UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Amendment
No. )
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CRITICAL THERAPEUTICS, INC.
(Name of Registrant as Specified in
Its Charter)
(Name of Person(s) Filing Proxy
Statement, if Other Than the Registrant)
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TABLE OF CONTENTS
CRITICAL
THERAPEUTICS, INC.
60 Westview Street
Lexington, Massachusetts 02421
60 Westview Street
Lexington, Massachusetts 02421
To the Stockholders of Critical Therapeutics, Inc.:
As you know, Critical Therapeutics, Inc., or Critical
Therapeutics, is holding a special meeting of stockholders in
order to obtain the stockholder approvals necessary to complete
the proposed business combination of Critical Therapeutics and
Cornerstone BioPharma Holdings, Inc., or Cornerstone. At the
special meeting, which will be held at 10:00 a.m., local
time, on October 31, 2008, at the offices of Wilmer Cutler
Pickering Hale and Dorr LLP, located at 60 State Street, Boston,
Massachusetts 02109, unless postponed or adjourned to a later
date, Critical Therapeutics will ask its stockholders to approve
the issuance of Critical Therapeutics’ common stock
pursuant to the merger agreement, approve an amendment to
Critical Therapeutics’ certificate of incorporation to
effect a reverse stock split of Critical Therapeutics’
common stock, referred to as the reverse stock split, and
approve an amendment to Critical Therapeutics’ certificate
of incorporation to change the name of Critical Therapeutics to
“Cornerstone Therapeutics Inc.”
On or about October 6, 2008, Critical Therapeutics mailed
to you a detailed proxy statement/prospectus that contains a
description of the proposed transaction. On or about
October 20, 2008, Critical Therapeutics mailed to you a
first supplement to the proxy statement/prospectus. The attached
second supplement to the proxy statement/prospectus
contains certain additional information that further supplements
the proxy statement/prospectus. Critical Therapeutics urges you
to read this second supplement, together with the proxy
statement/prospectus and the first supplement that Critical
Therapeutics previously sent to you regarding the proposed
transaction, carefully and in its entirety.
The second supplement contains information relating to the
financial results for Critical Therapeutics and Cornerstone for
the three and nine months ended September 30, 2008.
After careful consideration, Critical Therapeutics’ board
of directors has unanimously approved the merger agreement and
the proposals referred to above, and has determined that they
are advisable, fair to and in the best interests of Critical
Therapeutics’ stockholders. Accordingly, Critical
Therapeutics’ board of directors unanimously recommends
that stockholders vote FOR the issuance of Critical
Therapeutics’ common stock pursuant to the merger
agreement, FOR the amendment to Critical Therapeutics’
certificate of incorporation to effect the reverse stock split
and FOR the amendment to Critical Therapeutics’ certificate
of incorporation to change the name of Critical Therapeutics to
“Cornerstone Therapeutics Inc.”
Your vote is important. Whether or not you expect to
attend the special meeting in person, please complete, date and
sign the proxy card enclosed with the proxy statement/prospectus
or the first supplement and mail it in the postage-paid envelope
to ensure that your shares will be represented and voted at the
special meeting.
Critical Therapeutics is excited about the opportunities the
merger brings to its stockholders, and we thank you for your
consideration and continued support.
Yours sincerely,
Trevor Phillips, Ph.D.
President and Chief Executive Officer
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved the merger
described in the proxy statement/prospectus or the Critical
Therapeutics’ common stock to be issued in connection with
the merger or determined if the proxy statement/prospectus or
this supplement is accurate or adequate. Any representation to
the contrary is a criminal offense.
The proxy statement/prospectus and this supplement are not
offers to sell these securities and they are not soliciting
offers to buy these securities in any state where the offer or
sale is not permitted.
This supplement is dated October 22, 2008 and is first
being mailed to stockholders of Critical Therapeutics on or
about October 24, 2008.
IMPORTANT!
SUPPLEMENT NO. 2 DATED OCTOBER 22, 2008
TO
PROXY STATEMENT/PROSPECTUS DATED OCTOBER 3, 2008
CRITICAL THERAPEUTICS, INC.
60 WESTVIEW STREET
LEXINGTON, MASSACHUSETTS 02421
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 31, 2008
SUPPLEMENT NO. 2 DATED OCTOBER 22, 2008
TO
PROXY STATEMENT/PROSPECTUS DATED OCTOBER 3, 2008
CRITICAL THERAPEUTICS, INC.
60 WESTVIEW STREET
LEXINGTON, MASSACHUSETTS 02421
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 31, 2008
GENERAL
INFORMATION
This supplement is being mailed to the stockholders of record of
Critical Therapeutics, Inc., or Critical Therapeutics, as of the
close of business on September 29, 2008. The following
information supplements and should be read in conjunction with
the proxy statement/prospectus dated October 3, 2008 of
Critical Therapeutics relating to the proposed business
combination of Critical Therapeutics and Cornerstone BioPharma
Holdings, Inc., or Cornerstone, which Critical Therapeutics
previously mailed to you on or about October 6, 2008, as
supplemented by the first supplement thereto dated
October 17, 2008, which Critical Therapeutics previously
mailed to you on or about October 20, 2008.
For a discussion of significant matters that should be
considered before voting at the special meeting of stockholders,
see “Risk Factors” beginning on page 24 of the
proxy statement/prospectus.
FINANCIAL
RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2008
Critical
Therapeutics
On October 20, 2008, Critical Therapeutics announced the
following financial results for the three and nine months ended
September 30, 2008. You should read the following
information together with the sections entitled “Selected
Historical Consolidated Financial Data of Critical
Therapeutics” and “Critical Therapeutics’
Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and Critical Therapeutics’
financial statements and accompanying notes included in the
proxy statement/prospectus beginning on pages 14, 235 and F-1,
respectively. Prior results are not necessarily indicative of
future performance. Critical Therapeutics’ future
performance may differ materially from its previous results due
to many important factors, including, but not limited to, those
set forth in the section entitled “Risks Related to
Critical Therapeutics” beginning on page 28 of the
proxy statement/prospectus.
Financial
Results for the Three Months Ended September 30, 2008 and
2007
Critical Therapeutics’ total revenue in the three months
ended September 30, 2008 was $6.0 million, compared
with $3.2 million in the three months ended
September 30, 2007. Total revenue for the three months
ended September 30, 2007 included collaboration and license
revenue of $93,000, whereas no collaboration or license revenue
was recorded in the three months ended September 30, 2008.
Net product sales of ZYFLO
CR®
(zileuton) extended-release tablets, or ZYFLO CR, and
ZYFLO®
(zileuton tablets), or ZYFLO, totaled approximately
$6.0 million in the three months ended September 30, 2008,
compared with $3.1 million of net product sales of ZYFLO
and ZYFLO CR in the three months ended September 30, 2007,
an increase of 92%. Twice-daily ZYFLO CR was approved by the
U.S. Food and Drug Administration, or the FDA, in May 2007
and commercially launched in September 2007. Critical
Therapeutics and Dey, L.P., a subsidiary of Mylan Inc., or DEY,
currently market ZYFLO CR in the United States. The increase in
net product sales during the three months ended
September 30, 2008 is primarily attributable to a 15%
increase in prescription volume and a 5% increase in the
wholesale acquisition price over the same period in 2007, as
well as the result of an increase in the amount of ZYFLO CR
purchased by wholesalers to replenish their available
supplies following the shortage of commercial product that
occurred in the three months ended June 30, 2008 due to the
previously disclosed supply chain issues with ZYFLO CR.
Operating expenses for the three months ended September 30,
2008 totaled $8.0 million, compared with $11.4 million
in the three months ended September 30, 2007, a decrease of
approximately 30%.
| • | Cost of products sold in the three months ended September 30, 2008 totaled $2.3 million, compared with $1.2 million in the three months ended September 30, 2007. Gross margin from product sales was 61% in both the three months ended September 30, 2008 and 2007. | |
| • | Research and development expenses decreased approximately 87% to $497,000 in the three months ended September 30, 2008 from $3.9 million in the three months ended September 30, 2007. This decrease was primarily due to lower expenses in the three months ended September 30, 2008 associated with Critical Therapeutics’ Phase IV clinical trial for ZYFLO CR, its Phase II zileuton injection clinical trial and its alpha-7 preclinical program. | |
| • | Sales and marketing expenses declined approximately 51% to $1.8 million in the three months ended September 30, 2008 from $3.6 million in the three months ended September 30, 2007. This decrease was primarily due to lower expenses related to promotional materials and advertising costs and a decrease in salary and other employee related expenses following Critical Therapeutics’ personnel reductions in the first half of 2008. | |
| • | General and administrative expenses increased approximately 28% to $3.4 million in the three months ended September 30, 2008 from $2.7 million in the three months ended September 30, 2007. This increase was primarily attributable to an increase in legal, printing and production fees related to the proposed merger with Cornerstone. |
For the three months ended September 30, 2008, Critical
Therapeutics posted a net loss of $2.0 million, or $0.05
per share. This compares with a net loss of $7.8 million,
or $0.18 per share, for the same period in 2007. As of
September 30, 2008, Critical Therapeutics had 43,062,448
common shares outstanding, excluding warrants and stock options.
Cash and investments totaled $7.3 million at
September 30, 2008, compared with $11.2 million at
June 30, 2008 and $34.1 million at December 31,
2007. Net cash expenditures were $3.9 million in the three
months ended September 30, 2008, compared with net cash
expenditures of $6.4 million in the three months ended
September 30, 2007.
Financial
Results for the Nine Months Ended September 30, 2008 and
2007
Critical Therapeutics’ total revenue for the nine months
ended September 30, 2008 increased approximately 30% to
$13.2 million from $10.1 million for the same period
in 2007. Total revenue for the first nine months of 2007
included collaboration and license revenue of $1.8 million,
whereas no collaboration or license revenue was recorded in 2008.
Total operating expenses for the nine months ended
September 30, 2008 totaled $32.8 million, compared
with $37.0 million for the same period in 2007. For the
nine months ended September 30, 2008, Critical Therapeutics
posted a net loss of $19.4 million, or $0.45 per share,
compared with a net loss of $25.4 million, or $0.60 per
share, for the same period in 2007.
2
CRITICAL
THERAPEUTICS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
September 30, |
December 31, |
|||||||
| 2008 | 2007 | |||||||
| (Unaudited) | ||||||||
| (In thousands) | ||||||||
|
ASSETS:
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 7,014 | $ | 33,828 | ||||
|
Accounts receivable, net
|
3,643 | 1,273 | ||||||
|
Inventory, net
|
7,064 | 5,599 | ||||||
|
Prepaid expenses and other
|
1,817 | 2,205 | ||||||
|
Total current assets
|
19,538 | 42,905 | ||||||
|
Fixed assets, net
|
305 | 1,151 | ||||||
|
Other assets
|
277 | 868 | ||||||
|
Total assets
|
$ | 20,120 | $ | 44,924 | ||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY:
|
||||||||
|
Current liabilities:
|
||||||||
|
Current portion of long-term debt
|
$ | 0 | $ | 370 | ||||
|
Deferred co-promotion fees
|
9,867 | 11,434 | ||||||
|
Accounts payable and accrued expenses
|
10,431 | 14,275 | ||||||
|
Total current liabilities
|
20,298 | 26,079 | ||||||
|
Long-term portion of accrued license fees, less current portion
|
— | 1,754 | ||||||
|
Stockholders’ (deficit) equity
|
(178 | ) | 17,091 | |||||
|
Total liabilities and stockholders’ equity
|
$ | 20,120 | $ | 44,924 | ||||
3
CRITICAL
THERAPEUTICS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
| (Unaudited) | ||||||||||||||||
| (In thousands except share and per share data) | ||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Net product sales
|
$ | 5,993 | $ | 3,126 | $ | 13,220 | $ | 8,311 | ||||||||
|
Revenue under collaboration agreements
|
— | 93 | — | 1,830 | ||||||||||||
|
Total revenues
|
5,993 | 3,219 | 13,220 | 10,141 | ||||||||||||
|
Costs and expenses:
|
||||||||||||||||
|
Cost of products sold
|
2,307 | 1,232 | 6,964 | 2,653 | ||||||||||||
|
Research and development
|
497 | 3,939 | 7,424 | 16,961 | ||||||||||||
|
Sales and marketing
|
1,768 | 3,574 | 7,799 | 8,156 | ||||||||||||
|
General and administrative
|
3,403 | 2,653 | 9,413 | 9,241 | ||||||||||||
|
Restructuring charges
|
— | — | 1,204 | — | ||||||||||||
|
Total costs and expenses
|
7,975 | 11,398 | 32,804 | 37,011 | ||||||||||||
|
Operating loss
|
(1,982 | ) | (8,179 | ) | (19,584 | ) | (26,870 | ) | ||||||||
|
Other income (expense):
|
||||||||||||||||
|
Interest income
|
10 | 474 | 299 | 1,628 | ||||||||||||
|
Interest expense
|
(22 | ) | (81 | ) | (107 | ) | (150 | ) | ||||||||
|
Total other income
|
(12 | ) | 393 | 192 | 1,478 | |||||||||||
|
Net loss
|
$ | (1,994 | ) | $ | (7,786 | ) | $ | (19,392 | ) | $ | (25,392 | ) | ||||
|
Net loss per share
|
$ | (0.05 | ) | $ | (0.18 | ) | $ | (0.45 | ) | $ | (0.60 | ) | ||||
|
Basic and diluted weighted-average common shares outstanding
|
43,025,652 | 42,615,318 | 42,913,928 | 42,548,001 | ||||||||||||
4
CRITICAL
THERAPEUTICS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Nine Months Ended |
||||||||
| September 30, | ||||||||
| 2008 | 2007 | |||||||
| (Unaudited) | ||||||||
| (In thousands) | ||||||||
|
Cash flows from operating activities:
|
||||||||
|
Net loss
|
$ | (19,392 | ) | $ | (25,392 | ) | ||
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation and amortization expense
|
282 | 483 | ||||||
|
Amortization of premiums on short-term investments and other
|
123 | 72 | ||||||
|
Other non-cash items
|
287 | (87 | ) | |||||
|
Stock-based compensation expense
|
2,123 | 2,914 | ||||||
|
Changes in assets and liabilities:
|
||||||||
|
Accounts receivable
|
(2,370 | ) | (1,309 | ) | ||||
|
Inventory
|
(1,465 | ) | (187 | ) | ||||
|
Prepaid expenses and other assets
|
556 | (52 | ) | |||||
|
Accounts payable and accrued expenses
|
(5,698 | ) | 4,132 | |||||
|
Deferred product and collaboration revenue
|
— | (1,853 | ) | |||||
|
Deferred co-promotion fees
|
(1,567 | ) | 6,615 | |||||
|
Net cash used in operating activities
|
(27,121 | ) | (14,664 | ) | ||||
|
Cash flows from investing activities:
|
||||||||
|
Proceeds from sale of investment
|
400 | — | ||||||
|
Proceeds from sales and maturities of short-term investments
|
— | 300 | ||||||
|
Proceeds from sale of fixed assets
|
278 | 216 | ||||||
|
Purchases of fixed assets
|
(1 | ) | (7 | ) | ||||
|
Net cash provided by investing activities
|
677 | 509 | ||||||
|
Cash flows from financing activities:
|
||||||||
|
Proceeds from exercise of stock options and other
|
— | 299 | ||||||
|
Repayments of long-term debt and capital lease obligations
|
(370 | ) | (836 | ) | ||||
|
Net cash used in financing activities
|
(370 | ) | (537 | ) | ||||
|
Net decrease in cash and cash equivalents
|
(26,814 | ) | (14,692 | ) | ||||
|
Cash and cash equivalents at beginning of period
|
33,828 | 48,388 | ||||||
|
Cash and cash equivalents at end of period
|
$ | 7,014 | $ | 33,696 | ||||
5
Cornerstone
You should read the following information related to
Cornerstone’s financial results for the three and nine
months ended September 30, 2008 and September 30, 2007
together with the sections entitled “Selected Historical
Consolidated Financial Data of Cornerstone” and
“Cornerstone’s Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and Cornerstone’s financial statements and accompanying
notes included in the proxy statement/prospectus beginning on
pages 16, 267 and F-52, respectively. In addition to historical
information, the following discussion contains forward-looking
statements that involve risks, uncertainties and assumptions.
Prior results are not necessarily indicative of future
performance. Cornerstone’s future performance may differ
materially from its previous results and from those anticipated
in these forward-looking statements due to many important
factors, including, but not limited to, those set forth in the
section entitled “Risks Related to Cornerstone”
beginning on page 59 of the proxy statement/prospectus.
Comparison
of the Three Months Ended September 30, 2008 and
2007
Net
Revenues
Net Product Sales. Net product sales were
$20.1 million in the three months ended September 30,
2008, compared to $7.4 million in the three months ended
September 30, 2007, an increase of approximately
$12.8 million, or 174%. The increase in net product sales
was primarily due to a $2.5 million increase in net product
sales of the
AlleRx®,
or ALLERX, Dose Pack family of products and a $12.5 million
of net product sales of Cornerstone’s
HyoMaxtm,
or HYOMAX, line of products. Cornerstone launched its first
HYOMAX product in May 2008, followed by its second and third
HYOMAX products in June 2008 and its fourth HYOMAX product in
July 2008. These increases were offset, in part, by a
$2.1 million decrease in net product sales of
Spectracef®,
or SPECTRACEF, primarily due to decreased wholesaler purchasing
activity in the three months ended September 30, 2008 as
there was sufficient supply of product in the distribution
channel. Cornerstone management believes the amount of product
in the distribution channel has now been reduced such that
future prescription demand will necessitate additional purchases
by wholesalers.
Royalty Agreement Revenues. Royalty agreement
revenues were $457,000 in the three months ended
September 30, 2008, compared to $545,000 in the three
months ended September 30, 2007, a decrease of
approximately $88,000, or 16%.
Costs and
Expenses
Cost of Product Sales. Cost of product sales
(exclusive of amortization of product rights of $109,000 and
$768,000 in the three months ended September 30, 2008 and
2007, respectively) was $1.6 million in the
three months ended September 30, 2008, compared to
$848,000 in the three months ended September 30, 2007.
Gross margin (exclusive of amortization of product rights of
$109,000 and $768,000 in the three months ended
September 30, 2008 and 2007, respectively) was
approximately 92% in the three months ended September 30,
2008 and 88% in the three months ended September 30, 2007.
The 4% gross margin increase was primarily due to sales of
Cornerstone’s HYOMAX products.
Sales and Marketing Expenses. Sales and
marketing expenses were $3.8 million in the three months
ended September 30, 2008, compared to $2.7 million in
the three months ended September 30, 2007, an increase of
approximately $1.0 million, or 37%. This increase was
primarily due to a $376,000 increase in advertising and
promotion expenses, a $317,000 increase in labor, benefits and
related employee expenses as a result of additional headcount
and a $156,000 increase in co-promotion expenses relating to
Balacet®
325, or BALACET 325.
Royalty Expenses. Royalty expenses were
$6.8 million in the three months ended September 30,
2008, compared to $1.1 million in the three months ended
September 30, 2007, an increase of approximately
$5.5 million, or 497%. This increase was due to
$5.8 million of royalty expenses related to sales of the
HYOMAX line of products in the three months ended
September 30, 2008.
General and Administrative Expenses. General
and administrative expenses were $2.3 million in the three
months ended September 30, 2008, compared to
$1.0 million in the three months ended September 30,
2007, an increase of approximately $1.3 million, or 137%.
This increase was primarily due to an $816,000 increase
6
in legal and consulting fees related to the proposed merger with
Critical Therapeutics and $284,000 in expenses related to
Aristos Pharmaceuticals, Inc., or Aristos, which began
operations in November 2007. Cornerstone formed Aristos to
launch authorized generic versions of Cornerstone’s
products that become subject to generic competition and to
acquire or in-license generic versions of products with little
or no generic competition, such as the HYOMAX line of products,
that Cornerstone’s management believes offer attractive
returns on investment, regardless of whether such products fall
within the respiratory market, which is Cornerstone’s
primary focus.
Research and Development Expenses. Research
and development expenses were $568,000 in the three months ended
September 30, 2008, compared to $191,000 in the three
months ended September 30, 2007, an increase of
approximately $377,000, or 197%. This increase was primarily due
to increased expenses related to the SPECTRACEF life cycle
extension programs and the hydrocodone cough suppressant product
candidates, CBP 067 and CBP 069.
Amortization and Depreciation
Expenses. Amortization and depreciation expenses
were $128,000 in the three months ended September 30,
2008, compared to $787,000 in the three months ended
September 30, 2007, a decrease of approximately $659,000,
or 84%. This decrease was primarily due to a $630,000 decrease
in amortization expense associated with the BALACET product
rights due to these product rights being fully amortized as of
March 31, 2008.
Other
Expenses
Interest expense, net, was $336,000 in the three months ended
September 30, 2008, compared to $368,000 in the three
months ended September 30, 2007, a decrease of
approximately $32,000, or 9%.
Provision
for Income Taxes
The provision for income taxes from continuing operations was
$2.4 million in the three months ended September 30,
2008, compared to $147,000 in the three months ended
September 30, 2007. This increase in the provision for
income taxes was due to the increase in income before income
taxes from $764,000 in the three months ended September 30,
2007 to $5.0 million in the three months ended
September 30, 2008. The effective tax rate was 46.8% in the
three months ended September 30, 2008 and 19.2% in the
three months ended September 30, 2007. The increase in the
effective tax rate in the three months ended September 30,
2008 was primarily due to the full utilization during the year
of net operating loss carryforwards.
Comparison
of the Nine Months Ended September 30, 2008 and
2007
Net
Revenues
Net Product Sales. Net product sales were
$42.9 million in the nine months ended September 30,
2008, compared to $20.8 million in the nine months ended
September 30, 2007, an increase of approximately
$22.0 million, or 100%. The increase in net product sales
was primarily due to $17.0 million of net product sales of
Cornerstone’s HYOMAX line of products and a
$7.0 million increase in net product sales of the ALLERX
Dose Pack family of products. These increases were offset, in
part, by a $3.3 million decrease in net product sales of
SPECTRACEF primarily due to decreased wholesaler purchasing
activity in the nine months ended September 30, 2008 as
there was sufficient supply of product in the distribution
channel. Cornerstone management believes the amount of product
in the distribution channel has now been reduced such that
future prescription demand will necessitate additional purchases
by wholesalers.
Royalty Agreement Revenues. Royalty agreement
revenues were $1.2 million in the nine months ended
September 30, 2008, compared to $1.3 million in the
nine months ended September 30, 2007, a decrease of
approximately $24,000, or 2%, primarily due to reduced royalty
agreement revenues from the Propoxyphene-APAP
100-500
product.
Costs and
Expenses
Cost of Product Sales. Cost of product sales
(exclusive of amortization of product rights of $957,000 and
$2.4 million in the nine months ended September 30,
2008 and 2007, respectively) was $3.1 million in the
7
nine months ended September 30, 2008, compared to
$2.4 million in the nine months ended September 30,
2007. Gross margin (exclusive of amortization of product rights
of $957,000 and $2.4 million in the nine months ended
September 30, 2008 and 2007, respectively) was
approximately 93% in the nine months ended September 30,
2008 and 89% in the nine months ended September 30, 2007.
The 4% gross margin increase was primarily due to sales of
Cornerstone’s HYOMAX products.
Sales and Marketing Expenses. Sales and
marketing expenses were $11.3 million in the nine months
ended September 30, 2008, compared to $7.6 million in
the nine months ended September 30, 2007, an increase of
approximately $3.7 million, or 49%. This increase was
primarily due to a $1.0 million increase in advertising and
promotion expenses, a $1.1 million increase in labor,
benefits and related employee expenses as a result of additional
headcount and a $1.3 million increase in co-promotion
expenses relating to BALACET 325.
Royalty Expenses. Royalty expenses were
$11.6 million in the nine months ended September 30,
2008, compared to $2.8 million in the nine months ended
September 30, 2007, an increase of approximately
$8.9 million, or 319%. This increase was primarily due to
$8.1 million of royalty expenses related to sales of the
HYOMAX line of products in the nine months ended
September 30, 2008.
General and Administrative Expenses. General
and administrative expenses were $6.0 million in the nine
months ended September 30, 2008, compared to
$3.0 million in the nine months ended September 30,
2007, an increase of approximately $3.0 million, or 99%.
This increase was primarily due to a $1.9 million increase
in legal and other professional fees related to the proposed
merger with Critical Therapeutics and $767,000 in expenses
related to Aristos.
Research and Development Expenses. Research
and development expenses were $1.2 million in the nine
months ended September 30, 2008, compared to $304,000 in
the nine months ended September 30, 2007, an increase of
approximately $869,000, or 286%. This increase was primarily due
to increased expenses related to the SPECTRACEF life cycle
extension programs and the hydrocodone cough suppressant product
candidates.
Amortization and Depreciation
Expenses. Amortization and depreciation expenses
were $1.0 million in the nine months ended
September 30, 2008, compared to $2.5 million in the
nine months ended September 30, 2007, a decrease of
approximately $1.5 million, or 59%. This decrease was
primarily due to a $1.2 million decrease in amortization
expense associated with the BALACET product rights due to these
product rights being fully amortized as of March 31, 2008.
Other
Expenses
Interest expense, net, was $1.1 million in the nine months
ended September 30, 2008, compared to $1.0 million in
the nine months ended September 30, 2007, an increase of
approximately $33,000, or 3%.
Provision
for Income Taxes
The provision for income taxes from continuing operations was
$3.2 million in the nine months ended September 30,
2008, compared to $681,000 in the nine months ended
September 30, 2007. This increase in the provision for
income taxes was due to the increase in income before income
taxes from $2.3 million in the nine months ended
September 30, 2007 to $8.7 million in the nine months
ended September 30, 2008. The effective tax rate was 36.8%
in the nine months ended September 30, 2008 and 29.6% in
the nine months ended September 30, 2007. The increase in
the effective tax rate in the nine months ended
September 30, 2008 was primarily due to the full
utilization during the year of net operating loss carryforwards.
Liquidity
Cash and cash equivalents totaled $4.5 million at
September 30, 2008, compared with $19,000 at June 30,
2008 and $241,000 at December 31, 2007. The increase in
Cornerstone’s cash and cash equivalents was primarily due
to Cornerstone’s net income of $5.5 million in the
nine months ended September 30, 2008. As of
September 30, 2008 and June 30, 2008, Cornerstone had
no outstanding balance on, and $3.9 million of borrowing
availability under, its line of credit with Paragon Commercial
Bank, or the Paragon line of credit. As of December 31,
2007, Cornerstone had a $1.75 million outstanding balance
on, and $2.25 of borrowing availability under, the Paragon line
of credit.
8
CORNERSTONE
BIOPHARMA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
September 30, |
December 31, |
|||||||
| 2008 | 2007 | |||||||
| (Unaudited) | (Audited) | |||||||
| (In thousands, except share and per share data) | ||||||||
|
Assets
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 4,500 | $ | 241 | ||||
|
Marketable security
|
8 | 8 | ||||||
|
Accounts receivable, net
|
17,611 | 6,529 | ||||||
|
Amounts due from related parties
|
55 | 648 | ||||||
|
Inventories, net
|
3,150 | 2,998 | ||||||
|
Prepaid expenses
|
1,002 | 278 | ||||||
|
Total current assets
|
26,326 | 10,702 | ||||||
|
Property and equipment, net
|
176 | 209 | ||||||
|
Other assets:
|
||||||||
|
Product rights, net
|
6,229 | 4,936 | ||||||
|
Amounts due from related parties
|
38 | 29 | ||||||
|
Deposits
|
92 | 33 | ||||||
|
Total other assets
|
6,359 | 4,998 | ||||||
|
Total assets
|
$ | 32,861 | $ | 15,909 | ||||
|
Liabilities
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 3,544 | $ | 2,214 | ||||
|
Accrued expenses
|
20,250 | 11,163 | ||||||
|
Current portion of license agreement liability
|
1,000 | 576 | ||||||
|
Line of credit
|
— | 1,750 | ||||||
|
Income taxes payable
|
2,688 | 130 | ||||||
|
Total current liabilities
|
27,482 | 15,833 | ||||||
|
Long-term liabilities:
|
||||||||
|
License agreement liability, less current portion
|
2,959 | 2,959 | ||||||
|
Note payable, related party
|
8,952 | 9,412 | ||||||
|
Total long-term liabilities
|
11,911 | 12,371 | ||||||
|
Total liabilities
|
39,393 | 28,204 | ||||||
|
Stockholders’ deficit
|
||||||||
|
Common stock — $0.0001 par value,
50,000,000 shares authorized 24,926,150 shares issued
and outstanding
|
2 | 2 | ||||||
|
Additional paid-in capital
|
1,057 | 801 | ||||||
|
Accumulated deficit
|
(7,591 | ) | (13,098 | ) | ||||
|
Total stockholders’ deficit
|
(6,532 | ) | (12,295 | ) | ||||
|
Total liabilities and stockholders’ deficit
|
$ | 32,861 | $ | 15,909 | ||||
9
CORNERSTONE
BIOPHARMA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
| (Unaudited) | ||||||||||||||||
| (In thousands, except share and per share data) | ||||||||||||||||
|
Net revenues
|
$ | 20,590 | $ | 7,902 | $ | 44,102 | $ | 22,105 | ||||||||
|
Costs and expenses:
|
||||||||||||||||
|
Cost of product sales (exclusive of amortization of product
rights of $109 and $768 in the three months ended
September 30, 2008 and 2007, respectively, and $957 and
$2,421 in the nine months ended September 30, 2008 and
2007, respectively)
|
1,604 | 848 | 3,102 | 2,364 | ||||||||||||
|
Sales and marketing
|
3,775 | 2,746 | 11,309 | 7,598 | ||||||||||||
|
Royalties
|
6,844 | 1,146 | 11,648 | 2,777 | ||||||||||||
|
General and administrative
|
2,254 | 953 | 6,027 | 3,031 | ||||||||||||
|
Research and development
|
568 | 191 | 1,173 | 304 | ||||||||||||
|
Amortization and depreciation
|
128 | 787 | 1,014 | 2,473 | ||||||||||||
|
Other charges
|
35 | 99 | 62 | 230 | ||||||||||||
|
Total costs and expenses
|
15,208 | 6,770 | 34,335 | 18,777 | ||||||||||||
|
Income from operations
|
5,382 | 1,132 | 9,767 | 3,328 | ||||||||||||
|
Other expenses:
|
||||||||||||||||
|
Interest expense, net
|
(336 | ) | (368 | ) | (1,056 | ) | (1,025 | ) | ||||||||
|
Other expenses
|
— | — | (2 | ) | — | |||||||||||
|
Total other expenses
|
(336 | ) | (368 | ) | (1,058 | ) | (1,025 | ) | ||||||||
|
Income before income taxes
|
5,046 | 764 | 8,709 | 2,303 | ||||||||||||
|
Provision for income taxes
|
2,363 | 147 | 3,202 | 681 | ||||||||||||
|
Net income
|
$ | 2,683 | $ | 617 | $ | 5,507 | $ | 1,622 | ||||||||
|
Net income per share, basic
|
$ | 0.11 | $ | 0.02 | $ | 0.22 | $ | 0.07 | ||||||||
|
Net income per share, diluted
|
$ | 0.09 | $ | 0.02 | $ | 0.19 | $ | 0.06 | ||||||||
|
Weighted-average common shares, basic
|
24,926,150 | 24,926,150 | 24,926,150 | 24,926,150 | ||||||||||||
|
Weighted-average common shares, diluted
|
28,981,844 | 27,503,556 | 28,906,561 | 27,271,698 | ||||||||||||
10
CORNERSTONE
BIOPHARMA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Nine Months Ended |
||||||||
| September 30, | ||||||||
| 2008 | 2007 | |||||||
| (Unaudited) | ||||||||
| (In thousands) | ||||||||
|
Cash flows from operating activities
|
||||||||
|
Net income
|
$ | 5,507 | $ | 1,622 | ||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||
|
Amortization and depreciation
|
1,014 | 2,474 | ||||||
|
Stock-based compensation
|
256 | 725 | ||||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Accounts receivable, net
|
(11,082 | ) | (5,667 | ) | ||||
|
Amounts due from related parties
|
(55 | ) | 117 | |||||
|
Inventories, net
|
(152 | ) | (904 | ) | ||||
|
Prepaid expenses
|
(723 | ) | (176 | ) | ||||
|
Accounts payable
|
1,330 | 278 | ||||||
|
Accrued expenses
|
9,511 | 1,648 | ||||||
|
Income taxes payable
|
2,558 | 673 | ||||||
|
Net cash provided by operating activities
|
8,164 | 790 | ||||||
|
Cash flows from investing activities
|
||||||||
|
Advances to related parties
|
(20 | ) | (679 | ) | ||||
|
Proceeds from collection of advances to related parties
|
658 | 209 | ||||||
|
Purchase of property and equipment
|
(24 | ) | (52 | ) | ||||
|
Purchase of product rights
|
(2,250 | ) | (75 | ) | ||||
|
Collection of deposits
|
20 | 50 | ||||||
|
Payment of deposits
|
(79 | ) | (5 | ) | ||||
|
Net cash used in investing activities
|
(1,695 | ) | (552 | ) | ||||
|
Cash flows from financing activities
|
||||||||
|
Proceeds from line of credit
|
5,500 | 6,500 | ||||||
|
Principal payments on line of credit
|
(7,250 | ) | (6,250 | ) | ||||
|
Principal payments on notes payable
|
(460 | ) | — | |||||
|
Net cash (used in) provided by financing activities
|
(2,210 | ) | 250 | |||||
|
Net increase in cash and cash equivalents
|
4,259 | 488 | ||||||
|
Cash and cash equivalents as of beginning of period
|
241 | 116 | ||||||
|
Cash and cash equivalents as of end of period
|
$ | 4,500 | $ | 604 | ||||
|
Supplemental disclosure of cash flow information
|
||||||||
|
Cash paid during the period for interest
|
$ | 58 | $ | 116 | ||||
|
Supplemental disclosure of non-cash flow investing and
financing activities
|
||||||||
|
Product rights acquired through issuance of a license agreement
|
$ | — | $ | 2,565 | ||||
11
THE
SPECIAL MEETING OF STOCKHOLDERS
The date, time and place of the special meeting of stockholders
of Critical Therapeutics have not changed and remain as follows:
October 31, 2008
10:00 a.m., local time
Wilmer Cutler Pickering Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
As set forth in the proxy statement/prospectus, at the special
meeting of stockholders, Critical Therapeutics’
stockholders will be asked:
| • | to approve the issuance of Critical Therapeutics’ common stock pursuant to the Agreement and Plan of Merger, dated as of May 1, 2008, by and among Critical Therapeutics, Neptune Acquisition Corp., a wholly owned subsidiary of Critical Therapeutics, and Cornerstone; | |
| • | to approve an amendment to Critical Therapeutics’ certificate of incorporation to effect a reverse stock split of Critical Therapeutics’ common stock; | |
| • | to approve an amendment to Critical Therapeutics’ certificate of incorporation to change the name of Critical Therapeutics to “Cornerstone Therapeutics Inc.”; and | |
| • | to consider and vote upon an adjournment of the special meeting, if necessary, if a quorum is present, to solicit additional proxies if there are not sufficient votes in favor of the first three proposals. |
Critical Therapeutics’ board of directors has determined
and believes that the issuance of shares of Critical
Therapeutics’ common stock in the merger and the other
proposals described in the proxy statement/prospectus are
advisable to, and in the best interest of, Critical Therapeutics
and its stockholders, and recommends that the holders of
Critical Therapeutics’ common stock vote
“FOR” such proposals at the special meeting of
stockholders.
The board of directors of Critical Therapeutics has fixed
September 29, 2008 as the record date for the determination
of stockholders entitled to notice of, and to vote at, the
special meeting of stockholders, and any adjournment or
postponement thereof. Stockholders of record on
September 29, 2008 may vote in person at the special
meeting or vote by proxy over the Internet, by telephone or by
using the proxy card enclosed with the proxy
statement/prospectus or the first supplement. Whether or not you
plan to attend the special meeting, Critical Therapeutics urges
you to vote by proxy to ensure your vote is counted. You may
still attend the special meeting and vote in person if you have
already voted by proxy.
If your shares are registered directly in your name, you may
vote:
| • | Over the Internet. Go to the web site of Critical Therapeutics’ tabulator, BNY Mellon Shareowner Services, at http://www.proxyvoting.com/crtx and follow the instructions you will find there. You must specify how you want your shares voted or your Internet vote cannot be completed and you will receive an error message. Your shares will be voted according to your instructions. | |
| • | By Telephone. Call (866) 540-5760 toll-free from the United States or Canada and follow the instructions. You must specify how you want your shares voted and confirm your vote at the end of the call or your telephone vote cannot be completed. Your shares will be voted according to your instructions. | |
| • | By Mail. Complete, date and sign the proxy card enclosed with the proxy statement/prospectus or the first supplement and mail it in the postage-paid envelope to BNY Mellon Shareowner Services. Your proxy will be voted according to your instructions. If you do not specify how you want your shares voted, they will be voted as recommended by Critical Therapeutics’ board of directors. | |
| • | In Person at the Meeting. If you attend the meeting, you may deliver your completed proxy card in person or you may vote by completing a ballot, which will be available at the meeting. |
12
If your shares are held in “street name” for your
account by a bank broker or other nominee, you may vote:
| • | Over the Internet or By Telephone. You will receive instructions from your broker or other nominee if you are permitted to vote over the Internet or by telephone. | |
| • | By Mail. You will receive instructions from your broker or other nominee explaining how to vote your shares. | |
| • | In Person at the Meeting. Contact the broker or other nominee that holds your shares to obtain a broker’s proxy card and bring it with you to the meeting. A broker’s proxy is not the form of proxy enclosed with the proxy statement/prospectus or the first supplement. You will not be able to vote shares you hold in “street name” at the meeting unless you have a proxy from your broker issued in your name giving you the right to vote the shares. |
If you have already delivered a properly executed proxy card,
you do not need to do anything unless you wish to revoke or
change your vote. If you are a stockholder of record of Critical
Therapeutics, you may still attend the special meeting and vote
in person if you have already voted by proxy. Unless you have
executed a voting agreement and irrevocable proxy, you may
change your vote at any time before your proxy is voted at the
special meeting. You can do this in one of three ways as
described in greater detail under “The Special Meeting of
Critical Therapeutics Stockholders — Voting and
Revocation of Proxies” beginning on page 93 of the
proxy statement/prospectus. First, you can send a written notice
stating that you would like to revoke your proxy. Second, you
may vote again over the Internet, by telephone or by providing a
duly executed proxy card bearing a later date than the proxy
being revoked. Third, you can attend the meeting and vote in
person. Your attendance alone will not revoke your proxy. If you
have instructed a broker to vote your shares of Critical
Therapeutics’ common stock, you must follow directions
received from your broker to change those instructions.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED
TO VOTE BY PROXY TO ENSURE YOUR VOTE IS COUNTED.
13