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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-26078
EXEGENICS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2402409
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 registrant: (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 past 90 days. Yes [X]
No [ ]
Check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the issuer's common stock, as of
November 13, 2002, was 16,184,486 shares of Common Stock, $.01 par value.
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TABLE OF CONTENTS
Page(s)
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PART I. FINANCIAL INFORMATION
Item 1. -- Financial Statements:
Balance Sheets as of September 30, 2002 (unaudited)
and December 31, 2001 3
Statements of Operations for the Three Months
and Nine Months Ended September 30, 2002
and 2001(unaudited) 4
Statements of Cash Flows for the Nine Months
Ended September 30, 2002 and 2001(unaudited) 5
Notes to Financial Statements 6
Item 2. -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. -- Quantitative and Qualitative Disclosures About
Market Risk 12
Item 4. -- Controls and Procedures 12
PART II. OTHER INFORMATION
Item 1. -- Legal Proceedings 12
Item 2. -- Changes in Securities and Use of Proceeds 12
Item 3. -- Defaults upon Senior Securities 12
Item 4. -- Submission of Matters to a Vote of Security Holders 12
Item 5. -- Other Information 13
Item 6. -- Exhibits and Reports on Form 8-K 13
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXEGENICS INC.
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,456,000 $ 14,995,000
Restricted cash 550,000 550,000
Investments 10,015,000 10,050,000
Prepaid expenses and other current assets 438,000 656,000
-------------- --------------
Total current assets 20,459,000 26,251,000
Equipment, net 604,000 1,009,000
Patent rights, less accumulated amortization of $138,000 and $111,000 46,000 74,000
Notes receivable - employee/stockholder -- 278,000
Other assets 8,000 13,000
-------------- --------------
Total $ 21,117,000 $ 27,625,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 826,000 $ 1,163,000
Deferred revenue -- 56,000
Current portion of capital lease obligations 138,000 83,000
-------------- --------------
Total current liabilities 964,000 1,302,000
Capital lease obligations, less current portion 79,000 202,000
-------------- --------------
Total liabilities 1,043,000 1,504,000
-------------- --------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock - $.01 par value, 10,000,000 shares
authorized; 828,023 and 755,950 shares of Series A
convertible preferred issued and outstanding (liquidation
value $2,070,000 and $1,890,000) 8,000 8,000
Common stock - $.01 par value, 30,000,000 shares authorized;
16,184,486 and 16,180,935 shares issued 162,000 162,000
Additional paid-in capital 67,254,000 67,025,000
Subscriptions receivable (305,000) (360,000)
Unearned compensation -- (5,000)
Accumulated deficit (44,475,000) (38,139,000)
Treasury stock, 511,200 shares of common stock, at cost (2,570,000) (2,570,000)
-------------- --------------
Total stockholders' equity 20,074,000 26,121,000
-------------- --------------
Total $ 21,117,000 $ 27,625,000
============== ==============
See notes to financial statements
3
EXEGENICS INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Revenue:
Licensing & research fees $ -- $ 333,000 $ 556,000 $ 1,000,000
------------ ------------ ------------ ------------
Operating Expenses:
Research and development 824,000 1,106,000 3,301,000 4,112,000
General and administrative 2,017,000 2,243,000 4,127,000 4,951,000
------------ ------------ ------------ ------------
2,841,000 3,349,000 7,428,000 9,063,000
------------ ------------ ------------ ------------
Operating (loss) (2,841,000) (3,016,000) (6,872,000) (8,063,000)
------------ ------------ ------------ ------------
Other (income) expense:
(Gain) or loss on disposition -- -- (4,000) --
Interest (income) (171,000) (289,000) (543,000) (1,117,000)
Interest expense 4,000 -- 15,000 1,000
------------ ------------ ------------ ------------
(167,000) (289,000) (532,000) (1,116,000)
Loss before items shown below (2,674,000) (2,727,000) (6,340,000) (6,947,000)
Provision (benefit) for taxes 8,000 25,000 (4,000) 93,000
------------ ------------ ------------ ------------
Net loss (2,682,000) (2,752,000) (6,336,000) (7,040,000)
Preferred stock dividend -- -- (169,000) (180,000)
------------ ------------ ------------ ------------
Net loss attributable to
to common shareholders $ (2,682,000) $ (2,752,000) $ (6,505,000) ($ 7,220,000)
============ ============ ============ ============
Net loss per share-basic and diluted $ (0.17) $ (0.17) $ (0.42) (0.45)
============ ============ ============ ============
Weighted average number of
shares outstanding - basic and
diluted 15,673,286 16,174,173 15,671,972 16,165,018
============ ============ ============ ============
See notes to financial statements
4
EXEGENICS INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2002 2001
------------ ------------
(unaudited)
Cash flows from operating activities:
Net (loss) $ (6,336,000) $ (7,041,000)
Adjustments to reconcile net (loss) to net
cash used in operating activities:
Depreciation and amortization 349,000 332,000
Gain on disposal of assets (4,000) --
Value assigned to common shares and options for services 234,000 (112,000)
Changes in:
Prepaids and other assets 278,000 (198,000)
Deferred revenue (56,000) 389,000
Accounts payable and accrued expenses (337,000) 1,938,000
------------ ------------
Net cash used in operating activities (5,872,000) (4,692,000)
------------ ------------
Cash flows from investing activities:
Notes receivable - officer/shareholder 278,000 --
Purchase of securities -- (10,030,000)
Sale (purchase) of equipment 123,000 (603,000)
------------ ------------
Net cash provided by (used in) investing activities 401,000 (10,633,000)
------------ ------------
Cash flows from financing activities:
Payment of capital lease (68,000) --
Payment of royalties -- (94,000)
Stock subscriptions -- (284,000)
Purchase of treasury stock -- (568,000)
------------ ------------
Net cash used in financing activities (68,000) (946,000)
------------ ------------
NET DECREASE IN CASH (5,539,000) (16,271,000)
Cash and cash equivalents at beginning of period 14,995,000 35,408,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,456,000 $ 19,137,000
============ ============
See notes to financial statements
5
eXegenics Inc.
Notes to Financial Statements
September 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 $20,021,000 at
September 30, 2002 and consisted of $10,006,000 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 $10,015,000 at September 30,
2002. Interest at 5% per annum is received semi-annually in February
and August. Cash and cash equivalents also include restricted cash of
$550,000.
(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 compensation to nonemployees using the
fair value method in accordance with SFAS No. 123 and
6
eXegenics Inc.
Notes to Financial Statements
September 30, 2002
(unaudited)
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 nine months ended September 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 nine
months ended September 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 $76,000 and $6,300 during the nine months ended September 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 $69,000 and $352,000 during the nine months ended
September 30, 2002 and 2001, respectively.
On August 13, 2002 the Company issued warrants to purchase 125,000
shares of its common stock at a purchase price of $1.00 per share, with
an expiration date of August 13, 2007, and additional warrants to
purchase 125,000 shares of our common stock at a purchase price of
$0.55 per share, with an expiration date of August 13, 2007 to
Roan/Meyers Associates, L.P. in exchange for financial advisory
services. In connection with this exchange, the Company recorded a
charge of $90,600.
(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 nine months ended September 30,
2002, net of $556,000 in revenues recognized cumulatively through
September 30, 2002 and, including $56,000 in deferred revenue
outstanding as of December 31, 2001, eliminate deferred revenues at
September 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, the completion of funding related to the
"Sponsored Research Agreement" with BMS necessitated the Company's
decision to concentrate on its strategic drug discovery programs, and
the Company terminated additional employees. The Company recognized
approximately $560,000 related to those activities through September
30, 2002. Cash payments of $193,000 were charged against the account
during the nine months ended September 30, 2002. Accrued expenses
relating to restructuring are $17,000 at September 30, 2002.
(8) EMPLOYMENT AGREEMENT
We employ Dorit Arad, Ph.D. under an employment agreement dated July 1,
2002. The employment agreement renews each year on December 31 unless
either party provides notice of termination 90 days prior to the
expiration, and provides for the payment to Dr. Arad of a base salary
of $190,000 subject to annual reviews and adjustments in accordance
with our compensation plan and practices and approval by the
compensation committee of our board of directors. The agreement also
provides for an annual performance bonus, at the discretion of the
board of directors, of not more that 30% per year of her annual salary.
An additional payment of $9,750 as a one-time cash bonus was paid to
Dr. Arad upon execution of the agreement. In the event we terminate Dr.
Arad's employment without cause, the agreement requires us to pay her
salary for twelve months following the date of termination. The
employment agreement contains an assignment to the Company of certain
patents and a post-termination non-compete, non-solicitation and
non-disclosure agreement that extends for a period of one year
following the expiration or termination of employment. Certain
conditions existing in Dr. Arad's previous employment agreement, dated
December 31, 1998, obligated the company to: make royalty payments of
3% of sales and 10% of sublicense fees related to products developed
from her technology; pay on her behalf a sum of up to $200,000 to
7
eXegenics Inc.
Notes to Financial Statements
September 30, 2002
(unaudited)
Saturi Medical Research, Ltd.; and reimburse to her certain business
expenses related to her research for us while she was resident in
Israel. In lieu of our making direct cash payments to Dr. Arad, or
payments on her behalf to Saturi Medical Research, in settlement of our
obligations (amounting to approximately $355,000), Dr. Arad agreed to
accept termination of her liabilities to us under the loans we
previously issued to her. In addition, we granted to Dr. Arad an option
to purchase up to 150,000 shares of our common stock at an exercise
price of $0.81 per share. The agreement provides for additional option
grants to purchase up to 160,000 shares of our common stock based on
achievement of milestones related to the development of certain
products
(9) SUBSEQUENT EVENTS
As a result of the completion of funding related to the "Sponsored
Research Agreement" with BMS and the Company's resulting decision to
concentrate on its strategic drug discovery programs, 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.
On September 20, 2002 the Company announced that it had executed a
definitive merger agreement with Innovative Drug Delivery Systems,
Inc., or IDDS, a private company with products ready to enter Phase III
clinical trials. Subsequent to the merger, IDDS will be the surviving
company.
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 and since that time
have been devoted to research activities including efforts to discover
therapeutic products for human diseases. Beginning in 2001, we defined 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
addition, we increased our efforts to obtain and develop clinical drug
candidates and to identify opportunities for financial and operational
synergies, specifically to identify acquisition or merger opportunities that
would provide pharmaceutical compounds in or close to human clinical trials. We
engaged Petkevich & Partners, LLC in March of 2002 to assist us in this
endeavor, and on September 20, 2002, we announced that we had executed a
definitive merger agreement with Innovative Drug Delivery Systems, Inc., or
IDDS, a private company with product candidates ready to enter Phase III
clinical trials. We are currently involved in activities related to the pending
business combination, including regulatory filings and a stockholders' meeting
while continuing work on our internal discovery-research programs.
We utilize our proprietary research technologies, Quantum Core
Technology, or QCT(TM), and Optimized Anti-Sense Inhibitory Sequence, or
OASIS(TM), in attempts to create novel compounds that may be advanced towards
clinical drug candidates and pharmaceutical products. QCT is a computer-assisted
drug design technology platform, primarily targeted to the inhibition of
proteins involved in disease processes. OASIS is a patented technology
8
platform that uses computers to design "anti-sense sequences" -- molecules
capable of blocking the expression of specific genes. By targeting both proteins
and genes, we believe we have the capability to produce chemical molecules that
can be developed into drugs effective against a variety of cancers and
infectious diseases. If such compounds are successfully synthesized, they must
undergo additional testing. If they are successfully tested and optimized in
vitro, they will then be tested in animals and ultimately in humans. Successful
development of such drugs could provide a broad range of business opportunities
between us and other pharmaceutical and biotechnology companies.
In April 2002, we announced the discovery of a series of novel chemical
entities, or NCEs. These NCEs demonstrated 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. Using our
proprietary research technology QCT, we are endeavoring to create clinical drug
candidates based on these agents, although we must first overcome a number of
hurdles, such as increased activity and less toxicity, 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.
We are engaged in a Master License Agreement with Bristol-Myers Squibb,
or Bristol-Myers. The technology that is the basis for the license agreement
concerns genetically engineered fermentation technology that has been under
development for the creation of an improved production system for paclitaxel,
the active ingredient in Taxol(R), and its precursor taxane, baccatin. We
obtained the rights to patents covering this technology from Research and
Development Institute, or RDI, and Washington State University Research
Foundation, or WSU. A sponsored research program had been actively funded by
Bristol-Myers since 1998; we received their final payment in February of this
year; and as of June 12, 2002, we had no further research obligations to
Bristol-Myers. However, our Master License Agreement with Bristol-Myers remains
in effect. We have initiated discussions with Bristol-Myers with the objective
of negotiating an agreement to reacquire exclusive rights to the WSU paclitaxel
gene technology for eXegenics.
As a result of the completion of funding related to the Sponsored
Research Agreement with Bristol-Myers, we initiated efforts to renegotiate
several scientific collaborations, including agreements with RDI and WSU. The
agreement with RDI was terminated in June 2002, relieving us of future annual
minimum royalty payments and neither party has any further obligation to the
other with respect to any terminated licenses or their respective technologies.
We have requested a renegotiation of our current agreement with WSU.
We have initiated efforts to find a party willing to outlicense our
production system for manufacturing a recombinant form of glucocerebrosidase
that is intended for use as an enzyme replacement therapy for Type 1 Gaucher's
disease. Our production system for the enzyme could result in a more
cost-effective means of producing the enzyme as compared to those production
systems currently in commercial use.
Our overall business strategy has been to:
o Acquire, via merger or acquisition, later-stage pharmaceutical
compounds that complement our strategy to accelerate the development of
proprietary drugs;
o Establish a partner relationship to advance and leverage our QCT and
OASIS research platforms;
o Continue development of our anti-bacterial NCEs into anti-infective
candidate drug leads; and
o Advance our research related to enzyme targets that are central to the
development of antibiotic resistance in 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.
Our actual research and development and related activities may vary
significantly from current plans
9
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 SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
Revenue
We had no revenue for the three months ended September 30, 2002 and had
revenue of $333,000 for the three months ended September 30, 2001. Revenues were
attributable to license and research and development payments from our
agreements with Bristol-Myers Squibb, pursuant to which Bristol-Myers has now
made all of the required payments to us.
Research and Development Expenses
We incurred research and development expenses of $824,000 for the three
months ended September 30, 2002 and $1,106,000 for the three months ended
September 30, 2001, a decrease of $282,000 or 25 percent. The decrease in
research and development expenses for the three months ended September 30, 2002,
as compared to the same period in 2001, was due to a $105,000 decrease in
research services and supplies, a $26,000 decrease in salary and wage expenses,
a $109,000 decrease in expenses for contract research, licenses and royalties, a
$70,000 decrease in research consulting cost, offset by a $23,000 increase in
facilities and equipment related expenses and a $16,000 increase in research
operating costs previously charged to general and administrative expenses.
General and Administrative Expenses
We incurred general and administrative expenses of $2,017,000 for the
three months ended September 30, 2002 and $2,243,000 plus a $25,000 tax
provision for a total of $2,268,000 for the three months ended September 30,
2001, a decrease of $226,000 or 10 percent, excluding the tax provision. The
decrease in general and administrative expenses for the three months ended
September 30, 2002 as compared to the same period in 2001 was attributable to a
$72,000 decrease in administrative salary expense, a $584,000 decrease in
professional fees for general corporate legal activities, a $42,000 decrease in
travel related expenses, a $44,000 decrease in employee relations and other
benefits, a $22,000 decrease in depreciation and amortization, a $16,000
decrease in research operating costs now charged to research and development
expenses, partially offset by a $436,000 increase in professional consulting and
audit services in connection with the pending merger, a $51,000 increase due to
a write-off of a shareholder subscription, a $45,000 increase in public and
financial relations expenses, a $12,000 increase in corporate governance fees
and a $10,000 increase in legal services related to intellectual property.
Interest Income
Interest income was $171,000 and $289,000 for the three months ended
September 30, 2002 and September 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 September 30, 2002, we incurred a net loss
attributable to common stockholders of $2,682,000, which was 3 percent less than
the net loss of $2,752,000 for the three months ended September 30,
10
2001. The decrease in net loss of $70,000 was primarily the result of the
aforementioned changes in our operations. The net loss per common share was
unchanged, and was $0.17 for both three month periods.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
Revenue
Revenues were $556,000 and $1,000,000 for the nine months ended
September 30, 2002 and 2001, respectively. Revenues were attributable to license
and research and development payments from our agreements with Bristol-Myers
Squibb, pursuant to which Bristol-Myers has now made all of the required
payments to us.
Research and Development Expenses
We incurred research and development expenses of $3,301,000 for the
nine months ended September 30, 2002 and $4,112,000 for the nine months ended
September 30, 2001, a decrease of $811,000 or 20 percent. The decrease in
research and development expenses for the nine months ended September 30, 2002
as compared to the same period in 2001 was primarily due to a $448,000 decrease
for research salaries due to discontinuation of non-strategic research projects,
a $533,000 decrease in expenses for contract research, licenses and royalties, a
$109,000 decrease in research services and supplies partially offset by a
$105,000 increase in research consultant costs related to the creation of drug
leads, an $86,000 increase in equipment and depreciation expenses as well as
costs associated with the closing of one location and an $82,000 increase in
research operating costs previously charged to general and administrative.
General and Administrative Expenses
We incurred general and administrative expenses of $4,127,000 for the
nine months ended September 30, 2002 and $4,951,000 plus a $93,000 tax provision
for a total of $5,044,000 for the nine months ended September 30, 2001, a
decrease of $824,000 or 17 percent, excluding the tax provision. The decrease in
general and administrative expenses for the nine months ended September 30, 2002
as compared to the same period in 2001 was attributable to a $272,000 decrease
in administrative salary expense, a $1,029,000 decrease in professional fees for
general corporate legal activities, a $128,000 decrease in travel related
expenses, a $66,000 decrease in corporate governance fees, a $56,000 decrease in
amortization, an $82,000 decrease in research operating costs now charged to
research and development expenses, offset by a $142,000 increase in legal
services related to intellectual property, a $51,000 increase due to a write-off
of a shareholder subscription, a $617,000 increase in professional consulting
and audit services related to our proposed merger and a $35,000 increase in
other operating expenses.
Interest Income
Interest income was $543,000 and $1,117,000 for the nine months ended
September 30, 2002 and September 30, 2001, respectively. The decrease was due
primarily to lower interest rates in 2002 and also to lower principal balances.
Net Loss
In the nine months ending on September 30, 2002, we incurred a net loss
attributable to common stockholders of $6,505,000, or 10 percent less than the
$7,220,000 loss for the nine months ended September 30, 2001. The decrease in
net loss of $715,000 was primarily the result of the aforementioned changes in
our operations. Net loss per common share was $0.42 for the nine months ended
September 30, 2002 and $0.45 for the nine months ended September 30, 2001.
11
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had cash, cash equivalents and investments of
approximately $20,021,000. 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, 2002, net cash used in
operating activities was $5,872,000, the largest element of which was the net
loss of $6,336,000. The net loss included approximately $526,000 in expenses
related to our proposed merger and a $347,000 non-cash item (for royalty
payments and operating expenses related to an agreement with an employee). In
addition, during the nine months ended September 30, 2002, we used $68,000 in
financing activities and received $401,000 from investing activities, primarily
from the sale of equipment and exchange of a receivable for a liability. 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 have no material capital commitments for the
year ending December 31, 2002.
We believe that we have sufficient cash and cash equivalents on hand to
finance our plan of operation for the next twelve months. However, there can be
no assurance that we will generate sufficient 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.
If we are successful with our efforts to combine the operations of
eXegenics and IDDS, the combined company will have several product candidates
that have reached the clinical development stage. We will have to fund all of
our combined operations and capital expenditures from the cash on hand at the
time of the merger. We expect that our operating expenses and capital
expenditures will increase in future periods as a result of increased
preclinical studies and clinical trial activity, and the anticipated
commercialization of our product candidates, assuming we receive the necessary
regulatory approvals. The initiation of commercial activities will require the
hiring of additional staff. Our capital expenditure requirements will depend on
numerous factors, including the progress of our clinical development programs,
the time required to file and process regulatory approval applications, the
ability to obtain additional licensing arrangements, and the demand for our
product candidates, if and when approved by the FDA or other regulatory
authorities.
We assume that cash on hand after the merger will be sufficient to meet
working capital and capital expenditure needs of the combined company for at
least the next twelve months. We will require substantial funds to conduct
research and development activities, preclinical studies, clinical trials and
other activities prior to the commercialization of any potential products. We
anticipate that such funds will be obtained from external sources and intend to
seek additional equity, debt or lease financing to fund future operations. We
also expect to seek additional collaborative agreements with corporate partners
to fund our research and development programs. However, our actual capital
requirements will depend on many factors. If we experience unanticipated cash
requirements, we may need to seek additional sources of funding, which may not
be available on favorable terms, if at all. If we do not succeed in raising
additional funds on acceptable terms, we may be unable to complete planned
preclinical studies and clinical trials or obtain approval of our product
candidates from the FDA and other regulatory authorities. In addition, we could
be forced to discontinue product development, reduce or forego sales and
marketing efforts and attractive business opportunities or discontinue
operations.
We cannot make any assurance that we will be able to consummate our
merger with IDDS. In the event that
12
the merger is not completed, we will have incurred a significant amount of
non-operating expenses associated with the merger that we would not have
otherwise incurred. Consequently, if the merger is not consummated, our
financial condition will likely be worse that it would have been had we never
entered into the merger agreement.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board, or FASB, issued
their Statement of Financial Accounting Standards No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets." The objective
of FAS 143 is to provide accounting guidance for legal obligations associated
with the retirement of tangible long-lived assets. The retirement obligations
included within the scope of FAS 143 are those that an entity cannot avoid as a
result of either the acquisition, construction or normal operation of a
long-lived asset. Components of larger systems also fall under FAS 143, as well
as tangible long-lived assets with indeterminable lives. FAS 143 is required to
be adopted on January 1, 2003.
In April 2002, the FASB issued their Statement of Financial Accounting
Standards No. 145, "Rescission of FAS Nos. 4, 44, and 64, amendment of FASB 13,
and Technical Corrections as of April 2002." As a result, the accounting for
gains and losses from extinguishment of debt and sale-leaseback transactions
will be affected by FAS 145. The provisions of FAS 145 related to the rescission
of Statements 4, 44 and 64 shall be applied in fiscal years beginning after May
15, 2002. The provisions of FAS 145 related to Statement 13 shall be effective
for transactions occurring after May 15, 2002.
In June 2002, the FASB issued their Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". FAS 146 nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." FAS
146 requires a liability for a cost associated with an exit or disposal activity
to be recognized when the liability is incurred rather than on the date of an
entity's commitment to an exit plan and establishes that fair value is the
objective for initial measurement of the liability. The provisions of FAS 146
shall be effective for exit or disposal activities initiated after December 31,
2002. The provisions of Issue 94-3 shall continue to apply for an exit activity
initiated under an exit plan that met the criteria of Issue 94-3 prior to FAS
146's initial application.
Effective January 1, 2002 we adopted the provisions of Financial
Accounting Standards No. 141 "Business Combinations", No. 142 "Goodwill and
Other Intangible Assets" and No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets".
We believe that the adoption of these accounting standards will not
have a material impact on our financial statements.
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 were in U.S. dollars. We do not have any material exposure to
changes in foreign currency exchange rates.
13
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Our principal executive officer and principal financial officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)), 2002, have concluded
that, based on such evaluation, which was completed on November 11, 2002, our
disclosure controls and procedures were adequate and effective to ensure that
material information relating to us was made known to them by others within
eXegenics, particularly during the period in which this quarterly report on Form
10-Q was being prepared.
(b) Changes in Internal Controls.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, nor were there any significant deficiencies or material
weaknesses in our internal controls. Accordingly, no corrective actions were
required or undertaken.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
On August 13, 2002 we issued warrants to purchase 125,000 shares of our
common stock at a purchase price of $1.00 per share, with an expiration date of
August 13, 2007, and additional warrants to purchase 125,000 shares of our
common stock at a purchase price of $0.55 per share, with an expiration date of
August 13, 2007 to provided to us by Roan/Meyers Associates, L.P. in connection
with financial advisory services.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed herewith as part of this
Form 10-Q:
None.
(b) The following report was filed on Form 8-K during the quarter
ended September 30, 2002:
On September 25, 2002, we filed a current report on Form 8-K
regarding our entering into a definitive merger agreement with
Innovative Drug Delivery Systems, Inc.
14
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: November 14, 2002 By: /s/ Joan H. Gillett
---------------------------------
Name: Joan H. Gillett, CPA
Title: Vice President/Controller*
----------
*Ms. Gillett is signing this quarterly report on Form 10-Q as both the chief
accounting officer and authorized officer.
15
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
I, Ronald L. Goode, certify that:
1. I have reviewed this quarterly report on Form 10-Q of eXegenics Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Ronald L. Goode
------------------------------------
Name: Ronald L. Goode
Title: President and Chief Executive
Officer
CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER
I, Joan H. Gillett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of eXegenics Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Joan H. Gillett
--------------------------------
Name: Joan H. Gillett
Title: Vice President/Controller