MBRK Middlebrook Pharmaceuticals (MM)

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

Commission File Number: 000-50414

 

MiddleBrook Pharmaceuticals, Inc.

(Exact name of Registrant as specified in its Charter)

 

 

(301) 944-6600

(Registrant’s telephone number, including area code)

None

(Former name, former address and former
fiscal year — if changed since last report)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o      No  þ

 

As of April 30, 2008, 56,007,157 shares of common stock of the Registrant were outstanding.

 

 

MIDDLEBROOK PHARMACEUTICALS, INC

 

INDEX

 

FORM 10-Q

 

 

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

The accompanying notes are an integral part of these consolidated financial statements.

MIDDLEBROOK PHARMACEUTICALS, INC

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

The accompanying notes are an integral part of these consolidated financial statements.

MIDDLEBROOK PHARMACEUTICALS, INC.

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

 

The accompanying notes are an integral part of these consolidated financial statements.

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The accompanying unaudited condensed consolidated financial statements of MiddleBrook Pharmaceuticals, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Therefore, these condensed financial statements should be read in conjunction with the Company’s 2007 Annual Report on Form 10-K. The interim condensed financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of financial condition and results of operations for the periods presented. Except as otherwise disclosed, all such adjustments are of a normal recurring nature.

 

The Company has experienced significant operating losses since its inception in 2000. As of March 31, 2008, the Company had an accumulated deficit of $209.1 million. The process of developing and commercializing the Company’s products requires significant research and development work, preclinical testing and clinical trials, as well as regulatory approvals, significant marketing and sales efforts, and manufacturing capabilities. These activities, together with the Company’s general and administrative expenses, require significant investments and are expected to continue to result in significant operating losses for the foreseeable future. In January 2008, the Company received approval for marketing from the FDA for its lead product, MOXATAG (amoxicillin extended-release) Tablets, and it expects to incur significant expenses in preparing for the commercial launch of the product. To date, revenues recognized from non-PULSYS products have been limited and have not been sufficient for the Company to achieve or sustain profitability. The Company expects to incur a loss from operations in 2008. The Company believes its existing cash resources will be sufficient to fund its operations at least into the first quarter of 2009 at its planned levels of research, development, sales and marketing activities, barring unforeseen developments. However, the Company does not currently have the cash resources to fully fund the commercial launch of MOXATAG in late 2008 or in 2009 or to fund clinical trials of additional PULSYS product candidates. The Company is currently exploring various strategic alternatives, including licensing or development arrangements, the sale of some or all of the Company’s assets, partnering or other collaboration agreements, or a merger or other strategic transaction. Execution of the Company’s future strategies is dependent on the outcome of the strategic alternatives process. Should a strategic transaction not be completed, the Company may, if possible, enter into arrangements to raise additional capital which may dilute the ownership of its equity investors. The Company believes that additional financing may be available to it, but there can be no guarantee financing will be available on acceptable terms or at all. If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate its research and development programs, reduce its commercialization efforts, or effect changes to its facilities or personnel. The Company’s future operations are dependent on the success of the Company in commercializing new products, and there is no assurance that profitable operations can be achieved or sustained on a continuing basis.

 

 

Consolidation

 

The condensed consolidated financial statements include the accounts of MiddleBrook Pharmaceuticals, Inc., together with the accounts of Kef Pharmaceuticals, Inc. (Kef) and Lex Pharmaceuticals, Inc. (Lex), two variable interest entities for which MiddleBrook is the primary beneficiary as defined by FASB Interpretation No. 46 (revised 2003), “Consolidation of Variable Interest Entities” (FIN 46R). Kef and Lex are legal entities that were formed in November 2007 by Deerfield Management, a stockholder and affiliate of MiddleBrook, which purchased certain non-PULSYS Keflex assets from the Company. See Note 11, “Noncontrolling Interest — Deerfield Transaction” for a discussion of the transaction. As Deerfield and MiddleBrook are related parties, no gain or loss was recognized by the Company on the transaction and the initial measurement of assets and liabilities transferred to the variable interest entities remained at the amounts at which they were carried in the accounts of

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

MiddleBrook, in accordance with FIN 46R, paragraph 20. Expenses recognized in the condensed consolidated statement of operations for cost of product sales and amortization of intangible assets have been calculated on a basis consistent with the calculations that would have been made had the related inventory and intangible assets remained with MiddleBrook. All significant intercompany accounts and transactions between MiddleBrook and the two variable interest entities, Kef and Lex, have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Revenue Recognition

 

Product sales revenue , net of estimated provisions, is recognized when persuasive evidence that an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectibility is reasonably assured. Provisions for sales discounts, and estimates for chargebacks, rebates, and product returns are established as a reduction of product sales revenue at the time revenues are recognized, based on historical experience adjusted to reflect known changes in the factors that impact these reserves. These factors include current contract prices and terms, estimated wholesaler inventory levels, remaining shelf life of product, and historical information for similar products in the same distribution channel.

 

Deferred product revenue represents goods shipped under guaranteed sales arrangements in connection with initial stocking for a new product launch or other product sale arrangements containing terms that may differ significantly from the Company’s customary terms and conditions. For such arrangements, the risk of loss has not passed to the customer and, accordingly, products delivered under guaranteed sales arrangements or certain incentive terms are accounted for as consignment sales. The Company recognizes revenue when the product is sold by its customer or at the expiration of the consignment period if the product has not been returned.

 

Contract revenues include license fees and milestone payments associated with collaborations with third parties. Revenue from non-refundable, upfront license fees where the Company has continuing involvement is recognized ratably over the development or agreement period.

 

Deferred contract revenue represents cash received in excess of revenue recognized. See “ Note 3 — Revenue ” for discussion of deferred contract revenue related to the terminated collaboration with Par Pharmaceutical.

 

Research and Development

 

The Company expenses research and development costs as incurred. Research and development costs primarily consist of salaries and related expenses for personnel, fees paid to consultants and outside service providers, including clinical research organizations for the conduct of clinical trials, costs of materials used in clinical trials and research and development, development costs for contract manufacturing prior to FDA approval of products, depreciation of capital resources used to develop products, and costs of facilities, including costs to modify third-party facilities.

 

Cash and Cash Equivalents

 

Cash equivalents are highly liquid investments with a maturity of three months or less at date of purchase and consist of time deposits, investments in money market funds with commercial banks and financial institutions, commercial paper and high-quality corporate bonds. At March 31, 2008 and December 31, 2007, the Company maintained all of its cash and cash equivalents in three financial institutions. Deposits held with banks may exceed

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and the Company believes there is minimal risk of losses on such cash balances.

 

Cash and cash equivalents at March 31, 2008 include $333,119 held by Kef Pharmaceuticals, Inc., and Lex Pharmaceuticals, Inc., two variable interest entities which are consolidated by MiddleBrook. Kef and Lex are entities affiliated with Deerfield Management, which entered into a transaction with the Company in November 2007, as discussed in Note 11. Kef and Lex did not have cash and cash equivalents at December 31, 2007.

 

Restricted Cash

 

In conjunction with the lease of its corporate, research and development facilities, the Company provided the landlord with letters of credit that were collateralized with restricted cash deposits in the amounts of $872,180 at March 31, 2008 and December 31, 2007. These deposits are recorded as non-current restricted cash at March 31, 2008 and December 31, 2007.

 

Fair Value of Financial Instruments

 

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, approximate their fair values due to their short maturities. Warrants classified as liabilities are recorded at their fair value, based on the Black-Scholes option-pricing model.

 

Accounts Receivable

 

Accounts receivable represent amounts due from wholesalers for sales of pharmaceutical products. Allowances for estimated product discounts, chargebacks and wholesaler rebates are recorded as reductions to gross accounts receivable. Amounts due for returns and estimated rebates payable to third parties are included in accrued liabilities.

 

Inventories

 

Inventories consist of finished products purchased from third-party contract manufacturers and are stated at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) method. Reserves for obsolete or slow-moving inventory are recorded as reductions to inventory cost. The Company periodically reviews its product inventories on hand. Inventory levels are evaluated by management relative to product demand, remaining shelf life, future marketing plans and other factors, and reserves for obsolete and slow-moving inventories are recorded for amounts which may not be realizable. As discussed above under “Consolidation,” inventories were sold on November 7, 2007 to affiliates of Deerfield Management; however, the Deerfield affiliates are consolidated with MiddleBrook in accordance with FIN 46R, and there was no change in the accounting policies or basis for inventories.

 

Property and Equipment

 

Property and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are capitalized and amortized over the shorter of their economic life or the lease term. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred.

 

Intangible Assets

 

Identifiable intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. The Keflex brand rights are amortized over 10 years, the Keflex non-compete agreement with Eli Lilly and Company is amortized over five years, and certain acquired patents are amortized over 10 years. The Company

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

does not have identifiable intangible assets with indefinite lives. The Keflex brand name and other intangible assets were acquired for marketing purposes, and the related amortization is charged to selling expense. In November 2007, the Company sold its Keflex brand rights to affiliates of Deerfield Management, as discussed further in Note 11. The Company retained the right to repurchase at a predetermined price the intangible assets at a future date, as well as to continue to utilize the Keflex trademark and other intangible assets in order to continue to operate its Keflex business. As discussed above under “Consolidation,” the Deerfield affiliates are consolidated with MiddleBrook in accordance with FIN 46R, and there was no change in the accounting policies or basis for intangible assets.

 

Patents are carried at cost less accumulated amortization which is calculated on a straight-line basis over the estimated useful lives of the patents. The Company periodically reviews the carrying value of patents to determine whether the carrying amount of the patent is recoverable. For the three months ended March 31, 2008, and for the year ended December 31, 2007, there were no adjustments to the carrying values of patents. The Company is amortizing the cost of the patent applications over a period of 10 years.

 

Impairment of Long-Lived Assets

 

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” establishes accounting standards for the impairment of long-lived assets. The Company reviews its long-lived assets, including property and equipment and intangible assets owned by variable interest entities included in the condensed consolidated balance sheet, for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If this review indicates that the asset will not be recoverable based on the expected undiscounted net cash flows of the related asset, an impairment loss is recognized. There were no indications of impairment through March 31, 2008, and consequently there were no impairment losses recognized in 2008, or prior periods. If the Company is not able to carry out its business plans, there is the potential that this will be an indicator of an event or change in circumstances under SFAS 144 that would require the Company to perform an impairment analysis, and ultimately may result in impairment of the long-lived assets.

 

Leases

 

The Company leases its office and laboratory facilities under operating leases. Lease agreements may contain provisions for rent holidays, rent escalation clauses or scheduled rent increases, and landlord lease concessions such as tenant improvement allowances. The effects of rent holidays and scheduled rent increases in an operating lease are recognized over the term of the lease, including the rent holiday period, so that rent expense is recognized on a straight-line basis. For lease concessions such as tenant improvement allowances, the Company records a deferred rent liability included in “Deferred rent and credit on lease concession” on the balance sheet and amortizes the deferred liability on a straight-line basis as a reduction to rent expense over the term of the lease. The tenant improvements are capitalized as leasehold improvements and are amortized over the shorter of the economic life of the improvement or the lease term (excluding optional renewal periods). Amortization of leasehold improvements is included in depreciation expense. The Company’s leases do not include contingent rent provisions. For leased facilities where the company has ceased use for a portion or all of the space, the Company accrues a loss if the cost of the leased space is in excess of market rates for potential sublease income

 

Income Taxes

 

The Company accounts for income taxes under the liability method. Under this method, deferred income taxes are recognized for tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end, based on enacted laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Warrant Liabilities

 

Warrants may be classified as assets or liabilities (derivative accounting), temporary equity, or permanent equity, depending on the terms of the specific warrant agreement. Warrants are evaluated under SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” If the instrument is not governed by SFAS 150, then it is reviewed to determine whether it meets the definition of a derivative under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” or whether the warrant would meet the definition of equity under the provisions of EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” Financial instruments such as warrants that are classified as permanent or temporary equity are excluded from the definition of a derivative for purposes of SFAS 133. Financial instruments, including warrants, that are classified as assets or liabilities are considered derivatives under SFAS 133, and are marked to market at each reporting date, with the change in fair value recorded in the income statement. Based on a review of the provisions of its warrant agreements, the Company has determined that the warrants it issued in November 2007 should be accounted for as liabilities and marked to market at each reporting date, while its remaining warrants should be classified as permanent equity.

 

Registration Payment Arrangements

 

The Company views a registration rights agreement containing a liquidated damages provision as a separate freestanding contract which has nominal value, and the Company has followed that accounting approach, consistent with FASB Staff Position No. EITF 00-19-2, “Accounting for Registration Payment Arrangements.” Under this approach, the registration rights agreement is accounted for separately from the financial instrument. Under FSP No. EITF 00-19-2, registration payment arrangements are measured in accordance with SFAS No. 5, “Accounting for Contingencies.” Should the Company conclude that it is more likely than not that a liability for liquidated damages will occur, the Company would record the estimated cash value of the liquidated damages liability at that time.

 

Earnings Per Share

 

Basic earnings per share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed based on the weighted average shares outstanding adjusted for all dilutive potential common shares. The dilutive impact, if any, of potential common shares outstanding during the period, including outstanding stock options, is measured by the treasury stock method. Potential common shares are not included in the computation of diluted earnings per share if they are antidilutive. The Company incurred net losses for the quarters ended March 31, 2008 and 2007, and accordingly, did not assume exercise of any of the Company’s outstanding stock options, or warrants, because to do so would be antidilutive.

 

The following are the securities that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the periods presented:

 

 

Recent Accounting Pronouncements

 

In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), which is effective for financial statements

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

issued for fiscal years beginning after November 15, 2007. SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The Company did not elect the fair value option under SFAS 159 for any of its financial assets or liabilities upon adoption.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R), which is effective for financial statements issued for fiscal years beginning on or after December 15, 2008. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and the goodwill acquired in the business combination. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R will be applied prospectively. The Company is currently evaluating the effect that the adoption of SFAS 141R will have on its results of operations and financial condition.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” (SFAS 160). SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests (NCI) and classified as a component of equity. The Statement also requires that entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS 160 will be applied prospectively as of the beginning of the fiscal year in which the Statement is initially applied, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Company is currently evaluating the effect that the adoption of SFAS 160 will have on its results of operations and financial condition.

 

In February 2008, the FASB issued a FASB Staff Position, or FSP, to defer the effective date of SFAS No. 157 , “Fair Value Measurements,” (SFAS 157), for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The FSP defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008. The delay is intended to provide the Board additional time to consider the effect of certain implementation issues that have arisen from the application of SFAS 157 to these assets and liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The Company is currently evaluating the effect that the adoption of SFAS 157 will have on its results of operations and financial condition.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 amends SFAS 133 by requiring expanded disclosures about an entity’s derivative instruments and hedging activities. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments. SFAS 161 is effective for the Company as of January 1, 2009. The Company is currently assessing the impact of SFAS 161 on its consolidated financial statements.

 

 

Product Sales.   The Company records revenue from sales of pharmaceutical products under the Keflex brand. The Company’s largest customers are large wholesalers of pharmaceutical products. Three of these large

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

wholesalers accounted for approximately 51.6%, 32.8%, and 10.5% of the Company’s net revenues from product sales in the three month period ended March 31, 2008.

 

Deferred Revenue: Collaboration with Par Pharmaceutical for Amoxicillin PULSYS .  In May 2004, the Company entered into an agreement with Par Pharmaceutical to collaborate in the further development and commercialization of a PULSYS-based amoxicillin product. Under the terms of the agreement, the Company conducted the development program, including the manufacture of clinical supplies and the conduct of clinical trials, and was responsible for obtaining regulatory approval for the product. The Company was to own the product trademark and was to manufacture or arrange for supplies of the product for commercial sales. Par was to be the sole distributor of the product. Both parties were to share commercialization expenses, including pre-marketing costs and promotion costs, on an equal basis. Operating profits from sales of the product were also to be shared on an equal basis. Under the agreement, the Company received an upfront fee of $5,000,000 and a commitment from Par to fund all further development expenses. Development expenses incurred by the Company were to be partially funded by quarterly payments aggregating $28 million over the period of July 2004 through October 2005, of which up to $14 million would have been contingently refundable.

 

On August 3, 2005, the Company was notified by Par that Par decided to terminate the companies’ amoxicillin PULSYS collaboration agreement. Under certain circumstances, the termination clauses of the agreement may entitle Par to receive a share of net profits up to one-half of their cumulative $23,250,000 funding of the development costs of certain amoxicillin PULSYS products, should a product covered by the agreement be successfully commercialized. Accordingly, in 2005 the Company retained deferred revenue of $11,625,000 related to the agreement, and accelerated the recognition into current revenue of the remaining balance of $2,375,000 of deferred reimbursement revenue. The Company received approval for marketing of MOXATAG from the FDA on January 23, 2008. If MOXATAG is successfully commercialized and if it generates net profits, as defined, the balance of deferred revenue would be reduced as payments for a share of net profits are made to Par.

 

 

Accounts receivable, net, consists of the following:

 

 

The Company’s largest customers are large wholesalers of pharmaceutical products. Three of these large wholesalers accounted for approximately 46.4% 33.8% and 5.5% of the Company’s accounts receivable for product sales as of March 31, 2008.

 

 

Inventories, net, consist of the following:

 

 

The Company periodically reviews its product inventories on hand. Inventory levels are evaluated by management relative to product demand, remaining shelf life, future marketing plans and other factors, and

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

reserves for obsolete and slow-moving inventories are recorded for amounts which may not be realizable. During the three months ended March 31, 2008, the Company increased its reserve for obsolete and slow-moving inventories by $278,980, which was recorded as a component of cost of product sales. All obsolete and slow-moving product inventories were physically destroyed during the period, and, accordingly, the recorded amounts for gross inventories of finished goods as well as the related reserve for obsolete and slow-moving inventory were reduced. There were no obsolete inventory stocks on hand at March 31, 2008.

 

On November 7, 2007, the Company entered into a transaction with Deerfield Management, as described further in Note 11, “Noncontrolling Interest — Deerfield Transaction.” As part of the transaction, the Company sold its entire inventory of Keflex products to Deerfield. Under the transaction agreements, which include an inventory consignment agreement, the Company will continue to operate its Keflex business, and will purchase consigned inventory from Deerfield as necessary to fulfill customer orders. The Company has a repurchase right, under which it can re-acquire all the inventories from Deerfield at a future date.

 

 

Property and equipment consists of the following:

 

 

 

Intangible assets at March 31, 2008 and December 31, 2007 consist of the following:

 

 

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Identifiable intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. The Keflex brand rights are amortized over 10 years, the non-compete agreement with Eli Lilly and Company is amortized over 5 years, and certain acquired patents are amortized over 10 years.

 

Amortization expense for acquired intangible assets with definite lives was $289,419 for the three month period ended March 31, 2008. For the year ending December 31, 2008 and for the next four years, annual amortization expense for acquired intangible assets is expected to be approximately $1.2 million per year for 2008, and approximately $1.1 million per year from 2009 through 2012.

 

In November 2007, the Company sold its Keflex brand rights to affiliates of Deerfield Management, as discussed further in Note 11. The Company retained the right to repurchase at a predetermined price the intangible assets sold at a future date, as well as to continue to utilize the Keflex trademark and other intangible assets in order to continue to operate its Keflex business. As discussed in Note 2 under “Consolidation,” the Deerfield affiliates are consolidated with MiddleBrook in accordance with FIN 46R, and there was no change in the accounting policies or basis for intangible assets.

 

 

Accrued expenses consist of the following:

 

 

Accrued Severance

 

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

On June 30, 2006, the Company entered into a $12 million senior secured credit facility with Merrill Lynch Capital, consisting of an $8 million term loan (“Term Loan”) and a $4 million revolving loan facility (“Revolving Loan”). The entire $8 million Term Loan was borrowed at closing. The Company never utilized the Revolving Loan. On November 8, 2007, the Company repaid the outstanding Merrill Lynch Capital loan balance in full, using a portion of the proceeds from the transaction with Deerfield Management, as discussed further in Note 11, “Noncontrolling Interest — Deerfield Transaction.” In the three-month period ending March 31, 2007, the Company made principal payments totaling $666,667 on the debt.

 

 

In November 2007, the Company issued warrants for the purchase of 3,000,000 shares of its common stock to Deerfield Management in connection with the sale of certain non-PULSYS Keflex tangible and intangible assets (see Note 11). The warrants are exercisable immediately upon issuance for a period of six years. The warrant agreement contains provisions for cash settlement under certain conditions, including a major asset sale or acquisition in certain circumstances, which is available to the warrant holders at their option. As a result, the warrants cannot be classified as permanent equity under the requirements of EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” and are instead classified as a liability at their contractual fair value in the accompanying condensed consolidated balance sheet. Upon issuance of the warrants in November 2007, the Company recorded the warrant liability at is initial fair value of $2,580,000 based on the Black-Scholes option-pricing model, using the following assumptions: exercise price of $1.38, expected life of 6.0 years, expected volatility of 65.0% (contractual volatility rate fixed for the life of the warrant agreement), risk-free interest rate of 3.90%, and dividend yield of 0%.

 

Equity derivatives not qualifying for permanent equity accounting are recorded at fair value and are remeasured at each reporting date until the warrants are exercised or expire. Changes in the fair value of the warrants issued in November 2007 are reported in the condensed consolidated statement of operations as non-operating income or expense. In the three months ended March 31, 2008, the aggregate fair value of these warrants increased to $9,540,000, using the Black-Scholes option pricing model, from their fair value of $2,100,000 at December 31, 2007, resulting in a noncash expense of $7,440,000 and a corresponding increase in the recorded value of the warrant liability as of March 31, 2008. The expense was primarily attributable to the increase in the Company’s stock price from December 31, 2007 to March 31, 2008.

 

 

On November 7, 2007, the Company entered into a series of agreements with Deerfield Management, a healthcare investment fund and one of the Company’s largest equity shareholders, which provided for a potential capital raise of up to $10 million in cash. The financing consisted of two potential closings, with the first closing occurring upon the signing of the agreements (for $7.5 million in gross proceeds, less $0.5 million in transaction expenses) and the second closing (for an additional $2.5 million in gross proceeds) occurring at our option, contingent upon FDA approval of the Company’s New Drug Application for the amoxicillin PULSYS adult product. The agreements were designed to provide the Company with financial flexibility.

 

First Closing

 

At the transaction’s first closing, the Company sold certain assets, including Keflex product inventories, and assigned certain intellectual property rights, relating only to its existing, non-PULSYS cephalexin business, to two Deerfield affiliates, Kef Pharmaceuticals, Inc. (Kef) and Lex Pharmaceuticals, Inc. (Lex). Under the terms of the agreement, $7.5 million was received by the Company on November 8, 2007 for the first closing, and the Company reimbursed Deerfield $0.5 million for transaction-related expenses. Approximately $4.6 million of those proceeds was used to fully repay the outstanding Merrill Lynch Capital loan balance, with the remainder available for general

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

corporate purposes. Pursuant to a consignment of those assets and license of those intellectual property rights back to the Company, the Company will continue to operate its existing cephalexin business, subject to consignment and royalty payments to Deerfield of 20% of net sales, which decline to 15% should the Company elect to make an extension payment, of $1.35 million ($1.8 million, if the second closing has occurred) by June 30, 2008 subject to a minimum quarterly payment of $400,000. In addition, the Company granted to Deerfield a six-year warrant to purchase 3.0 million shares of the Company’s common stock at $1.38 , the closing market price on November 7, 2007.

 

Second Closing

 

The agreements provided for a second closing, at the Company’s option. In the event that the Company received approval (or an acceptable approvable letter) of its amoxicillin PULSYS New Drug Application from the FDA, then it could require Deerfield to acquire and license certain intellectual property rights relating only to the Company’s cephalexin PULSYS business for a payment of $2.5 million. Pursuant to a required sublicense of those intellectual property rights back to the Company, the Company would continue to operate its cephalexin PULSYS activities. Cephalexin PULSYS is not approved for marketing by the FDA. To date, the Company has not exercised the option for a second closing. This option expires June 30, 2008.

 

Repurchase Right

 

Deerfield also granted the Company the right to repurchase all of the assets and rights sold and licensed by the Company to Deerfield by purchasing all of the outstanding capital stock of both Kef and Lex. If the Company exercises this right prior to November 7, 2008, then the purchase price for all of the outstanding capital stock of Kef and Lex is a total of $11.0 million, if the Company has not elected the second closing (which would have required Deerfield to acquire and license certain intellectual property rights relating to the Company’s cephalexin PULSYS business), or $14.0 million if the Company did elect the second closing, in which it would have received $2.5 million in cash and Deerfield would have acquired and license certain rights to the Company’s cephalexin PULSYS business (in each case subject to certain adjustments). Those purchase prices will increase by $2.0 million on each subsequent anniversary of that date until the right is exercised or expires.

 

The Company’s purchase rights expire on June 30, 2008, unless an extension payment of $1.35 million ($1.8 million, if a second closing has occurred) is made to extend the expiration date to December 31, 2008. If an extension payment of $4.5 million ($6.0 million, if a second closing has occurred) is made by December 31, 2008, the expiration date is extended to September 30, 2009. If an extension payment of $2.2 million ($2.9 million if a second closing has occurred) is made by September 30, 2009, then the expiration date for the right to purchase the capital stock of Lex is extended to November 1, 2012. The Company may not exercise its right to purchase the capital stock of Lex without first exercising its right to purchase the capital stock of Kef. The Company’s exercise of this purchase right is mandatory upon the change of control of the Company.

 

Variable Interest Entities and FIN 46R Consolidation

 

In connection with the transaction, Deerfield Management established two new legal entities, Kef Pharmaceuticals, Inc. (Kef) and Lex Pharmaceuticals, Inc. (Lex) to hold the Keflex tangible and intangible assets. Affiliates of Deerfield own 100 percent of the voting interests in the two entities. In accordance with FIN 46R, MiddleBrook management evaluated whether Kef and Lex are variable interest entities and, if so, whether there is a primary beneficiary with a controlling financial interest. A key characteristic of a controlling financial interest is the equity holder’s ability to make important decisions with respect to the ongoing activities. Since MiddleBrook is making the important decisions with respect to the ongoing activities involving the assets owned by Kef and Lex, the Kef and Lex entities were determined to be variable interest entities for this characteristic. Another characteristic of a controlling financial interest is whether the equity holders of the entities have the obligation to absorb the expected losses of the entity or to receive the expected residual returns of the entity. Since MiddleBrook has a fixed price

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

repurchase option, the equity holders in Kef and Lex do not have rights to all of the residual returns of the entities and Kef and Lex were determined to be variable interest entities for this characteristic. Management used a qualitative analysis to determine whether Deerfield or MiddleBrook was the primary beneficiary of the entities. MiddleBrook was determined to be the primary beneficiary, since it is the party exposed to the majority of the risks. Thus, MiddleBrook consolidates the financial condition and results of operations of Kef and Lex in accordance with FIN 46R. Accordingly, the loss of $242,905 for the three months ended March 31, 2008, attributable to the noncontrolling interest (the losses of Kef and Lex) has been deducted from the net loss in the condensed consolidated statement of operations, and the noncontrolling interest holders’ ownership interest in Kef and Lex in the condensed consolidated balance sheet has been reduced by the losses of Kef and Lex.

 

 

In January 2008, the Company closed a private placement of 8,750,001 shares of its common stock and warrants to purchase 3,500,001 shares of common stock, at a price of $2.40 per unit. Each unit consists of one share of the Company’s common stock and a warrant to purchase 0.40 shares of common stock. The transaction raised approximately $21.0 million in gross proceeds and $19.9 million in net proceeds, net of expenses. The warrants have a five-year term and an exercise price of $3.00 per share. Based on a review of the provisions of its warrant agreements and EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” the Company has determined that the warrants it issued in January 2008 should be classified as permanent equity. Pursuant to the terms of the registration rights agreement, the Company filed with the SEC a registration statement covering the resale of common stock. The registration rights agreement provides that if the initial registration statement is not effective within 120 days of closing, or if the Company does not subsequently maintain the effectiveness of the initial registration statement or any additional registration statements, then in addition to any other rights the investor may have, the Company will be required to pay the investor liquidated damages, in cash, equal to 1.0 percent per month of the aggregate purchase price paid by such investor. Maximum aggregate liquidated damages payable to an investor are 20 percent of the aggregate amount paid by the investor. The SEC declared the Company’s Form S-3 effective on February 11, 2008, which was within 120 days of closing.

 

 

The Company currently grants stock options under the Stock Incentive Plan (the “Plan”). The number of shares available for issuance under the Plan is 9,348,182.

 

Options granted under the Plan may be incentive stock options or non-statutory stock options. Stock purchase rights may also be granted under the Plan. Incentive stock options may only be granted to employees. The compensation committee of the Board of Directors determines the period over which options become exercisable. Options granted to employees and consultants normally vest over a 4-year period. Options granted to directors, upon their initial appointment or election, vest monthly over periods of 36 months. Annual director and advisor grants vest monthly over 12 months. Director and advisor grants are exercisable on the date of grant but are restricted, subject to repurchase until vested. The exercise price of incentive stock options and non-statutory stock options shall be no less than 100% of the fair market value per share of the Company’s common stock on the grant date. The term of all option grants is 10 years. As of March 31, 2008, there were 1,881,463 shares of common stock available for future option grants.

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes the activity of the Company’s stock option plan for the three months ended March 31, 2008:

 

 

The total intrinsic value of options exercised during the three months ended March 31, 2008 was $1,022,296. Cash received by the Company upon the issuance of shares from option exercises was $560,989. The Company’s policy is to issue new shares of common stock to satisfy stock option exercises.

 

A summary of the Company’s nonvested options as of and for the nine months ended March 31, 2008 is presented below:

 

 

 

The Company has recorded stock-based compensation expense for the grant of stock options to employees and to nonemployee consultants as follows:

 

 

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The weighted average fair value of options granted to employees during the three months ended March 31, 2008 and 2007 was $2.06 and $1.79 per share, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes options pricing model with the following assumptions for grants in 2008 and 2007:

 

 

Nonemployees.   The Company has recorded stock-based compensation expense for options granted to nonemployees, including consultants, Scientific Advisory Board (SAB) members and contracted sales representatives based on the fair value of the equity instruments issued. Stock-based compensation for options granted to non employees is periodically remeasured as the underlying options vest in accordance with Emerging Issues Task Force 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.” The Company recognizes an expense for such options throughout the performance period as the services are provided by the nonemployees, based on the fair value of the options at each reporting period. The options are valued using the Black-Scholes option pricing model. For graded-vesting options, a final measurement date occurs as each tranche vests.

 

 

During 2003, the Company adopted an employee stock purchase plan which provides for the issuance of up to 100,000 shares of common stock. This plan, which is intended to qualify under Section 423 of the Internal Revenue Code, provides the Company’s employees with an opportunity to purchase shares of its common stock through payroll deductions. Options to purchase the common stock may be granted to each eligible employee periodically. The purchase price of each share of common stock will not be less than the lesser of 85% of the fair market value of the common stock at the beginning or end of the option period. Participation is limited so that the right to purchase stock under the purchase plan does not accrue at a rate which exceeds $25,000 of the fair market value of our common stock in any calendar year. To date, no shares have been issued under this plan.

 

 

Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (FIN 48). FIN 48 clarifies the criteria that an individual tax position must satisfy for some or all of the tax benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The implementation of FIN 48 had no impact on the Company’s financial statements, as the Company has no unrecognized tax benefits.

 

The Company is primarily subject to U.S federal and Maryland state corporate income tax. All tax years from the Company’s inception in 2000 remain open to examination by U.S. federal and state authorities.

 

The Company’s policy is to recognize interest related to income tax matters, if any, in interest expense and penalties related to income tax matters, if any, in operating expenses. As of January 1 and March 31, 2008, the Company had no accruals for interest or penalties related to income tax matters.

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Royalties

 

In the event the Company is able to develop and commercialize a PULSYS-based Keflex product, another cephalexin product relying on the acquired NDAs, or other pharmaceutical products using the acquired trademarks, Eli Lilly will be entitled to royalties on these new products. In 2006 the Company launched its Keflex 750mg product, which is covered by the agreement and is subject to a royalty on net sales, as defined, of 10 percent. Royalties are payable on a new product by new product basis for five years following the first commercial sale for each new product, up to a maximum aggregate royalty per calendar year. All royalty obligations with respect to any defined new product cease after the fifteenth anniversary of the first commercial sale of the first defined new product.

 

On November 7, 2007, the Company closed an agreement with Deerfield Management, a healthcare investment fund and one of the Company’s largest equity shareholders. The Company sold certain assets, and assigned certain intellectual property rights, relating only to its existing cephalexin business, excluding cephalexin PULSYS, to Deerfield for $7.5 million (less a $500,000 payment to Deerfield). Pursuant to an inventory consignment agreement and license of those intellectual property rights back to the Company, the Company will continue to operate its existing cephalexin business, subject to consignment and royalty payments to Deerfield of 20% of net sales, which decline to 15% should the Company elect to make an extension payment of $1.35 million ($1.8 million if a second closing has occurred) by June 30, 2008. Regardless of the level of net sales, the minimum combined consignment and royalty payment is $400,000 for each calendar quarter. Consignment and royalty payments due to affiliates of Deerfield Management from MiddleBrook are eliminated in the condensed consolidated balance sheet and condensed consolidated statement of operations in accordance with FIN 46R.

 

Legal Proceedings

 

The Company is a party to legal proceedings and claims that arise during the ordinary course of business.

 

In December 2003, Aventis and Aventis Pharmaceuticals Inc., now part of sanofi-aventis, brought an action against MiddleBrook Pharmaceuticals, Inc., then named Advancis Pharmaceutical Corp, alleging, in essence, that the Advancis corporate name was infringing the plaintiff’s trademark and sought injunctive relief. A trial was held in May 2005, and the Court’s decision, dated September 26, 2006, ruled in favor of sanofi-aventis. On June 28, 2007 the name change was completed pursuant to the Company’s jointly submitted Permanent Injunction and Order with sanofi-aventis of October 27, 2006, whereby the Company agreed to cease using the Advancis name by June 30, 2007. No monetary damages were associated with the decision, and the Company agreed to cease using the Advancis name by June 30, 2007. The Company implemented the name change on June 28, 2007, and there was no significant financial impact resulting from the change.

 

In August 2007, Eli Lilly and Company provided notice of a legal matter relating to Keflex to MiddleBrook. A product liability claim was filed by Jamie Kaye Moore against Eli Lilly, Teva Pharmaceuticals, Inc. and Teva Pharmaceuticals Industries Ltd. on March 28, 2007. The claim alleges injury from ingestion of some form of “Keflex.” Lilly has filed preliminary objections to the complaint, and has also requested prescription and other records, in order to determine whether the plaintiff ingested brand or generic cephalexin and which manufacturer might be involved. Since the identity of the manufacturer is not known, Lilly is not currently requesting indemnification from MiddleBrook.

 

 

In September 2006, the FASB issued Statement No. 157, “ Fair Value Measurements ” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. In February 2008, the FASB agreed to delay the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair

 

MIDDLEBROOK PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. The Company has adopted the provisions of SFAS 157 as of January 1, 2008, for financial instruments. Although the adoption of SFAS 157 did not materially impact its financial condition, results of operations, or cash flow, the Company is now required to provide additional disclosures as part of its financial statements. Under FAS No. 159, entities are permitted to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value measurement option under FAS No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment to FAS 115 ” (SFAS 159), for any of its financial assets or liabilities.

 

SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

 

 

As of March 31, 2008, the Company held certain liabilities that are required to be measured at fair value on a recurring basis. The Company makes use of observable market based inputs to calculate fair value, in which case the measurements are classified within Level 2. The Company currently does not have non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis.

 

 

The following discussion of our financial condition and results of operations should be read in conjunction with the condensed financial statements and the related notes included elsewhere in this Form 10-Q and the financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2007 Annual Report on Form 10-K. This discussion contains forward-looking statements, the accuracy of which involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons including, but not limited to, those discussed herein and in our 2007 Annual Report. See “Forward-looking Statements.”

 

Our Business

 

MiddleBrook Pharmaceuticals, Inc. was incorporated in Delaware in December 1999 and commenced operations on January 1, 2000. On June 28, 2007, we changed our corporate name from Advancis Pharmaceutical Corporation to MiddleBrook Pharmaceuticals, Inc. We are a pharmaceutical company focused on developing and commercializing anti-infective drug products that fulfill unmet medical needs in the treatment of infectious disease. We are developing a portfolio of drugs based on the novel biological finding that bacteria exposed to antibiotics in front-loaded, sequential bursts, or pulses, are killed more efficiently than those exposed to standard antibiotic treatment regimens. We currently have 26 issued U.S. patents and two issued foreign patent covering our proprietary once-a-day pulsatile delivery technology called PULSYS. We have initially focused on developing PULSYS product candidates utilizing approved and marketed drugs that no longer have patent protection or that have patents expiring in the next several years. Our lead pulsatile product candidate, based on the antibiotic amoxicillin, received U.S. Food and Drug Administration (FDA) approval for marketing on January 23, 2008, under the trade name MOXATAG ^tm , and our Keflex PULSYS product candidate, based on the antibiotic cephalexin, is currently under evaluation in Phase I clinical trials. We also have a number of additional pulsatile product candidates in preclinical development, although further development of these candidates will only occur if we secure additional capital resources. We acquired the U.S. rights to Keflex (cephalexin) from Eli Lilly in 2004. We currently sell our line of Keflex products to wholesalers in both capsule and powder formulations, and received FDA approval in 2006 for two additional Keflex strengths — 333 mg capsules and 750 mg capsules. We have focused our commercialization initiatives solely on the Keflex 750 mg capsules. In support of the launch of the Keflex 750 mg capsules, we entered into an agreement with a contract sales organization and currently deploy approximately 30 contract sales representatives across the United States. We have also entered into agreements with third-party contract manufacturers for the commercial supply of our products. In March 2007, we announced that we are evaluating various strategic alternatives to further enhance shareholder value and in February 2008, announced that we retained Morgan Stanley as our strategic advisor to assist us in this regard. Strategic alternatives we may pursue could include, but are not limited to, continued execution of our operating plan, licensing or development arrangements, the sale of some or all of our company’s assets, partnering or other collaboration agreements, or a merger or other strategic transaction.

 

General

 

Our future operating results will depend largely on our ability to successfully commercialize our lead PULSYS product, MOXATAG, and our ability to successfully commercialize our launched Keflex 750 mg product, and the progress of other product candidates currently in our research and development pipeline. The results of our operations will vary significantly from year to year and quarter to quarter and depend on a number of factors, including risks related to our business, risks related to our industry, and other risks which are detailed in this Annual Report on Form 10-K.

Management Overview of the First Quarter of 2008

 

The following is a summary of key events that occurred during the first quarter of 2008.

 

MOXATAG ^tm (amoxicillin extended-release) Tablets approval

 

 

Marketed Products — Keflex Capsules (Cephalexin USP)

 

 

Investment Bank Retained to Explore Strategic Alternatives

 

 

Focus for Remainder of 2008

 

Our primary focus for the remainder of 2008 will be on the manufacturing process for our MOXATAG product for adults and pediatric patients 12 years and older, along with the continued commercialization of our Keflex 750 mg capsules. Our NDA supporting MOXATAG was approved by the FDA on January 23, 2008, and we believe MOXATAG could be marketed to healthcare professionals as soon as the fourth quarter of 2008, should we successfully conclude our strategic evaluation process. We intend to continue promoting Keflex 750 mg capsules through our approximately 30 contract sales representatives and three MiddleBrook district sales managers to targeted U.S. physicians throughout 2008, assuming there are no generic competitors that enter the market during the year. In order to minimize our financing requirements in 2008, we expect to maintain our reduced cost structure implemented during 2007, including personnel reductions, postponement of PULSYS clinical development programs, and the elimination of other discretionary spending.

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses, fair valuation of stock related to stock-based compensation and income taxes. We based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

 

Revenue Recognition

 

We recognize revenue for the sale of pharmaceutical products and for payments received, if any, under collaboration agreements for licensing, milestones, and reimbursement of development costs as follows:

 

Product Sales.   Revenue from product sales, net of estimated provisions, is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectibility is reasonably probable. Our customers consist primarily of large pharmaceutical wholesalers who sell directly into the retail channel. Provisions for sales discounts, and estimates for chargebacks, rebates, and product returns are established as a reduction of product sales revenue at the time revenues are recognized, based on historical experience adjusted to reflect known changes in the factors that impact these reserves. Factors include current contract prices and terms, estimated wholesaler inventory levels, remaining shelf life of product, and historical information for similar products in the same distribution channel. These revenue reductions are generally reflected either as a direct reduction to accounts receivable through an allowance, or as an addition to accrued expenses if the payment is due to a party other than the wholesaler.

 

Chargebacks and rebates.   We record chargebacks and rebates based on the difference between the prices at which we sell our products to wholesalers and the sales price ultimately paid under fixed price contracts by third party payers, including governmental agencies. We record an estimate at the time of sale to the wholesaler of the amount to be charged back to us or rebated to the end user. We have recorded reserves for chargebacks and rebates based upon various factors, including current contract prices, historical trends, and our future expectations. The amount of actual chargebacks and rebates claimed could be either higher or lower than the amounts we accrued. Changes in our estimates would be recorded in the income statement in the period of the change.

 

Product returns.   In the pharmaceutical industry, customers are normally granted the right to return product for a refund if the product has not been used prior to its expiration date, which for our Keflex product is typically three years from the date of manufacture (two years, in the case of oral suspension products). Our return policy typically allows product returns for products within an eighteen-month window from six months prior to the expiration date and up to twelve months after the expiration date. We estimate the level of sales which will ultimately be returned pursuant to our return policy, and record a related reserve at the time of sale. These amounts are deducted from our gross sales to determine our net revenues. Our estimates take into consideration historical returns of our products and our future expectations. We periodically review the reserves established for returns and adjust them based on actual experience. The amount of actual product returns could be either higher or lower than the amounts we accrued. Changes in our estimates would be recorded in the income statement in the period of the change. If we over or under estimate the quantity of product which will ultimately be returned, there may be a material impact to our financial statements.

Inventories

 

Inventory is stated at the lower of cost or market with cost determined under the first-in, first-out method. Inventory consists of Keflex finished capsules and finished oral suspension powder. We purchase our Keflex products from third-party manufacturers only at the completion of the manufacturing process, and accordingly have no raw material or work-in-process inventories. At least on a quarterly basis, we review our inventory levels and write down inventory that has become obsolete or has a cost basis in excess of its expected net realizable value or is in excess of expected requirements. Inventory levels are evaluated by management relative to product demand, remaining shelf life, future marketing plans and other factors, and reserves for obsolete and slow-moving inventories are recorded for amounts which may not be realizable.

 

Intangible Assets

 

Acquired Intangible Assets.   We acquired the U.S. rights to the Keflex brand of cephalexin in 2004. We may acquire additional pharmaceutical products in the future that include license agreements, product rights and other identifiable intangible assets. When intangible assets are acquired, we review and identify the individual intangible assets acquired and record them based on relative fair values. Each identifiable intangible asset is then reviewed to determine if it has a definite life or indefinite life, and definite-lived intangible assets are amortized over their estimated useful lives.

 

Impairment.   We assess the impairment of identifiable intangible assets on an annual basis or when events or changes in circumstances indicate that the carrying value may not be recoverable. Some factors we consider important which could trigger an impairment review include significant underperformance compared to historical or projected future operating results, significant changes in our use of the acquired assets or the strategy for our overall business, or significant negative industry or economic trends. If we determine that the carrying value of intangible assets may not be recoverable based upon the existence of one or more of these factors, we first perform an assessment of the asset’s recoverability based on expected undiscounted future net cash flow, and if the amount is less than the asset’s value, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model.

 

Accrued Expenses

 

As part of the process of preparing financial statements, we are required to estimate accrued expenses for services performed and liabilities incurred. This process involves identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date in our financial statements. Examples of estimated accrued expenses for services include professional service fees, such as lawyers and accountants, contract service fees, such as amounts paid to clinical monitors, data management organizations and investigators in conjunction with clinical trials, fees paid to our contract sales organization, and fees paid to contract manufacturers in conjunction with the production of clinical materials. In connection with such service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual levels of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs that have begun to be incurred or we under- or over-estimate the level of services performed or the costs of such services, our reported expenses for such period would be too low or too high. The date on which certain services commence, the level of services performed on or before a given date and the cost of such services are often judgmental. We make these judgments based upon the facts and circumstances known to us in accordance with generally accepted accounting principles. We also make estimates for other liabilities incurred, including health insurance costs for our employees. We are self-insured for claims made under our health insurance program and record an estimate at the end of a period for claims not yet reported. Our risk exposure is limited, as claims over a maximum amount are covered by an aggregate stop loss insurance policy.

Stock-Based Compensation

 

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R). We adopted SFAS 123R using the modified prospective transition method, which requires the recognition of compensation expense under the Statement on a prospective basis only. Accordingly, prior period financial statements have not been restated. Under this transition method, stock-based compensation cost for the three month periods ended March 31, 2008 and 2007, includes (a) compensation cost for all share-based awards granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based awards granted subsequent to January 1, 2006 based on the grant-date fair value estimated in accordance with the fair value provisions of SFAS 123R.

 

SFAS 123R also requires us to estimate forfeitures in calculating the expense related to share-based compensation rather than recognizing forfeitures as a reduction in expense as they occur. To the extent actual forfeitures differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period that the estimates are revised. We plan to refine our estimated forfeiture rate as we obtain more historical data.

 

We determine the value of stock option grants using the Black-Scholes option-pricing model. Our determination of fair value of share-based payment awards on the date of grant is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards and projected employee stock option exercise behaviors. This model requires that we estimate our future expected stock price volatility as well as the period of time that we expect the share-based awards to be outstanding.

 

Income Taxes

 

As part of the process of preparing our financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. We account for income taxes by the liability method. Under this method, deferred income taxes are recognized for tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end, based on enacted laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We have not recorded any tax provision or benefit for the three month periods ended March 31, 2008 or 2007. We have provided a valuation allowance for the full amount of our net deferred tax assets since realization of any future benefit from deductible temporary differences and net operating loss carry forwards cannot be sufficiently assured at December 31, 2007 and March 31, 2008.

 

Recent Accounting Pronouncements

 

In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), which is effective for financial statements issued for fiscal years beginning after November 15, 2007. SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. We did not elect the fair value option under SFAS 159 for any of our financial assets or liabilities upon adoption.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141 R), which is effective for financial statements issued for fiscal years beginning on or after December 15, 2008. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and the goodwill acquired in the business combination. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R will be applied

prospectively. We are currently evaluating the effect that the adoption of SFAS 141R will have on our results of operations and financial condition.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” (SFAS 160). SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests (NCI) and classified as a component of equity. The Statement also requires that entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS 160 will be applied prospectively as of the beginning of the fiscal year in which the Statement is initially applied, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. We are currently evaluating the effect that the adoption of SFAS 160 will have on our results of operations and financial condition.

 

In February 2008, the FASB issued a FASB Staff Position, or FSP, to defer the effective date of SFAS No. 157, “Fair Value Measurements,” (SFAS 157), for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The FSP defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008. The delay is intended to provide the Board additional time to consider the effect of certain implementation issues that have arisen from the application of SFAS 157 to these assets and liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. We are currently evaluating the effect that the adoption of SFAS 157 will have on our results of operations and financial condition.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 amends SFAS 133 by requiring expanded disclosures about an entity’s derivative instruments and hedging activities. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments. SFAS 161 is effective as of January 1, 2009. We are currently assessing the impact of SFAS 161 on its consolidated financial statements

 

Our Approved and Marketed Products

 

 

Our Lead Product: MOXATAG ^tm (amoxicillin extended-release) Tablets

 

On January 23, 2008, we received FDA approval of our New Drug Application (NDA) for our once-daily amoxicillin PULSYS product, under the trade name, MOXATAG ^tm (amoxicillin extended-release) Tablets. MOXATAG is approved for the treatment of pharyngitis and/or tonsillitis secondary to Streptococcus pyogenes (strep throat) in adults and pediatric patients 12 years or older.

 

MOXATAG is a once-a-day extended-release formulation of amoxicillin for oral administration consisting of three components: one immediate-release and two delayed-release. The three components are combined in a specific ratio to prolong the release of amoxicillin from MOXATAG compared to immediate-release amoxicillin.

 

MOXATAG is intended to provide a lower treatment dose, once-daily alternative to currently approved penicillin and amoxicillin regimens for the treatment of adults and pediatric patients 12 years and older with tonsillitis and/or pharyngitis. We utilized the Company’s proprietary PULSYS ^® once-daily pulsatile delivery

technology to develop MOXATAG. We currently have a total of 26 issued U.S. patents and two issued foreign patents covering our PULSYS technology. Patents specifically relating to MOXATAG run to 2020.

 

MOXATAG is the first and only once-daily aminopenicillin therapy approved by the FDA to treat strep throat. According to prescription data from IMS Health, more than 30 million prescriptions were written for strep throat, pharyngitis and tonsillitis in the U.S. in 2007.

 

MOXATAG U.S. Market Opportunity

 

Amoxicillin is the most widely prescribed antibiotic drug in the United States. We believe the market opportunity for a once-daily amoxicillin product is substantial, with approximately 55 million prescriptions written for traditional multiple-times per day amoxicillin formulations in 2007 (IMS National Prescription Audit 2007).

 

Amoxicillin (marketed by GSK as Amoxil and marketed by other companies as a generic product) is a semi-synthetic antibiotic that is effective for the treatment of a variety of conditions, including ear, nose and throat infections, urinary tract infections, skin infections and lower respiratory infections. In 2007, amoxicillin had U.S. retail sales of approximately $1.1 billion, based on branded retail pricing of $20 per prescription. Approximately one-quarter of amoxicillin’s use is estimated to be for the treatment of pharyngitis and/or tonsillitis. Amoxicillin is generally recommended for dosing two or three times daily, for a period of ten to 14 days.

 

We believe MOXATAG will compete effectively in the strep throat segment of the antibiotic market due to its once-daily dosing and favorable side effect profile. We also expect MOXATAG to compete most directly against generic amoxicillin therapies and to a lesser degree against other common strep throat therapies such as penicillin, cephalosporins, and amoxicillin/clavulanate. According to prescription data from IMS Health, more than 30 million prescriptions were written for strep throat, pharyngitis and tonsillitis in the U.S. in 2007.

 

Today in the United States, the most frequently prescribed pharyngitis prescription is for 500mg of amoxicillin three times daily for ten days, or 15 grams total over the course of therapy. In addition, amoxicillin is the most commonly mentioned antibiotic associated with the pharyngitis/tonsillitis diagnosis. Our MOXATAG product for adults and pediatric patients 12 years and older is dosed 775mg once-daily for ten days, or 7.75 grams total per course of therapy. Therefore, physicians prescribing MOXATAG would be able to dose approximately one-half the amount of amoxicillin, while also providing the convenience of once-daily dosing versus a typical amoxicillin therapy.

 

As part of our ongoing strategic evaluation process, we are currently evaluating commercialization options for our MOXATAG product. We believe the MOXATAG market opportunity would be best addressed through its direct promotion by a national sales force of approximately 200 to 300 sales representatives. As such, a commercialization initiative would require significant resources and expertise, and we believe it would be in the Company’s best interests to seek potential acquirers or partners to capitalize on MOXATAG’s commercial potential. Potential sales and marketing strategies for MOXATAG include the acquisition of the Company and/or MOXATAG by a larger pharmaceutical organization with an established commercialization infrastructure, working with contract sales organizations, developing our own internal sales organization, or co-promoting products with collaborative marketing partners. Through the anticipated commercialization efforts for MOXATAG, we would expect to target high-volume prescribers with a community-based contract sales force detailing physicians, including family practitioners and internists.

 

Even if we successfully conclude our strategic evaluation process and identify a third party to assist in the commercialization of MOXATAG, the earliest we could launch the product would be in the fourth quarter of 2008. In addition, in order for the Company to participate in the sales and marketing of MOXATAG, we would need to have sufficient financial resources, which will require us to raise additional capital. These forward-looking statements are based on information available to us in May 2008.

 

MOXATAG International Market Opportunity

 

We own the worldwide rights to MOXATAG. In addition to sales in the U.S., we believe there will be the opportunity for us to earn additional revenue from sales of MOXATAG in other countries. Our international commercialization strategy is currently being evaluated, and may include the outsourcing of the sales and marketing functions to others, in exchange for royalties or other financial consideration.

Marketed Products — Keflex (non-PULSYS)

 

Keflex is a first-generation cephalosporin approved for treatment of several types of bacterial infections. Keflex is most commonly used in the treatment of uncomplicated skin and skin structure infections and, to a lesser extent, upper respiratory tract infections. Keflex is among the most prescribed antibiotics in the U.S.; however, generic competition is intense, and a high percentage of all Keflex prescriptions are substituted by generic versions of cephalexin, the active ingredient in Keflex.

 

We have the exclusive U.S. rights to manufacture, sell and market Keflex pursuant to our purchase agreement with Eli Lilly and Company and pursuant to subsequent agreements with Deerfield Management. On June 30, 2004, we acquired the U.S. rights to the Keflex brand of cephalexin from Eli Lilly for a purchase price of $11.2 million, including transaction costs, which were paid in cash from our working capital. The asset purchase includes the exclusive rights to manufacture, sell and market Keflex in the United States (including Puerto Rico). We also acquired Keflex trademarks, technology and new drug applications (NDAs) supporting the approval of Keflex capsules and oral suspension. On December 9, 2004, we announced that we entered into a commercial supply agreement with Ceph International Corporation, a wholly owned subsidiary of Patheon’s MOVA Pharmaceutical Corporation, to secure a long-term supply for Keflex products beyond the transitional period.

 

On May 12, 2006, the FDA approved two new strengths of Keflex for marketing — 750mg and 333mg capsules. We decided to focus our commercialization efforts solely on Keflex 750mg capsules. We believe the introduction of Keflex 750mg capsules allows physicians the flexibility to deliver higher doses of Keflex with fewer capsules per day. In July 2006, we began promoting Keflex 750mg capsules across the U.S. to targeted high-prescribing physicians through a dedicated national contract sales force of 75 sales representatives and eight MiddleBrook district sales managers. We market Keflex in the U.S. to healthcare practitioners, pharmacists, pharmaceutical wholesalers and retail pharmacy chains.

 

In addition to our ongoing sales and marketing responsibilities for non-PULSYS Keflex products, we have initiated a research program with the goal of developing a once-a-day cephalexin product utilizing our proprietary once-a-day PULSYS dosing technology. In the event we are able to develop and commercialize a PULSYS-based Keflex product, other cephalexin products relying on the acquired NDAs, or other pharmaceutical products using the acquired trademarks, Eli Lilly will be entitled to royalties on these new products. Our Keflex 750 mg product (and our potential Keflex 333 mg product, should we decide to commercialize it) is subject to the royalty. Royalties are payable on a new product by new product basis for five years following the first commercial sale for each new product, up to a maximum aggregate royalty per calendar year. All royalty obligations with respect to any defined new product cease after the fifteenth anniversary of the first commercial sale of the first defined new product.

 

Keflex Agreements — Deerfield Transaction

 

On November 7, 2007, we entered into a series of agreements with Deerfield Management, a healthcare investment fund and one of our largest equity shareholders, which provided for a potential capital raise of up to $10 million in cash. The financing consisted of two potential closings, with the first closing occurring upon the signing of the agreements (for $7.5 million in gross proceeds, less $0.5 million in transaction expenses) and the second closing (for an additional $2.5 million in gross proceeds) occurring at our option, contingent upon FDA approval of our New Drug Application for the amoxicillin PULSYS adult product. The agreements were designed to provide us with financial flexibility.

 

First Closing

 

At the transaction’s first closing, we sold certain assets, including Keflex product inventories, and assigned certain intellectual property rights, relating only to our existing, non-PULSYS cephalexin business, to two Deerfield affiliates, Kef Pharmaceuticals, Inc. (Kef) and Lex Pharmaceuticals, Inc. (Lex). Under the terms of the agreement, $7.5 million was received by MiddleBrook on November 8, 2007 for the first closing, and MiddleBrook reimbursed Deerfield $0.5 million for transaction-related expenses. Approximately $4.6 million of those proceeds was used to fully repay the outstanding Merrill Lynch Capital loan balance, with the remainder available for general corporate purposes. Pursuant to a consignment of those assets and license of those intellectual property rights back to the Company, the Company will continue to operate its existing cephalexin business, subject to consignment and royalty

payments to Deerfield of 20% of net sales, which decline to 15% should the Company elect to make an extension payment of $1.35 million ($1.8 million if the second closing has occurred as described below) by June 30, 2008, subject to a minimum quarterly payment of $400,000. In addition, we granted to Deerfield a six-year warrant to purchase 3.0 million shares of the Company’s common stock at $1.38 , the closing market price on November 7, 2007.

 

Second Closing

 

The agreements provided for a second closing, at the Company’s option. In the event that the we received approval (or an acceptable approvable letter) of our amoxicillin PULSYS New Drug Application from the FDA, then we could require Deerfield to acquire and license certain intellectual property rights relating only to our cephalexin PULSYS business for a payment of $2.5 million. Pursuant to a required sublicense of those intellectual property rights back to us, we would continue to operate our cephalexin PULSYS activities. Cephalexin PULSYS is not approved for marketing by the FDA. To date, we have not exercised this option. This option expires June 30, 2008.

 

Repurchase Right

 

Deerfield also granted us the right to repurchase all of the assets and rights sold and licensed by us to Deerfield by purchasing all of the outstanding capital stock of both Kef and Lex. If we exercise this right prior to November 7, 2008, then the purchase price for all of the outstanding capital stock of Kef and Lex is a total of $11.0 million, if we have not elected the second closing (which would have required Deerfield to acquire and license certain intellectual property rights relating to the Company’s cephalexin PULSYS business), or $14.0 million if we did elect the second closing, in which we would have received $2.5 million in cash and Deerfield would have acquired and licensed certain rights to our cephalexin PULSYS business (in each case subject to certain adjustments). Those purchase prices will increase by $2.0 million on each subsequent anniversary of that date until the right is exercised or expires.

 

Our purchase rights expire on June 30, 2008, unless an extension payment of $1.35 million ($1.8 million, if a second closing has occurred) is made to extend the expiration date to December 31, 2008. If an extension payment of $4.5 million ($6.0 million, if a second closing has occurred) is made by December 31, 2008, the expiration date for repurchase is extended to September 30, 2009. If an extension payment of $2.2 million ($2.9 million if a second closing has occurred) is made by September 30, 2009, then the expiration date for the right to purchase the capital stock of Lex is extended to November 1, 2012. We may not exercise our right to purchase the capital stock of Lex without first exercising our right to purchase the capital stock of Kef. Our exercise of this purchase right is mandatory upon the change of control of the Company.

 

Our Product Pipeline

 

The following table summarizes the antibiotic compounds we have in clinical trials and preclinical development. We expect that these compounds will serve as the basis for drug products or, with additional clinical development, drug combination products. Each of our preclinical product candidates is still in the early stage of development, and their further clinical progress requires significant additional capital expenditures that would be completely dependent upon our ability to obtain additional financing. Due to our on-going research and development efforts, additional or alternative compounds may be selected to replace or supplement the compounds described below.

 

 

 

 

A significant portion of our expenses may be related to research and development of investigational stage product candidates. In the event that we are unable to raise additional capital, we may not have sufficient resources to complete our development programs.

 

Keflex (Cephalexin) PULSYS

 

We are developing a once-daily PULSYS version of Keflex, our first generation oral cephalosporin antibiotic. Additional development of Keflex PULSYS is on hold, unless and until we have sufficient financial resources. Our intent is to develop a once-daily Keflex PULSYS for uncomplicated skin and skin structure infections. Currently, Keflex (or, in its generic form, cephalexin) is the antibiotic most frequently prescribed by physicians in the treatment of uncomplicated skin and skin structure infections. Most commonly, Keflex is prescribed 500mg three times per day for a period of ten days. We believe a once-daily version of Keflex PULSYS may represent a substantial market opportunity. In 2007, cephalexin, the active ingredient in Keflex, was the third most prescribed antibiotic in the United States, with approximately 23 million prescriptions (IMS National Prescription Audit 2007). Assuming branded retail pricing of $30 per prescription, we estimate that the cephalexin market opportunity has a value of approximately $690 million.

 

We have completed a total of six Keflex PULSYS Phase I clinical studies, evaluating various pulsatile formulations of Keflex dosed in a total of more than 150 healthy volunteer subjects. Based on the results from our Phase I studies, we believe we have finalized the formulation development Phase I program for our Keflex PULSYS product candidate.

 

On June 25, 2007, we completed a meeting with the FDA’s Division of Anti-Infective and Ophthalmology Products to discuss our Phase III trial and regulatory strategy to support product approval for Keflex PULSYS for the treatment of uncomplicated skin and skin structure infections (uSSSIs) in adults and adolescents due to susceptible Staphylococcus aureus and/or Streptococcus pyogenes . We believe our planned non-inferiority Phase III clinical trial design and regulatory strategy for Keflex PULSYS were acceptable to the FDA.

 

Our anticipated Phase III trial is designed as a two-arm, double-blind, non-inferiority trial with a minimum enrollment of 600 patients. We expect to compare our 1200 milligram Keflex PULSYS product administered once-daily for 10 days to 250 milligrams of Keflex dosed four-times daily, for a total daily dose of 1000 milligrams, for 10 days. These forward-looking statements are based on information available to us at this time. Actual results could differ because our trial results could be delayed or unsuccessful or due to delays in FDA approval, which may never occur.

 

Our once-daily Keflex PULSYS product candidate is designed to increase the convenience of cephalexin therapy, which is currently dosed two to four times daily for a period of seven to 14 days. Cephalexin is commonly prescribed as a first-line therapy for common uncomplicated skin infections such as impetigo (skin lesions), simple skin abscesses, and cellulitis (acute inflammation of connective tissue of the skin). There is currently no once-daily cephalexin product approved for marketing in the United States.

 

Amoxicillin Pediatric Pharyngitis Program

 

We have developed two amoxicillin PULSYS formulations, our MOXATAG tablet approved for adults and pediatric patients age 12 and older and a pediatric sprinkle. Our pediatric sprinkle product utilizes a similar formulation to the adult product; however, it is dosed in multiparticulate granules designed to be sprinkled over food. Survey results from patients and caregivers utilizing our pediatric sprinkle product suggest that its convenience and transportability may be beneficial features of our sprinkle formulation, and we expect to utilize our sprinkle presentation as the method of dosing our amoxicillin pediatric product. We believe the market opportunity for a pediatric strep throat product is substantial, as more than half of the strep throat market is believed to be represented by pediatric patients.

 

In 2005, we concluded a Phase III clinical trial evaluating once-daily amoxicillin PULSYS in pediatric patients with pharyngitis/tonsillitis (strep throat) which failed to achieve its desired clinical endpoints. However, we believe there is potential for us to pursue a pulsatile version of amoxicillin for the treatment of pediatric patients with strep throat through a redesigned clinical trial program. In 2006, we completed a Phase I study evaluating the observed

drug concentrations from various pulsatile sprinkle amoxicillin formulations in healthy volunteer subjects. Based on the results from the 2006 study along with our Phase I studies, we intend to evaluate the safety and efficacy of various daily doses and durations of treatment for our pediatric amoxicillin PULSYS product candidate in a Phase II study, should we have sufficient capital and other resources to do so.

 

As part of our FDA approval of MOXATAG on January 23, 2008, in adults and pediatric patients 12 years and older and in accordance with the requirements of the Pediatric Research Equity Act, we received from the FDA a deferral to further evaluate our product candidate for pediatric patients less than 12 years of age with pharyngitis and/or tonsillitis as part of a post-marketing commitment. Should the results of the Phase II study support proceeding into Phase III, we may design and conduct a Phase III trial in this population. We agreed to submit a completed study report and data set for MOXATAG in pediatric patients less than 12 years old within the next five years as part of this commitment. If the results of the Phase II do not support proceeding into Phase III, we may file a request for a waiver for the assessment of the safety and effectiveness of the product in this population.

 

Other Possible Pulsatile Product Candidates

 

Our current focus is on the antibiotic product candidates that include amoxicillin and Keflex. We have also identified additional product candidates which we believe could be developed for delivery in a pulsatile manner. The timing of further development work on these candidates depends on our financial and other resources as well as our evaluation of the commercial potential of the products.

 

Research and Development Expenses

 

Our research and development expenses consist primarily of salaries and related expenses for personnel, development costs for contract manufacturing prior to FDA approval of products, costs of materials required to validate the manufacturing process and prepare for commercial launch, depreciation of capital resources used to develop our products, and other costs of facilities. We expense research and development costs as incurred.

 

Summary of Product Development Initiatives.   The following table summarizes our product development initiatives for the three month periods ended March 31, 2008 and 2007. Included in this table is the research and development expense recognized in connection with each product candidate currently in clinical development and all preclinical product candidates as a group.

 

 

 

 

 

Results of Operations

 

Three months ended March 31, 2008 compared to three months ended March 31, 2007

 

Revenues.   We recorded revenues from Keflex product sales of $2,394,000 and $1,773,000 during the three-month periods ended March 31, 2008 and 2007, respectively.

 

 

Sales of Keflex products increased in the first quarter of 2008 as compared to 2007, primarily as the result of price increases across all product lines that were implemented after the first quarter of 2007. Unit sales of 750mg in 2008 were comparable to 2007, while unit sales of other Keflex products declined 21%.

 

Cost of Product Sales.   Cost of product sales represents the purchase cost of the Keflex products sold, royalties on the 750 mg product, and any provisions recorded for slow-moving or excess inventory that is not expected to be sold prior to reaching expiration. Cost of product sales increased from $0.2 million in 2007 to $0.6 million in 2008, primarily as the result of provisions of $0.3 million made in 2008 as estimates of the future saleability of certain inventory stocks were revised.

 

 

Research and Development Expenses.   Research and development expenses decreased $3.8 million, or 50 percent, to $3.7 million for the three months ended March 31, 2008 from $7.5 million for the three months ended March 31, 2007. Research and development expenses consist of direct costs which include salaries and related costs of research and development personnel, and the costs of consultants, materials and supplies associated with research and development projects, as well as clinical studies. Indirect research and development costs include facilities, depreciation, and other indirect overhead costs.

The following table discloses the components of research and development expenses reflecting our project expenses.

 

 

Direct costs for the first quarter of 2008 decreased by $3.5 million compared to the first quarter of 2007. The decrease is primarily attributable to contract R&D, consultants, materials and other cost reductions of $2.8 million resulting from a declining level of activity relating to development of MOXATAG manufacturing capacity at our contract manufacturer’s facility in Clonmel, Ireland, as work at the site is nearly completed. Personnel-related cost reductions are due to lower headcount, primarily in research staff as we have focused our resources on commercialization of our MOXATAG product, which was approved by the FDA during the first quarter of 2008.

 

Selling, General and Administrative Expenses.   Selling, general and administrative expenses decreased $2.9 million, or 38%, to $4.8 million for the three months ended March 31, 2008 from $7.7 million for the three months ended March 31, 2007.

 

 

Selling, general and administrative expenses consist of salaries and related costs for executive and other administrative personnel, selling and product distribution costs, professional fees and facility costs. Overall, costs decreased $2.9 million primarily due to a reduction in marketing and contract sales costs to promote Keflex 750mg, which accounted for $1.9 million of the decrease as compared to 2007. Other expenses declined due to an FDA New Drug Application filing fee incurred in 2007 of $0.9 million, versus none in 2008.

 

Net Interest Income (Expense).   Net interest income in the three months ended March 31, 2008 was $185,000 improved compared to the three months ended March 31, 2007, as we paid off the remaining Merrill Lynch debt in the fourth quarter of 2007, and have no remaining debt.

 

Liquidity and Capital Resources

 

We have funded our operations principally with the proceeds of $54.5 million from a series of five preferred stock offerings and one issue of convertible notes over the period 2000 through 2003, the net proceeds of $54.3 million from our initial public offering in October 2003, and private placements of common stock for net proceeds of $25.8 million, $16.7 million, $22.4 million and $19.9 million in April 2005, December 2006, April 2007, and January 2008, respectively. In addition, we have received funding of $8.0 million and $28.25 million from GlaxoSmithKline and Par Pharmaceutical, respectively, as a result of collaboration agreements for the development of new products. Since July 2004, we have also received cash of approximately $26.6 million from sales of our Keflex products. We received a $1.0 million advance payment in 2005 from a potential buyer of our Keflex brand, which we recognized in income in 2006 as the sale was not completed. In the second quarter of 2006, we received proceeds of $6.9 million from a term loan, net of costs and the payoff of existing debt. In November 2007, we sold certain of our Keflex assets in exchange for $7.5 million (less a $500,000 payment to the purchaser), while retaining the right to continue operating the Keflex business subject to certain royalty payments to the purchaser as well as the right to repurchase the assets at a future date at predetermined prices.

 

We are evaluating various strategic alternatives to further enhance shareholder value, and in January 2008 we retained an investment banking firm to assist us in this regard. Strategic alternatives we may pursue could include, but are not limited to, continued execution of our operating plan, licensing or development arrangements, the sale of some or all of our company’s assets, partnering or other collaboration agreements, or a merger or other strategic transaction. There can be no assurance that the exploration of strategic alternatives will result in any agreements or transactions, or that, if completed, any agreements or transactions will be successful or on attractive terms.

 

Cash and Marketable Securities

 

At March 31, 2008, cash and cash equivalents and were $18.0 million compared to $2.0 million at December 31, 2007. Cash and cash equivalents at March 31, 2008 include $333,000 held by Kef Pharmaceuticals, Inc., and Lex Pharmaceuticals, Inc., two variable interest entities which are consolidated by MiddleBrook. Kef and Lex are entities affiliated with Deerfield Management, which entered into a transaction with the Company in November 2007, as discussed in Note 11. Kef and Lex did not have cash and cash equivalents at December 31, 2007.

 

Our cash and cash equivalents are highly-liquid investments with a maturity of 90 days or less at date of purchase and consist of time deposits, investments in money market funds with commercial banks and financial institutions, and commercial paper of high-quality corporate issuers.

 

Our investment policy requires the selection of high-quality issuers, with bond ratings of AAA to A1+/P1. We do not invest in auction rate securities. Our objective is to limit the investment portfolio to a maximum average duration of approximately one year, with no individual security exceeding a two-year duration. Due to our current liquidity needs we do not anticipate holding any security with a maturity greater than 6 months, and at March 31, 2008 and December 31, 2007 we held no security with a maturity greater than 90 days.

 

Also, we maintain cash balances with financial institutions in excess of insured limits. We do not anticipate any losses with respect to such cash balances.

 

Cash Flow

 

The following table summarizes our sources and uses of cash and cash equivalents for the nine month periods ending March 31, 2008 and 2007.

 

 

Cash received from product sales in 2008 increased versus 2007 as a result of higher product prices, as well as normal variability in the timing of orders and subsequent payment. Interest and other cash received in 2007 included one time refunds of deposits totaling $298,000. Cash paid for employee-related costs reflects lower headcount in 2008 as compared to the prior year. Cash paid to vendors in 2007 includes costs to prepare the third party manufacturing site for MOXATAG production, as well as a one-time NDA filing fee.

 

 

Investing activities in 2008 consisted of the sale of laboratory equipment that was no longer required. Investing activities in 2007 consisted of the purchase of equipment to be used for the manufacture of MOXATAG.

 

 

The major financing activity in the first quarter of 2008 was a private placement of common stock, which occurred in January, and generated net proceeds of $19.9 million. Additionally, primarily as a result of higher stock prices, option exercises increased from the prior year. Payments on lines of credit in 2007 related to the Merrill Lynch term loan, which was fully repaid in the fourth quarter of 2007.

Contractual Obligations and Other Commercial Commitments

 

We have entered into an agreement with Innovex, a division of Quintiles, for contract sales services. Innovex is providing sales representatives dedicated to promotion of the Keflex 750 product. We have a commitment to pay fees to Innovex to cover the costs of the sales force, as well as related expenses. We estimate this commercial commitment as an expense of approximately $3.1 million over the next nine months. The agreement is cancelable at our option, which we would consider exercising if business conditions warrant it. The cost of termination would be approximately $1.1 million.

 

Since November 2007, we pay consignment payments and royalties to Deerfield at 20% of net Keflex revenues, with a minimum combined quarterly payment of $400,000. The combined 20% rate decreases to 15% if we elect to make an extension payment, as defined in the agreements with Deerfield, of $1.35 million ($1.8 million if a second closing has occurred) to Deerfield by June 30, 2008. The related agreements expire June 30, 2008, unless extension payments are made, at the Company’s option, to extend the expiration dates of the repurchase rights.

 

Prospective Information

 

We are evaluating various strategic alternatives to further enhance shareholder value, and in February 2008 we retained Morgan Stanley, an investment banking firm, to assist us in this regard. Strategic alternatives we may pursue could include, but are not limited to, continued execution of our operating plan, licensing or development arrangements, the sale of some or all of our company’s assets, partnering or other collaboration agreements, or a merger or other strategic transaction. There can be no assurance that the exploration of strategic alternatives will result in any agreements or transactions, or that, if completed, any agreements or transactions will be successful or on attractive terms.

 

We expect to incur a loss from operations in 2008. However, we believe that our existing cash resources, including the net proceeds from the private placement transaction in January 2008, will be sufficient to fund our operations at least into the first quarter of 2009 at our planned levels of research, development, sales and marketing activities, barring unforeseen developments. Furthermore, due to the approval of our amoxicillin PULSYS NDA on January 23, 2008, we have the right, if we choose to give notice by June 30, 2008, to require a second closing of the Deerfield transaction, in which we would receive an additional payment of $2.5 million, net, in exchange for the acquisition and license by Deerfield of certain intellectual property rights relating only to the Company’s cephalexin PULSYS business; we would retain the right to operate that business (subject to certain future consignment and royalty payments to Deerfield, should a cephalexin PULSYS product be successfully developed and commercialized) as well as the right to reacquire those intellectual property rights at some point in the future.

 

To minimize our cash requirements, we have continued our program of cost reductions including personnel reductions, postponement of PULSYS clinical development programs, and elimination of other discretionary spending. Our net cash requirements for 2008 will depend, among other things, on the cash received from sales of our existing non-PULSYS products (primarily sales of Keflex capsules in 250 mg, 500 mg and 750 mg strengths) and the cash expended for (1) cost of products sold, including royalties due to Eli Lilly on Keflex 750 net revenues and consignment and royalty payments due to Deerfield on all Keflex net revenues, (2) research and development spending, (3) sales and marketing expenses for Keflex 750 and MOXATAG, and (4) general and administrative expenses. Our cash receipts and cash expenditures assumptions for 2008 include the following: (1) continuation of Keflex 750 monthly prescriptions at the current 20,000 to 25,000 prescriptions per month rate (end-user demand), assuming no generic competitive product enters the market in 2008, (2) validation and manufacturing scale-up activities at our contract manufacturing site in Clonmel, Ireland, in preparation for the MOXATAG product launch, (3) research and development programs for PULSYS product candidates basically on hold unless and until additional finance is obtained, (4) a sales force of approximately 30 representatives, excluding the sales and marketing cost of a commercial launch of MOXATAG, and (5) continued focus on reductions in discretionary spending. We expect to incur a significant loss in 2008, as we expect that revenues from product sales will not be sufficient to fully fund our operating costs. These 2008 estimates are forward-looking statements that involve risks and uncertainties, and actual results could vary.

 

Our cash projections for 2008 do not include the cost of selling and marketing activities for the commercial launch of MOXATAG. We are currently evaluating commercialization options for our MOXATAG product. We

believe the MOXATAG market opportunity would be best addressed through its direct promotion by a national sales force of approximately 200 to 300 sales representatives. As such, a commercialization initiative would require significant resources and expertise, and we believe it would be in the Company’s best interests to seek potential acquirers or partners to capitalize on MOXATAG’s commercial potential. Potential sales and marketing strategies for MOXATAG include the acquisition of the Company by a larger pharmaceutical organization with an established commercialization infrastructure, working with contract sales organizations, developing our own internal sales organization, or co-promoting products with collaborative marketing partners. Even if we successfully conclude our strategic evaluation process and identify a third party to assist in the commercialization of MOXATAG, the earliest we could launch the product would be in the fourth quarter of 2008. In addition, in order for the Company to participate in the sales and marketing of MOXATAG, we would need to have sufficient financial resources, which may require us to raise additional capital.

 

We have experienced significant losses since our inception in 2000, and as of March 31, 2008, we had an accumulated deficit of $209.1 million. The process of developing and commercializing our products requires significant research and development work, preclinical testing and clinical trials, as well as regulatory approvals, significant marketing and sales efforts, and manufacturing capabilities. These activities, together with our general and administrative expenses, are expected to continue to result in significant operating losses for the foreseeable future. To date, the revenues we have recognized from our non-PULSYS products have been limited and have not been sufficient for us to achieve or sustain profitability. Our product revenues are unpredictable in the near term and may fluctuate due to many factors, many of which we cannot control, including the market acceptance of our products. If our products fail to achieve market acceptance, we would have lower product revenues which may increase our capital requirements.

 

Our estimates of future capital requirements are uncertain and will depend on a number of factors, including the progress of our research and development of product candidates, the timing and outcome of regulatory approvals, cash received from sales of our existing non-PULSYS products, payments received or made under any future collaborative agreements, the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights, the acquisition of licenses for new products or compounds, the status of competitive products, the availability of financing and our or our partners’ success in developing markets for our product candidates. Changes in our commercialization plans, partnering activities, regulatory activities and other developments may increase our rate of spending and decrease the period of time our available resources will fund our operations. Insufficient funds may require us to delay, scale back or eliminate some or all of our research, development or commercialization programs, or may adversely affect our ability to operate as a going concern.

 

We have no unused credit facility, or other committed sources of capital, except for the $2.5 million we would be entitled to receive in the event that we request a second closing from Deerfield and require Deerfield to license certain intellectual property rights relating to cephalexin PULSYS, as described above. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to raise additional capital, incur indebtedness, or consider the sale of company assets in order to fund our operations. There is no assurance additional debt or equity financing will be available on acceptable terms, if at all. Our ability to raise capital by issuing additional equity may require the prior approval of Deerfield Management, under the terms of its warrant agreement, to the extent the number of common shares to be issued exceeds 25% of the outstanding common shares; should Deerfield not approve the transaction, it may require the redemption of its warrants in cash, at the contractual fair value calculated in accordance with the Black-Scholes formula. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our commercialization efforts, effect changes to our facilities or personnel, or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently. Any future funding may dilute the ownership of our equity investors.

 

Forward-looking Statements

 

This report contains forward-looking statements. These statements relate to future events or to our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our

actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, forward-looking statements may be identified by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology. You should not place undue reliance on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, levels of activity, performance or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:

 

 

All written and oral forward-looking statements made in connection with this Quarterly Report on Form 10-Q which are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the “Risk Factors” and other cautionary statements included in our 2007 Annual Report on Form 10-K. We disclaim any obligation to update information contained in any forward-looking statement.

 

 

Market Risk

 

Our exposure to market risk is currently confined to our cash and cash equivalents, marketable securities, and restricted cash that generally have maturities of less than one year. We currently do not hedge interest rate exposure. We have not used derivative financial instruments for speculation or trading purposes. Because of the short-term maturities of our cash, cash equivalents and marketable securities, we do not believe that an increase in market rates would have any significant impact on the realized value of our investments.

 

Fair Value of Warrants (Derivative Liabilities)

 

As of March 31, 2008, the estimated fair value of warrant liabilities recorded on our balance sheet, which are related to the Deerfield transaction, was $9.5 million. We estimate the fair value of these instruments using the Black-Scholes option pricing model which takes into account a variety of factors, including stock price volatility, risk-free interest rates, remaining term, and the closing price of our common stock. The determination of the fair value of the Deerfield warrants is most significantly affected by the change in the closing price of our common stock. The stock price volatility factor for the Deerfield warrants is not a risk exposure, as the volatility factor is fixed in the agreement. The following table illustrates the potential effect of changes in the assumptions used to calculate fair value:

 

 

The Company’s stock price can fluctuate significantly. We cannot predict our future stock prices nor can we predict the future fair value of the warrant liabilities.

Inflation

 

Our most liquid assets are cash, cash equivalents and marketable securities. Because of their liquidity, these assets are not directly affected by inflation. We also believe that we have intangible assets in the value of our intellectual property. In accordance with generally accepted accounting principles, we have not capitalized the value of this intellectual property on our balance sheet. Due to the nature of this intellectual property, we believe that these intangible assets are not affected by inflation. Because we intend to retain and continue to use our equipment, furniture and fixtures and leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources.

 

 

Our management, including our principal executive and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2008. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in this Quarterly Report on Form 10-Q has been appropriately recorded, processed, summarized and reported. Based on that evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

 

Our management, including our principal executive and principal financial officers, has evaluated any changes in our internal control over financial reporting that occurred during the quarterly period ended March 31, 2008, and has concluded that there was no change that occurred during the quarterly period ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

We are not a party to any material pending legal proceedings, other than ordinary routine litigation incidental to our business, except as discussed below.

 

In December 2003, Aventis and Aventis Pharmaceuticals Inc., now part of sanofi-aventis, brought an action against MiddleBrook Pharmaceuticals, Inc., then named Advancis Pharmaceutical Corp, alleging, in essence, that the Advancis corporate name was infringing the plaintiff’s trademark and sought injunctive relief. A trial was held in May 2005, and the Court’s decision, dated September 26, 2006, ruled in favor of sanofi-aventis. On June 28, 2007 the name change was completed pursuant to the Company’s jointly submitted Permanent Injunction and Order with sanofi-aventis of October 27, 2006, whereby the Company agreed to cease using the Advancis name by June 30, 2007. No monetary damages were associated with the decision, and the Company agreed to cease using the Advancis name by June 30, 2007. The Company implemented the name change on June 28, 2007, and there was no significant financial impact resulting from the change.

 

In August 2007, Eli Lilly and Company provided notice of a legal matter relating to Keflex to MiddleBrook. A product liability claim was filed by Jamie Kaye Moore against Eli Lilly, Teva Pharmaceuticals, Inc. and Teva Pharmaceuticals Industries Ltd. on March 28, 2007. The claim alleges injury from ingestion of some form of “Keflex.” Lilly has filed preliminary objections to the complaint, and has also requested prescription and other records, in order to determine whether the plaintiff ingested brand or generic cephalexin and which manufacturer might be involved. Since the identity of the manufacturer is not known, Lilly is not currently requesting indemnification from MiddleBrook.

 

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial conditions and/or operating results.

 

 

In January 2008, the Company closed a private placement of 8,750,001 shares of its common stock and warrants to purchase 3,500,001 shares common stock, at a price of $2.40 per unit. Each unit consists of one share of the Company’s common stock and a warrant to purchase 0.40 shares of common stock. The warrants have a five-year term and an exercise price of $3.00 per share. The transaction raised approximately $21.0 million in gross proceeds. Net proceeds to the Company after deducting commissions and expenses were approximately $19.9 million. The shares and warrants were offered and sold only to institutional and accredited investors. The SEC declared the Company’s Form S-3 effective on February 11, 2008.

 

None

 

 

None

 

 

None

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Middlebrook Pharmaceuticals, Inc.

 

Edward M. Rudnic, Ph.D.

President and Chief Executive Officer

 

Robert C. Low

Vice President, Finance and

Chief Financial Officer

 

Dated: May 14, 2008

Middlebrook Pharmaceuticals (MM) (NASDAQ:MBRK)
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