Form 8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of report (Date of earliest event reported) April 20, 2007

Arrowhead Research Corporation

(Exact Name of Registrant as Specified in Charter)

Delaware

(State or Other Jurisdiction of Incorporation)

 

0-21898   46-0408024
(Commission File Number)   (IRS Employer Identification No.)

 

201 South Lake Avenue, Suite 703, Pasadena, CA   91101
(Address of Principal Executive Offices)   (Zip Code)

(626) 304-3400

(Registrant’s Telephone Number, Including Area Code)

 


(Former Name or Former Address, If Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 



Item 9.01 Financial Statements and Exhibits.

On April 25, 2007, Arrowhead Research Corporation (“Arrowhead”) filed a Form 8-K describing the acquisition of Carbon Nanotechnologies, Inc., a Delaware corporation (“CNI”) by Unidym, Inc., a Delaware corporation and majority-owned subsidiary of Arrowhead (“Unidym”) which was completed on April 20, 2007. Arrowhead hereby amends such Form 8-K to provide certain financial statements required by Item 9.01 of Form 8-K with respect to CNI and pro forma condensed combined financial information with respect to Unidym’s acquisition of CNI.

 

(a) Financial Statements of the Business Acquired.

The audited financial statements for CNI as of December 31, 2006, together with a report of independent registered public accounting firm are hereby filed as part of this Report on Form 8-K/A and are included in Exhibit 99.1.

 

(b) Pro Forma Financial Information.

a) Unaudited pro forma condensed combined balance sheet as of March 31, 2007.

b) Unaudited pro forma condensed combined statements of operations for the years ended September 30, 2006 and December 31, 2006.

c) Unaudited pro forma condensed combined statements of operations for the first quarters ended December 31, 2006 and March 31, 2007.

d) Notes to unaudited pro forma condensed combined financial statements.

 

(d) Exhibits.

 

Exhibit Number   

Description

23.1    Consent of Independent Registered Public Accounting Firm
99.1    Independent Registered Public Accounting Firm’s Report and Carbon Nanotechnologies, Inc. Audited Financial Statements
99.2    Unaudited Pro Forma Condensed Combined Financial Statements of Arrowhead Research Corporation


SIGNATURES

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 hereunto duly authorized.

 

    ARROWHEAD RESEARCH CORPORATION
June 28, 2007     By:   /s/ Joseph T. Kingsley
    Name:   Joseph T. Kingsley
    Title:   President & Chief Financial Officer
Consent

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use of our report dated June 26, 2007, with respect to the financial statements of Carbon Nanotechnologies, Inc. included in the Current Report on Form 8-K/A of Arrowhead Research Corporation.

/s/ Rose, Snyder & Jacobs

Rose, Snyder & Jacobs

A Corporation of Certified Public Accountants

Encino, California

June 27, 2007

Audited Financial Statements

EXHIBIT 99.1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

Carbon Nanotechnologies, Inc.

We have audited the accompanying balance sheet of Carbon Nanotechnologies, Inc. (the “Company”) as of December 31, 2006, and the related statement of operations, shareholders’ deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with standards established by Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2006, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 2 to the financial statements, the Company has suffered recurring losses, and negative cash flows from operations that raise substantial doubt about its going concern. Management’s plans in regard to these matters are also described in note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Rose Snyder & Jacobs
Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants
Encino, California

June 26, 2007


Carbon Nanotechnologies Incorporated

Balance Sheet

As of December 31, 2006

 

ASSETS   

CURRENT ASSETS

  

Cash and cash equivalents

   $ 718,049  

Accounts receivable, net of allowance for doubtful account of $13,514

     282,866  

Grants receivable

     253,898  

Other prepaid expenses

     49,539  
        

TOTAL CURRENT ASSETS

     1,304,352  

PROPERTY AND EQUIPMENT

  

Computers, office equipment and furniture

     251,453  

Plant, machinery and research equipment

     4,935,749  

Leasehold improvements

     164,970  
        
     5,352,172  

Less: Accumulated depreciation and amortization

     (5,272,673 )
        

NET PROPERTY AND EQUIPMENT

     79,499  

INTANGIBLE AND OTHER ASSETS

  

License Agreements

     3,294,211  
        

TOTAL OTHER ASSETS

     3,294,211  

TOTAL ASSETS

   $ 4,678,062  
        
LIABILITIES AND STOCKHOLDERS’ DEFICIT   

CURRENT LIABILITIES

  

Accounts payable

   $ 227,340  

Accrued expenses

     470,929  

Accounts payable to affiliates

     133,300  

Revolving line of credit

     5,136,713  
        

TOTAL CURRENT LIABILITIES

     5,968,282  
        

Commitment and contingencies, note 10

  

STOCKHOLDERS’ DEFICIT

  

Common stock, $.001 par value-authorized, 40,000,000 shares; issued and outstanding, 12,256,053

     12,256  

Preferred stock-authorized, 5,000,000 shares

     —    

Series A preferred stock, $.001 par value-issued and outstanding

     420  

Series B preferred stock, $.001 par value-issued and outstanding

     100  

Series C preferred stock, $.001 par value-issued and outstanding

     517  

Series D preferred stock, $.001 par value-issued and outstanding

     237  

Additional paid-in capital

     38,765,406  

Accumulated deficit during the development stage

     (40,069,156 )
        

TOTAL STOCKHOLDERS’ DEFICIT

     (1,290,220 )

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

   $ 4,678,062  
        

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


Carbon Nanotechnologies Incorporated

Statement of Operations

For the Year Ended December 31, 2006

 

REVENUE

   $ 3,108,500  

COST OF SALES

     2,023,780  
        

GROSS PROFIT

     1,084,720  
        

OPERATING EXPENSES

  

Salaries

     2,180,472  

Consulting

     —    

General and administrative expenses

     1,427,080  

Research and development

     368,603  

Depreciation and amortization

     317,336  
        

TOTAL OPERATING EXPENSES

     4,293,491  
        

OPERATING LOSS

     (3,208,771 )

OTHER INCOME (EXPENSES)

  

Gain on sale of assets

     20,000  

Interest income

     12,304  

Interest expense

     (240,677 )

Other income (expense)

     (15,619 )
        

TOTAL OTHER INCOME (EXPENSES)

     (223,992 )
        

NET LOSS

   $ (3,432,763 )
        

Net loss per share, basic and diluted

   $ (0.28 )

Weighted average shares outstanding, basic and diluted

     12,256,253  

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


Carbon Nanotechnologies Incorporated

Statement of Stockholders’ Deficit

For the Year Ended December 31, 2006

 

     Common Stock    Preferred Stock   

Additional Paid-

in-Capital

  

Accumulated Deficit
during the
Development Stage

   

Totals

 
     Shares    Amount    Shares    Amount        

Balance at December 31, 2005

   12,256,053    $ 12,256    1,273,263    $ 1,274    $ 38,629,644    $ (36,636,393 )   $ 2,006,781  

Stock based compensation

   —        —      —        —        135,762      —         135,762  

Net loss

   —        —      —        —        —        (3,432,763 )     (3,432,763 )
                                               

Balance at December 31, 2006

   12,256,053    $ 12,256    1,273,263    $ 1,274    $ 38,765,406    $ (40,069,156 )   $ (1,290,220 )
                                               

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


Carbon Nanotechnologies Incorporated

Statement of Cash Flows

For the Year Ended December 31, 2006

 

CASH FLOWS FROM OPERATING ACTIVITIES:

  

Net loss

   $ (3,432,763 )

Adjustment to reconcile net loss to net cash used in operating activities:

  

Depreciation and amortization

     317,336  

Stock based compensation-employee stock options

     135,762  

Changes in operating assets and liabilities:

  

Accounts receivable

     (379,703 )

Prepaid expenses

     (20,011 )

Accounts payable and accrued liabilities

     195,723  

Accounts payable to affiliate-Rice University

     124,323  
        

NET CASH USED IN OPERATING ACTIVITIES

     (3,059,333 )

CASH FLOWS FROM INVESTING ACTIVITIES:

  

Equipment purchases

     (69,311 )
        

NET CASH USED IN INVESTING ACTIVITIES

     (69,311 )

CASH FLOWS FROM FINANCING ACTIVITIES:

  

Borrowing under revolving credit agreement

     3,611,713  
        

NET CASH PROVIDED BY FINANCING ACTIVITIES

     3,611,713  
        

NET INCREASE IN CASH

     483,069  

CASH AT BEGINNING OF PERIOD

     234,980  
        

CASH AT END OF PERIOD

   $ 718,049  
        

SUPPLEMENTAL DISCLOSURES

  

Cash interest paid during 2006

   $ 210,419  

Cash taxes paid during 2006

   $ 7,200  

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


CARBON NANOTECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

AS OF AND FOR THE YEAR ENDED

DECEMBER 31, 2006

1. ORGANIZATION

Carbon Nanotechnologies, Inc. (“CNI”), a Delaware corporation, was the surviving entity in a merger with Carbon Nanotechnologies, Inc., a Texas corporation. The operations of the combined companies have been reported in the accompanying financial statements as a reorganization of entities under common control.

CNI’s purpose is to develop, produce, and market fullerene nanotubes (“buckytubes”) and related technology developed by the Company’s founder, the late Dr. Richard E. Smalley. The number of issued and outstanding shares of common stock reflected in these financial statements reflect CNI’s 10-for-1 stock split on April 6, 2001.

CNI is currently the leading producer of buckytubes. Buckytubes possess exceptionally high material properties, such as electrical and thermal conductivity, strength, and stiffness, which CNI believes will have applications in materials, electronics, chemical processing, and energy management.

2. GOING CONCERN

The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company’s losses and negative cash flows from operations raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. The Company has funded its operations through the proceeds from a revolving credit agreement guaranteed by certain investors of the Company. As discussed in note 13, the Company entered into a merger agreement with Unidym, Inc. on March 21, 2007. Management believes this agreement will provide the Company with the additional resources it needs to continue as a going concern.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Management Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.

Cash Equivalents—The Company considers highly liquid investment securities purchased with an original maturity of three months or less to be cash equivalents.

Property, Plant and Equipment—The Company’s property, plant and equipment consist primarily of its pilot plants, and computer and office equipment that are recorded at cost. Depreciation is provided over the estimated useful life of three years for such assets using the straight-line method.


Income Taxes—The Company accounts for income taxes under the liability method, which requires, among other things, recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Under this method, deferred income tax liabilities and assets are determined based on the temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and the recognition of available tax carryforwards.

Revenue Recognition—Revenue from product sales is recognized when the related goods are shipped and all significant obligations of the Company have been satisfied.

Cost of Sales—The Company includes direct materials and direct plant production cost in cost of sales.

Earnings (Loss) per Share—Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of stock options issued to employees and consultants and warrants of the Company.

Intangible Assets—Intangible assets consist of license agreements being amortized on a straight-line basis over 20 and 11 years. Each applicable license agreement terminates upon the expiration of the last expiring patent covering any of the technology licensed thereunder. The Company has adopted a policy of expensing all patent-related costs up to the point of commercial viability of a given patent. At that time, all subsequent costs will be capitalized and amortized over the patent’s then remaining life. Intangible assets subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable.

Credit Risk—The Company extends credit to its customers in the normal course of business and generally does not require collateral or other security. The Company performs ongoing credit evaluations of its customers’ financial condition and historically has not incurred significant credit losses.

Long-Lived Assets—The Company periodically evaluates the recoverability of its long-lived assets and recognizes an impairment if the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. The Company assesses for long-lived asset impairment when events or circumstances indicate that the carrying value of an asset may not be recoverable.

Recent Accounting Pronouncements—In December 2004, the FASB issued SFAS No, 123(R), Share-Based Payment, replacing SFAS No. 123 and superseding APB Opinion No, 25. SFAS No. 123(R) requires non-public companies to recognize compensation expense for the cost of awards of equity instruments. This compensation cost will be measured as the fair value of the award on the grant date estimated using an option-pricing model or based on a value calculated using the historical volatility of an appropriate industry sector index instead of the expected volatility of its share price should the expected volatility of its share price not be determinable. The Company adopted SFAS No. 123(R) effective January 1, 2006.

4. ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company accrues an allowance for doubtful accounts based on estimates of uncollectible revenues by analyzing historical collections, accounts receivable aging and other factors. Accounts receivable are written off when all collection attempts have failed. Allowance for doubtful accounts recorded during 2006 was $13,514.


5. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment at December 31, 2006, is comprised the following:

 

Plant and machinery

   $ 4,935,749  

Computer and office equipment

     251,453  

Leasehold improvements

     164,969  
        

Total

     5,352,171  

Less accumulated depreciation and amortization

     (5,272,673 )
        

Net property, plant, and equipment

   $ 79,498  
        

Property, plant and equipment related depreciation and amortization expense recorded during 2006 was $84,513.

The Company periodically evaluates property, plant and equipment for impairments when events or circumstances indicate that the carrying value of these assets may not be recoverable. The evaluation is highly dependent on the underlying assumptions of related cash flows. The Company recorded no property, plant and equipment impairments during 2006.

6. INTANGIBLE ASSETS

Intangible assets at December 31, 2006, comprised the following:

 

License agreements

   $ 4,627,796  

Less: accumulated amortization and impairment

     (1,333,585 )
        

Net intangible assets

   $ 3,294,211  
        

Intangible assets related amortization expense recorded during 2006 was $232,822. Intangible assets are being amortized on a straight-line basis. Without any change in the gross intangible assets will continue to be amortized at a rate of $232,822 per year through 2011, at a minimum.

7. REVOLVING CREDIT AGREEMENT

On August 5, 2005, the Company entered into a Revolving Credit Agreement (the “Agreement”) with a bank for $5,000,000. Amounts drawn are due and payable at maturity on August 5, 2008. Interest is payable monthly based on LIBOR plus 1.25%. The Agreement is collateralized by substantially all assets of the Company and guaranteed by certain investors of the Company. The Company is subject to certain restrictions including the ability to declare or make dividends or other distributions as defined in the Agreement. On August 24, 2006, the Agreement was amended to increase the maximum on the Agreement to $7,500,000. As of December 31, 2006, $5,136,713 was outstanding under the Agreement.


8. SHAREHOLDERS’ EQUITY

All classes of the Company’s equity instruments are subject to a shareholders’ agreement, which generally prohibits the shareholders’ from selling, transferring, or assigning their respective equity instruments without the consent of the Company. Pursuant to the shareholders’ agreement, the Company and shareholders maintain a right of first refusal with respect to a shareholder’s decision to dispose of any securities held.

Common Stock—The Company has 40,000,000, $0.001 par value, shares of common stock authorized and 12,256,053 shares issued and outstanding at December 31, 2006. In addition, 16,663,430 shares of common stock have been reserved for issuance upon conversion of preferred stock and stock options granted under the Company’s long-term incentive plan (the “Plan”). Holders of the Company’s common stock are entitled to one vote per share on all matters to be voted on by shareholders and are entitled to receive dividends, if any, as may be declared from time to time by the Board of Directors of the Company. Upon any liquidation or dissolution of the Company, the holders of common stock are entitled, subject to any preferential rights of the holders of preferred stock, to receive a pro rata share of all of the assets remaining available for distribution to shareholders after payment of all liabilities.

Preferred Stock—-The Company has authorized 5,000,000 shares, $0.001 par value, of preferred stock, which may be divided into such series as determined by the Board of Directors.

Series A Convertible Preferred Stock—On April 5, 2000, 420,000 shares of Series A convertible preferred stock (“Series A”) were purchased by founders and directors at $ 1 per share (stated at unconverted, nonsplit-adjusted basis). Each share of Series A is convertible, at the option of the holder, at any time. and without payment of additional consideration into shares of the Company’s common stock at a conversion price of $0.10 per share, subject to antidilution adjustments; and shall immediately convert into common stock upon the earlier of (1) a firm, committed underwriting, as defined in the stock purchase agreement, or (2) the consent of the holders of at least 80% of the then outstanding Series A shares. On or after the fifth anniversary of the issuance date, the Company may redeem, at its option, the Series A shares at a redemption price of $1 per share. Upon any liquidation of the Company, the Company must pay the holders of the Series A $1 per share (aggregate of $420,000) before any amounts may be paid to the holders of common stock. No dividends accrue on the Series A. The holders of the Series A are entitled to 10 votes per share on all matters upon which the holders of common stock have the right to vote and are generally entitled to vote as a class on any matters adversely affecting their rights as holders of this series of preferred stock.

Series B Convertible Preferred Stock—In October 2000, 100,000 shares of Series B convertible preferred stock (“Series B”) were purchased by a founder at $10 per share (stated at unconverted, nonsplit-adjusted basis). Each share of Series B is convertible, at the option of the holder, at any time, and without payment of additional consideration into shares of the Company’s common stock at a conversion price of $ 1 per share, subject to antidilution adjustments; and shall immediately convert into common stock upon the earlier of (1) a firm, committed underwriting, as defined in the stock purchase agreement, or (2) the consent of the holders of at least 50% of the then outstanding Series B shares. On or after the fifth anniversary of the issuance date, the Company may redeem, at its option, the Series B shares at a redemption price of $10 per share. Upon any liquidation of the Company, the Company must pay the holders of the Series B $10 per share (aggregate of $1,000,000) before any amounts may be paid to the holders of common stock. No dividends accrue on the Series B. The holders of the Series B are entitled to ten votes per share on all matters upon which the holders of common stock have the right to vote and are generally entitled to vote as a class on any matters adversely affecting their rights as holders of this series of preferred stock.


Series C Convertible Preferred Stock—On April 6, 2001, the Company issued 258,354 shares of Series C convertible preferred stock (“Series C”) to the OC & WM Limited Partnership, L.P. (the “Limited Partnership’) pursuant to the terms of the Series C Preferred Stock Purchase Agreement (the “Agreement. The Limited Partnership purchased these shares at $29.03 per share (stated at unconverted, nonsplit basis). Under the Agreement the Limited Partnership was obligated to purchase, and the Company was obligated to issue, an additional 258,353 shares of Series C. The value of this obligation, as of December 31, 2001, was $7,449,988 which was received in February 2002. Each share of Series C is convertible, at the option of the holder, at any time, and without payment of additional consideration into shares of the Company’s common stock at a conversion price of $2.90 per share, subject to antidilution adjustments; and shall immediately convert into common stock upon the earlier of (1) a firm, committed underwriting, as defined in the Agreement or (2) the consent of the holders of at least 80% of the then outstanding Series C shares. On or after the fifth anniversary of the issuance date, the Company may redeem, at its option, the Series C shares at a redemption price of $29.03 per share. Upon any liquidation of the Company, the Company must pay the holders of the Series C $29.03 per share (aggregate of $15,000,000) before any amounts may be paid to the holders of common stock. No dividends accrue on the Series C. The holders of the Series C are entitled to ten votes per share on all matters upon which the holders of common stock have the right to vote and are generally entitled to vote as a class on any matters adversely affecting their rights as holders of this series of preferred stock.

Series D Convertible Preferred Stock—The Company issued 118,278 shares of Series D convertible preferred stock (“Series D”) to the Limited Partnership pursuant to the terms of the Series D Preferred Stock Purchase Agreement dated June 28, 2002, as amended in June 2003 (the “Purchase Agreement”). The Limited Partnership purchased these shares at $63.41 per share (stated at unconverted, nonsplit adjusted basis). Under the Purchase Agreement the Limited Partnership was obligated to purchase subject to the fulfillment of certain conditions, and the Company was obligated to issue, an additional 118,278 shares of Series D; the value of this obligation as of December 31, 2002, was $7,500,008. In 2003, the Company received $7,500,008 in satisfaction of the stock subscription receivable.

Each share of Series D is convertible, at the option of the holder at any time, without payment of additional consideration into shares of the Company’s common stock at a conversion price of $6.341 per share, subject to antidilution adjustments; and shall immediately convert into common stock upon the earlier of (1) a firm, committed underwriting, as defined in the Purchase Agreement or (2) the consent of the holders of at least 80% of the then outstanding Series D shares. On or after the fifth anniversary of the issuance date, the Company may redeem, at its option, the Series D shares at a redemption price of $6.341 per share. Upon liquidation of the Company, the Company must pay the holders of the Series D $6.341 per share (aggregate of $15,000,000), plus any declared but unpaid dividends if any, to such date before any amounts may be paid to the holders of common stock The holders of the Series D are entitled to ten votes per share on all matters upon which the holders of common stock have the right to vote and are generally entitled to vote as a class on any matters adversely affecting their rights as holders of this series of preferred stock

The Series A, Series B, Series C, and Series D rank pari passu with respect to liquidation preference rights.

Outstanding Warrants— The Company issued 900,000 warrants to purchase shares of common stock to the guarantors of the Company debt. The warrants have an exercise price of $0.01 per common share. The first 450,000 warrants become exercisable upon the termination of the revolving credit agreement or upon an acceleration of event for the revolving line of credit. The remaining 450,000 warrants are exercisable at any time after the guarantors shall make a guaranty payment to the bank. At December 31, 2006, a total of 900,000 shares of common stock were reserved for these warrants.


On December 17, 2004, the Company issued a warrant to purchase 200,000 shares of common stock at an exercise price of $8.69. There was no value assigned to this warrant. The warrant becomes exercisable at the earlier of December 17, 2009, or upon a liquidity event including a merger, sale of all or substantially all assets of the Company, initial public offering, liquidation, or dissolution of the Company. At December 31, 2006, 200,000 shares of common stock were reserved for that purpose.

9. STOCK-BASED COMPENSATION PLAN

The Company has reserved for issuance 4,000,000 shares of common stock available for grants under the Plan. The exercise price of each option is equal to the fair value of the Company’s stock on the date of grant. The maximum term of the options is 10 years, and the options generally vest at the rate of 25% per year. At December 31, 2006, the Company had 3,944,800 options outstanding and 55,200 shares are available for issuance under the Plan.

The Company has reserved for issuance 1,000,000 shares of common stock available for grant under the new 2005 Long-Term Incentive Plan. The Long-Term Incentive Plan permits the Company to grant awards (stock options, nonqualified options, stock award, phantom stock, stock appreciation right cash awards and director options) to employees, consultants and directors of the Company, subject to adjustment as provided in the plan. As of December 31, 2006, the Company had 235,000 options outstanding under the Long-Term Incentive Plan and 765,000 shares are available for issuance.

During 2006, the Company granted 185,000 options, under the new 2005 Long-Term Incentive Plan and the Plan, with a weighted average exercise price of $2.90 per share. During 2006, no options were forfeited, and none were exercised. At December 31, 2006, there were 3,355,800, vested and exercisable under the Plan. The remaining contractual life of all outstanding options at December 31, 2006, is approximately five years.

The fair value of the options granted has been estimated for each option granted using the Black Scholes option-pricing model with the following assumptions; dividend yield 0.0%; volatility 0.0%, risk free interest rate of 4.4% for 2006; and expected lives of four years for stock options grant The estimated fair value of the 185,000 options granted by the Company during 2006 was $85,100.

As of December 31, 2006, information concerning options currently outstanding and vested is summarized as follows:

 

Exercise

Prices

  

Number

of

Shares

   Options Outstanding   

Options Vested and

and Exercisable

      Weighted-
Average
Remaining
contractual
Life
(Years)
   Weighted-
Average
Exercise
Price
   Number of
Shares
   Weighted-
Average
Exercise
Price

$0.001

   500,000    3    $ 0.001    500,000    $ 0.001

1.000

   356,300    3      1.000    356,300      1.000

2.903

   3,323,500    5      2.903    2,499,500      2.903
                  
   4,179,800          3,355,800   
                  


     Number of
Options
Outstanding
   Weighted
Average
Remaining
Life in
Years
   Weighted
Average
Exercise Price
Per Share

Total Options Granted at December 31, 2006

   4,179,800    5.6    $ 2.394

10. COMMITMENTS AND CONTINGENCIES AND RELATED-PARTY TRANSACTIONS

The Company has entered into an exclusive worldwide license agreement with Rice University (“Rice”) for a broad array of technology developed by the late Dr. Richard E. Smalley. As compensation for this license agreement, Rice received 1,577,780 shares of the Company’s common stock valued at $2.90 per share. The Company shall pay a 1% royalty on sales of Rice-Licensed products. The agreement will terminate upon the expiration of Rice’s patent rights, or in three years from the date of the agreement, April 2001, if the Company has not achieved specified milestones. This agreement has been reflected within intangible assets and shareholders’ equity at $4,580,295. Royalty expense of $25,682 is included in operating expenses for the year ended December 31, 2006. During 2006, the Company paid Rice $455,459 for patent-related legal fees.

Leases—The Company is obligated under an operating lease for office space. Rent expense for the years ended December 31, 2006 was approximately $128,818. Future minimum lease payments under the lease are as follows:

 

Year

   Amount

2007

   $ 120,000
      

Total minimum lease payments

   $ 120,000
      

Related Party

During 2006, the Company sold $361,402 of product to one of its stockholders.

11. BUSINESS AND CREDIT CONCENTRATION

For the year ended December 31, 2006 the Company had combined sales to three customers which represented 69 percent of total revenues. These customers represented 32%, 25% and 12% of total revenues for the year ended December 31, 2006.

At December 31, 2006 the Company had three customers, which combined, represented more than 84 percent of the outstanding accounts receivable.

At December 31, 2006, the Company had funds in deposit with financial institutions that exceeded the FDIC insurance limit by approximately $552,000.


12. INCOME TAXES

The Company has incurred losses since inception for both financial reporting and tax purposes. Due to the uncertainty of being able to utilize such losses to reduce future taxes, a valuation allowance has been provided to reduce to zero the net deferred tax assets resulting primarily from the loss carryforwards. At December 31,2006, the Company had approximately $40,000,000 of net operating loss carryforwards that begin to expire in 2021. However the net loss carryforward is subject to severe limitations due to change of control (see Note 13).

The components of deferred tax assets and liabilities consist of book and tax differences for property, plant, and equipment, amortization of intangibles and net loss carryforwards.

13. SUBSEQUENT EVENTS

On March 21, 2007, the Company entered into an Agreement and Plan of Merger with Unidym, Inc. (“Unidym”) a subsidiary of Arrowhead Research Corporation (NASDAQ: ARWR), Unidym Acquisition, LLC (“Merger LLC”), a Delaware limited liability company and wholly-owned subsidiary of Unidym, CNI, and William A. McMinn as stockholder representative (the “Merger Agreement”). The transaction closed on April 20, 2007. The combined company, operates under the Unidym name, will have the dominant portfolio of carbon nanotube-related patents and be positioned as a leader in bringing carbon nanotube-based products to market.

Pursuant to the Merger Agreement, Unidym acquired CNI through a merger of CNI with and into Merger LLC, with Merger LLC continuing as the surviving company of such merger and a wholly-owned subsidiary of Unidym (the “Merger”). Pursuant to the Merger Agreement, at the closing, Unidym issued 5,000,000 shares of Unidym Series A Convertible Preferred Stock, $.0001 par value per share (“Unidym Series A Preferred Stock”), to be distributed to the holders of CNI common stock and 2,784,252 shares of Unidym Series B Convertible Preferred Stock, $.0001 par value per share (“Unidym Series B Preferred Stock”) to be distributed to the holders of CNI Series E Preferred Stock. In addition, in connection with the Merger, all 2,889,000 shares of Unidym Series A Preferred Stock outstanding prior to the effective time of the Merger were converted into 2,889,000 shares of Unidym Series B Preferred Stock. Approximately twenty percent (20%) of the issued and outstanding capital stock of Unidym (calculated on an as-converted to common stock basis after giving effect to the Merger) was placed into a share escrow account to fund certain claims for indemnification for breaches of or inaccuracies in Unidym’s and CNI’s representations and warranties, covenants and agreements.

On April 20, 2007, Arrowhead entered into a Stock Purchase Agreement (the “Purchase Agreement”) with William A. McMinn, Robert Gower, Mary H. Cain and The Mary H. Cain Marital Trust (collectively, the “Purchasers”) for the sale of 1,431,222 shares of Arrowhead’s common stock in exchange for 1,080,000 shares of Series E Preferred Stock of Carbon Nanotechnologies, Inc.

In accordance with the Merger Agreement, Unidym assumed CNI’s 2007 Restricted Stock Unit Plan and all outstanding CNI restricted stock units that were outstanding as of the effective time of the Merger. In connection with such assumption, appropriate adjustments described in the Merger Agreement were made to the number of shares of Unidym common stock subject to each restricted stock

Unaudited Pro Forma Condensed Combined Financial Statements

EXHIBIT 99.2

UNAUDITED COMBINED PRO FORMA FINANCIAL DATA

The following unaudited pro forma combined financial information has been prepared to give effect to the acquisition of CNI by Arrowhead and the related financing activities.

On April 20, 2007, Arrowhead entered into a Stock Purchase Agreement (the “Purchase Agreement”) with William A. McMinn, Robert Gower, Mary H. Cain and The Mary H. Cain Marital Trust (collectively, the “Purchasers”) for the sale of 1,431,222 shares of Arrowhead’s common stock in exchange for 1,080,000 shares of Series E Preferred Stock of Carbon Nanotechnologies, Inc., a Delaware corporation (“CNI”). As part of the transactions contemplated by the Purchase Agreement, Arrowhead has committed to register the newly-issued shares of Arrowhead common stock for resale by the Purchasers pursuant to the terms of a Registration Rights Agreement dated as of April 20, 2007 by and among Arrowhead and the Purchasers (the “Registration Rights Agreement”). On the same date, Arrowhead and the Purchasers entered into a Lock-up and Standstill Agreement (the “Lock-up and Standstill Agreement”) whereby the Purchasers agreed to refrain from sales of Arrowhead’s common stock for a period of 181 days following the date of the agreement. The foregoing is intended only as a summary of the terms and conditions of the Purchase Agreement, the Registration Rights Agreements and the related transactions. On April 20, 2007, Unidym (“Unidym”), a Delaware corporation and majority-owned subsidiary of Arrowhead Research Corporation (“Arrowhead”), and Arrowhead amended the Agreement to Provide Additional Capital (“Capital Agreement”) dated June 13, 2006 by and between Arrowhead and Unidym to accelerate the payment of $4 million of additional capital to Unidym, such that it was agreed that all of the capital contributions set forth in the Capital Agreement would be payable to Unidym on April 20, 2007. In aggregate consideration for the acceleration and payment of the additional capital and the transfer from Arrowhead to Unidym of rights and obligations under two sponsored research agreements, Unidym issued 448,000 shares of Unidym common stock to Arrowhead.

On April 20, 2007, pursuant to an Agreement and Plan of Merger, dated as of March 21, 2007, by and among Unidym, Unidym Acquisition, LLC (“Merger LLC”), a Delaware limited liability company and wholly-owned subsidiary of Unidym, CNI, and William A. McMinn as stockholder representative (the “Merger Agreement”), Unidym acquired CNI through a merger of CNI with and into Merger LLC, with Merger LLC continuing as the surviving company of such merger and a wholly-owned subsidiary of Unidym (the “Merger”). Pursuant to the Merger Agreement, at the closing, Unidym issued 5,000,000 shares of Unidym Series A Convertible Preferred Stock, $.0001 par value per share (“Unidym Series A Preferred Stock”), to be distributed to the holders of CNI common stock and 2,784,252 shares of Unidym Series B Convertible Preferred Stock, $.0001 par value per share (“Unidym Series B Preferred Stock”) to be distributed to the holders of CNI Series E Preferred Stock. In addition, in connection with the Merger, all 2,889,000 shares of Unidym Series A Preferred Stock outstanding prior to the effective time of the Merger were converted into 2,889,000 shares of Unidym Series B Preferred Stock. Approximately twenty percent (20%) of the issued and outstanding capital stock of Unidym (calculated on an as-converted to common stock basis after giving effect to the Merger) was placed into a share escrow account to fund certain claims for indemnification for breaches of or inaccuracies in Unidym’s and CNI’s representations and warranties, covenants and agreements.

In accordance with the Merger Agreement, Unidym assumed CNI’s 2007 Restricted Stock Unit Plan and all outstanding CNI restricted stock units that were outstanding as of the effective time of the Merger. In connection with such assumption, appropriate adjustments described in the Merger Agreement were made to the number of shares of Unidym common stock subject to each restricted stock


The preliminary estimated purchase price is as follows:

Consideration paid:

 

Value assigned to Unidym Series B Preferred Stock distributed to holders of CNI Series E Preferred Stock

   $ 5,400,000

Value assigned Unidym Series A Preferred Stock issued and distributed to holders of CNI Common Stock

     292,277
      

Total

   $ 5,692,277
      

 

Cash and cash equivalents

   $ 199,000  

Accounts receivable

     184,000  

Grant receivable

     70,000  

Other receivables

     23,000  

Other prepaid expenses

     36,000  

Property and equipment

     66,000  

Rent deposit and other assets

     2,000  

Purchase of in-process research and development

     5,760,000  

Accounts payable

     (425,000 )

Accrued expenses

     (223,000 )
        
   $ 5,692,000  
        

The acquisition has been accounted for using purchase price accounting in accordance with Financial Accounting Standard No. 141, Business Combinations. The unaudited pro forma combined statement of financial position as of March 31, 2007 gives effect to the acquisition as if it had occurred on that date.

The unaudited pro forma combined statement of operations for the year ended December 31, 2006 gives effect to the acquisition as if it had occurred on January 1, 2006. The unaudited pro forma combined statement of operations includes historical financial results of Arrowhead and CNI for the first quarter ended December 31, 2006 (Arrowhead) and March 31, 2007 (CNI) and the year ended September 30, 2006 (Arrowhead) and December 31, 2006 (CNI), respectively. Any savings or additional costs, which may be realized through the integration of the operations of Arrowhead’s Unidym with CNI, have not been estimated or included in the unaudited pro forma combined statement of operations.

The unaudited pro forma financial information includes the adjustments that have a continuing impact to the combined company to reflect the transaction using purchase accounting. The pro forma adjustments are described in the notes to the unaudited pro forma financial information. The adjustments are based upon preliminary information and certain management judgments and estimates. The purchase accounting adjustments are subject to revisions, which will be reflected in future periods.

The unaudited pro forma financial information and accompanying notes are presented for illustrative purposes only and do not purport to be indicative of, and should not be relied upon as indicative of, the financial position or operating results that may occur in the future or that would have occurred if the acquisition had been consummated on January 1, 2006. The unaudited pro forma financial information should be read in conjunction with:

 

1) Arrowhead Research Corporation’s audited consolidated financial statements and notes thereto and management’s discussion and analysis as of and for the fiscal year ended September 30, 2006 filed as part of Arrowhead’s Annual Report on Form 10-K.

 

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(2) Carbon Nanotechnologies, Inc’s audited financial statements and notes thereto as of December 31, 2006 and for the year then ended, included as Exhibit 99.1 of this Form 8-K/A.

 

(3) Arrowhead Research Corporation’s Current Report on Form 8-K, previously filed on April 20, 2007 and its Current Report on Form 8-K/A, filed on June 28, 2007.

 

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Unaudited Pro Forma Combined Balance Sheet

As of March 31, 2007

(in thousands)

 

     Arrowhead
Research Corp.
March 31, 2007
    Carbon
Nanotechnologies, Inc.
March 31, 2007
    Pro Forma
Adjustments
    Pro Forma
Combined
 
ASSETS         

CURRENT ASSETS

        

Cash and cash equivalents

   $ 21,592     $ 199     $ —       $ 21,791  

Marketable securities at fair market value - US Treasury Bills

     —         —         —         —    

Accounts receivable, net of allowance for doubtful account of $13,514

     —         184       —         184  

Grant receivable, net of allowance for doubtful account of $0

     —         70       —         70  

Other receivables

     2       23       —         25  

Prepaid sponsored research

     313       —         —         313  

Other prepaid research

     162       —         —         162  

Other prepaid expenses

     425       35       —         460  
                                

TOTAL CURRENT ASSETS

     22,494       511       —         23,005  

PROPERTY AND EQUIPMENT

        

Computers, office equipment and furniture

     562       131       (111)       582  

Research equipment

     1,472       4,936       (4,889)       1,519  

Software

     69       —         —         69  

Leasehold improvement

     409       165       (165)       409  
                                
     2,512       5,232       (5,165)  (2)     2,579  

Less: Accumulated depreciation and amortization

     (1,345 )     (5,165 )     5,165  (2)     (1,345 )
                                

NET PROPERTY AND EQUIPMENT

     1,167       67       —         1,234  

INTANGIBLE AND OTHER ASSETS

        

Rent deposit and other assets

     97       2       —         99  

Patents

     3,147       —         —         3,147  

License agreements

     —         3,236       (3,236)       —    
                                

TOTAL OTHER ASSETS

     3,244       3,238       (3,236)       3,246  

TOTAL ASSETS

   $ 26,905     $ 3,816     $ (3,236)     $ 27,485  
                                
LIABILITIES AND STOCKHOLDERS’ EQUITY         

CURRENT LIABILITIES

        

Accounts payable

   $ 490     $ 425     $ —       $ 915  

Accrued expenses

     330       224       —         554  

Payroll liabilities

     326       —         —         326  

Preferred stock liability

     —         —         —         —    

Deferred revenue

     —         —         —         —    
                                

TOTAL CURRENT LIABILITIES

     1,146       649       —         1,795  
                                

Minority interests

     1,282       —         —         1,282  

Commitment and contingencies

        

STOCKHOLDERS’ EQUITY

        

Common stock

     34       20       (20)  (1)     34  

Preferred stock

     —         5,401       (5,401)  (1)     —    

Additional paid-in capital

     62,800       38,766       (33,367)  (1)     68,199  

Accumulated deficit during the development stage

     (38,357 )     (41,020 )     41,020  (3)     (43,825 )
     —         —         (5,760)  (3)  
     —         —         292  (3)  
                                

TOTAL STOCKHOLDERS’ EQUITY

     24,477       3,167       (3,236 )     24,408  

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 26,905     $ 3,816     $ (3,236 )   $ 27,485  
                                

See Notes to Unaudited Pro Forma Combined Financial Statements

 

3


Unaudited Pro Forma Combined Statement of Operations

For the Fiscal Years Ended September 30, 2006 and December 31, 2006

(in thousands)

 

     Arrowhead
Research
October 1, 2005 -
September 30, 2006
    Carbon
Nanotechnologies, Inc.
January 1, 2006 -
December 31, 2006
    Proforma
Adjustments
    Proforma
Combined
 

REVENUE

   $ 595     $ 3,109     $ —       $ 3,704  

COST OF GOODS SOLD

     —         2,024       —         2,024  
                                

GROSS PROFIT

     595       1,085       —         1,680  

OPERATING EXPENSES

        

Salaries

     6,471       2,181       —         8,652  

Consulting

     750       —         —         750  

General and administrative expenses

     5,034       1,427       —         6,461  

Research and development

     8,582       369       5,760  (3)     14,711  

Depreciation and amortization

     242       317       (233 ) (4)     326  

Goodwill impairment & other charges

     999       —         —         999  
                                

TOTAL OPERATING EXPENSES

     22,078       4,294       5,527       31,899  
                                

OPERATING LOSS

     (21,483 )     (3,209 )     (5,527 )     (30,219 )

OTHER INCOME (EXPENSES)

        

Gain on sale of assets

     —         20       —         20  

Realized and unrealized gain (loss) in marketable securities

     316       —         —         316  

Interest income

     853       12       —         865  

Interest expense

     —         (241 )     241 (4)     0  

Other income (expense)

     —         (15 )     —         (15 )
                                

TOTAL OTHER INCOME (EXPENSES)

     1,169       (224 )     241       1,186  
                                

LOSS BEFORE MINORITY INTERESTS

     (20,314 )     (3,433 )     (5,286 )     (29,033 )

Minority interests

     1,317       —         —         1,317  

LOSS FROM CONTINUING OPERATIONS

     (18,997 )     (3,433 )     (5,286 )     (27,716 )

Provision for income taxes

     —         —         —         —    
                                

NET LOSS

   $ (18,997 )   $ (3,433 )   $ (5,286 )   $ (27,716 )
                                

Loss from continuing operations per share

   $ (0.595 )   $ (0.280 )     $ (0.839 )

Net loss per share, basic and diluted

   $ (0.595 )   $ (0.280 )     $ (0.839 )

Weighted average shares outstanding

     31,953,806       12,256,253         33,033,806  

See Notes to Unaudited Pro Forma Combined Financial Statements

 

4


Unaudited Pro Forma Combined Statement of Operations

For the First Quarters Ended December 31, 2006 and March 31, 2007

(in thousands)

 

    

Arrowhead
Research

First Quarter
October 1, 2006 -
December 31, 2006

    Carbon
Nanotechnologies, Inc.
First Quarter
January 1, 2007 -
March 31, 2007
    Proforma
Adjustments
    Proforma
Combined
 

REVENUE

   $ 11     $ 877     $ —       $ 888  

COST OF GOODS SOLD

     —         620       —         620  
                                

GROSS PROFIT

     11       257       —         268  

OPERATING EXPENSES

        

Salaries

     1,727       510       —         2,237  

Consulting

     231       —         —         231  

General and administrative expenses

     1,177       495       —         1,672  

Research and development

     1,246       52       —         1,298  

Depreciation and amortization

     104       72       (58 ) (4)     118  

Goodwill impairment & other charges

     —         —         —         —    
                                

TOTAL OPERATING EXPENSES

     4,485       1,129       (58 )     5,556  
                                

OPERATING LOSS

     (4,474 )     (872 )     58       (5,288 )

OTHER INCOME (EXPENSES)

        

Gain on sale of assets

     —         —         —         0  

Realized and unrealized gain (loss) in marketable securities

     0       —         —         0  

Interest income

     313       4       —         317  

Interest expense

     —         (77 )     77  (4)     0  

Other income (expense)

     —         (6 )     —         (6 )
                                

TOTAL OTHER INCOME (EXPENSES)

     313       (79 )     77       311  
                                

LOSS BEFORE MINORITY INTERESTS

     (4,161 )     (951 )     135       (4,977 )

Minority interests

     453       —         —         453  

LOSS FROM CONTINUING OPERATIONS

     (3,708 )     (951 )     135       (4,524 )

Provision for income taxes

     —         —         —         —    
                                

NET LOSS

   $ (3,708 )   $ (951 )   $ 135     $ (4,524 )
                                

Loss from continuing operations per share

   $ (0.108 )   $ (0.078 )     $ (0.128 )

Net loss per share, basic and diluted

   $ (0.108 )   $ (0.078 )     $ (0.128 )

Weighted average shares outstanding

     34,181,399       12,256,253         35,261,399  

See Notes to Unaudited Pro Forma Combined Financial Statements

 

5


Notes to Unaudited Pro Forma Combined Financial Statements (in thousands)

 

(1) Arrowhead Research Corporation issued 1,431,222 shares of Arrowhead’s common stock in exchange for 1,080,000 shares of Series E Preferred Stock of Carbon Nanotechnologies, Inc. Total fair market value of the shares issued was $5.4 million based upon the average closing price of Arrowhead’s common stock during the 10-day period ending March 21, 2007.

 

(2) The preliminary estimate of the fair value of the tangible assets approximates the current net book value. For illustrative purposes it is assumed that the historical costs are adjusted to reflect the current value. The tangible assets will continue to depreciated over their original estimated lives of 3 years.

 

(3) Represents the elimination of stockholders’ equity related to Carbon Nanotechnologies, Inc. The difference between the preliminary estimated value of the assets and liabilities acquired and the total value of consideration given has been expensed as purchased in-process research and development.

 

(4) An adjustment to eliminate the license amortization and the interest expense. The license amortization is eliminated as a result of accounting for the purchase of the existing intangible assets as a purchase of in process research and development. The interest expense is eliminated as a result of issuing stock and the elimination of revolving the line of credit balance.

 

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