RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The Company and
Nature of Operation and Basis of Preparation
Renovis, Inc. (the Company or Renovis) is a biopharmaceutical company focused on the
discovery and development of drugs to treat major medical needs in the areas of neurological and inflammatory diseases. We are located in South San Francisco, California.
The Company has sustained operating losses since inception and expects such losses to continue over the next several years. Management plans to continue to finance the Companys operations with a combination of
equity issuances, debt arrangements and revenues from corporate alliances with pharmaceutical and biotechnology companies. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of
its research or development programs.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those estimates.
Business Segments
Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related Information
, requires an
enterprise to report segment information based on how management internally evaluates the operating performance of its business units (segments). Our operations are confined to one business segment; the discovery and development of pharmaceutical
products.
Revenue Recognition
The Companys revenues are generated by complex collaborative research and licensing arrangements. Revenues under such agreements may include upfront payments, research funding, milestone payments and royalties. In accordance with
Emerging Issues Task Force (EITF) Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables
, we evaluate whether the delivered element under these arrangements has value to our collaborative partner or licensee on a stand-alone basis
and whether objective and reliable evidence of fair value of the undelivered element exists. Arrangements with multiple deliverables that do not meet these criteria are treated as one unit of accounting for the purposes of revenue recognition.
Revenues from nonrefundable upfront technology license fees, for product candidates where we are providing continuing services related to
product development, are deferred and recognized as contract revenue
34
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
ratably over the estimated period of performance under the research agreement. The performance period is estimated at the inception of the arrangement and is
periodically reevaluated. The reevaluation of the performance period may shorten or lengthen the period during which the deferred revenue is recognized, which would result in an acceleration or delay of expected revenue recognition.
Research funding is recognized as revenue as the related effort is performed.
Milestone payments we receive under collaborative arrangements are recognized as revenue upon achievement of the milestone events, which represent the
culmination of the earnings process, and when collectability is reasonably assured. Milestone payments are triggered either by the results of our research efforts or by events external to us, such as regulatory approval to market a product or the
achievement of specified sales levels by a marketing partner or licensee. Accordingly, the milestone payments are substantially at risk at the inception of the contract, and the amounts of the payments assigned thereto are commensurate with the
milestone achieved. Upon the achievement of a milestone event, we have no future performance obligations related to that milestone as the milestone payments we receive are nonrefundable.
Research and Development
Research and development costs, which include related salaries,
contractor fees, administrative expenses, and allocations of overhead costs, are charged to expense as incurred. License and milestone obligations that we must pay prior to regulatory approval to market a product related to the licensed technology
are also charged to research and development expense.
Cash, Cash Equivalents and Short-Term Investments
The Company invests its excess cash in bank deposits, money market accounts and other marketable securities. The Company considers all highly liquid
investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents.
The Company has designated its
investment securities as available-for-sale. The Company considers its available-for-sale portfolio as available for use in current operations. Accordingly, all investments have been classified as short-term, even though the stated maturity date may
be one year or more beyond the current balance sheet date. Available-for-sale securities are carried at fair value and unrealized gains and losses are included in other comprehensive income (loss) and reported as a separate component of
stockholders equity (net capital deficiency). Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in the statement of operations. The cost of securities sold
is based on the specific identification method. Interest on marketable securities is included in interest income.
Concentration of Credit Risk
Cash and cash equivalents consist of financial instruments that potentially subject the Company to concentrations of credit risk to
the extent recorded on the balance sheets. The Company has established guidelines for investment of its excess cash that it believes maintain safety and liquidity through diversification of counterparties and maturities.
Fair Value of Financial Instruments
The
Companys financial instruments consist principally of cash and cash equivalents, short-term investments and loans payable. The carrying values of the Companys financial instruments approximate fair value.
35
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
Property and Equipment, Net
Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are recorded using the
straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the related assets.
Impairment of Long-Lived Assets
The
Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be
recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment loss, if recognized, would be based on the excess of the carrying
value of the impaired asset over its respective fair value. Impairment, if any, is assessed using discounted cash flows.
Income Taxes
The Company utilizes the liability method of accounting for income taxes as required by SFAS No. 109,
Accounting for Income
Taxes
. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and the tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Currently, there is no provision for income taxes as the Company has incurred operating losses to date and a valuation allowance has been provided on the net deferred tax assets.
Stock-Based Compensation
The Company accounts
for its stock-based compensation utilizing the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment
(SFAS 123(R)). Under the fair value recognition provisions
for SFAS 123(R), stock-based compensation cost is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisite service period of the award. We have used the
Black-Scholes valuation model to estimate fair value of our stock-based awards which requires various judgmental assumptions including estimating stock price volatility, forfeiture rates and expected life. Our computation of expected volatility is
based on a combination of peer companies historical volatilities and our market-based implied volatility. In addition, we consider many factors when estimating expected forfeitures and expected life, including types of awards, employee class
and historical experience. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.
Recent Accounting Pronouncements
In September
2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). The purpose of SFAS No. 157 is to define fair value, establish a framework for measuring fair value and enhance disclosures about fair value
measurements. The measurement and disclosure requirements are effective for the Company beginning in the first quarter of 2008. The Company is currently evaluating the impact that SFAS No. 157 will have on its financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS No. 159).
SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be
reported in earnings. SFAS No. 159 is effective for the Company beginning in the first quarter of 2008 The Company is currently evaluating the impact that SFAS No. 159 will have on its financial statements.
In December 2007, the EITF reached a consensus on EITF 07-01,
Accounting for Collaborative Agreements
. EITF 07-01 prohibits companies from
applying the equity method of accounting to activities performed outside a separate legal entity by a virtual joint venture. Instead, revenues and costs incurred with third parties in connection with the collaborative arrangement should be presented
gross or net by the collaborators based on the criteria in EITF Issue No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent
, and other applicable accounting literature. The consensus should be applied to collaborative
arrangements in existence at the date of adoption using a modified retrospective method that requires reclassification in all periods presented for those arrangements still in effect at the transition date, unless that application is impracticable.
The consensus is effective for fiscal years beginning after December 15, 2008. We are currently evaluating EITF 07-01 and its impact, if any, on its financial statements.
In June 2007, the FASB ratified EITF Issue No. 07-3,
Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities
(EITF 07-3). EITF 07-3 requires that nonrefundable advance payments for goods and services that will be used or rendered in
future R&D activities pursuant to executory contractual arrangements be deferred and recognized as an expense in the period that the related goods are delivered or services are performed. EITF 07-3 is effective for us beginning on January 1,
2008. The Company is currently evaluating the impact, if any, that EITF 07-3 will have on its financial statements.
36
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
2. Proposed Merger with Evotec AG
On September 18, 2007, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with Evotec AG, an Aktiengesellschaft organized
and existing under the laws of the Federal Republic of Germany (Evotec). The Merger Agreement provides that, subject to the satisfaction of certain conditions, a wholly-owned subsidiary of Evotec will merge with and into the Company, with the
Company continuing to exist as the surviving corporation and as a wholly-owned subsidiary of Evotec. Under the terms of the Merger Agreement, at the effective time of the merger, each issued and outstanding share of Renovis common stock will be
automatically converted into the right to receive 0.5271 of an American Depositary Share (ADS) of Evotec (Exchange Ratio), with each ADS representing two ordinary shares of Evotec, such that each issued and outstanding share of Renovis common stock
will be exchanged for ADSs representing 1.0542 Evotec ordinary shares.
At the effective time of the merger, all outstanding Renovis equity
awards, except for Renovis stock options with an exercise price that exceeds $9.00 per share, will be converted into rights to acquire Evotec ADSs on the same terms and conditions as were applicable under the Company equity awards. The awards will
continue to vest according to the existing vesting schedules, and will represent the right to acquire that number of Evotec ADSs determined by multiplying the number of shares of Company common stock subject to the Company equity award by the
Exchange Ratio. All outstanding Company stock options with an exercise price that exceeds $9.00 per share will be cancelled.
The merger is
intended to qualify as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code. The merger is subject to the approval of Renovis stockholders, the listing of the Evotec ADSs to be issued to Renovis
stockholders on the NASDAQ Global Market and antitrust regulatory clearance, as well as other customary closing conditions. We currently anticipate the merger will be completed in the first half of 2008. Either party may be obligated to pay a
termination fee of $6.0 million and reimburse certain transaction expenses up to $500,000 if the merger agreement is terminated under certain circumstances. The Company recorded approximately $2.5 million in transaction advisory fees as general and
administrative expense in 2007 as the services have been largely rendered and as payment of the services are probable. Of the $2.5 million in transaction fees, approximately $1.75 million will not be paid until the merger transaction is consummated,
and a corresponding amount of expense may be reversed if the merger transaction does not occur
.
On January 7, 2008, Evotec filed a registration statement on Form F-4 with the Securities and Exchange Commission (SEC) for the
registration of its ordinary shares to be issued in connection with the proposed merger and amendments to that registration statement on February 20, 2008, March 11, 2008 and March 13, 2008. This registration statement has not
yet been declared effective.
3. Comprehensive Loss
SFAS No. 130,
Reporting Comprehensive Income,
requires components of other comprehensive income, including gains and losses on available-for-sale investments, to be included as part of total comprehensive
income. Comprehensive loss for the years ended December 31, 2007, 2006 and 2005 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net loss
|
|
$
|
(32,815
|
)
|
|
$
|
(28,376
|
)
|
|
$
|
(31,980
|
)
|
Unrealized gain (loss) on available-for-sale-securities
|
|
|
62
|
|
|
|
(19
|
)
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(32,753
|
)
|
|
$
|
(28,395
|
)
|
|
$
|
(31,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Net Loss per Share
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per
share is computed by dividing the net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock subject to repurchase by the
Company, preferred stock, options and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Historical
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(32,815
|
)
|
|
$
|
(28,376
|
)
|
|
$
|
(31,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
29,673,494
|
|
|
|
29,275,744
|
|
|
|
25,849,923
|
|
Less: Weighted-average unvested common shares subject to repurchase
|
|
|
(2,805
|
)
|
|
|
(62,646
|
)
|
|
|
(127,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted net loss per share
|
|
|
29,670,689
|
|
|
|
29,213,098
|
|
|
|
25,722,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share applicable to common stockholders
|
|
$
|
(1.11
|
)
|
|
$
|
(0.97
|
)
|
|
$
|
(1.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical outstanding dilutive securities not included in diluted net loss per share calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
Options/Restricted Stock Units to purchase common stock
|
|
|
3,710,766
|
|
|
|
3,657,866
|
|
|
|
2,637,749
|
|
Warrants
|
|
|
33,358
|
|
|
|
33,358
|
|
|
|
33,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,744,124
|
|
|
|
3,691,224
|
|
|
|
2,671,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
5. Collaboration and License Agreements
Pfizer
On May 26, 2005, the Company entered into a collaborative research agreement and
a license and royalty agreement with Pfizer to research, develop and commercialize small molecule compounds which work by targeting the vanilloid receptor (VR1). The collaboration focuses on potential treatments for pain and other diseases and
disorders. All of the revenue earned in 2007 and the majority of revenue earned in 2006 was related to the Companys collaboration with Pfizer.
Under the agreements, the Company received an upfront license fee of $10.0 million in July 2005. In addition to the upfront license fee, the agreements with Pfizer also provided the Company with research funding in
excess of $7.0 million over an initial two-year research period, subject to Pfizers option to extend for up to two additional years with additional funding requirements. The initial funded research period ran through June 2007. Under the
licensing and royalty agreement with Pfizer, the Company will be eligible to receive research, development, approval and commercialization milestone payments resulting in total potential payments to the Company of greater than $170.0 million through
successful achievement of research development and commercialization milestones for product candidates resulting from the collaboration. Upon commercialization of a product resulting from the collaboration, the Company would be entitled to receive
royalties on net sales by Pfizer.
On April 9, 2007, the Company and Pfizer amended the collaborative research agreement to extend the
term of the agreement for an additional twelve months. Under the terms of the extension, Pfizer will continue to fund all aspects of the collaboration, including the research and preclinical development efforts at the Company through June 30,
2008. Other terms of the collaboration and licensing agreements between Pfizer and Renovis were not changed.
The Company applied EITF
Issue No. 00-21 in evaluating the appropriate accounting for the agreements, which became effective on June 28, 2005. In accordance with this guidance, the Company identified the initial license transfer and the research and development
services as the deliverables under the agreements and concluded that they should be accounted for as a single unit of accounting based upon the determination that these deliverables were linked and did not have stand-alone value. The Company also
determined that the achievement of each milestone for which it is eligible for milestone payments represents a separate earnings process. The Company believes that each of these milestones, such as the commencement of a particular clinical trial,
the filing of a New Drug Application, or an NDA, or the receipt of regulatory approval is well-defined, substantive, measurable and reasonable relative to risk and effort. Accordingly, the Company concluded that such payments should be recognized as
revenue when the milestone is achieved and collectability is reasonably assured.
In accordance with the initial evaluation discussed
above, the Company began amortizing the upfront payment from Pfizer ratably in the third quarter of 2005 over the estimated research term of two years. As a result of the amended agreement, the Company revised the estimated completion date of the
research term from June 30, 2007 to June 30, 2008. Accordingly, the Company began recognizing the remaining deferred revenue as of December 31, 2006, $2.5 million, on a straight-line basis through the new estimated completion date of
the research period, June 30, 2008.
During the years ended December 31, 2007 and 2006, the Company recognized $9.8 million and
$10.1 million, respectively, in revenue related to the agreements. Revenue recognized in 2006 included milestone revenue of $1.5 million that the Company earned in connection with specific progress of the VR1 collaboration into preclinical studies.
Revenue recognized in 2007 included milestone revenue of $4.5 million related to the placement by Pfizer of a product candidate from the VR1 program into IND-enabling studies and for the completion of certain studies with a previously nominated
compound. As of December 31, 2007, deferred revenue under the agreements was $0.8 million, all of which related to the upfront payment received in July 2005.
Genentech
On December 31, 2003, the Company entered into a collaborative research, development and license
agreement with Genentech for the discovery and development of drugs that inhibit pathological or tumor angiogenesis and promote nerve re-growth following nervous system injury. Under the terms of the agreement, Genentech paid the Company an upfront
license and technology access fee of $5.3 million in January 2004 and made a $3.0 million equity purchase concurrent with our initial public offering. The Company deferred the $5.3 million upfront payment and began recognizing it on a straight-line
basis over the two-year estimated research period of the agreement. In July 2005, the Company revised the estimated completion date of the research period under the agreement by two months to February 2006 from the previous estimate of December
2005. Accordingly, the Company recognized the remaining deferred revenue on a straight-line basis through February 2006. During the years ended December 31, 2006 and 2005, the Company recognized $0.3 million and $2.3 million, respectively, in
revenue related to this agreement. The funded research period under this agreement ended in February 2006. The Company is eligible to receive future milestone and royalty payments on therapeutic products emerging from the collaboration that are
developed and commercialized by Genentech.
38
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
6. Cash, Cash Equivalents and Short-Term Investments
The following is a summary of cash, cash equivalents and short-term investments as of December 31, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
Cash
|
|
$
|
3,077
|
|
$
|
|
|
$
|
|
|
|
$
|
3,077
|
Money market funds
|
|
|
483
|
|
|
|
|
|
|
|
|
|
483
|
Commercial paper
|
|
|
20,515
|
|
|
6
|
|
|
|
|
|
|
20,521
|
Auction rate certificates
|
|
|
16,875
|
|
|
|
|
|
|
|
|
|
16,875
|
Corporate bonds
|
|
|
1,247
|
|
|
|
|
|
|
|
|
|
1,247
|
U.S. government sponsored entity securities
|
|
|
37,179
|
|
|
11
|
|
|
|
|
|
|
37,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,376
|
|
$
|
17
|
|
$
|
|
|
|
$
|
79,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,750
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
38,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value of short-term investment by contractual maturity at December 31 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,768
|
Maturing after one through 5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing after 5 through 10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing after 10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
16,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
Cash
|
|
$
|
4,367
|
|
$
|
|
|
$
|
|
|
|
$
|
4,367
|
Money market funds
|
|
|
165
|
|
|
|
|
|
|
|
|
|
165
|
Commercial paper
|
|
|
78,977
|
|
|
3
|
|
|
(46
|
)
|
|
|
78,934
|
Auction rate certificates
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
5,000
|
Corporate bonds
|
|
|
2,153
|
|
|
|
|
|
(4
|
)
|
|
|
2,149
|
U.S. government sponsored entity securities
|
|
|
8,489
|
|
|
3
|
|
|
|
|
|
|
8,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
99,151
|
|
$
|
6
|
|
$
|
(50
|
)
|
|
$
|
99,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,958
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
57,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
99,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value of short-term investment by contractual maturity at December 31 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,149
|
Maturing after one through 5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing after 5 through 10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing after 10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
The Companys marketable auction securities with contractual maturities greater than one year
have interest reset features. The interest rate of these securities reset at approximately every 30 days, typically through a remarketing process or based on an index.
To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value. The Company recognizes an impairment charge when the decline in the
estimated fair value of a marketable security below the amortized cost is determined to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the duration of time and the
severity to which the fair value has been less than amortized cost, any adverse changes in the investees financial condition and our intent and ability to hold the marketable security for a period of time sufficient to allow for any
anticipated recovery in market value.
The Companys short-term investments included $16.9 million and $14.3 million of auction rate
securities issued by municipalities as of December 31, 2007 and February 29, 2008, respectively. In mid-February 2008, liquidity issues in the global credit markets resulted in the failure of auctions representing substantially all of the
auction-rate securities we hold, as the amount of securities submitted for sale in those auctions exceeded the amount of bids. Prior to mid-February 2008, we had not experienced any auction failures with these instruments. Substantially all of our
auction-rate investments are AAA rated or equivalent, backed by pools of student loans substantially guaranteed by the U.S. Department of Education and we continue to believe that the credit quality of these securities is high based on this
guarantee. To date we have collected all interest payable on all of our auction-rate securities when due. For each unsuccessful auction, the interest rate moves to a maximum rate defined for each security, generally reset periodically at a level
higher than defined short-term interest benchmarks. The principal associated with failed auctions will not be accessible until successful auctions occur, a buyer is found outside of the auction process, the issuers establish a different form of
financing to replace these securities, or final payments come due according to contractual maturities ranging from 20 to 37 years. At this time, management does not believe that these investments are impaired or that they will not be settled in the
short term, although the market for these investments is presently uncertain. The Company will continue to monitor and evaluate these investments on an ongoing basis for impairment or for the need to reclassify to long term investments. Based on our
expected operating cash flows, and our other sources of cash, we do not anticipate the potential lack of liquidity on these investments will affect our ability to execute our current business plan.
There were no material gross realized losses or gains on the sale of available-for-sale securities during the years ended December 31, 2007 and
2006.
7. Property and Equipment
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Computer equip & software
|
|
$
|
3,375
|
|
|
$
|
3,365
|
|
Laboratory and office equip
|
|
|
9,193
|
|
|
|
9,163
|
|
Leasehold improvements
|
|
|
1,749
|
|
|
|
1,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,317
|
|
|
|
14,277
|
|
Less accumulated depreciation
|
|
|
(9,081
|
)
|
|
|
(7,225
|
)
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
5,236
|
|
|
$
|
7,052
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $2.0 million for each of the years ended December 31, 2007 and 2006,
and $1.8 million for the year ended December 31, 2005.
8. Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Professional services
|
|
$
|
434
|
|
$
|
400
|
Facilities related
|
|
|
464
|
|
|
408
|
Outside services
|
|
|
492
|
|
|
437
|
Deferred rent
|
|
|
375
|
|
|
291
|
Other
|
|
|
1,855
|
|
|
428
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
$
|
3,620
|
|
$
|
1,964
|
|
|
|
|
|
|
|
40
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
9. Loans Payable
In February 2004, the Company entered into a credit facility with a lender that provided up to an aggregate of $5 million to finance the purchase of laboratory and computer equipment and certain leasehold
improvements. In March 2005, the lender provided for a new credit facility of $3.5 million which was available for the Company to draw down through December 31, 2005. The draw down period was extended through December 31, 2006 by the
lender. As of December 31, 2007, the Company had borrowed an aggregate of approximately $8.5 million under these facilities, of which $3.0 million was outstanding at that date. Payments are due in monthly installments over a period ranging from
42 to 48 months at interest rates ranging from 8.80% to 10.67% and are secured by the assets financed.
Future principal payments under the
loans payable are as follows (in thousands):
|
|
|
|
|
|
|
Loans
Payable
|
|
Year ending December 31,
|
|
|
|
|
2008
|
|
$
|
1,620
|
|
2009
|
|
|
1,150
|
|
2010
|
|
|
242
|
|
|
|
|
|
|
Total principal payments required
|
|
|
3,012
|
|
|
|
|
|
|
Less current portion
|
|
|
(1,620
|
)
|
|
|
|
|
|
Noncurrent portion
|
|
$
|
1,392
|
|
|
|
|
|
|
10. Operating Leases
The Company leases its laboratory and office facilities under an operating lease arrangement that expires in August 2009. The Company has the option to extend the lease at this location in South San Francisco,
California through August 2012.
Rent expense was $1.7 million in each of the years ended December 31, 2007 and 2006, respectively.
Rent expense was $1.6 million for the year ended December 31, 2005 (net of $0.2 million sublease income).
Future minimum lease
payments as of December 31, 2007 under noncancelable operating leases are as follows (in thousands):
|
|
|
|
|
|
Operating
Leases
|
Year ending December 31,
|
|
|
|
2008
|
|
$
|
2,037
|
2009
|
|
|
1,405
|
|
|
|
|
Total principal payments required
|
|
$
|
3,442
|
|
|
|
|
41
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
11. Stockholders Equity
Common Stock
On February 10, 2004, the Company sold 6,325,000 shares of common stock to
the public in its initial public offering and realized net proceeds of approximately $68.3 million. Additionally, concurrent with the initial public offering the Company completed a private placement with Genentech for 250,000 shares of common stock
for proceeds of $3.0 million (Note 5).
On September 28, 2005, the Company sold 4,000,000 shares of common stock through a public
offering and realized net proceeds of approximately $50.4 million.
Stock Plans
Amended 2003 Stock Plan
Effective January 3, 2005, the Board of Directors approved the
Amended and Restated Renovis, Inc. 2003 Stock Plan (Amended 2003 Plan), giving effect to certain amendments to the previously approved Renovis, Inc. 2003 Stock Plan. The Board of Directors approved further amendments to the Amended 2003 Plan on
January 3, 2007. A total of 333,333 shares of the Companys common stock were initially reserved for issuance under the Amended 2003 Plan. The Amended 2003 Plan also includes additional shares of common stock that have or will have become
available for issuance under the Companys predecessor stock option plans. Additionally, commencing in 2005 and on each January 15 thereafter during the term of the Amended 2003 Plan, the number of shares reserved for issuance under the
Amended 2003 Plan is increased by the lesser of (i) 3.5% of the Companys outstanding shares of common stock on that date, (ii) 1,055,555 shares, or (iii) such lesser number determined by our Board of Directors. On
January 16, 2007, the Board authorized and reserved an additional 1,034,527 shares of the Companys common stock for issuance under the Amended 2003 Plan.
The Amended 2003 Plan permits the Company to grant incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, deferred stock units, dividend equivalents, performance share
awards, stock payments and other stock related benefits, or any combination thereof to employees or consultants of the Company. The Amended 2003 Plan provides that the automatic option grants for independent directors to purchase 11,111 shares and
the chairman of the Board of Directors to purchase 22,222 shares shall be granted annually on a date determined by the Board of Directors at its discretion, which date shall, to the extent practicable, be consistent with the date on which annual
replenishment grants of options are made to employees generally (the Annual Grant Date). The Board of Directors at its discretion may change the Annual Grant Date from year to year. Each eligible member of the Board of Directors must
continue to serve through the Annual Grant Date in order to receive an automatic option grant.
Stock options awarded to employees may be granted at an exercise price no less than the fair market value, as defined in the Amended 2003 Plan, of the common stock on the date of grant. Options become exercisable as
determined by the Board of Directors, generally at the rate of 1/48
th
per month such that the options will be fully vested after four years.
Options granted under the Amended 2003 Plan expire no more than ten years after the date of grant.
The predecessor plans to the Amended
2003 Plan allowed for the early exercise of options before they had vested. Shares issued as a result of early exercise are subject to a repurchase option by the Company upon termination of the purchasers employment or services at the exercise
price paid by the option holder. The repurchase right lapses over a period of time as determined by the Board of Directors. The Company may exercise its repurchase options within 90 days of such voluntary or involuntary termination. As of
December 31, 2007, shares issued pursuant to early exercise of options granted under the predecessor plans were fully vested.
Repurchase of
Outstanding Stock Options
On January 4, 2007, in order to replenish the number of shares available for grant to existing
non-executive employees, the Company entered into stock option cancellation agreements with the officers of the Company. Under the terms of these stock option cancellation agreements, the officers surrendered certain options to purchase shares of
the Companys common stock (the Options) to the Company for cancellation in exchange for $0.001 per share, the par value of the Companys common stock. The officers relinquished all right, title or interest in those Options. In aggregate,
Options to purchase 1,005,000 shares were cancelled. The shares reserved for issuance under the cancelled Options were immediately available for future grants to non-executive employees under the Companys Amended 2003 Plan. As a result of the
repurchase of the Options, the Company incurred a one-time noncash share-based payment charge of $7.3 million in the first quarter of 2007, which represented the amount of the unrecognized compensation cost for the Options repurchased as of the
repurchase date. Of the $7.3 million recognized, $1.4 million was recorded as research and development expense and $5.9 million was recorded as general and administrative expense in the accompanying statement of operations.
Issuance of Deferred Stock Units
During the
year ended December 31, 2007, the Company issued 2,230,000 deferred stock units (DSU), also known as restricted stock units, under the Amended 2003 Plan to existing employees. The DSUs vest monthly from one year to three years. In accordance
with SFAS 123(R), the fair value of the DSUs was estimated based upon the closing sales price of the Companys common stock on the date of grant.
Deferred stock units are rights to receive shares of common stock that vest over time. Unlike
stock options, deferred stock units do not require the delivery of a notice of exercise or the payment of an exercise price. Instead, the shares of common stock subject to vested deferred stock units are issued and delivered to the holder after the
earlier of the following: (i) a date selected by the Company within a certain range; (ii) the holders termination of employment; (iii) the holders disability; (iv) the holders death; or (v) a change in
control. The deferred stock units awarded to employees, including executive officers, in January 2007 vest with respect to 1/36
th
of the shares of
common stock subject the award for each calendar month such that the entire award will be vested on December 31, 2009. Other deferred stock units awarded to employees during 2007 vest with respect to 100% of the shares of common stock subject
to the award on the one-year from the date of grant.
In connection with the resignation of the Companys President and Chief
Executive Officer, Corey S. Goodman, Ph.D. on October 1, 2007, the Company appointed John P. Walker, current Chairman of the Board of Directors, as non-employee Executive Chairman and Principal Executive Officer of the Company, effective
October 2, 2007. Dr. Goodman continues to serve on our Board of Directors. Subject to his earlier resignation or termination, Mr. Walker will serve as Executive Chairman and Principal Executive Officer and Chairman of the Board of
Directors of the Company until the consummation of the merger of the Company with Evotec. In connection with his appointment as Executive Chairman and pursuant to the terms of the Amended 2003 Plan and his Executive Chairman Agreement,
Mr. Walker has been granted deferred stock units with respect to 100,000 shares of Company common stock. 1/36th of the shares subject to these deferred stock units will vest each month, subject to Mr. Walkers continued service with
the Company through such date, including his service as a member of the Board of Directors. Immediately prior to the consummation of a change in control, including the merger of the Company with Evotec, 25% of the shares subject to the deferred
stock unit award will vest.
The Company has accounted for this arrangement in accordance with SFAS 123(R) and EITF Issue No. 96-18,
Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services
(EITF No. 96-18). The compensation cost of this arrangement is subject to remeasurement over
the vesting term as earned. The Company recognized compensation cost related to this agreement in the amount of $27,000 for the year ended December 31, 2007.
42
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
The following table summarizes stock option and DSU activity under the Amended 2003 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Available
for Grant
|
|
|
Number of
Options/DSUs
|
|
|
Weighted-Average
Exercise Price
|
Balance at December 31, 2004
|
|
129,771
|
|
|
2,214,099
|
|
|
$
|
3.94
|
Shares authorized
|
|
863,984
|
|
|
|
|
|
|
|
Options granted
|
|
(821,799
|
)
|
|
821,799
|
|
|
$
|
11.75
|
Shares issued
|
|
(20,000
|
)
|
|
|
|
|
$
|
12.70
|
Options canceled
|
|
254,419
|
|
|
(254,419
|
)
|
|
$
|
8.30
|
Shares repurchased
|
|
4,389
|
|
|
|
|
|
$
|
1.27
|
Options exercised
|
|
|
|
|
(312,747
|
)
|
|
$
|
2.23
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
410,764
|
|
|
2,468,732
|
|
|
$
|
6.31
|
Shares authorized
|
|
1,016,319
|
|
|
|
|
|
|
|
Options granted
|
|
(1,420,686
|
)
|
|
1,420,686
|
|
|
$
|
17.66
|
Shares issued
|
|
136,788
|
|
|
(136,788
|
)
|
|
$
|
11.91
|
Options exercised
|
|
|
|
|
(383,752
|
)
|
|
$
|
2.35
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
143,185
|
|
|
3,368,878
|
|
|
$
|
11.32
|
Shares authorized
|
|
1,034,527
|
|
|
|
|
|
|
|
Options granted
|
|
(169,649
|
)
|
|
169,649
|
|
|
$
|
3.42
|
Options canceled
|
|
1,752,110
|
|
|
(1,752,110
|
)
|
|
$
|
14.15
|
Shares repurchased
|
|
4,429
|
|
|
|
|
|
$
|
2.50
|
Options exercised
|
|
|
|
|
(133,047
|
)
|
|
$
|
1.31
|
DSU granted
|
|
(2,330,000
|
)
|
|
2,330,000
|
|
|
|
|
DSU cancelled
|
|
369,368
|
|
|
(358,643
|
)
|
|
|
|
DSU released to common stock
|
|
|
|
|
(57,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
803,970
|
|
|
3,567,370
|
|
|
$
|
3.85
|
|
|
|
|
|
|
|
|
|
|
Inducement Stock Options
In July and August 2004, Renovis granted employment inducement stock options covering a total of
220,760 shares to certain newly hired executives. These options were granted without stockholder approval pursuant to NASDAQ Marketplace Rule 4350 (i)(1)(A)(iv) and in accordance with Renovis standard stock option terms, including a
10-year term and four year vesting, and were granted at exercise prices equal to the fair market value on the date of grant. These options become exercisable at the rate of 25% at the end of the first year, with the remaining balance vesting ratably
over the next three years, or 1/48
th
of the original number of shares per month.
The following table summarizes the inducement stock option activities:
|
|
|
|
|
|
|
|
|
|
|
Shares
Available
for Grant
|
|
Number of
Options
|
|
|
Weighted-Average
Exercise Price
|
Balance at December 31, 2004
|
|
|
|
220,760
|
|
|
$
|
8.07
|
Options canceled
|
|
|
|
(83,843
|
)
|
|
$
|
7.73
|
Options exercised
|
|
|
|
(5,000
|
)
|
|
$
|
7.64
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
131,917
|
|
|
$
|
8.30
|
Options canceled
|
|
|
|
(88,421
|
)
|
|
$
|
7.76
|
Options exercised
|
|
|
|
(2,000
|
)
|
|
$
|
9.41
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
41,496
|
|
|
$
|
9.41
|
Options canceled
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
41,496
|
|
|
$
|
9.41
|
|
|
|
|
|
|
|
|
|
43
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
Employment Commencement Incentive Plans
The Board of Directors approved the Renovis, Inc. 2007 Employment Commencement Incentive Plan (2007 Plan), effective January 22, 2007. The number of
shares of common stock reserved for issuance under the 2007 Plan was 250,000.
The 2007 Plan provided the Company with the ability to grant
specified types of equity awards including non-qualified stock options, restricted stock, stock appreciation rights, performance shares, dividend equivalents, deferred stock and stock payment awards to newly hired employees. New employees that were
otherwise eligible to receive grants under the 2007 Plan were eligible to receive all types of awards approved under these plans. A majority of the independent members of the Companys Board of Directors or the compensation committee of the
Board of Directors determined which new employees received awards under the 2007 Plan and the terms and conditions of such awards, within certain limitations set forth in the 2007 Plan. The awards granted pursuant to the 2007 Plan are intended to be
inducement awards pursuant to NASDAQ Marketplace Rule 4350(i)(1)(A)(iv). The 2007 Plan was not subject to the approval of the Companys stockholders.
Options granted under the 2007 Plan have a 10-year term, and were granted at exercise prices equal
to the fair market value on the date of grant. These options generally become exercisable at the rate of 25% at the end of the first year, with the remaining balance vesting ratably over the next three years, or 1/48
th
of the original number of shares per month such that the options will be fully vested after four years. Only an employee who has not previously been an
employee or director of the Company or a subsidiary, or following a bona fide period of non-employment by the Company or a subsidiary, was eligible to participate in the 2007 Plan and only if he or she was granted an award in connection with his or
her commencement of employment with the Company or a subsidiary and such grant was an inducement material to his or her entering into employment with the Company or a subsidiary. Shares available for grant under the 2007 Plan expired upon expiration
of the 2007 Plan at December 31, 2007.
In January 2005 and 2006, the Board of Directors approved similar plans, the Renovis, Inc.
2005 Employment Commencement Incentive Plan (2005 Plan) and the Renovis, Inc. 2006 Employment Commencement Incentive Plan (2006 Plan). The number of shares of common stock reserved for issuance under the 2005 Plan and 2006 Plan was 250,000 and
424,392, respectively. The 2005 Plan and 2006 Plan have similar terms as the 2007 Plan as described above. Shares available for grant under the 2005 Plan and 2006 Plan expired at December 31, 2005 and 2006, respectively.
The following table summarizes the 2007 Plan activity as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Available
for Grant
|
|
|
Number of
Options
|
|
|
Weighted-Average
Exercise Price
|
Shares authorized
|
|
250,000
|
|
|
|
|
|
|
|
Options granted
|
|
(58,000
|
)
|
|
58,000
|
|
|
$
|
3.41
|
Options canceled
|
|
13,400
|
|
|
(13,400
|
)
|
|
$
|
3.42
|
Plan shares expired
|
|
(205,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
44,600
|
|
|
$
|
3.41
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the 2006 Plan activity as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Available
for Grant
|
|
|
Number of
Options
|
|
|
Weighted-Average
Exercise Price
|
Shares authorized
|
|
424,392
|
|
|
|
|
|
|
|
Shares issued
|
|
(50,000
|
)
|
|
|
|
|
$
|
15.62
|
Options granted
|
|
(211,292
|
)
|
|
211,292
|
|
|
$
|
15.07
|
Options canceled
|
|
300
|
|
|
(300
|
)
|
|
$
|
15.62
|
Plan shares expired
|
|
(163,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
210,992
|
|
|
$
|
15.07
|
Options canceled
|
|
|
|
|
(172,792
|
)
|
|
$
|
15.12
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
38,200
|
|
|
$
|
14.84
|
|
|
|
|
|
|
|
|
|
|
44
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
The following table summarizes the 2005 Plan activity as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Available
for Grant
|
|
|
Number of
Options
|
|
|
Weighted-Average
Exercise Price
|
Shares authorized
|
|
250,000
|
|
|
|
|
|
|
|
Options granted
|
|
(38,300
|
)
|
|
38,300
|
|
|
$
|
14.18
|
Options canceled
|
|
1,200
|
|
|
(1,200
|
)
|
|
$
|
12.48
|
Plan shares expired
|
|
(212,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
37,100
|
|
|
$
|
14.23
|
Options canceled
|
|
|
|
|
(600
|
)
|
|
$
|
16.42
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
36,500
|
|
|
$
|
14.20
|
Options canceled
|
|
|
|
|
(17,400
|
)
|
|
$
|
14.40
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
19,100
|
|
|
$
|
14.01
|
|
|
|
|
|
|
|
|
|
|
The following tables summarize information about stock options outstanding as of December 31,
2007 for all stock plans (including the Inducement Stock Options, the 2005 Plan, the 2006 Plan and the 2007 Plan):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise
Prices
|
|
Number
Outstanding
|
|
Weighted-Average
Remaining
Contractual
Life
(In Years)
|
|
Weighted-Average
Exercise Price
|
|
Number
Exercisable
|
|
Weighted-Average
Remaining
Contractual
Life
(In Years)
|
|
Weighted-Average
Exercise Price
|
$0.81-$3.35
|
|
374,927
|
|
6.06
|
|
$
|
1.60
|
|
321,260
|
|
5.52
|
|
$
|
1.31
|
$3.36-$4.05
|
|
154,299
|
|
9.16
|
|
$
|
3.45
|
|
104,348
|
|
9.07
|
|
$
|
3.42
|
$4.50-$4.50
|
|
371,395
|
|
5.73
|
|
$
|
4.50
|
|
371,395
|
|
5.73
|
|
$
|
4.50
|
$5.40-$11.70
|
|
431,586
|
|
6.51
|
|
$
|
9.72
|
|
385,051
|
|
6.75
|
|
$
|
9.64
|
$11.94-$21.66
|
|
464,559
|
|
7.96
|
|
$
|
17.43
|
|
304,171
|
|
8.03
|
|
$
|
17.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.81-$21.66
|
|
1,796,766
|
|
6.86
|
|
$
|
8.40
|
|
1,486,225
|
|
6.65
|
|
$
|
7.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of outstanding, exercisable and vested options is $546,000 and is
calculated as the difference between the exercise price of the underlying awards and the closing price of the Companys common stock for 319,077 shares subject to options that were in-the-money at December 31, 2007. As of December 31,
2007 there were 1,486,225 vested and outstanding options with a weighted-average exercise price of $7.74 and a weighted average remaining contractual life of 6.65 years. The aggregate intrinsic value of outstanding DSUs is $5.8 million and is
calculated by multiplying the closing price of the Companys common stock by the 1,914,000 DSUs outstanding at December 31, 2007. The aggregate intrinsic value of vested DSUs is $1.4 million and is calculated by multiplying the closing
price of the Companys common stock by the 468,535 DSUs vested at December 31, 2007.
As of December 31, 2007, there was
approximately $5.8 million of unrecognized compensation cost related to unvested share-based compensation arrangements granted under our equity incentive plans. That cost was expected to be recognized over a weighted-average period of
1.61 years.
The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005 was $256,000,
$4.8 million and $2.6 million, respectively, determined as of the date of exercise. The weighted average fair value of options granted during the years ended December 31, 2007, 2006 and 2005 was $2.14, $9.72 and $7.87 per share, respectively.
All options granted in 2007, 2006 and 2005 had exercise prices equal to the fair market value of the stock on the grant dates. The weighted average fair value of DSUs granted during the year ended December 31, 2007 was $3.55.
45
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
Employee Stock Purchase Plan
The Company has an employee stock purchase plan for all eligible employees. Under the plan, shares of the Companys common stock may be purchased
over an offering period with a maximum duration of two years at 85% of the lower of the fair market value on the first day of the applicable offering period or on the last day of the six-month purchase period. Employees may purchase shares having a
purchase price not exceeding 20% of their gross compensation during an offering period. To be eligible to participate in the Purchase Plan an employee must be scheduled to work more than 20 hours per week for at least five calendar months per year.
During the years ended December 31, 2007 and 2006, the Company issued 167,971 and 106,139 shares of common stock, respectively, under the Purchase Plan.
At December 31, 2007, 740,537 shares of common stock were available for future issuance under the plan. The employee stock purchase plan contains an evergreen provision that automatically increases,
on each January 1, the number of shares reserved for issuance under the Purchase Plan by the lesser of 194,444 or 0.75% of the Companys outstanding shares on such date, or a lesser amount as determined by our Board of Directors. On
January 16, 2008, the Board authorized and reserved an additional 194,444 shares of the Companys common stock for issuance under the Purchase Plan.
Stockholder Rights Plan
On March 23, 2005, our Board of Directors adopted a Stockholder Rights Plan (Rights
Plan), which was amended in September 2007 to exclude the proposed merger with Evotec from the operation of the Rights Plan. On April 11, 2005, the Company filed with the Delaware Secretary of State a Certificate of Designations setting forth
the terms of the Companys Series A Junior Participating Preferred Stock, par value $0.001 per share (Preferred Shares) in connection with the adoption of the Rights Plan by our Board of Directors. The Company has agreed to initially reserve
100,000 Preferred Shares for issuance upon exercise of the rights under the Rights Plan from and after the date of distribution.
The
rights issued pursuant to the Rights Plan expire on April 12, 2015 and are exercisable upon the earlier of ten business days after a person or group either (i) announces the acquisition of 15% or more of the Companys outstanding
common stock or (ii) commences a tender offer, which would result in ownership by the person or group of 15% or more of the Companys outstanding common stock. Upon exercise, all rights holders except the potential acquirer will be
entitled to acquire the Companys common stock at a discount. The Company is entitled to redeem the rights in whole at any time on or before the tenth day following acquisition by a person or group of 15% or more of the Companys common
stock.
The rights under the Rights Plan were not distributed in response to any specific effort to acquire control of the Company. The
rights under the Rights Plan are designed to assure that all our stockholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender offers, open market accumulations and other
potentially abusive tactics to gain control of the Company, while not foreclosing a fair acquisition bid for the Company.
Stock Options Granted to
Nonemployees
Stock compensation arrangements to non-employees are accounted for in accordance with SFAS 123(R) and EITF Issue
No. 96-18 using a fair value approach. The compensation costs of these arrangements are subject to re-measurement over the vesting terms as earned. During the years ended December 31, 2007, 2006 and 2005, the Company granted options to
purchase 36,111, 48,111 and 30,611 shares of common stock to consultants at a weighted-average exercise price of $3.42, $17.43 and $11.70 per share, respectively. The related compensation expense, calculated in accordance with EITF Issue
No. 96-18 and recorded by the Company, was $118,000, $863,000 and $1.1 million in 2007, 2006 and 2005, respectively.
The weighted
average assumptions for the Black-Scholes model used in determining the fair value of options granted to non-employees are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Dividend yield:
|
|
0
|
|
|
0
|
|
|
0
|
|
Risk-free interest rate:
|
|
4.8
|
%
|
|
4.5
|
%
|
|
4.3
|
%
|
Volatility:
|
|
80
|
%
|
|
65
|
%
|
|
80
|
%
|
Maximum contractual life (from grant date)
|
|
10
|
|
|
10
|
|
|
10
|
|
Warrants
In connection with our equipment loan agreements, we issued warrants to the lenders to purchase an aggregate of 51,210 shares of preferred stock in 2001
and 2002. These warrants were converted into warrants for 57,222 shares of common stock upon conversion of the preferred stock to common stock following the closing of the Companys initial public offering in February 2004. The warrants are
exercisable for the longer of 10 years from the issuance date or the seventh anniversary of the Companys initial public offering. In July 2005, warrants for 23,864 shares of common stock were exercised. As of December 31, 2007, warrants
for 29,290 and 4,068 shares of common stock with exercise prices of $7.37 and $9.24, respectively, remained outstanding.
46
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
Shares Reserved for Future Issuance
At December 31, 2007, the Company had reserved shares of common stock for future issuances as follows:
|
|
|
Outstanding options and DSUs
|
|
3,710,766
|
2003 Employee Stock Purchase Plan
|
|
740,537
|
Options available for grant
|
|
803,970
|
Warrants
|
|
33,358
|
|
|
|
|
|
5,288,631
|
|
|
|
Pro forma Information for Periods Prior to the Adoption of SFAS 123(R)
Prior to the adoption of SFAS 123(R), the Company provided the disclosures required under SFAS 123,
Accounting for Stock-Based Compensation
, as
amended by SFAS 148. The pro-forma information for year ended December 31, 2005 is as follows:
|
|
|
|
|
Net loss applicable to common stockholders, as reported
|
|
$
|
(31,980
|
)
|
Plus: Employee stock compensation expense based on the intrinsic value method
|
|
|
3,822
|
|
Less: Employee stock compensation expense determined under the fair value method for all awards
|
|
|
(7,818
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(35,976
|
)
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
Basic and diluted, as reported
|
|
$
|
(1.24
|
)
|
|
|
|
|
|
Basic and diluted, pro forma
|
|
$
|
(1.40
|
)
|
|
|
|
|
|
Impact of the Adoption of SFAS No. 123(R)
The Company adopted SFAS 123(R) using the modified prospective transition method beginning January 1, 2006. During periods following adoption of
SFAS 123(R), the Company recorded stock-based compensation expense for awards granted prior to, but not yet vested, as of December 31, 2005, as if the fair value method required for pro forma disclosure under SFAS 123 were in effect for
expense recognition purposes, adjusted for estimated forfeitures. For stock-based awards granted after January 1, 2006, the Company recognized compensation expense based on the estimated grant date fair value method using the Black-Scholes
valuation model. The Company recognizes compensation expense using a straight-line amortization method. Because SFAS 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, stock-based
compensation expense has been reduced for estimated forfeitures. When estimating forfeitures, we consider voluntary termination behaviors as well as trends of actual option forfeitures. The impact on the results of operations of recording
stock-based compensation for the years ended December 31, 2007 and 2006 are as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Research and development
|
|
$
|
5,196
|
|
|
$
|
4,830
|
|
General and administrative
|
|
|
9,041
|
|
|
|
5,206
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
14,237
|
|
|
$
|
10,036
|
|
|
|
|
|
|
|
|
|
|
Effect on loss per share, basic and diluted
|
|
$
|
(0.48
|
)
|
|
$
|
(0.34
|
)
|
Due to our net loss position, a tax benefit was not realized during the year ended
December 31, 2007.
In November 2005, the FASB issued Staff Position (FSP) No. FAS 123(R)-3,
Transition Election Related
to Accounting for Tax Effects of Share-Based Payment Awards
(FSP 123R-3). The Company has elected to adopt the alternative transition method provided in the FSP 123R-3 for calculating the tax effects of stock-based compensation pursuant to
SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the APIC pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC
pool and Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).
47
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
Valuation Assumptions
The Company calculated the fair value of each option grant on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach. Option valuation models require the input of
subjective assumptions and these assumptions can vary over time. The weighted-average assumptions used are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Equity incentive plans:
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
80
|
%
|
|
66
|
%
|
|
80
|
%
|
Risk-free interest rate
|
|
4.7
|
%
|
|
4.5
|
%
|
|
3.8
|
%
|
Dividend yield
|
|
0
|
|
|
0
|
|
|
0
|
|
Expected life of options (in years)
|
|
4.23
|
|
|
4.23
|
|
|
5.00
|
|
Employee stock purchase plan:
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
121
|
%
|
|
110
|
%
|
|
80
|
%
|
Risk-free interest rate
|
|
4.9
|
%
|
|
4.9
|
%
|
|
3.5
|
%
|
Dividend yield
|
|
0
|
|
|
0
|
|
|
0
|
|
Expected life of options (in years)
|
|
0.5-2
|
|
|
0.5-2
|
|
|
0.5
|
|
The Companys computation of expected volatility is based on a combination of historical
volatilities of peer companies and market-based implied volatility from traded options on the Companys common stock. Peer companies historical volatilities are used in the determination of expected volatility due to the short trading
history of the Companys common stock, which began trading on February 5, 2004. In selecting the peer companies, the Company considered the following factors: industry, stage of life cycle, size and financial leverage. The computation of
the expected volatility for our employee stock purchase plan is based upon a combination of our historical volatility and our market-based implied volatility. Our computation of expected life of the options is determined based on historical
experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The interest rate for periods within the contractual life of the award is based on
the U.S. Treasury yield curve in effect at the time of grant.
The weighted average fair value of purchase rights granted under the
employee stock purchase plan was $3.62, $3.77 and $4.38 per share in 2007, 2006 and 2005, respectively.
48
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
12. Restructuring
On January 22, 2007, the Company committed to a restructuring plan with the intention of reducing spending while maintaining the research and development capabilities needed to advance the Companys
late-stage preclinical drug discovery programs. The plan was designed to reduce the Companys workforce by approximately 40% and was completed by the end of the first quarter of 2007. For the year ended December 31, 2007, the Company
incurred and paid restructuring costs of approximately $1.0 million primarily associated with one-time termination benefits. Of the $1.0 million recorded in 2007, $0.8 million was recorded as research and development expense and $0.2 million was
recorded as general and administrative expense.
13. Income Taxes
There is no provision for income taxes because we have incurred losses. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.
The
tax effects of significant items comprising the Companys deferred tax are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Federal and state net operating loss carryforwards
|
|
$
|
47,361
|
|
|
$
|
37,436
|
|
Capitalized research and development
|
|
|
11,514
|
|
|
|
13,668
|
|
Federal and state research credits
|
|
|
7,354
|
|
|
|
5,059
|
|
Other
|
|
|
4,434
|
|
|
|
4,277
|
|
Capitalized start-up costs
|
|
|
|
|
|
|
849
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
70,663
|
|
|
|
61,289
|
|
Valuation allowance
|
|
|
(70,663
|
)
|
|
|
(61,289
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 109 requires that the tax benefit of net operating losses, temporary differences and
credit carryforwards be recorded as an asset to the extent that management assesses the realization is more likely than not. Realization of future tax benefits is dependent on the Companys ability to generate sufficient taxable
income within the carryforward period. Because of the Companys recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefit is currently not likely to
realized and, accordingly, has provided a valuation allowance.
The valuation allowance increased by $9.4 million during 2007, $11.9
million during 2006, and $13.8 million during 2005.
Net operating losses and tax credit carryforwards as of December 31, 2007 are as
follows (in thousands):
|
|
|
|
|
|
|
|
Amount
|
|
Expiration
Years
|
Net operating losses, federal
|
|
$
|
116,670
|
|
2020-2027
|
Net operating losses, state
|
|
|
113,511
|
|
2012-2017
|
Tax credits, federal
|
|
|
4,367
|
|
2020-2027
|
Tax credits, state
|
|
|
4,595
|
|
do not expire
|
Utilization of the Companys net operating losses may be subject to substantial annual
limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss before utilization. The Company has performed a
detailed Section 382 analysis as of December 31, 2007 and adjusted its net operating losses and credits accordingly.
In July 2006, the FASB
released the Final Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial
statements. FIN 48 also requires additional disclosure of the beginning and ending unrecognized tax benefits and details regarding the uncertainties that may cause the unrecognized benefits to increase or decrease within a twelve month period.
We adopted the provisions of FIN 48 on January 1, 2007. There was no impact on our financial position, results of operations and cash flows as a
result of adoption. We have no unrecognized tax benefit as of December 31, 2007, including no accrued amounts for interest and penalties.
Our policy
will be to recognize interest and penalties related to income taxes as a component of income tax expense. We are subject to income tax examinations for U.S. incomes taxes and state income taxes from 2000 forward. We do not anticipate that total
unrecognized tax benefits will significantly change prior to December 31, 2008.
49
RENOVIS, INC.
NOTES TO FINANCIAL STATEMENTS(Continued)
14. Selected Quarterly Financial Data (Unaudited)
The following tables summarize the unaudited quarterly financial data for the last two fiscal years (in thousands except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Revenues
|
|
$
|
1,317
|
|
|
$
|
5,816
|
|
|
$
|
1,317
|
|
|
$
|
1,317
|
|
Net loss
|
|
|
(15,106
|
)
|
|
|
(1,838
|
)
|
|
|
(9,103
|
)
|
|
|
(6,768
|
)
|
Net loss per sharebasic and diluted
|
|
|
(0.51
|
)
|
|
|
(0.06
|
)
|
|
|
(0.31
|
)
|
|
|
(0.23
|
)
|
Weighted average shares used in computing basic and diluted loss per share
|
|
|
29,538,146
|
|
|
|
29,609,853
|
|
|
|
29,729,785
|
|
|
|
29,801,432
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Revenues
|
|
$
|
2,478
|
|
|
$
|
3,650
|
|
|
$
|
2,150
|
|
|
$
|
2,150
|
|
Net loss
|
|
|
(7,135
|
)
|
|
|
(5,831
|
)
|
|
|
(7,434
|
)
|
|
|
(7,976
|
)
|
Net loss per sharebasic and diluted
|
|
|
(0.25
|
)
|
|
|
(0.20
|
)
|
|
|
(0.25
|
)
|
|
|
(0.27
|
)
|
Weighted average shares used in computing basic and diluted loss per share
|
|
|
28,976,250
|
|
|
|
29,178,167
|
|
|
|
29,303,319
|
|
|
|
29,389,130
|
|
50