La Jolla Pharmaceutical Company
Annual Report 2011

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549 FORM 10-K xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended DECEMBER 31, 2011OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the transition period from to Commission file number: 0-24274 LA JOLLA PHARMACEUTICAL COMPANY(Exact name of registrant as specified in its charter) Delaware 33-0361285(State or other jurisdictionof incorporation or organization) (I.R.S. EmployerIdentification Number)4370 La Jolla Village Drive, Suite 400, San Diego, CA 92122(Address of principal executive offices, including Zip Code)Registrant’s telephone number, including area code: (858) 452-6600Securities registered pursuant to Section 12(b) of the Act:NoneSecurities registered pursuant to Section 12(g) of the Act:Common Stock, Par Value $0.0001 per share Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No xIndicate 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 of1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, tothe best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment tothis Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Accelerated filer ¨Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company xIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No xThe aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2011 totaled approximately$266,000 based on the closing price of $0.86. As of March 23, 2012, there were 5,542,519 shares of the Company’s common stock ($0.0001 par value)outstanding. DOCUMENTS INCORPORATED BY REFERENCEPortions of the annual stockholders’ report for the year ended December 31, 2011 are incorporated by reference into Parts I and II. Portions of the proxystatement for the 2012 annual stockholders’ meeting are incorporated by reference into Part III. Table of ContentsTABLE OF CONTENTS PART I Item 1. Business 1 Item 1A. Risk Factors 6 Item 1B. Unresolved Staff Comments 12 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Mine Safety Disclosures 12 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 13 Item 6. Selected Financial Data 13 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 18 Item 8. Financial Statements and Supplementary Data 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19 Item 9A. Controls and Procedures 19 Item 9B. Other Information 20 PART III Item 10. Directors, Executive Officers and Corporate Governance 21 Item 11. Executive Compensation 21 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 21 Item 13. Certain Relationships and Related Transactions, and Director Independence 21 Item 14. Principal Accountant Fees and Services 21 PART IV Item 15. Exhibits, Financial Statement Schedules 22 Signatures 23 Table of ContentsFORWARD-LOOKING STATEMENTSThe forward-looking statements in this report involve significant risks, assumptions and uncertainties, and a number of factors, both foreseen andunforeseen, could cause actual results to differ materially from our current expectations. Forward-looking statements include those that express a plan, belief,expectation, estimation, anticipation, intent, contingency, future development or similar expression. Accordingly, you should not rely upon forward-lookingstatements as predictions of future events. The outcome of the events described in these forward-looking statements are subject to the risks, uncertainties andother factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the “Risk Factors” contained inthis Annual Report on Form 10-K, and in other reports and registration statements that we file with the Securities and Exchange Commission from time totime. We expressly disclaim any intent to update forward-looking statements.Table of ContentsPART IIn this report, all references to “we,” “our,” “us” and “the Company” refer to La Jolla Pharmaceutical Company, a Delaware corporation, our whollyowned subsidiary SL JP Sub, Inc. and our formerly wholly owned subsidiary, Jewel Merger Sub, Inc.Item 1. BusinessOverviewLa Jolla Pharmaceutical Company is a biopharmaceutical company that was incorporated in Delaware in 1989. We had historically focused on thedevelopment and testing of Riquent as a treatment for Lupus nephritis. Lupus is an antibody-mediated disease caused by abnormal B cell production ofantibodies that attack healthy tissues. From August 2004 to February 2009, Riquent was being studied in a double-blinded multicenter Phase 3 clinical trial,called the “ASPEN” trial, which was determined to be futile in February 2009. Accordingly, the ASPEN trial and the development of Riquent werediscontinued in 2009. We do not currently plan to spend any additional effort on the development of Riquent.In March 2011, the Company and its formerly wholly-owned subsidiary, Jewel Merger Sub, Inc., acquired the rights to compounds known asRegenerative Immunophilin Ligands (“RILs” or “Compounds”) from privately held GliaMed, Inc. (“GliaMed”). The Compounds were acquired pursuant toan asset purchase agreement for a nominal amount, and if certain development and regulatory milestones were met, the Company would have paid GliaMedadditional consideration consisting of up to 8,205 shares of newly designated Series E Convertible Preferred Stock, which would have been convertible intoapproximately 20% of the Company’s fully diluted outstanding common stock on an as-converted basis. GliaMed would have also been eligible for apotential cash payment from the Company if a Compound was approved by the Food and Drug Administration, or FDA, or European Medicines Agency, orEMA, in two or more clinical indications.Following the acquisition of the Compounds, the Company initiated a confirmatory preclinical animal study in April 2011 studying the lead RILcompound, LJP1485. This study was completed in May 2011, after which the Company received final data from the Company’s clinical researchorganization, which data showed that the predetermined study endpoints were not met and that the LJP1485 compound did not show statistically significantimprovement in the study endpoints as compared to vehicle (placebo). Due to the failure of the study, the Company halted the further development of theCompounds and GliaMed reacquired the Compounds through the purchase of the outstanding capital stock of Jewel Merger Sub, Inc. (which held title to theCompounds) for the same nominal consideration that GliaMed received at the closing of the Company’s acquisition of the Compounds.On January 19, 2012, we acquired rights to certain assets, including a lead clinical-stage compound designated GCS-100, from privately held SolanaTherapeutics, Inc. (“Solana”), which was wholly owned by our largest holder of Series C-1 Convertible Preferred Stock. The GCS-100 compound, whichinhibits the expression of galectin-3 and may represent a novel treatment for certain types of cancers, was acquired pursuant to an asset purchase agreementfor nominal consideration. As a result of our acquisition of these assets, we are now focused on the development of treatments that inhibit the activity ofgalectins as a means of treating human diseases such as cancer and chronic organ failure.GCS-100 OverviewWe intend to leverage the unique biochemistry of the galectin family of proteins to pursue the development of innovative therapies to a multitude ofhuman diseases. In particular, over-expression of galectin-3 (one member of the galectin family) has been implicated in cancer and chronic organ failure.Thus, modulation of galectin-3 activity is an attractive therapeutic target. GCS-100, our lead product, is a first-in-class inhibitor designed to sequester andeliminate circulating levels of galectin-3.Galectins are lectins. Lectins are proteins found in the body that specifically interact with carbohydrate sugars located in, on the surface of and inbetween cells. This interaction causes the cells to change behavior, including cell movement, multiplication, and other cellular functions. The interactionsbetween lectins and their target carbohydrate sugars occur via a carbohydrate recognition domain, or CRD, within the lectin. Galectins are a subfamily oflectins that have a CRD that bind specifically to ß-galactoside sugar molecules. Galectins have a broad range of functions, including mediation of cellsurvival and adhesion, promotion of cell-cell interactions, growth of blood vessels, immune regulation and inflammation. 11Table of ContentsOver-expression of galectin-3 has been implicated in a number of human diseases including cancer and chronic organ failure. As such, this makesmodulation of the activity of galectin-3 an attractive target for therapy in these diseases. Our initial programs will accordingly focus on modulation ofgalectin-3 in cancer using GCS-100, a complex polysaccharide that binds to and blocks the effects of galectin-3. We plan to develop GCS-100 and otherinhibitors of galectin molecules as proprietary new agents subject to FDA approval.Recent DevelopmentsOn January 19, 2012, we entered into a Consent and Amendment Agreement (the “Amendment Agreement”) with certain of our Series C-1 ConvertiblePreferred Stock holders to amend the terms of our Securities Purchase Agreement, dated as of May 24, 2010 (“Securities Purchase Agreement”), and the formsof Cash Warrants (as defined in the Securities Purchase Agreement) and Cashless Warrants (as defined in the Securities Purchase Agreement) initially issuedunder the Securities Purchase Agreement, as well as to adopt a Certificate of Designations, Preferences and Rights of Series C-1 Convertible Preferred Stock(“Series C-1 Stock”), Series C-2 Convertible Preferred Stock (“Series C-2 Stock”), Series D-1 Convertible Preferred Stock (“Series D-1 Stock”) and SeriesD-2 Convertible Preferred Stock (“Series D-2 Stock”). Under the Amendment Agreement, the term of the warrants was extended to the third anniversary ofthe acquisition of the GCS-100 assets from Solana and the warrants were amended so that they would be exercisable for shares of 2012 New Preferred Stock(defined below).As part of the Amendment Agreement, the Company designated four new series of preferred stock on January 19, 2012: its Series C-1 Stock, Series C-2 Stock, Series D-1 Stock, and Series D-2 Stock (collectively, the “2012 New Preferred Stock”). The Company exchanged, on a one-for-one basis, eachshare of its existing Series C-1 Convertible Preferred Stock that was outstanding for a new share of Series C-1 Stock. Each holder of 2012 New PreferredStock may convert its 2012 New Preferred Stock shares into the Company’s common stock, par value $0.0001 per share (“Common Stock”), subject to aweekly conversion cap set forth in the Series C/D Certificate. Each 2012 New Preferred Stock holder may only convert such preferred shares into CommonStock to the extent that after such conversion such holder beneficially owns less than 9.999% of the Company’s issued and outstanding Common Stock.On the first anniversary of the asset purchase agreement (i.e., January 19, 2013), the holders of Series C-1 Stock will have a one-time right to elect toredeem a number of shares of Series C-1 Stock equal to the lesser of (i) the entire balance of the outstanding Series C-1 Stock, and (ii) 2,900 shares of SeriesC-1 Stock. The 2012 New Preferred Stock also allows for redemption by its holders following the occurrence of certain other events, such as a breach of theterms and conditions of the Series C/D Certificate. If the holders of Series C-1 Stock redeem a number of shares of Series C-1 Stock equal to or greater thanthe lesser of: (i) the entire balance of the outstanding Series C-1 Stock and (ii) 2,900 shares of Series C-1 Stock, then Solana shall have the right for a periodof 10 business days following the earlier of (i) or (ii) above, to elect to purchase from the Company all right, title and interest in and to the GCS-100 assets,upon repaying to the Company the nominal consideration initially paid pursuant to the asset purchase agreement.As part of the Amendment Agreement, the Company agreed to implement a reverse split of the Company’s Common Stock. Pursuant to the authoritydelegated to the Company’s Board of Directors at a meeting of stockholders held in August 2010, the Company implemented a 1-for-100 reverse split of itscommon stock on February 17, 2012 (the “2012 Reverse Stock Split”). No fractional shares were issued and, instead, stockholders received the cash value ofany fractional shares that would have been issued. Share amounts in this report are shown post-split and therefore have been adjusted to reflect the 2012Reverse Stock Split as well as the reverse stock split that occurred as of April 14, 2011 (“the 2011 Reverse Stock Split”). 212222222222221222222222Table of ContentsClinical StudyAs part of the asset purchase agreement with Solana, we agreed to use commercially reasonable efforts to complete a Phase 2a clinical study of GCS-100. As of the date of this report, we were developing a strategy for the GCS-100 clinical development plan and expect to finalize such plans during thesecond quarter of 2012.Patents and Proprietary TechnologiesAs a part of the acquisition of the rights to GCS-100 and the related assets, the Company acquired certain patents and patent rights. On February 23,2012, the Company received from the U.S. Patent and Trademark Office a notification of issuance for the Company’s patent application covering certainclaims relating to GCS-100. The patent was issued on March 6, 2012 and will expire on March 13, 2028, without giving effect to any potential patent termextensions that may be available in the future under the Hatch-Waxman Amendments to the Drug Price Competition and Patent Term Restoration Act of1984. In addition to the issued patent, the Company has one pending patent application in Europe, one pending patent application in Canada and twopending patent applications in the United States related to GCS-100, which applications will not likely extend beyond March 28, 2015 (subject to anypossible patent term extension).All of our previously issued and pending patents related to Riquent have been written off or sold. In order to conserve cash, we have stopped payingpatent maintenance and prosecution costs on certain Riquent related patents, and will need to either reinstate these patents by paying back fees, wherepossible and desirable, or let them irrevocably lapse. Certain issued and pending Riquent patents and pending applications have irrevocably lapsed and willnot be possible to reinstate. At the present time, we are considering whether there continues to be potential value in the Riquent patent estate.CompetitionThe biotechnology and pharmaceutical industries are subject to rapid technological change. Competition from domestic and foreign biotechnologycompanies, large pharmaceutical companies and other institutions is intense and expected to increase. A number of companies are pursuing the developmentof pharmaceuticals in our targeted areas. These include companies that are conducting clinical trials and pre-clinical studies in the field of galectinmediation.In addition, there are a number of academic institutions, both public and private, engaged in activities relating to the research and development of thetreatment of cancer, major organ failure and the potential role of galectin mediation as a therapy. Most of these companies and institutions have substantiallygreater facilities, resources, research and development capabilities, regulatory compliance expertise, and manufacturing and marketing capabilities than wedo. In addition, other technologies may in the future be the basis of competitive products. There can be no assurance that our competitors will not develop orobtain regulatory approval for products more rapidly than we can, or develop and market technologies and products that are more effective than those we aredeveloping or that would render our technology and proposed products obsolete or noncompetitive. 3Table of ContentsGovernment RegulationUnited StatesOur research and development activities and the future manufacturing and marketing of any products we develop are subject to significant regulationby numerous government authorities in the United States and other countries. In the United States, the Federal Food, Drug and Cosmetic Act and the PublicHealth Service Act govern the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion, and distributionof our drug candidates and any products we may develop. In addition, this regulatory framework is subject to changes that may adversely affect approval,delay an application or require additional expenditures.The steps required before a pharmaceutical compound may be marketed in the United States include: pre-clinical laboratory and animal testing;submission to the FDA of an Investigational New Drug application (“IND”), which must become effective before clinical trials may commence; conductingadequate and well-controlled clinical trials to establish the safety and efficacy of the drug; submission to the FDA of a New Drug Application (“NDA”) orBiologic License Application (“BLA”) for biologics; satisfactory completion of an FDA preapproval inspection of the manufacturing facilities to assesscompliance with cGMPs; and FDA approval of the NDA or BLA prior to any commercial sale or shipment of the drug. In addition to obtaining FDA approvalfor each product, each drug-manufacturing establishment used must be registered with the FDA and be operated in conformity with cGMPs. In addition, drugproduct manufacturing facilities may be subject to state and local regulatory requirements.Pre-clinical testing includes laboratory evaluation of product chemistry and animal studies to assess the safety and efficacy of the product and itsformulation. The results of pre-clinical testing are submitted to the FDA as part of an IND and, unless the FDA objects, the IND becomes effective 30 daysfollowing its receipt by the FDA.Clinical trials involve administration of the drug to healthy volunteers and to patients diagnosed with the condition for which the drug is being testedunder the supervision of a qualified clinical investigator. Clinical trials are conducted in accordance with protocols that detail the objectives of the study, theparameters to be used to monitor safety, and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA as part of the IND. Each clinical trialis conducted under the auspices of an independent Institutional Review Board (“IRB”) in the United States or Ethics Committee (“EC”) outside the UnitedStates for each trial site. The IRB or EC considers, among other matters, ethical factors and the safety of human subjects.Clinical trials are typically conducted in three sequential phases, but the phases may overlap or be repeated. In Phase 1, the phase in which the drug isinitially introduced into healthy human subjects or patients, the drug is tested for adverse effects, dosage tolerance, metabolism, distribution, excretion andclinical pharmacology. Phase 2 trials involve the testing of a limited patient population in order to characterize the actions of the drug in targetedindications, to determine drug tolerance and optimal dosage, and to identify possible adverse side effects and safety risks. When a compound appears to beeffective and to have an acceptable safety profile in Phase 2 clinical trials, Phase 3 clinical trials are undertaken to further evaluate and confirm clinicalefficacy and safety within an expanded patient population at multiple clinical trial sites. The FDA reviews the clinical plans and monitors the results of thetrials and may discontinue the trials at any time if significant safety issues arise. Similarly, an IRB may suspend or terminate a trial at a study site which is notbeing conducted in accordance with the IRB’s requirements or which has been associated with unexpected serious harm to subjects.The results of pre-clinical testing and clinical trials are submitted to the FDA in the form of an NDA or BLA for marketing approval. The submission ofan NDA or BLA also is subject to the payment of user fees, but a waiver of the fees may be obtained under specified circumstances. The testing and approvalprocess is likely to require substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all, or thatconditions of any approval, such as warnings, contraindications, or scope of indications will not materially impact the potential market acceptance andprofitability of the drug product. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret thesame data. The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether the application should beapproved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it generally follows suchrecommendations. The approval process is affected by a number of factors, including the severity of the disease, the availability of alternative treatments, andthe risks and benefits of the product demonstrated in clinical trials. 4Table of ContentsAdditional pre-clinical testing or clinical trials may be requested during the FDA review period and may delay any marketing approval. After FDAapproval for the initial indications, further clinical trials may be necessary to gain approval for the use of the product for additional indications. In addition,after approval, some types of changes to the approved product, such as manufacturing changes, are subject to further FDA review and approval. The FDAmandates that adverse effects be reported to the FDA and may also require post-marketing testing to monitor for adverse effects, which can involve significantexpense. Adverse effects observed during the commercial use of a drug product or which arise in the course of post-marketing testing can result in the needfor labeling revisions, including additional warnings and contraindications, and, if the findings significantly alter the risk/benefit assessment, the potentialwithdrawal of the drug from the market.Among the conditions for FDA approval is the requirement that the prospective manufacturer’s quality control and manufacturing procedures conformto the FDA’s cGMP requirements. Domestic manufacturing facilities are subject to biannual FDA inspections and foreign manufacturing facilities are subjectto periodic inspections by the FDA or foreign regulatory authorities. If the FDA finds that a company is not operating in compliance with cGMPs, thecontinued availability of the product can be interrupted until compliance is achieved and, if the deficiencies are not corrected within a reasonable time frame,the drug could be withdrawn from the market. In addition, the FDA strictly regulates labeling, advertising and promotion of drugs. Failure to conform torequirements relating to licensing, manufacturing, and promoting drug products can result in informal or formal sanctions, including warning letters,injunctions, seizures, civil and criminal penalties, adverse publicity and withdrawal of approval.ForeignWe are also subject to numerous and varying foreign regulatory requirements governing the design and conduct of clinical trials and marketingapproval for pharmaceutical products to be marketed outside of the United States. The approval process varies among countries and regions and can involveadditional testing, and the time required to obtain approval may differ from that required to obtain FDA approval.The steps to obtain approval to market a pharmaceutical compound in the European Union include: pre-clinical laboratory and animal testing;conducting adequate and well controlled clinical trials to establish safety and efficacy; submission of a Marketing Authorization Application (the “MAA”);and the issuance of a product marketing license by the European Commission prior to any commercial sale or shipment of drug. In addition to obtaining aproduct marketing license for each product, each drug manufacturing establishment must be registered with the European Medicines Agency (the “EMEA”),must operate in conformity with European good manufacturing practice and must pass inspections by the European health authorities.Upon receiving the MAA, the Committee for Human Medicinal Products (the “CHMP”), a division of the EMEA, will review the MAA and mayrespond with a list of questions or objections. The answers to the questions posed by the CHMP may require additional tests to be conducted. Responses tothe list of questions or objections must be provided to and deemed sufficient by the CHMP within a defined timeframe. Ultimately, a representative from eachof the European Member States will vote whether to approve the MAA.Foreign regulatory approval processes include all of the risks associated with obtaining FDA approval, and approval by the FDA does not ensureapproval by the health authorities of any other country.EmployeesAs of March 23, 2012, we employed two regular full-time employees (one of whom has an M.D., Ph.D.) and utilized a number of consultants and thirdparty service organizations on an as-needed basis. George Tidmarsh, M.D., Ph.D. is the sole member of our senior management team and has prior experiencewith pharmaceutical, biotechnology or medical product companies. We are highly dependent on the services of Dr. Tidmarsh and, if we are successful incompleting our planned Phase 2a study of GCS-100, we will need to hire additional personnel to assist with the continued development of the drugcandidate. There can be no assurance that we will be able to attract and retain the individuals needed. 5Table of ContentsAvailable InformationOur annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with or furnishedto the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free ofcharge through our website at www.ljpc.com as soon as reasonably practicable after we electronically file or furnish the reports with or to the Securities andExchange Commission.Item 1A. Risk FactorsI. RISK FACTORS RELATING TO THE COMPANY AND THE INDUSTRY IN WHICH WE OPERATE.If the future clinical study of GCS-100 is unsuccessful, we will likely be forced to liquidate the Company.As part of the Amendment Agreement, on the first anniversary of the asset purchase agreement (i.e., January 19, 2013), the holders of Series C-1 Stockmay elect to redeem a number of shares of Series C-1 Stock equal to the lesser of (i) the entire balance of the outstanding Series C-1 Stock, and (ii) 2,900shares of Series C-1 Stock. Although we do not expect that these stockholders will demand redemption prior to the completion of the future clinical study, itis possible for them to do so. If the Company is required to redeem the Series C-1 Stock, we would have very limited financial resources remaining and willlikely be forced to liquidate the Company. Additionally, in that circumstance, we expect that Solana would exercise its repurchase right, which means that wewould lose the rights to the GCS-100 compound and receive only nominal consideration upon Solana’s reacquisition of the compound.We have only limited assets and we have limits under our charter on our ability to fully spend the cash assets that we currently have.As of December 31, 2011, we had no revenue sources, an accumulated deficit of $439.6 million and available cash and cash equivalents of $5.0million, of which, at that time, up to $5.0 million could be required to be paid upon the triggering of a redemption right under our outstanding Series C-1Stock including accrued dividends. Although we acquired the GCS-100 patent estate in January 2012 for nominal consideration and we retain the rights (tothe extent not forfeited) to the Riquent patent estate, the values of these assets are highly uncertain and Riquent has been written down under United Statesgenerally accepted accounting principles (“GAAP”) to nearly zero. As a result, we have only limited assets available to operate and develop our business. Weare utilizing a portion of our existing cash balances to conduct future clinical study of GCS-100 and to evaluate whether or not GCS-100 should bedeveloped further. If we determine that GCS-100 does not warrant further development and the investors redeem their C-1 Stock, we would have only limitedcash and would likely be forced to liquidate the Company. In that event, the funds resulting from the liquidation of our assets, net of amounts payable, wouldlikely return only a small amount, if anything, to our stockholders.Additionally, the Series C/D Certificate contains a term that, for a period of one year, purports to render ultra vires any transaction in which theCompany causes its net cash balance to fall below $2.9 million. Thus, if the Company authorizes any expenditure or enters into any contract whereby theCompany’s cash balance falls below this threshold, it is possible that a court could find that the Company did not have the requisite corporate authority totake such action. Accordingly, the Company intends to limit its overall expenditures through February 2013 so that it maintains this minimum balance. As aresult, the Company effectively had only $1.9 million available for the maintenance of operations and development of GCS-100 for the period of February2012 through February 2013, notwithstanding the working capital appearing on the Company’s balance sheet at that time.The technology underlying GCS-100 is uncertain and unproven.The development efforts for the GCS-100 technology are based on unproven technologies and therapeutic approaches that have not been widely testedor used. To date, no products that use the GCS-100 technology have been approved or commercialized. Application of our technology to treat cancer is inearly stages. Preclinical studies and future clinical trials of GCS-100 may be viewed as a test of our entire approach to developing cancer therapeutics. If GCS-100 does not work as intended, or if the data from our future clinical study indicates that GCS-100 is not safe and effective, the applicability of ourtechnology for successfully treating cancer will be highly uncertain. As a result, there is a significant risk that our therapeutic approaches will not prove to besuccessful, and there can be no guarantee that our drug technologies will result in any commercially successful products. 62222222Table of ContentsWe have recently experienced significant turnover in senior management.Recently, we have experienced significant turnover in our senior management team, including the departures of our Chief Executive Officer, ChiefFinancial Officer and all three members of our board of directors. As a result of these changes, we have a new management team and board of directors. It isnot yet possible to assess how effective this new management team will be or whether the board will be able to work together to accomplish the Company’sbusiness objectives. Additionally, changes in management are disruptive to the organization and any further changes, which will be necessary as theCompany grows and needs to add additional members to the management team, may slow the Company’s progress toward its goals. Changes in compositionof our board of directors may also be disruptive and the loss of the experience and capabilities of any of our board members may reduce the effectiveness ofthe board.We have a small management team and are highly dependent on the services of George Tidmarsh, our Chief Executive Officer. Additionally, we will facechallenges in growing our headcount over time.We have only one officer, George Tidmarsh, who serves as our Chief Executive Officer and as our principal financial officer. Dr. Tidmarsh isresponsible for planning the development of our upcoming Phase 2a clinical study of GCS-100 and oversees all aspects of our day-to-day operations.Accordingly, we are highly dependent on the services of Dr. Tidmarsh and, if we lost his services, our ability to continue the development of GCS-100 withinthe time periods and budgets we have planned would be severely compromised.Additionally, if we are successful in developing GCS-100, we will need to hire additional employees to support expanded operations. The industry inwhich we compete has a high level of employee mobility and aggressive recruiting of skilled employees. This type of environment creates intensecompetition for qualified personnel, particularly in clinical and regulatory affairs, sales and marketing and accounting and finance. We may not be successfulattracting or retaining additional employees, which could limit our ability to grow and successfully manage our business over time.Our ability to raise additional capital and enter into strategic transactions requires the approval of our preferred stockholders.The terms of the Series C/D Certificate impose certain restrictions on the Company and our ability to engage in selected actions that may be out of theordinary course of business. For example, the Series C/D Certificate provides that without the approval by at least 80% of the then outstanding preferredstockholders, the Company may not: issue capital stock; enter into a definitive agreement that, if consummated, would effect a change of control; amend itscertificate of incorporation; or take corporate action that, if consummated, would represent a strategic transaction. Additionally, the Company may not, untilafter February 2013, incur expenditures that would cause the Company’s cash balances to fall below $2.9 million. Accordingly, even if we identify anopportunity to further develop GCS-100 or another drug candidate, our ability to enter into an appropriate arrangement to continue our operations may bemore difficult than in the absence of these restrictions. We may be prohibited from developing a partnership to further develop GCS-100, or entering into anagreement to acquire rights to another drug candidate for development if we do not receive approval from the requisite investors. If we cannot develop aproduct candidate, our resources will continue to be depleted and our ability to continue operations will be adversely affected.Our financial reporting is complicated and may confuse investors.The securities we issued in the May 2010 financing have certain features that result in mark-to-market accounting under FASB Topic of Derivativesand Hedging. These accounting rules require that our derivative instruments be adjusted to their fair market values at each reporting date. The fair marketvalues are based on option pricing models and require various inputs, including our stock price, which may change from period to period. Changes in theseinputs, such as increases or decreases in our stock price, will change the value of the derivative instruments, which means that we will likely report significantnon-cash gains or losses in future periods. These gains and losses can be very substantial each period and may result in significant period-over-period swingsin our GAAP operating results. For example, for the year ended December 31, 2011, we recorded a non-cash net loss on the fair value of our derivativeinstruments of approximately $9.5 million. As a result, investors are cautioned to carefully read our financial statements, the notes thereto and theManagement’s Discussion & Analysis of Financial Condition and Results of Operations for a more complete understanding of our operating results. Priorresults may not be indicative of future results and periods reflecting significant non-cash income under these accounting rules would not correspond tosignificant positive cash flows that investors may normally expect. 7Table of ContentsResults from any future clinical trials we may undertake may not be sufficient to obtain regulatory approvals to market our drug candidates in the UnitedStates or other countries on a timely basis, if at all.Drug candidates are subject to extensive government regulations related to development, clinical trials, manufacturing and commercialization. In orderto sell any product that is under development, we must first receive regulatory approval. To obtain regulatory approval, we must conduct clinical trials andtoxicology studies that demonstrate that our drug candidates are safe and effective. The process of obtaining FDA and foreign regulatory approvals is costly,time consuming, uncertain and subject to unanticipated delays.The FDA and foreign regulatory authorities have substantial discretion in the approval process and may not agree that we have demonstrated that ourdrug candidates are safe and effective. If our drug candidates are ultimately not found to be safe and effective, we would be unable to obtain regulatoryapproval to manufacture, market and sell them. We can provide no assurances that the FDA or foreign regulatory authorities will approve GCS-100 or, ifapproved, what the approved indication for GCS-100 might be.Future clinical trials that we may undertake may be delayed or halted.Any clinical trials of our drug candidates that we may conduct in the future may be delayed or halted for various reasons, including: • we do not have sufficient financial resources; • supplies of drug product are not sufficient to treat the patients in the studies; • patients do not enroll in the studies at the rate we expect; • the products are not effective; • patients experience negative side effects or other safety concerns are raised during treatment; • the trials are not conducted in accordance with applicable clinical practices; • there is political unrest at foreign clinical sites; or • there are natural disasters at any of our clinical sites.If any future trials are delayed or halted, we may incur significant additional expenses, and our potential approval of our drug candidates may bedelayed, which could have a severe negative effect on our business.If the third party manufacturers upon which we rely fail to produce our drug candidates that we require on a timely basis, or to comply with stringentregulations applicable to pharmaceutical drug manufacturers, we may face delays in the trials, regulatory submissions, required approvals orcommercialization of our drug candidates.We do not manufacture our drug candidates and we do not plan to develop any capacity to do so. We plan to contract with third-party manufacturers tomanufacture GCS-100. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development ofadvanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production which includedifficulties with production costs and yields, quality control and assurance and shortages of qualified personnel, as well as compliance with strictly enforcedfederal, state and foreign regulations. The third-party manufacturers we may contract with may not perform as agreed or may terminate their agreements withus. 8Table of ContentsIn addition to product approval, any facility in which GCS-100 is manufactured or tested for its ability to meet required specifications must beapproved by the FDA and/or the EMA before a commercial product can be manufactured. Failure of such a facility to be approved could delay the approvalof GCS-100.Any of these factors could cause us to delay or suspend any future clinical trials, regulatory submissions, required approvals or commercialization ofGCS-100, entail higher costs and result in our being unable to effectively commercialize products.Our success in developing and marketing our drug candidates depends significantly on our ability to obtain patent protection. In addition, we will need tosuccessfully preserve our trade secrets and operate without infringing on the rights of others.We depend on patents and other unpatented intellectual property to prevent others from improperly benefiting from products or technologies that wemay have developed or acquired. Our patents and patent applications cover various technologies and drug candidates, including GCS-100. There can be noassurance, however, that any additional patents will be issued, that the scope of any patent protection will be sufficient to protect us or our technology, orthat any current or future issued patent will be held valid if subsequently challenged. There is a substantial backlog of biotechnology patent applications atthe United States Patent and Trademark Office that may delay the review and issuance of any patents. The patent position of biotechnology firms like ours ishighly uncertain and involves complex legal and factual questions, and no consistent policy has emerged regarding the breadth of claims covered inbiotechnology patents or the protection afforded by these patents. Additionally, a recent U.S. Supreme Court opinion further limits the scope of patentableinventions in the life sciences space and has added increased uncertainty around the validity of certain patents that have been issued and the patentability ofcertain pending patent applications. We intend to continue to file patent applications as believed appropriate for patents covering both our products andprocesses. However, there can be no assurance that patents will be issued from any of these applications, or that the scope of any issued patents will protectour technology.We do not necessarily know if others, including competitors, have patents or patent applications pending that relate to compounds or processes thatoverlap or compete with our intellectual property or which may affect our freedom to operate.However, there can be no assurance that patents will not ultimately be found to impact the advancement of our drug candidates, including GCS-100. Ifthe United States Patent and Trademark Office or any foreign counterpart issues or has issued patents containing competitive or conflicting claims, and ifthese claims are valid, the protection provided by our existing patents or any future patents that may be issued could be significantly reduced, and our abilityto prevent competitors from developing products or technologies identical or similar to ours could be negatively affected. In addition, there can be noguarantee that we would be able to obtain licenses to these patents on commercially reasonable terms, if at all, or that we would be able to develop or obtainalternative technology. Our failure to obtain a license to a technology or process that may be required to develop or commercialize one or more of our drugcandidates may have a material adverse effect on our business. In addition, we may have to incur significant expense and management time in defending orenforcing our patents.We also rely on unpatented intellectual property such as trade secrets and improvements, know-how, and continuing technological innovation. Whilewe seek to protect these rights, it is possible that: • others, including competitors, will develop inventions relevant to our business; • our confidentiality agreements will be breached, and we may not have, or be successful in obtaining, adequate remedies for such a breach; or • our trade secrets will otherwise become known or be independently discovered by competitors. 9Table of ContentsWe could incur substantial costs and devote substantial management time in defending suits that others might bring against us for infringement ofintellectual property rights or in prosecuting suits that we might bring against others to protect our intellectual property rights.Because a number of companies compete with us, many of which have greater resources than we do, and because we face rapid changes in technology inour industry, we cannot be certain that our products will be accepted in the marketplace or capture market share.Competition from domestic and foreign biotechnology companies, large pharmaceutical companies and other institutions is intense and is expected toincrease. A number of companies and institutions are pursuing the development of pharmaceuticals in our targeted areas. Many of these companies are verylarge, and have financial, technical, sales and distribution and other resources substantially greater than ours. The greater resources of these competitors couldenable them to develop competing products more quickly than we are able to, and to market any competing product more quickly or effectively so as tomake it extremely difficult for us to develop a share of the market for our products. These competitors also include companies that are conducting clinicaltrials and pre-clinical studies in the field of cancer therapeutics. Our competitors may develop or obtain regulatory approval for products more rapidly thanwe do. Also, the biotechnology and pharmaceutical industries are subject to rapid changes in technology. Our competitors may develop and markettechnologies and products that are more effective or less costly than those we are developing, or that would render our technology and proposed productsobsolete or noncompetitive.II. RISK FACTORS RELATED SPECIFICALLY TO OUR STOCK.We currently have 5.5 million shares of common stock outstanding and currently may be required to issue up to 6.7 billion shares of common stock uponconversion of existing preferred stock and preferred stock warrants. Such an issuance would be significantly dilutive to our existing common stockholders.Upon the closing of the May 2010 financing, the Company issued to investors approximately 5,134 shares of Series C-1 Preferred. In light of theconversion ratio of our preferred stock (213,083 shares of common stock underlying every one share of Series C-1 Preferred), the issuance of such a largenumber of preferred shares diluted the ownership of our existing stockholders and provided the new investors with a sizeable interest in the Company. Theseinvestors also received warrants to purchase shares of other series of preferred stock that may also be converted into common stock at a rate of 213,083 sharesof common stock for every share of preferred stock held.Giving effect to the potential exercise of the outstanding preferred warrants, and assuming the conversion of all preferred stock into common stock atthe current conversion rate, we would have approximately 6.7 billion shares of common stock issued and outstanding, although the issuance of the commonstock upon the conversion of our preferred stock is limited by a 9.999% beneficial ownership cap for each preferred stockholder. With approximately5.5 million shares of common stock issued and outstanding as of the date of this report, the issuance of this number of shares of common stock underlying thepreferred stock would represent approximately 99% dilution to our existing stockholders. It is possible that our current stock price does not reflect our fully-diluted and as-converted capital structure, which means that the conversion of preferred stock into common stock could significantly reduce our stock price.Future adjustments to the conversion prices of our convertible securities may result in further dilution of our stockholders’ ownership upon conversion ofsuch securities.The conversion price for the 2012 New Preferred Stock was automatically adjusted downward following the 2012 Reverse Stock Split because theaverage of the closing sales prices following the stock split was less than ten times the split-adjusted conversion price. Accordingly, the conversion price ofthe 2012 New Preferred Stock was reduced to a price equal to 10% of the average stock price at that time. Effective on March 3, 2012, each share of 2012 NewPreferred Stock became convertible into approximately 213,083 shares of common stock; prior to that date, each share of 2012 New Preferred Stock wasconvertible into approximately 1,667 shares of common stock. 1022Table of ContentsThe conversion price of our outstanding preferred stock has a “full ratchet” anti-dilution adjustment, which means that it will be further reduced if weissue additional shares of common stock, or common stock equivalents, for consideration that is less than the then applicable conversion price, or if theconversion or exercise price of any common stock equivalent is adjusted or modified to a price less than the then applicable conversion price. If suchadjustments occur, our outstanding preferred stock will be convertible into a greater number of shares and our current stockholders’ ownership holdings willbe further diluted upon conversion of such preferred stock into common stock.The delisting of our common stock could have a substantial effect on the price and liquidity of our common stock.On March 4, 2010, our common stock was delisted from the Nasdaq Capital Market and we began trading on The Pink OTC Markets, Inc. and havesince moved to The OTC Bulletin Board (the “OTC BB”). As a result of trading on the OTC BB, the market liquidity of our common stock may be adverselyaffected as certain investors may not trade in securities that are quoted on the OTC BB due to considerations including low price, illiquidity, and the absenceof qualitative and quantitative listing standards. For example, since being delisted from Nasdaq, we are no longer subject to the Nasdaq listing standards,which included, among other things, that we seek stockholder approval for certain extraordinary transactions, such as the issuance of more than 20% of ourcommon stock at a price that is below market. Accordingly, we are no longer required to obtain stockholder approval for such transactions and may, underDelaware corporate law, effect transactions such as this without prior notice and without stockholder approval.In addition, our stockholders’ ability to trade or obtain quotations on our shares may be severely limited because of lower trading volumes andtransaction delays. These factors may contribute to lower prices and larger spreads in the bid and ask price for our common stock. Specifically, you may notbe able to resell your shares at or above the price you paid for such shares or at all. In addition, class action litigation has often been instituted againstcompanies whose securities have experienced periods of volatility in market price. Any such litigation brought against us could result in substantial costsand a diversion of management’s attention and resources, which could hurt our business, operating results and financial condition.The price of our common stock has been, and will be, volatile and may continue to decline.Our stock has historically experienced significant price and volume volatility and could continue to be volatile. Market prices for securities ofbiotechnology and pharmaceutical companies, including ours, have historically been highly volatile, and the market has from time to time experiencedsignificant price and volume fluctuations that are unrelated to the operating performance of particular companies. The following factors, among others, canhave a significant effect on the market price of our securities: • significant conversions of preferred stock into common stock and sales of these shares; • results from our preclinical studies and clinical trials; • limited financial resources; • announcements regarding financings, mergers or other strategic transactions; • future sales of significant amounts of our capital stock by us or our stockholders; • developments in patent or other proprietary rights; • developments concerning potential agreements with collaborators; and • general market conditions and comments by securities analysts.The realization of any of the risks described in these “Risk Factors” could have a negative effect on the market price of our common stock. 11Table of ContentsOur common stock is considered a “penny stock” and does not qualify for exemption from the “penny stock” restrictions, which may make it more difficultfor you to sell your shares.Our common stock is classified as a “penny stock” by the SEC and is subject to rules adopted by the SEC regulating broker-dealer practices inconnection with transactions in “penny stocks.” The SEC has adopted regulations which define a “penny stock” to be any equity security that has a marketprice of less than $5.00 per share, or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a pennystock, unless exempt, these rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule relating to the penny stock market.Disclosure is also required to be made about current quotations for the securities and about commissions payable to both the broker-dealer and the registeredrepresentative. Finally, broker-dealers must send monthly statements to purchasers of penny stocks disclosing recent price information for the penny stockheld in the account and information on the limited market in penny stocks. As a result of our shares of common stock being subject to the rules on pennystocks, the liquidity of our common stock may be adversely affected.Item 1B. Unresolved Staff Comments.None.Item 2. Properties.We maintain our operations in a temporary space under a short-term arrangement and expect that we will continue that arrangement through at least theend of fiscal 2012.Item 3. Legal Proceedings.We are not currently a party to any legal proceedings.Item 4. Mine Safety Disclosures.Not applicable. 12Table of ContentsPART IIItem 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Information About Our Common StockAs of March 4, 2010, our common stock was delisted from the Nasdaq Capital Market and began trading on the Pink OTC Markets, under the symbol“LJPC.PK” and has since transitioned to The OTC Bulletin Board (the “OTC BB”). Set forth below are the high and low sales prices for our common stock foreach full quarterly period within the two most recent fiscal years, adjusted to reflect the 1-for-100 reverse split of our common stock, which was implementedin February 2012. Prices High Low Year Ended December 31, 2011 First Quarter $420 $200 Second Quarter 315 0.55 Third Quarter 2.90 0.20 Fourth Quarter 0.42 0.20 Year Ended December 31, 2010 First Quarter $2,640 $600 Second Quarter 840 360 Third Quarter 490 300 Fourth Quarter 390 200 We have never paid dividends on our common stock and we do not anticipate paying dividends in the foreseeable future. The number of commonstock shares outstanding as of March 23, 2012 was 5,542,519 shares.Information About Our Equity Compensation PlansInformation regarding our equity compensation plans is incorporated by reference in Item 12 of Part III of this annual report on Form 10-K.Item 6. Selected Financial DataWe are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under thisitem. 13Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.IntroductionManagement’s discussion and analysis of financial condition and results of operations is provided as a supplement to the accompanying consolidatedfinancial statements and footnotes to help provide an understanding of our financial condition, the changes in our financial condition and our results ofoperations. Our discussion is organized as follows: • Overview and recent developments. This section provides a general description of our business and operating history and a general description ofrecent events and significant transactions that we believe are important in understanding our financial condition and results of operations. • Critical accounting policies and estimates. This section contains a discussion of the accounting policies that we believe are important to our financialcondition and results of operations and that require significant judgment and estimates on the part of management in their application. In addition, allof our significant accounting policies, including the critical accounting policies and estimates, are summarized in Note 1 to the accompanyingconsolidated financial statements. • Results of operations. This section provides an analysis of our results of operations presented in the accompanying consolidated statements ofoperations by comparing the results for the year ended December 31, 2011 to the results for the year ended December 31, 2010. • Liquidity and capital resources. This section provides an analysis of our cash flows as well as material subsequent changes.Overview and Recent DevelopmentsWe are a biopharmaceutical company dedicated to the development of treatments that significantly improve outcomes in patients with life-threateningdiseases. Our team is focusing on the science of galectins to develop innovative new therapies to treat human diseases such as cancer and chronic organfailure.We intend to leverage the unique biochemistry of the Galectin family of proteins to develop innovative therapies to a multitude of human diseases. Inparticular, over-expression of galectin-3 (one member of the galectin family) has been implicated in cancer and chronic organ failure. Thus, modulation ofgalectin-3 activity is an attractive therapeutic target. GCS-100, our lead product, is a first-in-class inhibitor designed to sequester and eliminate circulatinglevels of galectin-3.We have never generated any revenue from product sales and have relied on public and private offerings of securities, revenue from collaborativeagreements, equipment financings and interest income on invested cash balances for our working capital. We expect that our research and developmentexpenses will increase in the future as we initiate future clinical studies of GCS-100 or if we commence activities related to any additional drug candidates.We will need additional funds to finance our future operations. Our historical operations and the financial information included in this report are notnecessarily indicative of our future operating results or financial condition. As of December 31, 2011, our accumulated deficit was approximately$439.6 million, which principally represented cumulative expenditures developing Riquent as a potential treatment for Lupus.Our business is subject to significant risks, including, but not limited to, the need for additional financing or a collaborative partner to continue ourclinical activities and continue to operate, the risks inherent in research and development efforts, including clinical trials, the lengthy, expensive anduncertain process of seeking regulatory approvals, uncertainties associated with both obtaining and enforcing patents, the potential enforcement of the patentrights of others against us, uncertainties regarding government reforms regarding product pricing and reimbursement levels, technological change,competition, manufacturing uncertainties, our lack of marketing experience, the uncertainty of receiving future revenue from product sales or other sourcessuch as collaborative relationships, and the uncertainty of future profitability. Even if our product candidates appear promising at an early stage ofdevelopment, they may not reach the market for numerous reasons, including the possibilities that the products will be ineffective or unsafe during clinicaltrials, will fail to receive necessary regulatory approvals, will be difficult to manufacture on a large scale, will be uneconomical to market or will be precludedfrom commercialization by the proprietary rights of third parties or competing products. 14Table of ContentsOn January 20, 2012, we announced that we acquired rights to GCS-100 from privately held Solana. The GCS-100 compound was acquired pursuant toan asset purchase agreement for nominal consideration. We announced that the Company entered into a Consent and Amendment Agreement with certain ofits Series C-1 Convertible Preferred Stock holders to amend the terms of the Securities Purchase Agreement, and the forms of Cash Warrants and CashlessWarrants, as well as to adopt the Series C/D Certificate. Under the Amendment Agreement, the termination date of the Cash Warrants and Cashless Warrantswas amended to extend the termination date to the date that is three years following the closing of the asset purchase (i.e., January 19, 2015). Additionally,the mandatory redemption provision of the Cash Warrants was removed.On February 17, 2012, we amended our Certificate of Incorporation to effect a 1-for-100 reverse split of our outstanding common stock.On March 9, 2012, we announced that the holders converted approximately 67 shares of Series C-1 Convertible Preferred Stock, $0.0001 par value pershare into 3,457,692 shares of common stock, $0.0001 par value per share since November 14, 2011. Following these conversions, the Company had a totalof 4,249,105 shares of common stock issued and outstanding. As a result of the adjustment that followed the Company’s recent 1-for-100 reverse stock split,the Series C-1Preferred is convertible into common stock at a rate of 213,083 shares of common stock for each share of Series C-1Preferred, subject to aweekly conversion cap as well as a limitation that each holder may only convert such shares of Series C-1Preferred into common stock to the extent thatafter such conversion such holder owns less than 9.999% of the Company’s issued and outstanding common stock.The number of common stock shares outstanding as of March 23, 2012 was 5,542,519 shares. Approximately 6 shares of Series C-1 ConvertiblePreferred Stock, $0.0001 par value per share has been converted into 1,293,414 shares of common stock, $0.0001 par value per share since March 9, 2012.Critical Accounting Policies and EstimatesThe discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have beenprepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on anongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the resultsof which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual resultsmay differ materially from these estimates under different assumptions or conditions.We believe the following critical accounting policies involve significant judgments and estimates used in the preparation of our consolidated financialstatements (see also Note 1 to our consolidated financial statements included in Part IV).Share-based compensationShare-based compensation expense for the years ended December 31, 2011 and 2010 was approximately $0.3 million and $0.5 million, respectively.As of December 31, 2011, there was approximately $0.2 million of total unrecognized compensation cost related to non-vested share-based payment awardsgranted under all equity compensation plans. As share-based compensation expense recognized for fiscal years 2011 and 2010 is based on awards ultimatelyexpected to vest, share-based compensation expense has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from those estimates. Total unrecognized compensation cost will be adjusted for future changes inestimated forfeitures. We expect to recognize that cost over a weighted-average period of 10 months. Additional share-based compensation expense for anynew share-based payment awards granted after December 31, 2011 under all equity compensation plans cannot be predicted at this time because it willdepend on, among other matters, the amounts of share-based payment awards granted in the future. 15122 2 2 2Table of ContentsOption-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fullytransferable. Because the employee and director stock options granted by us have characteristics that are significantly different from traded options, andbecause changes in the subjective assumptions can materially affect the estimated value, in our opinion the existing valuation models may not provide anaccurate measure of the fair value of the employee and director stock options granted by us. Although the fair value of the employee and director stockoptions granted by us is determined using an option-pricing model, that value may not be indicative of the fair value observed in a willing-buyer/willing-seller market transaction.Derivative LiabilitiesIn conjunction with the financing we closed in May 2010, we issued Series C-1 Preferred Stock that contained certain embedded derivative features, aswell as warrants that are accounted for as derivative liabilities (see Note 4 to our consolidated financial statements included in Part IV). These derivativeliabilities were determined to be ineligible for equity classification due to provisions of the underlying preferred stock, which is also ineligible for equityclassification, whereby redemption is outside our sole control and due to provisions that may result in an adjustment to their exercise or conversion price.These derivative liabilities were initially recorded at their estimated fair value on the date of issuance and are subsequently adjusted to reflect theestimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded as other income or expense, accordingly. Thefair value of these liabilities is estimated using option pricing models that are based on the individual characteristics of the common stock and preferredstock, the derivative liability on the valuation date, probabilities related to our operations and clinical development (based on industry data), as well asassumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread. The option pricing models of our derivativeliabilities are estimates and are sensitive to changes to certain inputs used in the options pricing models. To better estimate the fair value of the DerivativeLiabilities at each reporting period, the binomial option pricing models and their inputs were refined based on information available to the Company. Suchchanges did not have a significant impact on amounts recorded in previous interim reporting periods.New Accounting PronouncementsIn May 2011, the FASB issued authoritative guidance regarding common fair value measurements and disclosure requirements in U.S. GAAP and IFRS.This newly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair valuemeasurements that are estimated using significant unobservable inputs. This guidance is effective on a prospective basis for annual and interim reportingperiods beginning after December 15, 2011. The Company does not expect that adoption of this standard will have a material impact on its consolidatedfinancial position or results of operations.In June 2011, the FASB issued authoritative guidance regarding comprehensive income that it amended in December 2011. This newly issuedaccounting standard (1) eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’equity and (2) requires the consecutive presentation of the statement of net income and other comprehensive income. The amendments do not change theitems that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income nor do theamendments affect how earnings per share is calculated or presented. This guidance is required to be applied retrospectively and is effective for fiscal yearsand interim periods beginning after December 15, 2011. As this accounting standard only requires enhanced disclosure, the adoption of this standard will notimpact the Company’s consolidated financial position or results of operations. 16Table of ContentsResults of OperationsYears Ended December 31, 2011 and 2010Revenue. There were no revenues for the years ended December 31, 2011 and 2010.Research and Development Expense. During the year ended December 31, 2011, we incurred $0.2 million in research and development expenseprimarily related to costs associated with the preclinical study of LJP1485 compared to only nominal expenses for the year ended December 31, 2010.Following the acquisition of the GCS-100 compound in January 2012, we expect research and development expenditures to increase going forward.General and Administrative Expense. For the year ended December 31, 2011, general and administrative expense decreased to $2.1 million from $3.9million for the year ended December 31, 2010. The decrease is primarily due to a $1.4 million decrease in salaries and benefits expense. Additional decreasesinclude a $0.2 million decrease in legal fees, a $0.1 million decrease in accounting fees, and a $0.1 million decrease in consulting fees, partially offset by the$0.2 million impairment charge for the GliaMed assets.Non-Operating Income/Expense. For the year ended December 31, 2011, non-operating expense as a result of adjustments to the estimated fair value ofderivative liabilities was $9.5 million. The derivative liabilities issued in the May 2010 financing were remeasured at their estimated fair value as ofDecember 31, 2011, resulting in a net increase in value of $9.2 million for the year ended December 31, 2011. The increase is primarily due to a planned“strategic transaction” in January 2012 which increased the probability of a transaction and other changes in variables and underlying shares for revaluationin our binomial pricing models. This increase in value was recorded as non-operating expense for the year ended December 31, 2011.Non-operating expense as a result of the estimated fair value of derivative liabilities in excess of proceeds for the year ended December 31, 2010 was$5.0 million. The charge was a result of the expense recorded for the estimated fair value of warrants and instruments with certain embedded derivativefeatures in excess of the proceeds received in the May 2010 financing. These derivative liabilities are required to be recorded at their estimated fair value inexcess of proceeds and remeasured at estimated fair value at each subsequent reporting period.Non-operating income as a result of adjustments to the estimated fair value of derivative liabilities for the year ended December 31, 2010 was $5.3million. The derivative liabilities issued in the May 2010 financing were remeasured at their estimated fair value as of December 31, 2010, resulting in a netdecrease in value from their date of issuance, based upon a decrease in the price per share of common stock and changes in other inputs to the valuationmodels used to estimate the liabilities, of $5.3 million. This decrease in value was recorded as non-operating income for the year ended December 31, 2010.The non-operating income and expense recorded as a result of adjustments to the estimated fair value of derivative liabilities is non-cash income orexpense. Accounting rules require that our derivative instruments be adjusted to their fair values at each reporting date, which may cause us to reportsignificant non-cash gains or losses as our stock price moves down or up. Prior results may not be indicative of future results.Financing transaction costs for the year ended December 31, 2010 were $0.2 million. The costs directly related to completing the May 2010 financingand were primarily comprised of legal expenses. There were no such costs for the same period in 2011.Other Income/ Expense.Other income and other expense, net, increased to $0.2 million of income for the year ended December 31, 2011 from less than $0.1 million of expensefor the same period in 2010. The increase was due to reclassification of the $0.2 million received from the Preferred Stockholders in April 2011 tomiscellaneous income as a result of the failure of the preclinical study of LJP1485 in May 2011, pursuant to the Consent Agreement.Preferred Stock Dividend. On November 25, 2011 and 2010, we paid dividends in-kind on the outstanding Series C-1 Preferred Stock issued in theMay 2010 financing of $0.1 million and $0.4 million, respectively. As of December 31, 2011 and 2010, we accrued dividends payable in-kind on theoutstanding Series C-1 Preferred Stock of $0.1 million and $0.1 million, respectively. 17Table of ContentsNet Operating Loss and Research Tax Credit Carryforwards. At December 31, 2008, we had federal and California income tax net operating losscarryforwards that are subject to Internal Revenue Code of 1986, as amended, Section 382/383 limitations of net operating loss and research anddevelopment credit carryforwards. In February 2009 and May 2010, we experienced changes in ownership at times when our enterprise value was minimal. Asa result of these ownership changes and the low enterprise value, our federal and California net operating loss carryforwards and federal research anddevelopment credit carryforwards as of December 31, 2011 will be subject to limitation under IRC Section 382/383 and more likely than not will expireunused.Liquidity and Capital ResourcesFrom inception through December 31, 2011, we have incurred a cumulative net loss of approximately $439.6 million and have financed our operationsthrough public and private offerings of securities, revenues from collaborative agreements, equipment financings and interest income on invested cashbalances. From inception through December 31, 2011, we have raised approximately $413 million in net proceeds from sales of equity securities.At December 31, 2011, we had $5.0 million in cash, of which, at that time, up to $5.0 million could be required to be paid upon the triggering of aredemption right under our outstanding Series C-1 Preferred Stock including accrued dividends, as compared to $6.9 million of cash at December 31, 2010.We had negative working capital at December 31, 2011 of $10.4 million compared to positive working capital of $0.5 million at December 31, 2010. Ourworking capital is largely driven by our derivative liability obligations which will likely change in value in the future. The decrease in cash resulted from theuse of our financial resources to fund our general corporate operations.In March 2011, we received funding of approximately $0.2 million from certain of our investors to help defray the costs of a confirmatory preclinicalstudy of LJP1485. In addition, we preserved cash through a temporary reduction in the salaries of our former officers.Our history of recurring losses from operations, our cumulative net loss as of December 31, 2011, and the absence of any current revenue sources raisesubstantial doubt about our ability to continue as a going concern.In June 2011, we entered into a short-term lease for office space. No notes payable, purchase commitments, capital leases or other material operatingleases existed as of December 31, 2011.We are utilizing the funds received in the May 2010 financing to conduct future clinical studies and to evaluate whether or not GCS-100 should bedeveloped further. If we determine that GCS-100 does not warrant further development and the investors redeem their C-1 Preferred Stock, we would haveonly limited cash and would likely be forced to liquidate the Company. In that event, the funds resulting from the liquidation of our assets, net of amountspayable, would likely return only a small amount, if anything, to our stockholders.Off-Balance Sheet ArrangementsWe have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our consolidated financial condition,changes in our consolidated financial condition, expenses, consolidated results of operations, liquidity, capital expenditures or capital resources.Item 7A. Quantitative and Qualitative Disclosures About Market Risk.We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under thisitem. 182Table of ContentsItem 8. Financial Statements and Supplementary Data.The financial statements required by this item are set forth at the end of this Report beginning on page F-2 and are incorporated herein by reference. Weare not required to provide the supplementary data required by this item as we are a smaller reporting company as defined by Rule 12b-2 of the ExchangeAct.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.None.Item 9A. Controls and Procedures.(a) Disclosure Controls and Procedures; Changes in Internal Control Over Financial ReportingOur management, with the participation of our principal executive and principal financial officers, has evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of December 31,2011. Based on this evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effectiveas of December 31, 2011.(b) Management Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financialreporting is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, ourprincipal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles and includes those policies and procedures that: • Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of ourmanagement and directors; and • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that couldhave a material effect on our financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, ourmanagement used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-IntegratedFramework.Based on our assessment, management concluded that, as of December 31, 2011, our internal control over financial reporting was effective based onthose criteria.There was no change in our internal control over financial reporting during the quarter ended December 31, 2011 that has materially affected, or isreasonably likely to materially affect, our internal control over financial reporting. 19Table of ContentsItem 9B. Other Information.None 20Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate Governance.Information required by this item will be contained in our Definitive Proxy Statement for our 2012 Annual Meeting of Stockholders, to be filedpursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2011. Such information is incorporated hereinby reference.We have adopted a code of conduct that applies to our Chief Executive Officer, Principal Financial Officer, Principal Accounting Officer, and to all ofour other officers, directors, employees and agents. The code of conduct is available at the Corporate Governance section of the Investor Relations page onour website at www.ljpc.com. We intend to disclose future amendments to certain provisions of our code of conduct on the above website within fourbusiness days following the date of such amendment or waiver.Item 11. Executive Compensation.Information required by this item will be contained in our Definitive Proxy Statement for our 2012 Annual Meeting of Stockholders, to be filedpursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2011. Such information is incorporated hereinby reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.Information required by this item will be contained in our Definitive Proxy Statement for our 2012 Annual Meeting of Stockholders, to be filedpursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2011. Such information is incorporated hereinby reference.Item 13. Certain Relationships and Related Transactions, and Director Independence.Information required by this item will be contained in our Definitive Proxy Statement for our 2012 Annual Meeting of Stockholders, to be filedpursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2011. Such information is incorporated hereinby reference.Item 14. Principal Accountant Fees and Services.Information required by this item will be contained in our Definitive Proxy Statement for our 2012 Annual Meeting of Stockholders, to be filedpursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2011. Such information is incorporated hereinby reference. 21Table of ContentsPART IVItem 15. Exhibits, Financial Statement Schedules.(a) Documents filed as part of this report. 1.The following consolidated financial statements of La Jolla Pharmaceutical Company are filed as part of this report under Item 8 — FinancialStatements and Supplementary Data: Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets at December 31, 2011 and 2010 F-2 Consolidated Statements of Operations for the years ended December 31, 2011 and 2010 F-3 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the years ended December 31, 2011 and2010 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010 F-5 Notes to Consolidated Financial Statements F-6 2.Financial Statement Schedules.These schedules are omitted because they are not required, or are not applicable, or the required information is shown in the consolidated financialstatements or notes thereto. 3.Exhibits.The exhibit index attached to this report is incorporated by reference herein. 22Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. LA JOLLA PHARMACEUTICAL COMPANY By: /s/ George TidmarshMarch 30, 2012 George Tidmarsh, M.D., Ph.D. President, Chief Executive Officer and SecretaryPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. Signature Title Date/s/ George TidmarshGeorge Tidmarsh, M.D., Ph.D. Director, President, Chief Executive Officer and Secretary (PrincipalExecutive, Financial and Accounting Officer) March 30, 2012 /s/ Saiid Zarrabian Director March 30, 2012Saiid Zarrabian 23Table of ContentsReport of Independent Registered Public Accounting FirmBoard of Directors and StockholdersLa Jolla Pharmaceutical CompanySan Diego, CaliforniaWe have audited the accompanying consolidated balance sheets of La Jolla Pharmaceutical Company as of December 31, 2011 and 2010 and the relatedconsolidated statements of operations, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years then ended.These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statementsbased on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of La Jolla PharmaceuticalCompany at December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in conformity with accountingprinciples 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 1 to thefinancial statements, the Company has suffered recurring losses from operations, has an accumulated deficit of $439.6 million and a stockholders’ deficit of$15.6 million as of December 31, 2011 and has no current source of revenues. These factors, among others discussed in Note 1, raise substantial doubt aboutits ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not includeany adjustments that might result from the outcome of this uncertainty./s/ BDO USA, LLPSan Diego, CaliforniaMarch 30, 2012 F-1Table of ContentsLa Jolla Pharmaceutical CompanyConsolidated Balance Sheets(In thousands, except share and par value amounts) December 31, 2011 2010 Assets Current assets: Cash and cash equivalents $5,040 $6,866 Prepaids and other current assets 60 67 Total current assets 5,100 6,933 $5,100 $6,933 Liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) Current liabilities: Accounts payable $8 $39 Accrued expenses 240 178 Accrued payroll and related expenses 7 85 Derivative liabilities 15,270 6,102 Total current liabilities 15,525 6,404 Series C-1 redeemable convertible preferred stock, $0.0001 par value; 11,000 shares authorized, 5,043 and 5,573 sharesissued and outstanding at December 31, 2011 and 2010, respectively (redemption value and liquidation preference inthe aggregate of $5,116 and $5,652 at December 31, 2011 and 2010, respectively) 5,133 47 Commitments Stockholders’ equity (deficit): Common stock, $0.0001 par value; 6,000,000,000 shares authorized, 874,746 and 947,101 shares issued andoutstanding at December 31, 2011 and 2010, respectively — — Additional paid-in capital 424,071 428,563 Accumulated deficit (439,629) (428,081) Total stockholders’ equity (deficit) (15,558) 482 $5,100 $6,933 See accompanying notes. F-2Table of ContentsLa Jolla Pharmaceutical CompanyConsolidated Statements of Operations(In thousands, except per share amounts) Years EndedDecember 31, 2011 2010 Expenses: Research and development $177 $13 General and administrative 2,097 3,915 Total expenses 2,274 3,928 Loss from operations (2,274) (3,928) Other income (expense): Fair value of derivative liabilities in excess of proceeds — (5,015) Adjustments to fair value of derivative liabilities (9,508) 5,347 Financing transaction costs — (163) Other income (expense), net 234 (1) Net loss (11,548) (3,760) Preferred stock dividends earned after forfeits (119) (466) Net loss and comprehensive loss attributable to common stockholders $(11,667) $(4,226) Basic and diluted net loss per share $(31.59) $(5.00) Shares used in computing basic and diluted net loss per share 369 832 See accompanying notes. F-3Table of ContentsLa Jolla Pharmaceutical CompanyConsolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)For the Years Ended December 31, 2011 and 2010(In thousands, except share data) Series C-1RedeemableConvertiblePreferred Stock Preferred stock Common stock Additionalpaid-in capital Accumulateddeficit Totalstockholders’Equity (Deficit) Shares Amount Shares Amount Shares Amount Balance at December 31, 2009 — $— — $— 65,722,648 $7 $428,533 $(424,321) $4,219 Issuance of common stock, net — — — — 28,970,435 2 (2) — — Issuance of Series C-1 preferred stockfor cash 5,134 — — — — — — — — Issuance of Series C-1 preferred stockfirst right of negotiation 50 12 — — — — — — — Issuance of Series C-1 preferred stockdividends 389 35 — — — — — — — Issuance of common stock underEmployee Stock Purchase Plan — — — — 16,977 — — — — Share-based compensation expense — — — — — — 489 — 489 Series C-1 preferred stock dividends — — — — — — (466) — (466) Reverse stock split as of April 14, 2011 (93,762,959) (9) 9 — — Net loss — — — — — — — (3,760) (3,760) Balance at December 31, 2010 5,573 47 — — 947,101 — 428,563 (428,081) 482 Issuance of Series C-1 preferred stockdividends 58 58 — — — — — — — Conversion of Series C-1 preferredstock (588) (588) — — 86,527,541 9 895 — 904 Share-based compensation expense — — — — — — 254 — 254 Series C-1 preferred stock dividends — 90 — — — — (197) — (197) Forfeit of Series C-1 preferred stockdividends — (5) — — — — 78 — 78 Reverse stock split as of February 20,2012 — — — — (86,559,895) (9) 9 — — Adjustment to redemption value — 5,531 — — — — (5,531) — (5,531) Net loss — — — — — — — (11,548) (11,548) Balance at December 31, 2011 5,043 $5,133 — $— 874,746 $— $424,071 $(439,629) $(15,558) See accompanying notes. F-4Table of ContentsLa Jolla Pharmaceutical CompanyConsolidated Statements of Cash Flows(In thousands) Years Ended December 31, 2011 2010 Operating activities Net loss $(11,548) $(3,760) Adjustments to reconcile net loss to net cash used for operating activities: Share-based compensation expense 254 489 Issuance of Series C-1 Preferred Stock for services — 12 Fair value of derivative liabilities in excess of proceeds — 5,015 Loss/(gain) on adjustment to fair value of derivative liabilities 9,508 (5,347) Changes in operating assets and liabilities: Prepaids and other current assets 7 519 Accounts payable and accrued expenses 31 (231) Accrued payroll and related expenses (78) (88) Net cash used for operating activities (1,826) (3,391) Financing activities Proceeds from issuance of derivative obligations — 6,003 Net cash provided by financing activities — 6,003 Net increase (decrease) in cash and cash equivalents (1,826) 2,612 Cash and cash equivalents at beginning of period 6,866 4,254 Cash and cash equivalents at end of period $5,040 $6,866 Supplemental disclosure of cash flow information: Interest paid $— $— Change in par value of capital stock $— $(938) Issuance of common stock at par value, offset by paid-in capital reduction $— $290 Conversion of preferred stock into common stock $904 $— Reclassification of preferred stock currently redeemable $5,531 $— Preferred stock dividends forfeited $17 $78 Dividends paid in Series C-1 Preferred Stock $58 $388 See accompanying notes. F-5Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements1. Organization and Summary of Significant Accounting PoliciesOrganization and Business ActivityLa Jolla Pharmaceutical Company (the “Company”) is a biopharmaceutical company dedicated to the development of treatments that significantly improveoutcomes in patients with life-threatening diseases.Basis of PresentationThe accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis ofaccounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business and does not include anyadjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might benecessary should the Company be unable to continue as a going concern. While the basis of presentation remains that of a going concern, the Company has ahistory of recurring losses from operations and, as of December 31, 2011, the Company had no revenue sources, an accumulated deficit of $439,629,000, astockholders’ deficit of $15,558,000 and available cash and cash equivalents of $5,040,000 all of which could be required to be paid upon the exercise ofredemption rights under the Company’s outstanding preferred securities including accrued dividends (see Note 4). Such redemption was not consideredprobable as of December 31, 2011. However, these factors raise substantial doubt about the Company’s ability to continue as a going concern.Significant 2012 EventsOn January 19, 2012, the Company entered into an Asset Purchase Agreement (the “Agreement”), dated as of January 19, 2012, with Solana Therapeutics,Inc., a Delaware corporation (“Solana”). Pursuant to the Agreement, the Company agreed to acquire from Solana the global development andcommercialization rights to and certain assets related to an investigational new drug referred to as GCS-100 (“GCS-100”), which include patents and patentrights, regulatory registrations and study drug supplies (collectively, the “Purchased Assets”). The acquisition of the Purchased Assets was completed onJanuary 19, 2012 and the Company agreed to pay a nominal amount for the Purchased Assets at that time.On January 19, 2012, the Company entered into a Consent and Amendment Agreement (the “Amendment Agreement”) with certain of its Series C-1Convertible Preferred Stock holders to amend the terms of the Securities Purchase Agreement, dated as of May 24, 2010 (“Securities Purchase Agreement”),and the forms of Cash Warrants (as defined in the Securities Purchase Agreement) and Cashless Warrants (as defined in the Securities Purchase Agreement), aswell as to adopt the Certificate of Designations, Preferences and Rights of Series C-1 Convertible Preferred Stock (“Series C-1 Stock”), Series C-2Convertible Preferred Stock (“Series C-2 Stock”), Series D-1 Convertible Preferred Stock (“Series D-1 Stock”) and Series D-2 Convertible Preferred Stock(“Series D-2 Stock”) (the “Series C/D Certificate”). Under the Amendment Agreement, the Termination Date (as defined in the Cash Warrants and CashlessWarrants) is amended to extend the Termination Date to the date that is three years following the closing of the asset purchase. Additionally, the mandatoryredemption provision of the Cash Warrants is removed.As part of the Amendment Agreement, the Company designated four new series of preferred stock on January 19, 2012: its Series C-1 Stock, Series C-2Stock, Series D-1 Stock, and Series D-2 Stock (collectively, the “ 2012 New Preferred Stock”). It exchanged on a one-for-one basis each share of its existingSeries C-1 Convertible Preferred Stock that was outstanding for a new share of Series C-1 Stock. Each holder of 2012 New Preferred Stock may convert its2012 New Preferred Stock shares into the Company’s common stock, par value $0.0001 per share (“Common Stock”), subject to a weekly conversion capequal to the product of the face amount of the outstanding Series C-1 Stock held by the stockholder on the Closing multiplied by the Conversion Cap (asdefined in the Series C/D Certificate) for such week. Depending on the Volume-Weighted Closing Price, or VWCP (as defined in the Series C/D Certificate),for the last three Trading Days (as defined in the Series C/D Certificate) during the previous calendar week, the Conversion Cap can range from 0% to 3.76%.Each 2012 New Preferred Stock holder may only convert such preferred shares into common stock to the extent that after such conversion such holder ownsless than 9.999% of the Company’s issued and outstanding common stock. F-61222222222222122Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements On the first anniversary of the Agreement (i.e. January 19, 2013), the holders of Series C-1 Stock may redeem a number of shares of Series C-1 Stock equal tothe lesser of (i) the entire balance of the outstanding Series C-1 Stock, and (ii) 2,900 shares of Series C-1 Stock. The 2012 New Preferred Stock also allowsfor redemption by its holders following the occurrence of certain other events. If the holders of Series C-1 Stock redeem a number of shares of Series C-1Stock equal to or greater than the lesser of (i) the entire balance of the outstanding Series C-1 Stock and (ii) 2,900 shares of Series C-1 Stock, then Solanashall have the right for a period of 10 business days following the earlier of (i) or (ii) above, to elect to purchase from the Company all right, title and interestin and to the Purchased Assets, including any assets and patent rights arising from the Purchased Assets after the Closing of the asset purchase, upon repayingto the Company the nominal consideration paid pursuant to the Agreement.The Company’s Board of Directors, approved a reverse stock split effective on February 17, 2012, with such reverse stock split having an exchange ratio of 1-for-100 (the “ 2012 Reverse Stock Split”). No fractional shares were issued and, instead, stockholders received the cash value of any fractional shares thatwould have been issued. Share amounts in the consolidated financial statements are shown post-split and therefore have been retroactively adjusted to reflectthe 2012 Reverse Stock Split.Significant 2011 EventsIn March 2011, the Company and its formerly wholly-owned subsidiary, Jewel Merger Sub, Inc. acquired the rights to compounds known as RegenerativeImmunophilin Ligands (“RILs” or “Compounds”) from privately held GliaMed, Inc. (“GliaMed”). The Compounds were acquired pursuant to an AssetPurchase Agreement (the “Asset Agreement”) for a nominal amount, and if certain development and regulatory milestones were met, the Company wouldhave paid GliaMed additional consideration consisting of up to 8,205 shares of newly designated Series E Convertible Preferred Stock (“Series E Preferred”),which would have been convertible into approximately 20% of the Company’s fully diluted outstanding common stock on an as-converted basis. GliaMedwould have also been eligible for a potential cash payment from the Company if a Compound was approved by the Food and Drug Administration, or FDA,or European Medicines Agency, or EMA, in two or more clinical indications (see Note 3).Also in March 2011, the Company entered into a Consent and Amendment Agreement (the “Consent Agreement”), dated as of March 29, 2011, with certainholders of convertible redeemable Series C-1 preferred stock (“Series C-1 Preferred”), in order to amend certain terms of the Company’s Securities PurchaseAgreement, dated as of May 24, 2010 (“Securities Purchase Agreement”) (see Note 4). The purpose of the Consent Agreement was to revise certain terms ofthe Company’s outstanding preferred securities in connection with the Company’s acquisition of the Compounds. Additionally, as part of the ConsentAgreement, the Company designated five new series of preferred stock: its Series C-1 Convertible Preferred Stock (“Series C-1 Preferred”), Series C-2Convertible Preferred Stock (“Series C-2 Preferred”), Series D-1 Convertible Preferred Stock (“Series D-1 Preferred”), Series D-2 Convertible PreferredStock (“Series D-2 Preferred” and collectively with the Series C-1 Preferred, the Series C-2 Preferred and the Series D-1 Preferred, the “New PreferredStock”) and Series E Preferred. The Company exchanged on a one-for-one basis each share of its existing Series C-1 Preferred that was outstanding for a newshare of Series C-1 Preferred (see Note 4).Following the acquisition of the Compounds, the Company initiated a confirmatory preclinical animal study in April 2011 studying the lead RIL compound,LJP1485. This study was completed in May 2011, after which the Company received final data from Charles River Laboratories, the Company’s clinicalresearch organization (the “CRO”), which showed that the predetermined study endpoints, as set forth in the Asset Agreement, were not met and that theLJP1485 compound did not show statistically significant improvement in the study endpoints as compared to vehicle (placebo).Pursuant to the Consent Agreement, the Company’s existing holders of Series C-1 Preferred (the “Preferred Stockholders”) were not required to exercise theircash warrants (the “Cash Warrants”) due to the failure of the LJP1485 study. The Preferred Stockholders elected to not exercise the Cash Warrants, which thenprovided GliaMed with the right to reacquire the Compounds through the purchase of the outstanding capital stock of Jewel Merger Sub, Inc. (which heldtitle to the Compounds) for the same nominal consideration that GliaMed received at the closing of the Company’s acquisition of the Compounds. F-7222222221111111111111Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements The cost for this preclinical study, including the Company’s operating costs, of approximately $712,000 was funded through cash on hand, which was madeavailable for this expense due to the forfeiture of dividends on the Company’s outstanding Series C-1Preferred and Series C-2 Preferred (together the“Series C Preferred”) for the period from November 26, 2010 to May 31, 2011 (the “Forfeited Dividend”), the receipt of cash from certain current investorspursuant to the Consent Agreement, and a temporary reduction in the salaries of the Company’s then current officers. The stockholders no longer have anyrights to receive stock for their Forfeited Dividend or any consideration for the cash payment made pursuant to the Consent Agreement.On June 30, 2011, the Company entered into an Amendment Agreement with certain holders of Series C-1 Preferred (the “Holders”) in order to provide theCompany with additional working capital to allow the Company to more fully evaluate additional product acquisition or in-licensing opportunities. TheHolders agreed to waive the dividends on their shares of Series C-1 Preferred for the period from June 1, 2011 to August 31, 2011 and agreed to provide theCompany with additional working capital by July 29, 2011, in an amount to be determined. In addition, the Company’s two executive officers at the timeagreed to a temporary reduction in their salaries and work hours from July 1, 2011 to August 31, 2011. As of August 24, 2011, no additional working capitalhad been contributed to the Company.On August 24, 2011, the Company entered into a Second Amendment Agreement with the Holders in order to provide the Company with additional workingcapital to allow the Company to continue to evaluate additional product acquisition or in-licensing opportunities. The Holders agreed to extend the waiveddividends and the two executive officers at the time agreed to extend the temporary reduction in their salaries and work hours through October 31, 2011. TheHolders also agreed to provide the Company with additional working capital, in an amount to be determined, by September 2, 2011 and then again bySeptember 26, 2011, if as of such dates, the Company was continuing to pursue a Strategic Transaction. In September 2011, in accordance with the ConsentAgreement, certain of the Holders agreed to waive the preferred stock conversion limits and converted 25 shares of Series C Preferred into common stock.The conversion reduced the redemption value of the Series C-1 Preferred by $25,000 and therefore increased working capital by the same amount. Thedividends waived from June 1, 2011 through October 31, 2011 are referred to as the “Waived Dividend”.As of December 31, 2011, the Preferred Stockholders had the right to require the Company to redeem all outstanding shares of Series C-1 Preferred for anaggregate sum of approximately $5,116,000. The Preferred Stockholders did not exercise this redemption right at December 31, 2011 or prior to the AssetPurchase Agreement in January 2012.The Company’s Board of Directors, approved a reverse stock split effective on April 14, 2011, with such reverse stock split having an exchange ratio of 1-for-100 (the “2011 Reverse Stock Split”). No fractional shares were issued and, instead, stockholders received the cash value of any fractional shares that wouldhave been issued. Share amounts at December 31, 2010 in the consolidated financial statements are shown post-split and therefore have been retroactivelyadjusted to reflect the 2011 Reverse Stock Split.Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of La Jolla Pharmaceutical Company and its wholly-owned subsidiaries, SL JPSub, Inc., which was incorporated in Delaware in December 2011 and Jewel Merger Sub, Inc., which was incorporated in Delaware in December 2009. InMarch 2011, the Company and Jewel Merger Sub, Inc. acquired assets related to certain Compounds from GliaMed. In June 2011, GliaMed repurchased theCompounds by acquiring all of the outstanding capital stock of Jewel Merger Sub for the same nominal amount that it received from the Company for theCompounds. F-81 1111111Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements Use of EstimatesThe preparation of consolidated financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requiresmanagement to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in theaccompanying notes to the consolidated financial statements. Actual results could differ materially from those estimates.Property and EquipmentProperty and equipment is stated at cost and has been depreciated using the straight-line method over the estimated useful lives of the assets (primarily fiveyears). As of December 31, 2011 and 2010, property and equipment was comprised of $2,186,000 of fully depreciated computer equipment and software.There was no depreciation expense for the years ended December 31, 2011 and 2010.PatentsDuring January 2012, the Company acquired certain patents and patent rights for GCS-100 for nominal consideration as part of the Purchased Assets fromSolana. The Company plans to file patent applications in the United States and in foreign countries for the protection of these proprietary technologies anddrug candidates as deemed appropriate.As a result of the futility determination in the Phase 3 ASPEN trial in February 2009, all of our previously issued and pending patents related to Riquent weresold, disposed of, or written off during 2009. As of December 31, 2011 and 2010, total issued and pending patent application costs and accumulatedamortization were $0. Capitalized costs related to patent applications were charged to operations at the time a determination was made not to pursue suchapplications or they became impaired. There was no amortization expense for the years ended December 31, 2011 and 2010.Share-Based CompensationShare-based compensation expense for the years ended December 31, 2011 and 2010 was approximately $254,000 and $489,000, respectively. As ofDecember 31, 2011, there was approximately $158,000 of total unrecognized compensation cost related to non-vested share-based payment awards grantedunder all equity compensation plans. As share-based compensation expense is based on awards ultimately expected to vest, share-based compensationexpense has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. The Companyexpects to recognize that cost over a weighted-average period of 10 months.Deferred charges for options granted to non-employees, other than non-employee directors, are periodically remeasured as the options vest. In September2010, the Company granted non-qualified stock options to purchase a total of 200,000 shares of common stock to a consultant at an exercise price equal tothe fair market value of the stock on the date of grant. As these stock options vest and become exercisable upon the achievement of future performanceconditions that are not considered probable as of December 31, 2010, the Company recognized no compensation expense for these stock option grantsduring the year ended December 31, 2010. These options were cancelled in 2011 when the GliaMed asset was sold back to GliaMed.The Company utilizes the Black-Scholes option-pricing model as its method of valuation for stock options and for purchases made under the La JollaPharmaceutical Company 1995 Employee Stock Purchase Plan (the “ESPP”). The Company’s determination of the fair value of share-based payment awardson the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complexand subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actualand projected employee stock option exercise behaviors. F-9Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements Share-Based Award Valuation and Expense InformationThe following table summarizes share-based compensation expense (in thousands) related to employee and director stock options for the years endedDecember 31, 2011 and 2010, as well as share-based compensation expense related to ESPP purchases for the year ended December 31, 2010: December 31, 2011 2010 Research and development $— $— General and administrative 254 489 Share-based compensation expense included in operating expenses $254 $489 For the year ended December 31, 2010, the Company estimated the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:Options: December 31,2010Risk-free interest rate 2.6%Dividend yield 0.0%Volatility 106.5%Expected life (years) 5.8For the year ended December 31, 2010, the Company estimated the fair value of ESPP purchase rights on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:ESPP: December 31,2010Risk-free interest rate 0.15%Dividend yield 0.0%Volatility 90.5%Expected life 3 monthsThere were no options granted during 2011. The weighted-average fair value of options granted was $0.04 for the year ended December 31, 2010. There wereno ESPP purchases made during 2011. The weighted-average purchase price of shares purchased through the ESPP was $0.04 for the year endedDecember 31, 2010.The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the Company’s employee and director stock options andESPP purchases. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The Company has never paiddividends on its common stock and the Company does not anticipate paying dividends in the foreseeable future.The Company used historical stock price volatility as the expected volatility assumption required in the Black-Scholes option-pricing model. The selectionof the historical volatility approach was based on the availability of historical stock prices for the duration of the awards’ expected term and the Company’sassessment that historical volatility is more representative of future stock price trends than other available methods.The expected life of employee and director stock options represents the weighted-average period the stock options are expected to remain outstanding. As aresult of the Company’s restructuring following the negative results of the Riquent Phase 3 ASPEN trial received in February 2009, the Company used thesimplified method to determine the expected life of option grants made during the year ended December 31, 2010, as historical option exercise data was nolonger considered indicative of future exercise patterns for grants made following the significant restructuring and operational changes that were made at theCompany. The expected life for option grants made during the year ended December 31, 2010 was 5.8 years for the new and existing employee grants and thedirector grants. No option grants were made during 2011. The expected life for ESPP purchase rights represents the length of each purchase period. Becauseemployees purchase stock quarterly, the expected term for ESPP purchase rights is three months for shares purchased during the year ended December 31,2010. No ESPP purchases were made during 2011. F-10®Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements Reverse Stock SplitThe Board of Directors approved the reverse stock split (the “2012 Reverse Stock Split”) of the Company’s common stock, which became effective onFebruary 17, 2012, with an exchange ratio of 1-for-100. As a result of the 2012 Reverse Stock Split, each 100 shares of the Company’s issued and outstandingcommon stock were automatically reclassified as and changed into one share of the Company’s common stock. No fractional shares were issued inconnection with the 2012 Reverse Stock Split. Stockholders who were entitled to fractional shares instead became entitled to receive a cash payment in lieuof receiving fractional shares (after taking into account and aggregating all shares of the Company’s common stock then held by such stockholder) equal tothe fractional share interest. The 2012 Reverse Stock Split affected all of the holders of the Company’s common stock uniformly.The Board of Directors approved the reverse stock split (the “2011 Reverse Stock Split”) of the Company’s common stock, which became effective onApril 14, 2011, with an exchange ratio of 1-for-100. As a result of the 2011 Reverse Stock Split, each 100 shares of the Company’s issued and outstandingcommon stock were automatically reclassified as and changed into one share of the Company’s common stock. No fractional shares were issued inconnection with the 2011 Reverse Stock Split. Stockholders who were entitled to fractional shares instead became entitled to receive a cash payment in lieuof receiving fractional shares (after taking into account and aggregating all shares of the Company’s common stock then held by such stockholder) equal tothe fractional share interest. The 2011 Reverse Stock Split affected all of the holders of the Company’s common stock uniformly.All common stock share and per share information in the accompanying consolidated financial statements and notes thereto included in this report have beenrestated to reflect retrospective application of the 2012 and 2011 Reverse Stock Split for all periods presented, except for par value per share and the numberof authorized shares, which were not affected. Shares of the Company’s common stock underlying outstanding options and warrants were proportionatelyreduced and the exercise prices of outstanding options and warrants were proportionately increased in accordance with the terms of the agreements governingsuch securities. Shares of the Company’s common stock underlying outstanding convertible preferred stock and warrants were proportionately reduced andthe conversion rates were proportionately decreased in accordance with the terms of the agreements governing such securities.Net Loss Per ShareBasic and diluted net loss per share is computed using the weighted-average number of common shares outstanding during the periods. Basic earnings pershare (“EPS”) is calculated by dividing the net income or loss by the weighted-average number of common shares outstanding for the period, withoutconsideration for common stock equivalents. Diluted EPS is computed by dividing the net income or loss by the weighted-average number of common sharesand common stock equivalents outstanding for the period issuable upon the conversion of preferred stock and exercise of stock options and warrants. Thesecommon stock equivalents are included in the calculation of diluted EPS only if their effect is dilutive. The shares used to compute basic and diluted net lossper share represent the weighted-average common shares outstanding.Because the Company has incurred a net loss of all periods presented in the consolidated Statements of Operations, common stock issuable upon theconversion of preferred stock and the exercise of stock options and warrants are not included in the computation of net loss per share because their effect isanti-dilutive. At December 31, 2011 and 2010, the potentially dilutive securities include 6.7 billion and 21 million shares, respectively, reserved for theconversion of convertible preferred stock, including accrued dividends, and the exercise of outstanding stock options and warrants. Of the potentiallydilutive securities, 1.1 billion potentially dilutive common shares relate to presently issued and outstanding shares of preferred stock at December 31, 2011. F-11Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements Derivative LiabilitiesIn May 2010, the Company entered into definitive agreements with institutional investors and affiliates for a private placement of common stock, redeemableconvertible preferred stock and warrants to purchase convertible preferred stock for initial proceeds of $6,003,000 (the “May 2010 Financing”). Inconjunction with the May 2010 Financing, the Company issued redeemable convertible preferred stock that contained certain embedded derivative features,as well as warrants that are accounted for as derivative liabilities (see Notes 2 and 4). These derivative liabilities were determined to be ineligible for equityclassification due to certain provisions of the underlying preferred stock, which is also ineligible for equity classification, whereby redemption is outside thesole control of the Company and due to provisions that may result in an adjustment to their exercise or conversion price.The Company’s derivative liabilities were initially recorded at their estimated fair value on the date of issuance and are subsequently adjusted to reflect theestimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded as other income or expense, accordingly. Thefair value of these liabilities is estimated using option pricing models that are based on the individual characteristics of the common stock and preferredstock, the derivative liability on the valuation date, probabilities related to the Company’s operations and clinical development (based on industry data), aswell as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread. The option pricing models are particularlysensitive to changes in the aforementioned probabilities and the closing price per share of the Company’s common stock.Recently Issued Accounting StandardsIn May 2011, the FASB issued authoritative guidance regarding common fair value measurements and disclosure requirements in U.S. GAAP and IFRS. Thisnewly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair valuemeasurements that are estimated using significant unobservable inputs. This guidance is effective on a prospective basis for annual and interim reportingperiods beginning after December 15, 2011. The Company does not expect that adoption of this standard will have a material impact on its consolidatedfinancial position or results of operations.In June 2011, the FASB issued authoritative guidance regarding comprehensive income that it amended in December 2011. This newly issued accountingstandard (1) eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity and(2) requires the consecutive presentation of the statement of net income and other comprehensive income. The amendments do not change the items that mustbe reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income nor do the amendments affecthow earnings per share is calculated or presented. This guidance is required to be applied retrospectively and is effective for fiscal years and interim periodsbeginning after December 15, 2011. As this accounting standard only requires enhanced disclosure, the adoption of this standard will not impact theCompany’s consolidated financial position or results of operations.2. Fair Value of Financial InstrumentsFinancial assets and liabilities are measured at fair value, which is defined as the exchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on themeasurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.The following is a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may beused to measure fair value: • Level 1 — Quoted prices in active markets for identical assets or liabilities. • Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quotedprices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially thefull term of the assets or liabilities. • Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets orliabilities. F-12Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements As of December 31, 2011 and 2010, cash and cash equivalents were comprised of cash in checking accounts.In conjunction with the May 2010 Financing, the Company issued redeemable convertible preferred stock with certain embedded derivative features, as wellas warrants to purchase various types of convertible preferred stock and units. These instruments are accounted for as derivative liabilities (see Note 4).The Company used Level 3 inputs for its valuation methodology for the embedded derivative liabilities and warrant derivative liabilities. The estimated fairvalues were determined using a binomial option pricing model based on various assumptions (see Note 4). The Company’s derivative liabilities are adjustedto reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expenseaccordingly, as adjustments to fair value of derivative liabilities.At December 31, 2011 and 2010, the estimated fair values of the liabilities measured on a recurring basis are as follows (in thousands): Fair Value Measurements at December 31, 2011 Balance atDecember 31,2011 Quoted Prices inActive Markets(Level 1) Significant OtherObservable Inputs(Level 2) SignificantUnobservable Inputs(Level 3) Embedded derivative liabilities $3,680 $— $— $3,680 Warrant derivative liabilities 11,590 — — 11,590 Total $15,270 $— $— $15,270 Fair Value Measurements at December 31, 2010 Balance atDecember 31,2010 Quoted Prices inActive Markets(Level 1) Significant OtherObservable Inputs(Level 2) SignificantUnobservable Inputs(Level 3) Embedded derivative liabilities $5,170 $— $— $5,170 Warrant derivative liabilities 932 — — 932 Total $6,102 $— $— $6,102 F-13Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements The following table presents the activity for liabilities measured at estimated fair value using unobservable inputs for the years ended December 31, 2011 and2010 (in thousands): Fair Value Measurements Using SignificantUnobservable Inputs (Level 3) Embedded DerivativeLiabilities Warrant DerivativeLiabilities Total Balance at December 31, 2009 $— $— $— Issuances 5,524 5,494 11,018 Adjustments to estimated fair value (785) (4,562) (5,347) Dividends paid in Series C-1 Preferred Stock 359 — 359 Accrued dividends payable in Series C-1 Preferred Stock 72 — 72 Balance at December 31, 2010 5,170 932 6,102 Adjustments to estimated fair value (1,150) 10,658 9,508 Decrease of the embedded derivative liabilities for preferred shares converted intocommon stock (361) — (361) Reversal of previously accrued dividends (72) (72) Dividends paid in Series C-1 Preferred Stock 41 41 Accrued dividends payable in Series C-1 Preferred Stock 52 — 52 Balance at December 31, 2011 $3,680 $11,590 $15,270 At the closing of the May 2010 Financing, the amount by which the fair value of the 2010 derivative liability issuances exceeded the proceeds from the May2010 Financing of $5,015,000 was recorded to other expense. During the year ended December 31, 2011, the estimated fair value of derivative liabilitiesincreased by $9,508,000, which was recorded as non-cash other expense. During the year ended December 31, 2010, the estimated fair value of derivativeliabilities decreased by $5,347,000, which was recorded as non-cash other income, resulting in net other income of $332,000 for the year ended December 31,2010.3. GliaMed Asset PurchaseIn March 2011, the Company and Jewel Merger Sub acquired assets related to certain RIL compounds from GliaMed. The Compounds were acquiredpursuant to the Asset Agreement for a nominal amount, and if certain milestones noted below were met, the Company would have paid GliaMed additionalconsideration of up to 8,205 shares of newly designated convertible Series E Preferred, which would have been convertible into approximately 20% of theCompany’s fully diluted outstanding common stock on an as-converted basis. The issuance of the shares was tied to the achievement of certain developmentand regulatory milestones. GliaMed was also eligible to receive a cash payment from the Company of $5,000,000 if a Compound was approved by the FDAor EMA in two or more clinical indications.In late May, 2011, the Company received final data from the Company’s clinical research organization, which showed that the predetermined studyendpoints, as set forth in the Asset Agreement, were not met and that the LJP1485 compound did not show statistically significant improvement in the studyendpoints as compared to vehicle (placebo).The purchase was originally recorded as a long-term other asset for the intangible rights received related to the Compounds equal to the nominal amount paidto GliaMed plus the asset acquisition costs incurred for legal services and due diligence related to the investigation of the underlying technology. As a resultof the negative results in the confirmatory preclinical study in May 2011, the Company discontinued the development of LJP1485 in May 2011 and inJune 2011 the Company sold the Compounds back to GliaMed by selling all of the outstanding capital stock of Jewel Merger Sub to GliaMed for the samenominal amount that it had paid for the Compounds.Jewel Merger Sub had no other assets or liabilities other than those relating to the Compounds and related assets and contract rights. F-1411Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements As part of this asset purchase, the Company designated five new series of preferred stock on March 30, 2011: its Series C-1 Stock, Series C-2 Stock, Series D-1 Stock, Series D-2 Stock (collectively, the “New Preferred Stock”) and Series E Preferred Stock. It exchanged on a one-for-one exchange ratio each share ofits existing Series C-1 Preferred Stock that was outstanding for a new share of Series C-1 Stock. Each holder of New Preferred Stock and Series E PreferredStock may convert its shares into common stock subject to a weekly conversion cap and certain common stock ownership limits.4. Securities Purchase AgreementOn May 24, 2010, the Company entered into a Securities Purchase Agreement by and among the Company and the purchasers named therein (the“Purchasers”). The Purchasers included institutional investors as well as the Company’s Chief Executive Officer, Chief Financial Officer and an additionalCompany employee at that time. The total investment by these Company employees represented less than 3% of the proceeds received by the Company inthe May 2010 Financing. Pursuant to the Securities Purchase Agreement, on May 26, 2010 (the “Closing Date” or “Closing”), for total consideration of$6,003,000, the Purchasers purchased (i) an aggregate of 289,704 shares of the Company’s Common Stock, par value $0.0001 per share, at a contractuallystated price of $3.00 per share, and (ii) 5,134 shares of the Company’s Series C-1 Preferred, par value $0.0001 per share, at a contractually stated price of$1,000 per share. The Purchasers also received (i) Series D-1 Warrants to purchase 5,134 shares of the Company’s Series D-1 Preferred, par value $0.0001 pershare, at an exercise price of $1,000 per share, which warrants may be exercised on a cashless basis, and (ii) Series C-2 Warrants to purchase 10,268 units, atan exercise price of $1,000 per unit, which warrants are exercisable only in cash, with each unit consisting of one share of the Company’s Series C-2Preferred, par value $0.0001 per share, and an additional Series D-2 Warrant to purchase one share of the Company’s Series D-2 Preferred, par value $0.0001per share, at an exercise price of $1,000 per share.At the Closing Date, the estimated fair value of the Series C-2 Warrants for units, Series D-1 Warrants, and the embedded derivatives included within theSeries C-1 Preferred exceeded the proceeds from the May 2010 Financing of $6,003,000 (see the valuations of these derivative liabilities under the heading,“Derivative Liabilities” below). As a result, all of the proceeds were allocated to these derivative liabilities and no proceeds remained for allocation to theCommon Stock and Series C-1 Preferred issued in the financing.As discussed in Note 2, in March 2011, the Company entered into the Consent Agreement which amended the terms of the Securities Purchase Agreement.Under the Consent Agreement, the holders agreed to the following, among other changes: (i) a temporary suspension of dividends on Series C-1 Preferredand Series C-2 Preferred (ii) to provide an additional cash payment of approximately $236,000 in exchange for the right to receive Series C-2 Preferred uponthe achievement of certain pre-specified results in the preclinical study of one of the Compounds (the “Preclinical Milestone”), (iii) to increase the warrantsthat must be exercised for cash from 10,268 to 10,646 units, (iv) the mandatory exercise of $7,452,000 of such warrants upon the achievement of thePreclinical Milestone, (v) the mandatory exercise of the remaining $3,194,000 of warrants upon the achievement of a future clinical milestone and (vi) anautomatic one time downward conversion price adjustment following the 2011 Reverse Stock Split.The Company filed its Series C/D Certificate and Series E Certificate (collectively, the “Certificates”) with the State of Delaware on March 30, 2011. EachCertificate provides the holders with the following rights: • The holders of New Preferred Stock and Series E Preferred Stock (collectively, the “C/D/E Preferred Stock”) do not have voting rights unlessrequired by the Delaware General Corporation Law or as set forth below. • Cumulative dividends are payable on the Series C-1 Stock and Series C-2 Stock (together referred to herein as the “Series C Preferred”) at a rateof 15% per annum and on the Series E Preferred Stock at a rate of 5% per annum, each accruing from the date of issuance through the date ofconversion or redemption, payable semi-annually in shares of Series C-1 Stock, Series C-2 Stock and Series E Preferred Stock, respectively, butsubject to the temporary suspension of dividends with respect to the Series C Preferred, as described above. Neither the Series D-1 Stock nor theSeries D-2 Stock is entitled to dividends. F-151111111111111111111111111Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements • The C/D/E Preferred Stock is convertible into common stock, initially at a rate of 66,667 shares of common stock for each share of C/D/EPreferred Stock, subject to certain limitations discussed below, at the election of the holders of C/D/E Preferred Stock. The conversion rate will beadjusted for certain events, such as stock splits, stock dividends, reclassifications and recapitalizations, and the New Preferred Stock is subject tofull-ratchet anti-dilution protection such that any subsequent issuance of common stock below the effective conversion price of the C/D/EPreferred Stock at the time of such issuance automatically adjusts the conversion price of the C/D/E Preferred Stock to such lower price. There arealso limits on the amount of C/D/E Preferred Stock that can be converted and the timing of such conversions. The New Preferred Stock may beconverted starting the first Monday following the Closing of the asset purchase. The Series E Preferred Stock may not be converted until the firstMonday following the achievement of the Preclinical Milestone under the Agreement. • Upon a Liquidation Event (as defined in each Certificate), no other class or series of capital stock can receive any payment unless the NewPreferred Stock has first received a payment in an amount equal to $1,000 per share, plus all accrued and unpaid dividends, if applicable. Oncethe New Preferred Stock has received its liquidation payment, the Series E Preferred Stock is entitled to receive a payment in an amount equal to$1,000 per share, plus all accrued and unpaid dividends, if applicable. • In the event that certain actions occur without the prior written consent of the holders of two-thirds of the then outstanding shares of NewPreferred Stock (the “Requisite Holders”), such as the Company’s material breach of any material representation or warranty under the SecuritiesAgreement, a suspension of the trading of the Company’s common stock, the failure to timely deliver shares on conversion of the C/D/E PreferredStock, or the consummation of a Change of Control (as defined in the Certificate of Designations), then the holders of the Series C Preferred shallhave the right, upon the delivery of a notice to the Company by the Requisite Holders, to have such shares redeemed by the Company for anamount equal to the greater of $1,000 per share, plus accrued and unpaid dividends, or the fair market value of the underlying common stockissuable upon conversion of the Series C Preferred. The Series E Preferred Stock does not have similar redemption rights. • Upon certain redemption events, such as the Company’s breach of covenants or material representations or warranties under the PurchaseAgreement, the conversion price of the C/D/E Preferred Stock decreases to 10% of the conversion price in effect immediately before suchredemption event.So long as at least 1,000 shares of New Preferred Stock remain outstanding (or at least 3,000 shares of New Preferred Stock remain outstanding if the CashWarrants have been fully exercised), the Company may not take a variety of actions (such as altering the rights, powers, preferences or privileges of the NewPreferred Stock so as to effect the New Preferred Stock adversely, amending any provision of the Company’s certificate of incorporation, entering into anagreement for a Strategic Transaction or Change of Control (as each is defined in the Series C/D Certificate) and may not consummate any financing or file aregistration statement with the Securities and Exchange Commission without the prior approval of the Requisite Holders. The Series E Preferred Stock doesnot have similar protective provisions.In June 2011, the Company entered into the Amendment Agreement which amended the terms of the Securities Purchase Agreement and the ConsentAgreement. Under the Amendment Agreement, the Holders agreed to the following, among other changes: (i) a temporary waiver of dividends on Series CPreferred (ii) to provide additional working capital by July 29, 2011, in an amount to be determined, if the Requisite Holders (as defined in the AmendmentAgreement) determined by July 22, 2011 that, as of such date, the Company was continuing to pursue a Strategic Transaction (as defined in the AmendmentAgreement) (iii) to purchase up to all of the outstanding Series C Preferred and certain warrants held by then current and former Company employees,including the executive officers at that time, who will have the right to require the Holder to purchase these securities for a limited period of time followingthe employee’s termination of service with the Company. F-1611Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements In August 2011, the Company entered into a Second Amendment Agreement which extended the terms of the Amendment Agreement through October 31,2011. Under the Second Amendment Agreement, the Holders agreed to the following, among other changes: (i) to continue a temporary waiver of dividendson Series C Preferred (ii) to provide additional working capital, in an amount to be determined, if the Requisite Holders (as defined in the SecondAmendment Agreement) determine by September 2, 2011, and then again by September 26, 2011, that, as of such date, the Company was continuing topursue a Strategic Transaction (as defined in the Second Amendment Agreement) (iii) to purchase up to all of the outstanding Series C Preferred and certainwarrants held by then current and former Company employees, including the executive officers at that time, who will have the right to require the Holder topurchase these securities for a limited period of time following the employee’s termination of service with the Company.Common StockPursuant to Rule 144 under the Securities Act of 1933 the Purchasers were restricted from selling the common stock until November 2010, which was sixmonths after the Closing Date.Redeemable Preferred StockAs of December 31, 2011, the Company’s Board of Directors is authorized to issue 8,000,000 shares of preferred stock, with a par value of $0.0001 per share,in one or more series, of which 11,000 are designated for Series C-1 Preferred, 22,000 are designated Series C-2 Preferred, 5,134 are designated Series D-1Preferred, 10,868 are designated Series D-2 Preferred, and 12,000 are designated Series E Preferred. As of December 31, 2011, 5,043 shares of Series C-1Preferred Stock are issued and outstanding. As of December 31, 2010, 5,573 shares of Series C-1 Preferred Stock were issued and outstanding.Voting RightsThe holders of New Preferred Stock do not have voting rights other than for general protective rights required by the Delaware General Corporation Law or asset forth below.DividendsCumulative dividends are payable on the Series C Preferred at an annual rate of 15% from the date of issuance through the date of conversion or redemption,payable semi-annually each November 25 and May 25 in shares of Series C Preferred. There is no limit to the number of shares of Series C Preferred thatmay be issued as dividends. Neither the Series D-1 Preferred nor the Series D-2 Preferred (if and when issued) is entitled to dividends.As discussed in Note 1, the Company funded its confirmatory preclinical study of the RIL compounds and general operations in part through the ForfeitedDividend and the Waived Dividend. From June 1 through August 31, 2011, there was an accrual of five shares Series C Preferred payable to current andformer Company employees who are holders of Series C Preferred. These holders waived their dividends as part of the Second Amendment Agreementeffective after August 31, 2011. The Waived Dividends were extended to cover the period through October 31, 2011. Dividends were paid in shares to theseholders on November 25, 2011 and were accrued for such holders for the period from November 26, 2011 to December 31, 2011.Conversion RightsThe New Preferred Stock was convertible into common stock, initially at a rate of 667 shares of common stock for each share of New Preferred Stock, subjectto certain limitations discussed below, at the election of the holders of New Preferred Stock. The conversion rate was to be adjusted for certain events, such asstock splits, stock dividends, reclassifications and recapitalizations, and the New Preferred Stock is subject to full-ratchet anti-dilution protection such that ifthe Company issues or grants any warrants, rights, options to subscribe or purchase common stock or common stock equivalents (the “Options”) and the priceper share for which the common stock issuable upon the exercise of such Options is below the effective conversion price of the New Preferred Stock at thetime of such issuance, then the conversion rate of the New Preferred Stock automatically adjusts to increase the number of common shares into which it canconvert. There are also limits on the amount of New Preferred Stock that can be converted and the timing of such conversions. In accordance with the ConsentAgreement, after the 2011 Reverse Stock Split, the conversion ratio for the New Preferred Stock was adjusted based on the trading price of the Company’scommon stock over a period of time after the 2011 Reverse Stock Split was implemented. Accordingly, effective May 7, 2011, each share of New PreferredStock was convertible into approximately 166,667 shares of common stock. F-17111111111thth111111Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements Effective with the Consent Agreement, in any week, each holder of New Preferred Stock may convert its amount of the outstanding New Preferred Stock heldby the stockholder multiplied by the Conversion Cap (as defined in the Certificate of Designations for the Series C-1, C-2, D-1 and D-2 Preferred (the“Series C/D Certificate”) for such week. Depending on the Closing Sales Prices (as defined in the Series C/D Certificate), the Conversion Cap can rangefrom 0% to 7.2%. Moreover, holders of New Preferred Stock may not convert if such conversion would result in the holder or any of its affiliates beneficiallyowning more than 9.999% of the Company’s then issued and outstanding shares of common stock. As of December 31, 2011, 588 shares of Series C-1Preferred had been converted into common stock.Upon certain redemption events, as set forth in the Securities Purchase Agreement, and as subsequently amended in the Consent Agreement, the conversionprice of the New Preferred Stock decreases to 10% of the conversion price in effect immediately before such redemption event thereby increasing the numberof common shares that would be issued for each share of New Preferred Stock by a factor of ten times.In connection with the Asset Purchase Agreement and the transaction that occurred in January 2012, the New Preferred Stock was exchanged for the 2012New Preferred Stock (see Note 1). Additionally, another reverse stock split was to be executed per the Asset Purchase Agreement. The 2012 Reverse Stockoccurred on February 17, 2012 and the conversion rate of the 2012 New Preferred Stock changed as a result. Effective on March 3, 2012, each share of 2012New Preferred Stock was convertible into approximately 213,083 shares of common stock.Liquidation PreferenceUpon a Liquidation Event (as defined in the Series C/D Certificate), no other class or series of capital stock can receive any payment unless the PreferredStock has first received a payment in an amount equal to $1,000 per share, plus all accrued and unpaid dividends, if applicable.Redemption RightsIn the event that certain actions occur without the waiver or prior written consent of the holders of two-thirds of the then outstanding shares of New PreferredStock (the “Requisite Holders”), such as the Company’s material breach of any material representation or warranty under the Securities Purchase Agreement, asuspension of the trading of the Company’s common stock, the failure to timely deliver shares on conversion of the New Preferred Stock, bankruptcyreorganization or the consummation of a Change of Control (as defined in the Series C/D Certificate) among others, then the holders of the Series CPreferred shall have the right, upon the delivery of a notice to the Company by the Requisite Holders, to have such shares redeemed by the Company for anamount equal to the greater of $1,000 per share, plus accrued and unpaid dividends, or the fair market value of the underlying common stock issuable uponconversion of the Series C Preferred, which could include a greater number of shares pursuant to the conversion reset described above under the caption“Conversion Rights”. As of December 31, 2011 and through the date of this filing, none of these redemption actions have occurred to the Company’sknowledge.Since the Company failed to consummate a Strategic Transaction (as defined in the Series C/D Certificate) by February 26, 2011 (nine months from theMay 26, 2010 Closing), the Series CPreferred may be redeemed upon the demand of the Requisite Holders. The redemption price would be equal to $1,000per share, plus accrued and unpaid dividends. As of December 31, 2011, the redemption value was $5,116,000. The Requisite Holders have not elected thisredemption feature through December 31, 2011 or the period prior to the Asset Purchase Agreement on January 19, 2012. In connection with the AssetPurchase Agreement, the January 2012 transaction was designated as a Strategic Transaction and any redemption events associated with the originaldefinition of a Strategic Transaction in the Series C/D Certificate are irrevocably waived. F-18111111111111111111 11Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements RestrictionsSo long as at least 1,000 shares of New Preferred Stock remain outstanding (or at least 3,000 shares of New Preferred Stock remain outstanding if the Series C-2 Warrants have been exercised), the Company may not take a variety of actions (such as altering the rights, powers, preferences or privileges of the NewPreferred Stock so as to affect the New Preferred Stock adversely, amending any provision of the Company’s certificate of incorporation, entering into anagreement for a Strategic Transaction or Change of Control, consummating any financing or filing a registration statement with the Securities and ExchangeCommission, or “SEC”) without the prior approval of the Requisite Holders. From May 2010 through April 2011, the Company had also agreed to certainlimitations on its spending per month based on predetermined budgeted amounts. See Note 10 for changes in the restrictions at the time of the January 2012asset purchase agreement.Accounting TreatmentOn May 26, 2010, the Company issued 5,134 shares of Series C-1 Preferred and recorded the par value of $0.0001 per share with a corresponding reductionto paid-in capital, given that there was no allocated value from the proceeds to the Series C-1 Preferred.In a separate transaction, in exchange for a first right of negotiation for a product candidate, the Company issued approximately 50 shares of Series C-1Preferred convertible into approximately 83,000 shares of the Company’s common stock to a Purchaser on May 26, 2010. Using the present value of the faceamount of the Series C-1 Preferred at Closing, these shares were valued at $12,000 and were fully charged to general and administrative expense during thethree months ended June 30, 2010.Under accounting guidance covering accounting for redeemable equity instruments, preferred securities that are redeemable for cash or other assets are to beclassified outside of permanent equity (within the mezzanine section between liabilities and equity on the consolidated balance sheets) if they areredeemable at the option of the holder or upon the occurrence of an event that is not solely within the control of the issuer. As there are redemption-triggeringevents related to the Series C Preferred that are not solely within the control of the Company, the Series C-1 Preferred was classified outside of permanentequity.As of December 31, 2011, the outstanding Series C-1 Preferred is convertible into approximately 8,405,000 shares of common stock. The Company may berequired to redeem the Series C-1 Preferred if a redemption event occurs. Since the Company did not consummate a Strategic Transaction by February 26,2011, the Series C-1 Preferred was currently redeemable and therefore the Company adjusted the carrying value of the Series C-1 Preferred to the redemptionvalue of such shares. The carrying value at December 31, 2011, $5,133,000, represents the redemption value of the Series C-1Preferred plus accrued andunpaid dividends.As of December 31, 2010, accrued dividends on the Series C-1 Preferred were $5,000, which consisted of 79 shares of Series C-1 Preferred, or approximately0.014 dividend shares per Series C-1 Preferred share outstanding, convertible into approximately 132,000 shares of common stock. Due to the forfeiture ofdividends on the Company’s outstanding Series CPreferred for the period from November 26, 2010 to May 31, 2011 as discussed in Note 1, the accrueddividends of $5,000 as of December 31, 2010 were reversed.As discussed in Note 1, the dividends for then current and former Company employees were forfeited from November 26, 2010 to May 31, 2011 and waivedfrom August 31, 2011 to October 31, 2011, and the dividends for the key investors were forfeited/waived from November 26, 2010 to October 31, 2011. F-1911111111111 1 1111 Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements As of December 31, 2011 accrued dividends on the Series C-1 Preferred were $74,000, which consisted of 74 shares of Series C-1 Preferred for the periodNovember 26, 2011 to December 31, 2011. The accrued dividends are convertible into approximately 123,000 shares of common stock.Derivative LiabilitiesThe Series C-1 Preferred and the underlying securities of the Series C-2 Warrants for units and Series D-1 Warrants (Series C Preferred and Series DPreferred) contain conversion features. In addition, the Series C-1 Preferred and the underlying securities of the Series C-2 Warrants for units (Series CPreferred) are subject to redemption provisions that are outside of the control of the Company.The Series C-2 Warrants and Series D-1 Warrants are exercisable starting on the issuance date and expire three years from the date of issuance. The Series C-2 Warrants must be exercised in cash and beginning in June 2011, they are no longer subject to mandatory exercise terms. The Series D-1 Warrants may beexercised on a cashless basis and are not subject to mandatory exercise terms.Changes in the redemption provisions and the expiration dates of the Warrants upon the January 2012 asset purchase are described in Note 1.Accounting TreatmentThe Company accounted for the conversion and redemption features embedded in the Series C-1 Preferred (the “Embedded Derivatives”) in accordance withaccounting guidance covering derivatives. Under this accounting guidance, companies may be required to bifurcate conversion and redemption featuresembedded in redeemable convertible preferred stock from their host instruments and account for these embedded derivatives as free standing derivativefinancial instruments. If the underlying security of the embedded derivative requires net cash settlement in the event of circumstances that are not solelywithin the Company’s control, the embedded derivative should be classified as a liability, measured at fair value at issuance and adjusted to their current fairvalue at each period. As there are redemption triggering events for net cash settlement for Series C Preferred that are not solely within the Company’s control,and the conversion feature is a derivative, the Embedded Derivatives are classified as liabilities and are accounted for using fair value accounting at eachreporting date (also see Note 2).The Company accounted for the Series C-2 Warrants for units and Series D-1 Warrants in accordance with accounting guidance covering derivatives. If theunderlying security of the warrant, a.) requires net cash settlement in the event of circumstances that are not solely within the Company’s control or if not, ifthey are b.) not indexed to the Company’s own stock, the warrants should be classified as liabilities, measured at fair value at issuance and adjusted to theircurrent fair value at each period. As there are redemption triggering events for Series C Preferred that are not solely within the Company’s control, and theSeries D Preferred are not indexed to the Company’s own stock, the Series C-2 Warrants for units and Series D-1 Warrants are classified as liabilities and areaccounted for using fair value accounting at each reporting date. The Embedded Derivatives, Series C-2 Warrants for units and Series D-1 Warrants arecollectively referred to as the “Derivative Liabilities”.The estimated fair values of the Derivative Liabilities as of December 31, 2010 and 2011 are summarized as follows (in thousands): Fair Value Measurements at December 31,2010 December 31,2011 Embedded Derivatives of Series C-1 Preferred (including dividends paid in Series C-1 Preferred $5,098 $3,628 Embedded Derivatives of accrued dividends payable in Series C-1 Preferred 72 52 Series D-1 Warrants 702 2,539 Series C-2 Warrants for: Series C-2 Preferred (1,175) 3,785 Series D-2 Warrants 1,405 5,266 $6,102 $15,270 F-201111111111111111111111111111111Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements The Derivative Liabilities were valued using binomial option pricing models with various assumptions detailed below. Due to the six month tradingrestriction on the unregistered shares of common stock issued or issuable from the conversion of Preferred Stock and the weekly conversion limitation onPreferred Stock as well as the uncertainty of the Company’s ability to continue as a going concern, the price per share of the Company’s common stock usedin the binomial option pricing models for the Derivative Liabilities was discounted from the closing market prices of $2.60 and $.0.27 on December 31, 2010and 2011, respectively. The expected lives that were used to value each of the Derivative Liabilities were based on the individual characteristics of theunderlying Preferred Stock, which impact the expected timing of conversion into common stock. In addition, the probabilities associated with theconsummation of a Strategic Transaction and the clinical development of a drug candidate based on industry data were used in each of the binomial optionpricing models. The models used to value the Series C-2 Warrants and Series D-1 Warrants are particularly sensitive to such probabilities, as well as to theclosing price per share of the Company’s common stock. In addition, as noted above, the model included the effects of the automatic one-time downwardconversion price adjustment following the 2011 Reverse Stock Split. To better estimate the fair value of the Derivative Liabilities at each reporting period,the binomial option pricing models and their inputs were refined based on information available to the Company. Such changes did not have a significantimpact on amounts recorded in previous interim reporting periods.At December 31, 2010, the total value of the Embedded Derivatives, including the estimated fair value of Embedded Derivatives related to the accrueddividends payable in Series C-1 Preferred of $72,000 was $5,170,000. At December 31, 2011, the total value of the Embedded Derivatives was $3,680,000,resulting in non-cash other income on the decrease in the estimated fair value of the Embedded Derivatives for the year ended December 31, 2011 of$1,149,000 (exclusive of the decrease in the liability of $361,000 due to the conversion of 588 shares of Series C-1 Preferred into common stock, $52,000due to the accrual of dividends and $41,000 due to the payment of dividends. Such decrease in value was primarily due to the significant decrease in theCompany’s common stock price, and the updates to the assumptions used in the option pricing models.The Embedded Derivatives were valued at December 31, 2010 and 2011 using a binomial option pricing model, based on the value of the Series C-1Preferred shares with and without embedded derivative features, with the following assumptions: December 31, 2010 December 31, 2011 Closing price per share of common stock $2.60 $0.27 Conversion price per share $1.50 $0.60 Volatility 84.6% 88.0% Risk-free interest rate 2.19% 0.83% Credit spread 14.2% 20.9% Remaining expected lives of underlying securities (years) 6.3 5.0 On December 31, 2010, the Series D-1 Warrants were recorded at estimated fair value of $702,000. On December 31, 2011, the Series D-1 Warrants wererevalued at $2,539,000 resulting in non-cash other expense on the increase in the estimated fair value of the Series D-1 Warrants of $1,837,000. Suchincrease in value was primarily due to the increase in corporate value as a result of the expected Strategic Transaction in January 2012 and the updates to theassumptions used in the option pricing models. F-2111111111Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements The Series D-1 Warrants were valued at December 31, 2010 and at December 31, 2011 using a binomial option pricing model with the followingassumptions: December 31, 2010 December 31, 2011 Closing price per share of common stock $2.60 $0.27 Conversion price per share $1.50 $0.60 Volatility 98.9% 67.5% Risk-free interest rate 1.02% 0.28% Remaining expected lives of underlying securities (years) 2.8 2.2 Probability of Strategic Transaction 50% 70% On December 31, 2010, the Series C-2 Warrants (which consist of rights to purchase Series C-2 Preferred and Series D-2 Warrants) were recorded at anestimated fair value of $230,000. On December 31, 2011, the Series C-2 Warrants were revalued at $9,051,000, resulting in non-cash other expense on theincrease in the estimated fair value of the Series C-2 Warrants of $8,821,000. Such increase in value was primarily due to the removal of the mandatoryredemption requirement upon successful completion of a Strategic Transaction, the extension of the term to cover the longer clinical trial period, the increasein the Series C-2 Warrants by 378 units, and the updates to the assumptions used in the option pricing models. The fair value of the rights to purchaseSeries C-2 Preferred was negative as of December 31, 2010 as the Series C-2 Warrants were mandatorily exercisable at a price that was greater than the fairvalue of the underlying instruments.The portion of the Series C-2 Warrants that represent the rights to purchase Series C-2 Preferred were valued at December 31, 2010 and December 31, 2011using a binomial option pricing model. The pricing model at December 31, 2010 is discounted for the lack of dividends until the Series C-2 Warrants areexercised. The pricing model at December 31, 2011 determines the value of the Series C-2 Preferred at the warrant exercise date which is assumed to be at theend of the successful clinical trial and subtracts the value of the Series C-2 Preferred with the exercise price. The assumptions are: December 31, 2010 December 31, 2011 Closing price per share of common stock $2.60 $0.27 Conversion price per share $1.50 $0.60 Volatility 84.6% 88.0% Risk-free interest rate 2.19% 0.83% Credit spread 14.2% 20.9% Remaining expected lives of underlying securities (years) 6.3 5.0 Time to exercise (months) 3 24 The Series D-2 Warrants were valued at December 31, 2010 and at December 31, 2011 using a binomial option pricing model with the same assumptionsused in the valuation of the Series D-1 Warrants. The increase in the value of the Series D-2 Warrants was primarily due to the increase in the Series D-2Warrants by 378 units and the updates to the assumptions used in the option pricing models.5. CommitmentsAs of December 31, 2011, there were no material operating leases, notes payable, purchase commitments or capital leases.The Company maintains its operations in a temporary space under a short-term arrangement and expects that it will transition to permanent space under along-term lease during 2012. F-2211111111111 1111111Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements 6. Retention Payments and Employment AgreementsOn December 4, 2009, the Company entered into Retention and Separation Agreements and General Release of All Claims (the “Retention Agreements”)with its then Chief Executive Officer and Vice President of Finance who was subsequently appointed as the Company’s Chief Financial Officer (the“Officers”). The Retention Agreements superseded the severance provisions of the employment agreements with the Officers that were effective prior to thesigning of the Retention Agreements (the “Prior Employment Agreements”), but otherwise the terms of the Prior Employment Agreements remained in fullforce and effect. The Retention Agreements did not alter the amount of severance that was to be awarded under the Prior Employment Agreements, but ratherchanged the events that triggered such payments.Pursuant to the Retention Agreements, on December 18, 2009 the Company paid a total of $269,000, less applicable withholding taxes, to the Officers (the“Retention Payments”). If the Officers were to voluntarily resign their employment prior to the earlier to occur of (a) the closing of the proposed Merger and(b) March 31, 2010, they were to immediately repay the Retention Payments to the Company. The date under (a) and (b) is referred to as the “SeparationDate.” Neither of the Officers resigned prior to March 31, 2010 and the Merger never closed, so each Officer was entitled to keep the full amount of herrespective Retention Payment.Under the Retention Agreements, each of the Officers agreed to execute an amendment to the Retention Agreements (the “Amendment”) on or about theSeparation Date to extend and reaffirm the promises and covenants made by them in the Retention Agreements through the Separation Date. The RetentionAgreements provided for severance payments totaling $538,000, less applicable withholding taxes (the “Severance Payments”), payable in a lump sum onthe eighth day after the Officers signed the Amendment.In April 2010, the Compensation Committee of the Board confirmed that, pursuant to the terms of the Retention Agreements, the Retention Payments andSeverance Payments were earned as of March 31, 2010 and agreed that the existing employment terms would remain in effect beyond March 31, 2010. TheRetention Payments of $269,000 that were paid in December 2009 were fully earned as of March 31, 2010, of which $222,000 was charged to general andadministrative expense for the quarter ended March 31, 2010. The fully-earned Severance Payments, including related employer taxes, of $550,000, werepaid during the quarter ended June 30, 2010. Of the $550,000 that was paid as of June 30, 2010, $456,000 was charged to general and administrative expensefor the quarter ended March 31, 2010.As an incentive to retain the Officers and an additional employee to pursue a strategic transaction such as a financing, merger, license agreement, third partycollaboration or wind down of the Company, in April 2010, the Compensation Committee approved retention bonuses for a total of up to approximately$600,000, depending on the type of strategic transaction completed (“Strategic Transaction Bonus”). Upon the closing of the financing in May 2010, theofficers and an additional employee were paid a Strategic Transaction Bonus totaling $296,000 that was charged to general and administrative expense forthe quarter ended June 30, 2010.As part of the Asset Purchase Agreement described in Note 1, the Company entered into an Employee Agreement with a new President and Chief ExecutiveOfficer on January 19, 2012. The annual base salary will be $240,000 for the first year of employment with the Company and will increase to $420,000 on theone- year anniversary of the employment start date. In addition, four weeks following the Conversion Price Adjustment Date, an option will be awarded topurchase the number of shares of common stock equal to 7.5% of the Company’s fully diluted, as-converted shares (the “First Option”), subject to the termsand conditions of any applicable award agreements and other restrictions and limitations generally applicable to common stock or equity awards held byCompany executives or otherwise imposed by law. Subject to applicable terms and conditions, the First Option shall vest with respect to 25% of theunderlying shares on the one-year anniversary of the employment start date, with the remainder vesting monthly, in equal monthly installments, over thethree years thereafter. The First Option will be exercisable at a price equal to the fair market value of a share of common stock on the date of the grant of theFirst Option. An additional option will be awarded to purchase the number of shares of common stock equal to 7.5% of the Company’s fully diluted, as-converted shares on the second anniversary of the employment start date, less the number of shares subject to the First Option on the First Option grant date(the “Second Option”), and the Second Option will also be subject to the same terms and conditions as the First Option. Subject to applicable terms andconditions, 50% of the underlying shares of the Second Option will be fully vested on the date of the grant with the remainder vesting monthly, in equalmonthly installments, over the two years thereafter. The Second Option will be exercisable at a price equal to the fair market value of a share of commonstock on the date of the grant of the Second Option. F-23Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements On January 19, 2012, effective upon the closing of the Asset Purchase Agreement, the former President and Chief Executive Officer and the former ChiefFinancial Officer resigned. Both of the Company’s aforementioned officers entered into separation agreements with the Company, and the Company agreedto make separation payments of $77,778 and $62,222, respectively.7. Stockholders’ EquityPreferred StockAs of December 31, 2011, the Company’s Board of Directors is authorized to issue 8,000,000 shares of preferred stock, with a par value of $0.0001 per share,in one or more series, of which 11,000 are designated for Series C-1 Preferred, 22,000 are designated Series C-2 Preferred, 5,134 are designated Series D-1Preferred, 10,868 are designated Series D-2 Preferred, and 12,000 are designated Series E Preferred. As of December 31, 2011, 5,043 shares of Series C-1Preferred Stock are issued and outstanding. As of December 31, 2010, 5,573 shares of Series C-1 Preferred Stock were issued and outstanding.WarrantsIn connection with the December 2005 private placement, the Company issued warrants to purchase 439 shares of the Company’s common stock. Thewarrants were immediately exercisable upon grant, had an exercise price of $50,000 per share and remained exercisable for five years. These warrants expiredin December 2010.In connection with the May 2008 public offering, the Company issued warrants to purchase 390 shares of the Company’s common stock. The warrants wereimmediately exercisable upon grant, have an exercise price of $21,500 per share and remain exercisable for five years. As of December 31, 2011, all of thesewarrants were outstanding and 390 shares of common stock are reserved for issuance upon exercise of the warrants.Stock Option PlansIn June 1994, the Company adopted the La Jolla Pharmaceutical Company 1994 Stock Incentive Plan (the “1994 Plan”), under which, as amended, 164shares of common stock were authorized for issuance. The 1994 Plan expired in June 2004 and there were 23 options outstanding under the 1994 Plan as ofDecember 31, 2011.In May 2004, the Company adopted the La Jolla Pharmaceutical Company 2004 Equity Incentive Plan (the “2004 Plan”), under which, as amended, 640shares of common stock have been authorized for issuance. The 2004 Plan provides for the grant of incentive and non-qualified stock options, as well asother share-based payment awards, to employees, directors, consultants and advisors of the Company with up to a 10-year contractual life and various vestingperiods as determined by the Company’s Compensation Committee or the Board of Directors, as well as automatic fixed grants to non-employee directors ofthe Company. As of December 31, 2011, there were a total of 261 options outstanding under the 2004 Plan and 351 shares remained available for futuregrant.In May 2010, the Company granted options to purchase a total of 580 shares of common stock to two employees. These grants were made outside of theCompany’s existing stockholder-approved equity compensation plans but were otherwise legally binding awards and did not require stockholder approval.These stock options are treated in all respects as if granted under the Company’s 2010 Equity Incentive Plan (the “2010 Plan”).In August 2010, the Company adopted the 2010 Plan under which 17,000 shares of common stock have been authorized for issuance. The 2010 Plan issimilar to the 2004 Plan, other than with regard to the number of shares authorized for issuance thereunder. The 2010 Plan provides for automatic increases tothe number of authorized shares available for grant under the 2010 Plan and as such, in May and September 2011, the number of authorized shares wereincreased by 33 and 16,007 shares of common stock, respectively. As of December 31, 2011, there were a total of 30 options outstanding and 16,970 sharesremained available for future grant under the 2010 Plan. F-24111111Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements A summary of the Company’s stock option activity and related data follows: Outstanding Options Number ofShares Weighted-AverageExercise Price Balance at December 31, 2009 350 $69,798 Granted 720 $530 Forfeited/Expired (90) $54,004 Balance at December 31, 2010 980 $20,370 Granted — — Forfeited/Expired (86) $50,529 Balance at December 31, 2011 894 $17,462 As of December 31, 2011, options exercisable have a weighted-average remaining contractual term of 6.8 years. No stock option exercises occurred duringthe years ended December 31, 2011 and 2010. As of December 31, 2011 and 2010, the total intrinsic value, which is the difference between the exercise priceand closing price of the Company’s common stock of options outstanding and exercisable, was $0 and less than $1,000, respectively. Years Ended December 31, 2011 2010 Options Weighted-AverageExercisePrice Options Weighted-AverageExercisePrice Exercisable at end of year 585 $26,243 382 $50,704 Weighted-average fair value of options granted during the year $— $436 Exercise prices and weighted-average remaining contractual lives for the options outstanding (excluding shares of restricted stock) as of December 31, 2011were: OptionsOutstanding Range of Exercise Prices Weighted-AverageRemainingContractualLife(in years) Weighted-AverageExercisePrice OptionsExercisable Weighted-AverageExercisePrice ofOptionsExercisable 30 $210 8.93 $210 15 $210 619 $550 8.41 $550 331 $550 90 $ 14,200 — $ 39,900 5.50 $26,364 84 $27,062 115 $ 42,000 — $ 52,600 4.16 $49,889 115 $49,889 23 $ 59,700 — $187,500 3.49 $112,337 23 $112,337 4 $235,500 1.72 $235,500 4 $235,500 4 $254,500 0.55 $254,500 4 $254,500 1 $260,500 0.39 $260,500 1 $260,500 4 $295,000 0.89 $295,000 4 $295,000 4 $352,500 0.25 $352,500 4 $352,500 894 $ 210 — $352,500 7.33 $17,462 585 $26,243 At December 31, 2011, the Company has reserved 18,215 shares of common stock for future issuance upon exercise of options granted or to be granted underthe 1994, 2004 and 2010 Plans, as well as for options granted outside of the Company’s equity compensation plans. F-25Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements Employee Stock Purchase PlanEffective August 1, 1995, the Company adopted the ESPP, under which shares of common stock are reserved for sale to eligible employees, as defined in theESPP. Employees may purchase common stock under the ESPP every three months (up to but not exceeding 10% of each employee’s base salary or hourlycompensation, and any cash bonus paid, subject to certain limitations) over the offering period at 85% of the fair market value of the common stock atspecified dates. The offering period may not exceed 24 months. At the Annual Meeting of Stockholders held on August 12, 2010, the stockholders approvedan amendment to the ESPP to extend the term thereof from 2015 to 2025 and to increase the shares of common stock authorized for issuance thereunder from85 to 485. As of December 31, 2011, 72 shares of common stock have been purchased under the ESPP and 413 shares of common stock are available forfuture issuance. No shares were issued under the ESPP during the year ended December 31, 2011. During the year ended December 31, 2010, 2 shares wereissued under the ESPP. Year EndedDecember 31,2010 Weighted-average fair value of Employee Stock Purchase Plan purchases $ 200 8. 401(k) PlanDuring September 2010, the Company adopted the La Jolla Pharmaceutical Company Retirement Savings Plan (the “401(k) Plan”), which qualifies underSection 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”). The 401(k) Plan is a defined contribution plan established to provideretirement benefits for employees and is employee funded up to an elective annual deferral. The 401(k) Plan is available for all employees who havecompleted one year of service with the Company.Following guidance in IRS Notice 98-52 related to the “safe harbor,” 401(k) plan method, non-highly compensated employees will receive a contributionfrom the Company equal to 3% of their annual salaries, as defined in the Code. Such contributions vest immediately and are paid annually following eachyear end. These “safe harbor” contributions by the Company were less than $8,000 and $2,000 for the years ended December 31, 2011 and 2010,respectively. These contributions were each paid during March of the following year.9. Income TaxesThe FASB Topic on Income Taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition andmeasurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not tobe sustained upon examination by taxing authorities. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of beingsustained. There were no unrecognized tax benefits as of the date of adoption. As of December 31, 2011 and 2010, the total liability for unrecognized taxbenefits was $45,000 and is included in current liabilities.The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual forinterest or penalties on the Company’s consolidated balance sheets at December 31, 2011 or December 31, 2010, and has not recognized interest and/orpenalties in the consolidated statements of operations for the years ended December 31, 2011 and 2010.A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands): Amount Unrecognized tax benefits balance at December 31, 2010 $45 Increases related to current and prior year tax positions — Settlements and lapses in statutes of limitations — Unrecognized tax benefits balance at December 31, 2011 $45 F-26Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements Included in the balance of unrecognized tax benefits at December 31, 2011 are $45,000 of tax benefits that, if recognized, would affect the effective tax rate.The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years for 1996 and forward are subject toexamination by the United States and California tax authorities due to the carry forward of unutilized net operating losses and research and developmentcredits.The Company has not completed its Section 382/383 analysis regarding the limitation of net operating loss and research and development creditcarryforwards. The Company does not presently plan to complete its Section 382/383 analysis and unless and until this analysis has been completed, theCompany has removed the deferred tax assets for net operating losses and research and development credits generated through 2011 from its deferred taxasset schedule and has recorded a corresponding decrease to its valuation allowance.At December 31, 2011, the Company had federal and California income tax net operating loss carryforwards of approximately $359,657,000 and$301,915,000, respectively. The difference between the federal and California tax loss carryforwards is primarily attributable to the capitalization of researchand development expenses for California income tax purposes. In addition, the Company has federal and California research and development tax creditcarryforwards of $15,958,000 and $10,081,000, respectively. The federal net operating loss, research tax credit carryforwards and California net operatingloss carryforwards will begin to expire in 2011 unless previously utilized. The California research and development credit carryforwards will carry forwardindefinitely until utilized. In May 2010 and February 2009, the Company experienced ownership changes at a time when its enterprise value was minimal. Asa result of these ownership changes and the low enterprise value, the Company’s federal and California net operating loss carryforwards and research anddevelopment credit carryforwards as of December 31, 2011 will be subject to limitation under IRC Section 382/383 and more likely than not will expireunused.Significant components of the Company’s deferred tax assets as of December 31, 2011 and 2010 are listed below (in thousands): December 31, 2011 2010 Deferred tax assets: Net operating loss carryforwards $— $— Research and development credits — — Capitalized research and development and other 11,156 10,989 Total deferred tax assets 11,156 10,989 Net deferred tax assets 11,156 10,989 Valuation allowance for deferred tax assets (11,156) (10,989) Net deferred taxes $— $— A valuation allowance of $11,156,000 and $10,989,000 at December 31, 2011 and 2010, respectively, has been recognized to offset the net deferred taxassets as realization of such assets is uncertain.Income taxes computed by applying the U.S. Federal Statutory rates to income from continuing operations before income taxes are reconciled to theprovision for income taxes set forth in the statement of operations as follows (in thousands): December 31, 2011 2010 Income tax benefit at statutory federal rate $(4,042) $(1,611)State tax benefit, net of federal (664) (264) Generation of research and development credits — — Expired tax attributes 3,709 3,521 Removal of net operating losses and research and development credits 2,644 1,156 Stock compensation expense 22 36 Change in valuation allowance 167 (1,892) Other (1,836) (946) Provision for income taxes $— $— F-27Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements 10. Subsequent EventsThe Company has completed an evaluation of all subsequent events through the issuance date of these consolidated financial statements and the followingrepresent subsequent events for disclosure.Asset Purchase AgreementAs described in Note 1, the Company acquired certain assets and rights to the GCS-100 compound on January 19, 2012 from Solana in an asset purchasetransaction for nominal consideration.This asset acquisition is expected to be accounted for in accordance with the authoritative guidance for intangible assets. The consideration paid to acquirethe Purchased Assets is required to be measured at fair value and, initially, the consideration to be measured consists only of the nominal amount paid at theClosing.The Company filed its Series C/D Certificate with the State of Delaware on January 20, 2012. The Series C/D Certificate provides the holders with thefollowing rights: • The holders of 2012 New Preferred Stock do not have voting rights, unless required by the Delaware General Corporation Law or as set forthbelow. • Cumulative dividends are payable on the Series C-1 Stock and Series C-2 Stock (together referred to herein as the “Series C Preferred”) at a rateof 15% per annum, each accruing from the date of issuance through the date of conversion or redemption, payable semi-annually in shares ofSeries C-1 Stock and Series C-2 Stock, respectively. Neither the Series D-1 Stock nor the Series D-2 Stock is entitled to dividends. • The 2012 New Preferred Stock is convertible into Common Stock, initially at a rate of 166,667 shares of Common Stock for each share of 2012New Preferred Stock (1,667 shares, after adjusting for our 1-for-100 reverse stock split), subject to certain limitations discussed below, at theelection of the holders of New Preferred Stock. The conversion rate will be adjusted for certain events, such as stock splits, stock dividends,reclassifications and recapitalizations, and the 2012 New Preferred Stock is subject to full-ratchet anti-dilution protection such that anysubsequent issuance of Common Stock below the effective conversion price of the 2012 New Preferred Stock at the time of such issuanceautomatically adjusts the conversion price of the 2012 New Preferred Stock to such lower price. There are also limits on the amount of 2012 NewPreferred Stock that can be converted and the timing of such conversions. • Upon a Liquidation Event (as defined in each Series C/D Certificate), no other class or series of capital stock can receive any payment unless theNew Preferred Stock has first received a payment in an amount equal to $1,000 per share, plus all accrued and unpaid dividends, if applicable • In the event that certain actions occur without the prior written consent of the holders of 80% of the shares of 2012 New Preferred Stock andWarrants (as defined in the Securities Purchase Agreement) on an as-converted basis (the “Requisite Holders”), such as the Company’s materialbreach of any material representation or warranty under the Securities Purchase Agreement, a suspension of the trading of the Common Stock, thefailure to timely deliver shares on conversion of the 2012 New Preferred Stock, the Company commences a bankruptcy proceeding, winding up,dissolution and the like, or the consummation of a Change of Control (as defined in the Series C/D Certificate), then the holders of the Series CPreferred shall have the right, upon the delivery of a notice to the Company by the Requisite Holders, to have such shares redeemed by theCompany for an amount equal to the greater of $1,000 per share, plus accrued and unpaid dividends, or the fair market value of the underlyingCommon Stock issuable upon conversion of the Series C Preferred. F-28222222Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements • In the event that the Company fails to timely deliver shares on conversion of the 2012 New Preferred Stock, under certain circumstances, theCompany must pay the 2012 New Preferred Stock holder’s costs and expenses of acquiring Cover Shares (as defined in the Series C/DCertificate). • Upon certain redemption events, such as the Company’s breach of covenants or material representations or warranties under the SecuritiesPurchase Agreement, the conversion price of the New Preferred Stock decreases to 10% of the conversion price in effect immediately before suchredemption event. • So long as at least 1,000 shares of 2012 New Preferred Stock remain outstanding (or at least 3,000 shares of 2012 New Preferred Stock remainoutstanding if the Cash Warrants have been fully exercised), the Company may not take a variety of actions (such as altering the rights, powers,preferences or privileges of the 2012 New Preferred Stock so as to effect the 2012 New Preferred Stock adversely, amending any provision of theCompany’s certificate of incorporation, setting aside any monies for the redemption, purchase or other acquisition of, or declare or pay anydividend or make any Distribution (as defined in the Series C/D Certificate) or other distribution other than pursuant to the Series C/D Certificateor equity compensation plans, increasing the value of the Common Stock, entering into an agreement for a Strategic Transaction or Change ofControl (as each is defined in the Series C/D Certificate), consummating any financing or filing a registration statement with the Securities andExchange Commission, incurring liabilities for no consideration or for cash consideration, property, services or other exchange, or taking anyaction or entering into any agreement causing the Company’s Net Cash (as defined in the Series C/D Certificate) to fall below $2,900,000 untilthe date that is thirteen months from the Closing of the asset purchase) without the prior approval of the Requisite Holders. • Subject to the approval of the Requisite Holders, 2,900 shares of the Series C-1 Stock are redeemable on, and only on, the twelve monthanniversary of the Closing of the asset purchase.Reverse Stock SplitThe Requisite Holders authorized the Company’s Board of Directors to effect and the Board of Directors has since approved a reverse stock splitimplemented on February 17, 2012, with such reverse stock split having an exchange ratio of 1-for-100 (the “ 2012 Reverse Stock Split”). No fractionalshares were issued, and, instead, fractional shares were rounded up to the nearest whole share. Pursuant to the Series C/D Certificate, the conversion price forthe 2012 New Preferred Stock was to automatically be adjusted downward if, after the 2012 Reverse Stock Split, on the Conversion Price Adjustment Date (asdefined in the Series C/D Certificate), the average of the closing sales prices (as defined in the Series C/D Certificate) for the three consecutive Trading Dayperiod ending on the last Trading Day prior to the Conversion Price Adjustment Date (the “Adjustment 3-Day Average Price”) is less than the product of theconversion price then in effect multiplied by ten. If this was the case, then the conversion price of the 2012 New Preferred Stock shall be reduced to a priceequal to ten percent (10%) of the Adjustment 3-Day Average Price. Effective on March 3, 2012, each share of 2012 New Preferred Stock was convertible intoapproximately 213,083 shares of common stock.Stock OptionsIn connection with the asset purchase agreement, certain members of the Board of Directors of the Company resigned on January 19, 2012. Two newmembers were appointed to the Board of Directors and both are to receive stock option grants at certain dates. The new President and Chief Executive Officeris one of the new members of the Board of Directors. See Note 6 for the terms of the employment agreement and stock option grant for the new President andChief Executive Officer. The other new director is to receive a stock option grant four weeks following the Conversion Price Adjustment Date to purchase thenumber of shares of Common Stock equal to .45% of the Company’s fully diluted, as-converted shares, subject to the terms and conditions of any applicableaward agreements and other restrictions and limitations generally applicable to common stock or equity awards held by Company executives or otherwiseimposed by law. Subject to applicable terms and conditions, the options will vest equally, on a quarterly basis, for one year following the commencement ofhis service on the Company’s Board of Directors. The options will be exercisable at a price equal to the fair market value of a share of Common Stock on thedate of the grant of the options. F-292Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements Issuance of Common StockAfter the 2012 Reverse Stock Split, holders of the 2012 New Preferred Stock have converted 22 shares of 2012 New Preferred Stock into 4,666,247shares of common stock. F-30Table of ContentsEXHIBIT INDEX Exhibit Number Description 2.1 Agreement and Plan of Reorganization, by and among La Jolla Pharmaceutical Company, Adamis Pharmaceuticals Corporationand Jewel Merger Sub, Inc., dated as of December 4, 2009 (9) 2.2 Asset Purchase Agreement by and among La Jolla Pharmaceutical Company, GliaMed, Inc., and Jewel Merger Sub, Inc., datedas of March 29, 2011 (10) 2.3 Asset Purchase Agreement by and among La Jolla Pharmaceutical Company and Solana Therapeutics, Inc., dated as ofJanuary 19, 2012 (15) 3.1 Restated Certificate of Incorporation (1) 3.2 Amended and Restated Bylaws (16) 3.3 Certificate of Designations, Preferences and Rights of Series C-1 Convertible Preferred Stock, Series C-2 Convertible PreferredStock, Series D-1 Convertible Preferred Stock and Series D-2 Convertible Preferred Stock (11) 3.4 Certificate of Designations, Preferences and Rights of Series C-1 Convertible Preferred Stock, Series C-2 Convertible PreferredStock, Series D-1 Convertible Preferred Stock and Series D-2 Convertible Preferred Stock (10) 3.5 Certificate of Designations, Preferences and Rights of Series C-1 Convertible Preferred Stock, Series C-2 Convertible PreferredStock, Series D-1 Convertible Preferred Stock and Series D-2 Convertible Preferred Stock (15) 3.6 Certificate of Designations, Preferences and Rights of Series E Convertible Preferred Stock (10) 4.1 Form of Common Stock Certificate (3) 9.1 Voting Agreement by and between La Jolla Pharmaceutical Company and GliaMed, Inc., dated as of March 31, 2011 (10)10.1 Form of Indemnification Agreement (4)*10.2 La Jolla Pharmaceutical Company 1994 Stock Incentive Plan (Amended and Restated as of May 16, 2003) (5)*10.3 La Jolla Pharmaceutical Company 1995 Employee Stock Purchase Plan (Amended and Restated as of June 20, 2008) (6)*10.4 La Jolla Pharmaceutical Company 2004 Equity Incentive Plan (Amended and Restated as of June 20, 2008) (6)*10.5 Form of Option Grant under the La Jolla Pharmaceutical Company 2004 Equity Incentive Plan (6)*10.6 La Jolla Pharmaceutical Company 2010 Equity Incentive Plan* **10.7 Form of Warrant Agreement (7)10.8 Confidential Separation Agreement and General Release of All Claims by and between La Jolla Pharmaceutical Company andDeirdre Y. Gillespie, M.D., dated as of January 13, 2012 (15)*11112222Table of ContentsExhibit Number Description10.9 Confidential Separation Agreement and General Release of All Claims by and between La Jolla Pharmaceutical Company andGail A. Sloan, dated as of January 13, 2012 (15)*10.10 Form of Voting Agreement (9)10.11 Securities Purchase Agreement, dated as of May 24, 2010 by and among the Company and the Purchasers named therein (11)10.12 Form of Series C-2 Preferred Stock Purchase Warrant (11)10.13 Form of Series D-1 Preferred Stock Purchase Warrant (11)10.14 Form of Series D-2 Preferred Stock Purchase Warrant (11)10.15 Chief Executive Officer Employment Agreement, dated as of May 24, 2010, by and between the Company and Deirdre Y.Gillespie, M.D. (11)*10.16 Confidential Retention Agreement, dated as of May 24, 2010, by and between the Company and Deirdre Y. Gillespie, M.D. (11)*10.17 Executive Employment Agreement, dated as of May 24, 2010, by and between the Company and Gail A. Sloan (11)*10.18 Confidential Retention Agreement, dated as of May 24, 2010, by and between the Company and Gail A. Sloan (11)*10.19 La Jolla Pharmaceutical Company Retirement Savings Plan (12)*10.20 Consent and Amendment Agreement by and among La Jolla Pharmaceutical Company and the undersigned parties thereto, datedas of March 29, 2011 (10)10.21 Consent and Amendment Agreement by and among La Jolla Pharmaceutical Company and the undersigned parties thereto, datedas of June 30, 2011 (13)10.22 Second Amendment Agreement by and among La Jolla Pharmaceutical Company and the undersigned parties thereto, dated as ofAugust 24, 2011 (14)10.23 Consent and Amendment Agreement by and among La Jolla Pharmaceutical Company and the undersigned parties thereto, datedas of January 19, 2012 (15)10.24 Employment Offer Letter by and between La Jolla Pharmaceutical Company and George Francis Tidmarsh, M.D., Ph.D., dated asof January 19, 2012 (15)*21.1 Subsidiaries of La Jolla Pharmaceutical Company **23.1 Consent of Independent Registered Public Accounting Firm BDO LLP **31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ** *This exhibit is a management contract or compensatory plan or arrangement.**Filed herewith.†Confidential treatment for certain provisions of this exhibit.(1)Previously filed with the Company’s Current Report on Form 8-K filed March 1, 2006 and incorporated by reference herein.(2)Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated by reference herein.Table of Contents(3)Previously filed with the Company’s Registration Statement on Form S-3 (Registration No. 333-131246) filed January 24, 2006 and incorporated byreference herein.(4)Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 and incorporated by reference herein.(5)Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated by reference herein.(6)Previously filed with the Company’s Registration Statement on Form S-8 (Registration No. 333-151825) filed June 20, 2008 and incorporated byreference herein.(7)Previously filed with the Company’s Current Report on Form 8-K filed May 7, 2008 and incorporated by reference herein.(8)Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 and incorporated by reference herein.(9)Previously filed with the Company’s Current Report on Form 8-K filed on December 7, 2009 and incorporated by reference herein.(10)Previously filed with the Company’s Current Report on Form 8-K filed April 5, 2011 and incorporated by reference herein.(11)Previously filed with the Company’s Current Report on Form 8-K filed May 28, 2010 and incorporated by reference herein.(12)Previously filed with the Company’s Current Report on Form 10-Q for the quarter ended September 30, 2010 and incorporated by reference herein.(13)Previously filed with the Company’s Current Report on Form 8-K, filed July 5, 2011 and incorporated by reference herein.(14)Previously filed with the Company’s Current Report on Form 8-K, filed August 25, 2011 and incorporated by reference herein.(15)Previously filed with the Company’s Current Report on Form 8-K, filed January 20, 2012 and incorporated by reference herein.(16)Previously filed with the Company’s Current Report on Form 8-K filed April19, 2011 and incorporated by reference herein.Exhibit 10.6APPENDIX C2010 Equity Incentive PlanLA JOLLA PHARMACEUTICAL COMPANY2010 EQUITY INCENTIVE PLANARTICLE IGENERAL PROVISIONS1.01 Definitions.Terms used herein and not otherwise defined shall have the meanings set forth below:(a) “Administrator” means the Board or a Committee that has been delegated the authority to administer the Plan.(b) “Award” means an Incentive Award or a Nonemployee Director’s Option.(c) “Award Document” means an award agreement duly executed on behalf of the Company and by the Recipient or, in the Administrator’sdiscretion, a confirming memorandum issued by the Company to the Recipient.(d) “Board” means the Board of Directors of the Company.(e) “Change in Control” means the following and shall be deemed to occur if any of the following events occur:(i) Except as provided by subsection (iii) hereof, the acquisition (other than from the Company) by any person, entity or “group,” within the meaningof Section 13(d)(3) or 14(d)(2) of the Exchange Act (excluding, for this purpose, the Company or its subsidiaries, or any employee benefit plan of theCompany or its subsidiaries which acquires beneficial ownership of voting securities of the Company), of beneficial ownership (within the meaning ofRule 13d-3 promulgated under the Exchange Act) of forty percent (40%) or more of either the then outstanding shares of Common Stock or the combinedvoting power of the Company’s then outstanding voting securities entitled to vote generally in the election of directors; or(ii) Individuals who, as of the effective date of the Plan, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least amajority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by theCompany’s stockholders, is or was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election ornomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of thedirectors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of the Plan,considered as though such person were a member of the Incumbent Board; or(iii) Approval by the stockholders of the Company of a reorganization, merger or consolidation with any other person, entity or corporation, other than:(A) a merger or consolidation which would result in the persons holding the voting securities of the Company outstanding immediately prior theretocontinuing to hold more than fifty percent (50%) of the combined voting power of the voting securities of the Company or its successor which areoutstanding immediately after such merger or consolidation, or(B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires fortypercent (40%) or more of the combined voting power of the Company’s then outstanding voting securities; or 2(iv) Approval by the stockholders of the Company of a plan of complete liquidation of the Company or an agreement for the sale or other dispositionby the Company of all or substantially all of the Company’s assets.Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred (1) if the “person” is an underwriter or underwriting syndicate thathas acquired the ownership of 50% or more of the combined voting power of the Company’s then outstanding voting securities solely in connection with apublic offering of the Company’s securities, or (2) if the “person” is an employee stock ownership plan or other employee benefit plan maintained by theCompany that is qualified under the provisions of the Employee Retirement Income Security Act of 1974, as amended.(f) “Code” means the Internal Revenue Code of 1986, as amended. Where the context so requires, a reference to a particular Code section shallalso refer to any successor provision of the Code to such section.(g) “Committee” means the committee appointed by the Board to administer the Plan.(h) “Common Stock” means the common stock of the Company.(i) “Company” means La Jolla Pharmaceutical Company.(j) “Dividend Equivalent” means a right granted by the Company under Section 2.07 to a holder of an Option, Stock Appreciation Right, orother Incentive Award denominated in shares of Common Stock to receive from the Company during the Applicable Dividend Period (as defined inSection 2.07) payments equivalent to the amount of dividends payable to holders of the number of shares of Common Stock underlying such Option, StockAppreciation Right, or other Incentive Award.(k) “Eligible Person” means any director, Employee or consultant of the Company or any Related Corporation.(l) “Employee” means an individual who is in the employ of the Company (or any Parent or Subsidiary) subject to the control and direction ofthe employer entity as to both the work to be performed and the manner and method of performance.(m) “Exchange Act” means the Securities Exchange Act of 1934, as amended. Where the context so requires, a reference to a particular section ofthe Exchange Act or rule thereunder shall also refer to any successor provision to such section or rule.(n) “Exercise Price” means the price at which the Holder may purchase shares of Common Stock underlying an Option.(o) “Fair Market Value” of capital stock of the Company shall be determined with reference to the closing price of such stock on the day inquestion (or, if such day is not a trading day in the U.S. securities markets, on the nearest preceding trading day), as reported with respect to the principalmarket or trading system on which such stock is then traded; or, if no such closing prices are reported, the mean between the high bid and low ask prices thatday on the principal market or national quotation system on which such shares are then quoted; provided, however, that when appropriate, the Administratorin determining Fair Market Value of capital stock of the Company may take into account such other factors as may be deemed appropriate under thecircumstances. Notwithstanding the foregoing, the Fair Market Value of capital stock for purposes of grants of Incentive Stock Options shall be determined incompliance with applicable provisions of the Code. The Fair Market Value of rights or property other than capital stock of the Company means the fairmarket value thereof as determined by the Administrator on the basis of such factors as it may deem appropriate.(p) “Holder” means the Recipient of an Award or any permitted assignee holding the Award.(q) “Incentive Award” means any Option (other than a Nonemployee Director’s Option), Restricted Stock, Stock Appreciation Right, StockPayment, Performance Award or Dividend Equivalent granted or sold to an Eligible Person under this Plan. 3(r) “Incentive Stock Option” means an Option that qualifies as an incentive stock option under Section 422 (or any successor section) of theCode and the regulations thereunder.(s) “Just Cause Dismissal” shall mean a termination of a Recipient’s Service for any of the following reasons: (i) the Recipient violates anyreasonable rule or regulation of the Company or the Recipient’s superiors or the Chief Executive Officer or President of the Company that (A) results indamage to the Company or (B) after written notice to do so, the Recipient fails to correct within a reasonable time; (ii) any willful misconduct or grossnegligence by the Recipient in the responsibilities assigned to him or her; (iii) any willful failure to perform his or her job; (iv) any wrongful conduct of aRecipient which has an adverse impact on the Company or which constitutes fraud, embezzlement or dishonesty; (v) the Recipient’s performing services forany other person or entity which competes with the Company while he or she is providing Service, without the written approval of the Chief ExecutiveOfficer or President of the Company; or (vi) any other conduct that the Administrator determines constitutes Just Cause for Dismissal; provided, however, thatif the term of concept has been defined in an employment agreement between the Company and the Recipient, then Just Cause Dismissal shall have thedefinition set forth in such employment agreement. The foregoing definition shall not in any way preclude or restrict the right of the Company or any RelatedCorporation to discharge or dismiss any Recipient or other person in the Service of the Company or any Related Corporation for any other acts or omissionsbut such other acts or omission shall not be deemed, for purposes of the Plan, to constitute grounds for Just Cause Dismissal.(t) “Nonemployee Director” means a director of the Company who is not an Employee of the Company or any of its Related Corporations.(u) “Nonemployee Director’s Option” means a Nonqualified Stock Option granted to a Nonemployee Director pursuant to Article III of the Plan.(v) “Nonqualified Stock Option” means an Option that does not qualify as an Incentive Stock Option.(w) “Option” means a right to purchase stock of the Company granted under this Plan, and can be an Incentive Stock Option or a NonqualifiedStock Option.(x) “Parent” means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, provided eachcorporation in the unbroken chain (other than the Company) owns, at the time of the determination, stock possessing 50% or more of the total combinedvoting power of all classes of stock in one of the other corporations in such chain.(y) “Performance Award” means an award, payable in cash, Common Stock or a combination thereof, which vests and becomes payable over aperiod of time upon attainment of performance criteria established in connection with the grant of the award.(z) “Performance-Based Compensation” means performance-based compensation as described in Section 162(m) of the Code and theregulations thereunder. If the amount of compensation an Eligible Person will receive under any Incentive Award is not based solely on an increase in thevalue of Common Stock after the date of grant or award, the Administrator, in order to qualify an Incentive Award as performance-based compensation underSection 162(m) of the Code and the regulations thereunder, can condition the grant, award, vesting, or exercisability of such an award on the attainment of apreestablished, objective performance goal. For this purpose, a preestablished, objective performance goal may include one or more of the followingperformance criteria: (i) cash flow, (ii) earnings per share (including earnings before interest, taxes, and amortization), (iii) return on equity, (iv) totalstockholder return, (v) return on capital, (vi) return on assets or net assets, (vii) income or net income, (viii) operating margin, (ix) return on operating revenue,(x) attainment of stated goals related to the Company’s research and development or clinical trials programs, (xi) attainment of stated goals related to theCompany’s capitalization, costs, financial condition, or results of operations, and (xii) any other similar performance criteria.(aa) “Permanent Disability” shall mean the inability of the Recipient to engage in any substantial gainful activity by reason of any medicallydeterminable physical or mental impairment which can be expected to result in death or has lasted or can be expected to last for a continuous period oftwelve months or more.(bb) “Plan” means the La Jolla Pharmaceutical Company 2010 Equity Incentive Plan as set forth in this document. 4(cc) “Purchase Price” means the purchase price (if any) to be paid by a Recipient for Restricted Stock as determined by the Administrator (whichprice shall be at least equal to the minimum price required under applicable laws and regulations for the issuance of Common Stock).(dd) “Recipient” means an Eligible Person who has received an Award hereunder.(ee) “Related Corporation” means either a Parent or Subsidiary.(ff) “Restricted Stock” means Common Stock that is the subject of an award made under Section 2.04 and which is nontransferable and subjectto a substantial risk of forfeiture until specific conditions are met as set forth in this Plan and in any Award Document.(gg) “Securities Act” means the Securities Act of 1933, as amended.(hh) “Service” means the performance of services for the Company or its Related Corporations by a person in the capacity of an Employee, adirector or a consultant, except to the extent otherwise specifically provided in the Award Document.(ii) “Stock Appreciation Right” means a right granted under Section 2.05 to receive a payment that is measured with reference to the amount bywhich the Fair Market Value of a specified number of shares of Common Stock appreciates from a specified date, such as the date of grant of the StockAppreciation Right, to the date of exercise.(jj) “Stock Payment” means a payment in shares of Common Stock to replace all or any portion of the compensation (other than base salary) thatwould otherwise become payable to a Recipient.(kk) “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company,provided each corporation in the unbroken chain (other than the last corporation) owns, at the time of the determination, stock possessing 50% or more of thetotal combined voting power of all classes of stock in one of the other corporations in such chain.(ll) “Ten Percent Owner” means an employee who owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code)more than 10 percent of the combined voting power of all classes of stock of the Company or any parent or subsidiary corporation.1.02 Purpose of the Plan.The Board has adopted this Plan to advance the interests of the Company and its stockholders by (a) providing Eligible Persons with financialincentives to promote the success of the Company’s business objectives, and to increase their proprietary interest in the success of the Company, and(b) giving the Company a means to attract and retain Eligible Persons.1.03 Common Stock Subject to the Plan.(a) Number of Shares. Subject to Section 1.05(b), the total number of shares of Common Stock initially authorized for issuance pursuant toAwards granted hereunder shall be 9,600,000, provided that the total number of shares authorized for issuance hereunder shall be automatically increased toequal 10% of the number of shares of Common Stock issued and outstanding as of the following measurement dates: January 1, 2011, May 1, 2011,September 1, 2011, January 1, 2012, May 1, 2012, September 1, 2012 and January 1, 2013, provided, further that in no event shall the total number of sharesissued hereunder exceed 170,000,000.(b) Source of Shares. The Common Stock to be issued under this Plan will be made available, at the discretion of the Administrator, either fromauthorized but unissued shares of Common Stock or from previously issued shares of Common Stock reacquired by the Company, including shares purchasedon the open market.(c) Availability of Unused Shares. Shares of Common Stock subject to unexercised portions of any Award granted under this Plan that expire,terminate or are cancelled, and shares of Common Stock issued pursuant to an Award under this Plan that are reacquired by the Company pursuant to theterms of the Award under which such shares were issued, will again become available for the grant of further Awards under this Plan. 5(d) Grant Limits. Notwithstanding any other provision of this Plan, no Eligible Person shall be granted Awards with respect to more than20 million shares of Common Stock in the aggregate in any one calendar year; provided, however, that this limitation shall not apply if it is not required inorder for the compensation attributable to Awards hereunder to qualify as Performance-Based Compensation.1.04 Administration of the Plan.(a) The Administrator. The Plan will be administered by a Committee, which will consist of two or more members of the Board each of whommust be an “independent director” as defined by applicable listing standards. Notwithstanding the foregoing or any provision of the Plan to the contrary, theBoard may, in lieu of the Committee, exercise any authority granted to the Committee pursuant to the provisions of the Plan. To obtain the benefits ofRule 16b-3, Incentive Awards must be granted by the entire Board or a Committee comprised entirely of “non-employee directors” as such term is defined inRule 16b-3. In addition, if Incentive Awards are to be made to persons subject to Section 162(m) of the Code and such Awards are intended to constitutePerformance-Based Compensation, then such Incentive Awards must be granted by a Committee comprised entirely of “outside directors” as such term isdefined in the regulations under Section 162(m) of the Code.(b) Authority of the Administrator. The Administrator has authority in its discretion to select the Eligible Persons to whom, and the time ortimes at which, Incentive Awards shall be granted or sold, the nature of each Incentive Award, the number of shares of Common Stock or the number of rightsthat make up or underlie each Incentive Award, the period for the exercise of each Incentive Award, the performance criteria (which need not be identical)utilized to measure the value of Performance Awards, and such other terms and conditions applicable to each individual Incentive Award as the Administratorshall determine. In addition, the Administrator shall have all other powers granted to it in the Plan.(c) Interpretation. Subject to the express provisions of the Plan, the Administrator has the authority to interpret the Plan and any AwardDocuments, to determine the terms and conditions of Incentive Awards and to make all other determinations necessary or advisable for the administration ofthe Plan. All interpretations, determinations and actions by the Administrator shall be final, conclusive and binding upon all parties. The Administrator hasauthority to prescribe, amend and rescind rules and regulations relating to the Plan.(d) No Liability. The Administrator and its delegates shall be indemnified by the Company to the fullest extent provided for in the Company’scertificate of incorporation and bylaws.1.05 Other Provisions.(a) Documentation. Each Award granted under the Plan shall be evidenced by an Award Document which shall set forth the terms and conditionsapplicable to the Award as the Administrator may in its discretion determine consistent with the Plan, provided that the Administrator shall exercise nodiscretion with respect to Nonemployee Directors’ Options, which shall reflect only the terms of the Award as set forth in Article III and certain administrativematters dictated by the Plan. Award Documents shall comply with and be subject to the terms and conditions of the Plan. In case of any conflict between thePlan and any Award Document, the Plan shall control. Various Award Documents covering the same types of Awards may but need not be identical.(b) Adjustment Provisions. Should any change be made to the outstanding shares of Common Stock by reason of a merger, consolidation,reorganization, recapitalization, reclassification, combination of shares, stock dividend, stock split, reverse stock split, exchange of shares or other changeaffecting the outstanding Common Stock without the Company’s receipt of consideration, an appropriate and proportionate adjustment may be made in(i) the maximum number and kind of shares subject to the Plan as provided in Section 1.03, (ii) the number and kind of shares or other securities subject tothen outstanding Awards, (iii) the price for each share or other unit of any other securities subject to then outstanding Awards and (iv) the number and kind ofshares or other securities subject to the Nonemployee Director Options described in Section 3.01 and 3.02. In addition, the per person limitation set forth inSection 1.03(d) shall also be subject to adjustment as provided in this Section 1.05(b), but only to the extent such adjustment would not affect the status ofcompensation attributable to Awards hereunder as Performance-Based Compensation. Such adjustments are to be effected in a manner that shall preclude theenlargement or dilution of rights and benefits under the Awards. In no event shall any adjustments be made in connection with the conversion of preferredstock or warrants into shares of Common Stock. No fractional interests will be issued under the Plan resulting from any such adjustments. 6(c) Continuation of Service. Nothing contained in this Plan (or in Award Documents or in any other documents related to this Plan or to Awardsgranted hereunder) shall confer upon any Eligible Person or Recipient any right to continue in the Service of the Company or its Related Corporations orconstitute any contract or agreement of employment or engagement, or interfere in any way with the right of the Company or its Related Corporations toreduce such person’s compensation or other benefits or to terminate the Service of such Eligible Person or Recipient, with or without cause. Except asexpressly provided in the Plan or in any Award Document, the Company shall have the right to deal with each Recipient in the same manner as if the Planand any Award Document did not exist, including, without limitation, with respect to all matters related to the hiring, discharge, compensation andconditions of the employment or engagement of the Recipient.(d) Restrictions. All Awards granted under the Plan shall be subject to the requirement that, if at any time the Company shall determine, in itsdiscretion, that the listing, registration or qualification of the shares subject to Awards granted under the Plan upon any securities exchange or under any stateor federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the grantingof such an Award or the issuance, if any, or purchase of shares in connection therewith, such Award may not be exercised in whole or in part unless suchlisting, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company.(e) Additional Conditions. Any Incentive Award may also be subject to such other provisions (whether or not applicable to any other Award orRecipient) as the Administrator determines appropriate.(f) Tax Withholding. The Company’s obligation to deliver shares of Common Stock under the Plan shall be subject to the satisfaction of allapplicable income and employment tax withholding requirements.(g) Privileges of Stock Ownership. Except as otherwise set forth herein, a Holder shall have no rights as a stockholder of the Company withrespect to any shares issuable or issued in connection with the Award until the date of the receipt by the Company of all amounts payable in connection withexercise of the Award, performance by the Holder of all obligations thereunder, and the Company issues a stock certificate representing the appropriatenumber of shares. Status as an Eligible Person shall not be construed as a commitment that any Incentive Award will be granted under this Plan to an EligiblePerson or to Eligible Persons generally. No person shall have any right, title or interest in any fund or in any specific asset (including shares of capital stock)of the Company by reason of any Award granted hereunder. Neither this Plan (or any documents related hereto) nor any action taken pursuant hereto shall beconstrued to create a trust of any kind or a fiduciary relationship between the Company and any person. To the extent that any person acquires a right toreceive an Award hereunder, such right shall be no greater than the right of any unsecured general creditor of the Company.(h) Effective Date and Duration of Plan; Amendment and Termination of Plan. The Plan shall become effective upon its approval by theCompany’s stockholders. Unless terminated by the Board prior to such time, the Plan shall continue in effect until the 10th anniversary of the date the Planwas adopted, whereupon the Plan shall terminate automatically. The Board may, insofar as permitted by law, from time to time suspend or terminate the Plan.No Awards may be granted during any suspension of this Plan or after its termination. Any Award outstanding after the termination of the Plan shall remain ineffect until such Award has been exercised or expires in accordance with its terms and the terms of the Plan. The Board may, insofar as permitted by law, fromtime to time revise or amend the Plan in any respect except that no such amendment shall adversely affect any rights or obligations of the Holder under anyoutstanding Award previously granted under the Plan without the consent of the Holder. Amendments shall be subject to stockholder approval to the extentsuch approval is required to comply with the listing requirements imposed by any exchange or trading system upon which the Company’s securities trade orapplicable law.(i) Amendment of Awards. The Administrator may make any modifications in the terms and conditions of an outstanding Incentive Award,provided that (i) the resultant provisions are permissible under the Plan and (ii) the consent of the Holder shall be obtained if the amendment will adverselyaffect his or her rights under the Award. However, the outstanding Options may not be repriced without stockholder approval.(j) Nonassignability. No Incentive Stock Option granted under the Plan shall be assignable or transferable except by will or by the laws ofdescent and distribution. No other Awards granted under the Plan shall be assignable or transferable except (i) by will or by the laws of descent anddistribution, (ii) to one or more of the Recipient’s family members (as such term is defined in the instructions to Form S-8) or (iii) upon dissolution ofmarriage pursuant to a qualified domestic relations order. During the lifetime of a Recipient, an Award granted to him or her shall be exercisable only by theHolder or his or her guardian or legal representative. 7(k) Other Compensation Plans. The adoption of the Plan shall not affect any other stock option, incentive or other compensation plans in effectfor the Company, and the existence of the Plan shall not preclude the Company from establishing any other forms of incentive or other compensation forEligible Persons.(l) Plan Binding on Successors. The Plan shall be binding upon the successors and assigns of the Company.(m) Participation by Foreign Employees. Notwithstanding anything to the contrary herein, the Administrator may, in order to fulfill thepurposes of the Plan, structure grants of Incentive Awards to Recipients who are foreign nationals or employed outside of the United States to recognizedifferences in applicable law, tax policy or local custom.ARTICLE IIINCENTIVE AWARDS2.01 Grants of Incentive Awards.Subject to the express provisions of this Plan, the Administrator may from time to time in its discretion select from the class of Eligible Personsthose individuals to whom Incentive Awards may be granted pursuant to its authority as set forth in Section 1.04(b). Each Incentive Award shall be subject tothe terms and conditions of the Plan and such other terms and conditions established by the Administrator as are not inconsistent with the provisions of thePlan.2.02 Options.(a) Nature of Options. The Administrator may grant Incentive Stock Options and Nonqualified Stock Options under the Plan. However,Incentive Stock Options may only be granted to Employees of the Company or its Related Corporations.(b) Option Price. The Exercise Price per share for each Option (other than a Nonemployee Director’s Option) shall be determined by theAdministrator at the date such Option is granted and shall not be less than the Fair Market Value of a share of Common Stock (or other securities, asapplicable) on the date of grant. In the case of an Incentive Stock Option that is granted to a Ten Percent Owner, the option price of such Incentive StockOption shall not be less than 110% of the Fair Market Value of a share of Common Stock (or other securities, as applicable). Notwithstanding the foregoing,however, in no event shall the Exercise Price be less than the par value of the shares of Common Stock.(c) Option Period and Vesting. Options (other than Nonemployee Directors’ Options) hereunder shall vest and may be exercised as determinedby the Administrator, except that exercise of such Options after termination of the Recipient’s Service shall be subject to Section 2.02(g). Each Optiongranted hereunder (other than a Nonemployee Directors Option) and all rights or obligations thereunder shall expire on such date as shall be determined bythe Administrator, but not later than ten years after the date the Option is granted and shall be subject to earlier termination as herein provided.(d) Exercise of Options. Except as otherwise provided herein, an Option may become exercisable, in whole or in part, on the date or datesspecified by the Administrator (or, in the case of Nonemployee Directors’ Options, the Plan) at the time the Option is granted and thereafter shall remainexercisable until the expiration or earlier termination of the Option. No Option shall be exercisable except in respect of whole shares, and fractional shareinterests shall be disregarded. An Option shall be deemed to be exercised when the Secretary of the Company receives written notice of such exercise from theHolder, together with payment of the Exercise Price made in accordance with Section 2.02(e). Upon proper exercise, the Company shall deliver to the personentitled to exercise the Option or his or her designee a certificate or certificates for the shares of stock for which the Option is exercised. 8(e) Form of Exercise Price. The aggregate Exercise Price shall be immediately due and payable upon the exercise of an Option and shall,subject to the provisions of the Award Document, be payable in one or more of the following: (i) by delivery of legal tender of the United States, (ii) bydelivery of shares of Common Stock held for the requisite period, if any, necessary to avoid a charge to the Company’s earnings for financial reportingpurposes, and/or (iii) through a sale and remittance procedure pursuant to which the Holder shall concurrently provide irrevocable instructions to (A) abrokerage firm to effect the immediate sale of the purchased shares and remit to the Company, out of the sale proceeds available on the settlement date,sufficient funds to cover the aggregate Exercise Price payable for the purchased shares plus all applicable income and employment taxes required to bewithheld by the Company by reason of such exercise and (B) the Company to deliver the certificates for the purchased shares directly to such brokerage firmin order to complete the sale. Any shares of Company stock or other non-cash consideration assigned and delivered to the Company in payment or partialpayment of the Exercise Price will be valued at Fair Market Value on the exercise date.(f) Limitation on Exercise of Incentive Stock Options. The aggregate Fair Market Value (determined as of the respective date or dates of grant)of the Common Stock for which one or more Options granted to any Recipient under the Plan (or any other option plan of the Company or any of itssubsidiaries or affiliates) may for the first time become exercisable as Incentive Stock Options under the Code during any one calendar year shall not exceed$100,000. Any Options granted as Incentive Stock Options pursuant to the Plan in excess of such limitation shall be treated as Nonqualified Stock Options.Options are to be taken into account in the order in which they were awarded.(g) Termination of Service.(i) Termination for Cause. Except as otherwise provided by the Administrator, in the event of a Just Cause Dismissal of a Recipient, all of theoutstanding Options granted to such Recipient shall expire and become unexercisable as of the date of such Just Cause Dismissal.(ii) Termination Other Than for Cause. Subject to subsection (i) above and except as otherwise provided by the Administrator, in the event of aRecipient’s termination of Service from the Company or its Related Corporations due to:(A) any reason other than Just Cause Dismissal, death, or Permanent Disability, or normal retirement, the outstanding Options granted to suchRecipient, whether or not vested, shall expire and become unexercisable as of the earlier of (1) the date such Options would expire in accordance with theirterms if the Recipient had remained in Service or (2) three calendar months after the date the Recipient’s Service terminated in the case of Incentive StockOptions, or six months after the Recipient’s Service terminated, in the case of Nonqualified Stock Options.(B) death or Permanent Disability, the outstanding Options granted to such Recipient, whether or not vested, shall expire and become unexercisable asof the earlier of (1) the date such Options would expire in accordance with their terms if the Recipient had remained in Service or twelve months after the dateof termination.(C) normal retirement, the outstanding Options granted to such Recipient, whether or not vested, shall expire and become unexercisable as of theearlier of (A) the date such Options expire in accordance with their terms or (B) twenty-four months after the date of retirement.(iii) Termination of Director Service. In the event that a Director shall cease to be a Nonemployee Director, all outstanding Options granted to suchRecipient shall be exercisable, to the extent already vested and exercisable on the date such Recipient ceases to be a Nonemployee Director and regardless ofthe reason the Recipient ceases to be a Nonemployee Director until the fifth anniversary of the date such Director ceases to be a Nonemployee Director;provided that the Administrator may extend such post-termination period to up to the expiration date of the Option.2.03 Performance Awards.(a) Grant of Performance Award. The Administrator may grant Performance Awards under the Plan and shall determine the performance criteria(which need not be identical and may be established on an individual or group basis) governing Performance Awards, the terms thereof, and the form andtiming of payment of Performance Awards. 9(b) Payment of Award; Limitation. Upon satisfaction of the conditions applicable to a Performance Award, payment will be made to the Holderin cash or in shares of Common Stock valued at Fair Market Value or a combination of Common Stock and cash, as the Administrator in its discretion maydetermine. Notwithstanding any other provision of this Plan, no Eligible Person shall be paid Performance Awards with a value in excess of $1,000,000 inany one calendar year; provided, however, that this limitation shall not apply if it is not required in order for the compensation attributable to thePerformance Award hereunder to qualify as Performance-Based Compensation.(c) Expiration of Performance Award. If any Recipient’s Service is terminated for any reason other than normal retirement, death or PermanentDisability prior to the time a Performance Award or any portion thereof becomes payable, all of the Holder’s rights under the unpaid portion of thePerformance Award shall expire unless otherwise determined by the Administrator. In the event of termination of Service by reason of death, PermanentDisability or normal retirement, the Administrator, in its discretion, may determine what portions, if any, of the Performance Award should be paid to theHolder.2.04 Restricted Stock.(a) Award of Restricted Stock. The Administrator may issue Restricted Stock under the Plan. The Administrator shall determine the PurchasePrice (if any), the forms of payment of the Purchase Price (which shall be either cash or past services), the restrictions upon the Restricted Stock, and whensuch restrictions shall lapse (provided that the restriction period shall be at least one year for performance-based grants and three years for non-performance-based grants).(b) Requirements of Restricted Stock. All shares of Restricted Stock granted or sold pursuant to the Plan will be subject to the followingconditions:(i) No Transfer. The shares of Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, alienated orencumbered until the restrictions are removed or expire;(ii) Certificates. The Administrator may require that the certificates representing shares of Restricted Stock granted or sold to a Holder pursuant to thePlan remain in the physical custody of an escrow holder or the Company until all restrictions are removed or expire;(iii) Restrictive Legends. Each certificate representing shares of Restricted Stock granted or sold to a Holder pursuant to the Plan will bear such legendor legends making reference to the restrictions imposed upon such Restricted Stock as the Administrator in its discretion deems necessary or appropriate toenforce such restrictions; and(iv) Other Restrictions. The Administrator may impose such other conditions on Restricted Stock as the Administrator may deem advisable including,without limitation, restrictions under the Securities Act, under the Exchange Act, under the requirements of any stock exchange or upon which suchRestricted Stock or shares of the same class are then listed and under any blue sky or other securities laws applicable to such shares.(c) Rights of Holder. Subject to the provisions of Section 2.04(b) and any additional restrictions imposed by the Administrator, the Holder willhave all rights of a stockholder with respect to the Restricted Stock, including the right to vote the shares and receive all dividends and other distributionspaid or made with respect thereto.(d) Termination of Service. Unless the Administrator in its discretion determines otherwise, upon a Recipient’s termination of Service for anyreason, all of the Restricted Stock issued to the Recipient that remains subject to restrictions imposed pursuant to the Plan on the date of such termination ofService may be repurchased by the Company at the Purchase Price (if any).(e) Adjustments. Any new, substituted or additional securities or other property which Holder may have the right to receive with respect to theHolder’s shares of Restricted Stock by reason of a merger, consolidation, reorganization, recapitalization, reclassification, combination of shares, stockdividend, stock split, reverse stock split, exchange of shares or other change affecting the outstanding Common Stock without the Company’s receipt ofconsideration shall be issued subject to the same vesting requirements applicable to the Holder’s shares of Restricted Stock and shall be treated as if they hadbeen acquired on the same date as such shares. 102.05 Stock Appreciation Rights.(a) Granting of Stock Appreciation Rights. The Administrator may grant Stock Appreciation Rights, either related or unrelated to Options,under the Plan.(b) Stock Appreciation Rights Related to Options.(i) A Stock Appreciation Right granted in connection with an Option granted under this Plan will entitle the holder of the related Option, upon exerciseof the Stock Appreciation Right, to surrender such Option, or any portion thereof to the extent unexercised, with respect to the number of shares as to whichsuch Stock Appreciation Right is exercised, and to receive payment of an amount computed pursuant to Section 2.05(b)(iii). Such Option will, to the extentsurrendered, then cease to be exercisable.(ii) A Stock Appreciation Right granted in connection with an Option hereunder will be exercisable at such time or times, and only to the extent that,the related Option is exercisable, and will not be transferable except to the extent that such related Option may be transferable.(iii) Upon the exercise of a Stock Appreciation Right related to an Option, the Holder will be entitled to receive payment of an amount determined bymultiplying: (i) the difference obtained by subtracting the Exercise Price of a share of Common Stock specified in the related Option from the Fair MarketValue of a share of Common Stock on the date of exercise of such Stock Appreciation Right (or as of such other date or as of the occurrence of such event asmay have been specified in the instrument evidencing the grant of the Stock Appreciation Right), by (ii) the number of shares as to which such StockAppreciation Right is exercised.(c) Stock Appreciation Rights Unrelated to Options. The Administrator may grant Stock Appreciation Rights unrelated to Options to EligiblePersons. Section 2.05(b)(iii) shall be used to determine the amount payable at exercise under such Stock Appreciation Right, except that in lieu of theExercise Price specified in the related Option the initial base amount specified in the Incentive Award shall be used.(d) Limits. Notwithstanding the foregoing, the Administrator, in its discretion, may place a dollar limitation on the maximum amount that willbe payable upon the exercise of a Stock Appreciation Right under the Plan.(e) Payments. Payment of the amount determined under the foregoing provisions may be made solely in whole shares of Common Stock valuedat their Fair Market Value on the date of exercise of the Stock Appreciation Right, in cash or in a combination of cash and shares of Common Stock as theAdministrator deems advisable. If permitted by the Administrator, the Holder may elect to receive cash in full or partial settlement of a Stock AppreciationRight. If the Administrator decides to make full payment in shares of Common Stock, and the amount payable results in a fractional share, payment for thefractional share will be made in cash.(f) Termination of Service. Section 2.02(g) will govern the treatment of Stock Appreciation Rights upon the termination of a Recipient’sService.2.06 Stock Payments.The Administrator may issue Stock Payments under the Plan for all or any portion of the compensation (other than base salary) or other paymentthat would otherwise become payable by the Company to the Eligible Person in cash. 112.07 Dividend Equivalents.The Administrator may grant Dividend Equivalents to any Recipient who has received an Option, Stock Appreciation Right, or other IncentiveAward denominated in shares of Common Stock. Such Dividend Equivalents shall be effective and shall entitle the Recipients thereof to payments during the“Applicable Dividend Period,” which shall be (a) the period between the date the Dividend Equivalent is granted and the date the related Option, StockAppreciation Right, or other Incentive Award is exercised, terminates, or is converted to Common Stock, or (b) such other time as the Administrator mayspecify in the Award Document. Dividend Equivalents may be paid in cash, Common Stock, or other Incentive Awards; the amount of Dividend Equivalentspaid other than in cash shall be determined by the Administrator by application of such formula as the Administrator may deem appropriate to translate thecash value of dividends paid to the alternative form of payment of the Dividend Equivalent. Dividend Equivalents shall be computed as of each dividendrecord date and shall be payable to Recipients thereof at such time as the Administrator may determine. Notwithstanding the foregoing, if it is intended thatan Incentive Award qualify as Performance-Based Compensation and the amount of the compensation the Eligible Person could receive under the award isbased solely on an increase in value of the underlying stock after the date of grant or award (i.e., the grant, vesting, or exercisability of the award is notconditioned upon the attainment of a preestablished, objective performance goal described in Section 1.01(x)), then the payment of any DividendEquivalents related to the Award shall not be made contingent on the exercise of the Award.ARTICLE IIINONEMPLOYEE DIRECTOR’S OPTIONS3.01 Grants of Initial Awards.Each Nonemployee Director shall, upon first becoming a Nonemployee Director, receive a one-time grant of an Award on such terms as may bedetermined from time to time by the Administrator. Awards granted under this Section 3.01 vest in accordance with Section 3.04(a) hereof and are “InitialAwards” for purposes hereof.3.02 Grants of Additional Awards.On the date of the annual meeting of stockholders of the Company next following a Nonemployee Director becoming such, and on the date ofeach subsequent annual meeting of stockholders of the Company, in each case if the Nonemployee Director has served as a director since his or her electionor appointment and has been re-elected as a director at such annual meeting or is continuing as a director without being re-elected due to the classification ofthe Board, such Nonemployee Director shall automatically receive an Award on such terms as may be determined from time to time by the AdministratorAwards granted under this Section 3.02 vest in accordance with Section 3.04(b) hereof and are “Additional Awards” for purposes hereof. Notwithstanding theforegoing to the contrary, the first grant of Additional Awards shall be made to eligible Nonemployee Directors on the date of the 2010 annual meeting ofstockholders.3.03 Exercise Price.The Exercise Price for Nonemployee Directors’ Options shall be payable as set forth in Section 2.02(e).3.04 Vesting and Exercise.(a) Initial Awards shall vest and become exercisable with respect to 25% of the underlying shares on the grant date and with respect to anadditional 25% of the underlying shares on the dates of each of the first three anniversaries of the date of grant provided the Recipient has remained aNonemployee Director for the entire period from the date of grant to such date.(b) Additional Awards shall vest and become exercisable upon the earlier of (i) the first anniversary of the grant date or (ii) immediately prior tothe annual meeting of stockholders of the Company next following the grant date, provided the Recipient has remained a Nonemployee Director for theentire period from the date of grant to such earlier date.(c) Notwithstanding the foregoing, however, Initial Awards and Additional Awards that have not vested and become exercisable at the time theRecipient ceases to be a Nonemployee Director shall expire. 123.05 Term of Options and Effect of Termination.No Nonemployee Directors’ Option shall be exercisable after the expiration of ten years from the date of its grant. In the event that the Recipientof a Nonemployee Director’s Option shall cease to be a Nonemployee Director, all outstanding Nonemployee Directors’ Options granted to such Recipientshall be exercisable, to the extent already vested and exercisable on the date such Recipient ceases to be a Nonemployee Director and regardless of the reasonthe Recipient ceases to be a Nonemployee Director until the fifth anniversary of the date such Director ceases to be a Nonemployee Director; provided thatthe Administrator may extend such post-termination period to the expiration date of the Option.ARTICLE IVRECAPITALIZATIONS AND REORGANIZATIONS4.01 Corporate Transactions.(a) Options. Unless the Administrator provides otherwise in the Award Document or another written agreement, in the event of a Change inControl, the Administrator shall provide that all Options (other than Non-employee Director Options) either (i) vest in full immediately preceding the Changein Control and terminate upon the Change in Control, (ii) are assumed or continued in effect in connection with the Change in Control transaction, (iii) arecashed out for an amount equal to the deal consideration per share less the Exercise Price or (iv) are substituted for similar awards of the survivingcorporation. Each Option that is assumed or otherwise continued in effect in connection with a Change in Control shall be appropriately adjusted,immediately after such Change in Control, to apply to the number and class of securities which would have been issuable to Recipient in consummation ofsuch Change in Control had the Recipient been exercised immediately prior to such Change in Control. Appropriate adjustments to reflect such Change inControl shall also be made to (A) the Exercise Price payable per share under each outstanding Option, provided the aggregate Exercise Price payable for suchsecurities shall remain the same, (B) the maximum number and/or class of securities available for issuance over the remaining term of the Plan, (C) themaximum number and/or class of securities for which any one person may be granted options and direct stock issuances pursuant to the Plan per calendaryear and (D) the number and/or class of securities subject to Nonemployee Director’s Options. To the extent the holders of Common Stock receive cashconsideration in whole or part for their Common Stock in consummation of the Change in Control, the successor corporation may, in connection with theassumption of the outstanding Options, substitute one or more shares of its own common stock with a fair market value equivalent to the cash considerationpaid per share of Common Stock in such Change in Control transaction.(b) Nonemployee Directors’ Options. Immediately prior to a Change of Control, all outstanding Nonemployee Directors’ Options shall vest infull.(c) Other Incentive Awards. The Administrator may specify the effect that a Change in Control has on an Incentive Award (other than anOption) outstanding at the time such a Change in Control occurs either in the applicable Award Document or by subsequent modification of the Award.4.02 No Restraint.The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications,reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all of any part of itsbusiness or assets. 13FORM OF OPTION GRANT Notice of Grant of Stock Options and Option Agreement La Jolla Pharmaceutical Co.ID: 33-03612854365 Executive Drive, Suite 300San Diego, CA 92121(858) 452-6600Name: Option Number: Address: Plan: 2010 ID: Effective , you have been granted a(n) Incentive Stock Option to buy shares of La Jolla Pharmaceutical Co. (the Company) stock at$ per share.The total option price of the shares granted is $ .Shares in each period will become fully vested on the date shown. Shares Vest Type Full Vest Expiration By your signature and the Company’s signature below, you and the Company agree that these options are granted under and governed by the termsand conditions of the Company’s Stock Option Plan as amended and the Option Agreement, all of which are attached and made a part of thisdocument. La Jolla Pharmaceutical Company Date Name Date 14Exhibit 21.1Subsidiaries of La Jolla Pharmaceutical Company Name of Subsidiary State of IncorporationSL JP Sub, Inc. DelawareExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMLa Jolla Pharmaceutical CompanySan Diego, CaliforniaWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 Nos. 333-106060, 333-116233, 333-125427, 333-131248,333-143677, 333-151825 and 333-169140 of La Jolla Pharmaceutical Company of our report dated March 30, 2012, relating to the consolidated financialstatements, which appear in the Annual Report on Form 10-K. Our report contains an explanatory paragraph regarding the Company’s ability to continue as agoing concern. /s/ BDO USA, LLPSan Diego, CaliforniaExhibit 31.1SECTION 302 CERTIFICATIONI, George Tidmarsh, certify that: 1.I have reviewed this annual report on Form 10-K of La Jolla Pharmaceutical Company; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: March 30, 2012 /s/ George TidmarshGeorge TidmarshPresident, Chief Executive Officer and Secretary(Principal Executive, Financial and Accounting Officer)Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002The undersigned, in his capacity as an officer of La Jolla Pharmaceutical Company (the “Registrant”), hereby certifies, for purposes of 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: • the annual report of the Registrant on Form 10-K for the year ended December 31, 2011 (the “Report”), which accompanies this certification,fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and • the information contained in the Report fairly presents, in all material respects, the financial condition of the Registrant at the end of such yearand the results of operations of the Registrant of such year.Dated: March 30, 2012 /s/ George TidmarshGeorge TidmarshPresident, Chief Executive Officer and Secretary(Principal Executive, Financial and Accounting Officer)Note: A signed original of this written statement required by Section 906 has been provided to La Jolla Pharmaceutical Company and will be retained by LaJolla Pharmaceutical Company and furnished to the Securities and Exchange Commission or its staff upon request.

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