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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 00-26078
eXegenics INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2402409
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2110 RESEARCH ROW 75235
DALLAS, TEXAS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(214) 358-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
N/A N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate) on June 30, 2002 was
$10,478,970, based on the last sale price as reported by The Nasdaq Stock
Market.
As of March 17, 2003, the registrant had 16,184,486 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Part III of this Annual Report on Form 10-K
is incorporated from the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 19, 2003.
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. Such statements are valid
only as of today, and we disclaim any obligation to update this information.
These statements, which include, but are not limited to, those related to our
drug creation/acquisition strategies and methodologies, are subject to known and
unknown risks and uncertainties that may cause actual future experience and
results to differ materially from the statements made. These statements are
based on our current beliefs and expectations as to such future outcomes. Drug
creation, acquisition and development involves a high degree of risk. It may be
impossible to implement our drug acquisition strategies. It may be impossible to
create drug leads for drug development. Success in early stage clinical trials
does not ensure that later stage or larger scale clinical trials will be
successful. Factors that might limit our future success include, among others,
uncertainties related to the ability to attract and retain partners for our
technologies, the identification of lead compounds, the successful pre-clinical
development thereof, the acquisition of drug development candidates, the
completion of clinical trials, the FDA review process and other governmental
regulation, pharmaceutical collaborator's ability to successfully develop and
commercialize drug candidates, competition from other pharmaceutical companies,
product pricing and third party reimbursement.
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PART I
ITEM 1. BUSINESS
GENERAL
We are focused on acquiring drug candidates that can be successfully
developed and marketed as pharmaceutical products to fight human diseases.
From the time of our founding in 1991 until 2001, our efforts were devoted
to discovery research activities related to potential therapies for human
disease and to improvement (by genetic engineering) of technologies for
producing certain products manufactured and marketed by other companies. Through
2001 we had not created a commercially viable drug candidate, nor had our
efforts in production technology improvement research led to any commercially
viable manufacturing processes.
Accordingly, during 2001 a new Chief Executive Officer was hired and we
evaluated all of our systems and programs. As a result of the systems evaluation
we installed a new financial accounting process and system and settled a
shareholder dispute that resulted in a cash payout. During our programs
evaluation we identified those programs that we believed had no near-term
potential to create drug leads or to generate near-term revenues and began
efforts to out-license those technologies. To date these marketing activities
have not resulted in any out-licenses for any of those technologies.
One program, taxanes production research, was generating research services
revenue, but had fallen well behind the originally anticipated schedule for
delivering a microbial fermentation alternative for manufacturing Taxol(R).
Thus, we set genetic engineering goals for this program and, because Taxol(R)
recently had become available generically, initiated discussions with our
partner, Bristol-Myers Squibb (BMS), regarding their continuing interest in this
project.
Our program evaluation identified two platform technologies ("Quantum Core
Technology" (QCT(TM)) and OASIS(TM) or "Optimized Anti-Sense Inhibitory
Sequence(TM)") that we believed had the potential to generate revenues based on
providing drug lead creation services to the broader pharmaceutical industry.
Thus, we began attempts to market QCT and OASIS to other companies in the
expectation that we could generate revenues from partnering these technologies
with pharmaceutical companies. In addition, we re-focused these technology
programs and set drug lead creation goals for them. To date these marketing
activities have not resulted in any material contracts for utilizing our
technologies, nor have any drug lead candidates been created.
With the lack of progress in discovery research, taken together with market
conditions, we came to believe that we can best build shareholder value and most
effectively utilize our financial resources by the acquisition of external
programs that have a greater potential for producing revenue than we can
generate with our current internal programs. Thus, in 2002 we initiated a new
strategy that focuses on accessing products in, or very close to, clinical
development in humans and applying our resources to accelerate that development.
In mid-2002, BMS indicated to us that, because of their de-emphasis on
funding external taxanes manufacturing research, the research services contract
between them and us would not be renewed. In June 2002, we implemented
restructuring activities to discontinue non-productive scientific programs,
programs that we have been unable to outlicense, and programs without external
funding (including the taxanes production program). As of December 2002, we had
completed the termination of all our internal scientific programs except for
work on the QCT platform technology, which had generated a small services
contract with a major pharmaceutical company. In an effort to maximize our
existing financial resources, we eliminated the personnel related to the
terminated programs as well as support-related administrative positions.
Associated research collaborations, non-productive licensing and royalty
agreements and non-productive patent agreements have been terminated as well.
Most consulting agreements and agreements with most of the members of our
Scientific Advisory Board that were discovery research-related have also been
terminated. The only significant agreements not so terminated as of December 31,
2002, are 1) the Master License Agreement (MLA) with BMS in which we have
assigned to BMS our rights to certain paclitaxel-associated technologies; 2) a
paclitaxel-associated license agreement with Washington State University
Research
2
Foundation (WSURF) in which WSURF assigned to us their rights to certain
patents; and 3) a license to certain "anti-sense"-related patents at the
University of Texas at Dallas (UTD). As of November 2002, we had reached
conceptual agreement with BMS to terminate the MLA and are in the process of
finalizing that agreement.
We continue to support limited operations related to QCT in an attempt 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 enzymes involved in disease
processes. To date we have been unsuccessful in demonstrating our capability to
develop drugs using this technology internally or by partnering with other
companies. There can be no assurance that we will be successful in these efforts
or that we will continue to fund these operations.
During the first quarter of 2002, we announced the discovery of a series of
novel chemical entities (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. While these
compounds are interesting, there are numerous research hurdles, such as
increased activity and less toxicity, that must be overcome before we could put
any one of them into a preclinical development program. Thus, owing to the
long-term development timeframe and the uncertain outcome of development, we
have curtailed our activities related to this discovery. In the event we decide
to continue our research, there can be no assurance that we will overcome these
hurdles or otherwise be successful in producing clinical drug candidates.
Early in 2002, we engaged Petkevich & Partners (P&P), a financial advisory
firm, to assist us in the endeavor to locate and obtain pharmaceutical compounds
in or close to human clinical trials. Together with P&P we identified and
examined a number of opportunities that would fulfill the product acquisition
goal and also provide financial and operational synergies. Our engagement of P&P
was initially for a one year period, but the board has approved, and we are
engaged in the process of finalizing an agreement for, the renewal of such
engagement. We undertook discussions with several companies and executed a
merger agreement with a private company in September 2002. This agreement was
terminated by mutual agreement in November 2002. We are currently evaluating
other companies and technologies that may provide these opportunities. There can
be no assurance that we will be successful in these efforts.
QUANTUM CORE TECHNOLOGY(TM) (QCT(TM))
QCT is a proprietary, drug creation methodology that is based on a
combination of quantum chemistry, proprietary computational software and
molecular modeling. Unlike the traditional and more common structural-based drug
design techniques, QCT is a Quantum Mechanism-Based drug creation technique that
combines quantum mechanical calculations and physical organic chemistry to
understand essential biochemical reactions at the level of the atom. The
insights we gain into "quantum core mechanisms" in this way may produce a wide
range of drug leads.
This approach to drug creation rises from fundamental concepts in the
quantum mechanics pioneered by Dr. John Pople, a Nobel Prize winner in Chemistry
in 1998 and a scientific advisor for us. Dr. Dorit Arad, our Vice-President of
Drug Design, developed QCT.
In December 2002, we executed a Laboratory Service Agreement with a major
pharmaceutical company utilizing our QCT technology to perform calculations for
the purpose of predicting whether selected compounds are inhibitors of certain
enzymes. This agreement, which represented $20,000 in total revenues, terminated
January 31, 2003.
DISCONTINUED PROGRAMS
OPTIMIZED ANTI-SENSE INHIBITORY SEQUENCE(TM) (OASIS(TM))
OASIS is a patented technology platform that uses computers to design
"anti-sense sequences" or "anti-senses" -- molecules capable of blocking the
expression of specific genes. The goal of OASIS is to eliminate the trial and
error work traditionally involved in finding anti-sense sequences and to
efficiently predict the most
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potent anti-sense molecules in a gene sequence. Although our scientists were
able to use OASIS to create a library of optimal inhibitor sequences to 100% of
the genes of Mycobacterium tuberculosis and another library consisting of
optimal inhibitors for 25% of human genes, we have not been able to find
corporate partners interested in utilizing our technology. Further development
of the technology was being conducted at the University of Texas at Dallas
(UTD). Our support of the UTD program terminated in December 2002.
TAXANES PROGRAM
We have an exclusive worldwide license to use gene-based technology to
synthesize taxanes (the chemical class to which Taxol(R) belongs). Taxol(R) is
expensive to manufacture since it is derived from hard-to-obtain natural
products: the bark and needles of the Pacific Yew tree. A genetically engineered
production system for baccatin could potentially be used to manufacture an
improved second-generation paclitaxel. Due to the absence of external funding
for this program, and the extremely long timeframe projected for successful
conclusion, if any, of this production development project, we have discontinued
our research in this area.
OTHER RESEARCH ACTIVITIES
We have been unsuccessful in finding a party interested in outlicensing our
program to produce glucocerebrosidase for use in Gaucher's disease, and have
discontinued those efforts. In addition, we have previously announced the
discontinuation, owing to insufficient progress to merit continuation, of the
following programs: vaccine engineering, telomerase, polycystic kidney disease,
estrogen peptide, and monoclonal antibodies.
COLLABORATIVE AND LICENSE AGREEMENTS
QCT
In June 2000, we entered into an exclusive worldwide license agreement with
the University of California -- San Diego (UCSD), and the University of British
Columbia (UBC) to use or sublicense patent rights disclosed in a pending U.S.
patent titled "A New Anti-tuberculosis Drug Target." Pursuant to the agreement,
we paid a license issue fee and we are obligated to pay license maintenance fees
and, possibly, milestone and royalty payments. Also in June 2000, we agreed to a
three-year collaborative research agreement with UBC and Vancouver Hospital to
fund research under the direction of Dr. Yossef Av-Gay of the Department of
Medicine at UBC. In August 2000, we entered into a three-year collaborative
research agreement with the Regents of the University of California to fund
research performed under the direction of Dr. Robert Fahey of the Department of
Chemistry and Biochemistry at the UCSD. We have now terminated the agreements
with both UBC and UCSD.
OASIS
An agreement with UTD that was originally entered into in 1992 pursuant to
which UTD was to perform certain research and development activities relating to
antisense compounds and related technology for use in humans terminated in
December 2002.
We retain certain rights to a patent, originated in June 1996, with the
Board of Regents of UTD whereby we obtained an exclusive royalty-bearing license
to manufacture, have manufactured, use, sell and sublicense products related to
a U.S. patent application entitled, "A Method for Ranking Sequences to Select
Target Sequence Zones of Nucleic Acids."
TAXANES PROGRAM
Our June 1998 license agreement and research and development agreement with
BMS granted them exclusive worldwide sublicenses under our agreements with the
Research & Development Institute (RDI) and WSURF. The research and development
agreement between BMS and us terminated on June 12, 2002. We have initiated
discussions with BMS with the objective of negotiating an agreement to reacquire
exclusive rights to the WSURF paclitaxel gene technology.
4
On June 19, 2002 we terminated our June 1993 license agreement with RDI, in
which we had been granted worldwide exclusive rights to fungal technology to
produce paclitaxel.
We have requested a renegotiation of our July 1996 agreement with WSURF
whereby we received an exclusive, worldwide license to use or sublicense WSURF's
technology for gene-based synthesis of paclitaxel.
OTHER PROGRAMS
In 2002, we terminated, for lack of progress, two license agreements we
entered into during 1996 with the University of California -- Los Angeles
(UCLA). One of these license agreements gave us exclusive rights to a pending
patent entitled, "Inhibition of Cyst Formation By Cytoskeletal Specific Drugs,"
that makes use of various drugs, one of which is paclitaxel. The other license
agreement gave us exclusive rights to technology in the field of pharmacological
treatment for polycystic kidney disease.
Other license agreements, terminated at our request in 2002, included a
December 1998 agreement with RDI in which we obtained an exclusive license to
technology for the fungal production of telomerase, the so-called "immortality
enzyme," for a term based on the useful life of the pending patent or related
patents and a September 2000 license agreement for gene technology for
telomerase reverse transcriptase, also from RDI.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
Our policy is to protect our technology that we consider important in the
development of our business by, among other things, filing patent applications
for such technology. In addition to filing patent applications in the U.S., we
have filed, and may continue to file, patent applications in certain foreign
countries. Although a patent has a statutory presumption of validity in the
U.S., the issuance of a patent is not conclusive as to such validity or as to
the enforceable scope of the claims of the patent. There can be no assurance
that our issued patents or any patents subsequently issued to us, or licensed by
us, will not be successfully challenged in the future. The validity or
enforceability of a patent after its issuance by the U.S. Patent and Trademark
Office can be challenged in litigation. If the outcome of the litigation is
adverse to the owner of the patent, third parties may then be able to use the
invention covered by the patent, in some cases without payment. There can be no
assurance that patents in which we have rights will not be infringed or
successfully avoided through design innovation.
Costs associated with maintaining our patent portfolio exceeded $600,000 in
2002. In the interest of cost savings and as a result of our decision to
terminate all discovery research operations, and in the absence of customers
interested in acquiring rights to any of the patent estate, we have begun the
process of formally abandoning patents associated with these discontinued
programs. We will limit our future efforts to those patents directly involved
with QCT, to the anti-staphylococcal NCE's, and to any future programs that we
consider to be essential to our success. We estimate that the 2003 costs to
maintain the current portfolio will be less than $50,000.
There can be no assurance that patent applications owned by us or licensed
to us will result in patents being issued or that any such patents will afford
protection against competitors with similar technology. It is also possible that
third parties may obtain patent or other proprietary rights that may be needed
by us. In cases where third parties are the first to invent a particular product
or technology, it is possible that those parties will obtain patents that will
be sufficiently broad so as to prevent us from using certain technology or from
further developing or commercializing certain products. If licenses from third
parties are necessary but cannot be obtained, commercialization of the related
products would be delayed or prevented. We are aware of patent applications and
issued patents belonging to competitors but we are uncertain whether any of
these, or patent applications filed of which we may not have any knowledge, will
require us to alter our potential products or processes, pay licensing fees or
cease certain activities.
We also rely on unpatented technology as well as trade secrets and
information. No assurance can be given that others will not independently
develop substantially equivalent information and techniques or otherwise gain
access to our technology or disclose such technology, or that we can effectively
protect our rights in such unpatented technology, trade secrets and information.
We require each of our employees to
5
execute a confidentiality agreement at the commencement of their employment with
us. The agreements generally provide that all inventions conceived by the
individual in the course of employment or in the providing of services to us and
all confidential information developed by, or made known to, the individual
during the term of the relationship shall be our exclusive property and shall be
kept confidential and not disclosed to third parties except in limited specified
circumstances. There can be no assurance, however, that these agreements will
provide us with meaningful protection in the event of unauthorized use or
disclosure of such confidential information.
COMPETITION
All of our proposed or potential products will face competition from
existing therapies. The development by others of novel treatment methods for
those indications for which we are developing compounds could render our
compounds non-competitive or obsolete. This competition potentially includes all
of the pharmaceutical concerns in the world that are developing pharmaceuticals
for the diagnosis and treatment of cancer. Competition in pharmaceuticals is
generally based on performance characteristics as well as price and timing of
market introduction of competitive products. Acceptance by hospitals, physicians
and patients is crucial to the success of a product. Price competition may
become increasingly important as a result of an increased focus by insurers and
regulators on the containment of health care costs. In addition, the various
federal and state agencies have enacted regulations requiring rebates of a
portion of the purchase price of many pharmaceutical products.
Most of our existing or potential competitors have substantially greater
financial, technical and human resources than us and may be better equipped to
develop, manufacture and market products. In addition, many of these companies
have extensive experience in preclinical testing, human clinical trials and the
regulatory approval process. These companies may develop and introduce products
and processes competitive with, or superior to, ours.
Our competition also will be determined in part by the potential
indications for which our compounds are developed. For certain potential
products, an important factor in their success may be the lack of competitive
products at the time of their market introductions. We expect that competition
among products approved for sale will be based on, among other things, product
efficacy, safety, reliability, availability, price and patent position.
Our competitive position also depends upon our ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often-lengthy period between technological conception and commercial sales.
GOVERNMENT REGULATION
At the current time, the FDA does not regulate us. However, if we are
successful in implementing our drug acquisition and development strategy, we
will become subject to FDA regulation. The FDA and comparable regulatory
agencies in foreign countries impose substantial requirements on the clinical
development, manufacture and marketing of pharmaceuticals and in vitro
diagnostic products. These agencies regulate research and development activities
and the testing, manufacture, quality control, safety, effectiveness, labeling,
storage, record keeping, advertising and promotion of these products and
services. Different centers within the FDA are responsible for regulating these
products, depending on whether the product is considered a pharmaceutical,
biologic, medical device or combination product.
The process required by the FDA before a new product may be marketed in the
US generally requires substantial time, effort and financial resources.
Satisfaction of FDA requirements or similar requirements of foreign regulatory
agencies typically takes several years and the actual time required may vary
substantially based upon the type, complexity and novelty of the product or
disease. Even if a product receives regulatory approval, later discovery of
previously unknown problems with a product may result in restrictions on the
product or even complete withdrawal of the product from the market.
6
We are also subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of, and the cost of compliance with, these regulations
could have a material adverse effect on our business and results of operations.
MANUFACTURING AND MARKETING
We have no marketed pharmaceutical products. In addition, we have never
commercially manufactured any products, and we do not have the resources to
manufacture any products on a commercial scale. For the foreseeable future, we
will be required to rely upon corporate partners or others to manufacture and
market products developed by us, if any. No assurance can be given that we will
be able to enter into any such arrangements on acceptable terms, if at all.
MANUFACTURING
While we intend to select manufacturers that comply with regulatory
standards, there can be no assurance that these manufacturers will comply with
such standards, that they will give our orders the highest priority or that we
will be able to find substitute manufacturers, if our selected manufacturers
prove to be unsatisfactory. In order for us to establish a manufacturing
facility, we would require substantial additional funds, would be required to
hire and retain significant additional personnel and comply with the extensive
regulations of the FDA applicable to such a facility. No assurance can be given
that we will be able to make the transition successfully to commercial
production, should we choose to do so.
MARKETING
Despite our strategy to develop or acquire products for sale to
concentrated markets, significant additional expenditures and management
resources would be required to develop an internal sales force, and there can be
no assurance that we will be successful in penetrating the markets for any
products developed. For certain products, we may seek to enter into development
and marketing agreements that grant exclusive marketing rights to our corporate
partners in return for royalties to be received on sales, if any. Under certain
agreements, our marketing partner may have the responsibility for all or a
significant portion of the development and regulatory approval. In the event
that our marketing and development partners fail to develop a marketable product
or to successfully market a product, our business may be materially adversely
affected. The sale of certain products outside the U.S. will also be dependent
on the successful completion of arrangements with future partners, licensees or
distributors in each territory. There can be no assurance that we will be
successful in establishing any additional collaborative arrangements, or that,
if established, such future partners will be successful in commercializing
products.
INSURANCE
The testing, marketing and sale of human drug products entail an inherent
risk of allegations of product liability, and there can be no assurance that
product liability claims will not be asserted against us. We intend to obtain
clinical trial liability insurance prior to conducting any clinical trials. Such
coverage may not be adequate as and when we develop our products. There can be
no assurance that we will be able to obtain, maintain or increase our insurance
coverage in the future on acceptable terms or that any claims against us will
not exceed the amount of such coverage.
EMPLOYEES
On March 12, 2003, we announced the appointment of David E. Riggs as Vice
President, Chief Business Officer (a newly created position), Chief Financial
Officer and Secretary, replacing Joan H. Gillett (formerly Vice President,
Controller and Secretary, who will leave eXegenics as of April 30, 2003) and Dr.
Robert Rousseau (former Vice President of Business Development, who left
eXegenics in January 2003). As of March 17, 2003 we had eight full-time
employees, of whom two were engaged directly in research and development
activities and six of whom were in executive and administrative positions.
Although we believe that we have been successful to date in attracting skilled,
highly qualified personnel, competition for personnel
7
is intense and we cannot assure that we will continue to be able to attract and
retain personnel of high scientific caliber and business acumen. Our employees
are not governed by any collective bargaining agreement, and we believe that our
relationship with them is good.
PROPERTIES
We occupy approximately 19,300 square feet of office and laboratory space
at 2110 Research Row, Dallas, Texas, pursuant to a lease assigned to us by the
Wadley/Phillips Partnership, which lease term extends until December 2003. We
believe that our current facilities are suitable for our present needs and for
the foreseeable future.
FACTORS THAT MAY AFFECT FINANCIAL CONDITION AND FUTURE RESULTS
We participate in a continually changing industry that utilizes rapidly
evolving technologies. The following cautionary statements discuss important
factors that could cause actual results to differ materially from the projected
results contained in the forward-looking statements in this report.
RESEARCH AND DEVELOPMENT
The theoretical bases of our platform technology have yet to be reduced to
the successful creation of potential drug candidates that can be tested in
humans. The drug creation methods we employ are relatively new and may not lead
to drug candidates that can be successfully developed into pharmaceutical
products. The expectation that drugs designed by quantum mechanism-based drug
design techniques will have improved efficacy, bioavailability and less
resistance build-up has not yet been verified by testing any drug candidate in
human clinical trials.
We intend to in-license or acquire additional human product development
candidates from companies, universities, research institutions and other
organizations to augment the results of our internal research activities. Given
the intense competition in the marketplace for product development candidates
with the potential for commercial success, there can be no assurance that such
product candidates will be available on acceptable terms or at all. Furthermore,
no assurance can be given that such externally generated candidates will result
in commercially viable products.
Any potential drug candidate must undergo extensive pre-clinical and
clinical testing prior to submission to any of the regulatory agencies for
approval for commercial use. Such testing will likely require significant
additional funding.
If these methods are successful in creating pharmaceutical products, we
cannot be sure that the pharmaceutical products we create will be commercially
successful. Therefore, we cannot assure you that our research and development
activities will result in any commercially viable products.
COMMERCIALIZATION OF OUR TECHNOLOGIES
We may have to rely on partners to help develop products and programs. Our
business model identifies fees, royalties and milestone payments from
pharmaceutical and biotechnology companies as sources of revenue. If we cannot
enter into corporate collaborations, our efforts to develop products could be
slowed. We cannot control the amount and timing of resources our corporate
collaborators devote to our programs or potential products. In addition, we
expect to rely on corporate collaborators for commercialization of our potential
products.
There have been a significant number of recent business combinations among
large pharmaceutical companies that have resulted in a reduced number of
potential future corporate collaborators. If a business combination involving
our current corporate collaborator was to occur, the effect could be to
diminish, terminate or cause delays in this corporate collaboration. We may not
be able to negotiate future corporate collaborations on acceptable terms, if at
all, and these collaborations may not be successful. Our quarterly operating
results may fluctuate significantly depending on the initiation of new corporate
collaboration agreements or the termination of our existing corporate
collaboration agreement.
8
PERSONNEL
We depend on our key personnel and may have difficulty attracting and
retaining the skilled employees we need to execute our growth plans. As of March
17, 2003, we had eight employees. Our success depends on our continued ability
to attract, retain and motivate highly qualified management personnel.
Competition for personnel is intense. The loss of the services of any of these
personnel, in particular, Ronald L. Goode, Ph.D., our Chairman, President and
Chief Executive Officer, could impede significantly the achievement of our
development objectives. In addition, we will need to hire additional personnel
as we continue to expand our development activities. We do not know if we will
be able to attract, retain or motivate such personnel.
INTELLECTUAL PROPERTY
Our commercial success will depend, in part, on obtaining patent protection
on our future products, if any, and successfully defending these patents against
third party challenges. The patent positions of pharmaceutical and biotechnology
companies can be highly uncertain and involve complex legal and factual
questions. No consistent policy regarding the breadth of claims allowed in
biotechnology patents has emerged to date. Accordingly, we cannot predict with
certainty the breadth of claims allowed in our patents and other companies'
patents.
The degree of future protection for our proprietary rights is uncertain and
we cannot ensure that:
- We were the first to make the inventions covered by each of our pending
patent applications and issued patents;
- We were the first to file patent applications for these inventions;
- Others will not independently develop similar or alternative technologies
or duplicate any of our technologies;
- Any of our pending patent applications will result in issued patents;
- Any patents issued to us or our collaborators will provide a basis for
commercially viable products or will provide us with any competitive
advantages or will not be challenged by third parties;
- We will develop additional proprietary technologies that are patentable;
or
- The patents of others will not have an adverse effect on our ability to
do business.
In addition, we could incur substantial costs in litigation if we are
required to defend against patent suits brought by third parties or if we
initiate these suits.
Others may have filed and in the future are likely to file patent
applications covering products that are similar or identical to ours. We cannot
assure you that any patent applications or issued patents of others will not
have priority over our patent applications or issued patents. Any legal action
against our collaborators or us claiming damages and seeking to enjoin
commercial activities relating to the affected products and processes could, in
addition to subjecting us to potential liability for damages, require our
collaborators or us to obtain a license to continue to manufacture or market the
affected products and processes. We cannot predict whether our collaborators or
we would prevail in any of these actions or that any license required under any
of these patents would be made available on commercially acceptable terms, if at
all. We believe that there may be significant litigation in the industry
regarding patent and other intellectual property rights. If we become involved
in litigation, it could consume a substantial portion of our managerial and
financial resources.
We rely on trade secrets to protect technology where we believe patent
protection is not appropriate or obtainable. However, trade secrets are
difficult to protect. While we require employees, collaborators and consultants
to enter into confidentiality agreements, we may not be able to adequately
protect our trade secrets or other proprietary information.
Our research collaborators and scientific advisors have rights to publish
data and information in which we have rights. If we do not apply for patent
protection prior to such publication or if we cannot maintain the
9
confidentiality of our technology and other confidential information in
connection with our collaborations, then our ability to receive patent
protection or protect our proprietary information will be imperiled.
LIQUIDITY AND CAPITAL RESOURCES
We expect that additional financing will be required in the future to fund
operations. We do not know whether additional financing will be available when
needed, or that, if available, we will obtain financing on terms favorable to
our stockholders or us. We have consumed substantial amounts of cash to date and
expect capital outlays and operating expenditures to increase over the next
several years as we expand our infrastructure and development activities.
We believe that existing cash and investment securities and anticipated
cash flow from existing collaborations will be sufficient to support our current
operating plan at least through January 1, 2004. We have based this estimate on
assumptions that may prove to be wrong. Our future capital requirements depend
on many factors that affect our research, development, collaboration and sales
and marketing activities.
We may raise additional financing through public or private equity
offerings, debt financings or additional corporate collaboration and licensing
arrangements. To the extent we raise additional capital by issuing equity
securities, our stockholders may experience dilution. To the extent that we
raise additional funds through collaboration and licensing arrangements, it may
be necessary to relinquish some rights to our technologies or product
candidates, or grant licenses on terms that are not favorable to us. If adequate
funds are not available, we will not be able to continue developing our programs
and products.
COMPETITION
If our competitors develop and market products that are more effective than
our product candidates, if any, our commercial opportunity will be reduced or
eliminated.
Our commercial opportunity will be reduced or eliminated if our competitors
develop products that are more effective, have fewer side effects or are less
expensive than our product candidates. With respect to our drug discovery
programs, other companies have product candidates in clinical trials to treat
each of the diseases for which we are seeking to discover and develop product
candidates. These competing potential drugs may be further advanced in
development than are any of our potential products and may result in effective,
commercially successful products. Even if our collaborators or we are successful
in developing effective drugs, our products may not compete effectively with
these products or other successful products. Our competitors may succeed in
developing and marketing products that either are more effective than those that
we may develop, alone or with our collaborators.
Our competitors include fully integrated pharmaceutical companies and
biotechnology companies that currently have drug and target discovery efforts
and universities and public and private research institutions. In addition,
companies pursuing different but related fields represent substantial
competition. Many of the organizations competing with us have substantially
greater capital resources, larger research and development staffs and
facilities, greater experience in drug development and in obtaining regulatory
approvals and greater marketing capabilities than we do.
These organizations also compete with us to:
- attract qualified personnel;
- attract parties for acquisitions, joint ventures or other collaborations;
and
- license proprietary technology that is competitive with the technology we
are practicing.
If our competitors successfully enter into partnering arrangements or
license agreements with academic research institutions, we will then be
precluded from pursuing those specific opportunities. Since each of these
opportunities is unique, we may not be able to find an acceptable substitute.
Because it is difficult and costly to protect our proprietary rights, we cannot
ensure their protection.
10
OUR STOCK
The market price of our stock may be negatively affected by market
volatility. The market prices for securities of biotechnology companies,
including our stock price, have been highly volatile and may continue to be
highly volatile in the future. The following factors, in addition to other risk
factors described in this section, may have a significant impact on the market
price of our securities:
- market conditions for pharmaceutical and biotechnology stocks generally;
- announcements of technological innovations or new commercial products by
our competitors or us;
- developments concerning proprietary rights, including patents;
- developments concerning our collaborations;
- publicity regarding actual or potential medical results relating to
products under development by our competitors or us;
- regulatory developments in the United States and foreign countries;
- litigation;
- economic and other external factors or other disasters or crises; or
- period-to-period fluctuations in financial results.
ITEM 2. PROPERTIES
We occupy approximately 19,300 square feet of office and laboratory space,
at 2110 Research Row, Dallas, Texas, pursuant to a lease assigned to us by the
Wadley/Phillips Partnership and which lease term extends until December 2003.
Our lease payments for the fiscal year ended December 31, 2002 of approximately
$275,000, included $33,000 in payments related to an office/laboratory space
lease agreement that was terminated in December 2001, effective March 31, 2002.
We believe that our current facilities are suitable for our present needs and
for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any litigation in any court, and management is not
aware of any contemplated proceeding by any governmental authority or individual
against us except as described below.
In June 2000, we entered into two three-year participation agreements with
Molecular Simulations Incorporated (MSI), which subsequently assigned its
interests and delegated its obligations to Accelrys, Inc., pursuant to which we
were to participate with MSI and others in a project with the purpose of
developing software to be used in the assignment and understanding of protein
function and a project with the purpose of developing and validating rapid
computer-based methods for x-ray structure determination and model building and
providing a scientific forum for research of x-ray crystallographic methods for
structure determination. Pursuant to the agreements, we were to pay
approximately $750,000 over a three-year period. In 2002, believing the
milestones of the agreements had not been met, we instituted efforts to
terminate the agreements and are currently in negotiations to reduce or
eliminate our obligations thereunder. Of the $250,000 due under the agreements
for the twelve-month period beginning July 2002, we recognized $127,000 in
expenses related to the third year and this amount is reflected in accrued
expenses at December 31, 2002. To the extent that an amicable termination of the
agreements cannot be reached, resulting in a litigation with MSI or its
successor, we believe we have meritorious claims and defenses, all of which we
intend to pursue vigorously.
In April 2002, Dr. Abdel Labidi, one of our former employees, made certain
allegations against us regarding discrimination. After we responded to these
allegations, Dr. Labidi took no further action. We received notice on March 17,
2003 from the U.S. Equal Employment Opportunity Commission (EEOC) that Dr.
Labidi had filed a Charge of Discrimination and that the EEOC intends to conduct
an investigation of the charge. We believe we have meritorious defenses with
respect to these allegations, all of which we intend to pursue vigorously.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended,
December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is currently listed on the Nasdaq SmallCap Market. On July
25, 2002, we received notification from Nasdaq that we failed to comply with
Nasdaq's minimum bid price requirement of $1.00 per share for continued listing
on the Nasdaq National Market. On October 25, 2002 we transferred to the
SmallCap Market from the Nasdaq National Market System. In January 2003 we
received, from Nasdaq, a 180-day extension, through July 21, 2003, to regain
compliance with Nasdaq's listing requirement of a minimum $1.00 bid-per-share.
During this period, it will be necessary for our stock to trade at or above
$1.00 per share for a minimum of 10 consecutive trading days. If we fail to meet
the requirement by that time, our stock will be delisted from the Nasdaq
SmallCap Market, unless Nasdaq modifies the applicable rules
Before May 22, 2000, our common stock was quoted in the over-the-counter
market on the Nasdaq SmallCap Market System under the ticker symbol "CYPH". From
May 22, 2000 until October 24, 2001 we had been listed on the Nasdaq National
Market under the symbol "CYPH". Since October 24, 2001 we have been listed under
"EXEG".
COMMON STOCK
HIGH LOW
----- -----
2001:
First Quarter............................................. $8.25 $2.66
Second Quarter............................................ 4.85 3.00
Third Quarter............................................. 4.50 2.22
Fourth Quarter............................................ 4.09 2.00
2002:
First Quarter............................................. $3.50 $1.50
Second Quarter............................................ 1.77 0.75
Third Quarter............................................. 0.92 0.46
Fourth Quarter............................................ 0.68 0.29
On March 17, 2003, the last sale price of our common stock was $0.55.
STOCKHOLDERS
As of March 19, 2003, there were approximately 200 holders of record of our
common stock and, according to our estimates, approximately 4,600 beneficial
owners of our common stock.
DIVIDENDS
We have not paid dividends to our stockholders since our inception and do
not plan to pay cash dividends in the foreseeable future. We currently intend to
retain earnings, if any, to finance our growth.
12
EQUITY COMPENSATION PLAN INFORMATION
EQUITY COMPENSATION PLAN INFORMATION
AS OF DECEMBER 31, 2002
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN(A))
PLAN CATEGORY (A) (B) (C)
------------- -------------------------- -------------------- -------------------------
Equity compensation plans
approved by security
holders...................... 3,613,409 $4.81 935,345
Equity compensation plans not
approved by security
holders...................... 1,053,800 $8.35
We have authorized the issuance of equity securities under the compensation
plans described below without the approval of stockholders. No additional
options, warrants or rights are available for issuance under any of these plans,
except for additional shares which may become purchasable under warrants with
anti-dilution protection as noted below. We have either already registered or
agreed to register for resale the common stock underlying all of these plans.
- Roan-Meyers UPO (1998) warrants, dated April 1998: provided common stock
purchase warrants to our placement agent in connection with a private
placement of our securities, to purchase an aggregate of 201,300 shares
of our common stock at a weighted average purchase price of $9.75 per
share, with an expiration date of April 2, 2003.
- The Synergy Group/Seavey Funds warrants, dated April 7, 1998: provided
common stock purchase warrants in connection with financial advisory
services, to purchase an aggregate of 75,000 shares of our common stock
at a weighted average purchase price of $7.66 per share, with an
expiration date of August 6, 2003.
- Gruntal & Co. warrants, dated February 23, 2000: provided common stock
purchase warrants to Gruntal & Co., L.L.C. ("Gruntal") and various
Gruntal employees in connection with financial advisory services, to
purchase an aggregate of 300,000 shares of our common stock at a purchase
price of $15.00 per share, with an expiration date of February 23, 2005.
These warrants were issued as a result of a re-issuance of a common stock
purchase warrant, dated February 1, 2000, to Gruntal for the purchase of
300,000 shares of our common stock.
- Dominick & Dominick Financial Services Advisory Letter Agreement
warrants, dated July 9, 1999: provided common stock purchase warrants to
Dominick & Dominick LLC, a financial consultant, to purchase 150,000
shares of our common stock for a purchase price of $7.00 per share, with
an expiration date of July 15, 2004.
- Southwest Securities warrants, dated February 23, 2000: provided common
stock purchase warrants in connection with financial advisory services,
to purchase 21,250 shares of our common stock at a purchase price of
$12.00 per share, with an expiration date of February 23, 2003.
- Darrell Todd warrants, dated February 23, 2000: provided common stock
purchase warrants in connection with financial advisory services, to
purchase 3,750 shares of our common stock at a purchase price of $12.00
per share, with an expiration date of February 23, 2003.
- Roan-Meyers warrants, dated November 2, 2001: provided common stock
purchase warrants in connection with financial advisory services, to
purchase 125,000 shares of our common stock at a purchase price of $7.00
per share, with an expiration date of November 2, 2003.
13
- Roan-Meyers warrants, dated August 13, 2002: provided common stock
purchase warrants in connection with financial advisory services, 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.
- Roan-Meyers warrants, dated August 13, 2002: provided common stock
purchase warrants in connection with financial advisory services 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.
RECENT SALES OF UNREGISTERED SECURITIES
In August 2002, in exchange for financial advisory services we issued
warrants to Roan/Meyers Associates, L.P. to purchase 125,000 shares of 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.
The engagement being renewed with Petkevich & Partners (P&P), as described
in Item 1 and Item 7 of this report, contemplates the issuance to P&P of a
warrant to purchase 40,000 shares of common stock at a purchase price of $0.58
per share, with an expiration date of March 5, 2008.
In addition, during the year ended December 31, 2002, we granted options to
purchase an aggregate of 788,000 shares of common stock to employees, directors
and consultants with a weighted average exercise price of $1.46 per share. We
recognized $247,000 in expense for the granting of these options to consultants.
We utilize the Black-Scholes option pricing model to calculate the related
expense.
The securities issued in the foregoing transactions were offered and sold
in reliance upon exemptions from the Securities Act of 1933 registration
requirements set forth in Sections 3(b) and 4(2) of the Securities Act and any
regulations promulgated thereunder, relating to sales by an issuer not involving
any public offering. No underwriters were involved in the foregoing sales of
securities.
14
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below is derived from our audited
financial statements. Such information should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and with such financial statements and the notes thereto contained
elsewhere in this report.
eXegenics Inc.
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ----------- ----------- -----------
Income Statement Data
Revenue................... $ 562,000 $ 1,333,000 $ 865,000 $ 1,375,000 $ 1,183,000
------------ ------------ ----------- ----------- -----------
Research and
development............. 3,948,000 4,843,000 3,681,000 2,332,000 1,692,000
General and administrative
expenses................ 4,770,000 6,448,000 5,788,000 3,194,000 2,500,000
Expenses related to
strategic redirection... 864,000 560,000 -- -- --
Merger expenses........... 2,010,000 -- -- -- --
------------ ------------ ----------- ----------- -----------
Operating loss............ (11,030,000) (10,518,000) (8,604,000) (4,151,000) (3,009,000)
Gain on disposition....... 4,000 274,000 -- -- --
Interest income........... 686,000 1,383,000 1,543,000 222,000 286,000
Interest expense.......... (18,000) (6,000) (9,000) (6,000) (5,000)
------------ ------------ ----------- ----------- -----------
Net loss before cumulative
effect of a change in
accounting principle.... (10,358,000) (8,785,000) (7,165,000) (3,935,000) (2,728,000)
Cumulative effect on prior
years of change in
method of revenue
recognition............. -- -- -- (422,000) --
------------ ------------ ----------- ----------- -----------
Net loss.................. $(10,358,000) $ (8,785,000) $(7,165,000) $(4,357,000) $(2,728,000)
------------ ------------ ----------- ----------- -----------
Preferred Stock
Dividend................ (169,000) (180,000) (180,000) (182,000) (187,000)
Net loss attributable to
common stockholders..... $(10,527,000) $ (8,965,000) $(7,345,000) $(4,539,000) $(2,915,000)
============ ============ =========== =========== ===========
Basic and diluted loss per
common share............ $ (0.67) $ (0.57) $ (0.51) $ (0.44) $ (0.30)
============ ============ =========== =========== ===========
DECEMBER 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ---------- ----------
Balance Sheet Data
Total assets.................. $17,515,000 $27,625,000 $37,378,000 $4,491,000 $7,746,000
Working capital............... 15,924,000 24,949,000 35,050,000 2,324,000 6,227,000
Royalties payable -- less
current portion............. -- -- 750,000 875,000 1,000,000
Stockholders' equity.......... $16,074,000 $26,121,000 $35,775,000 $2,592,000 $6,062,000
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this section, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," references to "we," "us," "our," and
"ours" refer to eXegenics, Inc.
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 our management or us are intended to identify such
forward-looking statements. Our 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 future period.
We are focused on creating and acquiring drug candidates that can be
successfully developed and marketed as pharmaceutical products to fight human
diseases.
From the time of our founding in 1991 until 2001, our efforts were devoted
to discovery research activities related to potential therapies for human
disease and to improvement (by genetic engineering) of technologies for
producing certain products manufactured and marketed by other companies. Through
2001 we had not created a commercially viable drug candidate, nor had our
efforts in production technology improvement research led to any commercially
viable manufacturing processes.
Accordingly, during 2001, a new CEO was hired and we evaluated all of our
systems and programs. As a result of the systems evaluation we installed a new
financial accounting process and system and settled a shareholder dispute that
resulted in a cash payout. During our programs evaluation we identified those
programs that we believed had no near-term potential to create drug leads or to
generate near-term revenues and began efforts to out-license those technologies.
To date these marketing activities have not resulted in any out-licenses for any
of those technologies.
One program, taxanes production research, was generating research services
revenue, but had fallen well behind the originally anticipated schedule for
delivering a microbial fermentation alternative for manufacturing Taxol(R).
Thus, we set genetic engineering goals for this program and, because Taxol(R)
recently had become available generically, initiated discussions with our
partner, Bristol-Myers Squibb (BMS), regarding their continuing interest in this
project.
Our program evaluation identified two platform technologies ("Quantum Core
Technology" (QCT) and OASIS or "Optimized Anti-Sense Inhibitory Sequence") that
we believed had the potential to generate revenues based on providing drug lead
creation services to the broader pharmaceutical industry. Thus, we began
attempts to market QCT and OASIS to other companies in the expectation that we
could generate revenues from partnering these technologies with pharmaceutical
companies. In addition, we re-focused these technology programs and set drug
lead creation goals for them. To date these marketing activities have not
resulted in any material contracts for utilizing our technologies, nor have any
drug lead candidates been created.
With the lack of progress in discovery research, taken together with market
conditions, we came to believe that we can best build shareholder value and most
effectively utilize our financial resources by the acquisition of external
programs that have a greater potential for producing revenue than we can
generate with our current internal programs. Thus, in 2002 we initiated a new
strategy that focuses on accessing products in, or very close to, clinical
development in humans and applying our resources to accelerate that development.
In mid-2002 BMS indicated to us that, because of their de-emphasis on
funding external taxanes manufacturing research, the research services contract
between them and the Company would not be renewed. In June 2002, we implemented
restructuring activities to discontinue non-productive scientific programs,
programs that we have been unable to outlicense, and programs without external
funding (including the taxanes production program). As of December 2002, we had
completed the termination of all our internal scientific programs except for
work on the QCT platform technology, which had generated a small services
contract with a major pharmaceutical company. In an effort to maximize our
existing financial resources, we
16
eliminated the personnel related to the terminated programs as well as
support-related administrative positions. Associated research collaborations,
non-productive licensing and royalty agreements and non-productive patent
agreements have been terminated as well. Most consulting agreements and
agreements with most of the members of our Scientific Advisory Board that were
discovery research-related have also been terminated. The only significant
agreements not so terminated as of December 31, 2002, are 1) the Master License
Agreement (MLA) with BMS in which we have assigned to BMS our rights to certain
paclitaxel-associated technologies; 2) a paclitaxel-associated license agreement
with Washington State University Foundation (WSURF) in which WSURF assigned to
us their rights to certain patents; and 3) a license to certain
"anti-sense"-related patents at the University of Texas at Dallas (UTD). As of
November 2002, we had reached conceptual agreement with BMS to terminate the MLA
and are in the process of negotiating final terms of that agreement.
We continue to support limited operations related to QCT in an attempt 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 enzymes involved in disease
processes. To date we have been unsuccessful in demonstrating our capability to
develop drugs using this technology internally or by partnering with other
companies. There can be no assurance that we will be successful in these efforts
or that we will continue to fund these operations.
During the first quarter of 2002, we announced the discovery of a series of
novel chemical entities (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. While these
compounds are interesting, there are numerous research hurdles, such as
increased activity and less toxicity that must be overcome before we could put
any one of them into a preclinical development program. Thus, owing to the
long-term development timeframe and the uncertain outcome of development, we
have curtailed our activities related to this discovery. In the event we decide
to continue our research, there can be no assurance that we will overcome these
hurdles or otherwise be successful in producing clinical drug candidates.
Early in 2002, we engaged Petkevich & Partners (P&P), a financial advisory
firm, to assist us in the endeavor to locate and obtain pharmaceutical compounds
in or close to human clinical trials. Together with P&P we identified and
examined a number of opportunities that would fulfill the product acquisition
goal and also provide financial and operational synergies. Our engagement of P&P
was initially for a one year period, but the board has approved, and we are
engaged in the process of finalizing an agreement for, the renewal of such
engagement. We undertook discussions with several companies and executed a
merger agreement with a private company in September 2002. Owing to market
conditions, this agreement was terminated by mutual agreement in November 2002.
We are currently evaluating other companies and technologies that may provide
these opportunities. There can be no assurance that we will be successful in
these efforts.
On March 12, 2003, we announced the election of Joseph M. Davie M.D., Ph.D.
to our board of directors, filling the board seat vacated by the previously
announced resignation of Dr. Arthur Bollon.
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.
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis we evaluate our estimates, including those related to
investments, intangible assets, income taxes, contingencies and litigation. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the
17
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. Revenue from research support agreements is recognized
ratably over the length of the agreements. Revenue resulting from contracts or
agreements with milestones is recognized when the milestone is achieved. Amounts
received in advance of services to be performed or the achievement of milestones
are recorded as deferred revenue. Payments to third parties in connection with
nonrefundable license fees are being recognized over the period of performance
of related research and development activities. We record a valuation allowance
to reduce our deferred tax assets to the amount that is more likely than not to
be realized. While we have considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation
allowance, in the event we were to determine that we would be able to realize
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the net deferred tax asset would increase income in the period
such determination was made. Likewise, should we determine that we would not be
able to realize all or part of our net deferred tax asset in the future, an
adjustment to the net deferred tax asset would be charged to income in the
period such determination was made.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 2002 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2001
Revenues
Revenues for 2002 and 2001 were primarily attributable to license and
research and development payments, including those from our agreements with BMS.
We recognized revenues of $562,000 during fiscal 2002, compared to $1,333,000
for fiscal 2001, a decrease of $771,000 or 58%. The decrease was a result of the
completion of the funding related to our research and development agreement with
BMS, offset by a laboratory services agreement executed in December 2002, in the
aggregate amount of $20,000, $7,000 of which was recognized in 2002.
Research and Development Expenses
We incurred research and development expenses of $3,948,000 during fiscal
2002 and $4,843,000 during fiscal 2001, a year-to-year decrease of $895,000 or
18%. The decrease in research and development expenses in 2002 from 2001 was
primarily due to the discontinuation of research projects and related activities
as we implemented our revised strategy. The overall decrease was comprised of a
$653,000 decrease in research salaries, a $683,000 decrease in expenses for
contract research, licenses and royalties, a $126,000 decrease in research
services and supplies, a $25,000 decrease in facility costs, partially offset by
a $141,000 increase in equipment and depreciation expenses for equipment placed
in service in the latter part of 2001 and a $90,000 charge for employee related
expenses previously charged to G&A expense.
General and Administrative Expenses
General and administrative expenses for fiscal 2002 were $4,770,000
compared to $6,448,000 for fiscal 2001, a decrease of $1,678,000 or 26%. General
and administrative expenses decreased primarily as a result of a $1,630,000
decrease in legal fees in 2002 due to a settlement fee of $765,000 and $803,000
of legal expenses recognized in 2001. Decreases in salaries and wages of
$535,000, a $61,000 decrease in expenses related to the amortization of
purchased intellectual property and a $90,000 decrease in employee related
expenses now charged to R&D expense were offset by a $218,000 increase in
expenses related to patents and intellectual property and a $178,000 increase in
professional consulting charges.
18
Merger Expenses
We recognized an aggregate of $2,010,000 in expenses related to our
terminated merger with IDDS, which included $496,000 in legal fees, $304,000 in
fees to the financial advisor and $210,000 in other fees for audit, printing and
investor relations services, a $500,000 termination fee paid to IDDS and a
$500,000 expense related to establishing the reserve account for the IDDS
convertible note. There were no comparable expenses for fiscal 2001.
Expenses Related to Strategic Redirection
As a result of our decision to redirect our business strategy, we
recognized $864,000 in expenses from operations terminated in fiscal 2002. These
expenses included $298,000 for severance payments, $186,000 for facility lease
space for the terminated operations through December 31, 2003, $161,000 for
losses for equipment no longer used, $79,000 in impairment charges for software
deemed to be of no value and $140,000 for charges related to leased equipment
utilized for the terminated operations. We recognized $560,000 in expenses
related to severance payments from operations terminated in the fiscal year
2001.
Other Income
Other income for fiscal 2002 was $4,000 as compared to $274,000 during
fiscal 2001. The gain in 2001 was due to recognizing the relinquishment of
certain patent rights.
Interest Income
Interest income for fiscal 2002 was $686,000 as compared to $1,383,000 for
fiscal 2001, a decrease of $697,000 or 50%. The decrease in interest income was
due to lower interest rates and declining investable balances as disbursements
were made.
Net Loss
We incurred net losses of $10,358,000 during fiscal 2002 and $8,785,000
during fiscal 2001. The increase in net loss of $1,573,000 or 17.9% is a result
of the aforementioned changes in our operations. Net loss per common share for
fiscal 2002 was $0.67 and for fiscal 2001 was $0.57.
FISCAL YEAR ENDED DECEMBER 31, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2000
Revenues
Revenues for 2001 and 2000 were primarily attributable to license and
research and development payments, including those from our agreements with BMS.
We recognized revenues of $1,333,000 during fiscal 2001, compared to $865,000
for fiscal 2000, an increase of $468,000 or 54.1%. The increase was a result of
the extension of our research and development agreement with BMS.
Research and Development Expenses
We incurred research and development expenses of $4,843,000 during fiscal
2001 and $3,681,000 during fiscal 2000, an increase of $1,162,000 or 32%. The
increase in research and development expenses in 2001 from 2000 was due to the
hiring of additional scientific staff in 2001, expenses for research services
including a non-cash charge related to options granted to consultants,
additional commitments to fund external research, increased depreciation
expense, and an increase in office and laboratory supplies required to support
our increased activities. Expenses in 2001 primarily include $643,000 for
research consultants, $1,311,000 for contract research and $344,000 for lab
supplies and other research services.
General and Administrative Expenses
General and administrative expenses for fiscal 2001 were $6,448,000
compared to $5,788,000 for fiscal 2000, an increase of $660,000 or 11%. General
and administrative expenses increased as a result of higher
19
salary costs, additional travel and lodging expenses including relocation
reimbursements, increases in legal and professional fees, including a $765,000
charge for a dispute settlement, and a non-cash expense for the issuance of
options. These expenses were substantially offset by a decrease in public and
financial relations expenses, as well as a decrease in tax expenses. Expenses in
2001 include $836,000 for expense related to our corporate restructuring
activities, $207,000 for audit fees and other accounting related services,
$667,000 for legal fees related to patents and intellectual property, $400,000
for company and employee insurance and $803,000 for legal services, of which the
consulting and legal services were mainly due to assistance with our
reorganization and ongoing corporate activities.
Expenses Related to Strategic Redirection
As a result of our decision to redirect our business strategy, we
recognized $560,000 in expenses related to severance payments from operations
terminated in the fiscal year 2001. There were no comparable expenses for fiscal
2000.
Other Income
Other income for fiscal 2001 was $274,000 as compared to $0 during fiscal
2000. The increase was due to recognizing a gain for the relinquishment of
certain patent rights.
Interest Income
Interest income for fiscal 2001 was $1,383,000 compared to $1,543,000 for
fiscal 2000, a decrease of $160,000 or 10.4%. The decrease in interest income
was due to lower interest rates and declining investable balances as
disbursements were made.
Net Loss
We incurred net losses of $8,785,000 during fiscal 2001 and $7,165,000
during fiscal 2000. The increase in net loss of $1,620,000 or 22.6%, is a result
of the aforementioned changes in our operations. Net loss per common share for
fiscal 2001 was $0.57 and for fiscal 2000 was $0.51.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002 we had cash, cash equivalents and investments of
approximately $16,192,000, plus restricted cash of $550,000. During 2002, we
used approximately $8,839,000 to fund our operating activities, principally
related to a net loss of $10,358,000 for the year. We sold approximately
$115,000 of laboratory equipment and paid $83,000 on our capital lease.
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 2000, we exercised our right of redemption related to
5,519,000 of our Class C, D and other warrants and options and received net
proceeds of approximately $39,925,000.
We have no material capital commitments for the year ending December 31,
2003.
We believe that we have sufficient cash on hand at December 31, 2002 to
finance our operations through at least January 1, 2004. We have enhanced our
cash planning procedures to ensure continual review and revision of the
allocation of financial resources to the programs that have the highest priority
and represent the best long and short-term profit potential. 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.
As our common stock has not maintained a bid price of greater than $1.00
under Nasdaq's listing guidelines, our common stock was due to be delisted from
the Nasdaq National Market on October 23, 2001. Prior to that date, however, we
successfully applied to have the listing of our common stock transferred to the
Nasdaq SmallCap Market. Transferring to the Nasdaq SmallCap Market provided us
with a grace period until
20
January 21, 2003 to comply with Nasdaq's $1.00 minimum bid price requirement. On
that date, Nasdaq granted us an additional 180-day grace period to comply, since
we met the "core" initial listing standards for the Nasdaq SmallCap Market as of
that date. If we fail to meet the continued listing standards by the time this
additional grace period terminates on July 21, 2003, our common stock would be
delisted from the Nasdaq SmallCap Market. This would likely have an adverse
impact on the trading price and liquidity of our common stock. If our common
stock were to be delisted, trading, if any, in the common stock may continue to
be conducted on the OTC Bulletin Board upon application by the requisite market
makers. It is possible, however, that Nasdaq will revise the applicable rules to
provide an extended grace period.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
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
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 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 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 with
earlier application encouraged. 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.
We believe that the adoption of these accounting standards will not have a
material impact on our financial statements.
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". The impact of adopting these standards on our financial
position and results of operations was immaterial.
ITEM 7A. 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 and corporate obligations with contractual
maturities of less than one year. 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 our transactions have been made in U.S. dollars. We do not have any
material exposure to changes in foreign currency exchange rates. Our investment
outstanding at December 31, 2002, in the amount of $10,004,000 matured in
February 2003.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in item 15 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is incorporated by reference from the discussion
responsive thereto under the captions "Management" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in our Proxy Statement for the
2003 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Executive Compensation" in our Proxy
Statement for the 2003 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Share Ownership" in our Proxy Statement
for the 2003 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Certain Relationships and Related
Transactions" and "Executive Compensation -- Employment Agreements, Termination
of Employment and Change of Control Arrangements" in our Proxy Statement for the
2003 Annual Meeting of Stockholders.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
Our management, including President and Chief Executive Officer Ronald L.
Goode, Chief Business Officer and Chief Financial Officer David E. Riggs and
Vice President and Controller Joan H. Gillett, have evaluated our disclosure
controls and procedures within the 90 days proceeding the date of this filing.
Under rules promulgated by the SEC, disclosure controls and procedures are
defined as those "controls or other procedures of an issuer that are designed to
ensure that information required to be disclosed by the issuer in the reports
filed or submitted by it under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms." Based on the evaluation of our disclosure controls and
procedures, management determined that such controls and procedures were
effective as of March 17, 2003, the date of the conclusion of the evaluation.
Further, there were no significant changes in the internal controls or in
other factors that could significantly affect these controls after March 17,
2003, the date of the conclusion of the evaluation of disclosure controls and
procedures.
22
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Report of Ernst & Young LLP, Independent Auditors
Report of Eisner LLP, Independent Auditors
Balance Sheets as of December 31, 2002 and 2001
Statements of Operations for the years ended December 31, 2002, 2001
and 2000
Statements of Changes in Stockholders' Equity for years ended December
31, 2002, 2001 and 2000
Statements of Cash Flows for the years ended December 31, 2002, 2001
and 2000
Notes to Financial Statements
(2) Financial Statement Schedules
All schedules have been omitted because the required information is
included in the financial statements or notes thereto or because they are
not required.
(3) Exhibits
3.1 -- Certificate of Incorporation, as amended(l)
3.2 -- By-laws(l)
4.1 -- Specimen certificates representing Class C Warrants, Class D
Warrants and Common Stock(l)
4.3 -- Form of Unit Purchase Option in connection with eXegenics
Inc.'s Initial Public Offering(l)
4.4 -- Warrant Certificate issued to the Washington State
University Research Foundation(4)
10.1 -- Employment Agreement dated March 1, 1992 between eXegenics
Inc. and Arthur P. Bollon, Ph.D., as amended(1)
10.2 -- 1992 Stock Option Plan, as amended(l)
10.3 -- Form of Stock Option Agreement(l)
10.4 -- Lease Agreement dated October 1, 1991 between eXegenics Inc.
and J.K. and Susie Wadley Research Institute and Blood Bank,
as amended(l)
10.5 -- Security Agreement dated October 10, 1991 between eXegenics
Inc. and Wadley(l)
10.6 -- License Agreement dated June 10, 1993 between eXegenics Inc.
and Research & Development Institute, Inc. ("RDI"), as
amended, relating to the Paclitaxel Fermentation Production
System(l)
10.7 -- Research and Development Agreement effective June 10, 1993
between eXegenics Inc. and RDI, as amended(l)
10.8 -- License Agreement dated February 22, 1995 between eXegenics
Inc. and RDI, as amended, relating to FTS-2(l)
10.9 -- Agreement effective June 30, 1992 between eXegenics Inc. and
University of Texas at Dallas ("UTD"), as amended(l)
10.10 -- Extension Agreement with RDI dated June 5, 1995(l)
10.11 -- Third Amendment to Lease Agreement dated April 30, 1995(l)
10.12 -- September 25, 1995 RDI Extension(l)
10.13 -- October 25, 1995 RDI Extension(1)
10.14 -- Amendment to License Agreement dated June 10, 1993, as
amended, and Research and Development Agreement effective
June 10, 1993, as amended, both agreements between eXegenics
Inc. and RDI(2)
10.15 -- License Agreement No. W960206 effective February 27, 1996
between eXegenics Inc. and The Regents of the University of
California(2)
10.16 -- License Agreement No. W960207 effective February 27, 1996
between eXegenics Inc. and The Regents of the University of
California(2)
10.17 -- License Agreement with the Washington State University,
dated July 2, 1996(3)*
23
..1810 -- Amendment to Agreement, effective June 30, 1992, as amended, between eXegenics Inc. and the
University of Texas at Dallas(3)
10.19 -- 1996 Stock Option Plan and Amendment No. 1 thereto(7)
10.20 -- Patent License Agreement, dated August 4, 1998, between The Regents of the University of
California and eXegenics Inc. for Peptide Anti-estrogen for Breast Cancer Therapy(5)*
10.21 -- Master License Agreement, dated as of June 12, 1998, between eXegenics Inc. and
Bristol-Myers Squibb Company(6)*
10.22 -- Sublicense Agreement, dated May 27, 1998, between eXegenics Inc. and Bristol-Myers Squibb
under The Research & Development Institute, Inc. License Agreement, as amended, dated June
10, 1998(6)*
10.23 -- Sublicense Agreement, dated May 19, 1998, between eXegenics Inc. and Bristol-Myers Squibb
Company under the Washington State University Research Foundation License Agreement, dated
June 8, 1996(6)*
10.24 -- Amended and Restated License Agreement, dated June 3, 1998, between the Washington State
University Research Foundation and eXegenics Inc.(6)*
10.25 -- Amendment, dated May 27, 1998, to the License Agreement, dated June 10, 1993, between The
Research and Development Institute, Inc. and eXegenics Inc.(6)*
10.26 -- Amended and Restated 2000 Stock Option Plan(7)
10.27 -- Employment Agreement dated March 21, 2001, between eXegenics Inc. and Ronald Lane Goode,
Ph.D.(8)
10.28 -- Employment Agreement dated March 13, 2003, between eXegenics Inc. and David E. Riggs.
10.29 -- Termination Agreement dated November 25, 2002 between eXegenics Inc., Innovative Drug
Delivery Systems, Inc., and IDDS Merger Corp(9)
21 -- List of Subsidiaries -- None
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Eisner LLP
---------------
* Confidential portions omitted and filed separately with the U.S. Securities
and Exchange Commission pursuant to Rule 24b-2 promulgated under the
Securities Exchange Act of 1934, as amended.
(1) Previously filed as an exhibit to eXegenics Inc.'s Registration Statement on
Form SB-2 (File No. 33-91802) and are incorporated by reference herein.
(2) Previously filed as an exhibit to eXegenics Inc.'s Annual Report on Form
10-KSB for the year ended December 31, 1995 and are incorporated by
reference herein.
(3) Previously filed as an exhibit to eXegenics Inc.'s Post-Effective Amendment
No. 1 to Form SB-2 (File No. 33-91802) and are incorporated by reference
herein.
(4) Previously filed as an exhibit to eXegenics Inc.'s Registration Statement on
Form SB-2 (File No. 333-13409) and is incorporated by reference herein.
(5) Previously filed as an exhibit to the Post-Effective Amendment to eXegenics
Inc.'s Registration Statement on Form SB-2 on Form S-3 (File No. 333-13409)
and is incorporated by reference herein.
(6) Previously filed as an exhibit to eXegenics Inc.'s Current Report on Form
8-K (File No. 000-26078) and is incorporated by reference herein.
(7) Previously filed as an appendix to eXegenics Inc.'s Schedule 14-A (File No.
000-26078) and is incorporated by reference herein.
(8) Previously filed as an exhibit to eXegenics Inc.'s Annual Report on Form
10-K (File No. 000-26078) for the year ended December 31, 2000 and is
incorporated by reference herein.
(9) Previously we filed as an exhibit to eXegenics Inc.'s Current Report on Form
8-K (File No. 000-26078) and is incorporated by reference herein.
24
(b) The following reports were filed on Form 8-K during the quarter ended
December 31, 2002:
(1) On December 3, 2002, we filed a current report on Form 8-K
regarding the execution of a termination agreement terminating the merger
agreement between us and Innovative Drug Delivery Systems, Inc.
(2) On November 14, 2002, we filed a current report on Form 8-K
containing the certification required by section 906 of the Sarbanes-Oxley
Act of 2002 with respect to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002.
(3) On October 24, 2002, we filed a current report on Form 8-K
regarding our issuance of a press release announcing that we received
approval from The Nasdaq Stock Market to transfer the listing of our common
stock from the Nasdaq National Market to the Nasdaq SmallCap Market
effective at the opening of trading on October 25, 2002.
(c) Refer to (a) 3 above.
(d) Refer to (a) 2 above.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EXEGENICS INC.
By: /s/ RONALD L. GOODE
------------------------------------
Name: Ronald L. Goode
Title: Chairman, President and
Chief Executive Officer
Date: March 18, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated below and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
By: /s/ RONALD L. GOODE Director, President and Chief March 10, 2003
------------------------------------------ Executive Officer
Ronald L. Goode (Principal Executive Officer)
By: /s/ DAVID E. RIGGS Vice President, Finance March 10, 2003
------------------------------------------ (Chief Financial Officer)
David E. Riggs
By: /s/ JOSEPH M. DAVIE Director March 10, 2003
------------------------------------------
Joseph M. Davie
By: /s/ ROBERT J. EASTON Director March 10, 2003
------------------------------------------
Robert J. Easton
By: /s/ GARY E. FRASHIER Director March 10, 2003
------------------------------------------
Gary E. Frashier
By: /s/ IRA J. GELB Director March 10, 2003
------------------------------------------
Ira J. Gelb
By: /s/ IRWIN C. GERSON Director March 10, 2003
------------------------------------------
Irwin C. Gerson
By: /s/ WALTER M. LOVENBERG Director March 10, 2003
------------------------------------------
Walter M. Lovenberg
26
eXegenics INC.
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ronald L. Goode, certify that:
1. I have reviewed this annual report on Form 10-K of eXegenics Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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 officer 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
functions):
(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 officer and I have indicated in this
annual 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.
/s/ RONALD L. GOODE
--------------------------------------
Ronald L. Goode
Chairman, President and Chief
Executive Officer
Date: March 18, 2003
27
eXegenics INC.
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David E. Riggs, certify that:
1. I have reviewed this annual report on Form 10-K of eXegenics Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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 officer 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
functions):
(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 officer and I have indicated in this
annual 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.
/s/ DAVID E. RIGGS
--------------------------------------
David E. Riggs
Vice President
Chief Financial Officer
Date: March 18, 2003
28
EXEGENICS INC.
CONTENTS
FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... F-2
Report of Eisner LLP, Independent Auditors.................. F-3
Balance sheets as of December 31, 2002 and 2001............. F-4
Statements of operations for the years ended December 31,
2002, 2001 and 2000....................................... F-5
Statements of changes in stockholders' equity for the years
ended December 31, 2002, 2001 and 2000.................... F-6
Statements of cash flows for the years ended December 31,
2002, 2001 and 2000....................................... F-7
Notes to financial statements............................... F-8
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
eXegenics Inc.
We have audited the accompanying balance sheets of eXegenics INC. (the
Company) as of December 31, 2002 and 2001, and the related statements of
operations, changes in stockholders' equity and cash flows for each of the two
years in the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of eXegenics Inc. as of
December 31, 2002 and 2001, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2002 in conformity
with accounting principles generally accepted in the United States.
Ernst & Young LLP
Dallas, Texas
February 28, 2003
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
EXEGENICS INC.
Dallas, Texas
We have audited the accompanying statements of operations, changes in
stockholders' equity and cash flows, of eXegenics Inc. (formerly known as
Cytoclonal Pharmaceutics Inc.), for the year ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements of eXegenics Inc. enumerated above
present fairly, in all material respects, the results of its operations and its
cash flows for the year ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ EISNER LLP
--------------------------------------
Eisner LLP (formerly Richard A. Eisner
& Company, LLP)
New York, New York
March 2, 2001
F-3
eXegenics Inc.
BALANCE SHEETS
DECEMBER 31,
---------------------------
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,188,000 $ 14,995,000
Restricted cash........................................... 550,000 550,000
Investments............................................... 10,004,000 10,050,000
Prepaid expenses and other current assets................. 515,000 656,000
------------ ------------
Total current assets................................... 17,257,000 26,251,000
Equipment, net.............................................. 221,000 1,009,000
Patent rights, less accumulated amortization of $151,000 and
$111,000.................................................. 37,000 74,000
Notes receivable -- officer/stockholder..................... -- 278,000
Other assets................................................ -- 13,000
------------ ------------
$ 17,515,000 $ 27,625,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 1,239,000 $ 1,163,000
Deferred revenue.......................................... -- 56,000
Current portion of capital lease obligations.............. 94,000 83,000
------------ ------------
Total current liabilities.............................. 1,333,000 1,302,000
Capital lease obligations, less current portion............. 108,000 202,000
------------ ------------
1,441,000 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................................ 67,272,000 67,025,000
Subscriptions receivable.................................. (301,000) (360,000)
Unearned compensation..................................... -- (5,000)
Accumulated deficit....................................... (48,497,000) (38,139,000)
Treasury stock, 511,200 shares of common stock, at cost... (2,570,000) (2,570,000)
------------ ------------
16,074,000 26,121,000
------------ ------------
$ 17,515,000 $ 27,625,000
============ ============
See notes to financial statements
F-4
eXegenics Inc.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
------------ ----------- -----------
Revenue:
License and research fees............................ $ 562,000 $ 1,333,000 $ 865,000
------------ ----------- -----------
Operating expenses:
Research and development........................... 3,948,000 4,843,000 3,681,000
General and administrative......................... 4,770,000 6,448,000 5,788,000
Expenses related to strategic redirection.......... 864,000 560,000 --
Merger expenses.................................... 2,010,000 -- --
------------ ----------- -----------
11,592,000 11,851,000 9,469,000
------------ ----------- -----------
Other (income) expenses:
Gain on dispositions................................. (4,000) (274,000) --
Interest income...................................... (686,000) (1,383,000) (1,543,000)
Interest expense..................................... 18,000 6,000 9,000
------------ ----------- -----------
(672,000) (1,651,000) (1,534,000)
------------ ----------- -----------
Loss before provision (benefit) for taxes............ (10,358,000) (8,867,000) (7,070,000)
Provision (benefit) for taxes........................ -- (82,000) 95,000
------------ ----------- -----------
NET LOSS............................................. (10,358,000) (8,785,000) (7,165,000)
Preferred stock dividend............................. (169,000) (180,000) (180,000)
------------ ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS......... $(10,527,000) $(8,965,000) $(7,345,000)
============ =========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE:............. $ (0.67) $ (0.57) $ (0.51)
============ =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING --BASIC
AND DILUTED........................................ 15,672,000 15,749,000 14,452,000
============ =========== ===========
See notes to financial statements
F-5
eXegenics INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
CONVERTIBLE
PREFERRED STOCK} COMMON STOCK ADDITIONAL
---------------- --------------------- PAID IN SUBSCRIPTIONS UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
------- ------ ---------- -------- ----------- ------------- ------------
BALANCE -- JANUARY 1, 2000........ 728,903 $7,000 10,377,453 $104,000 $24,670,000 $ -- $ --
Preferred dividend (stock)........ 72,856 1,000 -- -- (1,000) -- --
Preferred stock converted to
common stock..................... (83,406) (1,000) 83,406 1,000 -- -- --
Exercise of warrants, net of
related expenses of $1,999,000... -- -- 5,519,111 55,000 39,313,000 (51,000) --
Exercise of options and units..... -- -- 166,760 2,000 605,000 -- --
Value assigned to warrants and
options issued for professional
services......................... -- -- -- -- 2,360,000 -- --
Compensation related to grant of
options to employees............. -- -- -- -- 130,000 -- (70,000)
Purchase of Treasury stock........ -- -- -- -- -- -- --
Sale of Treasury stock............ -- -- -- -- 6,000 -- --
Net loss for the year............. -- -- -- -- -- -- --
------- ------ ---------- -------- ----------- --------- --------
BALANCE -- DECEMBER 31, 2000...... 718,353 7,000 16,146,730 162,000 67,083,000 (51,000) (70,000)
Preferred stock converted to
common stock..................... (34,205) -- 34,205 -- -- -- --
Preferred dividend (stock)........ 71,802 1,000 -- -- (1,000) -- --
Proceeds from sale of Treasury
stock............................ -- -- -- -- (442,000) (300,000) --
Interest accrual on Subscription
Receivable....................... -- -- -- -- -- (9,000) --
Purchase of Treasury stock........ -- -- -- -- -- -- --
Compensation related to grant of
options to employees............. -- -- -- -- 385,000 -- 65,000
Net loss for the year............. -- -- -- -- -- -- --
------- ------ ---------- -------- ----------- --------- --------
BALANCE -- DECEMBER 31, 2001...... 755,950 8,000 16,180,935 162,000 67,025,000 (360,000) (5,000)
Preferred stock converted to
common stock..................... (3,551) -- 3,551 -- -- -- --
Preferred dividend (stock)........ 75,624 -- -- -- -- -- --
Net interest on Subscription
Receivable....................... -- -- -- -- -- 8,000 --
Charge-off of Subscription
Receivable....................... -- -- -- -- -- 51,000 --
Value assigned to warrants and
options issued for professional
services......................... -- -- -- -- 247,000 -- --
Compensation related to grant of
options to employees............. -- -- -- -- -- -- 5,000
Net loss for the year............. -- -- -- -- -- -- --
------- ------ ---------- -------- ----------- --------- --------
BALANCE -- DECEMBER 31, 2002...... 828,023 $8,000 16,184,486 $162,000 $67,272,000 $(301,000) $ --
======= ====== ========== ======== =========== ========= ========
TREASURY STOCK
ACCUMULATED ------------------------
DEFICIT SHARES AMOUNT TOTAL
------------ ---------- ----------- ------------
BALANCE -- JANUARY 1, 2000........ $(22,189,000) -- $ -- $ 2,592,000
Preferred dividend (stock)........ -- -- -- --
Preferred stock converted to
common stock..................... -- -- -- --
Exercise of warrants, net of
related expenses of $1,999,000... -- -- -- 39,317,000
Exercise of options and units..... -- -- -- 607,000
Value assigned to warrants and
options issued for professional
services......................... -- -- -- 2,360,000
Compensation related to grant of
options to employees............. -- -- -- 60,000
Purchase of Treasury stock........ -- 263,600 (2,023,000) (2,023,000)
Sale of Treasury stock............ -- (3,000) 21,000 27,000
Net loss for the year............. (7,165,000) -- -- (7,165,000)
------------ ---------- ----------- ------------
BALANCE -- DECEMBER 31, 2000...... (29,354,000) 260,600 (2,002,000) 35,775,000
Preferred stock converted to
common stock..................... -- -- -- --
Preferred dividend (stock)........ -- -- -- --
Proceeds from sale of Treasury
stock............................ (100,000) -- 767,000 25,000
Interest accrual on Subscription
Receivable....................... -- -- -- (9,000)
Purchase of Treasury stock........ -- 350,600 (1,335,000) (1,335,000)
Compensation related to grant of
options to employees............. -- -- -- 450,000
Net loss for the year............. (8,785,000) -- -- (8,785,000)
------------ ---------- ----------- ------------
BALANCE -- DECEMBER 31, 2001...... (38,139,000) 511,200 (2,570,000) 26,121,000
Preferred stock converted to
common stock..................... -- -- -- --
Preferred dividend (stock)........ -- -- -- --
Net interest on Subscription
Receivable....................... -- -- -- 8,000
Charge-off of Subscription
Receivable....................... -- -- -- 51,000
Value assigned to warrants and
options issued for professional
services......................... -- -- -- 247,000
Compensation related to grant of
options to employees............. -- -- -- 5,000
Net loss for the year............. (10,358,000) -- -- (10,358,000)
------------ ---------- ----------- ------------
BALANCE -- DECEMBER 31, 2002...... $(48,497,000) 511,200 $(2,570,000) $ 16,074,000
============ ========== =========== ============
See Notes to Financial Statements
F-6
eXegenics Inc.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(10,358,000) $ (8,785,000) $(7,165,000)
------------ ------------ -----------
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................. 472,000 286,000 290,000
Non-cash expenses relating to strategic
redirection.................................. 726,000 -- --
Value assigned to warrants, options and
compensatory stock........................... 251,000 450,000 2,420,000
Gain on disposition of patent rights........... -- (274,000) --
Interest accrual on subscriptions receivable... 8,000 (9,000) --
Loss on extinguishment of subscriptions
receivable................................... 51,000 -- --
Payment of royalty liability................... -- (5,000) (135,000)
Changes in:
Prepaid expenses and other current assets...... 154,000 (159,000) (371,000)
Notes receivable -- officer/shareholder........ 278,000 (204,000)
Accounts payable and accrued expenses.......... (337,000) 530,000 (49,000)
Tax payable.................................... (28,000) (95,000) 95,000
Deferred revenue............................... (56,000) 56,000 (207,000)
------------ ------------ -----------
Net cash used in operating activities........ (8,839,000) (8,005,000) (5,326,000)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchase) of equipment..................... 115,000 (498,000) (407,000)
Purchases of investment securities................ -- (10,050,000) --
------------ ------------ -----------
Net cash provided by (used in) investing
activities................................ 115,000 (10,548,000) (407,000)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock through
exercise of options and warrants............... -- -- 39,924,000
Increase in restricted cash....................... -- (550,000) --
Purchase of treasury stock........................ -- (1,335,000) (2,023,000)
Payment of capital lease.......................... (83,000) -- --
Proceeds from sale of treasury stock.............. -- 25,000 27,000
------------ ------------ -----------
Net cash provided by (used in) financing
activities................................ (83,000) (1,860,000) 37,928,000
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... (8,807,000) (20,413,000) 32,195,000
Cash and cash equivalents at beginning of year...... 14,995,000 35,408,000 3,213,000
------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR............ $ 6,188,000 $ 14,995,000 $35,408,000
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest............................ $ 18,000 $ 6,000 $ 8,000
Noncash investing activities:
Taxes paid..................................... 14,000 95,000 --
Property acquired through capital lease
arrangements................................. -- 285,000 --
F-7
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE A -- THE COMPANY
eXegenics Inc., formerly known as Cytoclonal Pharmaceutics Inc. (the
"Company"), has previously been involved in the research, creation, and
development of drugs for the treatment and/or prevention of cancer and
infectious diseases. During the past two years the Company has ceased all
internal research programs with the exception of Quantum Core Technology, or
QCT. Most of the scientific staff positions and several administrative positions
have been eliminated and most of the Company's research, license and royalty
agreements have been terminated. The Company's activities are focused on
acquiring drugs in later stage clinical development, either by a purchase of
technology or a merger or acquisition.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS, RESTRICTED CASH, INVESTMENTS AND CONCENTRATION OF CREDIT
RISK
The Company considers all non-restrictive, highly liquid short-term
investments purchased with an original maturity of three months or less to be
cash equivalents. Cash equivalents, which amount to $6,188,000 and $14,995,000
at December 31, 2002 and 2001, respectively, consist principally of interest
bearing cash deposits placed with a single financial institution. Restricted
cash, which amounts to $550,000 and $550,000 at December 31, 2002 and 2001,
respectively, consists of certificates of deposits that are used as collateral
for equipment leases.
Investments consist of a $10,000,000 government agency debt security
purchased in May 2001 at a premium of $80,000. This debt security matures in
February 2003 and is classified as held-to-maturity. At December 31, 2002 and
2001, its net carrying amount was $10,004,000 and $10,050,000, respectively, its
fair market value was $10,044,000 and $10,288,000, respectively, and its
unrecognized holding gains were $44,000 and $288,000, respectively.
EQUIPMENT
Equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, which range
from 3 to 5 years. Leasehold improvements are amortized over the lesser of the
economic useful life of the improvement or term of the lease. Repairs and
maintenance that do not increase the economic useful life of the asset are
charged to expense as incurred.
PATENT RIGHTS AND COSTS
Certain patents acquired in October 1991 were stated at cost and amortized
to research and development expense using the straight-line method over the
17-year life of the patents. During August 2001, the Company decided to
terminate the subject agreement and, after the required three months notice,
wrote off the related patents and the accumulated amortization. (see Note C).
Patents and technology acquired during 1999, relating to QCT are being
amortized over an estimated useful life of 5 years.
The Company reviews its capital assets including the patents referenced
above for impairment whenever events or changes in circumstances indicate that
the carrying amount of the patents may not be recoverable. In performing the
review, the Company estimates undiscounted cash flows from products under
development that are covered by these patents. Impairment based on the estimated
fair value of the patents would be recognized if those estimated cash flows were
less than the unamortized costs. Related patents are grouped in estimating
future cash flows to determine whether patents are impaired and in measuring the
amount of the impairment. There were no impairment indicators relating to the
above referenced patent rights and costs at December 31, 2002.
F-8
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
REVENUE RECOGNITION
Revenue from research support agreements is recognized ratably over the
length of the agreements. Revenue resulting from contracts or agreements with
milestones is recognized when the milestone is achieved. Amounts received in
advance of services to be performed or the achievement of milestones are
recorded as deferred revenue. Payments to third parties in connection with
nonrefundable license fees are being recognized over the period of performance
of related research and development activities.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
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 effects would be antidilutive. The number of potentially dilutive
securities excluded from the computation of diluted loss per share was
approximately 5,495,000, 5,125,000 and 4,697,000 for the years ended December
31, 2002, 2001 and 2000, respectively.
STOCK-BASED COMPENSATION
The Company has elected to continue to account for its stock-based
compensation plans using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25") and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants as if the fair-value based method
defined in Statement of Financial Accounting Standards, No. 123, ("FAS 123")
"Accounting for Stock Based Compensation" had been applied.
Under the provisions of APB No. 25, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
common stock at the date of the grant over the amount an employee must pay to
acquire the stock.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash equivalents, accounts payable and accrued
expenses approximates their fair value due to the short period to maturity of
these instruments. It is not practicable to estimate the fair value of royalties
payable due to payment terms varying based on sales of products by the Company
and the lack of such sales during the years ended December 31, 2002, 2001 and
2000.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain items have been reclassified in the prior years' financial
statements to conform to current year presentation.
F-9
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE C -- ROYALTIES PAYABLE
On October 10, 1991, the Company entered into an agreement to acquire
certain patent rights, technology and know-how (the "Technology") from Wadley
Technologies, Inc. ("Wadtech") for the fixed sum of $1,250,000 and ongoing
royalties.
The agreement provided for the payment of royalties of up to 6.25% of gross
selling price of products incorporating the Technology and up to 50% of all
compensation received by the Company for sales by sublicensees of any products
covered by the Technology, which will be applied to reducing the fixed sum of
$1,250,000, until the fixed sum is paid. Thereafter, the agreement provided for
the payment of royalties of up to 3.75% of gross selling price of products
incorporating the Technology and up to 50% of all compensation received by the
Company for sales by sublicensees of any products covered by the Technology. The
agreement also provided for minimum annual royalty payments of $31,250, $62,500
and $125,000 payable quarterly during each twelve-month period beginning October
1, 1996, 1997 and 1998, respectively. Thereafter, during each twelve-month
period beginning October 1, 1999, the agreement provided for minimum annual
royalty payments of $125,000 payable yearly. Through October 31, 2001, the
Company made payments of approximately $480,000.
The Company granted Wadtech a security interest in the Technology until
payment of the fixed sum. The agreement was to continue for 99 years from
October 10, 1991 and the Company had the option to terminate the agreement
without cause on three months notice to Wadtech. The Company decided to
terminate the agreement in August of 2001 and notified Wadtech of its intent.
The agreement was terminated at the end of October 2001, resulting in a
recognized gain on disposition of $274,000, the excess of prior amortized
royalty expense over the actual royalty payments made. No additional payments
were required under this agreement.
NOTE D -- LICENSE AND RESEARCH AGREEMENTS
In June 1998, the Company entered into an agreement with Bristol Myers
Squibb ("BMS") whereby the Company agreed to sublicense to BMS two technologies,
related to production of paclitaxel, the active ingredient in BMS's largest
selling cancer product, Taxol(R). The agreement, which is for a term of ten
years, subject to earlier termination at the option of BMS, provides for fees,
milestone payments and minimum and sales-based royalties to be paid to the
Company. Subsequently, the Company and BMS entered into a separate 2-year term
research and development support agreement that provided for BMS to pay the
Company $2,000,000 in support of the Company's research efforts related to
development of a production system for paclitaxel. Subsequently, the term of the
research and development agreement was extended for an additional two years for
an additional payment of $2,000,000. The final payment due under this agreement
was made in February 2002. As of June 12, 2002 all activities related to this
research and development agreement ceased. The Master License Agreement remains
in place. The Company has initiated discussions with BMS with the objective of
negotiating an agreement to reacquire exclusive rights to the Washington State
University ("WSU") paclitaxel gene technology for eXegenics.
For the year ended December 31, 2002, revenue of $0 and $556,000 for the
license fee and research support, respectively, were recognized under the BMS
agreements. For the year ended December 31, 2001, revenue of $0 and $1,333,000
for the license fee and research support, respectively, were recognized under
the agreements. For the year ended December 31, 2000, revenue of $187,000 and
$678,000 for the license fee and research support, respectively, were recognized
under the agreements.
NOTE E -- STRATEGIC REDIRECTION
Beginning in June 2001, the Company initiated efforts to strategically
redirect the operations of the Company and terminated most of its research
programs. In addition, scientific personnel associated with these programs and
related administrative functions and support staff positions were also
terminated. During the
F-10
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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 both
scientific and administrative employees. In the last quarter of 2002, the
Company wrote down equipment no longer utilized to its estimated salvage value,
resulting in a charge of $240,000. Also, an expense of $326,000 was recognized
for commitments under operating leases that will not provide any future benefit
to the Company. Additional employees were terminated in December 2002 resulting
in a charge of $298,000. Expenses related to the reorganization for 2002 and
2001 totaled $864,000 and $560,000, respectively. Accrued reorganizational
expenses are $651,000 at December 31, 2002. Additional employee terminations
occurred in January 2003 resulting in an additional charge of $118,000.
NOTE F -- MERGER
In September 2002, the Company entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") with Innovative Drug Delivery
Systems ("IDDS"), and filed a related Registration Statement on Form S-4 with
the Securities and Exchange Commission on October 31, 2002. In November 2002,
the Merger Agreement was terminated, and on November 27, 2002, the Company
requested withdrawal of the registration statement.
Pursuant to this termination, the Company made a payment of $500,000 to
IDDS in exchange for a convertible subordinated note of IDDS in the amount of
$500,000 with a maturity date of November 24, 2004 and an interest rate equal to
the prime rate of Citibank N.A. plus 1%. The note contains a provision stating
that, in the event of a private placement of IDDS securities of at least
$1,500,000, IDDS can require conversion of the principal balance of the note,
together with accrued interest thereon, into the securities offered in the
private placement. An additional provision in the note allows IDDS to require
conversion of the principal balance of the note, together with accrued interest
thereon, into IDDS common stock in the event of a consolidation, merger,
combination, reorganization or other transaction in which IDDS is not the
surviving entity, or in which the stockholders of IDDS do not end up owning a
majority of the voting securities, or a sale of substantially all of IDDS's
assets to another entity or a collaboration or partnership with another company
pursuant to which IDDS receives an upfront payment of at least $5,000,000.
Due to the uncertainties related to this transaction and the difficulty of
establishing a value for the underlying collateral of the stock of IDDS and the
financial condition of IDDS, the Company established a $500,000 reserve against
the note, thereby reflecting no current value. This allowance will be adjusted
on a periodic basis if future events justify a change in valuation.
The Company recognized an aggregate of $2,010,000 in expenses related to
the merger which included $496,000 in legal fees, $304,000 in fees to the
financial advisor, $210,000 in other fees for audit, printing and investor
relations services and a $500,000 termination fee paid to IDDS. The $500,000
expense related to establishing the reserve account for the convertible note the
Company received from IDDS is included in the total.
F-11
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE G -- EQUIPMENT
Equipment is summarized as follows:
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
Office equipment............................................ $ 18,000 $ 151,000
Furniture and fixtures...................................... 92,000 99,000
Computers and laboratory equipment.......................... 844,000 1,298,000
Laboratory software......................................... 3,000 209,000
Leasehold improvements...................................... 82,000 76,000
---------- ----------
Total..................................................... 1,040,000 1,833,000
Less accumulated depreciation............................... 818,000 824,000
---------- ----------
Net......................................................... $ 221,000 $1,009,000
========== ==========
The gross book value of assets under capital leases was $166,000 and
$285,000 in 2002 and 2001, respectively.
NOTE H -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
Professional fees........................................... $ 177,000 $ 275,000
Accrued reorganization expense.............................. 651,000 210,000
Payroll and related expenses................................ 177,000 182,000
Licensors and contractors................................... 182,000 377,000
Occupancy costs............................................. -- 44,000
Real estate taxes........................................... 29,000 28,000
Other....................................................... 23,000 47,000
---------- ----------
$1,239,000 $1,163,000
========== ==========
NOTE I -- CAPITAL LEASE OBLIGATIONS
Included in equipment at December 31, 2002, is lab equipment totaling
$166,000 under capital lease obligations. The related annual interest rates
range from 6.0% to 6.2% throughout the lease terms, which expire in 2005. The
leased equipment collateralizes these leases and is amortized over the useful
life. The commencement date of these leases was December 28, 2001. The Company
has a lease line of credit of $1,000,000, of which approximately $500,000
remains unused. The Company has established additional collateral in the form of
a pledged account in the amount of $500,000, classified on the financial
statement as restricted cash.
F-12
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
The following represents future minimum rental payments due under the
noncancellable capital leases:
2003........................................................ $103,000
2004........................................................ 103,000
2005........................................................ 9,000
--------
215,000
Less amounts representing interest.......................... 13,000
--------
Present value of minimum lease payments..................... 202,000
Less current portion of capital lease obligations........... 94,000
--------
Capital lease obligations, less current portion............. $108,000
========
NOTE J -- STOCKHOLDERS' EQUITY
PREFERRED STOCK
On January 6, 1992, the Board of Directors designated 4,000,000 shares of
preferred stock as Series A convertible preferred stock. The holders of Series A
preferred stock are entitled to (i) convert on a one-for-one basis to common
stock subject to adjustment, as defined, (ii) voting rights equivalent to voting
rights of common stockholders, (iii) receive dividends equal to $.25 per share
payable on or about January 15 each year in cash or newly-issued shares of
Series A preferred or a combination thereof (iv) liquidation preferences of
$2.50 per preferred share and (v) certain demand and piggyback registration
rights with respect to the common shares issuable upon conversion.
The Company, at its option, has the right to redeem all or any portion of
the Series A convertible preferred stock at $2.50 per share plus accrued and
unpaid dividends.
During January 2000, the Company elected to pay the required yearly
dividend by issuing additional shares of Series A convertible preferred. The
Company issued 72,856 shares to satisfy the 10% dividend. In addition, during
2000, 83,406 shares of Series A convertible preferred were converted into 83,406
shares of common stock.
During January 2001, the Company elected to pay the required yearly
dividend by issuing additional shares of Series A convertible preferred. The
Company issued 71,802 shares to satisfy the 10% dividend. In addition, during
2001, 34,205 shares of Series A convertible preferred were converted into 34,205
shares of common stock.
During January 2002, the Company elected to pay the required yearly
dividend by issuing additional shares of Series A convertible preferred. The
Company issued 75,624 shares to satisfy the 10% dividend. In addition, during
2002, 3,551 shares of Series A convertible preferred were converted into 3,551
shares of common stock.
COMMON STOCK
In February and March 2000, the Company gave notice to the holders of its
Class C and D Warrants that it was exercising its right of redemption at $.05
per warrant effective March 9 and April 12, 2000. Subsequent to the notice, the
Company received approximately $13,001,000 from the exercise of 2,000,135 Class
C warrants and approximately $25,742,000 from the exercise of 2,941,905 Class D
warrants. In connection therewith the Company incurred expenses of $1,999,000.
In addition, during 2000, certain Class A, B, E and other warrants were
exercised for 577,071 common share and the Company received proceeds of
$2,573,000. Further, during 2000, warrants to acquire 14,268 common shares
expired.
F-13
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
In addition, during 2000, outstanding options to purchase 506,250 warrants
at $.10 per warrant were exercised and the acquired warrants were then exercised
for 202,500 shares of common stock at a price of $3.75 per share.
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. During the year ended December 31, 2000, the Company had purchased
263,600 shares of common stock at a cost of approximately $2,023,000.
In February 2001, the Company extended its stock buy-back program under
which the Board of Directors authorized the purchase of up to an additional
$1,000,000 of its common stock. During the year ended December 31, 2001, the
Company had purchased 250,600 shares of common stock at a cost of approximately
$935,000.
In May 2001, the Company sold 100,000 shares of its Treasury Stock to its
CEO for $325,000 or $3.25 per share, the then current market value. The Company
received $25,000 cash and a note receivable of $300,000, bearing interest at a
rate of 5% per annum. The weighted average method was used to determine the cost
basis of $7.67 per share of the Treasury Stock.
In October 2001, the Company purchased 100,000 shares of its common stock
and warrants to purchase 40,605 shares of its common stock for $1,165,000
pursuant to a settlement agreement. Of this amount, $765,000 was recognized as
expense in the third quarter of 2001 and $400,000 as the purchase of treasury
stock.
SUBSCRIPTIONS RECEIVABLE
In September 2002, the Company recognized as expense $50,625 previously
reported as Subscriptions receivable. The charges, related to unpaid warrant
conversion fees, were deemed uncollectible after recovery efforts were
unsuccessful.
WARRANTS AND UNIT PURCHASE OPTIONS
At December 31, 2002, outstanding warrants to acquire shares of the
Company's common stock are as follows:
NUMBER OF
WARRANT SHARES
TYPE EXERCISE PRICE EXPIRATION DATES RESERVED
------- --------------- ---------------- ---------
Class E $9.82 to $11.35 April 2003 326,554
Other $0.55 to $15.00 February 2003-August 2007 1,053,800
---------
1,380,354
=========
In connection with its initial public offering, the Company sold to the
underwriter, at a nominal amount, a unit purchase option to purchase up to an
aggregate of 200,000 additional units at $8.25 per unit. The units purchasable
upon exercise of the unit purchase option are comprised of one share of common
stock, one Class C warrant and one Class D warrant. Each Class C warrant
entitles the holder to purchase a unit consisting of one share of common stock
and one redeemable Class D detachable warrant. Each Class D warrant entitles the
holder to purchase one share of common stock. The exercise price of Class C and
D warrants is $6.50 and $8.75, respectively. The unit purchase options became
exerciseable in November 1998 for a two-year period. During 2000, the exercise
period was extended to November 2001. Upon expiration in November 2001, it was
determined to be in the best interest of the Company to replace the expiring
unit purchase options with two year warrants to purchase 125,000 shares of
common stock at $7.00 per share,
F-14
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
expiring in November of 2003. The Company evaluated the transaction using the
Black- Scholes option pricing model and determined that the cost was de minimis.
In 1996, the Company, under the terms of a financial services agreement
with a stockholder, granted a unit purchase option, exercisable for a five-year
period commencing April 2, 1998, to purchase 134,199 shares of Common Stock at
prices ranging from $8.18 to $9.46 and Class E Warrants to purchase 67,101
shares of Common Stock exercisable at prices ranging from $9.82 to $11.35.
During 1996, the Company entered into an agreement with a consulting firm
whereby the Company agreed to grant warrants to purchase 75,000 shares of common
stock at $4.25 per share in return for financial advisory services. The warrants
will be granted and become exercisable only in the event a transaction
introduced to the Company by the consulting firm is consummated, at which time
the Company will record a noncash charge representing the fair market value of
the warrants.
In August 1998, the Company entered into an agreement with a consulting
firm whereby the Company issued five-year warrants to purchase 75,000 shares of
common stock. Warrants for 50,000 shares vested on December 31, 1998 of which
37,500 have an exercise price of $7.00 per share and 12,500 have an exercise
price of $8.00 per share. The Company determined the fair value based on the
Black-Scholes option pricing model of these warrants to be approximately
$181,000, which was charged to operations. During 2000, 22,500 warrants at $7.00
per share were exercised. The remaining 25,000 warrants have an exercise price
of $9.00 per share and vest only if a transaction introduced to the Company by
the consulting firm is consummated, at which time the Company will record a
noncash charge representing the fair value of the warrants.
In July 1999, the Company sold to a consulting firm a warrant to purchase
150,000 common shares at $7.00 per share expiring on July 15, 2004. Warrants for
50,000 common shares which vested immediately were granted upon signing the
agreement; the Company determined the fair value based on the Black-Scholes
option pricing model of these warrants to be approximately $169,000, which was
charged to operations. These warrants were exercised during 2000. The remaining
100,000 warrants become exercisable and a cash fee of less than $200,000 will be
paid upon consummation of a transaction, as defined in the agreement.
In February 2000, the Company entered into an agreement with a consulting
firm whereby the Company issued warrants to purchase 300,000 shares of common
stock at $15 per share expiring on February 7, 2005. These warrants vested
during 2000; the Company determined the fair value based on the Black-Scholes
option pricing model of these warrants to be approximately $1,852,000, which was
charged to operations during 2000.
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 using the Black-Scholes option pricing model. The charge is
included in general and administrative expense.
STOCK OPTIONS
During 1992, the Board of Directors and the stockholders of the Company
approved a Stock Option Plan (the "1992 Plan") which provides for the granting
of options to purchase up to 520,000 shares of common stock, pursuant to which
officers, directors, key employees and the Company's Scientific Advisory Board
are eligible to receive incentive and/or nonstatutory stock options. At December
31, 2002 and 2001, no more options were available for future grant under the
1992 Plan.
During 1996, the Board of Directors and the stockholders of the Company
approved the 1996 Stock Option Plan (the "1996 Plan") that provides for the
granting of incentive and nonstatutory options for up to 750,000 shares of
common stock to officers, employees, directors and consultants of the Company.
During
F-15
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
1998, the Board of Directors and the stockholders of the Company approved an
amendment to the Plan to allow for the granting of an additional 750,000
options. At December 31, 2002 and 2001, no more options were available for
future grant under the 1996 Plan.
During 2000, the Board of Directors and the stockholders of the Company
approved the 2000 Stock Option Plan (the "2000 Plan"), which provides for the
granting of incentive and nonstatutory options for up to 1,500,000 shares of
common stock to officers, employees, directors, independent contractors,
advisors and consultants of the Company. The Company subsequently amended the
2000 plan to increase the options available for future grants by 1,250,000
shares and to change the vesting period. At December 31, 2002, 935,345 options
are available for grant under the 2000 Plan.
Options granted under the Plans are exercisable for a period of up to 10
years from date of grant at an exercise price which is not less than the fair
value of the common stock on date of grant, except that the exercise period of
options granted to a stockholder owning more than 10% of the outstanding capital
stock may not exceed five years and their exercise price may not be less than
110% of the fair value of the common stock at date of grant. For the 1992 Plan
and the 1996 Plan, options generally vest 40% after six months of employment and
thereafter 20% annually on the anniversary date of the grant. For the 2000 Plan,
as a result of an amendment approved by the stockholders in 2001, the vesting
period changed from 50% annually on the anniversary date of the grant, to
33 1/3% annually on the anniversary date of the grant.
Stock option activity under the Plans are summarized as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2002 2001 2000
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Options outstanding at
beginning of year......... 2,858,155 $4.94 2,080,600 $5.01 1,635,300 $4.16
Granted..................... 788,000 1.46 812,155 4.87 492,000(a) 7.69
Exercised................... -- -- -- -- (46,700) 3.57
Expired..................... (200,000) 1.65 -- -- -- --
Canceled.................... (159,300) 5.43 (34,600) 7.32 -- --
--------- --------- ---------
Options outstanding at end
of year................... 3,286,855 4.29 2,858,155 4.94 2,080,600 5.01
========= ========= =========
Options exercisable at end
of year................... 2,688,410 4.69 2,150,320 4.68 1,394,380 3.94
========= ========= =========
---------------
(a) In January and April 2000, respectively, options to acquire 106,000 and
10,000 shares were granted, subject to stockholder approval, to employees
and directors of the Company at an exercise price equal to the market price
at date of grant. At date of stockholder approval the market price exceeded
the exercise price by $1.06 and $1.75 per share, respectively, such excess
is being charged to operations over the vesting period.
F-16
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
The following table presents information relating to stock options
outstanding under the plans as of December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE REMAINING EXERCISE
EXERCISE PRICE SHARES PRICE LIFE IN YEARS SHARES PRICE
-------------- --------- -------- ------------- --------- --------
$0.54-$2.995.................... 970,500 $1.58 8.03 524,000 $1.53
$3.00-$4.995.................... 1,274,355 3.92 6.13 1,159,580 3.89
$5.00-$7.437.................... 406,000 6.69 6.33 385,830 6.67
$7.437-$9.875................... 636,000 7.61 7.50 619.000 7.62
--------- ---------
3,286,855 4.29 6.98 2,688,410 4.69
========= =========
In addition to options granted under the Plans, in February 1996, the
Company granted options to purchase 100,000 shares of common stock at $4.25 as
compensation for professional services. These options were exercised during
2000.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if we accounted for our
stock option grants under the fair market value method as prescribed by such
statement. The fair market value of our stock options was estimated at the date
of grant using the Black-Scholes option pricing model with the following
assumptions.
2002 2001 2000
------------ ------------ ------------
Risk-free interest rates........................... 3.3% to 6.7% 4.8% to 6.7% 5.0% to 6.7%
Expected option life in years...................... 5 5 5
Expected stock price volatility.................... 79% to 89% 78% to 120% 85% to 94%
Expected dividend yield............................ 0% 0% 0%
The weighted average fair value at date of grant for options granted during
2002, 2001 and 2000 was $0.46, $1.21 and $6.33 per option, respectively At
December 31, 2002 the Company has three stock-based employee compensation plans.
The Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. No stock-based employee compensation cost is reflected
in the net loss, all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrated the effect on net income and earnings per share
if the Company had applied the fair
F-17
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based compensation.
YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
------------ ------------ -----------
Net loss attributable to common stockholders
as reported............................... $(10,527,000) $ (8,965,000) $(7,345,000)
------------ ------------ -----------
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects............. (643,000) (1,596,000) (1,084,000)
------------ ------------ -----------
Pro forma net income...................... $(11,170,000) $(10,561,000) $(8,429,000)
------------ ------------ -----------
Earnings per share:
------------ ------------ -----------
Basic and diluted-as reported............. $ (0.67) $ (0.57) $ (0.51)
------------ ------------ -----------
Basic-pro forma...................... $ (0.71) $ (0.67) $ (0.58)
The Black-Scholes option valuation model was developed for use in
estimating the fair market value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because our stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair market value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair market value of our stock options.
NOTE K -- INCOME TAXES
At December 31, 2002 and 2001, the Company had approximately $43,893,000
and $34,747,000 of net operating loss carryforwards and $511,000 and $415,000 of
research and development credit carryforwards, respectively, for federal income
tax purposes that expire in years 2006 through 2021.
At December 31, 2002 and 2001, the Company had a deferred tax asset of
approximately $16,975,000 and $13,453,000 respectively, representing the
benefits of its net operating loss and research and development credit
carryforwards and certain expenses not currently deductible for tax purposes,
principally related to the granting of stock options and warrants, and non-cash
reorganization and merger expenses. The Company's deferred tax asset has been
fully reserved by a valuation allowance since realization of its benefit is
uncertain. The difference between the statutory tax rate of 34% and the
Company's effective tax rate is due to the increase in the valuation allowance
of $3,522,000 (2002), $3,015,000 (2001), and $3,018,000 (2000). The Company's
ability to utilize its carryforwards may be subject to an annual limitation in
future periods pursuant to Section 382 of the Internal Revenue Code of 1986, as
amended.
NOTE L -- COMMITMENTS AND OTHER MATTERS
LEASES
The Company occupies office and laboratory space under a lease expiring
December 31, 2003. Minimum future annual rental payments are $238,000 for the
year ended December 31, 2003.
Rent expense, prior to any reorganization expense, was approximately
$275,000, $299,000 and $269,000 for the years ended December 31, 2002, 2001 and
2000, respectively.
F-18
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with one of its officers, which
provides for an annual base salary of $200,000 (subject to annual increases of
not less than 5% per year and bonuses at the discretion of the Board of
Directors), for a period of five years, commencing November 1998. In November
2002 the annual base salary was adjusted to $265,000. During December 2002, the
employee resigned his position as a director for the Company and announced his
resignation as an employee for the Company to be effective in January 2003.
On December 31, 1998, the Company entered into an employment agreement with
its Vice President for Drug Design for three years. The 1998 agreement was
terminated and the Company entered into a new agreement on 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 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 than 30% per year of the annual salary. An additional
payment of $9,750 as a one-time cash bonus was paid in January 2003. In the
event the employment is terminated without cause, the agreement requires the
Company to pay 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 the employee'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 the employee's technology; pay on the employee's behalf
a sum of up to $200,000 to Saturi Medical Research, Ltd.; and reimburse certain
business expenses related to research completed prior to joining the Company.
The Company received authority from Saturi Medical Research, to apply the
payments in settlement of our obligations (amounting to approximately $355,000)
to the termination of liabilities to the Company under the loans we previously
issued to the employee.
In addition, we granted to our Vice-President of Drug Design 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.
On March 21, 2001, the Company entered into an employment agreement with
its President and Chief Executive Officer. The agreement is for a period of
three years commencing March 21, 2001 and shall be extended for successive
twelve-month periods unless terminated by either party. The agreement provides
for an annual base salary of $350,000 per year with an annual bonus of up to 60%
of base pay as determined by the Board's discretion. In addition, the Company
granted the employee an option to purchase 400,000 shares of the Company's
common stock at an exercise price of $3.25 per share. The Company also agreed to
reimburse the employee for certain expenses.
On March 10, 2003, the Company entered into an employment agreement with
its Vice-President, Chief Business Officer and Chief Financial Officer. The
agreement is for a period of three years commencing March 10, 2003 and shall be
extended for successive twelve-month periods unless terminated by either party.
The agreement provides for an annual base salary of $235,000 per year with an
annual bonus of up to 30% of base pay as determined by the Company's
Compensation Committee. In addition, the Company granted the employee an option
to purchase 225,000 shares of the Company's common stock at an exercise price of
$.55 per share. The Company also agreed to reimburse the employee for certain
expenses.
F-19
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
COLLABORATION AGREEMENTS
Agreements With Research and Development Institute, Inc. ("RDI")
During June 1993, the Company entered into a research and license agreement
with RDI of Montana State University pursuant to which the Company finances, and
RDI conducts, research and development at Montana State University in the field
of Taxol(R)-producing organisms. In connection with the agreement, RDI has
granted the Company an exclusive license and licensing rights to its patents and
know-how throughout the world to develop and market products relating to the
technology.
The Company had financed research to be conducted under the research and
license agreement and paid RDI an aggregate fixed fee of $250,000 per annum for
four years commencing in 1993. In July 1998, the Company agreed to finance
research for an additional year for $250,000. In addition, the Company agreed to
pay RDI royalties of up to 6% of net sales of products derived under the license
agreement with varying minimum royalty payments through June 1996 and $100,000
annually thereafter. The agreement was amended during May 1998 to require the
Company to pay a percentage of royalties received with respect to the
manufacture, use or sale of the inventions by sublicensees and a percentage of
all up-front, milestone, and royalty payments, which may be received under the
agreement with BMS. (see Note D).
As a result of the completion of funding related to our Sponsored Research
Agreement with BMS, the Company initiated efforts to renegotiate several
scientific collaborations, including agreements with RDI. The agreements with
RDI were terminated in June 2002, relieving the Company 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.
Agreements with Washington State University Research Foundation ("WSURF")
In July 1996, the Company entered into an agreement with WSURF whereby the
Company received an exclusive, worldwide license to use and/or sublicense
patented technology or prospective patented technology (the "WSURF Technology").
In June 1998, the agreement was amended to cover additional patents. The Company
was required to pay WSURF license fees of $7,500 per year commencing on July 1,
1997. The agreement was amended during May 1998 to require the Company to pay a
percentage of royalties received with respect to the manufacture, use or sale of
the inventions by sublicensees and a percentage of all up-front, milestone and
royalty payments that may be received under the agreement with BMS (see Note D).
In addition, the Company agreed to pay minimum royalties of $50,000 per year
payable on July 1, 1999, $75,000 payable on July 1, 2000, and $100,000 payable
on July 1, 2001 and annually thereafter. This agreement will remain in effect
until the last to expire of the patents licensed under the WSURF Technology,
subject to termination by either party.
In July 1996, the Company entered into a research agreement with WSURF, as
amended, for research to be conducted on behalf of the Company through July 2002
providing for funding of approximately $1,207,000. During 2002, 2001 and 2000,
respectively, the Company incurred approximately $188,000, $166,000 and $269,000
of research costs under the agreement. The research agreement was not extended.
Agreements with the Regents of the University of California
In February 1996, the Company entered into two license agreements
("Agreements") with the Regents of the University of California, granting to the
Company exclusive rights to certain technology and patent rights. Pursuant to
the Agreements, the Company paid license fees of $10,000 and $15,000 upon
issuance of the patents. In addition, the Company must pay a yearly license
maintenance fee for these licenses, aggregating $2,000 in the initial year,
increasing by $4,000 in the second year and increasing by $6,000 per year until
it reaches a maximum of $36,000, until the Company is commercially selling a
product based on the
F-20
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
technology derived from these license agreements, at which time a royalty based
on net sales will be due. These agreements were terminated in August of 2002.
In August 1998, the Company entered into an additional license agreement
with the Regents of the University of California, granting to the Company
exclusive rights to certain technology and patent rights. Pursuant to the
agreement, the Company paid license fees of $20,000 and has agreed to pay
$25,000 upon issuance of a patent. In addition, the Company must pay a yearly
license maintenance fee of $2,000, increasing by $2,000 per year until it
reaches a maximum of $12,000, until the Company is commercially selling a
product based on the technology derived from these license agreements, at which
time a royalty based on net sales will be due. The agreement has been
terminated.
In July 2000, the Company entered into a license agreement with the Regents
of the University of California, granting to the Company exclusive rights to
certain technology and patent rights. Pursuant to the agreement, the Company
paid license fees of $15,000 and has agreed to pay all past and future patent
costs plus a 15% patent service fee. In addition, the Company must pay a yearly
license maintenance fee of $10,000 until the Company is commercially selling a
product based on the technology derived from the license agreement, at which
time a royalty based on net sales will be due. Pursuant to this agreement the
Company entered into two sponsored research agreements with third parties
whereby the Company agreed to fund research for the period July 2000 through
June 2003 and August 2000 to July 2003 in the amounts of $99,360 and $109,320,
respectively, per annum. These sponsored research agreements were terminated in
December 2002.
Agreements with Molecular Simulations Incorporated ("MSI")
In June 2000, the Company entered into two, three year participation
agreements with MSI in which the Company will participate with MSI and others in
a project with the purpose of developing software to be used in the assignment
and understanding of protein function and a project with the purpose to develop
and validate rapid computer-based methods for x-ray structure determination and
model building and provide a scientific forum for research of x-ray
crystallographic methods for structure determination. Pursuant to the
agreements, the Company is to pay $125,000 per year for membership in the
software project and a total of $127,000 during the three years for membership
in the x-ray project. Each participation agreement requires that the Company
appoint at least one staff member to be an active participant in each project,
act as liaison between MSI and the Company, provide non-proprietary input
material in its possession which may be beneficial to the project and throughout
the term of the projects, the Company is to be a valid licensee of the most
recent version of certain commercially released software, as defined in the
agreement. Under such software license agreements the Company is to pay
approximately $174,000 over the three-year term. In 2002, the Company, believing
the milestones of the agreements had not been met, instituted efforts to
terminate the agreements. The Company recognized $127,000 in expenses related to
the third year and this amount is reflected in accrued expenses at December 31,
2002.
RELATED PARTY TRANSACTIONS
In December 2000, the Company entered into a consulting agreement with a
company owned by one of its Directors. The agreement calls for an annual
retainer of $125,000, paid quarterly in advance, and is renewable each year at
the Company's option.
In December 2000, the Company entered into an agreement with Gary E.
Frashier, Chairman of the Company's Board of Directors, for consulting services.
The agreement can be terminated by either party upon notice to the other.
F-21
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
In May 2001, the Company received a note receivable from the CEO for
$300,000 from the sale of Treasury Stock. The note bears interest at 5.00% per
annum and accrued interest receivable is approximately $2,500 at December 31,
2002.
In July 2002, the Company negotiated a new employment agreement with its
Vice President of Drug Design. See Note L.
On August 13, 2002 the Company entered into a consulting agreement for
advisory services dealing with investor relations and seeking strategic
alliances with Roan Meyers, LLC, a company owned by one of its shareholders. The
agreement calls for an initial retainer of $50,000, paid in advance, monthly
payments of $6,500 and has a term of one year. The agreement may be terminated
by either party upon 30 days notice. A total or 250,000 warrants were issued in
connection with the agreement. The agreement contains a provision for payments
in the event the financial advisor is instrumental in finding a partner for a
merger or acquisition.
NOTE M -- 401(K) PLAN
The Company maintains a defined contribution 401(k) plan available to
eligible employees. Employee contributions are voluntary and are determined on
an individual basis, limited to the maximum amount allowable under federal tax
regulations. The Company made no contributions during 2002, 2001 and 2000.
NOTE N -- QUARTERLY RESULTS (UNAUDITED)
QUARTER ENDED
-----------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL YEAR
----------- ----------- ------------ ----------- ------------
2002
Revenues.......................... $ 333,000 $ 222,000 $ 0 $ 6,000 $ 562,000
Net loss.......................... (1,769,000) (1,885,000) (2,682,000) (4,022,000)(b) (10,358,000)
Loss per share -- basic and
diluted(a)...................... (0.12) (0.12) (0.17) (0.25) (0.67)
2001
Revenues.......................... $ 333,000 $ 334,000 $ 333,000 $ 333,000 $ 1,333,000
Net loss.......................... (1,520,000) (2,999,000) (2,752,000) (1,514,000) (8,785,000)
Loss per share -- basic and
diluted(a)...................... (0.10) (0.19) (0.17) (0.11) (0.55)
---------------
(a) Per common share amounts for the quarters and full year have been
calculated separately. Accordingly, quarterly amounts may not add to the
annual amount because of differences in the weighted average common shares
outstanding during each period due to the effect of the Company's issuing
shares of its common stock during the year.
(b) In the quarter ended December 31, 2002, the Company recognized a total of
$2,010,000 related to its terminated merger agreement and initiated a
strategic redirection of its operations that resulted in a charge of
$864,000.
F-22
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Certificate of Incorporation, as amended(l)
3.2 -- By-laws(l)
4.1 -- Specimen certificates representing Class C Warrants, Class D
Warrants and Common Stock(l)
4.3 -- Form of Unit Purchase Option in connection with eXegenics
Inc.'s Initial Public Offering(l)
4.4 -- Warrant Certificate issued to the Washington State
University Research Foundation(4)
10.1 -- Employment Agreement dated March 1, 1992 between eXegenics
Inc. and Arthur P. Bollon, Ph.D., as amended(1)
10.2 -- 1992 Stock Option Plan, as amended(l)
10.3 -- Form of Stock Option Agreement(l)
10.4 -- Lease Agreement dated October 1, 1991 between eXegenics Inc.
and J.K. and Susie Wadley Research Institute and Blood Bank,
as amended(l)
10.5 -- Security Agreement dated October 10, 1991 between eXegenics
Inc. and Wadley(l)
10.6 -- License Agreement dated June 10, 1993 between eXegenics Inc.
and Research & Development Institute, Inc. ("RDI"), as
amended, relating to the Paclitaxel Fermentation Production
System(l)
10.7 -- Research and Development Agreement effective June 10, 1993
between eXegenics Inc. and RDI, as amended(l)
10.8 -- License Agreement dated February 22, 1995 between eXegenics
Inc. and RDI, as amended, relating to FTS-2(l)
10.9 -- Agreement effective June 30, 1992 between eXegenics Inc. and
University of Texas at Dallas ("UTD"), as amended(l)
10.10 -- Extension Agreement with RDI dated June 5, 1995(l)
10.11 -- Third Amendment to Lease Agreement dated April 30, 1995(l)
10.12 -- September 25, 1995 RDI Extension(l)
10.13 -- October 25, 1995 RDI Extension(1)
10.14 -- Amendment to License Agreement dated June 10, 1993, as
amended, and Research and Development Agreement effective
June 10, 1993, as amended, both agreements between eXegenics
Inc. and RDI(2)
10.15 -- License Agreement No. W960206 effective February 27, 1996
between eXegenics Inc. and The Regents of the University of
California(2)
10.16 -- License Agreement No. W960207 effective February 27, 1996
between eXegenics Inc. and The Regents of the University of
California(2)
10.17 -- License Agreement with the Washington State University,
dated July 2, 1996(3)*
10.18 -- Amendment to Agreement, effective June 30, 1992, as amended,
between eXegenics Inc. and the University of Texas at
Dallas(3)
10.19 -- 1996 Stock Option Plan and Amendment No. 1 thereto(7)
10.20 -- Patent License Agreement, dated August 4, 1998, between The
Regents of the University of California and eXegenics Inc.
for Peptide Anti-estrogen for Breast Cancer Therapy(5)*
10.21 -- Master License Agreement, dated as of June 12, 1998, between
eXegenics Inc. and Bristol-Myers Squibb Company(6)*
10.22 -- Sublicense Agreement, dated May 27, 1998, between eXegenics
Inc. and Bristol-Myers Squibb under The Research &
Development Institute, Inc. License Agreement, as amended,
dated June 10, 1998(6)*
10.23 -- Sublicense Agreement, dated May 19, 1998, between eXegenics
Inc. and Bristol-Myers Squibb Company under the Washington
State University Research Foundation License Agreement,
dated June 8, 1996(6)*
10.24 -- Amended and Restated License Agreement, dated June 3, 1998,
between the Washington State University Research Foundation
and eXegenics Inc.(6)*
eXegenics Inc.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.25 -- Amendment, dated May 27, 1998, to the License Agreement,
dated June 10, 1993, between The Research and Development
Institute, Inc. and eXegenics Inc.(6)*
10.26 -- Amended and Restated 2000 Stock Option Plan(7)
10.27 -- Employment Agreement dated March 21, 2001, between eXegenics
Inc. and Ronald Lane Goode, Ph.D.(8)
10.28 -- Employment Agreement dated March 13, 2003, between eXegenics
Inc. and David E. Riggs.
10.29 -- Termination Agreement dated November 25, 2002 between
eXegenics Inc., Innovative Drug Delivery Systems, Inc., and
IDDS Merger Corp(9)
21 -- List of Subsidiaries -- None
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Eisner LLP
---------------
* Confidential portions omitted and filed separately with the U.S. Securities
and Exchange Commission pursuant to Rule 24b-2 promulgated under the
Securities Exchange Act of 1934, as amended.
(1) Previously filed as an exhibit to eXegenics Inc.'s Registration Statement on
Form SB-2 (File No. 33-91802) and are incorporated by reference herein.
(2) Previously filed as an exhibit to eXegenics Inc.'s Annual Report on Form
10-KSB for the year ended December 31, 1995 and are incorporated by
reference herein.
(3) Previously filed as an exhibit to eXegenics Inc.'s Post-Effective Amendment
No. 1 to Form SB-2 (File No. 33-91802) and are incorporated by reference
herein.
(4) Previously filed as an exhibit to eXegenics Inc.'s Registration Statement on
Form SB-2 (File No. 333-13409) and is incorporated by reference herein.
(5) Previously filed as an exhibit to the Post-Effective Amendment to eXegenics
Inc.'s Registration Statement on Form SB-2 on Form S-3 (File No. 333-13409)
and is incorporated by reference herein.
(6) Previously filed as an exhibit to eXegenics Inc.'s Current Report on Form
8-K (File No. 000-26078) and is incorporated by reference herein.
(7) Previously filed as an appendix to eXegenics Inc.'s Schedule 14-A (File No.
000-26078) and is incorporated by reference herein.
(8) Previously filed as an exhibit to eXegenics Inc.'s Annual Report on Form
10-K (File No. 000-26078) for the year ended December 31, 2000 and is
incorporated by reference herein.
(9) Previously we filed as an exhibit to eXegenics Inc.'s Current Report on Form
8-K (File No. 000-26078) and is incorporated by reference herein.