Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

or

For the transition period from                      to                    

Commission file number: 0-27118

AKESIS PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

(858) 454-4311

(Registrant’s telephone number, including area code)

(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 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 x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Table of Contents

AKESIS PHARMACEUTICALS, INC.

Form 10-Q

Table of Contents

-i-

Table of Contents

PART I. FINANCIAL INFORMATION

Akesis Pharmaceuticals, Inc.

(a Development Stage Company)

Condensed Consolidated Balance Sheets

See accompanying notes.

Table of Contents

Akesis Pharmaceuticals, Inc.

(a Development Stage Company)

Condensed Consolidated Statements of Operations (Unaudited) For the Three Months Ended March 31, 2005

and 2004, and For the Cumulative Period From April 27, 1998 (date of inception of

Akesis Pharmaceuticals, Inc., a Delaware corporation) to March 31, 2005

See accompanying notes.

-2-

Table of Contents

Akesis Pharmaceuticals, Inc.

(a Development Stage Company)

Condensed Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2005

and 2004, and For the Cumulative Period from April 27, 1998 (date of inception of

Akesis Pharmaceuticals, Inc.) to March 31, 2005

See accompanying notes.

-3-

Table of Contents

Akesis Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

Akesis Pharmaceuticals, Inc., a Nevada corporation, (“we” or “us” or the “Company” or “Liberty”) has prepared the unaudited condensed consolidated financial statements in this quarterly report in accordance with the instructions to Form 10-Q adopted under the Securities Exchange Act of 1934. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read with our audited consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary to present a fair statement of our financial position as of March 31, 2005 and December 31, 2004, and the results of operations for the three-month periods ended March 31, 2005 and 2004, have been made. The results of operations for the three-month periods ended March 31, 2005 and 2004 are not necessarily indicative of the results for the fiscal year ending December 31, 2005 or any future periods.

2. The Company and Recapitalization

The Company was initially incorporated under the name Liberty Mint, Ltd. in Nevada on May 26, 1999 as a wholly owned subsidiary of Liberty Mint, Ltd., a Colorado corporation. Liberty Mint, Ltd., a Colorado corporation (“Liberty Colorado”), was originally incorporated in the state of Colorado on March 15, 1990 as St. Joseph Corp. VI. In July 1993, the name of Liberty Colorado was changed to Petrosavers International, Inc.; in September 1996 the name was changed to Hana Acquisitions Inc.; and on June 9, 1997, the name was changed to Liberty Mint, Ltd. In June of 1997, Liberty Colorado acquired a 90% majority interest in Liberty Mint, Inc., (“LMI”) a Utah corporation. Before the acquisition of LMI, Liberty Colorado had not engaged in any material operations. In 1998 Liberty Colorado formed a wholly owned subsidiary, Liberty Mint Marketing, Inc., a Utah corporation, which became SCCS, Inc. (“SCCS”) in 2001. In 1999 Liberty Colorado formed another wholly owned subsidiary, The Great Western Mint, Inc., (“GWM”) a Utah corporation. On September 23, 1999, Liberty Colorado sold its 90% interest in LMI. On October 8, 1999, the Company merged with Liberty Colorado, effecting a change of domicile of Liberty Colorado to the state of Nevada and pursuant to which the Company was the surviving corporation. On December 31, 2001, Liberty sold SCCS and GWM. Effective January 11, 2005, Liberty changed its name to Akesis Pharmaceuticals, Inc. and the trading symbol was changed to AKES.OB.

Effective December 9, 2004, pursuant to the Agreement and Plan of Merger and Reorganization, dated as of September 27, 2004, (the “Merger Agreement”), among the Company, Akesis Pharmaceuticals, Inc., a Delaware Corporation, (“Akesis Delaware”) and Ann Arbor Acquisition Corporation, a wholly-owned subsidiary of the Company (“MergerSub”), MergerSub merged with and into Akesis Delaware, with Akesis Delaware as the surviving corporation and wholly-owned subsidiary of the Company. Immediately prior to the closing of the merger, all of Akesis Delaware’s preferred shares were converted into Akesis Delaware common shares. In connection with the merger, the stockholders of Akesis Delaware received 3.292327 shares of the Company’s common stock for each share of Akesis Delaware common stock that they held (on an as-converted basis). All references in the consolidated financial statements, and notes thereto, to number of shares and per share amounts reflect the exchange ratio.

-4-

Table of Contents

Although the Company acquired Akesis Delaware as a result of the transaction, Akesis Delaware stockholders held approximately 70% of the Company following the transaction. Accordingly, for accounting purposes, the acquisition was a “reverse acquisition” and Akesis Delaware was the “accounting acquiror.” Further, since the Company discontinued its legacy business in 2001, the Company was a non-operating public shell with no continuing operations, and no intangible assets associated with the Company were purchased by Akesis Delaware. Accordingly, the transaction was accounted for as a recapitalization of Akesis Delaware and recorded based on the fair value of the Company’s net tangible assets acquired by Akesis Delaware. No goodwill or other intangible assets were recorded.

Two of the conditions of closing of the Akesis Delaware acquisition were that as of the closing, all of the Company’s debt would be paid or extinguished, and it would have $1.5 million of unrestricted cash on hand. The conversion of all of Akesis Delaware preferred stock into Akesis Delaware common stock resulted in an additional 2,828,501 shares of Akesis Delaware common stock outstanding prior to the merger and the merger resulted in the issuance of 10,499,985 the Company’s common shares to Akesis Delaware’s pre-merger shareholders (on an as-converted basis).

Akesis Delaware was incorporated on April 27, 1998, for the purpose of marketing an established over-the-counter product for lowering blood glucose levels in the treatment of diabetes. The product was initially developed and marketed through Diabetes Pro Health, Inc. which was merged into Akesis Delaware. The product was sold primarily through direct sales to consumers.

Akesis Delaware is considered to be in the development stage as defined in Statement of Financial Accounting Standards No. 7, “Accounting and Reporting by Developing Stage Enterprises” (“SFAS No. 7”) and since inception has devoted substantially all of its efforts to developing its products, raising capital and recruiting personnel.

3. Summary of Significant Accounting Policies

Principles of consolidation

The acquisition of Akesis Delaware by the Company has been accounted for as a reorganization as described in Note 2. Since Akesis Delaware is the surviving entity, the accompanying consolidated financial statements reflect its historical results of operations prior to the acquisition. The accounts of the Company and Akesis Delaware have been consolidated as of December 9, 2004, the effective date of the acquisition.

Use of estimates

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

Business risk and concentrations of credit risk

The Company’s business is in the healthcare industry and it plans to sell products that may not be successful in the marketplace. Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, including money market accounts.

-5-

Table of Contents

Fair value of financial instruments

The carrying amounts of cash and cash equivalents, prepaid assets and accounts payable approximate fair market value because of the short maturity of those instruments.

Cash and cash equivalents

Cash equivalents consist of highly liquid investments with original maturities of three months or less when purchased.

Property and equipment

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets ranging from 3 to 5 years. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in operations in the period realized.

Income taxes

Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effects for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

Stock-based compensation

In December 2004 the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values and does not allow the previously permitted pro forma disclosure as an alternative to financial statement recognition. SFAS No. 123R supersedes APB 25 and related interpretations and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123R is required to be effective beginning in fiscal year 2006. However, the Company has decided to adopt SFAS No. 123R effective with the acquisition of Akesis Delaware by the Company. The adoption of the SFAS No. 123R fair value method resulted in a non-cash stock-based compensation charge of $470,000 on the Company’s reported results of operations for the three months ended March 31, 2005. The fair value is amortized over the vesting period of the option using the multiple option methodology in accordance with the provisions of SFAS No. 123R.

Prior to the adoption of SFAS No. 123R, no stock options had been issued by Akesis Delaware to employees. However, stock options were issued by Akesis Delaware prior to the recapitalization to non-employees and were recorded at their fair value in accordance with SFAS No. 123 and EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” Such stock options to non-employees were periodically re-measured as the stock options vested, and no re-measurement issues having a material impact on the financial statements were identified.

-6-

Table of Contents

Net loss per share

Basic and diluted net loss per share is computed in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share.” Basic loss per share includes no dilution and is computed by dividing net loss by the weighted-average number of shares of common stock outstanding for the period. Diluted loss per share reflects the potential dilution of securities that could share in the Company’s earnings, such as common stock equivalents which may be issued upon exercise of outstanding common stock options. Diluted loss per share is identical to basic loss per share for all periods reported because inclusion of common stock equivalents would be anti-dilutive.

Effect of new accounting standards

In December 2004 the FASB issued SFAS No. 123R, “Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. Statement 123R supersedes APB Opinion No. 125, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an acceptable alternative. In March 2005, the SEC issued Staff Accounting Bulletin 107 (“SAB No. 107”), which provides guidance from the SEC staff regarding the implementation of SFAS No. 123R. SAB 107 provides guidance on a number of issues, including those related to share-based payment transactions with nonemployees, valuation methods, the classification of compensation expense and disclosures in Management’s Discussion and Analysis (“MD&A”) subsequent to the adoption of SFAS No. 123R. The Company elected to early adopt SFAS No. 123R as of December 9, 2004, and its implementation of SFAS No. 123R is consistent with the guidance in SAB No. 107. Stock-based compensation for the three months ended March 31, 2005 was $470,000.

In December 2004 the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets, an Amendment of APB Opinion No. 29, which is effective for non-monetary exchanges occurring in fiscal periods beginning after June 15, 2005. SFAS No. 153 amends APB Opinion No. 29, “Accounting for Non-monetary Transactions” to eliminate exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The Company does not expect SFAS No. 153 to affect the Company’s financial condition or results of operations.

In September 2004, the EITF (Emerging Issues Task Force) reached consensus on EITF Issue 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share”, which provides guidance on when the dilutive effect of contingently convertible debt securities with a market price trigger should be included in diluted earnings per share. The guidance is effective for all periods ending after December 15, 2004. The Company’s adoption of EITF 04-8 did not have an impact on the Company’s loss per share calculation for 2004 and is not expected to have an impact in the future.

In March 2005, the FASB issued Interpretation No. 47 (“FIN 47”), Accounting for Conditional Asset Retirement Obligations. FIN 47 clarifies that an entity must record a liability for a “conditional” asset retirement obligation if the fair value of the obligation can be reasonably estimated. The provision is effective

-7-

Table of Contents

no later than the end of fiscal years ending after December 15, 2005. The Company does not expect FIN 47 to affect the Company’s financial condition or results of operations.

4. Commitments, Contingencies and Related Party Transactions

The Company leases in aggregate approximately 1,000 square feet of office space located in San Diego, California, and Carefree, Arizona pursuant to two leases, each on a month-to-month basis. The Arizona lease is sublet from the Company’s CEO at his cost, and the San Diego office space is sublet from Avalon Ventures. One of the Company’s directors, Kevin Kinsella, is a general partner of Avalon, and the Board of Directors has determined that the rent charged to the Company for both leases is fair and reasonable. The Company recorded rent expense during the three months ended March 31, 2005 and 2004 of $5,650 and zero, respectively.

5. Stock-based Compensation

Immediately following the acquisition of Akesis Delaware by the Company in December 2004, two executive officers became entitled, through their respective employment offer letters, to nonstatutory stock options with a term of 10 years to acquire a total of 1,062,499 shares of common stock at an exercise price of $1.50 per share. Twenty percent of the shares of common stock subject to the options vested as of the effective date of the officers’ employment immediately following the acquisition of Akesis Delaware by the Company and one-forty eighth (1/48th) of the remaining shares subject to the options will vest each month following the effective date of the officers’ employment, subject to the officers’ continued employment with the Company on any such date. In addition, in the event of a change of control of the Company, then the officers shall fully vest in and have the right to exercise the options as to all of the shares of common stock subject to the options as to which the officers would not otherwise be vested or exercisable.

2005 Stock Plan

The Board of Directors of the Company authorized and reserved 1,500,000 shares of the Company’s common stock pursuant to a 2005 Stock Plan in January 2005 for option grants to the Company’s employees, directors and consultants. As of March 21, 2005, no options have been granted pursuant to such 2005 Stock Plan.

6. Income Taxes

At December 31, 2004, Akesis Delaware had no federal income tax expense or benefit but did have federal tax net operating loss carryforwards of approximately $2.2 million. The federal net operating loss carryforwards will begin to expire in 2018, unless previously utilized. Pursuant to Internal Revenue Code Section 382 and 383, use of Akesis Delaware’s net operating loss carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within a three-year period. No assessment has been made as to whether such a change in ownership has occurred. The Company incurred $3,200 of statutory minimum state tax expense for the three months ended March 31, 2005.

The Company (as the successor of Liberty Colorado, Hana Acquisitions, Inc., Petrosavers International, Inc., and St. Joseph Corp. VI) has not filed any tax returns. Akesis Delaware has filed all required tax returns. Based on a review of the Form 10-K’s filed via EDGAR by the Company with the Securities and Exchange Commission, the Company has generated substantial losses in each of the years indicated in such Form 10-K’s. Accordingly, the Company does not believe that the failure to file tax returns represents a material liability. Since the Company has not filed tax returns, it is not possible to determine the amount of net operating loss carryforwards that may be available. However, since the acquisition of Akesis Delaware resulted in a change of the Company’s ownership of more than 50%, use of the Company’s net operating loss carryforwards is limited pursuant to Internal Revenue Code Section 382 and 383.

-8-

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements that are based upon current expectations within the meaning of the Private Securities Reform Act of 1995. It is our intent that such statements be protected by the safe harbor created thereby and we disclaim any duty or obligation to update. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Forward-looking statements include information concerning possible or assumed future results of our operations. Also, when we use words such as “believes,” “expects,” “anticipates” or similar expressions, we are making forward-looking statements. Examples of such forward-looking statements include, but are not limited to, statements about: