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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 June 30, 2007
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 | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
230 THIRD AVENUE
WALTHAM, MA 02451
(Address of principal executive offices, including zip code)
(781) 547-5900
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
WALTHAM, MA 02451
(Address of principal executive offices, including zip code)
(781) 547-5900
(Registrant’s telephone number, including area code)
Not applicable
(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. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of July 15, 2007, there were 28,504,997 shares of the Registrant’s Common Stock issued and outstanding.
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OXiGENE, INC.
Cautionary Factors that May Affect Future Results
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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| EX-31.1 Section 302 Certification of CEO | ||||||||
| EX-31.2 Section 302 Certification of CFO | ||||||||
| EX-32.1 Section 906 Certification of CEO and 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)
(Unaudited)
| June 30, 2007 | December 31, 2006 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 9,373 | $ | 15,687 | ||||
| Available-for-sale securities | 27,095 | 29,661 | ||||||
| Prepaid expenses | 716 | 270 | ||||||
| Other assets | 377 | 371 | ||||||
| Total current assets | 37,561 | 45,989 | ||||||
| Furniture and fixtures, equipment and leasehold improvements | 1,306 | 1,248 | ||||||
| Accumulated depreciation | (1,062 | ) | (1,007 | ) | ||||
| 244 | 241 | |||||||
| Available-for-sale securities — long term | 1,574 | 491 | ||||||
| License agreement, net of accumulated amortization of $772 and $724 at June 30, 2007 and December 31, 2006, respectively | 727 | 777 | ||||||
| Deposits | 549 | 144 | ||||||
| Total assets | $ | 40,655 | $ | 47,642 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,109 | $ | 683 | ||||
| Accrued research and development | 2,939 | 2,603 | ||||||
| Accrued other | 1,399 | 936 | ||||||
| Total current liabilities | 5,447 | 4,222 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $.01 par value, 100,000 shares authorized; 28,505 shares at June 30, 2007 and 28,175 shares at December 31, 2006, issued and outstanding | 285 | 282 | ||||||
| Additional paid-in capital | 161,667 | 160,569 | ||||||
| Accumulated deficit | (126,730 | ) | (117,412 | ) | ||||
| Accumulated other comprehensive loss | (14 | ) | (19 | ) | ||||
| Total stockholders’ equity | 35,208 | 43,420 | ||||||
| Total liabilities and stockholders’ equity | $ | 40,655 | $ | 47,642 | ||||
See accompanying notes.
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OXiGENE, Inc.
Condensed Statements of Operations
(All amounts in thousands, except per share data)
(Unaudited)
(Unaudited)
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| License revenue | $ | 7 | $ | — | $ | 7 | $ | — | ||||||||
Costs and expenses: | ||||||||||||||||
| Research and development (1) | 3,502 | 3,275 | 5,891 | 5,596 | ||||||||||||
| General and administrative (1) | 2,380 | 2,337 | 4,504 | 3,958 | ||||||||||||
| Total costs and expenses | 5,882 | 5,612 | 10,395 | 9,554 | ||||||||||||
| Operating loss | (5,875 | ) | (5,612 | ) | (10,388 | ) | (9,554 | ) | ||||||||
| Investment income | 523 | 639 | 1,094 | 1,250 | ||||||||||||
| Other expense, net | (17 | ) | (22 | ) | (24 | ) | (28 | ) | ||||||||
Net loss | $ | (5,369 | ) | $ | (4,995 | ) | $ | (9,318 | ) | $ | (8,332 | ) | ||||
| Basic and diluted net loss per common share | $ | (0.19 | ) | $ | (0.18 | ) | $ | (0.33 | ) | $ | (0.30 | ) | ||||
| Weighted average number of common shares outstanding | 27,875 | 27,519 | 27,875 | 27,518 | ||||||||||||
| (1) Includes share-based compensation expense as follows: | ||||||||||||||||
| Research and development | $ | 77 | $ | 117 | $ | 152 | $ | 249 | ||||||||
| General and administrative | 482 | 431 | 950 | 780 | ||||||||||||
See accompanying notes.
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OXiGENE, Inc.
Condensed Statements of Cash Flows
(All amounts in thousands)
(Unaudited)
(Unaudited)
| Six months ended | ||||||||
| June 30, | ||||||||
| 2007 | 2006 | |||||||
Operating activities: | ||||||||
| Net loss | $ | (9,318 | ) | $ | (8,332 | ) | ||
| Adjustment to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 55 | 36 | ||||||
| Stock-based compensation | 1,102 | 1,029 | ||||||
| Amortization of licensing agreement | 50 | 48 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other current assets | (452 | ) | (128 | ) | ||||
| Accounts payable and accrued expenses | 1,225 | 309 | ||||||
| Net cash used in operating activities | (7,338 | ) | (7,038 | ) | ||||
Investing activities: | ||||||||
| Purchase of available-for-sale securities | (18,566 | ) | (25,692 | ) | ||||
| Proceeds from sale of available-for-sale securities | 20,054 | 26,228 | ||||||
| Purchase of furniture, fixtures and equipment | (59 | ) | (140 | ) | ||||
| Deposits | (405 | ) | 5 | |||||
| Net cash provided by investing activities | 1,024 | 401 | ||||||
Financing activities: | ||||||||
| Proceeds from the issuance of common stock | — | 2 | ||||||
| Net cash provided by financing activities | — | 2 | ||||||
| Net decrease in cash and cash equivalents | (6,314 | ) | (6,635 | ) | ||||
| Cash and cash equivalents at beginning of period | 15,687 | 32,344 | ||||||
| Cash and cash equivalents at end of period | $ | 9,373 | $ | 25,709 | ||||
See accompanying notes.
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OXiGENE, Inc.
Notes to Condensed Financial Statements
June 30, 2007
(Unaudited)
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles 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 six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.
The balance sheet at December 31, 2006 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. 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, 2006, which can be found at www.oxigene.com.
Available-for-Sale Securities
In accordance with the Company’s investment policy, surplus cash is invested primarily in investment-grade corporate bonds, commercial paper, U.S. government agency and debt securities, and certificates of deposit. In accordance with Statement of Financial Accounting Standards No. 115 (“SFAS 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. The Company reviews the status of the unrealized gains and losses of its available-for-sale marketable securities on a regular basis. 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. Securities in an unrealized loss position deemed not to be other-than-temporarily impaired, due to the Company’s positive intent and ability to hold the securities until anticipated recovery, with maturation greater than twelve months, are classified as long-term assets.
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.
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The following is a summary of the fair values of available-for-sale securities: (amounts in thousands)
| June 30, 2007 | December 31, 2006 | |||||||
Current | ||||||||
Government bonds and notes | $ | 998 | $ | 1,982 | ||||
Corporate bonds | 10,161 | 12,524 | ||||||
Subtotal bonds | 11,159 | 14,506 | ||||||
Asset-backed securities | 2,651 | — | ||||||
Commercial paper | 8,786 | 11,654 | ||||||
Certificates of deposit | 4,499 | 3,501 | ||||||
Subtotal current available-for-sale securities | $ | 27,095 | $ | 29,661 | ||||
Long Term | ||||||||
Asset-backed securities | 982 | — | ||||||
Corporate bonds | 592 | 491 | ||||||
Subtotal long term available-for-sale securities | $ | 1,574 | $ | 491 | ||||
Total available-for-sale securities | $ | 28,669 | $ | 30,152 | ||||
As of June 30, 2007, three of the Company’s available-for-sale securities account for the majority of the unrealized loss position totaling approximately $8,000, primarily attributable to increases in short-term to medium-term interest rates. The Company has determined that these losses are temporary, after taking into consideration the Company’s current cash and cash equivalent balances and its expected future cash requirements and its ability and intent to hold these securities until anticipated recovery. At December 31, 2006, the Company determined that one floating rate note and two of its corporate bonds were judged to be other-than-temporarily impaired by approximately $9,000 and reduced their values to their fair values as of that date. As of December 31, 2006, 13 of the Company’s remaining available-for-sale securities were in an unrealized loss position, primarily attributable to increases in short-term to medium-term interest rates over the course of 2006. The Company determined that these unrealized losses were temporary, after taking into consideration its current cash and cash equivalent balances and its expected future cash requirements and its ability and intent to hold these securities until anticipated recovery.
Accrued Research and Development
The Company charges all research and development expenses, both internal and external costs, to operations as incurred. The Company’s research and development costs represent expenses incurred from the engagement of outside professional service organizations, product manufacturers and consultants associated with the development of the Company’s potential product candidates. The Company recognizes expense associated with these arrangements based on the completion of activities as specified in the applicable 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 with clinical trial sites and principal investigators are generally accrued on a patient-treated basis consistent with the terms outlined in the contract. In determining costs incurred on some of these programs, the Company takes into consideration a number of factors, including estimates and input provided by internal program managers. Upon termination of such contracts, the Company is normally only liable for costs incurred and committed to date. As a result, accrued research and development expenses represent the Company’s estimated contractual liability to outside service providers at any relevant time.
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 2,825,000 and 2,375,000 at June 30, 2007 and 2006, respectively, were excluded from the calculation of weighted average shares for diluted loss per share.
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Stock-based Compensation
The Company follows the provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R), which requires the expense recognition of the estimated fair value of all share-based payments issued to employees. For the three and six months ended June 30, 2007, the Company recorded approximately $559,000 and $1,102,000 of expense associated with share-based payments, respectively. For the three and six months ended June 30, 2006, the Company recorded approximately $548,000 and $1,029,000 expense associated with share-based payments, respectively.
The stock options were valued using the Black-Scholes method of valuation, and the resulting fair value is recorded as compensation cost on a straight-line basis over the option vesting period. During the three and six months ended June 30, 2007 options to purchase 276,000 and 437,000 shares, respectively, of the Company’s common stock were granted. The weighted average fair values of the options granted based on the assumptions outlined in the table below were $2.12 and $2.45 per share, respectively, for the three and six months ended June 30, 2007. During the six months ended June 30, 2006, options to purchase 195,000 shares of the Company’s common stock were granted. The weighted average fair value of the options granted was $2.73 per share for the six months ended June 30, 2006. During the three months ended March 31, 2006, no options were granted.
The fair values for the employee stock options were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the three and six months ended June 30, 2007:
| Six months ended | Three months ended | Six months ended | |||||||||||
| Weighted Average Assumptions | June 30, 2007 | June 30, 2007 | June 30, 2006 | ||||||||||
| Risk-free interest rate | 4.62 | % | 4.50 | % | 5.13 | % | |||||||
| Expected life | 5 years | 5 years | 5 years | ||||||||||
| Expected volatility | 89 | % | 88 | % | 95 | % | |||||||
| Dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | |||||||
Options, Warrants and Non-Vested Stock
The following is a summary of the Company’s stock option activity under its 1996 and 2005 Stock Plans for the six months ended June 30, 2007:
| Weighted | ||||||||||||||||
| Average | ||||||||||||||||
| Remaining | ||||||||||||||||
| Shares | Weighted- | Contractual | Aggregate Intrinsic | |||||||||||||
| (in | Average | Life | Value | |||||||||||||
| thousands) | Exercise Price | (years) | (in thousands) | |||||||||||||
| Options outstanding at December 31, 2006 | 1,632 | $ | 6.11 | |||||||||||||
| Granted | 437 | 4.50 | ||||||||||||||
| Exercised | — | — | ||||||||||||||
| Forfeited | (24 | ) | 5.48 | |||||||||||||
| Options outstanding at June 30, 2007 | 2,045 | $ | 5.78 | 7.38 | $ | 348 | ||||||||||
| Options exercisable at June 30, 2007 | 1,066 | $ | 6.77 | 5.92 | $ | 295 | ||||||||||
| Options vested or expected to vest at June 30, 2007 | 1,973 | $ | 5.82 | 7.32 | $ | 344 | ||||||||||
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All of the stock options listed above are non-qualified stock options except for 98,036 options granted in 2006 which have an exercise price per share of $4.08 and 106,605 options granted in 2007 with an exercise price per share of $4.69.
As of June 30, 2007, there was approximately $2,567,000 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over a weighted average period of 2.0 years. The total fair value of stock options that vested during the six months ended June 30, 2007 and 2006 was approximately $131,000 and $91,000, respectively.
Non-Vested Stock
The following table summarizes the activity for unvested stock during the six months ended June 30, 2007:
| Shares | Weighted-Average | |||||||
| (in thousands) | Fair Value | |||||||
| Unvested at December 31, 2006 | 300 | $ | 5.18 | |||||
| Granted | 330 | 4.63 | ||||||
| Vested | — | — | ||||||
| Forfeited | — | — | ||||||
| Unvested at June 30, 2007 | 630 | $ | 4.89 | |||||
The Company recorded expense of approximately $270,000 and $545,000 related to outstanding restricted stock awards during the three and six months ended June 30, 2007, respectively. As of June 30, 2007, there was approximately $2,330,000 of unrecognized compensation expense related to restricted stock awards that will be recognized as expense over a weighted average period of 2.4 years. During the six months ended June 30, 2007, no shares of restricted stock vested.
In January 2007, the Company granted 250,000 shares of restricted common stock to the Chief Executive Officer pursuant to his employment agreement. In June 2007, the Company granted an aggregate of 80,000 shares of restricted common stock to two new members of the Board of Directors. The restricted stock awards were valued based on the closing price of the Company’s common stock on their respective grant dates. Compensation expense will be recognized on a straight –line basis over the vesting period of the award.
Warrants
In June 2003, the Company issued five-year warrants in connection with a private placement with three large institutional investors. As of June 30, 2007, there were 150,000 of such warrants outstanding and exercisable, which expire in June 2008. The weighted average exercise price per share of the outstanding and exercisable warrants was $12.00 at June 30, 2007.
Comprehensive Income (Loss)
Statement of Financial Accounting Standards No. 130,“Reporting Comprehensive Income” (FAS 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 $14,000 at June 30, 2007 and $19,000 at December 31, 2006.
A reconciliation of comprehensive loss is as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| (In thousands) | ||||||||||||||||
Net loss as reported | $ | (5,369 | ) | $ | (4,995 | ) | $ | (9,318 | ) | $ | (8,332 | ) | ||||
| Unrealized gains (losses) | (6 | ) | (3 | ) | (5 | ) | (14 | ) | ||||||||
Comprehensive loss | $ | (5,375 | ) | $ | (4,998 | ) | $ | (9,323 | ) | $ | (8,346 | ) | ||||
2. License agreements
In August 1999, the Company entered into an exclusive license agreement for the commercial development, use and sale of products or services covered by certain patent rights owned by Arizona State University. From the inception of the agreement through June 30, 2007, the Company has paid a total of $2,500,000 in connection with this license. The Company capitalized the net present value of the total amount paid under the initial terms of the license, or $1,500,000, and is amortizing this amount over the patent life or 15.5 years. In June 2002, this agreement was amended and provides for additional payments in connection with the license arrangement upon the initiation of certain clinical trials or the completion of certain regulatory approvals, which payments could be accelerated upon the achievement of certain financial milestones, as defined in the agreement. The license agreement also provides for additional payments upon the Company’s election to develop certain additional compounds, as defined in the agreement. As of June 30, 2007, additional accelerated milestones that have previously been expensed and paid due to achievement of certain financial milestones, totaled $700,000, and future milestones under this agreement could total up to an additional $200,000. These accelerated payments were expensed to research and development as triggered by the achievements defined in the agreement. The Company is also required to pay royalties on future net sales of products associated with these patent rights.
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In March 2007, the Company entered into an exclusive license agreement for the development and commercialization of products covered by certain patent rights owned by Intracel Holdings, Inc., a privately held corporation. The Company paid Intracel $150,000 in March 2007 as an up-front license fee that provides full control over the development and commercialization of licensed compounds/molecular products. The Company expensed the up-front payment to research and development expense. The agreement provides for additional payments by the Company to Intracel based on the achievement of certain clinical milestones and sales royalties based on sales milestones as defined in the agreement. The Company has the right to sublicense all or portions of its licensed patent rights under this agreement.
3. Restructuring
In August 2006, the Company implemented a restructuring plan in which it terminated 10 full-time employees, or approximately 30% of its work force. The purpose of the restructuring was primarily to streamline the clinical development operations in order to improve the effectiveness of efforts to develop the Company’s potential product candidates.
The following table sets forth the components of the Company’s restructuring as of June 30, 2007:
| Amounts | ||||||||||||||||||||
| Paid | Amounts | |||||||||||||||||||
| Through | Accrued as of | |||||||||||||||||||
| Original | Adjusted | June 30, | June 30, | |||||||||||||||||
| Charges | Adjustment | Charges | 2007 | 2007 | ||||||||||||||||
| General and administrative | ||||||||||||||||||||
| Employee severance and related costs | $ | 7 | $ | — | $ | 7 | $ | 7 | $ | 0 | ||||||||||
| Research and development | ||||||||||||||||||||
| Employee severance and related costs | $ | 468 | $ | 7 | $ | 475 | $ | 360 | $ | 114 | ||||||||||
| Total restructuring | $ | 475 | $ | 7 | $ | 482 | $ | 367 | $ | 114 | ||||||||||
4. Recent Accounting Pronouncements
In September, 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) SFAS No. 157, entitled “Fair Value Measurements” (SFAS 157).This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 157 to have a material effect on its financial position or results of operations.
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 June 30, 2007 and June 30, 2006 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, 2006, and also with the unaudited financial statements set forth in Part 1, Item 1 of this Quaterly Report.
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 whose primary focus is the development and commercialization of novel small-molecule therapeutics, which we refer to as “vascular disrupting agents” or VDAs, for the treatment of cancer and certain eye diseases.
Our Vascular Disrupting Agent Product Candidates
Currently, we have two VDA product candidates, ZYBRESTAT™ and OXi4503, in clinical development.
ZYBRESTAT™ (combretastatin-A4 phosphate/ CA4P) for anaplastic thyroid cancer and other oncology indications
Our lead VDA product candidate, ZYBRESTAT™ , (which we previously referred to as combrestastatin-A4 phosphate / CA4P), is being evaluated as a potential treatment for anaplastic thyroid cancer in a 180-patient, multi-center, randomized, controlled, Phase II/III pivotal registration study, which we initiated in July 2007 under a Special Protocol Assessment agreed with the U.S. Food and Drug
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Administration (FDA). Anaplastic thyroid cancer is believed to be one of the most aggressive and lethal cancers known to man, and no drugs are currently approved for this disease. ZYBRESTAT for anaplastic thyroid cancer has been designated as an Orphan Drug by the FDA and the European Commission. This designation confers statutory market exclusivity benefits and tax credits. In addition, the FDA has granted us “Fast Track” status for ZYBRESTAT in anaplastic thyroid cancer. In addition, ZYBRESTAT is being evaluated in multiple ongoing clinical studies in various oncology indications, including studies in which the safety and efficacy of ZYBRESTAT is being evaluated in combination treatment regimens with anti-angiongenic drugs, which we believe are potentially complementary to VDA therapy.
Development of a topical formulation of ZYBRESTAT™ (combretastatin-A4 phosphate/ CA4P) for ophthalmology indications
Based on positive Phase II clinical study results observed with ZYBRESTAT in a form of macular degeneration known as myopic macular degeneration, we believe that the drug has potential utility for the treatment of age-related macular degeneration, the leading cause of blindness in adults over 50 years of age. We are working to develop a patient-friendly and convenient eye-drop or other topical formulation of ZYBRESTAT that can be utilized for age-related macular degeneration and potentially other ophthalmology indications. Initial results from preclinical formulation experiments have been positive, and we currently plan to file an IND for the topical formulation of ZYBRESTAT as a potential treatment for age-related macular degeneration in the first half of 2008.
OXi4503, dual-mechanism VDA for oncology indications
OXi4503, our second VDA product candidate being developed for oncology indications, is currently being evaluated in a Phase I dose-escalation study in patients with advanced solid tumors. We refer to OXi4503 as an ortho-quinone prodrug, and we believe the drug works via a unique dual mechanism of action. In addition to acting as a VDA to shut down blood-flow to tumors, we believe the drug also has direct cytotoxic effects on tumors as a result of it being metabolized to an ortho-quinone chemical structure. In preclinical studies, OXi4503 has demonstrated potent effects as a single-agent in a variety cancer models.
How our VDA product candidates work
Our VDA candidates selectively disrupt abnormal blood vessels that solid tumors and pathological lesions, in the case of ophthalmological diseases such as age-related macular degeneration, depend uon for supply of oxygen and nutrients as well as removal of metabolic waste products. Starved of critical nutrients and oxygen, the tumor or ophthalmological lesion cannot readily progress and may die, shrink, stabilize and/or become more susceptible to treatment with other therapeutics such as traditional chemotherapeutic drugs in the case of cancer. This general therapeutic strategy of starving tumors or opthalmological lesions of blood supply has been validated with the recent approval and successful commercialization of several anti-angiogenic drugs. Currently-approved anti-angiogenic drugs are believed to prevent growth and development ofnewblood vessels in tumors and opthalmological lesions, yet, unlike our VDA product candidates, have minimal effects onexistingblood vessels in tumors and ophthalmological lesions. Because our VDA product candidates and currently-approved anti-angiogenic drugs work in different ways, we believe they are likely to be complementary when used in combination to treat patients with cancer and eye diseases. In preclinical models of cancer and eye disease, we and our collaborators have demonstrated that combination treatment with our VDA product candidates and anti-angiogenic drugs have additive effects as compared with single-agent therapy.
Currently, we do not have any products available for sale. The only source of potential revenue at this time is from a license to a third party of our formerly owned Nicoplex and Thiol test technology. Revenue in connection with this license arrangement is earned based on sales of products or services utilizing this technology. Revenue from this license agreement is recognized when payments are received due to the uncertainty of the timing of sales of products or services. Future revenues, if any, from this license agreement are expected to be minimal. We do not expect to generate material revenue or fee income in the foreseeable future unless we enter into a major licensing arrangement.
Our primary drug development programs are based on a series of natural products called Combretastatins, which were originally isolated from the African bush willow tree (Combretum caffrum) by researchers at Arizona State University, or ASU. ASU has granted us an exclusive, worldwide, royalty-bearing license with respect to the commercial rights to particular Combretastatins. Through in vitro and in vivo testing, it has been established that certain Combretastatins selectively disrupt the function of newly formed abnormal blood vessels associated with solid cancers and have a similar effect on abnormal blood vessels associated with certain diseases of the eye. We have developed two distinct technologies that are based on Combretastatins. We are currently developing the first of these technologies, our VDAs, 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. We are also currently exploring opportunities to in-license additional compounds. Our focus is on those compounds that may complement our potential products under development or broaden solutions in our current therapeutic areas. In addition, we continue to explore the out-licensing of some rights to certain of our current compounds.
We are committed to a disciplined financial strategy and as such 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 members typically work 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.
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Our failure to successfully complete human clinical trials, develop and market products over the next several years, or to 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 $126,730,000 for the period from our inception through June 30, 2007. 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 financings and the exercise of warrants and stock options. We currently have no material amount of licensing or other fee income. As of June 30, 2007, we had no long-term debt or loans payable.
Results of Operations
Revenue
Three Months Ended June 30, 2007 and 2006
We reported $7,000 and $0 in license revenue for the three months ended June 30, 2007 and 2006. 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.
Six Months Ended June 30, 2007 and 2006
We reported $7,000 and $0 in license revenue for the three months ended June 30, 2007 and 2006. 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.
Costs and expenses
Six Months Ended June 30, 2007 and 2006
Costs and Expenses
The following table summarizes our operating expenses for the periods indicated, in thousands and as a percentage of total expenses:
| Six Months ended June 30, | ||||||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||||||
| % of Total | % of Total | |||||||||||||||||||||||
| Operating | Operating | Increase (Decrease) | ||||||||||||||||||||||
| Amount | Expenses | Amount | Expenses | $ | % | |||||||||||||||||||
Research and development | $ | 5,891 | 57 | % | $ | 5,596 | 59 | % | $ | 295 | 5 | % | ||||||||||||
General and administrative | 4,504 | 43 | % | 3,958 | 41 | % | 546 | 12 | % | |||||||||||||||
Total operating expenses | $ | 10,395 | 100 | % | $ | 9,554 | 100 | % | $ | 841 | 9 | % | ||||||||||||
Research and development expenses
The table below summarizes the most significant components of our research and development expenses for the periods indicated, in thousands and as a percentage of total research and development expenses. The table also provides the changes in these components and their percentages:
| Six Months ended June 30, | ||||||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||||||
| % of Total | % of Total | |||||||||||||||||||||||
| Operating | Operating | Increase (Decrease) | ||||||||||||||||||||||
| Amount | Expenses | Amount | Expenses | $ | % | |||||||||||||||||||
| Employee compensation and related | $ | 1,681 | 28 | % | $ | 1,958 | 35 | % | $ | (277 | ) | -16 | % | |||||||||||
| External services | 3,877 | 66 | % | 3,275 | 59 | % | 602 | 16 | % | |||||||||||||||
| Stock-based compensation | 152 | 3 | % | 249 | 4 | % | (97 | ) | -64 | % | ||||||||||||||
| Other | 181 | 3 | % | 114 | 2 | % | 67 | 37 | % | |||||||||||||||
Total research and development | $ | 5,891 | 100 | % | $ | 5,596 | 100 | % | $ | 295 | 5 | % | ||||||||||||
The most significant increase in research and development expenses of $602,000 is due to an increase in early stage development activities with outside contractors in support of our ongoing program initiatives including the initiation of the ZYBRESTAT anaplastic
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Thyroid Cancer pivotal registration study. The increase in external service costs was partially offset by decreases in both employee compensation and related expenses and stock-based compensation expense, both due to a reduction in the average number of employees dedicated to research and development programs of approximately 35% in the first half of 2007 as compared to the first half of 2006. The reduction in average number of employees was mainly due to the restructuring plan implemented in August, 2006, whereby 9 full time research and development employees were terminated. We anticipate that research and development costs, particularly external services costs, will increase over current levels as we make progress in our ongoing clinical trial and product development programs.
General and administrative expenses
The table below summarizes the most significant components of our general and administrative expenses for the periods indicated, in thousands and as a percentage of total general and administrative expenses and provides the changes in these components and their percentages:
| Six Months ended June 30, | ||||||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||||||
| % of Total | % of Total | |||||||||||||||||||||||
| Operating | Operating | Increase (Decrease) | ||||||||||||||||||||||
| Amount | Expenses | Amount | Expenses | $ | % | |||||||||||||||||||
| Employee compensation and related | $ | 1,519 | 34 | % | 1,302 | 33 | % | $ | 217 | 14 | % | |||||||||||||
| Consulting and professional services | 1,127 | 25 | % | 1,105 | 28 | % | $ | 22 | 2 | % | ||||||||||||||
| Facilities related | 313 | 7 | % | 285 | 7 | % | $ | 28 | 9 | % | ||||||||||||||
| Stock-based compensation | 950 | 21 | % | 780 | 20 | % | $ | 170 | 18 | % | ||||||||||||||
| Other | 595 | 13 | % | 486 | 12 | % | $ | 109 | 18 | % | ||||||||||||||
Total general and administrative | ||||||||||||||||||||||||
| $ | 4,504 | 100 | % | $ | 3,958 | 100 | % | $ | 546 | 14 | % | |||||||||||||
A majority of the increase in general and administrative expenses in the first half of 2007 over the first half of 2006 is due to increases in both employee compensation and related expenses, as well as stock-based compensation expenses and is related to an increase in average salaries due to the hiring of our Chief Business Development Officer, John Kollins, in February 2007 and a number of stock-based awards being expensed. We anticipate increased general and administrative costs as we continue to prepare for and manage activities for both current and anticipated development programs.
Three Months Ended June 30, 2007 and 2006
Costs and Expenses
The following table summarizes our operating expenses for the periods indicated, in thousands and as a percentage of total expenses:
| Three Months ended June 30, | ||||||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||||||
| % of Total | % of Total | |||||||||||||||||||||||
| Operating | Operating | Increase (Decrease) | ||||||||||||||||||||||
| Amount | Expenses | Amount | Expenses | $ | % | |||||||||||||||||||
Research and development | $ | 3,502 | 60 | % | $ | 3,275 | 58 | % | $ | 227 | 6 | % | ||||||||||||
General and administrative | 2,380 | 40 | % | 2,337 | 42 | % | $ | 43 | 2 | % | ||||||||||||||
Total operating expenses | $ | 5,882 | 100 | % | $ | 5,612 | 100 | % | $ | 270 | 5 | % | ||||||||||||
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Research and development expenses
The table below summarizes the most significant components of our research and development expenses for the periods indicated, in thousands and as a percentage of total research and development expenses. The table also provides the changes in these components and their percentages:
| Three Months ended June 30, | ||||||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||||||
| % of Total | % of Total | |||||||||||||||||||||||
| Operating | Operating | Increase (Decrease) | ||||||||||||||||||||||
| Amount | Expenses | Amount | Expenses | $ | % | |||||||||||||||||||
| Employee compensation and related | $ | 963 | 28 | % | $ | 1,159 | 35 | % | $ | (196 | ) | -20 | % | |||||||||||
| External services | 2,375 | 68 | % | 1,923 | 59 | % | 452 | 19 | % | |||||||||||||||
| Stock-based compensation | 77 | 2 | % | 117 | 4 | % | (39 | ) | -51 | % | ||||||||||||||
| Other | 87 | 2 | % | 76 | 2 | % | 11 | 13 | % | |||||||||||||||
Total research and development | $ | 3,502 | 100 | % | $ | 3,275 | 100 | % | $ | 228 | 7 | % | ||||||||||||
The most significant increase in research and development expenses of $452,000 is due to an increase in early-stage development activities with outside contractors in support of our ongoing program initiatives. The increase in external service costs was partially offset by decreases in both employee compensation and related expenses and stock-based compensation expense due to a reduction in the average number of employees dedicated to research and development programs of approximately 50% in the second quarter of 2007 as compared to the second quarter of 2006. The reduction in average number of employees was mainly due to the restructuring plan implemented in August, 2006, whereby 9 full time research and development employees were terminated. We anticipate that research and development costs in total and specifically external services costs will increase over current levels as we make progress in our ongoing clinical trial and product development programs.
General and administrative expenses
The table below summarizes the most significant components of our general and administrative expenses for the periods indicated, in thousands and as a percentage of total general and administrative expenses and provides the changes in these components and their percentages:
| Three Months ended June 30, | ||||||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||||||
| % of Total | % of Total | |||||||||||||||||||||||
| Operating | Operating | Increase (Decrease) | ||||||||||||||||||||||
| Amount | Expenses | Amount | Expenses | $ | % | |||||||||||||||||||
| Employee compensation and related | $ | 833 | 35 | % | $ | 875 | 37 | % | (42 | ) | -5 | % | ||||||||||||
| Consulting and professional services | $ | 622 | 26 | % | 604 | 26 | % | 18 | 3 | % | ||||||||||||||
| Facilities related | $ | 142 | 6 | % | 161 | 7 | % | (19 | ) | -12 | % | |||||||||||||
| Stock-based compensation | $ | 482 | 20 | % | 431 | 19 | % | 51 | 12 | % | ||||||||||||||
| Other | $ | 301 | 13 | % | 266 | 11 | % | 35 | 13 | % | ||||||||||||||
Total general and administrative | $ | 2,380 | 100 | % | $ | 2,337 | 100 | % | 43 | 2 | % | |||||||||||||
A majority of the increase in general and administrative expenses in the second quarter of 2007 over the second quarter of 2006 is related to a number of stock-based awards being expensed. We anticipate increased general and administrative costs as we continue to prepare for and manage activities for both current and anticipated development programs.
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Other income and expenses
Investment income decreased to approximately $523,000 in the three-month period ended June 30, 2007 compared to $639,000 in the three-month period ended June 30, 2006. Investment income decreased to approximately $1,094,000 in the six-month period ended June 30, 2007 compared to approximately $1,250,000 in the six-month period ended June 30, 2006. These decreases are due primarily to a lower average balance of funds available for investment during the 2007 period offset by a higher average rate of return on our invested cash balances.
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 June 30, 2007, we had an accumulated deficit of approximately $126,730,000. 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 $38,042,000 at June 30, 2007, compared to approximately $45,839,000 at December 31, 2006.
The following table summarizes our cash flow activities for the period indicated, in thousands:
| Six Months Ended | ||||
| June 30, 2007 | ||||
Operating activities: | ||||
| Net loss | $ | (9,318 | ) | |
| Non-cash adjustments to net loss | 1,207 | |||
| Changes in operating assets and liabilities | 773 | |||
| Net cash used in operating activities | (7,338 | ) | ||
Investing activities: | ||||
| Net purchases of available-for-sale securities | 1,488 | |||
| Purchase of furniture, fixtures and equipment | (60 | ) | ||
| Deposits | (404 | ) | ||
| Net cash provided by investing activities | 1,024 | |||
| Decrease in cash and cash equivalents | (6,314 | ) | ||
| Cash and cash equivalents at beginning of period | 15,687 | |||
| Cash and cash equivalents at end of period | $ | 9,373 | ||
Approximately 90% or $1,102,000 of the non-cash adjustments to net loss in the first half of 2007 is due to compensation expense related to the issuance of options and restricted stock. The decrease in available for sale securities and the associated increase in cash and cash equivalents were primarily attributable to the short term clinical trial needs and the cash requirements to fund those needs.
We anticipate that our cash, cash equivalents and available-for-sale marketable securities, will be sufficient to satisfy the Company’s projected cash requirements for most of 2008. Our primary anticipated uses of funds during the 2007 fiscal year involve the pre-clinical and clinical development of our product candidates and potential in-licenses or other acquisitions of technology. Our cash requirements may vary materially from those now planned for or anticipated by management 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 VDAs and OQPs under development, including ZYBRESTAT™, 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 is dependent in turn on circumstances and uncertainties that cannot be fully
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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. The funding source would be either from raising additional capital by selling equity securities or entering into a collaboration that would provide material funding. If additional financing is needed, there can be no assurance that additional financing will be available on acceptable terms when needed, if at all.
The following table presents our contractual obligations and commercial commitments as of June 30, 2007:
Payments due by period
| (All amounts in thousands) | ||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | ||||||||||||||||
| Pre-clinical, product development and clinical development commitments | $ | 18,486 | $ | 11,393 | $ | 7,089 | $ | 4 | $ | — | ||||||||||
| Operating leases | 1,857 | 709 | 1,013 | 135 | — | |||||||||||||||
| Total contractual cash obligations | $ | 20,343 | $ | 12,102 | $ | 8,102 | $ | 139 | $ | — | ||||||||||
Payments under the pre-clinical, product development 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 activities contemplated in the agreements with such parties. In addition, not included in the operating leases above is sublease income, which is expected to total approximately $214,000 and $36,000 for the 12-month periods ending June 30, 2008 and 2009, respectively.
Our primary drug development programs are based on a series of natural products called Combretastatins. In August 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. This agreement was subsequently amended in June 2002. From the inception of the agreement through June 30, 2007, we have paid a total of $2,500,000 in connection with this license. The agreement provides for additional payments in connection with the license arrangement upon the initiation of certain clinical trials or the completion of certain regulatory approvals, which payments could be accelerated upon the achievement of certain financial milestones, as defined in the agreement. In the six months ended June 30, 2007, we made a payment of $100,000 pursuant to meeting a financial milestone under the agreement. The license agreement also provides for additional payments upon our election to develop certain additional compounds, as defined in the agreement. Future milestone payments under this agreement could total up to an additional $200,000. We are also required to pay royalties on future net sales of products associated with these patent rights.
In March 2007, we entered into an exclusive license agreement for the development and commercialization of products covered by certain patent rights owned by Intracel Holdings, Inc., a privately held corporation. We paid Intracel $150,000 in March 2007 as an up-front license fee that provides full control over the development and commercialization of licensed compounds and molecular products. We expensed the up-front payment to research and development expense. The agreement provides for additional payments to Intracel based on the achievement of certain clinical milestones and sales royalties based on sales milestones as defined in the agreement. We have the right to sublicense all or portions of our licensed patent rights under this 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.
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, 2006 and in our notes to the 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.
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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
Effective January 1, 2006, we adopted SFAS 123R, “Share-Based Payment,” which requires the expense recognition of the estimated fair value of all share based payments issued to employees. Prior to the adoption of SFAS 123R, the estimated fair value associated with such awards was not recorded as an expense, but rather was disclosed in a footnote to our financial statements. For the six -month period ended June 30, 2007, we recorded approximately $557,000 of expense, associated with share-based payments, which would not have been recorded prior to the adoption of SFAS 123R.
The valuation of employee stock options is an inherently subjective process, since market values are generally not available for long-term, non-transferable employee stock options. Accordingly, an option pricing model is utilized to derive an estimated fair value. In calculating the estimated fair value of our stock options, we used the Black-Scholes pricing model which requires the consideration of the following six variables for purposes of estimating fair value:
| • | the stock option exercise price, | ||
| • | the expected term of the option, | ||
| • | the grant date price of our common stock, which is issuable upon exercise of the option, | ||
| • | the expected volatility of our common stock, | ||
| • | the expected dividends on our common stock (we do not anticipate paying dividends in the foreseeable future), and | ||
| • | the risk free interest rate for the expected option term |
Stock Option Exercise Price & Grant Date Price of our common stock – The closing market price of our common stock on the date of grant.
Expected Term — The expected term of options represents the period of time for which the options are expected to be outstanding and is based on an analysis of historical behavior of participants over time and a review of other similar companies in the biotechnology field.
Expected Volatility — The expected volatility is a measure of the amount by which our stock price is expected to fluctuate during the term of the option granted. We determine the expected volatility based on the historical volatility of our common stock over a period commensurate with the option’s expected term.
Expected Dividends — Because we have never declared or paid any cash dividends on any of our common stock and do not expect to do so in the foreseeable future, we use an expected dividend yield of zero to calculate the grant date fair value of a stock option.
Risk-Free Interest Rate — The risk-free interest rate is the implied yield available on U.S. Treasury issues with a remaining life consistent with the option’s expected term on the date of grant.
Of the variables above, the selection of an expected term and expected stock price volatility are the most subjective. In the three-month period ended June 30, 2007, we granted options to purchase 276,000 shares of our common stock using these assumptions. The majority of the stock option expense recorded in the three-month period ended June 30, 2007 relates to continued vesting of stock options and
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restricted stock that were granted prior to January 1, 2006. In accordance with the transition provisions of SFAS 123R, the grant date estimates of fair value associated with prior awards, which were also calculated using the Black-Scholes option pricing model, have not been changed. The specific valuation assumptions that were utilized for purposes of deriving an estimate of fair value at the time that prior awards were issued are as disclosed in our prior Annual Reports on Form 10-K, as filed with the SEC.
Upon adoption of SFAS 123R, we were also required to estimate the level of award forfeitures expected to occur and record compensation expense only for those awards that are ultimately expected to vest. This requirement applies to all awards that are not yet vested, including awards granted prior to January 1, 2006. Accordingly, we performed a historical analysis of option awards that were forfeited prior to vesting, and ultimately recorded total stock option expense that reflected this estimated forfeiture rate. In our calculation, we segregated participants into two distinct groups, (1) directors and officers and (2) employees, and our estimated forfeiture rates were calculated at 0% and 50%, respectively. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.
Tax Matters
As of December 31, 2006, we had net operating loss carry-forwards of approximately $111,500,000 for U.S. income tax purposes, which expire through 2026. Due to the degree of uncertainty related to the ultimate use of these loss carry-forwards, we have fully reserved this future 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 June 30, 2007, we did not hold any derivative financial instruments, commodity-based instruments or other long-term debt obligations. We have adopted an Investment Policy and maintain our 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 our investments are subject to credit risk, we follow procedures to limit the amount of credit exposure in any single issue, issuer or type of investment. Our 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 our investments and their relatively short duration, we believe interest rate risk is mitigated. Our cash and cash equivalents are maintained in U.S. dollar accounts. Although we conduct a number of our trials and studies outside of the United States, we believe our exposure to foreign currency risk to be limited as the arrangements are in jurisdictions with relatively stable currencies.
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 Quarterly 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, as amended, 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.
There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such control that occurred during the last fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control 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 1A. Risk Factors
There have been no material changes to the risk factors as described in our Annual Report Form 10-K for the year ended December 31, 2006 filed with the SEC.
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 June 13, 2007, the Company held its Annual Meeting of Stockholders (the “Meeting”). On April 20, 2007, the record date for the Meeting, there were 28,504,997 shares of outstanding common stock of the Company that could be voted at the Meeting. A total of 26,254,339 shares were present, in person or by proxy and voted at the Meeting. At the Meeting, all nominees for director, Joel-Tomas Citron, David Chaplin, Ph.D, Richard Chin, M.D., Arthur Laffer, Ph.D., William N. Shiebler, Per-Olof Söderberg and J. Richard Zecher , Ph.D. were elected by plurality of the votes cast, as follows:
| Withheld | ||||||||
| FOR | Authority | |||||||
| Name of Director | Number of Shares | Number of Shares | ||||||
| Joel-Tomas Citron | 26,066,872 | 187,467 | ||||||
| David Chaplin, Ph.D. | 26,028,800 | 225,539 | ||||||
| Richard Chin, M.D. | 26,154,502 | 99,837 | ||||||
| Arthur Laffer, Ph.D. | 26,032,776 | 221,563 | ||||||
| William N. Shiebler | 26,112,066 | 142,273 | ||||||
| Per-Olof Söderberg | 26,044,168 | 210,171 | ||||||
| J. Richard Zecher, Ph.D. | 26,154,896 | 99,443 | ||||||
Item 5. Other Information
None.
Item 6. Exhibits
| 10.1 | Amendment No. 2 to Employment Agreement between the Company and Joel-Tomas Citron, dated July 9, 2007 (incorporated by reference from the Company’s Current Report on Form 8-K filed on July 11, 2007) | |
| 31.1 | Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief 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: August 6, 2007 | By: | /s/Richard Chin | ||||
| Richard Chin, M.D. | ||||||
| President and Chief Executive Officer | ||||||
| Date: August 6, 2007 | 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 | |
| 10.1 | Amendment No. 2 to Employment Agreement between the Company and Joel-Tomas Citron, dated July 9, 2007 (incorporated by reference from the Company’s Current Report on Form 8-K filed on July 11, 2007) | |
| 31.1 | Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief 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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