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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, 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 August 3, 2001, there were 43,942,778 shares of the registrant's common
stock outstanding.
Transitional Small Business Disclosure Format (check one)
Yes No X
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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 June 30, 2001 (unaudited)
and September 30, 2000 3
(b) Statements of Operations for the Nine Months Ended
June 30, 2001 and 2000 and Inception (December 6, 1991)
to June 30, 2001 (unaudited) 4
(c) Statements of Operations for the Three Months Ended
June 30, 2001 and 2000 (unaudited) 5
(d) Statements of Cash Flows for the Nine Months Ended
June 30, 2001 and 2000 and Inception (December 6, 1991)
to June 30, 2001 (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,
2001 2000*
------------ --------------
ASSETS (UNAUDITED)
CURRENT ASSETS
Cash and short-term investments $ 822,556 $ 1,825,352
Accounts receivable and other assets 13,534 22,409
------------ ------------
TOTAL CURRENT ASSETS 836,090 1,847,761
PROPERTY, PLANT AND EQUIPMENT 387,614 365,801
Less: accumulated depreciation (254,417) (208,971)
------------ ------------
133,197 156,830
INTANGIBLE ASSETS 651,830 604,837
Less: accumulated amortization (333,836) (297,836)
------------ ------------
317,994 307,001
------------ ------------
DEFERRED LICENSE FEE 4,848,000 --
Less: accumulated amortization (3,923,716) --
------------ ------------
924,284 --
------------ ------------
OTHER ASSETS 27,016 --
------------ ------------
TOTAL ASSETS $ 2,238,581 $ 2,311,592
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CURRENT LIABILITIES
Accounts payable $ 639,166 $ 263,303
Accrued payroll -- 97,261
Unearned revenue 160,000 --
Other accrued liabilities and unearned revenue 79,241 73,789
------------ ------------
TOTAL CURRENT LIABILITIES 878,407 434,353
OTHER LONG-TERM LIABILITIES 469,681 477,441
------------ ------------
TOTAL LIABILITIES 1,348,088 911,794
REDEEMABLE CONVERTIBLE PREFERRED STOCK 2,237,074 2,033,787
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Common stock 38,541 32,305
Warrants 3,522,354 1,287,004
Additional paid-in capital 17,745,335 14,619,089
Deferred Compensation (279,496) (343,999)
Subscription Receivable (244,344) (188,511)
Deficit accumulated during the development stage (22,128,971) (16,039,877)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (1,346,581) (633,989)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT (CAPITAL DEFICIENCY) $ 2,238,581 $ 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 NINE MONTHS INCEPTION
ENDED JUNE 30, (DECEMBER 6, 1991)
----------------------------------- TO
2001 2000 JUNE 30, 2001
------------ ------------ -------------------
INCOME $ 946,107 $ 708,347 $ 5,526,369
EXPENSES:
Research and development 2,040,432 1,208,238 9,094,298
General & administration 729,098 529,037 11,111,250
Interest 15,187 9,825 1,012,118
Depreciation and amortization 4,047,192 121,682 4,625,254
------------ ------------ ------------
TOTAL EXPENSES 6,831,909 1,868,782 25,842,920
------------ ------------ ------------
NET LOSS (5,885,802) (1,160,435) (20,316,551)
Preferred dividend and accretion amounts (203,287) (198,054) (1,812,420)
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (6,089,089) $ (1,358,489) $(22,128,971)
============ ============ ============
LOSS PER SHARE OF COMMON STOCK, BASIC AND DILUTED $ (0.17) $ (0.05)
============ ============
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING 34,955,214 28,904,418
============ ============
See accompanying notes to financial statements.
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DEMEGEN, INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED JUNE 30,
------------------------------
2001 2000
------------- ------------
INCOME $ 170,130 $ 222,171
EXPENSES:
Research and development 691,247 789,967
General & administration 252,343 167,042
Interest 5,595 4,375
Depreciation and amortization 2,791,441 39,991
------------- ------------
TOTAL EXPENSES 3,740,626 1,001,375
------------- ------------
NET LOSS (3,570,496) (779,204)
Preferred dividend and accretion amounts (68,213) (66,445)
------------- ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (3,638,709) $ (845,649)
============= ============
LOSS PER SHARE OF COMMON STOCK, BASIC AND DILUTED $ (0.10) $ (0.03)
============= ============
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING 37,802,789 32,300,637
============= ============
See accompanying notes to financial statements.
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DEMEGEN, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS INCEPTION
ENDED JUNE 30, (DECEMBER 6, 1991)
----------------------------------- TO
2001 2000 JUNE 30, 2001
------------ ------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,885,802) $ (1,160,435) $(20,316,551)
Adjustments to Reconcile Net Loss to Cash:
Depreciation and amortization 4,047,192 121,682 4,625,254
Stock issued for services 136,667 -- 2,026,867
Stock based compensation 64,503 -- 107,504
Issuance of stock and options to employees and directors -- 353,151 2,041,440
Warrants issued for interest -- -- 286,434
Other (19,418) 2,126 65,258
Changes in Assets and Liabilities
Other than Cash:
Accounts receivable 12,875 (38,213) (9,534)
Prepaid expenses and current assets (4,000) 13,471 (4,000)
Accounts payable and other liabilities 83,628 (81,987) 1,506,066
Unearned revenue 160,000 (68,750) 160,000
------------ ------------ ------------
NET CASH USED BY OPERATING ACTIVITIES (1,404,355) (858,955) (9,511,262)
CASH FLOWS FROM INVESTING ACTIVITIES:
Intangible assets (48,912) -- (408,280)
Payment for license agreement (225,000) -- (225,000)
Purchase of property, plant and equipment (21,847) (10,589) (408,344)
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (295,759) (10,589) (1,041,624)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 8,544 150,000 1,307,153
Principal payments on debt (34,663) (16,636) (131,827)
(Decrease) increase in payable to employees and directors -- 7,915 2,687,962
Net proceeds from issuance of equity instruments 717,187 2,374,231 7,400,904
Proceeds from exercise of stock options 6,250 -- 111,250
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 697,318 2,515,510 11,375,442
------------ ------------ ------------
Net Increase (Decrease) in Cash and Equivalents (1,002,796) 1,645,966 822,556
Cash and Cash Equivalents, Beginning of Period 1,825,352 583,585 0
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 822,556 $ 2,229,551 $ 822,556
============ ============ ============
INTEREST PAID DURING PERIOD $ 13,312 $ 6,075
============ ============
See accompanying notes to financial statements.
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DEMEGEN, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 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 nine months ended June
30, 2001 were of a normal, recurring nature. The amounts presented for the nine
months ended June 30, 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, in the Quarterly Report on Form 10-QSB of the
Corporation for the quarter ended December 31, 2000 dated February 12, 2001 and
in the Quarterly Report on Form 10-QSB of the Corporation for the quarter ended
March 31, 2001 dated May 4, 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 nine months ended June
30, 2001 and 2000 due to existence of unused net operating loss carryforwards.
The Corporation did not pay any income taxes during the nine months ended June
30, 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 NINE MONTHS
ENDED JUNE 30,
2001 2000
------------ ------------
NUMERATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Net Loss $ (5,885,802) $ (1,160,435)
Preferred stock dividends and accretion amounts (203,287) (198,054)
------------ ------------
Numerator for basic and diluted earnings per share--income
available to common stockholders $ (6,089,089) $ (1,358,489)
============ ============
DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Denominator for basic and diluted earnings per share--
weighted average shares 34,955,214 28,904,418
============ ============
BASIC AND DILUTED EARNINGS PER SHARE $ (0.17) $ (0.05)
============ ============
FOR THE THREE MONTHS
ENDED JUNE 30,
2001 2000
------------ ------------
NUMERATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Net Loss $ (3,570,496) $ (779,204)
Preferred stock dividends and accretion amounts (68,213) (66,445)
------------ ------------
Numerator for basic and diluted earnings per share--income
available to common stockholders $ (3,638,709) $ (845,649)
============ ============
DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Denominator for basic and diluted earnings per share--
weighted average shares 37,802,789 32,300,637
============ ============
BASIC AND DILUTED EARNINGS PER SHARE $ (0.10) $ (0.03)
============ ============
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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 Company
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 of 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 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 share for twenty consecutive
trading days.
o On April 2, 2001, Periodontix received the second issuance under the
license agreement of 2 million restricted 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 share for twenty consecutive trading days.
o On July 16, 2001, under the license agreement, the Company exercised
its option to purchase the aforementioned technologies, free and clear
of all liens and to terminate the license by the issuance of 4.7
million restricted 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 are callable by the Company if the price of the
Company's Common Stock trades above $2.50 per share for twenty
consecutive trading days.
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 agreed 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.
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The initial (February 2001) 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.
The second (April 2001) license payment of restricted common stock and warrants
issued to Periodontix was valued at $1.78 million and along with the two $0.175
million payments that the Company is obligated to make are classified as
Deferred Licensing Fees and are being amortized over the remaining four month
term of the license.
NOTE 6 - PRIVATE PLACEMENT OF SECURITIES
During the third quarter of Fiscal 2001, the Company made a private placement
of its securities to institutional and other accredited investors raising $0.88
million of which $0.155 million was in the form of prepaid services with the
remainder of $0.73 million in cash. The private placement resulted in the sale
of 1.76 million restricted shares of Common Stock and warrants to purchase an
additional 1.76 million shares of the Company'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
Company's common stock for $0.75 per share. The warrant expires the earlier
of May 31, 2006 or 60 days after a call by the Company. The Company may
call the warrants at any time, provided that the price of the Company's
common stock has been in excess of $1.50 per share for each of the twenty
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.
Pricing of the securities was determined based on several factors, including
reference to market price of the Company's Common Stock, the holding period
requirement of restricted stock, and the Company's need for additional
funding for development of pharmaceutical products.
Funds raised will be utilized to fund the Company's working capital and
product development efforts.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2001 AND 2000
During the nine months ended June 30, 2001 ("Fiscal 2001"), grants, license fees
and other income increased to $0.95 million compared to $0.71 million in the
nine months ended June 30, 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 $6.8 million from $1.9 million in the corresponding
prior fiscal nine month period. The increase was due to additional preclinical
development activities in the current fiscal nine month period and included
$3.9 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 $2.0 million from $1.2
million in the corresponding prior fiscal nine month period. The increase was
due to additional preclinical development activities in the current fiscal nine
month period and includes additional expenditures related to the aforementioned
Periodontix license. General and administrative expenses increased to $0.73
million from $0.53 million in the prior nine month period due to the addition of
the operation covered by the license with Periodontix from January 1, 2001.
During the nine month periods ended June 30, 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 net loss of $5.9 million for the nine months ended
June 30, 2001 compared to the net loss of $1.2 million for the nine months ended
June 30, 2000 as a direct result of the factors discussed above.
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
During the three months ended June 30, 2001, grants, license fees and other
income decreased to $0.17 million compared to $0.22 million in the three months
ended June 30, 2000.
Total expenses increased to $3.7 million from $1.0 million in the corresponding
prior fiscal quarter. The increase was due to the $2.76 million of amortization
of the deferred license fee with Periodontix.
Research and development expenditures decreased to $0.69 million from $0.79
million in the corresponding prior fiscal quarter. The decrease was due to the
timing of preclinical development activities. General and administrative
expenses increased to $0.25 million from $0.17 million in the prior quarter.
During the quarters ended June 30, 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 $3.6 million for the three months ended June
30, 2001 compared to the net loss of $0.8 million for the three months ended
June 30, 2000 as a direct result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 2001, the Corporation's cash decreased by
$1.0 million to $0.82 million. The cash decrease was due $1.4 million of cash
used by operating activities and $0.3 million of cash used by investing
activities which were partially offset by $0.7 million of cash generated by
financing activities.
Cash flows used by operating activities totaled $1.4 million in the nine months
ended June 30, 2001. Operating activities included the net loss of $5.9 million.
This amount was significantly adjusted by certain non-cash items which
principally included
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a $0.16 million increase in unearned revenue, $0.2 million for stock issued for
services and stock based compensation and $4 million of depreciation and
amortization and a $0.08 million increase in accounts payable and other
liabilities.
Cash flows used by investing activities totaled $0.3 million in the nine months
ended June 30, 2001 and included the $0.23 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 $0.7 million of cash provided by financing activities consisted of $0.7
million net proceeds from the private placement of securities, $0.01 million of
proceeds from an equipment loan and $0.01 million from the exercise of stock
options. These cash inflows were partially offset by $0.03 principal payments on
debt.
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 a $0.15
million loan 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. The operating
activities 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 in connection with the hiring of a Chief
Operating Officer - Pharmaceutical Products and $0.12 million of depreciation
and amortization.
The Company believes that it has adequate liquidity to fund its operations
through the remainder of its fiscal year ending September 30, 2001. On a longer
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. Without such additional long-term funding, the Company's research and
development activities will need to be significantly curtailed. The curtailment
of these activities will reduce the Company's ability to ultimately transform
itself from the development stage to a commercially viable entity. This funding
may be in the form of a private placement of equity securities or secondary
issuance of securities into the market or a combination thereof. With respect to
private placements, there can be no assurance that such future private
placements will be similar as to price or terms as prior private placements of
the Company's securities.
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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
Exhibit 3 (ii) Amended and Restated By-Laws of Demegen, Inc.
Exhibit 99 Letter dated June 28, 2001 from CEO Venture Fund III to
Consent to Increase the Number of Directors and Amend the
Amended and Restated By-Laws of the Company
(b) Reports on Form 8-K
None
The registrant filed the following Current Reports on Form 8-K subsequent to
June 30, 2001.
Current Report on Form 8-K dated July 31, 2001 announcing the completion of the
acquisition of Periodontix, Inc. by the registrant and the execution of the
Asset Purchase Agreement (dated July 16, 2001) between the registrant and
Periodontix, Inc.
Current Report on Form 8-K dated August 2, 2001 announcing the completion of the
registrant's 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
(Principal Financial and Accounting Officer)
Date: August 13, 2001
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