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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission file number 0-26918
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CYTOCLONAL PHARMACEUTICS INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 75-2402409
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(State or Other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or Organization)
9000 Harry Hines Boulevard, Suite 621, DALLAS, TEXAS 75235
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(Address of Principal Executive Offices)
(214)-353-2922
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by
section 13 or 15(d) of the exchange act during the past 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
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 15,648,494 shares of common
stock, $.01 par value, outstanding as of May 11, 2000.
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CYTOCLONAL PHARMACEUTICS INC.
TABLE OF CONTENTS
Page(s)
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PART I. FINANCIAL INFORMATION
Item 1. -- Financial Statements:
Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999 3
Statements of Operations for the Three Months
Ended March 31, 2000 and 1999 (unaudited) 4
Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 (unaudited) 5
Notes to Financial Statements 6
Item 2. -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 2. -- Changes in Securities and use of Proceeds 11
Item 6. -- Exhibits and Reports on Form 8-K 12
Signatures 12
Exhibit 27 Financial Data Schedule
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYTOCLONAL PHARMACEUTICS INC.
BALANCE SHEETS
MARCH 31
2000 DECEMBER 31,
ASSETS (unaudited) 1999
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Current assets:
Cash (principally money market) $ 16,499,000 $ 3,213,000
Subscriptions receivable (collected in April) $ 575,000
Prepaid expenses and other current assets 171,000 135,000
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Total current assets 17,245,000 3,348,000
Equipment, net 270,000 285,000
Patent rights, less accumulated amortization of
$679,000 and $654,000 755,000 780,000
Notes receivable-officer/stockholder-9.75% due April 30, 2003 137,000 74,000
Other assets 4,000 4,000
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T O T A L $ 18,411,000 $ 4,491,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 740,000 682,000
Deferred revenue from research and development
collaborative contract 387,000 207,000
Current portion of royalties payable 125,000 135,000
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Total current liabilities 1,252,000 1,024,000
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Royalties payable less current portion 844,000 875,000
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Total liabilities 2,096,000 1,899,000
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Stockholders' equity:
Preferred stock - $.01 par value, 10,000,000 shares authorized; 745,031 and
728,903 shares of Series A convertible preferred issued and outstanding at
March 31, 2000 and December 31, 1999, respectively (liquidation value
$1,863,000 and $1,822,000 at March 31, 1000 and December 31,
1999, respectively) 7,000 7,000
Common Stock - $.01 par value, 30,000,000 shares authorized: 12,804,560 and
10,377,753 shares issued and outstanding at March 31, 2000 and December 31,
1999, respectively 128,000 104,000
Additional paid-in capital 42,389,000 24,759,000
Unearned compensatory cost (1,601,000) (89,000)
Accumulated Deficit (24,608,000) (22,189,000)
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Total Stockholders' Equity 16,315,000 2,592,000
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T O T A L $ 18,411,000 $ 4,491,000
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CYTOCLONAL PHARMACEUTICS INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
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2000 1999
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(note 4)
Revenue:
Licensing & research collaborative
agreement $ 344,000 $ 233,000
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Operating Expenses:
Research and development $ 577,000 $ 872,000
General and administrative 2,265,000 513,000
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2,842,000 1,385,000
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Operating (loss) (2,498,000) (1,152,000)
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Other (Income) expenses:
Interest (income) (81,000) (69,000)
Interest expense 2,000 2,000
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(79,000) (67,000)
NET (LOSS) $ (2,419,000) $ (1,085,000)
Preferred stock dividend $ (47,000) (49,000)
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Net loss attributable to common shareholders (2,466,000) (1,134,000)
============ ============
Net loss per share - basic and diluted $ (0.22) $ (0.11)
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Weighted average number of
shares outstanding - basic and
diluted 11,156,000 10,268,000
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CYTOCLONAL PHARMACEUTICS INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
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2000 1999
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Cash flows from operating activities:
Net (loss) $ (2,419,000) $ (1,085,000)
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Depreciation and amortization 40,000 30,000
Value assigned to common shares and options 1,347,000 291,000
Changes in:
Prepaid expenses and other current assets (36,000) (90,000)
Deferred revenue 180,000 266,000
Accounts payable and accrued expenses 58,000 57,000
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Net cash (used in) operating activities (830,000) (531,000)
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Cash flows from investing activities:
Notes receivable - officer/shareholder (63,000)
Purchase of equipment (47,000)
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Net cash used in investing activities (63,000) (47,000)
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Cash flows from financing activities:
Proceeds from exercise of options and warrants 14,220,000 24,000
Payment of royalties (41,000) (31,000)
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Net cash provided(used in)financing activities 14,179,000 (7,000)
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NET INCREASE (DECREASE) IN CASH 13,286,000 (585,000)
Cash at beginning of period 3,213,000 6,826,000
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CASH AT END OF PERIOD $ 16,499,000 $ 6,241,000
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CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2000
(unaudited)
(1) FINANCIAL STATEMENT PRESENTATION
The unaudited financial statements of Cytoclonal Pharmaceutics Inc., a
Delaware corporation (the "Company"), included herein have been
prepared in accordance with the rules and regulations promulgated by
the Securities and Exchange Commission and, in the opinion of
management, reflect all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the results of
operations for the interim periods presented. Certain information and
footnote disclosures normally included in financial statements,
prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to such rules and regulations.
However, management believes that the disclosures are adequate to make
the information presented not misleading. These financial statements
and the notes thereto should be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999. The
results for the interim periods are not necessarily indicative of the
results for the full fiscal year.
(2) RESEARCH AND COLLABORATIVE AGREEMENT
In June 1998, the Company entered into a license and research agreement
with Bristol-Myers Squibb ("BMS") on two technologies related to
production of paclitaxel, the active ingredient in BMS's largest
selling cancer product, Taxol(R). The agreement includes fees,
milestone payments, research and development support and minimum and
sales based royalties.
(3) LOSS PER COMMON SHARE
Basic and diluted loss per common share is based on the net loss
increased by dividends on preferred stock divided by the weighted
average number of common shares outstanding during the year. No effect
has been given to outstanding options, warrants of convertible
preferred stock in the diluted computation as their effect would be
antidilutive.
(4) REVENUE RECOGNITION AND CHANGE IN ACCOUNTING PRINCIPLE
Revenue from research support agreements is recognized as the expenses
for research and development activities performed under the terms of
the agreements are incurred. Revenue resulting from the achievement of
milestones is recognized when the milestone is achieved. Amounts
received in advance of services to be performed are recorded as
deferred revenue. In December 1999, the staff of the Securities and
Exchange Commission issued an accounting bulletin on revenue
recognition which
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provides, among other matters, that nonrefundable license fees should
be recognized over the period of performance of related research and
development activities. Accordingly, the Company changed its accounting
policy from recognizing revenue from nonrefundable license fees at
signing of agreement to deferring and recognizing such fees over the
period of performance of related research and development activities.
Effective January 1, 1999, the Company reflected this change in
accounting principle as a cumulative effect on prior years of $422,000.
Payments to third parties in connection with nonrefundable license fees
are being recognized over the period of performance of related research
and development activities. This change in accounting principle would
have resulted in an increase in revenues and research and development
expenses and a decrease in net loss of approximately $94,000, $24,000
and $70,000, respectively for the three months ended March 31, 1999 if
it was retroactively applied. The corresponding impact on net loss per
share would be a decrease from $(0.11) to $(0.10) if this change in
accounting principle were retroactively applied.
(5) STOCKHOLDERS EQUITY
On February 7, 2000, the Company gave notice to the holders of our
Class C Warrants that it was exercising its right of redemption
effective March 9, 2000. Through March 14, 2000 the Company received
approximately $12,953,000 from the exercise of 1,992,829 such warrants.
On March 13, 2000 the Company gave notice to the holders of its Class D
Warrants that it was exercising its right of redemption effective April
12, 2000. Through April 14, 2000 the Company received approximately
$25,742,000 from the exercise of 2,941,905 such warrants. Additionally,
through April 30, 2000 the Company received proceeds of approximately
$945,000 from the exercise of 208,971 other warrants.
In January 2000 the Board of Directors approved the 2000 Employee
Option Plan (the "Plan") authorizing up to 1,000,000 shares, subject to
approval of the plan by a majority of our shareholders. We granted
116,000 options to purchase shares of Common Stock under the Plan at an
exercise price of $7.438 per share to officers, directors, employees
and consultants of the Company.
At the time of such stockholder approval, if the market value of the
Company's stock exceeds the exercise price of the subject options noted
above, the Company will incur a non-cash charge to earnings equal to
the spread between the exercise price and the option and market price,
times the number of options involved.
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." In October 1995, the Financial Accounting
Standards Board issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which establishes a fair value-based
method of accounting for stock-based compensation plans. The Company
has adopted the disclosure-only alternative under SFAS No. 123. The
Company accounts for stock based compensation to nonemployees using the
fair value method in accordance with SFAS No. 123 and Emerging Issues
Task Force (EITF) 96-18. The Company has recognized deferred stock
compensation related to certain stock option and warrants grants.
During the three months under March 31, 2000 the Company granted 25,000
and 300,000 warrants to purchase shares of common stock at $12.00 and
$15.00 per share, respectively in return for financial advisory
services. The Company valued these warrants based on the Black-Scholes
option pricing. In connection herewith the Company recorded a charge of
$1,268,000 during the three months ended March 31, 2000. In connection
with other option grants to consultants the Company recorded a charge
of $79,000 during the three months ended March 31, 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Financial Statements and the Notes thereto
included in this report. This discussion contains certain forward-looking
statements that involve substantial risks and uncertainties. When used in this
report, the words "anticipate," "believe," "estimate," "expect" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from those expressed in, or
implied by, these forward-looking statements. Historical operating results are
not necessarily indicative of the trends in operating results for any further
period.
We were organized and commenced operations in September 1991, and until
July 1998 we were in the development stage. To this day, our efforts have been
principally devoted to research and development activities and organizational
efforts, including the development of products for the treatment of cancer and
infectious diseases, recruiting our scientific and management personnel and
advisors and raising capital.
Our plan of operation for the next 12 months will consist of research
and development and related activities aimed at:
o Continued collaboration with Bristol-Myers Squibb on the
development of Paclitaxel production from Fermentation and
Paclitaxel-specific genes using genetic engineering.
o Further development of the treatment of polycystic kidney
disease with Paclitaxel or related compound, a potential new
Paclitaxel indication, and establishing a strategic
partnership.
o Development of our rational drug design program using Quantum
Core Technology(TM), which targets proteins.
o Further development of our OASIS(TM) optimized antisense
genome library, which targets genes.
o Development of an alternative production system for
glucocerebrosidase, the deficient enzyme in Gaucher's disease.
o Evaluation of potential new proprietary microbial anticancer
drugs with Bristol-Meyers Squibb.
o Further development of a diagnostic test using the patented
LCG gene and related MAb to test in vitro serum, tissue or
respiratory aspirant material for the presence of cells which
may indicate a predisposition to, or early sign of, lung or
other cancers.
o Further testing of peptide from UCLA for inhibition of breast
cancer via steroid receptors.
o Further analysis of the TNF-PEG technology as an anticancer
agent in animal studies.
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o Testing proprietary vectors, which have been constructed for
the expression of specific proteins that may be utilizable for
vaccines for different diseases using Mycobacteria.
o Developing a humanized antibody specific or peptide specific
for the protein associated with the LCG gene and, if
successful, submission of an IND for clinical trials.
o Making improvements to the Company's laboratory facilities and
corporate facilities.
o Hiring additional technical and administrative staff.
o Seeking to establish strategic partnerships for the
development, marketing, sales and manufacturing of the
Company's proposed products.
Our actual research and development and related activities may vary
significantly from current plans depending on numerous factors, including
changes in the costs of such activities from current estimates, the results of
our research and development programs, the results of clinical studies, the
timing of regulatory submissions, technological advances, determinations as to
commercial potential and the status of competitive products. The focus and
direction of our operations will also be dependent upon the establishment of
collaborative arrangements with other companies, the availability of financing
and other factors. The funded research and development program, if not renewed,
terminates during the year ended December 31, 2000 and thereafter our future
revenues depend upon the achievement of certain milestones related to product
development and royalties based on product sales.
RESULTS OF OPERATIONS
Revenue
We recognized revenues of $344,000 and $233,000 for the three months
ended March 2000, and 1999, respectively. The increase in revenue from 1999 to
2000 was attributable to license and research and development payments from our
agreements with Bristol-Myers Squibb.
Research and Development Expenses
We incurred research and development expenses of $577,000 and $872,000
for the three months ended March 2000 and 1999, respectively. The decrease in
research and development expenses in 2000 from 1999 was due to a $17,000
decrease in laboratory supply expenses, a $17,000 decrease in funding at the
Research & Development Institute, Inc., a $365,000 decrease in technology costs
associated with the acquisition of Quantum Core Technology(TM) and a $53,000
decrease in contract labor and payroll taxes, partially offset by a $20,000
increase in rent expense due to expansion of facilities a $28,000 increase in
funding for the research program at Washington State University and a $45,000
increase in expenses for contracted research.
We anticipate that we will incur increased research and development
expenses as we move products from pre-clinical to clinical trials and as we
expand our drug discovery efforts. We also expect to hire additional technical
staff to aid in the fulfillment of these goals.
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General and Administrative Expenses
We incurred general and administrative expenses of $2,265,000 and
$513,000 for the three months ended March 2000, and 1999, respectively. The
increase in general and administrative expenses in 2000 from 1999 was
attributable to a $1,556,000 increase in public and financial relations costs
including $1,267,000 in value assigned to warrants granted to our financial
advisors, $21,000 increase in consulting fees, and a $189,000 increase in legal
and professional fees.
We anticipate that we will incur increased general and administrative
expenses as we expand our administrative staff to aid in our business
development.
Interest Income
Interest income was $81,000 and $69,000 for the three months ended
March 2000 and 1999, respectively. The increase in interest income is due to
the increase in available cash balances resulting from the exercise of warrants.
Change in accounting principle - Revenue recognition
In December 1999, the staff of the Securities and Exchange Commission
issued an accounting bulletin on revenue recognition which provides, among other
matters, that nonrefundable license fees should be recognized over the period of
performance of related research and development activities. Accordingly, we
changed our accounting policy from recognizing revenue from nonrefundable
license fees at signing of agreement to deferring and recognizing such fees over
the period of performance of related research and development activities.
Effective January 1, 1999, we reflected this change in accounting principle as a
cumulative effect on prior years of $422,000, which is shown in the statement of
operations. Payments to third parties in connection with nonrefundable license
fees are being recognized over the period of performance of related research and
development activities.
This change in accounting principle would have resulted in an increase
in revenues and research and development expenses and a decrease in net loss of
approximately $94,000, $24,000 and $70,000, respectively for the three months
ended March 31, 1999 if it was respectively applied. The corresponding impact on
net loss per share would be a decrease from $(0.11) to $(0.10) if this change in
accounting principle were respectively applied.
Net Losses
We incurred net losses of $2,419,000 and $1,085,000 for the three
months ended March 2000 and 1999, respectively. The increase in net losses in
2000 from 1999 was attributable to increased operating expenses, partially
offset by in increase in revenue from the Bristol-Myers Squibb license and
research and development agreements and an increase in interest income.
Liquidity and Capital Resources
At March 31, 2000, we had cash of approximately $16,499,000. Since
inception we have financed our operations from debt and equity financings as
well as fees received from licensing and research and development agreements.
During the three months ended March 31, 2000, we used cash of approximately
$830,000 to fund our operating activities, principally caused by the net loss of
$2,419,000. In addition, during the three months ended 2000 we used
approximately $63,000 to fund our investing activities, principally caused by a
loan to an officer/shareholder of $63,000.
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On February 7, 2000, the Company gave notice to the holders of our
Class C Warrants that it was exercising its right of redemption effective March
9, 2000. Through March 14, 2000 the Company received approximately $12,953,000
from the exercise of 1,992,829 such warrants. On March 13, 2000 the Company
gave notice to the holders of its Class D Warrants that it was exercising its
right of redemption effective April 12, 2000. Through April 14, 2000 the
Company received approximately $25,742,000 from the exercise of 2,941,905 such
warrants. Additionally, through April 30, 2000 the Company received proceeds of
approximately $945,000 from the exercise of 208,971 other warrants.
In January 2000 the Board of Directors approved the 2000 Employee
Option Plan (the "Plan") authorizing up to 1,000,000 shares, subject to approval
of the plan by a majority of our shareholders. We granted 116,000 options to
purchase shares of Common Stock under the Plan at an exercise price of $7.438
per share to officers, directors, employees and consultants of the Company.
At the time of such stockholder approval, if the market value of the
Company's stock exceeds the exercise price of the subject options noted above,
the Company will incur a non-cash charge to earnings equal to the spread between
the exercise price and the option and market price, times the number of options
involved.
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
which establishes a fair value-based method of accounting for stock-based
compensation plans. The Company has adopted the disclosure-only alternative
under SFAS No. 123. The Company accounts for stock based compensation to
nonemployees using the fair value method in accordance with SFAS No. 123 and
Emerging Issues Task Force (EITF) 96-18. The Company has recognized deferred
stock compensation related to certain stock option and warrants grants.
During the three months under March 31, 2000 the Company granted 25,000 and
300,000 warrants to purchase shares of common stock at $12.00 and $15.00 per
share, respectively in return for financial advisory services. The Company
valued these warrants based on the Black-Scholes option pricing. In connection
herewith the Company recorded a charge of $1,268,000 during the three months
ended March 31, 2000. In connection with other option grants to consultants the
Company recorded a charge of $79,000 during the three months ended March 31,
2000.
We have agreed to fund scientific research at academic institutions and
to make minimum royalty payments for licensing and collaborative agreements of
approximately $700,000 in 2000. We do not expect these arrangements to have a
significant impact on our liquidity and capital resources. We intend to continue
to maintain and develop relationships with academic institutions and to
establish licensing and collaborative agreements.
We have no material capital commitments for the year ended December 31,
2000.
We believe that we have sufficient cash on hand at March 31, 2000 and
from the exercise of warrants in April 2000 to finance our plan of operation
through December 31, 2000. However, there can be no assurance that we will
generate sufficient revenues, if any, to fund its operations after such period
or that any required financings will be available, through bank borrowings, debt
or equity offerings, or otherwise, on acceptable terms or at all.
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2000, we issued 72,856 shares of Series A Preferred Stock as
full payment of the dividend due on the Series A Preferred Stock for the year
ended December 31, 1999 to the holders of such preferred stock. Such issuance
was pursuant to Section 3(a)(9) promulgated under the Securities Act based on
the fact that it involved an exchange by the issuer exclusively with its
existing security-holders and no commission or other remuneration was paid or
given directly or soliciting such exchange.
In January 2000 the Board of Directors approved the 2000 Employee
Option Plan authorizing up to 1,000,000 shares, subject to approval of the plan
by a majority of our shareholders. We granted 116,000 options to purchase
shares of Common Stock at an exercise price of $7.438 per share to officers,
directors, employees and consultants of the company. The shares of Common Stock
were granted pursuant to the exemption afforded by Section 4(2) promulgated
under the Securities Act based on the fact that the issuance was to a single
individual not involving a public offering.
In February 2000, the Company granted 25,000 and 300,000 warrants to
purchase shares of Common Stock at $12.00 and $15.00 per share to Southwest
Securities, Inc. and Gruntal & Co., L.L.C., respectively in return for financial
advisory and investment banking services. The shares of Common Stock were
granted pursuant to the exemption afforded by Section 4(2) promulgated under the
Securities Act based on the fact that the issuance was to a single individual
not involving a public offering.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K - None
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.
CYTOCLONAL PHARMACEUTICS INC.
Date: May 15, 2000 /s/ Daniel M. Shusterman
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Daniel M. Shusterman
Vice President of Operations,
Treasurer and Chief Financial
Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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Exhibit 27 Financial Data Schedule