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Filing
[ADVENTRX LETTERHEAD]
Mark Bagnall, CPA
Executive Vice President and CFO
Executive Vice President and CFO
SENT VIA FACSIMILE: 202-772-9217
AND VIA EDGAR
AND VIA EDGAR
November 12, 2008
United States Securities and Exchange Commission
Division of Corporate Finance
100 F Street, N.E.
Mail Stop 6010
Washington, D.C. 20549
Division of Corporate Finance
100 F Street, N.E.
Mail Stop 6010
Washington, D.C. 20549
Attention:
|
James Rosenberg, Senior Assistant Chief Accountant | |
Mary Mast, Senior Staff Accountant | ||
Vanessa Robertson, Staff Accountant |
Re:
|
ADVENTRX Pharmaceuticals, Inc. | |
File Number: 001-32157 | ||
Form 10-K for the Fiscal Year Ended December 31, 2007 | ||
Filed March 17, 2008 |
Dear Mr. Rosenberg, Ms. Mast and Ms. Robertson:
Thank you for your comment letter of November 3, 2008 on our Annual Report on Form 10-K (the Form
10-K) for the year ended December 31, 2007 (the Comment Letter). We submit to you the following
information in response to the Comment Letter. For your convenience, we have repeated each comment
and set forth our response immediately after each comment.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations,
page 43
Contractual Obligations, page 50
1. | We note your reference to potential milestone payments to a consultant based on the regulatory success of CoFactor. Please provide us with a description of the material terms of the agreement, including the identity of the consultant, a description of the services provided by the consultant, payment arrangements including potential milestone payments and royalties, expiration and termination provisions, amounts paid to date, and any other material terms. Additionally provide us with an analysis supporting your determination not to describe the agreement in your 10-K and file it as an exhibit. |
Response:
The potential milestone payments to a consultant based on the regulatory success of CoFactor and
our ability to partner CoFactor relate to a Consulting Agreement, effective as of January 1, 2005
(the Agreement), by and among Bengt G. Gustavsson, M.D., Ph.D., Biofol AB (Biofol), and
ADVENTRX Pharmaceuticals, Inc. (the Company ). During the term of the Agreement, Dr. Gustavsson
controlled Biofol and provided his consulting services to the Company through Biofol. The
Agreement expired pursuant to its terms on January 1, 2008.
Pursuant to the Agreement, Biofol agreed to provide Dr. Gustavssons services to the Company in
connection with the research, development and commercialization of CoFactor. The Company had no
obligation to utilize Dr. Gustavssons services or to guarantee any minimum quantity of work;
however, the Company had an obligation to pay a minimum cash fee of $5,000 per month during the
term of the Agreement for Dr. Gustavssons services, and over the term of the Agreement, the
Company paid a total of $145,000 to Biofol, as consulting services commenced
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in August 2005. As additional compensation pursuant to the Agreement, in July 2005, the Company
issued to Biofol 100,000 shares of its common stock and an option to purchase up to an additional
100,000 shares of its common stock at an exercise price of $2.50 per share, which became
exercisable in three equal annual installments on January 1, 2006, 2007 and 2008. (To date, this
option has not been exercised.) At July 31, 2005, the number of outstanding shares of the Companys
common stock was 66,028,312 and 200,000 shares was less than one-half percent of the Companys
outstanding shares. In July 2005, neither Biofol nor Dr. Gustavsson beneficially owned any other
shares of the Companys common stock or securities convertible into or exercisable for the
Companys common stock.
Pursuant to the Agreement, the Company is obligated to make additional payments to Biofol or Dr.
Gustavsson (payable in cash and stock) upon the occurrence of certain regulatory and partnering
milestones related to the commercialization of CoFactor. These milestone payment obligations
survive expiration of the Agreement. The milestone events consist of (1) the Company entering into
a partnership agreement that provides for the sublicensing and commercialization of CoFactor with a
marketing partner; (2) the Companys submission of a New Drug Application (a NDA) to the U.S.
Food and Drug Administration (FDA) seeking approval to market CoFactor in the United States; (3)
the Companys submission of a NDA or its equivalent to the European Medicines Agency (EMEA), or
equivalent agency in Sweden, seeking approval to market CoFactor in Europe or Sweden; (4) the
Companys obtaining approval from the FDA to market CoFactor in the United States; and (5) the
Companys obtaining approval from the EMEA to market CoFactor in Europe. The payments related to
each of the above-listed milestones consist of (i) $125,000 cash and $125,000 worth of shares of
the Companys common stock, calculated based on a 10-day trailing average of the closing price of
the common stock; (ii) $125,000 cash; (iii) $125,000 cash; (iv) $125,000 worth of shares of the
Companys common stock, calculated based on the greater of (A) a 10-day trailing average of the
closing price of the common stock and (B) $3.00 per share; (v) $125,000 worth of shares of the
Companys common stock, calculated based on the greater of (A) a 10-day trailing average of the
closing price of the common stock and (B) $3.00 per share.
At the time the Company entered into the Agreement, CoFactor was in Phase 2 clinical trials and,
assuming success in additional clinical trials and manufacturing activities, the Company
anticipated it was approximately five years from submitting an NDA or its equivalent to the FDA or
EMEA, which are the first regulatory milestones under the Agreement. In addition, while the
Company had held preliminary discussions with potential commercialization and marketing partners,
it had not entered into any agreements with partners or potential partners and had no immediate
serious prospects for such a partnering arrangement for CoFactor.
In October 2007, the Company announced results from its Phase 2b clinical trial of CoFactor for the
treatment of metastatic colorectal cancer. CoFactor did not demonstrate statistically significant
improved safety in the trials primary endpoint. In addition, no statistically significant
differences between the arms were observed across overall safety and efficacy variables. In
November 2007, the Company announced that it would discontinue enrolling patients in its Phase 3
clinical trial of CoFactor for the treatment of metastatic colorectal cancer. The Company
determined that these developments combined with its decision to focus its capital and other
resources on other of its product candidates instead of CoFactor, significantly decreased the
likelihood of triggering any of the milestone payments under the Agreement in the near term.
In determining that the Agreement was not required to be described in the Companys Annual Report
on Form 10-K for the year ended December 31, 2007, the Company took into account that (1) the
Agreement was entered into in the ordinary course of its business based on the fact that the
Company regularly engaged consultants to provide services in connection with the development of its
product candidates, (2) the Agreement is not material to the Company, and (3) the Agreement does
not fall into any of the specific categories of contracts required to be filed under Item
601(b)(ii) or (iii) of Regulation S-K. The Company determined that the Agreement was not material
to it because (a) it expired on January 1, 2008 and (b) the likelihood of triggering any of the
milestone payments in the near term was slim. Because the milestone payments survive the
expiration of the Agreement, the Company will continue to periodically assess whether the Agreement
is material to it in order to determine its obligations to describe the Agreement in its reports
filed with the Securities and Exchange Commission and file it as an exhibit to such reports.
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(2) Summary of Significant Accounting Policies
Change in Accounting Principle for Registration Payment Arrangement, page F-11
2. | Paragraph 22 of FSP EITF 00-19-2 states that retrospective application is not permitted. Therefore, please explain to us why the financial statements for the years ended December 31, 2006 and 2005 were adjusted retrospectively. In addition, please explain to us why you reversed the loss on the fair value of warrants for 2006 and 2005. Include any reference to the specific authoritative literature that supports this treatment. |
Response:
Effective January 1, 2007, we adopted the provisions of FASB Staff Position on No. EITF 00-19-2,
Accounting for Registration Payment Arrangements (FSP EITF 00-19-2), to account for the
Registration Payment Arrangement. FSP EITF 00-19-2 provides that the contingent obligation to make
future payments or otherwise transfer consideration under a registration payment arrangement should
be separately recognized and measured in accordance with Statement of Financial Accounting
Standards (FAS) No. 5, Accounting for Contingencies, which provides that loss contingencies
should be recognized as liabilities if they are probable and reasonably estimable.
As reported in our Form 10-K for the year ended December 31, 2007, management determined that it
was not probable that we would have any payment obligation under the Registration Payment
Arrangement as of January 1, 2007 and December 31, 2007; therefore, no accrual for the contingent
obligation was required under the provisions of FSP EITF 00-19-2.
Pursuant to paragraphs 17-19 of FSP EITF 00-19-2, the difference of $12,239,688 between the
carrying amount of the July 2005 Registration Payment Arrangement warranty liability as of December
31, 2006 of $30,356,439 and the amount reclassified to equity upon the adoption of this FSP at
January 1, 2007 of $18,116,751 was recognized as a cumulative-effect adjustment. Following Example
7 from the Appendix of FSP EITF 00-19-2, the Company recorded the following journal entry for the
fair value of the July 2005 Registration Payment Arrangement as of the adoption date:
Dr. Warrant Liability |
$ | 30,356,439 | ||||||
Cr. Retained Earnings |
$ | 12,239,688 | ||||||
Cr. Additional Paid in Capital |
$ | 18,116,751 |
The Company also adjusted the comparative financial statements of prior periods to apply the new
method retrospectively. This resulted in the warranty liability being removed from the balance
sheet and the loss on the fair value of the warrants being removed from the income statements for
2006 and 2005. The adjustments were done based on the Companys interpretation of paragraph 21 of
FSP EITF 00-19-2 and paragraphs 17-18 of Financial Accounting Standard No. 154 Accounting Changes
and Error Corrections (FAS 154).
Upon current review of paragraph 22 of FSP EITF 00-19-2, it appears that retrospective application
was not appropriate. The Company will update its disclosure in the earlier of: 1) any SEC filing
related to a debt or equity offering or 2) our Annual Report on Form 10-K for the year ended
December 31, 2008, and will remove the retrospective adjustments from any prior years presented.
Reference to Accounting Literature:
FSP EITF 00-19-2, Paragraphs 17, 18 and 21:
17. For registration payment arrangements and financial instruments subject to those
arrangements that were entered into prior to the issuance of this FSP and that continue to
be outstanding at the beginning of the period of adoption, transition shall be achieved by
reporting a change in accounting principle through a cumulative-effect adjustment to the
opening balance of retained earnings, or other appropriate components of equity or net
assets in the statement of financial position, as of the first interim period for
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the fiscal year in which this FSP is initially applied. However, an entity shall not apply
the guidance in this FSP to registration payment arrangements that are no longer outstanding
upon adoption of this FSP.
18. For purposes of measuring the component of the cumulative-effect adjustment relating to
the recognition of a contingent liability under Statement 5, an entity shall evaluate
whether the transfer of consideration under a registration payment arrangement is probable
and can be reasonably estimated as of the adoption date of this FSP. If prior to adoption of
this FSP a registration payment arrangement was separately recognized at its fair value, the
cumulative-effect adjustment shall be the difference between (a) the carrying amount of the
registration payment arrangement immediately prior to adoption of this FSP and (b) the
measurement of the contingent liability, if any, that must be recognized under Statement 5
upon adoption. The carrying amounts of other instruments that were originally issued
together with a registration payment arrangement that was separately recognized and measured
at fair value prior to adoption of this FSP shall not be adjusted upon adoption.
21. An entity shall separately disclose (a) the portion of the cumulative-effect adjustment
resulting from the recognition and measurement of a contingent liability under Statement 5
and (b) the portion of the cumulative-effect adjustment resulting from the reclassification
of a financial instrument subject to the registration payment to equity (or the
recombination of an embedded derivative). Examples of the transition provisions of this FSP
are provided in Appendix A.
FAS 154, Paragraphs 17 and 18:
17. An entity shall disclose the following in the fiscal period in which a change in
accounting principle is made:
a. | The nature of and reason for the change in accounting principle, including an explanation of why the newly adopted accounting principle is preferable. | |
b. | The method of applying the change, and: |
(1) A description of the prior-period information that has been retrospectively
adjusted, if any.
(2) The effect of the change on income from continuing operations, net income
(or other appropriate captions of changes in the applicable net assets or
performance indicator), any other affected financial statement line item, and any
affected per-share amounts for the current period and any prior periods
retrospectively adjusted. Presentation of the effect on financial statement
subtotals and totals other than income from continuing operations and net income (or
other appropriate captions of changes in the applicable net assets or performance
indicator) is not required.
(3) The cumulative effect of the change on retained earnings or other components
of equity or net assets in the statement of financial position as of the beginning
of the earliest period presented.
(4) If retrospective application to all prior periods (paragraph 7) is
impracticable, disclosure of the reasons therefore, and a description of the
alternative method used to report the change (paragraphs 8 and 9).
c. If indirect effects of a change in accounting principle are recognized: |
(1) A description of the indirect effects of a change in accounting principle,
including the amounts that have been recognized in the current period, and the
related per-share amounts, if applicable.
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(2) Unless impracticable, the amount of the total recognized indirect effects of
the accounting change and the related per-share amounts, if applicable, that are
attributable to each prior period presented.
Financial statements of subsequent periods need not repeat the disclosures required by this
paragraph. If a change in accounting principle has no material effect in the period of
change but is reasonably certain to have a material effect in later periods, the disclosures
required by paragraph 17(a) shall be provided whenever the financial statements of the
period of change are presented.
18. In the fiscal year in which a new accounting principle is adopted, financial
information reported for interim periods after the date of adoption shall disclose the
effect of the change on income from continuing operations, net income (or other appropriate
captions of changes in the applicable net assets or performance indicator), and related
per-share amounts, if applicable, for those post-change interim periods.
Additionally, as requested in the Comment Letter, the Company acknowledges:
| the Company is responsible for the adequacy and accuracy of the disclosure in the filing; | ||
| staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and | ||
| the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
If you have any further questions or wish to discuss the responses we have provided above, please
call me at 858-552-0866 at your convenience.
Sincerely, |
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/s/ Mark N.K. Bagnall | ||||
Mark N.K. Bagnall | ||||
Executive Vice President and Chief Financial Officer |
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cc: | Patrick Keran, Vice President, Legal and General Counsel |
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