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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
OR
| o | 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: 0-21990
OXiGENE, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 13-3679168 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
230 THIRD AVENUE
WALTHAM, MA 02451
(Address of principal executive offices, including zip code)
WALTHAM, MA 02451
(Address of principal executive offices, including zip code)
(781) 547-5900
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
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. Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesþ Noo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
As of October 15, 2005, there were 20,562,498 shares of the Registrant’s Common Stock issued and outstanding.
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OXiGENE, INC.
Cautionary Factors that May Affect Future Results
The disclosure and analysis by OXiGENE, Inc. (the “Company”) in this report contain “forward-looking statements.” Forward-looking statements give management’s current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They use words, such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning. These include statements, among others, relating to our planned future actions, our clinical trial plans, our research and development plans, our prospective products or product approvals, our beliefs with respect to the sufficiency of our financial resources, our plans with respect to funding operations, projected expense levels, and the outcome of contingencies.
Any or all of our forward-looking statements in this report may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual results may vary materially from those set forth in forward-looking statements. The uncertainties that may cause differences include, but are not limited to: the Company’s history of losses, anticipated continuing losses and uncertainty of future revenues or profitability; the early stage of product development; uncertainties as to the future success of ongoing and planned clinical trials; the unproven safety and efficacy of products under development; the sufficiency of the Company’s existing capital resources; the possible need for additional funds; uncertainty of future funding; the Company’s dependence on others for much of the clinical development of its product candidates under development, as well as for obtaining regulatory approvals and conducting manufacturing and marketing of any product candidates that might successfully reach the end of the development process; the impact of government regulations, health care reform and managed care; competition from other companies and other institutions pursuing the same, alternative or superior technologies; the risk of technological obsolescence; uncertainties related to the Company’s ability to obtain adequate patent and other intellectual property protection for its proprietary technology and product candidates; dependence on officers, directors and other individuals; and risks related to product liability exposure.
We will not update forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law. You are advised to consult any further disclosures we make in our reports to the Securities and Exchange Commission, including our reports on Form 10-Q, 8-K and 10-K. Our filings list various important factors that could cause actual results to differ materially from expected results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.
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INDEX
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| EX-31.1 Certification of CEO | ||||||||
| EX-31.2 Certification of CFO | ||||||||
| EX-32.1 Certification of CEO & CFO | ||||||||
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements—Unaudited
OXiGENE, Inc.
Condensed Balance Sheets
(All amounts in thousands, except per share data)
(Unaudited)
(All amounts in thousands, except per share data)
(Unaudited)
| September 30, 2005 | December 31, 2004 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 13,378 | $ | 15,988 | ||||
| Available-for-sale securities | 23,461 | 14,514 | ||||||
| Prepaid expenses | 244 | 59 | ||||||
| Other | 105 | 46 | ||||||
| Total current assets | 37,188 | 30,607 | ||||||
| Furniture and fixtures, equipment and leasehold improvements | 1,010 | 955 | ||||||
| Accumulated depreciation | (906 | ) | (888 | ) | ||||
| 104 | 67 | |||||||
| License agreements, net of accumulated amortization of $601 and $528 at September 30, 2005 and December 31, 2004, respectively | 898 | 971 | ||||||
| Deposits | 149 | 112 | ||||||
| Total assets | $ | 38,339 | $ | 31,757 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 861 | $ | 494 | ||||
| Accrued research and development | 1,774 | 1,263 | ||||||
| Accrued other | 1,198 | 865 | ||||||
| Total current liabilities | 3,833 | 2,622 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Common Stock, $.01 par value, 60,000 shares authorized; 20,562 shares at September 30, 2005 and 16,714 shares at December 31, 2004, issued and outstanding | 206 | 167 | ||||||
| Additional paid-in capital | 135,470 | 119,527 | ||||||
| Accumulated deficit | (98,576 | ) | (90,046 | ) | ||||
| Accumulated other comprehensive loss | (131 | ) | (94 | ) | ||||
| Notes receivable | (184 | ) | (384 | ) | ||||
| Deferred compensation | (2,279 | ) | (35 | ) | ||||
| Total stockholders’ equity | 34,506 | 29,135 | ||||||
| Total liabilities and stockholders’ equity | $ | 38,339 | $ | 31,757 | ||||
See accompanying notes.
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OXiGENE, Inc.
Condensed Statements of Operations
(All amounts in thousands, except per share data)
(Unaudited)
Condensed Statements of Operations
(All amounts in thousands, except per share data)
(Unaudited)
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
License revenue | $ | — | $ | — | $ | — | $ | 7 | ||||||||
Costs and expenses: | ||||||||||||||||
| Research and development | 2,273 | 1,837 | 5,060 | 4,660 | ||||||||||||
| General and administrative | 1,492 | 1,209 | 4,285 | 3,541 | ||||||||||||
| Total costs and expenses | 3,765 | 3,046 | 9,345 | 8,201 | ||||||||||||
| Operating loss | (3,765 | ) | (3,046 | ) | (9,345 | ) | (8,194 | ) | ||||||||
| Investment income | 321 | 140 | 810 | 421 | ||||||||||||
| Other income (expense), net | (1 | ) | (4 | ) | 5 | (2 | ) | |||||||||
Net loss | $ | (3,445 | ) | $ | (2,910 | ) | $ | (8,530 | ) | $ | (7,775 | ) | ||||
| Basic and diluted net loss per common share | $ | (0.17 | ) | $ | (0.17 | ) | $ | (0.44 | ) | $ | (0.47 | ) | ||||
| Weighted average number of common shares outstanding | 20,042 | 16,668 | 19,233 | 16,524 | ||||||||||||
See accompanying notes.
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OXiGENE, Inc.
Condensed Statements of Cash Flows
(All amounts in thousands)
(Unaudited)
Condensed Statements of Cash Flows
(All amounts in thousands)
(Unaudited)
| Nine months ended | ||||||||
| September 30, | ||||||||
| 2005 | 2004 | |||||||
Operating activities: | ||||||||
| Net loss | $ | (8,530 | ) | $ | (7,775 | ) | ||
| Adjustment to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 18 | 19 | ||||||
| Compensation related to issuance of options and restricted stock | 150 | 136 | ||||||
| Amortization of licensing agreement | 73 | 73 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Restricted cash | — | 364 | ||||||
| Prepaid expenses and other current assets | (244 | ) | (89 | ) | ||||
| Accounts payable and accrued expenses | 1,211 | (310 | ) | |||||
| Net cash used in operating activities | (7,322 | ) | (7,582 | ) | ||||
Investing activities: | ||||||||
| Purchase of available-for-sale securities | (21,862 | ) | (9,777 | ) | ||||
| Proceeds from sale of available-for-sale securities | 12,879 | 7,609 | ||||||
| Amount paid for license agreements | — | (155 | ) | |||||
| Purchase of furniture, fixtures and equipment | (55 | ) | (48 | ) | ||||
| Deposits | (37 | ) | (4 | ) | ||||
| Net cash used in investing activities | (9,075 | ) | (2,375 | ) | ||||
Financing activities: | ||||||||
| Proceeds from the issuance of common stock | 13,729 | 22,411 | ||||||
| Payment of notes receivable and related interest | 58 | 82 | ||||||
| Net cash provided by financing activities | 13,787 | 22,493 | ||||||
| Net (decrease) increase in cash and cash equivalents | (2,610 | ) | 12,536 | |||||
| Cash and cash equivalents at beginning of period | 15,988 | 878 | ||||||
| Cash and cash equivalents at end of period | $ | 13,378 | $ | 13,414 | ||||
See accompanying notes.
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OXiGENE, Inc.
Notes to Condensed Financial Statements
September 30, 2005
(Unaudited)
Notes to Condensed Financial Statements
September 30, 2005
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
The condensed balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Certain amounts have been reclassified for the period ended September 30, 2004 to conform to the current year presentation. For further information, refer to the financial statements and footnotes thereto included in the Annual Report on Form 10-K for OXiGENE, Inc. (the “Company”) for the year ended December 31, 2004, which can be found at www.oxigene.com.
Revenue Recognition
Revenue is deemed earned when all of the following have occurred: all obligations of the Company relating to the revenue have been met and the earnings process is complete; the amounts received or receivable are not refundable irrespective of the research results; and there are neither future obligations nor future milestones to be met by the Company with respect to such revenue.
Collaboration revenues are earned based upon research expenses incurred and milestones achieved. Revenue from non-refundable payments received upon initiation of contracts is deferred and amortized over the period in which the Company is obligated to participate on a continuing and substantial basis in the research and development activities outlined in each contract. Amounts received in advance of reimbursable expenses are recorded as deferred revenue until the related expenses are incurred. Milestone payments are recognized as revenue in the period in which the parties agree that the milestone has been achieved and no further obligation is deemed to exist.
The Company also earns revenue on royalty agreements, which is recognized when payments are received due to their uncertainty. Royalty revenue of $7,000 was recognized during the nine months ended September 30, 2004, which was earned as a percentage of the sales generated by a third party selling a Nicoplex compound formerly owned by the Company.
Available-for-Sale Securities
The Company’s investment policy allows for surplus cash to be invested in commercial paper, asset backed securities, obligations of commercial banks and U.S. Government and corporate debt securities. In accordance with Statement of Financial Accounting Standard No. 115 (“FAS 115”),Accounting for Certain Investments in Debt and Equity Securities, the Company separately discloses cash and cash equivalents from investments in marketable securities. The Company designates its marketable securities as available-for-sale securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, if any, reported as accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. Interest and dividends on securities classified as available-for-sale are included in investment income.
The Company’s investment objectives are to preserve principal, maintain a high degree of liquidity to meet operating needs and obtain competitive returns subject to prevailing market conditions. The Company assesses the market risk of its investments on an ongoing basis so as to avert risk of loss. The Company assesses the market risk of its investments by continuously monitoring the market prices of its investments and related rates of return, continuously looking for the safest, most risk-averse investments that will yield the highest rates of return in their category. Available-for-sale securities are as follows:
| September 30, 2005 | December 31, 2004 | |||||||
Government bonds and notes | ||||||||
| Maturing in less than 2 years | $ | 11,751 | $ | 744 | ||||
| Maturing in 2 to 4 years | — | 1,496 | ||||||
| Maturing in greater than 4 years | — | 1,000 | ||||||
Subtotal government bonds | 11,751 | 3,240 | ||||||
Corporate bonds | ||||||||
| Maturing in less than 2 years | 5,763 | 2,674 | ||||||
| Maturing in 2 to 4 years | 705 | 1,706 | ||||||
Subtotal corporate bonds | 6,468 | 4,380 | ||||||
Commercial Paper | 2,972 | — | ||||||
Asset backed securities | 2,270 | — | ||||||
Certificates of deposit | — | 2,641 | ||||||
Fixed income mutual funds | — | 4,253 | ||||||
Total available-for-sale securities | $ | 23,461 | $ | 14,514 | ||||
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Accrued Research and Development
The Company charges all research and development expenses, both internal and external costs, to operations as incurred. External costs consist of fees paid to consultants and other outside providers under service contracts. Costs incurred under fixed fee contracts are accrued ratably over the contract period absent any knowledge that the services will be performed other than ratably. Costs incurred under contracts to perform clinical trials are accrued on a patients-treated basis consistent with the typical terms of reimbursement. Upon termination of such contracts, the Company is normally only liable for costs incurred to date. As a result, accrued research and development expenses represent the Company’s estimated contractual liability to outside service providers at any of the relevant times.
Net Loss Per Share
Basic and diluted net loss per share were calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 128,Earnings Per Share, by dividing the net loss per share by the weighted-average number of common shares outstanding. Diluted net loss per share includes the effect of all dilutive, potentially issuable common equivalent shares as defined using the treasury stock method. All of the Company’s common stock equivalents are anti-dilutive due to the Company’s net loss position for all periods presented. Accordingly, common stock equivalents of approximately 2,310,600 and 2,140,300 at September 30, 2005 and 2004, respectively, were excluded from the calculation of weighted average shares for diluted loss per share.
Stock-based Compensation
The Company accounts for stock-based compensation for employees under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and has elected the disclosure-only alternative under SFAS No. 123, “Accounting for Stock-Based Compensation.” Accordingly, when options granted to employees have an exercise price equal to the market value of the stock on the date of grant, no compensation expense is recognized. In accordance with SFAS No. 148, “Accounting for Stock Based Compensation-Transition and Disclosure,” the following tables present the effect on net loss and net loss per share as if compensation cost for the Company’s stock had been determined consistent with SFAS No. 123:
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (in thousands, except per share data) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Reported net loss | $ | (3,445 | ) | $ | (2,910 | ) | $ | (8,530 | ) | $ | (7,775 | ) | ||||
Addstock-based employee compensation included in reported net loss | 143 | 32 | 143 | 97 | ||||||||||||
Lessstock-based employee compensation expense determined under the fair value method for all stock options | (460 | ) | (569 | ) | (1,343 | ) | (1,639 | ) | ||||||||
Pro forma net loss | $ | (3,762 | ) | $ | (3,447 | ) | $ | (9,730 | ) | $ | (9,317 | ) | ||||
Reported basic and diluted loss per share | $ | (0.17 | ) | $ | (0.17 | ) | $ | (0.44 | ) | $ | (0.47 | ) | ||||
Pro forma basic and diluted loss per share | $ | (0.19 | ) | $ | (0.21 | ) | $ | (0.51 | ) | $ | (0.56 | ) | ||||
Fair value was estimated on the grant date using the Black-Scholes option-pricing model with the assumptions below for options issued during 2005 and 2004.
| 2005 | 2004 | |||||||
| Risk free interest rate | 4.08 | % | 2.56 | % | ||||
| Expected life | 4 years | 4 years | ||||||
| Expected volatility | 133 | % | 95 | % | ||||
| Dividend yield | 0.00 | % | 0.00 | % | ||||
The weighted average fair values of the options granted based on the assumptions outlined in the table above were $4.02 and $4.17 for the nine-month periods ended September 30, 2005 and 2004, respectively.
Comprehensive Income (Loss)
Statement of Financial Accounting Standards No. 130,Reporting Comprehensive Income(“SFAS 130”), establishes rules for the reporting and display of comprehensive income (loss) and its components and requires unrealized gains or losses on the Company’s available-for-sale securities and the foreign currency translation adjustments to be included in other comprehensive income (loss).
Accumulated other comprehensive loss consisted of an unrealized loss on available-for-sale securities of $131,000 at September 30, 2005 and $94,000 at December 31, 2004.
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A reconciliation of comprehensive loss is as follows:
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| (In thousands) | ||||||||||||||||
Net loss as reported | $ | (3,445 | ) | $ | (2,910 | ) | $ | (8,530 | ) | $ | (7,775 | ) | ||||
| Unrealized gains (losses) | (32 | ) | 195 | (37 | ) | (38 | ) | |||||||||
Comprehensive loss | $ | (3,477 | ) | $ | (2,715 | ) | $ | (8,567 | ) | $ | (7,813 | ) | ||||
2. Stockholders’ Equity
On March 7, 2005, the Company received gross proceeds of approximately $15,000,000 from the sale of 3,336,117 shares of its common stock and net proceeds of approximately $13,719,000 after the deduction of fees and expenses, pursuant to an offering conducted as a takedown from a shelf registration statement on Form S-3 filed with the Securities and Exchange Commission in October 2003, allowing it to sell up to $50,000,000 of its Common Stock, debt securities and/or warrants to purchase its securities. The Company plans to use these proceeds to accelerate the development of its two lead product candidates, Combretastatin A4P (CA4P) and OXi4503, in oncology and ophthalmology. To date, the Company has received a total of approximately $39,200,000 of gross proceeds pursuant to the offerings made under this shelf registration. On September 23, 2005, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission, allowing it to sell up to $75,000,000 of its Common Stock, debt securities and/or warrants to purchase its securities. This registration statement, which became effective on October 6, 2005, replaces the shelf registration statement filed in October 2003.
Under a Restricted Stock Program adopted in January 2002, 208,541 shares of restricted common stock were issued to employees and consultants. The shares vested over a three-year period beginning on the first anniversary of the date of grant. During the three and nine months ended September 30, 2004, the Company recognized compensation expense of approximately $32,000 and $97,000, respectively, in connection with this program. No expense was recognized for the three and nine months ended September 30, 2005 as shares issued in connection with this program were fully vested in prior periods. Under the terms of the program, participants were permitted to request a loan from the Company, the proceeds of which were to be used to satisfy any participant’s tax obligations that arose from the awards. Each of these loans was evidenced by a promissory note. Principal amounts outstanding under the promissory notes accrued interest at a rate of 10% per year. The principal amount, together with accrued interest on the principal amount to be repaid, was scheduled to be repaid in three equal installments, on the first three anniversary dates of the stock grant date, unless extended by the Company. As of September 30, 2005, all loans made and interest accrued in connection with these grants have been repaid.
Certain stock options have been exercised with the presentation of non-recourse promissory notes to the Company. The interest rate on the non-recourse promissory notes is 5.6% with maturity terms of one to three years. In June 2005, a note including accrued interest totaling approximately $151,000 was not repaid, and therefore, 10,856 shares of common stock were forfeited. As of September 30, 2005, one note, including accrued interest totaling approximately $184,000, is outstanding from a director of the Company. The note becomes due in November 2006. A total of 20,000 shares of common stock were issued and are outstanding in connection with the exercise of this option.
In July 2005, the stockholders approved the 2005 Stock Plan at the Company’s Annual General Meeting. Under the 2005 Stock Plan eligible employees, directors and consultants of the Company may be granted shares of common stock of the Company, stock-based awards and/or incentive or non-qualified stock options. In the third quarter ended September 30, 2005, directors and officers of the Company were awarded a total of 520,000 shares of restricted common stock pursuant to the Company’s 2005 Stock Plan. These shares have full voting rights and are eligible for dividends should they be declared. The restricted stock agreements contain a lapsing repurchase right under which a portion of the shares granted would be forfeited to the Company should the director or officer no longer serve in his capacity as a director or officer prior to the end of the four year vesting term. The aggregate fair market value of the awards granted during the third quarter is approximately $2,403,000 and is based on the closing market value of our common stock on the date of grant. A total of $143,000 has been recognized as expense for both the three and nine months ended September 30, 2005 in connection with these awards. On October 3, 2005, the Company cancelled 480,000 of these awards and immediately granted those directors and officers of the Company 480,000 replacement restricted stock under the provisions of the Company’s 2005 Stock Plan, in order to avail the participants of potential tax election benefits. The terms of the replacement awards are similar to those of the original award. The replacement grant will result in a new measurement date and additional compensation expense of approximately $293,000, which in addition to the unamortized intrinsic value of the initial grant will be amortized over the remaining vesting period of the replacement grant, commencing in October 2005.
During the three months ended September 30, 2005 and 2004, the Company recognized compensation expense of approximately $7,000 and $11,000 respectively, in connection with options issued to non-employees. During the nine months ended September 30, 2005 and 2004, the Company recognized non-employee stock-based compensation expense of approximately $7,000 and $39,000, respectively.
3. License agreement
Our primary drug development programs are based on a series of natural products called Combretastatins. Arizona State University (ASU) has granted us an exclusive, worldwide, royalty-bearing license with respect to the commercial rights to particular Combretastatins. The terms of our agreement with ASU provide for the payment of amounts in connection with certain patent rights upon the achievement of certain milestones and events as described in the agreement. In the nine months ended September 30, 2005 we recognized research and development charges of $300,000 in accordance with the terms of the agreement. The agreement provides for additional payments in future periods based upon the achievement of certain milestones and events as described in the agreement. As of September 30, 2005, the achievement of any future milestones was indeterminable. Total payments in connection with these patent rights could total $900,000, including the $300,000 described above, should we achieve all of the milestones defined in the agreement.
4. Leases
In May 2005, the Company executed a modification to its existing lease for its Waltham, Massachusetts headquarters. The lease modification expands the amount of space leased and extends the end of the base term to May 2009. This modification resulted in a change in the Company’s estimate of whether it would reoccupy its former headquarters location resulting in a charge of approximately $247,000 in the second quarter of 2005. The amount recorded represents the difference between the amounts owed to the landlord of the Company’s former Watertown headquarters location and amounts due from the Company’s subtenant of that space over the remaining life of the lease.
5. New Accounting Pronouncements
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123(R)”)“Share-Based Payment,”which is a revision of SFAS 123 and supersedes APB 25 and its related implementation guidance. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the
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income statement based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative. SFAS 123(R) is effective for public companies (excluding small business issuers as defined in SEC regulations) at the beginning of the first fiscal year beginning after June 15, 2005.
SFAS 123(R) permits public companies to adopt its requirements using one of two methods. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date of SFAS 123(R) that remain unvested on the effective date. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. We have yet to determine which method to use in adopting SFAS 123(R). As permitted by SFAS 123, we currently account for share-based payments to employees using APB 25’s intrinsic value method. Accordingly, the adoption of SFAS 123(R)’s fair value method will have a significant impact on our results of operations. We are evaluating SFAS 123(R) and have not yet determined the impact in future periods.
In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) SFAS No. 154,Accounting Changes and Error Corrections(“SFAS 154”) which supersedes APB Opinion No. 20,Accounting Changesand SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements.SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retroactively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by this Statement. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS 154 to have a material impact on its consolidated results of operations and financial condition.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations as of September 30, 2005 and 2004 should be read in conjunction with the sections of our audited consolidated financial statements and notes thereto, as well as our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that is included in our Annual Report on Form 10-K for the year ended December 31, 2004.
Overview
We were incorporated in 1988 in the state of New York and reincorporated in 1992 in the state of Delaware, and are a biopharmaceutical company developing novel small-molecule therapeutics to treat cancer and certain eye diseases. Our focus is the development and commercialization of drug candidates that selectively disrupt abnormal blood vessels associated with solid tumor progression and visual impairment. Currently, we do not have any products available for sale; however, we have several therapeutic product candidates in various stages of clinical and preclinical development.
Our primary drug development programs are based on a series of natural products called Combretastatins. We have developed two distinct technologies that are based on Combretastatins. We refer to the first technology as vascular targeting agents, or VTAs. We are currently developing VTAs for indications in both oncology and ophthalmology. We refer to the second technology as ortho-quinone prodrugs, or OQPs. We are currently developing OQPs for indications in oncology. Our most advanced clinical compound is CA4P, a VTA, which is in multiple ongoing clinical trials in various oncology and ophthalmic indications.
We are committed to a disciplined financial strategy and maintain a limited employee and facilities base, with development, scientific, finance and administrative functions, which include, among other things, product development, regulatory oversight and clinical testing, managed from our Waltham, Massachusetts headquarters. Our research and development team typically works on a number of development projects concurrently. Accordingly, we do not separately track the costs for each of these research and development projects to enable separate disclosure of these costs on a project-by-project basis. We conduct substantial scientific activities pursuant to collaborative arrangements with universities. Regulatory and clinical testing functions are generally contracted out to third-party, specialty organizations.
Our failure to successfully complete human clinical trials, develop and market products over the next several years, or realize product revenues, would materially adversely affect our business, financial condition and results of operations. Royalties or other revenue generated by us from commercial sales of our potential products are not expected for several years, if at all.
We have generated a cumulative net loss of approximately $98,576,000 for the period from our inception through September 30, 2005 . We expect to incur significant additional operating losses over at least the next several years, principally as a result of our continuing clinical trials and anticipated research and development expenditures. The principal source of our working capital has been the proceeds of private and public equity financing and the exercise of warrants and stock options; we currently have no material amount of licensing or other fee income. As of September 30, 2005, we had no long-term debt or loans payable.
Results of Operations
Revenue
Three Months Ended September 30, 2005 and 2004
For the three months ended September 30, 2005 and September 30, 2004 we did not report any license revenue. Currently, our only source of revenue is from the license to a third party of our formerly owned nutritional and diagnostic technology. Future revenues from this license agreement are expected to be minimal. We do not expect to generate material revenue or fee income unless we enter into a major licensing arrangement.
Nine Months Ended September 30, 2005 and 2004
We reported $0 and $7,000 in license revenue for the nine months ended September 30, 2005 and 2004, respectively. The amounts received were in connection with the license to a third party of our formerly owned nutritional and diagnostic technology. Future revenues from this license agreement are expected to be minimal.
Costs and expenses
Three Months Ended September 30, 2005 and 2004
Total costs and expenses for the three months ended September 30, 2005 and 2004 amounted to approximately $3,765,000 and $3,046,000, respectively.
Research and development expenses were approximately $2,273,000 during the three months ended September 30, 2005 and were approximately $1,837,000 for the comparable 2004 period, an increase of approximately $436,000 or 24%. The increase was primarily attributable to both higher compensation expense and other employee-related costs and, to a lesser extent, higher contracted development expenses. We continue to build internal program management infrastructure in anticipation of increased development activities going forward. We anticipate that research and development costs will increase over current levels as we make progress in our ongoing clinical trial programs.
General and administrative expenses for the three months ended September 30, 2005 were approximately $1,492,000 and were $1,209,000 for the comparable 2004 period, an increase of approximately $283,000 or 23%. The increase is primarily attributable to higher professional consulting and advisory expenses of approximately $110,000, higher compensation and employee related costs of approximately $89,000 and increased general corporate costs of approximately $66,000. We have added additional management and staff and incurred advisory consulting costs to prepare for and manage activities for both current and anticipated development programs.
Nine Months Ended September 30, 2005 and 2004
Total costs and expenses for the nine months ended September 30, 2005 and 2004 amounted to approximately $9,345,000 and $8,201,000, respectively.
Research and development expenses were approximately $5,060,000 during the nine months ended September 30, 2005 and were approximately $4,660,000 for the comparable 2004 period, an increase of approximately $400,000 or 9%. Lower contracted development costs were offset by higher compensation and employee-related costs. During the first nine months of fiscal 2004, we incurred significant preclinical and manufacturing development costs in preparation for anticipated additional clinical trials of both our CA4P and OXi4503 product candidates. These costs did not recur to the same extent in the first nine months of fiscal
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2005 but have been offset by higher clinical trial program expenses and internal program management costs than those experienced in the first nine months of fiscal 2004. We anticipate that research and development costs will increase over current levels as we make progress in our ongoing clinical trial programs.
General and administrative expenses for the nine months ended September 30, 2005 were approximately $4,285,000 and were $3,541,000 for the comparable 2004 period, an increase of approximately $744,000 or 21%. The increase is attributable to higher professional consulting and advisory expenses of approximately $282,000, a rent loss charge of approximately $247,000 in connection with the lease modification of our Waltham, Massachusetts headquarters, higher compensation and employee related costs of approximately $122,000 and higher general corporate costs.
Other income and expenses
Investment income increased to approximately $321,000 in the three-month period ended September 30, 2005 compared to approximately $140,000 in the three-month period ended September 30, 2004. Investment income increased to approximately $810,000 in the nine-month period ended September 30, 2005 compared to approximately $421,000 in the nine-month period ended September 30, 2004. The increases in both the three and nine-month periods are due primarily to a higher average rate of return on our invested cash balances during the 2005 periods and, to a lesser extent, a higher average balance of funds available for investment.
Liquidity and Capital Resources
We have experienced net losses and negative cash flow from operations each year since our inception, except in fiscal 2000. As of September 30, 2005, we had an accumulated deficit of approximately $98,576,000. We expect to incur expenses, resulting in operating losses, over the next several years due to, among other factors, our continuing clinical trials, planned future clinical trials, and other anticipated research and development activities. Our cash, cash equivalents and available-for-sale securities balance was approximately $36,839,000 at September 30, 2005, compared to approximately $30,502,000 at December 31, 2004.
In the nine-month period ended September 30, 2005, we experienced a decrease in cash and cash equivalents of $2,610,000. The decrease in cash and cash equivalents is due to cash used in operating activities of $7,322,000 and cash used in investing activities of $9,075,000, offset in part by cash provided by financing activities of $13,787,000.
The net cash provided by financing activities of $13,787,000 is attributable to proceeds from the issuance of common stock of $13,729,000, of which approximately $13,719,000 is attributable to proceeds from the sale of 3,336,117 shares of our common stock in March 2005, pursuant to a takedown from a shelf registration statement on Form S-3 filed with the Securities and Exchange Commission in October 2003, and $10,000 is attributable to proceeds from the exercise of stock options. Proceeds from the receipt of payments on outstanding notes receivable of $58,000 are also included in the $13,787,000 total.
Cash used in operating activities of $7,322,000 is primarily attributable to the net loss of $8,530,000 and an increase in prepaid expenses and other current assets of $244,000, offset in part by an increase in accounts payable and accrued expenses of $1,211,000 and a non-cash charges totaling $241,000.
Net cash used in investing activities of $9,075,000 is primarily attributable to the purchase of available-for-sale marketable securities for $21,862,000 offset in part by proceeds from the sale of available-for-sale marketable securities of $12,879,000.
On September 23, 2005, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission, allowing it to sell up to $75,000,000 of its common stock, debt securities and/or warrants to purchase its securities. This registration statement, which became effective on October 6, 2005, replaces the shelf registration statement filed in October 2003.
We anticipate that our cash, cash equivalents and available-for-sale marketable securities will be sufficient to satisfy our projected cash requirements based on our current programs at least through approximately the first half of fiscal 2007. Our cash requirements may vary materially from those now planned for or anticipated by us due to numerous risks and uncertainties. These risks and uncertainties include, but are not limited to: the progress of and results of our pre-clinical testing and clinical trials of our VTAs and OQPs under development, including CA4P, our lead compound, and OXi4503; the progress of our research and development programs; the time and costs expended and required to obtain any necessary or desired regulatory approvals; the resources, if any, that we devote to developing manufacturing methods and advanced technologies; our ability to enter into licensing arrangements, including any unanticipated licensing arrangements that may be necessary to enable us to continue our development and clinical trial programs; the costs and expenses of filing, prosecuting and, if necessary, enforcing our patent claims, or defending ourselves against possible claims of infringement by us of third party patent or other technology rights; the costs of commercialization activities and arrangements, if any, undertaken by us; and, if and when approved, the demand for our products, which demand will depend in turn on circumstances and uncertainties that cannot be fully known, understood or quantified unless and until the time of approval, for example, the range of indications for which any product is granted approval.
If our existing funds are not sufficient to continue operations, we would be required to seek additional funding and/or take other measures. If additional financing is needed, there can be no assurance that additional financing will be available on acceptable terms when needed, if at all. We have no material commitments for capital expenditures as of September 30, 2005.
The following table presents our contractual obligations and commercial commitments as of September 30, 2005:
| Payments due by period | ||||||||||||||||||||
| (All amounts in thousands) | ||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | ||||||||||||||||
| Pre-clinical and clinical development commitments (1) | $ | 3,972 | $ | 3,922 | $ | 46 | $ | 4 | $ | — | ||||||||||
| Operating leases | 2,659 | 578 | 1,190 | 837 | 54 | |||||||||||||||
| Total contractual cash obligations | $ | 6,631 | $ | 4,500 | $ | 1,236 | $ | 841 | $ | 54 | ||||||||||
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(1) Payments under the pre-clinical and clinical development contracts are based on the completion of activities as specified in the contract. The amounts in the table above assume the successful completion, by third-party contractors, of all of the activities contemplated in the agreements with such parties. Upon termination of such contracts, we are normally only liable for costs incurred to date.
Our primary drug development programs are based on a series of natural products called Combretastatins. Arizona State University (ASU) has granted us an exclusive, worldwide, royalty-bearing license with respect to the commercial rights to particular Combretastatins. The terms of our agreement with ASU provide for the payment of amounts in connection with certain patent rights upon the achievement of certain milestones and events as described in the agreement. In the nine months ended September 30, 2005 we recognized a $300,000 charge in accordance with the terms of the agreement. The agreement provides for additional payments in future periods based upon the achievement of certain milestones and events as described in the agreement. As of September 30, 2005, the achievement of any future milestones was indeterminable. Total payments in connection with these patent rights could total $900,000, including the $300,000 described above, should we achieve all of the milestones defined in the agreement.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on 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 assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to intangible assets. We base our estimates on historical experience and on various other factors that are believed to be appropriate under the circumstances, the results of which form the basis for making the judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
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While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004 and in our financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q, we believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial results.
Available-for-Sale Securities
We designate our marketable securities as available-for-sale securities. Available-for-sale securities are carried at fair value with the unrealized gains and losses, net of tax, if any, reported as accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. Interest and dividends on securities classified as available-for-sale are included in investment income.
Accrued Research and Development
We charge all research and development expenses, both internal and external costs, to operations as incurred. External costs consist of fees paid to consultants and other outside providers under service contracts. Costs incurred under fixed fee contracts are accrued ratably over the contract period absent any knowledge that the services will be performed other than ratably. Costs incurred under contracts to perform clinical trials are accrued on a patients-treated basis consistent with the typical terms of reimbursement. Upon termination of such contracts, we are normally only liable for costs incurred to date. As a result, accrued research and development expenses represent our estimated contractual liability to outside service providers at any of the relevant times.
Impairment of Long-lived Assets
On August 2, 1999, we entered into an exclusive license for the commercial development, use and sale of products or services covered by certain patent rights owned by Arizona State University. The present value of the amount payable under the license agreement has been capitalized based on a discounted cash flow model and is being amortized over the term of the agreement (approximately 15.5 years). We review this asset for impairment whenever there are indications of impairment based on an undiscounted net cash flow approach, in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS 144”). If the undiscounted cash flows of an intangible asset are less than the carrying value of an intangible asset, the intangible asset is written down to the discounted cash flow value.
Stock-Based Compensation
We account for stock-based compensation to employees in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations rather than the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), which requires the use of option valuation models that were not developed for use in valuing employee stock options. The Company also has issued options to non-employees for services provided to the Company. Such options have been accounted for at fair value in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18,Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling Goods or Services. Such compensation expense is recognized based on the vested portion of the compensation cost at the respective balance sheet dates. Pro forma information regarding net loss and net loss per share has been determined as if the Company had accounted for its employee stock options and stock appreciation rights under the fair value method of SFAS 123. The fair value for these options and stock appreciation rights was estimated at the date of grant using the Black-Scholes option-pricing model.
Tax Matters
As of December 31, 2004, the Company had net operating loss carry forwards of approximately $109,000,000 for U.S. and foreign income tax purposes, of which approximately $68,700,000 expires for U.S. purposes through 2024. Due to the degree of uncertainty related to the ultimate use of these loss carry forwards, the Company has fully reserved this tax benefit. Additionally, the future utilization of the U.S. net operating loss carry forwards is subject to limitations under the change in stock ownership rules of the Internal Revenue Service.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At September 30, 2005, the Company did not hold any derivative financial instruments, commodity-based instruments or other long-term debt obligations. The Company has adopted an Investment Policy and maintains its investment portfolio in accordance with the Investment Policy. The primary objectives of the Investment Policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields while preserving principal. Although the Company’s investments are subject to credit risk, OXiGENE follows procedures to limit the amount of credit exposure in any single issue, issuer or type of investment. The Company’s investments are also subject to interest rate risk and will decrease in value if market interest rates increase. However, due to the conservative nature of the Company’s investments and their relatively short duration, OXiGENE believes interest rate risk is mitigated. The Company’s cash and cash equivalents are maintained in U.S. dollar accounts and amounts payable for research and development to research organizations are contracted primarily in U.S. dollars. Accordingly, the Company’s exposure to foreign currency risk is limited because its transactions are primarily based in U.S. dollars.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
The Securities and Exchange Commission requires that as of the end of the period covered by this report on Form 10-Q, the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) evaluate the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, or the Exchange Act, and report on the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we record, process, summarize and report the information we must disclose in reports that we file or submit under the Exchange Act, within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control.
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There were no changes in the Company’s internal controls over financial reporting, identified in connection with the evaluation of such controls that occurred during the last fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Important Considerations.
The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On July 7, 2005, the Company held its Annual Meeting of Stockholders (the “Meeting”). On May 13, 2005, the record date for the meeting, there were 20,053,354 shares of outstanding common stock of the Company that could be voted at the Meeting. A total of 18,420,162 shares were present, in person or by proxy, and voted at the Meeting. At the Meeting, all nominees for director, Joel-Tomas Citron, Frederick W. Driscoll, Arthur B. Laffer, William N. Shiebler, Per-Olof Söderberg and J. Richard Zecher were elected by plurality as follows:
| FOR | Withhold Authority | |||||||
| Name of Director | Number of Shares | Number of Shares | ||||||
| Joel-Tomas Citron | 17,067,042 | 1,353,120 | ||||||
| Frederick W. Driscoll | 17,137,487 | 1,282,675 | ||||||
| Arthur B. Laffer | 17,082,299 | 1,337,863 | ||||||
| William N. Shiebler | 17,083,457 | 1,336,705 | ||||||
| Per-Olof Söderberg | 17,153,566 | 1,266,596 | ||||||
| J. Richard Zecher | 17,155,266 | 1,264,896 | ||||||
At the Meeting, the Company’s stockholders also approved an amendment to our Restated Certificate of Incorporation to increase from 60,000,000 to 100,000,000 the number of authorized shares of our common stock, with 17,676,163 votes cast in favor, 700,173 against and 43,826 abstentions. In addition, the Company’s stockholders approved the OXiGENE, Inc. 2005 Stock Plan, with 3,560,945 votes cast in favor, 959,784 against and 180,549 abstentions.
Item 5. Other Information
None.
Item 6. Exhibits
| 31.1 | Certification of Principal Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Principal Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| OXiGENE, INC. (Registrant) | ||||||
| Date: October 28, 2005 | By: | /s/Frederick W. Driscoll | ||||
| Frederick W. Driscoll | ||||||
| President and Chief Executive Officer | ||||||
| Date: October 28, 2005 | By: | /s/James B. Murphy | ||||
| James B. Murphy | ||||||
| Vice President and Chief Financial Officer and Chief Accounting Officer | ||||||
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EXHIBIT INDEX
| Exhibit | ||
| Number | Description | |
| 31.1 | Certification of Principal Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Principal Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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