(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 DECEMBER 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 January 20, 2002, there were 44,022,778 shares of the registrant's common stock outstanding. DEMEGEN, INC. INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements and Notes to Financial Statements (a) Condensed Balance Sheets as of December 31, 2001 (unaudited) and September 30, 2001 3 (b) Statements of Operations for the Three Months Ended December 31, 2001 and 2000 and Inception (December 6, 1991) to December 31, 2001 (unaudited) 4 (c) Statements of Cash Flows for the Three Months Ended December 31, 2001 and 2000 and Inception (December 6, 1991) to December 31, 2001 (unaudited) 5 (d) Notes to Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 10 Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11 PART I. FINANCIAL INFORMATION DEMEGEN, INC CONDENSED BALANCE SHEETS DECEMBER 31, SEPTEMBER 30, 2001 2001* ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS Cash and short-term investments $ 344,047 $ 537,478 Accounts receivable 46,968 46,310 Prepaid expenses and other current assets 6,500 6,500 ------------ ------------ TOTAL CURRENT ASSETS 397,515 590,288 PROPERTY, PLANT AND EQUIPMENT 516,124 475,479 Less: accumulated depreciation (300,380) (280,116) ------------ ------------ 215,744 195,633 INTANGIBLE ASSETS 31,162 31,162 Less: accumulated amortization (780) -- ------------ ------------ 30,382 31,162 OTHER ASSETS 20,317 20,417 ------------ ------------ TOTAL ASSETS $ 663,958 $ 837,500 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) CURRENT LIABILITIES Accounts payable $ 711,285 $ 725,552 Unearned revenue 310,000 50,000 Current portion of notes payable 106,813 97,130 Other accrued liabilities 20,566 21,851 ------------ ------------ TOTAL CURRENT LIABILITIES 1,148,664 894,533 LONG TERM PORTION OF NOTES PAYABLE 358,067 354,286 ------------ ------------ TOTAL LIABILITIES 1,506,731 1,248,819 REDEEMABLE CONVERTIBLE PREFERRED STOCK 2,374,889 2,305,748 STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) Common stock 44,023 44,023 Warrants 4,362,301 4,362,301 Additional paid-in capital 20,307,744 20,315,014 Deferred Compensation (296,522) (332,344) Subscription Receivable (242,374) (291,150) Deficit accumulated during the development stage (27,392,834) (26,814,911) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (3,217,662) (2,717,067) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT (CAPITAL DEFICIENCY) $ 663,958 $ 837,500 ============ ============ *Derived from audited financial statements. See accompanying notes to financial statements. 3 DEMEGEN, INC STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS INCEPTION ENDED DECEMBER 31, (DECEMBER 6, 1991) --------------------------------- TO 2001 2000 DECEMBER 31, 2001 ------------ ------------ ----------------- INCOME $ 277,688 $ 186,451 $ 5,968,954 EXPENSES: Research and development 553,039 495,931 10,158,873 General & administration 207,808 250,700 11,801,120 License amortization and purchased research & development related to Periodontix acquisition -- -- 7,667,739 Interest 4,571 4,462 1,021,536 Depreciation and amortization 21,044 47,456 762,284 ------------ ------------ ------------ TOTAL EXPENSES 786,462 798,549 31,411,552 ------------ ------------ ------------ NET INCOME (LOSS) (508,774) (612,098) (25,442,598) Preferred dividend and accretion amounts (69,149) (67,316) (1,950,236) ------------ ------------ ------------ NET LOSS APPLICABLE TO COMMON STOCK $ (577,923) $ (679,414) $(27,392,834) ============ ============ ============ INCOME (LOSS) PER SHARE OF COMMON STOCK, BASIC AND DILUTED $ (0.01) $ (0.02) ============ ============ WEIGHTED AVERAGE COMMON STOCK OUTSTANDING 44,022,778 32,310,213 ============ ============ See accompanying notes to financial statements. 4 DEMEGEN, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS INCEPTION ENDED DECEMBER 31, (DECEMBER 6, 1991) --------------------------------- TO 2001 2000 DECEMBER 31, 2001 ------------ ------------ ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (508,774) $ (612,098) $(25,442,598) Adjustments to Reconcile Net Loss to Cash: Depreciation and amortization 21,044 47,456 762,284 License amortization and purchased research & development related to Periodontix acquisition -- -- 7,667,739 Stock issued for services 48,776 41,829 2,327,366 Stock based compensation 21,501 21,501 150,506 Issuance of stock and options to employees and directors 7,051 -- 2,093,524 Warrants issued for interest -- -- 286,434 Other 92 (2) 53,389 Changes in Assets and Liabilities Other than Cash: Accounts receivable (658) 22,409 (46,968) Prepaid expenses and current assets -- -- (6,500) Accounts payable and other liabilities (15,552) (45,233) 1,626,048 Unearned revenue 260,000 280,000 310,000 ------------ ------------ ------------ NET CASH USED BY OPERATING ACTIVITIES (166,520) (244,138) (10,218,776) CASH FLOWS FROM INVESTING ACTIVITIES: Intangible assets -- (9,866) (408,280) License with and acquisition of Periodontix -- (50,000) (230,000) Purchase of property, plant and equipment (40,375) (8,544) (454,485) ------------ ------------ ------------ NET CASH USED BY INVESTING ACTIVITIES (40,375) (68,410) (1,092,765) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt 40,375 8,544 1,357,657 Principal payments on debt (26,911) (17,604) (202,413) (Decrease) increase in payable to employees and directors -- -- 2,687,962 Net proceeds from issuance of equity instruments -- -- 7,701,132 Proceeds from exercise of stock options -- 6,250 111,250 ------------ ------------ ------------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 13,464 (2,810) 11,655,588 ------------ ------------ ------------ Net Increase (Decrease) in Cash and Equivalents (193,431) (315,358) 344,047 Cash and Cash Equivalents, Beginning of Period 537,478 1,825,352 -- ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 344,047 $ 1,509,994 $ 344,047 ============ ============ ============ INTEREST PAID DURING PERIOD $ 2,696 $ 2,587 $ 52,954 ============ ============ ============ See accompanying notes to financial statements. 5 DEMEGEN, INC. NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 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. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continued existence is dependent upon its ability to generate sufficient cash flows from equity financing and successfully concluding additional license agreements. The Company historically has obtained its working capital through equity issuances to shareholders, royalty payments and from certain borrowing arrangements. Management has plans in Fiscal 2002 to issue additional equity to shareholders and to obtain additional funding support from grants and product development partners. Should these plans not be successful, there is uncertainty as to the Company's ability to continue as a going concern through the year ending September 30, 2002. All adjustments made during the three months ended December 31, 2001 were of a normal, recurring nature. The amounts presented for the three months ended December 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, 2001 dated January 2, 2002, 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 three months ended December 31, 2001 and 2000 due to existence of unused net operating loss carryforwards. The Corporation did not pay any income taxes during the three months ended December 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 THREE MONTHS ENDED DECEMBER 31, 2001 2000 ------------ ------------ NUMERATOR FOR BASIC AND DILUTED EARNINGS PER SHARE: Net Income (Loss) $ (508,774) $ (612,098) Preferred stock dividends and accretion amounts (69,149) (67,316) ------------ ------------ Numerator for basic and diluted earnings per share--income available to common stockholders $ (577,923) $ (679,414) ============ ============ DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE: Denominator for basic and diluted earnings per share-- weighted average shares 44,022,778 32,310,213 ============ ============ BASIC AND DILUTED EARNINGS PER SHARE $ (0.01) $ (0.02) ============ ============ 6 NOTE 4 - DOW AGROSCIENCES AGREEMENT On October 31, 2001 Dow AgroSciences, LLC notified the Company that it was exercising its right to terminate the license agreement it has with the Company. In October 2001 Dow AgroSciences paid the Company $485,000 consisting of $225,000 for the semi-annual research payment and $260,000 for the minimum annual royalty. In December 2001 Dow AgroSciences demanded repayment of the $260,000 paid for the minimum annual royalty. The Company's position is that the minimum annual royalty was due and paid prior to the cancellation of the agreement. The $260,000 annual minimum royalty has been deferred as "Unearned Revenue"" until the matter is clarified. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PROSPECTIVE/FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 (as amended, the "Act"). In particular, when use herein, the words "plan," "estimates," "confident that," "believe," "expect," or "intend to," and similar expressions are intended to identify forward-looking statements within the meaning of the Act and are subject to the safe harbor created by the Act. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward-looking statements. Such risks and uncertainties include, but are not limited to, market conditions, general acceptance of the Company's products and technologies, possible delays or failures to develop and/or commercialize any technology, possible risks related to adverse clinical results, impact of alternative technology advances, inherent risks in early stage development of such technology, reimbursement policies imposed by third-party payers in the event that any of the Corporation's technologies are approved for sale on the market, competitive factors, the ability to successfully complete additional financings and other risks described in the Corporation's reports and filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000 During the three months ended December 31, 2001 ("Fiscal 2002"), grants, license fees and other income increased to $0.28 million compared to $0.19 million in the three months ended December 31, 2000 ("Fiscal 2001"). Fiscal 2002 revenue includes $0.225 million for the semi-annual research payment from Dow AgroSciences, which was recognized into income in connection with the termination of the agreement. The prior fiscal period did not include $0.28 million of payments from Dow AgroSciences as they were deferred and amortized into income over the semi-annual or annual term of the payments Total expenses remained stable at $0.8 million. Research and development expenditures increased slightly to $0.55 million from $0.50 million in the corresponding prior fiscal quarter. The increase was primarily due the costs associated with the addition of the Watertown, MA facility that the Corporation obtained in connection with the Periodontix acquisition. General and administrative expenses decreased slightly to $0.21 million from $0.25 million. During the quarters ended December 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 $0.51 million for the three months ended December 31, 2001 compared to net loss of $0.61 million for the three months ended December 31, 2000 as a direct result of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES During the three months ended December 31, 2001, the Corporation's cash decreased by $0.19 million to $0.34 million. The cash decrease was due to $0.17 million of cash used by operating activities and $0.04 million of cash used in investing activities which was partially offset by $0.01 million of cash provided by financing activities. The cash used in investing activities of $0.04 million was for the purchase of equipment. The $0.01 million of cash provided by financing activities consisted of $0.04 million proceeds of a new debt instrument partially offset by $0.03 million of principal payments on debt. Cash flows used by operating activities totaled $0.17 million in the three months ended December 31, 2001. Cash outflows included the net loss of $0.51 million and a $0.02 million decrease in accounts payable and 8 other liabilities. These cash outflows were partially offset by cash inflows which principally included $0.02 million of depreciation and amortization, $0.05 million of stock issued for services, $0.02 million of stock based compensation and a $0.26 million increase in unearned income related to the deferral of the annual royalty paid but disputed by Dow AgroSciences. During the three months ended December 31, 2000, the Corporation's cash decreased by $0.32 million to $1.51 million. The cash decrease was due $0.24 million of cash used by operating activities and $0.07 million of cash used by investing activities. Cash flows used by operating activities totaled $0.24 million in the three months ended December 31, 2000. Cash outflows included the net loss of $0.61 million and a $0.05 million decrease in accounts payable and other liabilities. These cash outflows were partially offset by cash inflows which principally included a $0.02 million decrease in accounts receivables, a $0.28 million increase in unearned revenue, $0.09 million for stock issued for services and stock based compensation and $0.05 million of depreciation and amortization. Cash flows used by investing activities totaled $0.07 million in the three months ended December 31, 2000 and included $0.05 million deposit relative to the Periodontix license and $0.02 million for the purchase of equipment and patent related activities. The $0.003 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. The Company is subject to the risks associated with emerging technology-oriented companies. Primary among these risks are the ability to obtain sufficient financing, competition from substitute products and the ability to successfully develop and market its products. As of December 31, 2001, the Company has an accumulated deficit of $27.4 million. In addition, the Company has a working capital deficiency of approximately $0.751 million as December 31, 2001. For the quarter and year ended on December 31, 2001 and September 30, 2001, the Company incurred losses of $0.509 million and $10.503 million respectively, and used $0.167 million and $1.945 million, respectively, of cash for operations during the quarter and year ended on December 31, 2001 and September 30, 2001, respectively. The Company historically has obtained its working capital requirements through equity issuances to shareholders, grants, royalty payments and from certain borrowing arrangements. Management has plans in Fiscal 2002 to issue additional equity to shareholders and to obtain additional funding support from grants and product development partners. Should these plans not be successful, there is uncertainty as to the Company's ability to continue as a going concern through the year ending September 30, 2002. The Company's current cash resources are close to being exhausted and it is extremely uncertain that new sources of cash will be identified and will be received during fiscal 2002. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continued existence is dependent upon its ability to generate sufficient cash flows from equity financing and successfully concluding additional license agreements and developing its technologies. 9 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In December 2001, the Company commenced an arbitration proceeding in Pittsburgh, PA against Dow AgroSciences LLC for damages the Company's management believes it has sustained as a result of Dow AgroSciences' failure to perform certain contractual obligations under the agreement that was terminated by Dow AgroSciences on October 31, 2001. The Company is asserting a claim for substantial damages. The Company can not predict the outcome of the arbitration. Also, in December 2001, Dow AgroSciences asserted a claim for the Company to return the most recent minimum royalty payment. The Company does not believe that the now terminated agreement requires it to do so. Arbitration of the matter is scheduled for June 2002. 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 did not file any current reports on Form 8-K during the three months ended December 31, 2001. 10 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 of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) Date: February 12, 2002 11