10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 9, 2002
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 JUNE 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-26918
EXEGENICS INC.
(EXACT NAME OF ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2402409
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2110 RESEARCH ROW, SUITE 621, DALLAS, TEXAS 75235
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(214) 358-2000
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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
----- -----
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE: 16,184,486 SHARES OF COMMON
STOCK, $.01 PAR VALUE, OUTSTANDING AS OF AUGUST 6, 2002.
TABLE OF CONTENTS
EXEGENICS INC.
BALANCE SHEETS
See notes to financial statements
3
EXEGENICS INC.
STATEMENTS OF OPERATIONS
See notes to financial statements
4
EXEGENICS INC.
STATEMENTS OF CASH FLOWS
See notes to financial statements
5
eXegenics Inc.
Notes to Financial Statements
June 30, 2002
(unaudited)
(1) FINANCIAL STATEMENT PRESENTATION
The unaudited financial statements of eXegenics 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, 2001. The results for the interim periods are
not necessarily indicative of the results for the full fiscal year.
(2) CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash, cash equivalents, and investments totaled $22,197,000 at June 30,
2002 and consisted of $12,170,000 on deposit with a financial
institution and an investment security issued by the Federal National
Mortgage Agency. The security, purchased in May 2001, matures in March
2003 and has a carrying value of $10,027,000 at June 30, 2002. Interest
at 5% per annum is received semi-annually in February and August.
(3) MASTER LICENSE AGREEMENT WITH BRISTOL-MYERS SQUIBB
In June 1998, the Company executed a "Master License Agreement" with
Bristol-Myers Squibb ("BMS"). This agreement sublicensed to BMS the
Company's rights to two technologies related to production of
paclitaxel, the active ingredient in BMS's anti-cancer product,
Taxol(R). The agreement provides for various fees, milestone payments,
and royalties. The final payment due under an R&D development funding
provision of this agreement was made in February 2002. The Company has
thus curtailed its R&D spending on this project. Discussions are
ongoing with BMS as to their intentions to commercialize this
production process.
(4) 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 period. No
effect has been given to outstanding options, warrants or convertible
preferred stock in the diluted computation, as their effect would be
antidilutive.
(5) STOCKHOLDERS' EQUITY
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
6
compensation to nonemployees using the fair value method in accordance
with SFAS No. 123 and Emerging Issues Task Force (EITF) Issue No.
96-18. The Company has recognized deferred stock compensation related
to certain stock option and warrant grants. During the six months ended
June 30, 2002 the Company granted 10,000, 25,000, 10,000 and 25,000
options to purchase shares of common stock at $7.13, $3.28, $3.20 and
$1.67 per share, respectively, in return for consulting services.
During the six months ended June 30, 2001 the Company granted 5,000
options to purchase shares of common stock at $7.188 per share in
return for consulting services. The Company valued these options using
the Black-Scholes option pricing model. As a result, the Company
recorded a charge of $60,100 and $2,800 during the six months ended
June 30, 2002 and 2001, respectively, related to these grants. In
connection with other option grants to consultants in previous years,
the Company recorded a charge of $65,000 and $231,400 during the six
months ended June 30, 2002 and 2001, respectively.
(6) DEFERRED REVENUE
The Company recognizes revenue from development agreements over the
stated life of the agreement. Amounts received in advance of the
services to be performed are recorded as deferred revenue. Accordingly,
funds of $500,000 received during the six months ended June 30, 2002,
net of $556,000 in revenues recognized cumulatively through June 30,
2002 and, including $56,000 in deferred revenue outstanding as of
December 31, 2001, eliminate deferred revenues at June 30, 2002.
(7) RESERVE FOR RESTRUCTURE
The Company generally recognizes operating expenses as incurred. As
part of its reorganization efforts in June 2001, the Company terminated
several employees, remodeled facilities and moved equipment. During the
second quarter of 2002, due to the Company's decision to concentrate on
its strategic drug discovery and development programs, as well as the
completion of funding related to the "Sponsored Research Agreement"
with BMS, the Company terminated additional employees. The Company
recognized approximately $560,000 related to those activities through
June 30, 2002. Cash payments of $166,000 were charged against the
account during the six months ended June 30, 2002. Accrued expenses
relating to restructuring are $44,000 at June 30, 2002.
(8) SUBSEQUENT EVENTS
As a result of the Company's decision to concentrate on its strategic
drug discovery and development programs, as well as the completion of
funding related to the "Sponsored Research Agreement" with BMS, the
Company recently began the process of renegotiating several scientific
collaborations, including agreements with the Research and Development
Institute, or RDI, and Washington State University Research Foundation.
The agreement with RDI was terminated, relieving the Company of future
annual minimum royalty payments.
7
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. This discussion contains certain forward-looking
statements that involve substantial risks and uncertainties. When used in this
report, the words "anticipate," "believe," "estimate," "expect" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. 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.
OVERVIEW
We were organized and commenced operations in 1991. Prior to 2001, our
efforts were principally devoted to research activities including efforts to
discover therapeutic products for human diseases. Beginning in 2001, we
repositioned ourselves as a post-genomics drug creation enterprise with a goal
of building a development pipeline of commercially viable drug leads and
pharmaceutical products for the treatment of cancers and drug-resistant
bacterial diseases. In the first six months of 2002, we adopted a strategy to
leverage our proprietary research technologies, Quantum Core Technology
(QCT(TM)) and Optimized Anti-Sense Inhibitory Sequence (OASIS(TM)), to create
and/or obtain novel compounds that may be advanced towards clinical drug
candidates and pharmaceutical products. We increased our efforts to obtain and
develop clinical drug candidates and to identify opportunities for financial and
operational synergies. There can be no assurance, however, that we will be
successful in discovering or advancing drug leads that are commercially viable
or that we will otherwise be able to achieve our strategic goals.
In April 2002, we announced the discovery of a series of novel new
chemical entities, ("NCEs"). These NCEs demonstrated excellent in vitro activity
against Gram-positive bacterial pathogens, including Staphylococcus aureus, that
are resistant to ordinary antibiotics. We filed a provisional U.S. patent
application regarding the structure and use of these agents. We plan on using
our proprietary research technologies to assist us in our effort to create
clinical drug candidates based on these agents, although we must first overcome
a number of hurdles, such as toxicity tests, before we are ready to begin
clinical trials. There can be no assurance that we will overcome these hurdles
or otherwise be successful in producing clinical drug candidates.
In April 2002, we announced that we are exploring acquisition and
merger opportunities that would provide pharmaceutical compounds that are in or
close to human clinical trials. We plan to identify and acquire and/or merge
with companies having clinical drug candidates and technologies that complement
our own technologies. We engaged a strategic and financial advisory firm with
experience in biotechnology to assist in this endeavor. There can be no
assurance, however, that we will be successful in obtaining clinical drug
candidates or accelerating our development of proprietary drugs.
In April 2002, we announced that Bristol-Myers Squibb ("BMS") advised
us that it would not provide additional funding beyond their previous commitment
for our research related to the development of a new fermentation process for
paclitaxel. The sponsored research program had been actively funded by BMS since
1998 and we received their final payment in February of this year. Our Master
License Agreement with BMS remains in effect. As a result of the completion of
funding related to the "Sponsored Research Agreement" with BMS, as well as our
decision to concentrate on our strategic drug discovery and development
programs, we have initiated efforts to renegotiate several scientific
collaborations, including agreements with the Research and Development Institute
("RDI") and Washington State University Research Foundation. The agreement with
RDI was terminated, relieving the Company of future annual minimum royalty
payments. Further, discussions are ongoing with BMS as to their intentions to
commercialize this production process.
8
As a result of our decision to focus on the discovery and creation of
drug leads as well the lack of continued external funding of our paclitaxel
research, we recently restructured our program of internal scientific projects.
We have discontinued support of certain projects that are not consistent with
our new focus. Consequently, we eliminated several scientific, administrative
and support positions resulting in severance payments of approximately $56,000
which will have been or will be paid in the second and third quarters of 2002
and charged against our Reserve for Restructure.
We hope to out-license to, or partner with, other companies to advance
our system for producing glucocerebrosidase used in treating Gaucher's Disease.
There can be no assurance that we will be successful in finding a partner for
this program.
We anticipate that the focus of our efforts for the next twelve months will be
as follows:
o Advancing our research related to enzyme targets that are central to the
development of resistance by Mycobacterium tuberculosis, the causative
agent of tuberculosis. Using QCT we are in the preclinical discovery stage
of creating "core inhibitors" of the specific enzyme targets.
o Developing anti-infective candidate drug leads pursuant to our recently
announced creation of a new series of anti-bacterial NCEs.
o Establishing a partner relationship to advance and leverage our QCT(TM)
and OASIS(TM) research platforms.
o Acquiring, via merger or acquisition, later-stage pharmaceutical compounds
that complement our own technologies to accelerate the development of
proprietary drugs.
o Divesting, via out-licensing or partnering, our system for producing
glucocerebrosidase used in treating Gaucher's Disease.
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.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
Revenue
Revenues were $222,000 for the three months ended June 30, 2002 and
$334,000 for the three months ended June 30, 2001. Revenues were attributable to
license and research and development payments from our agreements with
Bristol-Myers Squibb.
9
Research and Development Expenses
We incurred research and development expenses of $1,254,000 for the
three months ended June 30, 2002 and $1,858,000 for the three months ended June
30, 2001, a decrease of $604,000 or 32 percent. The decrease in research and
development expenses for the three months ended June 30, 2002 as compared to the
same period in 2001 was due to a $22,000 decrease in research services and
supplies, a $414,000 decrease in salary and wage expenses, a $361,000 decrease
in expenses for contract research, licenses and royalties, offset by a $114,000
increase in research consulting cost, a $13,000 increase in facilities and
equipment related expenses and a $45,000 increase in research operating costs
previously charged to general and administrative expenses.
General and Administrative Expenses
We incurred general and administrative expenses of $1,030,000 for the
three months ended June 30, 2002 and $1,741,000 for the three months ended June
30, 2001, a decrease of $711,000 or 41 percent. The decrease in general and
administrative expenses for the three months ended June 30, 2002 as compared to
the same period in 2001 was attributable to a $230,000 decrease in
administrative salary expense, a decrease of $350,000 in professional fees for
general corporate legal activities, a $25,000 decrease in legal services related
to intellectual property, a $77,000 decrease in travel related expenses, a
$12,000 decrease in corporate governance fees, a $9,000 decrease in professional
consulting and audit services, a $41,000 decrease in research operating costs
now charged to research and development expenses, partially offset by a $32,000
increase in public and financial relations expenses and an $18,000 increase in
other operating expenses.
Interest Income
Interest income was $182,000 and $367,000 for the three months ended
June 30, 3002 and June 30, 2001, respectively. The decrease was due primarily to
lower interest rates in 2002 and also to lower principal balances.
Net Loss
In the three months ended June 30, 2002, we incurred a net loss
attributable to common shareholders of $1,885,000, which was 36% less than the
net loss of $2,949,000 for the three months ended June 30, 2001. The decrease in
net loss of $1,064,000 was primarily the result of the aforementioned changes in
our operations. Likewise, the net loss per common share was improved by 33% at
$0.12 for the three months ended June 30, 2002 as compared to a net loss per
common share of $0.18 for the three months ended June 30, 2001.
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
Revenue
Revenues were $556,000 and $667,000 for the six months ended June 30,
2002 and 2001, respectively. Revenues were attributable to license and research
and development payments from our agreements with Bristol-Myers Squibb.
Research and Development Expenses
We incurred research and development expenses of $2,476,000 for the six
months ended June 30, 2002 and $3,006,000 for the six months ended June 30,
2001, a decrease of $530,000 or 18 percent. The decrease in research and
development expenses for the six months ended June 30, 2002 as compared to the
same period in 2001 was due to a $420,000
10
decrease for research salaries due to discontinuation of non-strategic research
projects, a $420,000 decrease in expenses for contract research, licenses and
royalties, partially offset by a $174,000 increase in research consultant costs
related to the creation of drug leads, a $54,000 increase in equipment and
depreciations expenses as well as costs associated with the closing of one
location and a $72,000 increase in research operating costs previously charged
to general and administrative.
General and Administrative Expenses
We incurred general and administrative expenses of $2,109,000 for the
six months ended June 30, 2002 and $2,708,000 for the six months ended June 30,
2001, a decrease of $599,000 or 22 percent. The decrease in general and
administrative expenses for the six months ended June 30, 2002 as compared to
the same period in 2001 was attributable to a $200,000 decrease in
administrative salary expense, a decrease of $325,000 in professional fees for
general corporate legal activities, a $86,000 decrease in travel related
expenses, a $93,000 decrease in corporate governance fees, a $95,000 decrease in
research operating costs now charged to research and development expenses offset
by a $49,000 increase in legal services related to intellectual property, a
$132,000 increase in professional consulting and audit services and a $20,000
increase in other operating expenses.
Interest Income
Interest income was $371,000 and $828,000 for the six months ended June
30, 3002 and June 30, 2001, respectively. The decrease was due primarily to
lower interest rates in 2002 and also to lower principal balances.
Net Loss
In the six months ending on June 30, 2002, we incurred a net loss
attributable to common shareholders of $3,822,000, or 14% less than the
$4,468,000 loss for the six months ended June 30, 2001. The decrease in net loss
of $646,000 was primarily the result of the aforementioned changes in our
operations. Net loss per common share was $0.24 for the six months ended June
30, 2002 and $0.28 for the six months ended June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we had cash, cash equivalents and investments of
approximately $22,200,000. 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 six months ended June 30, 2002, net cash
used in operating activities was $ 3,462,000, the largest element of which was
the net loss of $3,654,000. In addition, during the six months ended June 30,
2002 we used $46,000 in financing activities and received $133,000 from
investing activities, primarily from the sale of equipment. As a result of the
decision by BMS to discontinue funding of our paclitaxel research efforts, we
have lost our previous sole source of revenue. We cannot make any assurance as
to when, if ever, we will generate revenue again.
We have scheduled payments to fund scientific research at academic
institutions and to make minimum royalty payments for licensing and
collaborative agreements of approximately $300,000 during the remainder of 2002.
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 ending December
31, 2002.
We believe that we have sufficient cash and cash equivalents on hand at
June 30, 2002 to finance our plan of operation for the next twelve months.
However, there can be no assurance that we will generate sufficient
11
revenues, if any, to fund our operations after such period or that any required
financings will be available, through bank borrowings, debt or equity offerings,
or otherwise, on acceptable terms or at all.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to financial market risk, including changes in interest
rates, relates primarily to our marketable security investments. We generally
place our marketable security investments in high credit quality instruments,
primarily U.S. government obligations. We do not believe that a 100 basis point
increase or decrease in interest rates would significantly impact our business.
We do not have any derivative instruments. We operate only in the United States
and all sales have been made in U.S. dollars. We do not have any material
exposure to changes in foreign currency exchange rates.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of stockholders on May 13, 2002, at which
time the stockholders voted on the following proposals:
(1) Election of eight directors for a one-year term each.
There were no abstentions and no broker non-votes.
(2) Ratification of appointment of Ernst & Young LLP as auditors.
The vote was 14,800,272 for, 169,961 against, and there were 46,037 abstentions.
There were no broker non-votes.
12
Item 5. Other Information
On July 12, 2002, our Board of Directors adopted Amended and Restated
By-Laws to provide, among other things, certain procedures for stockholder
proposals and nominations to be presented at stockholder meetings and for
stockholders taking action by written consent. A copy of the Amended and
Restated By-Laws are attached to this Quarterly Report on Form 10-Q as Exhibit
3.1 hereto.
We received notice from The Nasdaq Stock Market that for 30 trading
days the price of our common stock had closed below the minimum $1.00 per share
bid price required for continued listing on the Nasdaq National Market by
Marketplace Rule 4450(a)(5). Under Marketplace Rule 4450(c)(2), we will be
provided 90 calendar days, or until October 23, 2002, to regain compliance with
the minimum bid price requirement. We can regain compliance with the minimum bid
price requirement if, at anytime before October 23, 2002, the bid price of our
common stock closes at $1.00 per share or more for a minimum of 10 consecutive
trading days. Should we fail to regain compliance, Nasdaq stated that it would
provide us with written notification that our common stock will be delisted from
the Nasdaq National Market. Removal of our common stock from listing on the
Nasdaq National Market would likely have an adverse impact on the trading price
and liquidity of our common stock. During this 90-day period we will consider
our option of transferring our stock listing to Nasdaq's Small Cap Market.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed herewith as part of this form 10-Q:
3.1 Amended and Restated By-Laws
99.1 Certification Pursuant to 18 U.S.C. Section 1350
The following report was filed on Form 8-K during the quarter ended June 30,
2002:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXEGENICS INC.
Date: August 1, 2002 /s/ Joan H. Gillett
-------------- ------------------------------
Joan H. Gillett, CPA
Vice President/Controller
Principal Accounting Officer
13
EXHIBIT INDEX