | 1,510,680 | 2,059,039 | ||||||||||||||
|
Total
other (income) expense
|
1,021,727 | 1,507,972 | 9,118 | 2,538,817 | |||||||||||||
|
Net
loss
|
(2,793,285 | ) | (2,212,543 | ) | (3,081 | ) | (5,008,909 | ) | |||||||||
|
Net
loss per common share:
|
|||||||||||||||||
|
Primary
and fully diluted
|
$ | (0.04 | ) | $ | (0.06 | ) | |||||||||||
|
Weighted
average shares of common stock Outstanding:
|
|||||||||||||||||
|
Primary
and fully diluted
|
70,624,232 | 7,062,423 |
B
|
77,686,655 | |||||||||||||
A Write-off
of net book value of fixed assets net acquired and reversal of related
depreciation expense. Assets have no value to Manhattan.
B Issued
7,062,423 common shares upon Mereger with Ariston.
Manhattan
Pharmaceuticals, Inc.
Notes
to Unaudited Pro Forma Condensed Consolidated Financial Statements
|
1.
|
Basis
of Presentation
|
The
unaudited pro forma condensed consolidated statement of operations is based on
historical statements of Manhattan Pharmaceuticals, Inc. (“Manhattan”) and
Ariston Pharmaceuticals, Inc. (“Ariston”), after giving effect to the merger
with Ariston as if it occurred on January 1, 2009 for the year ended December
31, 2009.
The
merger has been accounted for as a purchase business combination, and, as such,
the Ariston assets acquired and liabilities assumed have been recorded at their
estimated respective fair values at the time of the merger as provisionally
determined by management.
The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of the merger, March 8, 2010.
|
Valuation
|
||||
|
Cash
and cash equivalents
|
$ | 519,365 | ||
|
Other
assets
|
120,932 | |||
|
Total
identifiable assets
|
640,297 | |||
|
Accounts
payable and accrued expenses
|
(437,616 | ) | ||
|
Senior
convertible notes
|
(16,452,793 | ) | ||
|
Total
liabilities assumed
|
(16,890,409 | ) | ||
|
Net
identifiable assets acquired
|
(16,250,112 | ) | ||
|
In-process
R&D acquired
|
17,742,049 | |||
|
Net
assets acquired
|
$ | 1,491,937 | ||
The
in-process R&D acquired relates entirely to AST-726.