10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 14, 2000
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ___________ TO __________
COMMISSION FILE NUMBER 0-26918
CYTOCLONAL PHARMACEUTICS INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
9000 HARRY HINES BOULEVARD, SUITE 621, DALLAS, TEXAS 75235
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(214)-353-2922
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(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
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APPLICABLE ONLY TO CORPORATE ISSUERS
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE: 16,138,843 SHARES OF COMMON
STOCK, $.01 PAR VALUE, OUTSTANDING AS OF NOVEMBER 7, 2000.
CYTOCLONAL PHARMACEUTICS INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYTOCLONAL PHARMACEUTICS INC.
BALANCE SHEETS
See notes to financial statements
3
CYTOCLONAL PHARMACEUTICS INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
See notes to financial statements
4
CYTOCLONAL PHARMACEUTICS INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
See notes to financial statements
5
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
(unaudited)
(1) FINANCIAL STATEMENT PRESENTATION
The unaudited financial statements of Cytoclonal Pharmaceutics Inc., a
Delaware corporation (the "Company"), included herein have been
prepared in accordance with the rules and regulations promulgated by
the Securities and Exchange Commission and, in the opinion of
management, reflect all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the results of
operations for the interim periods presented. Certain information and
footnote disclosures normally included in financial statements,
prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to such rules and regulations.
However, management believes that the disclosures are adequate to make
the information presented not misleading. These financial statements
and the notes thereto should be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999. The
results for the interim periods are not necessarily indicative of the
results for the full fiscal year.
(2) RESEARCH AND COLLABORATIVE AGREEMENT
In June 1998, the Company entered into a license and research agreement
with Bristol-Myers Squibb ("BMS") on two technologies related to the
production of paclitaxel, the active ingredient in BMS's largest
selling cancer product, Taxol(R). The agreement includes fees,
milestone payments, research and development support and minimum and
sales based royalties.
(3) LOSS PER COMMON SHARE
Basic and diluted loss per common share is based on the net loss
increased by dividends on preferred stock divided by the weighted
average number of common shares outstanding during the year. No effect
has been given to outstanding options, warrants or convertible
preferred stock in the diluted computation as their effect would be
antidilutive.
(4) REVENUE RECOGNITION AND CHANGE IN ACCOUNTING PRINCIPLE
Revenue from research support agreements is recognized as the expenses
for research and development activities performed under the terms of
the agreements are incurred. Revenue resulting from the achievement of
milestones is recognized when the milestone is achieved. Amounts
received in advance of services to be performed are recorded as
deferred revenue. In December 1999, the staff of the Securities and
Exchange Commission issued an accounting bulletin on revenue
recognition which provides, among other matters, that nonrefundable
license fees should be recognized over the period of performance of
related research and development activities. Accordingly, the Company
changed its accounting policy from recognizing revenue from
nonrefundable license fees at signing of agreement to deferring and
recognizing such fees over the period of performance of related
research and development activities. Effective January 1, 1999, the
Company reflected this change in accounting principle as a cumulative
effect on prior years of $422,000. Payments to third parties in
connection with nonrefundable license fees are being recognized over
the period of performance of related research and development
activities. This change in accounting principle would
6
have resulted in an increase in revenues and research and development
expenses and a decrease in net loss of approximately $ 281,000,
$ 70,000 and $ 211,000, respectively for the nine months ended
September 30, 1999 if it was retroactively applied. The corresponding
impact on net loss per share would be a decrease from $(0.30) to
$(0.28) if this change in accounting principle were retroactively
applied.
(5) STOCKHOLDERS' EQUITY
On February 7, 2000, the Company gave notice to the holders of Class C
Warrants that it was exercising its right of redemption effective March
9, 2000. We received net proceeds of approximately $12,953,000 from the
exercise of 1,992,829 such warrants. On March 13, 2000 the Company gave
notice to the holders of its Class D Warrants that it was exercising
its right of redemption effective April 12, 2000. The Company received
net proceeds of approximately $25,742,000 from the exercise of
2,941,905 such warrants. Additionally, through September 30, 2000 the
Company received net proceeds of approximately $1,776,000 from the
exercise of 221,010 other warrants and 145,300 options. During the
period from October 1, 2000 through November 10, 2000 the Company
received net proceeds of approximately $1,438,000 from the exercise of
361,779 warrants.
In January 2000 the Board of Directors approved the 2000 Employee
Option Plan (the "Plan") authorizing up to 1,500,000 shares, subject to
approval of the Plan by a majority of our shareholders. We granted
200,000 options to purchase shares of Common Stock under the Plan at
exercise prices ranging from $6.75 to $10.125 per share to officers,
directors, employees and consultants of the Company. On September 11,
2000 the stockholders of the Company approved the Plan. At the time of
stockholder approval, the market value of the Company's stock exceeded
the exercise price of certain options noted above, consequently the
Company recorded deferred compensatory charges of $130,000 equal to the
spread between the exercise price of the option and the market price,
times the number of options involved. The charge to operations for the
nine months ended September 30, 2000 was $44,000.
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." In October 1995, the Financial Accounting
Standards Board issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which establishes a fair value-based
method of accounting for stock-based compensation plans. The Company
has adopted the disclosure-only alternative under SFAS No. 123. The
Company accounts for stock based compensation to nonemployees using the
fair value method in accordance with SFAS No. 123 and Emerging Issues
Task Force (EITF) 96-18. The Company has recognized deferred stock
compensation related to certain stock option and warrant grants. During
the nine months ended September 30, 2000 the Company granted 25,000 and
300,000 warrants to purchase shares of Common Stock at $12.00 and
$15.00 per share, respectively in return for financial advisory
services. The Company valued these warrants based on the Black-Scholes
option pricing. In connection therewith the Company recorded a charge
of $1,982,000 during the nine months ended September 30, 2000. In
connection with other option grants to consultants the Company recorded
a charge of $329,000 during the nine months ended September 30, 2000.
7
(6) STOCK BUY-BACK PROGRAM
In April 2000, the Company announced a stock buy-back program under
which the Board of Directors authorized the purchase of up to
$2,000,000 of its common stock. As of September 30, 2000 the Company
had purchased 143,100 shares at a cost of approximately $1,089,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Financial Statements and the Notes thereto
included in this report. Certain of the matters and subject areas discussed in
this report that are not statements of current or historical fact are
"forward-looking statements" that convey information about potential future
circumstances and developments. These are subject to the inherent risks and
uncertainties surrounding expectations regarding future occurrences. Factors
that might cause the Company's actual future experience to differ materially
from the forward-looking statements include, but are not limited to (i) the
Company's absence of commercialized products, (ii) the Company's dependence, to
an extent, on third parties for clinical development and commercialization of
potential products, (iii) the potential failure of any drug candidates that
emerge from the Company's discovery operations top progress successfully to or
though clinical development, (iv) competition, (v) government regulation, and
(vi) pharmaceutical pricing. The Company's actual results, performance or
achievements could differ materially from those expressed in, or implied by,
these forward-looking statements. Historical operating results are not
necessarily indicative of the trends in operating results for any further
period.
The strategy of the Company is to target opportunities offered by both
established drugs and new drugs. Concerning established drugs, the Company is
focusing on improvements in production and/or activity, and development of new
uses for these drugs. Regarding development of new drugs, the Company is
focusing on the use of novel technologies, including platform technologies,
targeting genes and proteins from the human genome. The Company hopes to
implement this strategy using proprietary company technology or in-licensed
technology, either alone or in combination with corporate partners.
In the quarter ended September 30, 2000 the Company announced the
issuance of a key patent (U.S. Patent No. 6,043,072) for a new gene coding for a
pivotal enzyme in paclitaxel synthesis. Paclitaxel is the key ingredient in
Taxol(R), the $1.7 billion cancer drug sold by Bristol-Myers Squibb. The holder
of the patent, Washington State University, is under exclusive contract with the
Company to isolate the key genes in paclitaxel synthesis.
Several key agreements were completed and announced in the third
quarter. The Company completed an agreement with the Research & Development
Institute Inc. at Montana State University for worldwide rights to their
Telomerase "Immortality Enzyme" Reverse Transcriptase (TERT) gene technology. In
July 2000 we announced the completion of an agreement with the University of
California, San Diego and University of British Columbia for worldwide rights to
a new drug target for preventing drug resistance by pathogenic bacteria, such as
tuberculosis.
In addition, we announced the expansion and integration of our
OASIS(TM) and QCT(TM) platforms, including a new computer center which includes
enhanced bioinformatics capability and an expanded QCT(TM) department.
8
In August 2000, we became a founding member of a functional genomics
consortium sponsored by Molecular Simulations, Inc.(MSI), a wholly owned
subsidiary of Pharmacopeia, Inc.
Our actual research and development and related activities may vary
significantly from current plans depending on numerous factors, including
changes in the costs of such activities from current estimates, the results of
our research and development programs, the results of clinical studies, the
timing of regulatory submissions, technological advances, determinations as to
commercial potential and the status of competitive products. The focus and
direction of our operations will also be dependent upon the establishment of
collaborative arrangements with other companies, the availability of financing
and other factors. The funded research and development program, if not renewed,
terminates during the year ended December 31, 2000 and thereafter our future
revenues depend upon the achievement of certain milestones related to product
development and royalties based on product sales.
RESULTS OF OPERATIONS
Revenue
We recognized revenues of $67,000 and $267,000 for the three months
ended September 30, 2000, and 1999, respectively and $754,000 and $750,000 for
the nine months ended September 30, 2000 and 1999, respectively. Revenues in
both 1999 to 2000 were primarily attributable to license and research and
development payments including those from our agreements with Bristol-Myers
Squibb.
Research and Development Expenses
We incurred research and development expenses of $2,076,000 and
$2,022,000 for the nine months ended September 30, 2000 and 1999, respectively.
For the quarter, ended September 30, 2000 and 1999, research and development
expenses were $891,000 and $640,000, respectively. The increase in research and
development expenses in the nine months ended September 30, 2000 from 1999 was
due to a $174,000 increase in research and development salaries due to
additional scientific staff, a $144,000 increase in contracted research, a
$37,000 increase on rent expense due to the expansion of facilities, a $27,000
increase in funding for the research program at the University of Texas at
Dallas, a $70,000 increase in depreciation expenses, and a $56,000 increase in
expenses related to activities as a member of a functional genomics consortium
sponsored by Molecular Simulation, Inc. and partially offset by a $420,000
decrease in technology costs associated with the acquisition of Quantum Core
Technology(TM) and other decreases in research funding and contract labor.
We anticipate that we will incur increased research and development
expenses if we succeed in our objective to move products from pre-clinical to
clinical trials and as we expand our drug discovery efforts. We also expect to
hire additional technical staff to aid in the fulfillment of these goals. There
can be no assurance as to when or if we will achieve such objectives.
General and Administrative Expenses
We reported general and administrative expenses of $5,391,000 and
$1,828,000 for the nine months ended September 30, 2000, and 1999, respectively.
For the quarter ended September 30, 2000 and 1999, general and
9
administrative expenses were $1,662,000 and $689,000, respectively. The increase
in general and administrative expenses in 2000 from 1999 was attributable to a
$2,949,000 increase in public and financial relations costs including a non-cash
charge of $2,311,000 related to the value assigned to warrants granted to our
financial advisors and consultants, a $56,000 increase in insurance costs, a
$52,000 increase in travel and lodging expenses including relocation
reimbursements, a $97,000 increase in consulting fees, a $30,000 increase in
fees associated with scientific conferences, a $378,000 increase in legal and
professional fees and a $58,000 increase in employee related expenses, partially
offset by a $18,000 decrease in technology marketing costs.
We anticipate that we will incur increased general and administrative
expenses as we expand our administrative staff to aid in our business
development.
Interest Income
Interest income was $1,045,000 and $179,000 for the nine months ended
September 2000 and 1999, respectively. For the quarter, interest income was
$529,000 and $50,000 for September 2000 and 1999, respectively. The increase in
interest income is due to the increase in available cash balances resulting from
the receipt of proceeds from the exercise of warrants.
Change in accounting principle - Revenue recognition
In December 1999, the staff of the Securities and Exchange Commission
issued an accounting bulletin on revenue recognition which provides, among other
matters, that nonrefundable license fees should be recognized over the period of
performance of related research and development activities. Accordingly, we
changed our accounting policy from recognizing revenue from nonrefundable
license fees at signing of agreement to deferring and recognizing such fees over
the period of performance of related research and development activities.
Effective January 1, 1999, we reflected this change in accounting principle as a
cumulative effect on prior years of $422,000, which is shown in the statement of
operations. Payments to third parties in connection with nonrefundable license
fees are being recognized over the period of performance of related research and
development activities.
This change in accounting principle would have resulted in an increase
in revenues and research and development expenses and a decrease in net loss of
approximately $281,000, $70,000 and $211,000, respectively for the nine months
ended September 30, 1999 if it was retroactively applied. The corresponding
impact on the net loss per share would be a decrease from $(0.30) to $(0.28) if
this change in accounting principle were retroactively applied.
Net Losses
We incurred net losses of $5,672,000 and $2,924,000 for the nine months
ended September 30, 2000 and 1999, respectively. Net loss for the nine months
ended September 30, 2000 included $2,311,000 in non-cash charges related to
warrants granted to our financial advisors and consultants. For the quarter net
losses were $1,958,000 and $1,012,000 for September 30, 2000 and 1999,
respectively. The increase in net losses in 2000 from 1999 was attributable to
increased general and administrative expenses, partially offset by an increase
in interest income.
10
Liquidity and Capital Resources
At September 30, 2000, we had cash of approximately $36,472,000. Since
inception we have financed our operations from debt and equity financings as
well as fees received from licensing and research and development agreements.
During the nine months ended September 30, 2000, we used cash of approximately
$3,471,000 to fund our operating activities, principally caused by the net loss
of $5,672,000. In addition, during the nine months ended September 30, 2000, we
used approximately $646,000 to fund our investing activities, principally caused
by loans to an officer/shareholder of $204,000 and the purchase of equipment of
$442,000.
On February 7, 2000, the Company gave notice to the holders of our
Class C Warrants that it was exercising its right of redemption effective March
9, 2000. We received net proceeds of approximately $12,953,000 from the exercise
of 1,992,829 such warrants. On March 13, 2000 the Company gave notice to the
holders of its Class D Warrants that it was exercising its right of redemption
effective April 12, 2000. The Company received net proceeds of approximately
$25,742,000 from the exercise of 2,941,905 such warrants. Additionally, through
September 30, 2000 the Company received net proceeds of approximately $1,776,000
from the exercise of 221,010 other warrants and 145,300 options. During the
period from October 1, 2000 through November 10, 2000 the Company received net
proceeds of approximately $1,438,000 from the exercise of 361,779 warrants.
In January 2000 the Board of Directors approved the 2000 Employee
Option Plan (the "Plan") authorizing up to 1,500,000 shares, subject to approval
of the Plan by a majority of our shareholders. We granted 200,000 options to
purchase shares of Common Stock under the Plan at exercise prices ranging from
$6.75 to $10.125 per share to officers, directors, employees and consultants of
the Company. On September 11, 2000 the stockholders of the Company approved the
Plan. At the time of stockholder approval, the market value of the Company's
stock exceeded the exercise price of certain options noted above, consequently
the Company recorded deferred compensatory charges of $130,000 equal to the
spread between the exercise price of the option and the market price, times the
number of options involved. The charge to operations for the nine months ended
September 30, 2000 was $44,000.
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
which establishes a fair value-based method of accounting for stock-based
compensation plans. The Company has adopted the disclosure-only alternative
under SFAS No. 123. The Company accounts for stock based compensation to
nonemployees using the fair value method in accordance with SFAS No. 123 and
Emerging Issues Task Force (EITF) 96-18. The Company has recognized deferred
stock compensation related to certain stock option and warrant grants. During
the nine months ended September 30, 2000 the Company granted 25,000 and 300,000
warrants to purchase shares of Common Stock at $12.00 and $15.00 per share,
respectively in return for financial advisory services. The Company valued these
warrants based on the Black-Scholes option pricing. In connection therewith the
Company recorded a charge of $1,982,000 during the nine months ended September
30, 2000. In connection with other option grants to consultants the Company
recorded a charge of $329,000 during the nine months ended September 30, 2000.
11
We have agreed to fund scientific research at academic institutions and
to make minimum royalty payments for licensing and collaborative agreements of
approximately $851,795 through September 30, 2001. We do not expect these
arrangements to have a significant impact on our liquidity and capital
resources. We intend to continue to maintain and develop relationships with
academic institutions and to establish licensing and collaborative agreements.
We have no material capital commitments for the year ended December 31,
2000.
We believe our finances are adequate to meet our current capital and
operating needs.
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In July and August 2000, the Company granted 24,000 options to purchase
shares of Common Stock at exercise prices ranging from $9.375 to $10.125 per
share to employees and consultants of the Company. The shares of Common Stock
were granted pursuant to the exemption afforded by Section 4(2) promulgated
under the Securities Act since such issuances did not involve a public offering.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders ("Annual Meeting")
on September 11, 2000 and adjourned until September 22, 2000. The purpose of the
Annual Meeting was (i) to approve an amendment to the Company's certificate of
incorporation (the "Certificate of Incorporation") to divide the Board of
Directors into three classes; (ii) to elect five directors as follows: two
directors to serve a three-year term, two directors to serve a two-year term,
and one director to serve a one-year term; (iii) to approve the adoption of an
amendment to the Certificate of Incorporation to require that all actions taken
by stockholders be taken at an annual or special meeting and not by written
consent; and (iv) to approve the Company's 2000 Stock Option Plan.
The Board of Directors recommended that the stockholders amend the
Certificate of Incorporation to divide the Board of Directors into three
classes. The stockholders voted 6,990,060 shares for the amendment to the
Certificate of Incorporation 725,903 shares against the amendment to the
Certification of Incorporation and 149,886 shares abstained. While the proposal
was approved by 90% of the shareholders that voted on those proposal, the number
of shares voted did not meet the statutory requirement needed for approval.
At the Annual Meeting, Arthur P. Bollon, Ira J. Gelb, Irwin C. Gerson,
Walter M. Lovenberg, and Gary E. Frashier were elected as directors of the
Company. The number of votes for and withheld are detailed below for each
director.
12
The Board of Directors recommended that the stockholders amend the
Certificate of Incorporation to require that all actions taken by stockholders
be taken at an annual or special meeting and not by written consent. The
stockholders voted 6,533,317 shares for the amendment to the Certificate of
Incorporation, 706,720 shares against the amendment to the Certification of
Incorporation and 97,152 shares abstained. While the proposal was approved by
90% of the shareholders that voted on those proposal, the number of shares voted
did not meet the statutory requirement needed for approval.
The Board of Directors recommended that the stockholders approve the
Company's 2000 Stock Option Plan. The stockholders voted 14,049,592 shares for
the approval of the 2000 Stock Option Plan, 925,612 shares against the 2000
Stock Option Plan and 102,807 shares abstained.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYTOCLONAL PHARMACEUTICS INC.
Date: November 14, 2000 /s/ Joan Gillett
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Joan Gillett
Vice President and
Controller
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INDEX TO EXHIBITS