1
(conformed)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
____________ TO ____________
COMMISSION FILE NUMBER 0-25353
DEMEGEN, INC.
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(Exact name of registrant as specified in its charter)
COLORADO 84-1065575
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1051 BRINTON ROAD, PITTSBURGH, PENNSYLVANIA 15221
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(Address of principal executive offices) (Zip Code)
412-241-2150
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of July 24, 2000, there were 32,304,778 shares of the registrant's common
stock outstanding.
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DEMEGEN, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements and Notes to Financial Statements
(a) Condensed Balance Sheets as of June 30, 2000 (unaudited) and September 30, 1999 3
(b) Statements of Operations for the Nine Months Ended June 30, 2000
and 1999 and Inception (December 6, 1991) to June 30, 2000 (unaudited) 4
(c) Statements of Operations for the Three Months Ended June 30, 2000
and 1999 (unaudited) 5
(d) Statements of Cash Flows for the Nine Months Ended June 30, 2000
and 1999 and Inception (December 6, 1991) to June 30, 2000 (unaudited) 6
(e) Notes to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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PART I. FINANCIAL INFORMATION
DEMEGEN, INC
CONDENSED BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
2000 1999*
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 2,229,551 $ 583,585
Accounts receivable 60,759 22,546
Prepaid expenses and other current assets 270,588 2,057
------------ ------------
TOTAL CURRENT ASSETS 2,560,898 608,188
PROPERTY, PLANT AND EQUIPMENT 363,625 361,544
Less: accumulated depreciation (193,245) (151,219)
------------ ------------
170,380 210,325
INTANGIBLE ASSETS 493,436 493,436
Less: accumulated amortization (300,718) (227,444)
------------ ------------
192,718 265,992
------------ ------------
TOTAL ASSETS $ 2,923,996 $ 1,084,505
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CURRENT LIABILITIES
Payable to employees and directors $ 76,823 $ 92,000
Accounts payable 258,746 354,988
Accrued liabilities and unearned revenue 54,770 154,351
------------ ------------
TOTAL CURRENT LIABILITIES 390,339 601,339
OTHER LONG-TERM LIABILITIES 471,796 270,254
------------ ------------
TOTAL LIABILITIES 862,135 871,593
Redeemable convertible preferred stock 1,966,912 1,768,846
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Common stock 32,305 26,362
Warrants 1,287,004 497,000
Additional paid-in capital 14,619,089 12,040,166
Deferred compensation (365,500) --
Deficit accumulated during the development stage (15,477,949) (14,119,462)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) 94,949 (1,555,934)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT (CAPITAL DEFICIENCY) $ 2,923,996 $ 1,084,505
============ ============
*Derived from audited financial statements.
See accompanying notes to financial statements.
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DEMEGEN, INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED JUNE 30, INCEPTION
------------------------------- (DECEMBER 6, 1991)
2000 1999 TO JUNE 30, 2000
----------- ----------- ------------------
INCOME $ 708,347 $ 918,051 $ 4,524,844
EXPENSES:
Research and development 1,208,238 1,075,084 6,701,123
General & administration 529,037 592,799 10,201,656
Interest 9,825 2,139 992,549
Depreciation and amortization 121,682 108,167 565,218
----------- ----------- ------------
TOTAL EXPENSES 1,868,782 1,778,189 18,460,546
----------- ----------- ------------
NET LOSS (1,160,435) (860,138) (13,935,702)
Preferred dividend and accretion amounts (198,054) (193,171) (1,542,247)
----------- ----------- ------------
NET LOSS APPLICABLE TO COMMON STOCK $(1,358,489) $(1,053,309) $(15,477,949)
=========== =========== ============
LOSS PER SHARE OF COMMON STOCK, BASIC AND DILUTED $(0.05) $(0.04)
=========== ===========
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING 28,904,418 26,219,115
=========== ===========
See accompanying notes to financial statements.
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DEMEGEN, INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS
-------------------------------
ENDED JUNE 30,
2000 1999
----------- -----------
INCOME $ 222,171 $ 36,654
EXPENSES:
Research and development 789,967 439,895
General & administration 167,042 242,557
Interest 4,375 611
Depreciation and amortization 39,991 40,001
----------- -----------
TOTAL EXPENSES 1,001,375 723,064
----------- -----------
NET LOSS (779,204) (686,410)
Preferred dividend and accretion amounts (66,445) (64,786)
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK $ (845,649) $ (751,196)
=========== ===========
LOSS PER SHARE OF COMMON STOCK, BASIC AND DILUTED $ (0.03) $ (0.03)
=========== ===========
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING 32,300,637 26,355,297
=========== ===========
See accompanying notes to financial statements.
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DEMEGEN, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED JUNE 30, INCEPTION
------------------------------- (DECEMBER 6, 1991)
2000 1999 TO JUNE 30, 2000
----------- ----------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,160,435) $ (860,138) $(13,935,702)
Adjustments to Reconcile Net Loss
to Cash:
Depreciation and amortization 121,682 108,167 565,218
Stock issued for services -- -- 1,729,058
Issuance of stock and options to employees and directors 353,151 -- 2,130,591
Warrants issued for interest -- -- 286,434
Other 2,126 -- 84,668
Changes in Assets and Liabilities
Other than Cash:
Accounts receivable (38,213) 18,611 (60,759)
Prepaid expenses and current assets 13,471 9,352 11,414
Accounts payable and other liabilities (81,987) 2,187 1,344,058
Unearned revenue (68,750) (68,750) 22,917
----------- ----------- ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (858,955) (790,571) (7,822,103)
CASH FLOWS FROM INVESTING ACTIVITIES:
Intangible assets -- -- (238,324)
Purchase of property, plant and equipment (10,589) (208,388) (393,964)
----------- ----------- ------------
NET CASH USED BY INVESTING ACTIVITIES (10,589) (208,388) (632,288)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 150,000 21,109 1,298,609
Principal payments on debt (16,636) -- (84,725)
(Decrease) increase in payable to employees and directors 7,915 54,727 2,681,327
Net proceeds from issuance of equity instruments 2,374,231 -- 6,683,731
Proceeds from exercise of stock options -- 17,500 105,000
----------- ----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,515,510 93,336 10,683,942
----------- ----------- ------------
Net Increase (Decrease) in Cash and Equivalents 1,645,966 (905,623) 2,229,551
Cash and Cash Equivalents, Beginning of Period 583,585 1,686,658 0
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,229,551 $ 781,035 $ 2,229,551
=========== =========== ============
See accompanying notes to financial statements.
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DEMEGEN, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying financial statements of Demegen, Inc. (the "Corporation") are
unaudited. However, in the opinion of management, they include all adjustments
necessary for a fair presentation of financial position, results of operations
and cash flows. All adjustments made during the three and nine months ended June
30, 2000 were of a normal, recurring nature. The amounts presented for the nine
months ended June 30, 2000 are not necessarily indicative of results of
operations for a full year. Additional information is contained in the Annual
Report on Form 10-KSB of the Corporation for the year ended September 30, 1999
dated December 21, 1999, in the Quarterly Report on Form 10-QSB of the
Corporation for the quarter ended December 31, 1999 dated January 27, 2000 and
in the Quarterly Report on Form 10-QSB of the Corporation for the quarter ended
March 31, 2000 dated May 8, 2000, which should be read in conjunction with this
quarterly report.
NOTE 2 - FEDERAL INCOME TAXES
No federal or state income tax has been provided for the nine months ended June
30, 2000 and 1999 due to existence of unused net operating loss carryforwards.
The Corporation did not pay any income taxes during the nine months ended June
30, 2000 and 1999.
NOTE 3 - NOTE PAYABLE
In December 1999, the Corporation received $150,000 from a local foundation to
fund program related research. The loan matures on February 28, 2005 with a
balloon payment due at that time. The loan is at an interest rate of 5% with
interest due February 28 of each year. The loan contains call provisions which
could result in the loan becoming due before its planned maturity. The
Corporation does not foresee, at this time, the call provisions becoming
effective.
The Corporation paid interest costs totaling approximately $6,075 and $2,217
during the nine months ended June 30, 2000 and 1999, respectively.
NOTE 4 - NET EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
FOR THE NINE MONTHS
ENDED JUNE 30,
2000 1999
------------ ------------
NUMERATOR FOR BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Net Loss $ (1,160,435) $ (860,138)
Preferred stock dividends and accretion amounts (198,054) (193,171)
------------ ------------
Numerator for basic and diluted earnings per share--income
available to common stockholders $ (1,358,489) $ (1,053,309)
============ ============
DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Denominator for basic and diluted earnings per share--
weighted average shares 28,904,418 26,219,115
========== ==========
BASIC AND DILUTED EARNINGS PER SHARE $ (0.05) $ (0.04)
========== ==========
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FOR THE THREE MONTHS
ENDED JUNE 30,
2000 1999
------------ ------------
NUMERATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Net Loss $ (779,204) $ (686,410)
Preferred stock dividends and accretion amounts (66,445) (64,786)
------------ ------------
Numerator for basic and diluted earnings per share--income
available to common stockholders $ (845,649) $ (751,196)
============ ============
DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Denominator for basic and diluted earnings per share--
weighted average shares 32,300,637 26,355,297
========== ==========
BASIC AND DILUTED EARNINGS PER SHARE $ (0.03) $ (0.03)
========== ==========
NOTE 5 - PRIVATE PLACEMENT OF SECURITIES
During the second quarter of Fiscal 2000, the Corporation closed on a private
placement of its securities to institutional and other accredited investors
raising $2.78 million of which $0.38 million was in the form of prepaid services
with the remainder of $2.4 million in cash. The private placement resulted in
the sale of 5.56 million restricted shares of common stock and warrants to
purchase an additional 5.56 million shares of the Corporation's common stock.
The investors were offered one unit at $0.50 per unit. Each unit consisted of
one share of restricted common stock and a warrant to purchase one share of the
Corporation's common stock for $0.75 per share. The warrant expires the earlier
of March 31, 2005 or 60 days after a call by the Corporation. The Corporation
may call the warrants at any time after March 31, 2001, provided that the price
of the Corporation's common stock has been in excess of $1.50 per share for each
of the forty consecutive trading days immediately preceding the date of the
call. Upon receipt of the call, warrant holders shall have sixty days to elect
to exercise all or a portion of the warrants.
The Corporation has agreed to file a registration statement with the Securities
& Exchange Commission to register all common stock which comprise the unit and
the common stock issuable from the exercise of the warrant on or before March
31, 2001.
Pricing of the securities was determined based on several factors, including
reference to market price of the Corporation's common stock, the holding period
requirement of restricted stock, and the Corporation's need for additional
funding for development of pharmaceutical products.
Funds raised will be utilized to fund the Corporation's product development
efforts.
NOTE 6 - EMPLOYMENT AGREEMENT
Effective April 1, 2000 the Corporation hired a Chief Operating Officer -
Pharmaceutical Products. His employment agreement is for an initial term of
three years and provides for the issuance of 300,000 shares of restricted common
stock upon joining the Corporation and options to purchase, subject to
achievement of certain funding, investigative new drug ("IND") approval and
commercialization objectives, up to 1,400,000 shares of the Corporation's common
stock at exercise prices of $0.45 and $0.90 per share. The valuation of the
restricted stock and stock options resulted in a non-cash charge of $285,500 in
the quarter ending June 30, 2000 which was included in research and development
expense. The related Deferred Compensation component of Stockholders' Equity
will be amortized against income over the terms of the various option
agreements.
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NOTE 7 - RECENT PRONOUNCEMENTS
During the fourth quarter of 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements", which clarifies the accounting rules for revenue recognition in
financial statements. The implementation date is no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Corporation is
currently reviewing its revenue recognition policy to ensure compliance with SAB
101.
On March 31, 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44 ("FIN 44"), Accounting for Certain Transaction Involving
Stock Compensation", which provides guidance on several implementation issues
related to the accounting for employee stock options and is effective July 1,
2000. Interpretation No. 44 clarifies the definition of employee and the
accounting for stock options that have been repriced. The Corporation adopted
FIN 44 and it did not have any material impact on the Corporation's financial
position or results of operation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2000 AND 1999
During the nine months ended June 30, 2000 ("Fiscal 2000"), grants, license fees
and other income decreased to $0.71 million compared to $0.92 million in the
nine months ended June 30, 1999 ("Fiscal 1999"). The decrease was due to the
Corporation receiving a $250,000 grant in the fiscal 1999 period with no similar
grants being received in the fiscal 2000 period. In the Fiscal 2000 period the
Corporation received a $150,000 program related loan from a local charity. Had
this been a grant, revenues would have been more comparable for the nine-month
periods.
Total expenses decreased to $1.52 million from $1.78 million in the
corresponding prior fiscal nine month period, exclusive of a $0.36 million
non-cash charge in the current fiscal period for the issuance of restricted
stock, stock options and warrants to purchase common stock relative to the
hiring of a Chief Operating Officer - Pharmaceutical Products. The decrease was
due to the timing of preclinical development activities.
Research and development expenditures decreased to $0.86 million from $1.08
million in the prior fiscal nine month period, exclusive of the aforementioned
$0.36 million non-cash charge in the current fiscal period for the
aforementioned reason. General and administrative expenses remained relatively
constant at $0.53 million and $0.59 million, respectively, for the two
comparable nine month periods.
During the nine months ended June 30, 2000 and 1999, the Corporation made no
provision for federal or state income taxes due to the existence of net
operating loss carryforwards.
The Corporation reported a loss of $1.16 million for the nine months ended June
30, 2000 compared to a loss of $0.86 million for the nine months ended June 30,
1999 as a direct result of the factors discussed above.
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
During the three months ended June 30, 2000 ("Fiscal 2000"), grants, license
fees and other income increased to $0.23 million compared to $0.04 million in
the three months ended June 30, 1999 ("Fiscal 1999"). The increase was due to
the Corporation receiving a $175,000 research support payment in the fiscal 2000
period with no similar payment being received in the fiscal 1999 period.
Total expenses decreased to $0.65 million from $0.72 million in the
corresponding prior fiscal quarter, exclusive of a $0.36 million non-cash charge
in the current fiscal period for the issuance of restricted stock, stock options
and warrants to purchase common stock relative to the hiring of a Chief
Operating Officer - Pharmaceutical Products. The decrease was due to the timing
of preclinical development activities.
Research and development expenditures remained constant at $0.44 million for the
two comparable quarters exclusive of the aforementioned $0.36 million non-cash
charge in the current fiscal period. General and administrative expenses
decreased to $0.17 million from $0.24 million in the prior quarter due to the
termination of a senior executive during the second quarter of fiscal 2000 and
the decrease in a number of other administrative costs.
During the quarters ended June 30, 2000 and 1999, the Corporation made no
provision for federal or state income taxes due to the existence of net
operating loss carryforwards.
The Corporation reported a loss of $0.78 million for the three months ended June
30, 2000 compared to a loss of $0.68 million for the three months ended June 30,
1999 as a direct result of the factors discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 2000, the Corporation's cash increased by
$1.65 million to $2.23 million. The cash increase was due to $2.5 million of
cash provided by financing activities partially offset by $0.86 million of cash
used by operating activities and $0.01 million of cash used by investing
activities for the purchase of equipment.
The $2.5 million of cash provided by financing activities consisted of $2.37
million net proceeds from the private placement of securities and $0.15 million
received from a local foundation. The loan matures on February 28, 2005 with
interest at 5%. The loan is to fund program related research.
Cash flows used by operating activities totaled $0.86 million in the nine months
ended June 30, 2000. Cash outflows included the net loss of $1.16 million, a
$0.04 million increase in accounts receivables, a $0.08 million decrease in
accounts payable and other liabilities and a $0.07 million decrease in unearned
revenue. These cash outflows were partially offset by cash inflows which
principally included $0.36 million of non-cash compensation related to the
issuance of restricted common stock and below market stock options issued in
connection with the hiring of a Chief Operating Officer - Pharmaceutical
Products and $0.12 million of depreciation and amortization.
During the nine months ended June 30, 1999, the Corporation's cash decreased by
$0.91 million to $0.78 million. The decrease in cash and cash equivalents during
the first nine months of fiscal 1999 is attributable to cash outflows from
operations of $0.79 million and cash outflows from investment activities of
$0.21 million for the purchase of property, plant and equipment. These cash
outflows were partially offset by $0.09 million of cash provided by financing
activities.
Cash flows used by operating activities totaled $0.79 million in the nine months
ended June 30, 1999 Cash outflows included the net loss of $0.86 million and a
$0.07 million decrease in unearned revenue. The cash outflows were partially
offset by $0.11 million of depreciation and amortization and a $0.02 million
decrease in accounts receivables.
Cash provided by financing activities consisted of $0.02 million from the
exercise of employee stock options, $0.02 million from the proceeds of an
equipment loan and $0.05 million due to the increase in the payable to employees
and directors.
The $0.21 million expended for the purchase of property, plant and equipment
primarily related to furnishing the lab at the Corporation's new office.
The Company believes that the recent cash received from the private placement of
securities (Note 5 to Financial Statements) in conjunction with the anticipated
receipts under the agreements with Dow Agro Sciences will be sufficient to meet
liquidity needs for the foreseeable short-term period. In the long-term, the
Corporation will need to rely upon additional capital infusions until it emerges
from the development stage and commences to produce cash flow from operations.
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PART II-- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT INDEX
EXHIBIT NO. AND DESCRIPTION
PAGES OF SEQUENTIAL
NUMBERING SYSTEM
27. Financial data schedule
(b) Reports on Form 8-K
On April 7, 2000, the registrant filed a current report on Form 8-K announcing
the completion of a private placement of securities.
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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.
DEMEGEN, INC.
By /s/ Richard D. Ekstrom
--------------------------------------
Richard D. Ekstrom
Chairman and Chief Executive Officer
Date: August 9, 2000
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