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 MARCH 31, 2001 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.
(Exact name of registrant as specified in its charter)
COLORADO 84-1065575
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1051 BRINTON ROAD, PITTSBURGH, PENNSYLVANIA 15221
(Address of principal executive offices) (Zip Code)
412-241-2150
(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 May 3, 2001, there were 36,779,778 shares of the registrant's common stock
outstanding.
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DEMEGEN, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements and Notes to Financial Statements
(a) Condensed Balance Sheets as of March 31, 2001 (unaudited) and 3
September 30, 2000
(b) Statements of Operations for the Six Months Ended March 31, 4
2001 and 2000 and Inception (December 6, 1991) to March 31,
2001 (unaudited)
(c) Statements of Operations for the Three Months Ended March 31, 5
2001 and 2000 (unaudited)
(d) Statements of Cash Flows for the Six Months Ended March 31, 6
2001 and 2000 and Inception (December 6, 1991) to March 31,
2001 (unaudited)
(e) Notes to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
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
MARCH 31, SEPTEMBER 30,
2001 2000*
-------------- ------------
ASSETS (UNAUDITED)
CURRENT ASSETS
Cash and short-term investments $ 844,265 $ 1,825,352
Accounts receivable 15,191 22,409
------------ ------------
TOTAL CURRENT ASSETS 859,456 1,847,761
PROPERTY, PLANT AND EQUIPMENT 387,519 365,801
Less: accumulated depreciation (239,366) (208,971)
------------ ------------
148,153 156,830
INTANGIBLE ASSETS 651,830 604,837
Less: accumulated amortization (333,836) (297,836)
------------ ------------
317,994 307,001
------------ ------------
DEFERRED LICENSE FEE 2,718,000 --
Less: accumulated amortization (1,161,358) --
------------ ------------
1,556,642 --
------------ ------------
OTHER ASSETS 41,014 --
------------ ------------
TOTAL ASSETS $ 2,923,259 $ 2,311,592
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CURRENT LIABILITIES
Accounts payable $ 279,294 $ 263,303
Accrued payroll -- 97,261
Unearned revenue 120,000 --
Other accrued liabilities and unearned revenue 76,829 73,789
------------ ------------
TOTAL CURRENT LIABILITIES 476,123 434,353
OTHER LONG-TERM LIABILITIES 480,748 477,441
------------ ------------
TOTAL LIABILITIES 956,871 911,794
REDEEMABLE CONVERTIBLE PREFERRED STOCK 2,168,861 2,033,787
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Common stock 34,780 32,305
Warrants 2,286,004 1,287,004
Additional paid-in capital 16,380,864 14,619,089
Deferred Compensation (300,997) (343,999)
Subscription Receivable (112,867) (188,511)
Deficit accumulated during the development stage (18,490,257) (16,039,877)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (202,473) (633,989)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT (CAPITAL DEFICIENCY) $ 2,923,259 $ 2,311,592
============ ============
*Derived from audited financial statements.
See accompanying notes to financial statements.
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DEMEGEN, INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS INCEPTION
ENDED MARCH 31, (DECEMBER 6, 1991)
----------------------------------- TO
2001 2000 MARCH 31, 2001
------------ ------------ -----------------
INCOME $ 775,977 $ 486,176 $ 5,356,239
EXPENSES:
Research and development 1,349,185 418,271 8,403,051
General & administration 476,755 361,995 10,858,907
Interest 9,592 5,450 1,006,523
Depreciation and amortization 1,255,751 81,691 1,833,813
------------ ------------ ------------
TOTAL EXPENSES 3,091,283 867,407 22,102,294
------------ ------------ ------------
NET LOSS (2,315,306) (381,231) (16,746,055)
Preferred dividend and accretion amounts (135,074) (131,609) (1,744,202)
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (2,450,380) $ (512,840) $(18,490,257)
============ ============ ============
LOSS PER SHARE OF COMMON STOCK, BASIC AND DILUTED $ (0.07) $ (0.02)
============ ============
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING 33,531,426 27,213,528
============ ============
See accompanying notes to financial statements.
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DEMEGEN, INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------------------
2001 2000
------------ ------------
INCOME $ 589,526 $ 61,475
EXPENSES:
Research and development 853,254 217,478
General & administration 226,055 192,796
Interest 5,130 4,439
Depreciation and amortization 1,208,295 40,314
------------ ------------
TOTAL EXPENSES 2,292,734 455,027
------------ ------------
NET LOSS (1,703,208) (393,552)
Preferred dividend and accretion amounts (67,758) (66,007)
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (1,770,966) $ (459,559)
============ ============
LOSS PER SHARE OF COMMON STOCK, BASIC AND DILUTED $ (0.05) $ (0.02)
============ ============
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING 34,779,778 28,074,516
============ ============
See accompanying notes to financial statements.
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DEMEGEN, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS INCEPTION
ENDED MARCH 31, (DECEMBER 6, 1991)
-------------------------------- TO
2001 2000 MARCH 31, 2001
------------- ------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,315,306) $ (381,231) $(16,746,055)
Adjustments to Reconcile Net Loss to Cash:
Depreciation and amortization 1,255,751 81,691 1,833,813
Stock issued for services 113,144 -- 2,003,344
Stock based compensation 43,002 -- 86,003
Issuance of stock and options to employees and directors -- -- 2,041,440
Warrants issued for interest -- -- 286,434
Other (15,593) 2,125 69,083
Changes in Assets and Liabilities
Other than Cash:
Accounts receivable 7,218 (54,105) (15,191)
Prepaid expenses and current assets -- 10,065 --
Accounts payable and other liabilities (63,326) (31,211) 1,359,112
Unearned revenue 120,000 (45,834) 120,000
----------- ----------- ------------
NET CASH USED BY OPERATING ACTIVITIES (855,110) (418,500) (8,962,017)
CASH FLOWS FROM INVESTING ACTIVITIES:
Intangible assets (48,912) -- (408,280)
Payment for license agreement (50,000) -- (50,000)
Purchase of property, plant and equipment (21,718) (5,671) (408,215)
----------- ----------- ------------
NET CASH USED BY INVESTING ACTIVITIES (120,630) (5,671) (866,495)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 8,544 150,000 1,307,153
Principal payments on debt (20,141) (4,286) (117,305)
(Decrease) increase in payable to employees and directors -- 3,355 2,687,962
Net proceeds from issuance of equity instruments -- 2,347,111 6,683,717
Proceeds from exercise of stock options 6,250 -- 111,250
----------- ----------- ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (5,347) 2,496,180 10,672,777
----------- ----------- ------------
Net Increase (Decrease) in Cash and Equivalents (981,087) 2,072,009 844,265
Cash and Cash Equivalents, Beginning of Period 1,825,352 583,585 0
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 844,265 $ 2,655,594 $ 844,265
=========== =========== ============
INTEREST PAID DURING PERIOD $ 5,723 $ 1,001
=========== ===========
See accompanying notes to financial statements.
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DEMEGEN, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 2001
(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 six months ended March
31, 2001 were of a normal, recurring nature. The amounts presented for the six
months ended March 31, 2001 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, 2000
dated December 14, 2000 and in the Quarterly Report on Form 10-QSB of the
Corporation for the quarter ended December 31, 2000 dated February 12, 2001,
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 six months ended March
31, 2001 and 2000 due to existence of unused net operating loss carryforwards.
The Corporation did not pay any income taxes during the six months ended March
31, 2001 and 2000.
NOTE 3 - NET EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
FOR THE SIX MONTHS
ENDED MARCH 31,
2001 2000
------------ -----------
NUMERATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Net Loss $ (2,315,306) $ (381,231)
Preferred stock dividends and accretion amounts (135,074) (131,609)
------------ ------------
Numerator for basic and diluted earnings per share--income
available to common stockholders $ (2,450,380) $ (512,840)
============ ============
DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Denominator for basic and diluted earnings per share--
weighted average shares 33,531,426 27,213,528
------------ ============
BASIC AND DILUTED EARNINGS PER SHARE $ (0.07) $ (0.02)
============ ============
FOR THE THREE MONTHS
ENDED MARCH 31,
2001 2000
------------ ------------
NUMERATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Net Loss $ (1,703,208) $ (393,552)
Preferred stock dividends and accretion amounts (67,758) (66,007)
------------ ------------
Numerator for basic and diluted earnings per share--income
available to common stockholders $ (1,770,966) $ (459,559)
============ ============
DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Denominator for basic and diluted earnings per share--
weighted average shares 34,779,778 28,074,516
------------ ============
BASIC AND DILUTED EARNINGS PER SHARE $ (0.05) $ (0.02)
============ ============
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NOTE 4 - UNEARNED REVENUE
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
adopted SAS 101 in the first quarter of Fiscal 2001. Implementation of SAB 101
resulted in the deferral of $280,000 of revenue received from Dow AgroSciences
during the first quarter of Fiscal 2001 in the form of a minimum annual royalty
and a semi-annual research support fee. These revenues are being amortized into
income over the twelve month and six month period of the royalty and fee and
will be fully recognized by September 30, 2001.
NOTE 5 - LICENSE AGREEMENT WITH PURCHASE OPTION
Effective January 1, 2001 the Company entered into a definitive license
agreement with an option to purchase with Periodontix, Inc for all of their
technologies and rights in related clinical trials, except for Periodontix'
photodynamic technology. The transaction is structured under a short-term
license agreement to permit the Company a period of time to evaluate
Periodontix's technology and obtain the necessary funds to support the
additional research, prior to exercising the purchase option. The terms or the
agreement are as follows:
o On December 15, 2000 the Company made a $50,000 good faith
non-refundable payment to Periodontix
o During February 2001 the Company issued Periodontix 2.3 million
restricted common shares of the Company's Common Stock and warrants to
purchase up to 2.3 million Common Shares of the Company's Common Stock
at an exercise price of $1.25 per share. The Warrants have a five year
term and are callable by the Company if the price of the Company's
common Stock trades above $2.50 per shares for twenty consecutive
trading days.
o On April 2, 2001 Periodontix received the second issuance under the
license agreement of 2 million restricted common shares of the
Company's Common Stock and warrants to purchase up to 2 million Common
Shares of the Company's Common Stock at an exercise price of $1.25 per
share. The Warrants have a five year term and are callable by the
Company if the price of the Company's common Stock trades above $2.50
per shares for twenty consecutive trading days.
o Under the license agreement, the Company will have an option to
purchase the aforementioned technologies, free and clear of all liens
and to terminate the license by July 31, 2001 with the issuance of 4.7
million restricted common shares of the Company's Common Stock and
warrants to purchase up to 4.7 million Common Shares of the Company's
Common Stock at an exercise price of $1.25 per share. The Warrants have
a five year term and is callable by the Company if the price of the
Company's common Stock trades above $2.50 per shares for twenty
consecutive trading days. The option date may be extended by the
Company until January 31, 2002 with the payment of 1 million restricted
Common Shares of the Company by July 31, 2001. If the option is
exercised after July 31, 2001, the number of Common Shares and Warrants
required to purchase the technologies will be 7 million each.
o Periodontix has agreed not to sell the technologies while the Company's
option is in force.
o Should any license or sublicense agreements be negotiated by
Periodontix with a customer for the licensed Periodontix technologies
prior to the exercise of the option to purchase by the Company, the
Company will receive the first $350,000 of any upfront license fees.
The remaining balance of any upfront license fees will be paid to
Periodontix in the Company's restricted Common Stock valued at the
closing price for the preceding twenty trading days.
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o On January 1, 2001 the Company hired selected Periodontix employees to
facilitate the clinical trials and other tasks related to the combined
Company.
o Beginning January 1, 2001 the Company agrees to pay Periodontix for
rent and utilities at their office and other operating costs.
o As part of the license fee the Company paid $175,000 to Periodontix on
April 2, 2001 and is obligated to make a second $175,000 payment to
Periodontix on December 1, 2001.
The initial license payment of restricted common stock and warrants issued to
Periodontix was valued at $2.7 million and along with the $0.05 million deposit
made in December 2000 are classified as Deferred Licensing Fees and are being
amortized over the seven month term of the license.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2001 AND 2000
During the six months ended March 31, 2001 ("Fiscal 2001"), grants, license fees
and other income increased to $0.78 million compared to $0.49 million in the six
months ended March 31, 2000 ("Fiscal 2000"). The fiscal 2001 amount included a
$0.4 million grant from the Pacific West Cancer Fund and the National Cancer
Coalition to expand efforts to develop therapeutics to treat cancer.
Total expenses increased to $3.1 million from $0.87 million in the corresponding
prior fiscal six month period. The increase was due to additional preclinical
development activities in the current fiscal six month period and included $1.16
million of amortization of the deferred license fee with Periodontix and the
addition of the personnel and operating expenses associated with the license
with Periodontix.
Research and development expenditures increased to $1.35 million from $0.42
million in the corresponding prior fiscal six month period. The increase was due
to additional preclinical development activities in the current fiscal six month
period and includes additional expenditures relative to the aforementioned
Periodontix license. General and administrative expenses increased to $0.48
million from $0.36 million in the prior six month period due to the addition of
the operation covered by the license with Periodontix from January 1, 2001.
During the six month period ended March 31, 2001 and 2000, 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 $2.3 million for the six months ended March
31, 2001 compared net loss of $0.38 million for the six months ended March 31,
2000 as a direct result of the factors discussed above.
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
During the three months ended March 31, 2001, grants, license fees and other
income increased to $0.59 million compared to $0.06 million in the three months
ended March 31, 2000. The fiscal 2001 amount included a $0.4 million grant from
the Pacific West Cancer Fund and the National Cancer Coalition to expand efforts
to develop therapeutics to treat cancer.
Total expenses increased to $2.3 million from $0.46 million in the corresponding
prior fiscal quarter. The increase was due to additional preclinical development
activities in the current fiscal quarter and included $1.16 million of
amortization of the deferred license fee with Periodontix and the addition of
the personnel and operating expenses associated with the license with
Periodontix.
Research and development expenditures increased to $0.85 million from $0.22
million in the corresponding prior fiscal quarter. The increase was due to
additional preclinical development activities in the current fiscal quarter and
includes additional expenditures relative to the aforementioned Periodontix
license. General and administrative expenses increased to $0.23 million from
$0.19 million in the prior quarter.
During the quarters ended March 31, 2001 and 2000, 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 $1.7 million for the three months ended March
31, 2001 compared net loss of $0.39 million for the three months ended March 31,
2000 as a direct result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended March 31, 2001, the Corporation's cash decreased by
$0.98 million to $0.84 million.
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The cash decrease was due $0.86 million of cash used by operating activities and
$0.12 million of cash used by investing activities.
Cash flows used by operating activities totaled $0.86 million in the six months
ended March 31, 2001. Cash outflows included the net loss of $2.32 million and a
$0.06 million decrease in accounts payable and other liabilities. These cash
outflows were partially offset by cash inflows which principally included a
$0.12 million increase in unearned revenue, $0.16 million for stock issued for
services and stock based compensation and $1.26 million of depreciation and
amortization.
Cash flows used by investing activities totaled $0.12 million in the six months
ended March 31, 2001 and included the $0.05 million cash payment as part of the
Periodontix license and purchase option agreements and $0.07 million for the
purchase of equipment and patent related activities.
The $0.005 million of cash utilized by financing activities consisted of $0.02
principal payments on notes partially offset by $0.01 million of proceeds from
an equipment loan and $0.01 million from the exercise of stock options.
During the six months ended March 31, 2000, the Corporation's cash increased by
$2.07 million to $2.66 million. The cash increase was due to $2.5 million of
cash provided by financing activities partially offset by $0.42 million of cash
used by operating activities.
The $2.5 million of cash provided by financing activities consisted of $2.35
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 $0.42 million in the six months
ended March 31, 2000. Cash outflows included the net loss of $0.38 million, a
$0.05 million increase in accounts receivables, a $0.03 million decrease in
accounts payable and other liabilities and a $0.05 million decrease in unearned
revenue. These cash outflows were partially offset by cash inflows which
principally included $0.08 million of depreciation and amortization.
The Company believes that it has adequate liquidity to fund its operations in
Fiscal 2001 if the expected milestones, research support, license, sub-license
and equity financing payments are received as expected. Should the expected
payments either be delayed or not forth coming, the Company would take the
necessary actions to scale back its level of expenditures, primarily research
expenditures associated with new projects, to maintain sufficient cash flow to
fund basic operations. On a long term basis, it will be necessary for the
Company to access additional funding so that it can continue to fund the Phase I
and Phase II testing of its therapeutic agents. This funding may be in the form
of a private placement of equity securities or a secondary issuance of
securities into the market.
The Company intends to pursue the acquisition/merger of biotechnology companies
with similar technologies to increase the range of potential product offerings
that the Company will have to push through the clinical trial pipeline and to
broaden its exposure to potential partners.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 16, 2001 the Annual Meeting of the Stockholders of Demegen, Inc. was
held in Pittsburgh, PA. At the meeting all of management's nominees for director
were elected directors of the Corporation and Ernst & Young LLC was ratified as
the Corporations auditors for Fiscal 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT INDEX
EXHIBIT NO. AND DESCRIPTION
PAGES OF SEQUENTIAL
NUMBERING SYSTEM
(b) Reports on Form 8-K
The registrant filed a current report on Form 8-K on February 20, 2001
disclosing the license agreement with Periodontix, Inc.
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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: May 3, 2001
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